Iran Among Most Tax Attractive Emerging Markets

Every week, press updates confirm the growing commercial interest of first class international groups in entering the Iranian market-whether it’s the US green light for export licenses to Airbus and Boeing, Renault’s joint venture, Peugeot’s extensive manufacturing contracts, or the return of major energy, oil and gas and infrastructure players to the market.

Less visible but just as dynamic, a number of private investors are currently implementing investment structures in sectors as diverse as finance, real estate and retail.

Beyond the commercial potential, how do Iranian taxes impact foreign investment profitability? Vincent Lacombe with multinational law firm Dentons has sought to answer the question.

Last September, Europe LLP entered into association with APP Legal Institute, an Iranian law firm based in Tehran, to better serve its international clients investing and doing business in Iran. The Tehran-based team advises international clients on a broad range of legal and tax issues, including corporate, infrastructure, regulatory, capital markets, employment and litigation matters.

Below is the full text of Lacombe's write-up exclusively shared with Financial Tribune:   

The economic growth of emerging markets boosts foreign direct investment and integrates their domestic economies to the world market. With the lifting of sanctions and a gross domestic product growth projected to reach 4.6% in 2017, Iran has been able to enter the new emerging market group and is expected to gain a solid share of increasing world FDI.  

This comes at a time when investors and financial institutions with huge available liquidity are struggling more and more to achieve a high return on investment. In this context, Iran’s taxes are among the lowest in emerging countries.

Thanks to a relatively moderate 25% corporate income tax and no domestic withholding tax on dividends, Iran is one of the emerging markets where locally created value and cash repatriation to the investor’s home country attracts the lowest taxation.

Even though in benchmark countries, depending on the investor’s home jurisdiction, relevant double taxation treaties may mitigate withholding tax on dividends, this generally does not change Iran’s first rank.  It is also important to note that Iran has signed DTTs with many countries.

> No Capital Gains Tax on Sale of Company Shares

The Iranian tax system does not provide for taxation of gains resulting from the sale of company shares. The sale of non-listed companies’ shares triggers a 4% stamp duty assessed on the par value of the shares. The sale of shares negotiated on Tehran Stock Exchange is subject to a 0.5% stamp duty assessed on the transaction value.

> Value Added Tax

Iran’s VAT rate is 9%. VAT credit can be reimbursed or carried forward without a time limit. It is anticipated that the Iranian VAT rate may increase to 10 or 12%.

> Double Taxation Treaties

Cross-border structures and transactions benefit from a number of tax treaties in force to avoid double taxation.

Iran has signed around 40 DTTs, notably with Austria, China, France, Germany, Indonesia, Kuwait, Lebanon, Malaysia, Oman, Poland, Qatar, Russia, South Korea, South Africa, Spain, Switzerland and Turkey.

> Free Trade Zones

Iran currently has seven free trade zones: Qeshm, Chabahar, Aras, Anzali, Arvand, Kish and Maku. These free-trade zones enable investors to benefit from investment guarantees under the Foreign Investment Promotion and Protection Act of 2002 (which also applies outside FTZs), protection of registered trademarks and intellectual property rights, 100% foreign ownership, no restrictions on repatriation of capital and finally no entry visa requirements.

Revenues from commercial or industrial activity are, under certain conditions, tax free for 15 to 20 years from the date of the transaction.  This has been extended to 25 years by a decision of October 1, 2016, but has not yet entered into force.

Moreover, importation of raw materials and machinery for production and manufacturing is free from all kinds of duties and taxes.

> General Tax Incentive in Tourism

On October 2, 2016, Deputy Economy Minister Mohammad Khazaei stated that both foreign and Iranian investments in the tourism industry will enjoy tax exemption for 5 to 13 years depending on the area.