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Maliyat Journal, No. 36


Summer and Autumn 2002 and Winter 2003




In the Name of God




The Iranian year of 1381 (2002-2003) is of special significance from taxation point of view. This is the year in which the execution of most extensive amendment of the Direct Taxes Act (DTA) takes place. The new amendment would certainly involve many changes and developments in various aspects of rights and duties of both the taxpayers and tax administration, and would entail considerable effects on the trend of relevant affairs in the future.

Meanwhile, the adoption of the amendment in question was coincided with the approval of the budget law of the current year. The latter has always and traditionally contained some tax regulations beside provisions pertaining to other budgetary issues. In addition, a new law called the Law on Regulation of some Public Financial Provisions was also approved just at the same time as the budget law and the amendment of DTA. Certain tax regulations are contained in that new law as well.

Quite important points are to be mentioned with regard to the aforesaid laws. One noticeable aspect of the new amendment of DTA is the canceling of tax exemption of the public sector in several cases. The aim of this measure has been the strengthening of competitive position of private and cooperative sectors against the public sector, which benefited in the past from vast privileges.

Extensive changes have also been occurred in connection with tax rates and tax burden resulting from them. Some of these changes are of special importance. Among them one can refer to the introduction of periodical adjustment mechanism into the tax law. This mechanism has been in use in other countries for a long time, but it is the first time that it finds its way into the Iranian tax system. For the adjustment, the inflationary trend of the economy will be taken into account and it would apply to both schedular tables and single monetary amounts scattered all around the tax law. Proper and on time execution of the mechanism would hopefully prevent the effects of inflation on relevant cases in the future.

The second important step taken in the same direction was the adoption of a single and flat rate of corporate taxation. Application of progressive rates on corporate income tax has been abandoned and thus a major step taken forward towards promotion of investment and economic development.

The rates have also been reduced in many cases and the tax burden resulting from them is ameliorated both in case of individuals and companies. Reduction of corporate tax rate has been very sizeable. Though it has been a common trend in most countries over the last decade to reduce corporate tax rate gradually, but in the case of Iran the new amendment of DTA has accomplished the job abruptly and gone some steps ahead from the others.

Some specific taxes has been removed totally from the tax law, among which the abolition of the tax on aggregate income is of special significance. Several new concepts and categories are also introduced into the Iranian tax law.

Another critically important change effected by the new amendment has been the conversion of the previous organization of the tax administration to a new institution with independent legal identity whose autonomous status is recognized by the law. The skeleton and structure of the tax administration have been subjected to fundamental changes.

Considerable changes are also visible in the budget law of the current year. The number and extent of tax regulations of the budget law are noticeably reduced. Some tax provisions that used to be repeatedly included in the budget law every year, are now transferred to the newly adopted Law on Regulation of some Public Financial Provisions referred to earlier. Moreover, various exemptions and abatements were usually included in the annual budget law. Those cases have also been left aside and are no more visible in the budget law.

What mentioned above was a very short reference to some aspects of the above-mentioned laws. These and other features of the said regulations should be properly studied and reflected on.  No doubt, some organizations, researchers and professionals will embark on such studies. Maliyat journal has already begun its work in this regard, so that the most parts of the present issue of the journal are dedicated to the same purpose and we will continue our study in the future as well.


Dr. Aliakbar Arabmazar






New amendment of the Iranian tax law


By: Dr. Mohammad Tavakkol


In last February the Iranian parliament approved a new draft of law containing vast amendments to the Direct Taxes Act, the principal tax law of the country. In this article a short history of the amendment will be presented first, then changes of the law will be examined under different headings.


Legislative History


The Finance Ministry’s Office of the Undersecretary for Tax Revenues began work on the amendment a few years ago. When the first version of the draft was prepared, it was signed by the Minister of Economic Affairs and Finance and sent to the Council of Ministers for their approval. The council accepted the draft after deliberations and introducing some changes to it. Finally the draft was signed by the President of the country and submitted to the parliament to be approved and become an executable law.

The parliament after a general review of the draft sent it, for more careful consideration, to its Economic Committee. The committee (composed of some members of the parliament specialized in the field of various economic affairs) set up a group consisted of people of different discipline and interests (experts, researchers, representatives of public and private sectors, etc.). This group began its work not on the draft, but on the previous text of the Direct Taxes Act. After several meetings and deliberations, an entirely new draft was prepared and resubmitted to the plenary session of the Parliament by the Economic Committee. The parliament approved the new draft in 5 sessions (during the second half of January and first half of February 2002).

