INTRODUCTION

Summary of Principal Iranian Taxes:

The principal taxes in Iran are corporate and personal taxes on income. The Iranian tax law is formulated in a way to encourage investments in producing activities, mainly industry and mining. This is done through low tax rates and various facilities and exemptions.

Iran Tax Law on Profits and Other Income:

Profits of Iranian corporate entities are subject to Corporate Income Tax Law of The Direct Taxation Act of1988asamendedonMay1992. Personal profits and income are subject to the same act.

The Ministry of Economic Affairs & Finance and The AdministrationofTaxLaw:

The Ministry of Economic Affairs and Finance is the authority responsible for tax arrangements, including such national taxes as customs and excise duties. The assessment of taxable income is undertaken by district tax auditors who are, as defined by the above mentioned Act, competent authorities in respect to technical, specialized and administrative tax issues.

CORPORATE TAXES

The taxable income of all corporateentities including local-foreign joint ventures is assessed on the basis of their book accounts.

Resident Companies:

Corporate income tax is assessed by way of deducting a “corporate tax” of 10% of the taxable income. There maining 90% of taxable income is taxed according to the progressive income tax table prescribed in the tax law:

Non-Resident Companies:

1.Inthe case of non-resident companies operating in Iran, whose income is earned through granting licences and concessions, the income tax is assessed at rates ranging from 20% to 45% (the above mentioned progressive table will apply to non-resident companies, on their part of taxable income):

a)in the case wherea government company is the party receiving such services from a non-resident company, 20% of the incomeearned within a tax year is assessed as taxable income;

b)in the case where the producingunit is located in a deprived or semi deprived area, and provided that the activity in questionis not one of the tax exempted activities, 20% of the income earned in a tax year is assessed as taxable income;

c)in the case of othernon-resident companies 45% of their income earned in a tax year is assessed as taxable income

2.In the case of non-resident companies operating in Iran, whose income is earned through providing technical training and assistance the income is assessed a trates ranging from 20%to 45% (the fore- mentioned progressive income tax table will apply on their part of taxable income):

a)in cases where a government company is the party making payment, if at least 35% of the total income earned by a non-resident companyin a tax year is spent on salaries in Iran, 20% of the income earned in a tax year is assessed as taxable income, otherwise a rate of 30% will be applied;

b)in cases where at least 35% of the total income earned in a tax year is spent on salaries in Iran, if the producing unit is located in a deprived or semi deprived area, 20% of the total income earned in a tax year is assessed as taxable income, otherwise a rate of 25% will be applied;

c)incaseswherethe amount spent on salaries in Iran is less than 35% of the total income earned in a tax year, if the producing unit is located in a deprived or semi deprived area, 35% of the income is assessed as taxable income and in the case of producing units located in other areas a rate of 40% will apply;

d)inthe case of other companies, if the minimum amount spent on salaries in Iran is 35% of the total income earned in a tax year the taxable income is assessed at 35%, otherwise a rate of 45% will apply.

3.Thetaxableincome of contractual activities of companies or non-resident natural persons operating in Iran in relation to any operation concerning construction, technical installations, transportation, preparation of construction and installation drawings, surveying, supervising, and technical calculations is assessed at a rate of 12% of their annual income.

LOCAL TAXES

Resident and non-resident companies are subject to municipal tax at a rate of 3% of their taxable income. Governmental companies and individuals' salaries are an exception to this rule.

ALLOWABLE DEDUCTIONS

General Rule:

Allowable deductions include all expenses directly connected with the conduct of the business. These expenses mainly include: the price of purchased goods or the price of consumer goods used as part of sold goods and services, personnel expenses, rent, rented equipment, overhead expenses, insurance premiums, expenses related to research, testing and training, compensations, transportation, unsuccessful mining exploitations, losses arising from exchange of currency, auditing and administrative expenses and others.

Depreciation:

Generally, all assets owned or used by a company for the purpose of its trade are depreciable, whether tangible or intangible, new or used, if their values necessarily diminish with time or by usage. Depreciation is calculated on the first day the asset is made available for use by the entity. Establishment expenses such as registration fees and consultancy fees are depreciable upto a maximum period of 10 years. The depreciation rates are indicated in the depreciation table which is prepared by the Ministry of Economic Affairs and Finance and approved by the Council of Ministers. Depending on the case, the calculation method could be straight-line or declining-balance. Overall, expenses arising before the exploitation period is depreciable upto a maximum period of ten years starting from the exploitation date.

Tax Free Reserves:

Contributions made to pension schemes, the social security organization, insurance companies and amounts up to 10% of annual payments saves for pension, retirement, compensation given on dismissals and repurchasing of employee services are considered tax free reserves provided that:

a)such reserves are kept under the supervision of The Ministry of Economic Affairs and Finance;

b)such amounts are kept within a separate account with an Iranian Bank, and

c)the reserve is not used for purposes other than those prescribed by the law.

TREATMENT OF LOSSES

Expenses related to compensation of damages incurred upon the assets and activities of an entity are considered as allowable deductions provided that:

a)there is adequate evidence for its certainty;

b)its nature and amount is specified and that;

c)a second party is not liable for its compensation.

LIQUIDATION AND DISSOLUTIONS

Income arising during the course of liquidation and dissolution is subject to corporate income tax at the normal rates, so that capital gains arising on the disposal of fixed assets are added to taxable income in the normal manner.

