Many companies are unaware of the tax system in Iran. In addition to the sources which are mainly in Persian, there are a low number of experts who have both the experience and communication skills in order to assist prospecting companies to understand the matter.
However, understanding the tax system in a new country is an important step a business needs to take. Knowing the rates, the reporting system, obligations for the business owners, and any existing exemptions will have a considerable effect on the overall ROI of your new venture not to mention that failing to comply with the local regulations will produce penalties. Nonetheless, you can avoid these consequences by familiarizing yourself with the new regulatory environment.
But before we dive in, beware that this article is not meant to be a comprehensive guide for tax in Iran. Your industry, your company’s legal form, and even the location of your business will affect your taxes. You can always use our tax advisory service to sort out your entire taxation system.
What you need to know about types of tax in Iran
As a company operating in Iran, you are expected to calculate, pay, and report for the following taxes:
- Annual Income Tax
- Salary Tax
- Social Security Organization (SSO) Charges, a.k.a. insurance
- Value-Added Tax
So, let’s get into the essentials of each of the above taxes.
1- Annual Income Tax
The annual income tax in Iran is the most trivial of all taxes that you are going to face in your operations in the country. At the end of each fiscal year, you will calculate your company’s revenue and subtract all expenses to come up with the profit. You will then pay a portion of the profit to the government.
The following applies to all companies that are established in Iran or are operating in the country through registered branches.
What is the rate?
The income tax in Iran is a flat rate at 25% of the year-end profits. You will have four months after the end of your fiscal year to pay the tax and deliver the reports.
Iran’s tax law also allows you to carry forward previous years’ losses to decrease your income tax. You may also be able to enjoy existing tax holidays. These exemptions are awarded to companies based on their field of activity, their location, their shareholder structure, and whether or not they are high-tech companies.
We recommend that you examine whether your business can use any of these exemptions before incorporating your business in Iran.
Who will you be reporting to?
When you establish your company in Iran, you have two months to register your company with Iran’s National Tax Administration (INTA). The registration starts by submitting the company’s documents online. INTA will then assign a regional tax bureau for your company to report to. You will have to visit the bureau to set up your tax account. All matters regarding the income tax will be settled through these local entities.
What does the reporting procedure look like?
The first step is to select the right fiscal year when you set up your company. The tax law does not restrict the business’s fiscal year. So, you can choose the year to match your headquarter’s fiscal calendar or select any other arbitrary date as the beginning of the year. We advise you to choose a fiscal year that ensures your reporting will fall within a low-workload period.
The first step is to select the right fiscal year when you set up your company. The tax law does not restrict the business’s fiscal year. So, you can choose the year to match your headquarter’s fiscal calendar or select any other arbitrary date as the beginning of the year. We advise you to choose a fiscal year that ensures your reporting will fall within a low-workload period.
Anyway, the importance of the fiscal year is that, after it ends, you have four months to submit your accounting documents to the tax bureau. You will also pay your tax to INTA within this four-month period. At this stage, the tax you pay is what you calculate. However, you will have to “defend” your reports at the local tax bureau, and they will determine your final payable tax.
To do so, you will have to send the accounting ledgers, balance sheet, statement of income, and the cash flow statement. Having financial and accounting software will help you accelerate these processes since you will also be submitting your accounting reports online. Then, you will receive an invitation letter from the tax bureau to have an appointment with them and prove the accuracy of your report.
If you have a sound accounting procedure in place, you will not have to worry about this meeting. Otherwise, if the tax officer disapproves your accounting reports, they will determine your payable tax through their calculations. If this is the case, they will inflate your revenue and deflate your expenses to come up with higher income. So, make sure you have the right finance manager and create reliable accounting reports.
What if you do not have a local company or branch?
OK, all the above explanations apply to companies that have a local presence. What if you are a contractor, who is working in Iran as a foreign entity? Or a company planning to sell your license to an Iranian partner? Do you still have to pay the income tax in Iran?