Then the approved text of the draft was sent to the Guardian Council to check it and determine whether contradictions existed between the draft and the Constitution or between the draft and the religious law (Feqh or Islamic canon law). Few contradictions were found in the draft, and the Guardian Council sent it back to the Parliament for the necessary corrections. The Parliament approved the corrected draft, and on 25 February, the law was sent to the President for execution.


Classification of the amendment

The approved amendment consists of 133 articles, each article amending one or more articles of the Direct Taxes Act, or adding new regulations to it. Thus the changes introduced to the law are quite considerable, and giving an exact classification of them is not an easy job, though we shall try to provide a general picture in this regard. The most important amendments to the DTA can be classified under the following headings:

Part 1. Amendment of tax rates

In most cases, tax rates have been reduced, so that some commentators are concerned that the reductions, combined with exemptions granted under the amendment, may lead to decline in tax revenue. Both the scheduler tax tables and the scattered single DTA rates have been amended. The changes in question include:

A) The revision of the inheritance tax table under article 20 to change the rates and the monetary figures of the relevant tax brackets.

B) A reduction of the stamp duty on bills of exchange, promissory notes, and similar documents under article 45.

C) Deletion of the scheduler tax table of the article 59 regarding the tax on real property and good will transfers, and provision of two lower flat rates for such transactions.

D) A tenfold increase in the pecuniary figures of the tax table in article 103, paragraph D; the table pertains to the stamp duty collectible from attorneys in certain cases. The amendment will result in a considerable increase in tax amount because the rates are degressive in this particular case.

E) The most important part of the amendment relates to changes occurred in respect of the rates of corporate taxation. According to the previous law, companies and other juridical persons were subject to the schedular rate table of the Article 131, DTA. Now, for the first time companies are subjected to a single flat rate of 25% in respect of their overall taxation. Introduction of the flat rate of 25% means a sharp decrease of corporate tax liability. The new rate covers all types of juridical persons, including foreign companies and enterprises that may become subject to Iranian taxation.

F) Beside the rates of the tax table of the Article 131, the Iranian companies were subject to an overall corporate tax rate of 10%, which had to be deducted from their taxable income, and the rest of the income was taxed according to the rates of the Article 131. Thus the total tax of Iranian companies could reach, in most cases, to the very high level of 64%. This shows the importance of the change effected by the new amendment that reduced the rate of 64% abruptly to 25%.

G) The schedular rate table of the Article 131, DTA has been changed in some regards:

1. Companies and other juridical persons, and also most of salary receivers, are excluded from the application of this table.

2. Number of income brackets is reduced from 9 to 5.

3. The rates are drastically reduced, so that the highest rate of the table has dropped from 54% to 35%.

4. Monetary amounts of the income brackets are sharply increased (from 3.3 times in respect of the highest bracket to 30 times for the lowest one).

H) Salary income has been subjected to a flat rate of 10%, which substitutes for the progressive rates of the tax table of the Article 131. This amendment applies to the employees of public sector. As far as the private sector is concerned, the same flat rate would apply in case of salaries not exceeding the amount of 42 million Iranian Rials per year (8000 IRR equals to 1 US $ approximately). In respect of the salaries exceeding that amount, the schedular rates of the Article 131 (as amended) shall be taken into account. 

I) According to Notes 1 and 2 of the Article 143 (before the amendment) the transfer of joint-stock companies’ shares, and also transfer of priority rights of such shares in stock exchange were subject to flat rates of 0.5% and 1% respectively. The new amendment has introduced the following changes in this regard:

1. Both kinds of transfers (of shares and priority rights of shares) will be taxed at the same rate of 0.5%.

2. Transfer of other types of securities in stock market has also been  subjected to the same 0.5% taxation.

3. A new tax of 4% has been envisaged for transfer of shares and priority rights of shares (of either joint-stock companies or partnerships) outside the stock exchange.

4. In respect of a special reserve of joint-stock companies that is set aside to be added to the capital of the company, a new tax of 0.5% has been imposed. It shall be collected at the time of registration of capital increase.


Part 2. Cancellation of some taxes

A number of taxes of DTA are deleted by the new amendment. Such cases include:

A) Annual tax on real property (Articles 3 to 9, DTA).

B) Tax on unoccupied residential properties (Articles 10 and 11, DTA).

C) Tax on undeveloped lands (Articles 12 to 16, DTA).

