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Maliyat Journal, No. 34, Winter 2001-2002

English section


In the Name of Allah




The overwhelming developments of the recent decades in the field of international trade and communications, and also the advent of the globalization phenomenon, have had profound impacts on the domain of taxation. In the past, the tax problems of international character were comparatively simple and could be handled in easier ways. The subject of double taxation constituted the most significant tax issue of international attribute. To deal with problems of this type, governments resorted to conclusion of double taxation treaties. Eventually the theme of cooperation between tax administrations for prevention of tax evasion found its way into tax treaties, and these two topics used to comprise the most important subjects in the arena of international tax relations.

Nowadays, the double taxation and tax evasion problems are remained in place with more implications and higher complexity. In addition, a series of new dilemmas have been appeared in the area of international tax relations whose dimensions are growing day by day. As a result, the governments are confronted with increasing difficulties.

Tax systems of some countries and the regions known as tax havens, have expanded their operations in an extent that could threaten the interest of many countries. Existence of vast legal and technical facilities in these jurisdictions would present most favorable conditions for the taxpayers escaping from taxation. Beside that, the modern tax havens offer money-laundering possibilities to those who have earned riches from various illegal activities.

The circumstances described above, would not only jeopardize the economic safety of other countries and cause the breach of their criminal and social laws, but also would entail the erosion of their tax bases and revenues. Formerly, tax havens did not pose real threats to tax revenues of other countries. Today, they exploit the latest advancements in technology and communications to attract capital and income sources from around the world. The high mobility of capital and almost instantaneous communications allow the offshore centers to act freely and in an unprecedented proportion.

To offset the effects of the said harmful activities, some countries have followed the pattern of the same tax havens and introduced changes into their tax systems for preventing the erosion of their tax bases and revenues on the one hand, and absorbing new capital and income from abroad on the other hand. This exercise, together with the maneuvers of tax havens, have accelerated destructive implications of the situation explained above, and is on the verge of creating serious problems for majority of other states. The world economy would also suffer from this process and the free and healthy competition would be replaced by a destructive competition in the field of taxation. Every government would endeavor to safeguard its own interests through such mechanisms as more as possible.

Another new phenomenon encroaching on tax resources of many countries is the advent of electronic commerce. It is quite difficult to control e-commerce transactions by traditional ways and means. Products of digital content (software, music, videos, books and the like) are presently main subjects of these transactions. Such products can not be checked at ordinary points like customs and post offices. Therefore, it is difficult, even impossible, to use traditional methods for collecting taxes on them. The problem will grow as the types of digital products and commerce on them become more diversified and developed.

Overall economic effects of the aforesaid practices, including their impact on tax bases and revenues, have induced many countries to take remedial measures. The Organization for Economic Co-operation and Development, in which the chief industrialized countries are gathered, has assumed the leadership in these international efforts. Many sessions of this organization were convened in recent years to find suitable ways for confronting this situation. Some countries and organizations outside the OECD have also taken considerable measures to coordinate their policies with the OECD in this respect.

As regards our country, we have to deliberate on an appropriate way to approach the problem in question. Research and study play an undeniable role in this regard. Academic and relevant government agencies, as well as the other interested persons, have to participate in this type of studies for understanding the prevailing situation of today’s world and the measures that can be taken by our country in this regard. This journal will also do its best to undertake studies for presenting articles in this connection to its readership. The scope of the work should, however, go further and the general policy of the country is to be clarified. We have to see whether our tax revenues are faced with the threats of the kind mentioned above or not. What can be forecasted for the future? The result of such studies and the kind of policy adopted, would determine the nature and scope of measures that could be taken in this field.


