Tax Regulations

Tax Regulations

Taxation constitutes one of the principal sources of government revenue used to finance public expenditures and general state expenses. Taxes are levied on individuals’ assets or income, as well as on the value added of goods and services supplied within society. In essence, the payment of taxes reflects the level of public participation in funding national public expenditures. Since the collection of any monetary amount from individuals imposes an obligation upon them, the Constitution recognizes statutory law as the sole basis for the establishment and collection of taxes. Matters relating to tax exemptions, remissions, and reductions are entrusted to legislation enacted by the Parliament. Accordingly, the collection of taxes at present is carried out exclusively pursuant to the Direct Taxation Act.

Legal Foundations of the Iranian Tax System

Definitions and General Principles

Related Parties

In relation to taxation and its assessment and collection, the principal related parties are as follows:

• The Tax Affairs Organization.
• The Taxpayer.
• The Payer.

The Tax Affairs Organization was established pursuant to Article 59(a) of the Third Economic, Social, and Cultural Development Plan Act of 2000. Under this provision, the government was authorized to establish the National Tax Affairs Organization as a governmental institution under the supervision of the Minister of Economic Affairs and Finance, with the objective of increasing the efficiency of the tax system, removing existing organizational obstacles, and centralizing all matters relating to tax collection. Upon the establishment of this organization, all duties, authorities, human resources, facilities, and equipment previously assigned to the tax affairs departments and divisions of the Ministry of Economic Affairs and Finance were transferred to it.

The payer is the person from whom the final payment of tax is made. The taxpayer is the person who bears legal responsibility for payment before the Tax Affairs Administration.

Tax Year

The tax year is defined as one solar year commencing on the first day of Farvardin and ending on the last day of Esfand of the same year. In cases where the fiscal year of a legal entity does not correspond to the statutory tax year, the entity’s own fiscal year shall serve as the basis instead of the legal tax year, pursuant to Article 155 of the Direct Taxation Act.

Tax Return

A tax return is the declaration by the taxpayer of taxable financial resources for the purpose of applying the relevant tax rates. The Tax Affairs Administration examines income tax returns submitted within the prescribed deadline and issues a tax assessment notice in order to determine and finalize the taxable base, in accordance with Article 156 of the Direct Taxation Act. Furthermore, under Article 158 of the same Act, the National Tax Affairs Organization may announce, through a public notice issued during the first half of each year, that in the following year it will accept certain taxpayers’ timely submitted returns without detailed examination and will audit only a selected sample in accordance with the provisions of the law.

Tax Dispute Resolution Board

Pursuant to Article 170 of the Direct Taxation Act, the Tax Dispute Resolution Board serves as the competent authority for addressing any disputes arising between the Tax Affairs Administration and the taxpayer concerning tax assessments under this law. In addition, the Board is authorized to examine complaints arising from enforcement measures related to government claims against individuals, whether natural or legal persons, in cases where tax regulations are applicable and enforceable, as provided under Article 216 of the Direct Taxation Act.

Taxpayers Subject to Taxation

According to Article 1 of the Direct Taxation Act, the following persons are subject to taxation:

• All owners of property and real estate located in Iran, where the decisive factor is the location of the asset within Iran.
• All Iranian natural persons residing in Iran with respect to all income earned inside or outside Iran, where nationality and residence in Iran are the determining factors.
• All Iranian legal entities with respect to all income earned inside or outside Iran, where Iranian legal status is the determining factor.
• All non-Iranian persons with respect to income earned in Iran, where the decisive factor is the generation of income within Iran, regardless of nationality.

Under Article 2 of the Direct Taxation Act, the legislator has excluded the following entities from the scope of the law:

• Ministries and governmental institutions.
• Entities whose budgets are financed by the government.
• Municipalities.

With respect to the above entities, two points merit attention:

First, only these entities themselves benefit from the prescribed exemptions. Companies whose capital is wholly or partially owned by the above entities are not entitled to such exemptions with respect to their share of income or profits.

Second, income derived from economic activities, including industrial, mining, commercial, service, and other productive activities carried out by the aforementioned entities, does not fall within the stated exemption. Such income is subject to taxation separately in each case at the rates prescribed by law. Accordingly, profit-generating activities of these entities, due to their operational and commercial nature rather than the exercise of sovereign authority, remain subject to taxation.

Tax Base

Financial resources, including individuals’ assets and income, constitute the tax base. The tax base refers to the source and foundation upon which tax is assessed and collected, which, under the Direct Taxation Act, includes assets and income.

Frequently Asked Questions on Tax Regulations