(The above taxes were categorized as three types of property tax under the second part of DTA. The reasons provided for removing these taxes from the tax law were as follows: The actual amount of taxes collected from these sources has always been small and negligible, enforcement of them requires annoying and socially unpleasant investigations, and the taxes in question are of a nature more similar to duties collected by municipalities rather than the Finance Ministry. It has been stated (during the amendment deliberations) that municipalities would undertake collection and handling of these taxes.

D. According to the Article 77 of the previous text of DTA, the activity of the people who engage (several times in a year) in building and selling of houses and other real properties, was considered to be a business by itself and was subject to annual examination and taxation. The new amendment has cancelled taxation of the said business. Instead of that an extra tax of 10% has been imposed on transfer of any newly built properties, whether or not the building and selling of properties is the ordinary business of the seller. That 10% tax is to be collected on basis of taxable value of the property and is payable in addition to the usual tax on transfer of real properties.

E. Tax on aggregate income has also been wholly removed from the Iranian tax system. It was a category of tax similar to personal or individual tax in other countries. The reason provided for abolishment of this particular tax is that it had never been enforced in the past.


Part 3. Novelties

The amendment has introduced new categories of taxpayers, subject matters, etc. into the Direct Taxes Act. Some examples are given below:


A. Agencies without the right to make transactions

Note 3 to the amended Article 107, DTA refers to the branches of foreign banks and companies who are engaged solely in collecting information and finding market for their parent enterprises, without the right to make transactions in Iran. Such branches and agencies shall be exempt from taxation on remuneration they receive from their parent enterprises. Those are new categories of persons becoming subjects of the tax law. The exemption likely follows the example of article 5, paragraph 4 of the OECD Model Tax Convention on Income and Capital.

B. Company Mergers

Amended article 111 of the DTA deals with the tax aspects of company mergers for the first time. If, as a result of a merger, a new company is created, or a company is absorbed by another one, the resulting increase in the capital of the absorbing or new company will be exempt from the stamp duty of the article 48 of DTA. Any transfer of assets from one company to another will also be exempt from the tax on transfer of properties, and termination of companies that results from a merger is exempt from the tax applicable to company liquidation. However, any income accrued to shareholders as a result of a merger will be taxed according to the relevant regulations.


C. Non-bank credit institutions

The phrase "non-bank credit institutions" has been added to every section of the DTA that addresses duties and rights for banks, thus extending the same duties and rights to non-bank credit institutions. In addition, a note to amended article 145 provides the same rule in a general way. It says:

In cases where reference is made in the Direct Taxes Act to banks, any privileges, facilities, priorities and duties envisaged for them shall apply to non-bank credit institutions that are established, or will be established, according to the law or by the authorization of the Central Bank of the Islamic Republic of Iran.


D. Participation Bonds

Participation bonds are special bonds issued by some government organizations and entities in recent years. The amendments deal with this new kind of securities for the first time, providing certain exemptions for them.


E. New stamp duties

A Note added by the amendment to the Article 46, DTA has listed several types of documents and levied certain stamp duties on each of them. The list includes certificate of exemption from military service, a number of educational certificates and documents, various permits and licenses, and the like.

F. Periodical adjustment mechanism

The new amendment of the tax law provides for this type of adjustment in respect of monetary amounts of different rate brackets of tax tables, stated amounts of exemptions, duties, etc. Such monetary amounts have become, for the first time, adjustable every two years on basis of the proposal of the Ministry of Economic Affairs and Finance and approval of the Council of Ministers. The adjustment will be tied to the inflation rate.

G. Direct Withdrawal From Certain Taxpayers' Bank Accounts

According to the amended Article 104, DTA, the government organizations, municipalities, companies and owners of certain businesses are required to withhold a tax of 5% from their payments against a number of services. The tax so withheld should be remitted to relevant tax offices within a specified period. The new amendment has introduced two new rules in this connection:

1. The Organization of Tax Affairs (new title for the tax administration) is authorized to revise annually the list of sources subject to the said withholding tax and publish the new list in the press (without being required to obtain approval of the parliament or the Council of Ministers).

2. If the withholding agent is a government organization or a public entity receiving money from the state budget, and such agent fails to comply with the aforesaid duties in spite of demand of the tax administration, then the latter would have the right to withdraw from any bank account of the failing organization an amount equal to the applicable withholding tax. This is also a wholly new phenomenon in the tax law.


H. Indemnification of taxpayers

The previous Article 242, DTA permitted the refund of extra taxes collected as a result of miscalculation. Now, this article has been amended in two ways. First, the extra tax is refundable whatsoever its reason might be. Second, the taxpayer has become entitled to receive the interest accrued to the extra tax as well. The rate of interest is 1.5% per month.