Dr. Aliakbar Arabmazar



Foreign corporations in the new bill of amendment of the Iranian tax law


By:  Dr. Mohammad Tavakkol


A new bill of amendment of the Iranian tax law (Direct Taxes Act) has been submitted to the parliament for their approval. Its most important part relates to the provisions applicable to the tax on juridical persons, including foreign companies. The regulations on taxation of foreign corporations are – like those of the Iranian companies – included in the fifth chapter of the Title “C” of the Direct Taxes Act (DTA). (DTA is the backbone and most significant constituent of the Iranian tax law) As regards the foreign entities, section “c” of the article 105 and article 107, DTA are very important and can be considered the core of the law in this regard. This study, therefore, would concentrate on the same provisions more than any other part of the law. The points worth of mentioning in this regard can be examined under the following headings.


A - Foreign corporations subject to taxation

Foreign corporations or entities may become subject to taxation if they earn certain incomes under specific conditions described in articles 105 and 107, DTA. Only the following two categories of foreign entities are dealt with in other parts of the same chapter 5 of the Title C:

1. Foreign insurance enterprises earning income by accepting reinsurance from Iranian insurance companies. They are subject to taxation at a single flat rate of 2% on their income and on the interest accrued to their deposits in Iran (Note 5 of the article 109, DTA).

2. Foreign airline and shipping companies are also subject to a single flat rate of 5% on amounts received by them for the carriage of passengers, freight, etc. from Iran, whether such amounts are received in Iran, at the destination or en route (Article 113, DTA).

None of the above provisions (Note 5 of the article 109 and article 113, DTA) are changed by the bill of amendment.


B – Incomes subject to taxation

Under the current text of the articles 105 and 107, DTA, foreign corporations are subject to taxation on the following types of income.

1. Income earned from the operation of capital in Iran.

2. Income derived from the activities performed in Iran, either directly or through a permanent establishment.

3. Income earned from Iran against the granting of licenses and similar rights (royalties).

4. Income derived for provision of training and technical assistance.

5. Income earned for transfer of cinematographic films (whether it is received as the price, or fee for the screening of the film or under any other title).

The bill of amendment has repeated the above 5 categories taxable incomes (of foreign corporations) and has added the following ones.

6. Income of foreign entities engaged as contractors in Iran in certain fields. These taxpayers are currently dealt with in the article 111, DTA (of the same chapter 5 of the Title “C”). The bill of amendment has deleted the article 111 and moved its content – with certain changes – into the article 107. These changes, and subject of foreign contractors in the whole, needs more discussion. Further information in this respect will be given in a separate part of the article later.

7. Receipts of representative offices of foreign banks in Iran. This is a new phenomenon introduced by the bill of amendment in the Iranian tax law. The receipts of such representative offices from their parent banks located abroad would be exempt from taxation, provided that they would refrain from engaging in banking transactions and restrict themselves to marketing and information gathering activities for their parents.

8. Income derived from transfer of technical know-how. This is also a new term introduced by the bill of amendment into the section “c” of the article 105 (alongside with “granting of licenses and similar rights” listed above as item 3).


C – Assessment of taxable income

Different types of income described in part B of this article can be divided into two categories for the purpose of assessing their taxable part. First, the incomes, in case of which the taxable part is assessable by multiplying the gross income by certain coefficients. Second, the incomes, in respect of which the taxable part is assessable through examination of statutory books of accounts of relevant taxpayers.


a) Income subject to application of coefficients

The taxable part of incomes listed in the part B of this article under numbers 3, 4 and 5 is to be assessed by using coefficients determined by the law. Taxable income of foreign corporations from these sources consists (under the current provisions) of 20% to 90% of all payments received by them during a tax year. Application of coefficients between 20 to 90 percent takes place on basis of special regulations proposed by the Ministry of Economic Affairs and Finance and approved by the Council of Ministers.

In respect of one item of those three types of income, namely the income from provision of training and technical assistance, the current text of the law has envisaged the possibility of determining a coefficient even less than 20%. The Ministry of Economic Affairs and Finance may grant such abatement if considers it appropriate, and it is restricted to cases where the income is payable by ministries or other government organizations.

The bill of amendment has introduced the following changes in this regard.

1. The maximum coefficient of 90% has been dramatically reduced to 40 percent. This can be considered a positive step, since the net taxable income of an entity scarcely reaches a high climax of 90 percent.