TAX INCENTIVES

Government incentives on taxation are available to investors as a range of chronological exemptions on priority producing activities.

Housing Projects:

The income resulting from low and medium cost housing projects, subject to the actual transfer of ownership, is fully tax exempted provided that the criteria prescribedby The Ministry of Housing, and Economic Affairs & Finance are met.

Agricultural Activities:

The income resulting from agricultural, husbandry, forestry, bee keeping activities and the like are fully tax exempted.

Producing and Mining Activities:

A.The income earned by producing and mining units upon the permission obtained from the relevant ministries and subject to prioritiesprescribed as (1), (2) & (3) will enjoy tax exemption for 8, 6 and 4 years respectively, provided that they are located outside the 120km radius of Tehran and 50km radius of Isfahan. As an advantage to Iran-foreign company joint ventures the minimum exemption period will be 6 years. The list ofpriority projects is prepared and made availableby the government at the beginning of each 5 year development plan.

B.Moreover, the producing and mining units located in less developed areas enjoy an additional extension equal to half amountof the exempt period. For example a priority 1 pharmaceutical project will enjoy an 8 year tax exemption if located outside the 50km radius of Isfahan, but if located in a less developed area such as Hashtroud ( a town in East Azerbaijan Province) it will enjoy(8-2=4 , 8+4=12) a 12 year tax exemption period.

The list of less developed areas is prepared by the Plan and Budget Organization at the beginningof each 5 year development plan.

C. 20% of the declared taxable income resulting from producing, mining, design and engineering, and design and assembly activities is tax exempted provided that the related exploitation permit is acquired.

D. The declared profit resulting from industrial and mining activities appropriated for the renovation, expansion, completion of existing industrial and mining units and/or being reserved for setting up new industrial and mining units is tax exempt.

E. 100% of income resulting from the export of finished industrial goods, agricultural products, and the related convertible & supplementary industry products and 50% ofincomeresulting from export of other goods and commodities intended for promoting the export of non-oil commodities are tax exempt. The list of tax exempt products is suggested by the Ministries of Economic Affairs & Finance, Commerce, Agriculture, Construction, and Industry during each development plan and approved by the Council of Ministers.

F. 100% of income resulting from transited commodities through Iran is tax exempt provided that no modification is made to the nature of the commodity(s) in question.

G. Companies withenlisted shares on the stock exchange are exempted from 10% corporate income tax, provided that the related equity transactions are registered by the stock exchange agents.

Moreover, the dividend allocated or paid to shareholders is tax exempt provided that:

a) the share of the company are enlisted;

b) the shareholder' share of equity is less than 5%;

c) the number of shareholders within the company is not less than 100.

H.All tourist institution, agencies, hotels etc. which have obtained the related permit from the Ministry of Culture and Islamic Guidance are exempted from 50% of their annual tax (5 star hotel are an exception to this rule).

TAXYEAR

For a corporate entity the tax year is defined as an Iranian year starting from 1st of Farvardin (21st of March) and ending on the last day of Isfand (20th of March).
However, in the case of legal entities with different financial year it is possibleto assume their financial year as the basis for tax assessment. The deadline for submitting the returns and accounting records is 4 months after the end of the financial year.

RETURNS, ASSESSMENT & APPEALS,DELAYS

An annual return must be filed, usually within four months of the close oftheprecedingfinancialyear. On those returns which are submitted and paid within the legal time an amount equal to 4% of the payable tax is deducted as “good pay prize”. In cases where accounting records have not been kept according to the prescribed regulations an estimated assessment isissued.Inthisevenit is on the taxpayer toprovide sufficient proof that the amount so assessed is excessive.
Assessments are issued every year within 12 months after the deadline for submitting returns. Objections to the assessment could be made within one month after the receipt of the official notice. If the documents presented by the taxpayer are accepted and approved, final agreement could be reached with the head tax auditor. Otherwise, the case is referred to The Initial Board of Tax Disputes for further investigation. Taxpayers with approved accounting records who have, in threeconsecutive years, paid their due tax without referringto The Initial Board of Tax Disputes will enjoy a “good pay prize” on their credit tax account equal to 5% of the total 3 year tax amount. In case the taxpayer again has objection the case may be referred to the High Council for Tax Affairs.

TAX AUDITS

Tax or fiscal audits of companies and businesses are undertaken periodically by district tax auditors.

SampleCalculationofCorporateIncomeTax

Assumption:

Taxableincomeof hypotheticalproducingjointventurecompany isRls.2,000,000,000afterallowabledeductions. The share holding ratiois 40% foreign and 60% Iranian.

25%of the income derived from exports (taxexempted)
20% of the income reserved for expansion (taxexempted)

Totalincome

less:25% income from exports exempted : Rls. 2,000,000,000
less:20% income for expansion exempted :Rls.500,000,000

Calculationof foreign share according to income taxs chedule
(Art. 131amended )

PriorityActivitiesEnjoyingTaxExemption
intheIranianMainland

( Annex to Article132 of the Direct Taxation Act.)
Tableone ( 8 years Tax Exemption )

Industriesunderthiscode,asbelow, do notenjoyTaxExemption:

TableTwo(6YearsTaxExemption )

Tablethree
( ListofProducingActivitiesExcluded
fromtheThirdPriorityofTaxExemption )