I. Role of official accountants

An important role is recognized for official accountants under the recent amendment of the tax law. The auditing report prepared by official accountants on the taxpayer’s return and records, will be accepted by tax authorities, even in cases where the report is prepared at the request of the taxpayer. Similar regulations had been inserted in tax law many years ago, but the consequences were discouraging and the relevant regulations were changed and acceptability of auditing reports became limited to certain special cases.


J. Joint tax returns

Unincorporated bodies of persons are referred to in DTA as civil partnerships. These partnerships have no separate legal identity and each of the partners has to pay the tax applicable to his personal income. The new amendment has permitted the partners to submit a joint tax return. This is also an innovation of the new amendment.


Part 4. Exemptions

Most important changes of DTA provisions in respect of tax exemptions are outlined below.


A. Changes of the Article 2

The Article 2 of the Direct Taxes Act is of a general nature. It has been positioned at the beginning of the law for determining the organizations and entities that are excluded from the application of taxes imposed by the law.

Five categories of institutions previously were excluded from tax, under certain conditions and requirements:

1. government organizations and municipalities;

2. certain special institutions -- the Red Crescent Society, Social Security Organization, pensionary saving funds, and a few others;

3. public endowments whose income is used for certain charity purposes;

4. registered public service institutions whose income is used for the same charitable purposes; and

5. religious societies and missions of recognized religious minorities.

The new amendment has retained the first category of those institutions (government organizations and municipalities) and deleted all other four categories. The reason declared for this considerable change was the necessity of removing the cases of tax discrimination and having a wider tax base. But what actually has taken place is the transfer of the abatement of the Article 2 to another part of the law (new Article 139, DTA), though the title of the abatement is changed and some modifications have also been introduced.


B. Changes related to the inheritance tax

Tax exemptions are considerably increased in this section of the law, though some minor exemptions are cancelled. Main cases of changes are as follows:

1. The minimum exempted inheritance share of the first class heirs is considerably increased (15 times).

2. The exemption already was higher for immediate heirs who are under age 20, are wards, or are disabled and unable to work. Under the amendment, that higher exemption has been increased more than 16 times. However, a lesser exemption granted to second-tier heirs who were in the same condition has been canceled.

3. The exemption provided previously to first- and second-tier heirs under the age of 25 who are full-time students has been withdrawn.

4. Certain salary benefits and employment claims of the deceased person have been added to a list of similar items that are exempt from inheritance tax.

5. Before the amendment, the tax law had exempted from inheritance tax any properties endowed for some of the organizations and institutions referred to earlier in connection with the changes of the Article 2, DTA (see section A, Part 4 above). Now this abatement has been retained for the first category (government organizations and municipalities) only and other groups have become deprived from it.

6. 100% of the decedent’s deposits in Iranian banks and their branches abroad were exempted from inheritance tax before the amendment. Now, this percentage is decreased to 80%, but it has become applicable to authorized non-bank credit institutions as well.

7. 40% of the value of the decedent’s shares in industrial and mining joint-stock companies was exempted from inheritance tax before the amendment. The amendment has extended that exemption to the shares of all companies of any nature. Beside that, 40% of the net value of the assets belonging to the deceased person in industrial, mining and agricultural companies is exempted also from inheritance tax.


C. Changes connected with the real estates income tax

Changes effected by the new amendment in respect of the exemptions related to this part of the law are as follows:

1. 100% of rental income of the owners of apartment buildings that are built according to an official model is exempted from taxation, provided that no fewer than three building units are leased.

2. Owners of residential units leased for dwelling will be exempt from 100% of the tax on their rental income. This exemption is applicable in proportion to certain acreage of the useful substructure of the leased dwelling units. The acreage subject to exemption is up to 150 square meters in Tehran (capital city) and up to 200 square meters in other parts of the country.

3. The minimum tax exemption of rental income provided before the amendment to the individuals having no other sources of income has been considerably increased.

4. The residential units occupied by the owner’s father, mother, spouse, children, grand parents and other persons dependent on him were not considered as leasehold (and thus were not subject to taxation) according to the Note 1 of the Article 53, DTA before the amendment. The same Note ruled that in cases where several properties are allocated for habitation of the aforesaid persons, only one of such dwelling units would be exempted from taxation. The new amendment not only has retained the exemption for such properties, but it has also permitted that several dwelling units (each per one of the listed persons) be exempted from the above taxation.

On the other hand, the following exemptions and abatements (with regard to the tax on rental income) are cancelled:

1. A special exemption provided previously for the taxpayers having disabled and backward children under their custody.

2. Exemption of the joint owners of a leased property in cases where the share of each of them in the rental income was small and negligible.