The answer is yes. You are obligated to pay taxes on any income that you make from the country. The rate of the income tax for you is still 25%. The difference is in the way INTA calculates your profit. At INTA, they have tables that determine what percentage of your revenue is subject to the income tax.
For example, the taxable income of foreign oil exploration contractors is 15% of their contract value. So, their payable tax is 25% times 15%, which is 3.75% off of their contract value.
2. Salary Tax
Salary tax is what your employees pay. Since it is subtracted directly from the employee’s paycheck, it does not add any financial burden on your company. So, why should you care about it?
Since the tax law holds you responsible for deducting and paying your employees’ salary tax on a monthly basis, failing to do so, will create penalties for your company, not the employees. So, although the money comes from your employees’ pocket, it is the company that must pay the cash to INTA.
What is the rate?
The salary tax is 10% of the employee’s salary above the minimum taxable salary and up to a higher cap threshold. What does that mean? It means that the salary tax is calculated using stepped rates as follows:
Monthly Salary Range (IRR: Iranian Rial)
Tax Rate
0-20,000,000 0%
20,000,000-120,000,000 10%
> 120,000,000 20%
So, here are a few examples that show how to make the calculations:
- For the employees who earn less than IRR20mn per month, the salary tax is 0%, and they do not pay any taxes.
- For the employees who earn IRR30mn, the first IRR20mn is exempt from the salary tax. The tax rate for the remaining IRR10mn will be 10%. So, this employee’s salary tax is 10% × IRR10mn = IRR1mn.
- On the upper side, if an employee’s monthly salary is IRR150mn, the first IRR20mn are exempt from the salary tax. The portion from IRR20mn to IRR120mn is subject to a 10% tax. And the final IRR30mn is subject to a 20% tax. The total salary tax for this employee will be 0% × 20mn + 10% × (120-20)mn + 20% × (150-120)mn = IRR16mn.
Note that the above calculations are simplified. For the exact calculations, you will have to deduct items such as insurance payments from the employee’s taxable salary. We highly advise that you consult with an experienced accountant if you are going to pay out your employee salaries.
Who will you be reporting to?
You will be reporting to and settling all matters regarding the salary tax with your tax bureau – the same bureau that handles your annual income tax.
What does the reporting procedure look like?
You will be paying salaries at the end of each Iranian month. But before you pay your employees, you need to deduct taxes from their paycheck. You will transfer the deducted amount to INTA’s account and create a report for them. The report, which is often called the “salary list”, will include a list of employees’ names with detailed descriptions of their work hours, hourly rates, bonuses, and any other payment items. You have one month to submit the list to the tax bureau.
3. Social Security Organization (SSO) charges
Although the SSO payment is a type of insurance payment, we categorize it as a tax in Iran because of its resemblance to the conventional taxation system. However, note that the laws and procedures regarding the SSO originate from Iran’s labor law, rather than the tax laws.
Iran’s labor law mandates nationwide social security coverage– commonly referred to as insurance. The insurance covers retirement pension payments and health insurance for anyone who sells their work for money. Thus, all your company employees, as well as any consultants and external workers that you employ for short periods, will be subject to this law.
According to the labor law, the employer and employee must jointly pay for the employees’ social security on a monthly basis. This amount is known as insurance payment or the SSO payment.
As was the case with the employee salary tax, you, as the employer, must deduct the employee’s share of the insurance payment from his/her paycheck. But, unlike the salary tax, you must also pay a part of the amount.
What is the rate?
According to the labor law, the SSO payment is 30% of the employee’s salary after excluding the deductible items. These items include children allowance and business mission bonuses.
Meanwhile, if you give your employees some products as part of your compensation, the monetary value of these products will be added to the taxable salary.
The employee pays 7% of this amount, the employer must pay 20%, and the government must pay the remaining 3%. However, since the government does not pay its share, the employer is responsible for contributing 23% for each employee.
To better understand the process, imagine you have an employee to whom you pay IRR50mn per month. Assuming that the deductible items will sum to IRR10mn, the taxable salary will be IRR40mn.