On the other hand, the bill of amendment has terminated the abatement described above. Therefore, in case of approval of the amendment, the minimum coefficient of 20% could not be reduced any more.

2. The income of foreign corporations from transfer of technical know-how (item 8 of the incomes listed in part B) would also be subject to the same coefficients of 20% to 40% for assessment of taxable income.

3. The taxable income of foreign contractors (item 6 of the part B of this article) is currently equaled to 12% of all their annual receipts. This percentage would remain unchanged under the bill of amendment (see also part “D” below).


 b) Incomes subject to examination

The taxable part of the rest of incomes enumerated in part B of this article, namely the income derived from operation of capital or from activities performed, directly or through agencies, in Iran, are assessable by examination of statutory books of accounts of relevant companies. They are obligated, under the current regulations, to keep a separate account for their operations in Iran and to record it in their statutory books of accounts. In case of their routine and office expenses, only those expenditures are acceptable that are pertaining to their operations in Iran (paragraph “b”, article 107, DTA). Thus, the current text of DTA has envisaged separate and special provisions concerning the duty of these categories of foreign corporations in respect of books of accounts and acceptable expenditures.

The bill of amendment has not changed that part of the current law, which makes the assessment of taxable income of the taxpayers subject to verification of books of accounts. But it has cancelled another part of the law that provides for a separate situation in respect of acceptable expenditures and keeping books of accounts.

Under the amendment, the companies in question would become subject to general regulations of DTA in respect of keeping books of accounts, acceptable expenditures, depreciation norms and similar provisions. The general provisions in this regard can be found in the chapter 4, Title C of DTA (Articles 94, 95 and 97 in particular).



D – Foreign contractors

The current article 111, DTA has listed a series of activities and ruled that if such operations are performed by foreign contractors in Iran, then taxable income of their earnings will be 12% of their annual receipts. The operations subject to that article are: construction works of all types, technical installations, transportation, preparation of design for buildings and installations, land surveying, drawing, technical supervision and calculations.

The changes introduced by the bill of amendment in respect of foreign contractors are as follows.

1. New cases of operations are added to activities enumerated above. The new operations are: provision of training and technical assistance, transfer of technical know-how and “other services”. Thus, the scope of operations subject to this type of tax would be considerably broadened, especially because of insertion of the very general term of “other services”, which may cover any kind of services.

Even cases such as granting licenses and similar rights are referred to in the amendment as the foreign contractors’ activities. With regard to the latter case, as well as the case of transfer of technical know-how, the assumption of assigning such actions to contractors seems ambiguous. How, for instance, licensing for a chemical formula or computer software could become subject matter of a contract? But if these types of transfers and assignments would constitute only a part of wider operations assigned to contractors, then the ruling of the amendment would become more understandable.

2. By including the provisions related to foreign contractors in the article 107, the article 111 would not be needed any more, and it had been deleted in the bill of amendment.

3. The current article 111, DTA has a Note, according to which a part of contract price that is used for purchase of supplies and equipment from abroad, is exempt from taxation, provided that the relevant employer is a ministry, a government organization, a state company or a municipality. The bill of amendment has moved the same provisions into the article 7 (as Note 1) by making the exemption in question subject to a new requirement:  “on the condition that the amount needed for purchase of supplies and equipment produced abroad, is inserted as a separate item in the original contract or its subsequent amendments”.

4. According to a new Note added by the bill of amendment to the article 107 (Note 3), in cases where a foreign contractor assigns the operations of the contract, wholly or partially, to Iranian juridical persons as second hand contractors, any amounts paid for the supplies and equipment imported by such second hand contractor, would also be exempt from taxation. But the exemption would be granted to the first hand (foreign), and not the second hand, contractor.


E – Tax rates

One of the important changes effected by the bill of amendment, is the introduction of a separate table of tax rates for juridical persons, including foreign corporations subject to taxation in Iran. Under the current law, companies and other juridical persons are subject to the rate table of the article 131, DTA, which applies to both natural and juridical persons.

