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How do foreign companies income taxes are calculated (Article 107 of direct taxation act)?

The taxable income of foreign juridical persons andenterprises residing abroad shall be assessed as follows:

In case of contracting business in Iran with regardto all types of work in the fields of construction, installations and technicalinstallations, including procurement and setting up of the same, and also inthe fields of transportation, preparation of design for buildings andinstallations, topography, drawing, supervision and technical calculations,provision of training and technical assistance, transfer of technology andother services, the taxable income in all cases will be 12% of total annualreceipts.

In case of income derived from Iran for granting oflicenses and other rights or transfer of cinematographic films, whether thelatter income is received as the price or the fee for the screening of thefilms, or under any other titles, the taxable income shall consist of 20% to40% of all payments received by them during a tax year. The applicable coefficients for determination of taxable income in each of the cases mentioned in thisparagraph shall be determined on basis of the proposal of the Ministry ofEconomic Affairs and Finance and approval of the Council of Ministers. Thosemaking the said payments shall be required to withhold, from each payment, theapplicable tax by taking into account the total payments made from thebeginning of the year up to the date of each relevant payment. They shouldremit the withheld amounts, within ten days, to the tax affairs office local totheir residence. Otherwise, the receivers shall be jointly and severallyliable for payment of the basic tax and other payments related thereto.

As for the operation of capital and other activitiesperformed by the aforesaid legal persons and enterprises in Iran through theagencies such as branches, representatives, agents and the like, theregulations of the Article 106 of this Act shall apply.

Note 1: In cases where the contractoperations subject to paragraphs (a) and (b) of this article are wholly orpartly assigned to Iranian legal entities as contractors, those making paymentsto such Iranian contractors should with­hold 2.5% of each payment as their ownaccount tax and remit it, within thirty days from the date of payment, to theaccount to be determined by the State Organization of Tax Affairs.

Note 2: If the relevant employer of thecontract subject to the paragraph (a) of this article is a ministry, a government institution, a state company or a municipality, then that part of the contract price which is used for purchase of supplies and equipment from domestic orforeign sources shall be exempt from taxation, provided the amounts relevant tothose supplies and equipment are included, apart from other items, in thecontract or in its further amendments or supplements.

Note 3: Branches and agents of foreign companies and banks in Iran that are engaged in gathering information orfinding markets in Iran for their parent entities, without having the right tomake transactions, and receive remuneration from them against their expenditures,shall not be subject to taxation in respect of such remuneration.

Note 4: In cases where foreign contractors assign, wholly or partly, the contract subject to the paragraph (a) of thisarticle to Iranian legal entities as subcontractors, any part of the receipts of the main contractor in respect of the supplies and equipment that arementioned in the first hand contract but purchased by the subcontractor, willbe exempt from taxation.

Note 5: The taxable income ofthe activitiessubject to the paragraph (a) of the Article 107 hereof, the contracts of whichwill be concluded from the beginning of the year 2003 onward s, shall beassessed according to the regulations of the Article 106 of this Act. The ruleof this Note shall not apply to the remaining part of the activities of thecontracts concluded before the year 2003.

Important note:

Non-residing foreign juridical persons (article 5above) that have not representative or branch in Iran, include article (104)and the rate of withholding tax is 5%. 

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