Review of the Fiscal Year in a Holding Company

Review of the Fiscal Year in a Holding Company

The calculation of the fiscal year for companies governed by the Commercial Code is conducted as follows:

• A fiscal year refers to a twelve-month business period. For natural persons, the fiscal year must correspond to the Iranian solar calendar year. For legal entities, the fiscal year may or may not coincide with the solar calendar year. In practice, a company’s fiscal year usually runs from the first day of Farvardin to the end of Esfand of the same year.
• Financial statements must be submitted to the company inspector within the legally prescribed timeframe. The first fiscal year extends from the date of incorporation until the end of the final month of the designated year, regardless of whether a full twelve-month period has elapsed. From the commencement of the second fiscal year onward, the calculation follows a regular twelve-month business cycle.
• In addition, the preparation of the assets ledger must be completed within fifteen days following the end of the fiscal year and not necessarily by the fifteenth of Farvardin of the following year, pursuant to Article 9 of the Commercial Code.

The tax year is defined as one solar year beginning on the first of Farvardin and ending on the last day of Esfand. However, for taxable legal entities whose fiscal year does not correspond with the tax year as stipulated in their articles of association, the income of their fiscal year serves as the basis for tax assessment. In such cases, the deadline for submitting tax returns, balance sheets, profit and loss statements, and for paying the assessed tax is four solar months after the end of the fiscal year.

The Impact of the Fiscal Year on Tax Calculation and Profit Distribution in a Holding Structure

The Effect of Pledged Shares

Pledged shares serve as security for potential damages that shareholders may incur as a result of individual or joint misconduct by directors. Holding such shares is mandatory for the chief executive officer and legal entity members of the board of directors.

The minimum number of pledged shares is determined by law, while the maximum number is specified in the articles of association.

The statutory minimum is one block of shares, and in the absence of a share block, one single share. Pledged shares must be registered shares and carry voting rights as well as the right to receive dividends.

The law does not explicitly state that dividends derived from pledged shares are themselves subject to pledge. Nevertheless, by reference to Article 786 of the Civil Code and the concept of separable benefits, it is generally interpreted that although the shares are pledged, the dividends are not subject to the pledge.

There is no legal restriction on the type of shares that may be pledged. They may be ordinary or extraordinary, including founders’ shares or preferred shares, capital shares, or profit-sharing shares.

Pledged shares are non-transferable. Consequently, directors may not transfer all of their shares during their term of office and may transfer only the portion that is not designated as pledged shares.

Because directors must hold pledged shares, not all a company’s shares need be bearer shares, although all may be registered shares. Failure to provide the required pledged shares within one month following the occurrence of a reason necessitating an increase in pledged shares is deemed equivalent to resignation.

Pledged shares remain under pledge until a tax clearance certificate is obtained. Approval of the balance sheet and profit and loss account for each fiscal period constitutes a discharge of liability for directors for that period. Upon issuance of the discharge, the pledged shares are automatically released.

Stamp Duty on Shares and Equity Interests of Companies

The shares and equity interests of all Iranian companies subject to the Commercial Code, including subsidiary and parent companies, except cooperative companies, are subject to stamp duty based on their nominal value.

Stamp duty on shares and equity interests, as well as on capital increases and additional shares, must be paid through stamp cancellation within two months from the date of registration of the capital increase with the Companies Registration Office.

Capital increases in companies that have previously reduced their capital are exempt from additional stamp duty to the extent that stamp duty has already been paid.

Failure to comply with stamp duty regulations does not invalidate the relevant instrument. However, pursuant to Article 48 of the Direct Taxation Law, any violation results in a penalty equal to twice the amount of the unpaid stamp duty, in addition to the principal amount.

All institutions and individuals who trade, receive, or settle such instruments within Iran are jointly and severally liable to pay the prescribed duties, in accordance with Article 49 of the Direct Taxation Law.

Tax Arrangement in Iran for Commercial Companies Merged into a Parent Company

Commercial companies are classified as legal entities. Accordingly, their tax status is governed by Chapter Five of the Direct Taxation Law enacted in 1988.

Natural and legal persons are not subject to additional taxation on dividends or equity profits received from companies in which they hold shares or equity interests.

Pursuant to the amended Article 111 of the Direct Taxation Law, companies that are merged through the establishment of a new company or through the continuation of the legal personality of an existing company are subject to the following tax provisions:

• The establishment of a new company or an increase in the capital of an existing company, up to the total registered capital of the merged companies, is exempt from the stamp duty of two percent referred to in Article 48 of the Direct Taxation Law.
• The transfer of assets of the merged companies to the new or existing company, as applicable, at book value, is not subject to taxes imposed under the Direct Taxation Law.
• The operations of the merged companies conducted within the new or existing company are not subject to the dissolution-period income tax.
• Depreciation of the transferred assets must continue in accordance with the depreciation method applied before the merger.
• If, as a result of the merger, any income accrues to shareholders of the merged companies, such income shall be subject to tax in accordance with the relevant regulations.
• All tax obligations and liabilities of the merged companies shall be assumed by the new or existing company, as applicable.

Frequently Asked Questions Regarding the Review of the Fiscal Year in a Holding Company