Seven progressive rates are envisaged in the bill of amendment: 20%, 32%, 36%, 40%, 42%, 44% and 45%. The income brackets against these rates begin from IRR 20 million and end at IRR 1 Billion. The rates have been considerably moderated in comparison with the current table of article 131.

An interesting provision of the new bill of amendment is introduction of periodical adjustment mechanism in respect of monetary amounts of the table in question and similar rate tables of DTA (see the article: “Introduction of periodical adjustment mechanism into the Iranian tax system“, Maliyat , No. 33, pages: 3-0).




An introduction to

the Iranian tax system


By: M.T. Hamadani

(part 14)


In previous issues of this journal we studied the regulations of the Iranian tax law in respect of taxes on certain types of properties and the income tax on real estates, salaries and business income. Now we will begin our discussion on the following subjects:



Tax on the Income of Juridical Persons

Before touching upon the main part of our study regarding this type of taxation, some points are to be mentioned in brief:

1. The term “juridical person” as used in the Iranian law comprises all kinds of companies and other entities and bodies of persons that are registered under the law as juridical persons. For instance, syndicates, trade unions and associations would be considered juridical persons after being registered as such. The tax regulations, however, deal mostly with the corporate taxation.

2. The Iranian government has submitted a new bill of law for the amendment of the Direct Taxes Act (DTA), the country’s principal tax law. The most important part of this amendment pertains to the Chapter 5 of the Title “C” of the DTA, which deals with the tax on juridical persons. It is not clear whether all amendments contained in the bill of law would be approved by the parliament or not. Nevertheless, we will refer to some of the proposed amendments in examining the rules governing corporate taxation.

3. A separate section of the Direct Taxes Act (Chapter 1, Title D) is assigned to tax exemptions provided for different types of income, including the income of juridical persons. We will examine these tax exemptions in the future.

Now, let us study the main regulations of DTA concerning the income tax of juridical persons .


A. Taxable income

The taxable income of companies and other juridical persons consists of the “aggregate” income derived by them during a tax year, less the exemptions envisaged under the Direct Taxes Act (Article 105, DTA).

Aggregate income  as used above means the balance of income derived from different taxable sources enumerated under the DTA, minus the losses resulting from non-exempt sources (Note 4, Article 105, DTA).

Thus, the juridical persons should pay income tax not only for the income directly derived from their principal business, but any other income derived from other sources (for instance from real estates) must also be taken into account in computation of their overall taxable income. The worldwide income of juridical persons is to be accounted for.

In respect of the juridical persons other than companies, their profit-making activities shall constitute the basis of calculation of their income tax.


B. Variation in taxation

Various types of companies and juridical persons are treated differently under the tax law. They are divided into the following categories for purpose of taxation:

1. Companies whose total capital is owned, directly or indirectly, by the government or municipalities. The tax base of these companies shall be their aggregate income, minus two items:

a) agricultural exemptions provided under the tax law, but unlike other categories of companies they may not benefit from other kinds of exemptions set forth in DTA, and

b) an amount of 10% that shall be computed and collected as the corporate tax. (The bill of law referred to above has omitted this 10% corporate tax)

The balance of the income shall be taxed at the rates of the Article 131, DTA. The tax table of the Article 131 had been presented in part 4 of these series of articles, which you can see in page 8, No. 24 of Maliyat journal. According to the aforementioned bill of amendment, the rates of the article 131 would not apply to the juridical persons and a new tax table has been provided for this purpose. For details of the changes introduced in this connection by the bill of amendment, see the article: “Introduction of periodical adjustment mechanism into the Iranian tax system” in pages 3-10 of No. 33 of this journal.

In cases where the company’s capital is partially owned by the government or municipalities, the above rule shall apply only to that portion of income that belongs to them. The balance of the taxable income shall be treated as described below in respect of the fourth category of juridical persons. On the other hand, the capital of the relevant companies may belong to several shareholders (e.g. several ministries). In that case, the tax rates shall apply separately to the shares of each of such shareholders. This would lower the tax rates applicable to individual shareholders (paragraph “a” of the Article 105, DTA).

