The parliament on Wednesday approved laws based on which companies that recapitalize using share premiums will be eligible for tax breaks.
As per the new legislation, listed companies will get tax cuts on their net profit equivalent to 20% of the value of the increased capital via share premium.
Share premium is the difference in price between the par value, or face value of shares, and the total price a company received for recently-issued shares.
Also called capital surplus, share premium cannot be used for paying dividends or any other payouts and can only be used for whatever has been expressly laid out in the company's bylaws. A share premium account appears in the shareholders' equity section of the balance sheet.
Share premium is the additional paid-in capital in excess of par value that an investor pays. Listed companies have to submit evidence of recapitalization via share premium within three months to be eligible for the tax holiday.
The Majlis on Sunday approved a bill proposed by the government in which listed companies are obliged to improve their capital structure using share premium.
Direct Tax Act Tweaked
Lawmakers also revised some provisions of the Direct Taxes Act, which pertains to taxing listed companies. Accordingly, listed companies are required to increase floating stocks from the previous minimum 20% to at least 25% to be eligible for tax breaks.
Floating stocks represent the total number of shares that are open to public for investment. It is a measure that excludes closely-held shares. Closely-held shares are stock shares that are held by company insiders or controlling investors. In short, floating shares indicate the number of shares available for trading.
As per the previous provisions of Article 143 of Direct Taxes Act, there is up to 10% tax cut on income of companies that list their goods at commodity-based bourses (Iran Energy Exchange and Iran Mercantile Exchange). In addition, companies that are listed as equity markets (TSE and IFB) will get a 10% tax break on their income.
The revised law, however, stipulates that listed companies wanting to increase their floating stocks by 25% will benefit from tax breaks equivalent to two-fold of the above-mentioned tax cuts.
The decision to increase floating stocks was made last month amid unprecedented demand and huge inflow of liquidity into the bourse, to partly address concerns about the supply crunch in the share market, given the significance of floating stocks in strengthening the supply side.
Earlier the government announced that it would consider tax incentives for new companies wanting to list in fiscal March 2020-21.
Accordingly, potential listed companies will be accountable only for tax liabilities in the last fiscal year (March 2019-20) and the tax authority will not dig into unpaid taxes in previous years.