3. The previous Note 2 of the Article 53, DTA ruled that any real property that is put free of charge at the disposal of the organizations and institutions mentioned in some paragraphs of the Article 2 would not be considered as leaseholds (and thus excluded from taxation). The organizations and institutions in question are those whom we described before (see Part 4, A above). The amendment has retained that abatement for the first group of the said institutions, namely government organizations and municipalities. Other groups (public-service institutions, religious societies and missions and certain specific organizations) are excluded from the same abatement.


The rest of the Part 4 (other tax exemptions) and remaining parts of this article will be printed in the next issue of the journal.






An introduction to the Iranian tax system




Part 16



Up to now we have dealt with all types of taxes envisaged by the Direct Taxes Act, except the tax on incidental income, which will be examined in the present issue. Then these series of article will come to an end, not only for the reason that the study of the main body of substantial regulations of the tax law would thereby completed, but also because the Direct Taxes Act has been recently subjected to vast and sizeable changes by a new amendment. A relatively long article will be printed in the present and coming issues of the journal that would provide a general and overall picture of the alterations introduced into the tax law by that amendment. It should also be pointed out that the tax on aggregate income, which constituted the last type of taxes subject to DTA, is now wholly cancelled by the amendment and therefore there is no need to examine it any more.



Tax on incidental income


A cash or non-cash income earned gratuitously as a matter of grace, favor and the like, or as an award, or under any other title of the same nature, is subject to tax on incidental income at the rates of the schedular table of the Article 131, DTA.

The income so earned is wholly taxable and in case of non-cash income valuation should take place at current market prices. But in respect of real properties the taxable value (which we had described in previous parts of these series of articles) shall constitute the basis of tax computation.


Compromise (sulh) and gift (hebeh)

Compromise and gift are two important cases of application of the incidental income tax. The word compromise is a translation of the term “sulh”, which is one of the several types of contract referred to in the Iranian civil law. Compromise is a contract whereby the parties to disputed transactions, etc. settle their dispute by mutual, or sometimes unilateral, concession. As a result of compromise some money or properties may be transferred to one of the parties or both of them. In other words, compromise can be with or without consideration.

Gift (a translation for the term “hebeh”) is another type of civil law contracts, whereby a person gives some money or property to another parson gratis. Sometimes the gift can be reciprocal, so that one of the parties gives away something against another gift from the receiver.

In respect of compromise and gift against consideration, the taxable income shall consist of the difference between the values of the objects of relevant reciprocal contracts. Such difference shall be assessed and attributed to the party benefiting from it.

Compromise and gift can be revocable and with the option of cancellation. As far as taxation is concerned, both transactions are considered final, but if cancellation takes place not later than six months, the collected taxes shall become refundable.



Transfer of proceeds of properties

Where the proceeds of a property are provisionally or permanently transferred to a person gratuitously, the transferee (recipient of the proceeds) should pay the accrued tax of each year in subsequent year.


Disposition of property by will

In case of disposition of properties in favor of other persons under a will, two situations are conceivable:

1. The beneficiaries are heirs of the testator. In this case the bequeathed property shall be added (after the death of the testator) to the inheritance share of each of the relevant heirs and as such shall become subject to inheritance tax.

2. In case of beneficiaries other than the heirs, the total amount of the willed property shall be taxed as incidental income.




The incidental income shall not apply in the following cases:

1. Gratuitous donation to individuals by charities, public-service institutions, government organizations, municipalities and foundations of Islamic revolution.

2. Donations to the people suffered from war, earthquake, flood, fire and other unexpected disasters.

3. Government bonuses for promotion of production, export or purchase of agricultural products.



Tax return

Those deriving incidental income should submit their tax return to the respective tax offices and pay applicable taxes within thirty days. In case of transfer of proceeds of properties (as described above), an annual tax return should be submitted up to the end of the month Ordibehesht (May 21) of the subsequent year. The same deadline applies to payment of the applicable tax.

Where the relevant transaction is registered by a notary public and taxes are already paid, the task of submission of tax return shall be discarded.

The juridical persons too are not required to prepare and submit a separate return for their incidental income, and any income from that source shall be assessed by reference to their books of accounts. Any taxes withheld at source from incidental income of juridical persons shall be considered as advance payment of their final taxes.

In respect of government companies, the said at source payment of incidental income was not applicable before the recent amendment of the tax law. But this exception has been cancelled by the new amendment.


The End