2. The Iranian non-commercial juridical persons that are not established for distribution of profits in principle, but nevertheless engage in profit-making activities and thus derive profits, such entities shall be subject to taxation at the rates set forth in the same Article 131, DTA (which would be changed in case of approval of the new bill of law referred to above). It should be noted in respect of these juridical persons, that the profit so described is one that is derived from the aggregate operations of the relevant entities. This means that overall expenses of the entity shall be taken into account in calculation of their profit.

 3. The foreign juridical persons and entities residing abroad constitute the third category enumerated in the Article 105, DTA. (Foreign airline and shipping companies and also foreign insurance companies accepting reinsurance from Iranian insurance companies are dealt with separately under the Article 113 and Note 5 of the Article 109, to which we will refer later).

The following types of income of the above third category of juridical persons are taxable according to the paragraph “c” of the Article 105, DTA:

i. Income derived from the operation of their investment in Iran (the interest on the loan given by foreign entities to the borrowers residing in Iran is an example),

ii. Income derived by the entities residing abroad from the activities performed in Iran, either directly by the foreign enterprises themselves, or through permanent establishments.

iii. Income received by the said foreign entities from Iran as royalties, or for provision of training and technical assistance.

The tax rates of the Article 131, DTA are currently applicable in all these cases (which may be changed by the new bill of law as stated above).

4. Joint stock companies, joint stock partnerships, cooperative societies and their unions, comprise the fourth category of juridical persons. The profits of these entities shall be treated as follows:

i. Total profits attributable to bearer shares shall be taxed at the rates of the tax table of the Article 131, DTA. This rule would entail higher tax on the bearer shares than a hypothetical case in which the shares would be taxed  in the hand of each of the shareholders.

ii. Reserves attributable to each registered shareholder, guarantor partner (of joint stock partnerships) and members (of cooperative companies) will  be taxed at the rates of the Article 131, DTA (subject to probable changes by the proposed bill of amendment).

iii. The balance of the taxable income of the juridical persons in question, which is attributable to each registered shareholder, guarantor partner or member will also be individually taxed at the rates of the Article 131, DTA.

As it can be seen, the taxpayers referred to in paragraphs ii and iii above (registered shareholders, etc.) are treated more favorably than the owners of bearer shares. But this favorable treatment would be ceased in case of failure of relevant entities to submit balance sheet and other required statements and documents on time. In that case, the entire taxable income of the company shall be taxed at the rates of the Article 131, DTA.

5. In case of all other juridical persons (like general and limited partnerships) the share of taxable profit that is attributable to each of the owners of capital or members of the juridical person (in accordance with the entity’s statute or articles of association) shall be taxed at the rates of the Article 131, DTA.

(In the following issue of the journal we will continue our discussion on corporate taxation.)






Abstracts of Persian Articles




The editorial of English and Persian sections of the journal is devoted to the themes of globalization, e-commerce and tax competition and the impact of these phenomena on tax bases and revenues of different countries. It has been recommended that a clear and wise policy should be taken by our country in this respect.


Foreign corporations in the new bill of amendment


The most important part of the new bill of amendment submitted to the parliament relates to the provisions applicable to the tax on juridical persons, including foreign companies. The latter aspect of the bill is examined in both the Persian and English sections of the journal.


Periodical adjustment mechanism


The bill of amendment referred to above has also provided for introduction of adjustment mechanism into the Iranian tax law. This part of the new bill of amendment has also been reviewed in a separate article.


Globalization, tax rules and national sovereignty


Persian translation of an article written by Charles McLure Jr. in the IBFD Bulletin of August 2001 with regard to the above subject is presented in this edition of the journal.


A comment on the statute of the State Tax Organization


The establishment of a more autonomous organization for tax administration had been envisaged under the law of third development plan of the country. Now the statute of this organization has been approved by the Council of Ministers. The author reflects on this newly adopted statute.


Enactment of levies in Iran


The growing number of scattered duties and levies in recent years has induced the government to prepare a bill of law for correcting this situation. The bill is commented on in the article.