So, at the end of the month, you will calculate and pay the SSO charges in the following manner:
- Employee’s contribution: Before giving the employee’s paycheck, you must deduct 7% of the taxable salary, 7% × IRR40mn = IRR2.8mn.
- Employer’s contribution: Then, you will have to set aside another 23%, i.e., 23% × IRR40mn = IRR9.2mn.
- Now, you pay the above amounts to SSO.
Who will you be reporting to?
When you incorporation your business or set up your branch in Iran, you will have a few months to register your company with the Social Security Organization (SSO). The SSO will assign your business to one of its regional offices. Then you must go to the office and set up your company’s SSO account. Upon completion, you will receive an ID, the “Workshop Code,” which you will use in your reporting to the organization.
What does the reporting procedure look like?
At the end of each month, you will submit a list of your employees including their names, work hours, hourly rates, bonuses, and any other payments to SSO. Also, you will transfer the SSO charges to the organization’s account.
The deadline for sending the documents and making the payments is one month.
4. Value-Added Tax (VAT)
The value-added tax (VAT) is a sales tax in Iran that the Iranian government has been implementing during the past decade. The tax is intended to apply to final consumption. Now, why should you know about the VAT? The answer is because every purchase transaction in Iran is subject to VAT.
The seller will add the tax amount to the overall purchase price and pay it to Value-Added Tax Bureau. It applies to both products and services.
What is the rate?
The government has been increasing the VAT rate during recent years. As of the current Iranian year, the VAT is 9%.
However, the Value-Added Tax Act exempts some industries from paying the VAT. Transportation and healthcare are among the industries that enjoy VAT exemptions. For more information, refer to Iran’s Value-Added Tax Act.
Who will you be reporting to?
After you register your company or branch in Iran, you will refer to INTA which is in charge of administering the direct tax and the value-added tax in Iran. Just like the case with the annual income tax, INTA will assign your company to a VAT bureau in your region. Note that VAT bureaus are different from the tax bureaus that we mentioned before. You will then open your company’s account at this local VAT office and conduct all VAT reporting and payments through it.
What does the reporting procedure look like?
Calculating the value-added tax in Iran follows an offsetting mechanism. What is the offsetting mechanism?
During each quarter, you will pay VAT on your purchases and the VAT received from your customers on your sales. At the end of the quarter, you subtract the amount of the paid VAT from the amount of the received VAT (offsetting). Then, you will pay the difference to INTA.
Reporting on the value-added tax in Iran is done quarterly. At the end of every three months of operation, you must log into your company’s page on INTA’s website and submit a complete list of your purchases and sales.
It is important to fill out these forms carefully because INTA will use the information you submit and the information that your suppliers and buyers submit to determine your annual income. Wrong information will result in paying penalties and extra taxes at the end of the fiscal year.
Any Other Taxes?
The taxes explained above, are the ones a company owner must be aware of. However, there are other taxes which might apply to you based on your specific operations in Iran.
For example, if you are going to trade on either of Iran’s exchanges, you will be paying a tax on every sale and purchase of your assets. Or, if you are selling a property or a car, you will have to pay their respective taxes.
So, it is wise to consult a tax specialist to know what taxes apply to your specific case.
Final Notes
Understanding the details of tax in Iran is crucial as it could affect your company’s financial performance in the country. Although it is possible to handle the reporting and record-keeping yourself, during the initial stages of operations in Iran, we recommend that you do the opposite of it.
You might miss deadlines, submit wrong reports, or just miscalculate the taxes. The penalties for mistakes are costly because:
- The government is trying to increase its tax revenue to reduce its reliance on oil and severely punishes tax fraud with hefty fines;
- The tax regulations are constantly changing and keeping up with the latest requirements is difficult.
Given the high risks of getting penalized, it is wise to invest in hiring an accountant or better yet a finance manager for your company. The person will be handling your accounting and sorting out your reporting requirements so that you would never miss a deadline.
You may read more about laws governing Taxation in Iran in below.
