Taxes play a crucial role in shaping the economy of every nation, serving as an important revenue source for governments to finance public services and infrastructure. Additionally, they influence the behavior of consumers and producers, contribute to social welfare, and encourage investment—making them a cornerstone of fiscal policy worldwide. For foreign investors looking for opportunities in Iran, it is important to understand the concept of taxation, the different tax categories involved, and notably, the available tax exemptions.

Taxation can be defined as the transfer of a portion of society’s income or profits generated from economic activities to the government; as the government has provided the tools and facilities for earning that income and profits. The primary Act governing taxes in Iran is the Direct Tax Act of 1988, revised in 2015 (hereinafter referred to as DTA).

 

Individuals Responsible for Paying Taxes in Iran

 

To gain a comprehensive understanding of Iran’s taxation framework, it is important to identify who is liable for tax payments and who is not. In this regard, according to Article 1 of the DTA, the following individuals are subject to tax payment:

  • All owners, whether natural persons or legal entities, in respect of their property or properties located in Iran;
  • Iranian natural persons residing in Iran, in respect of all their income earned in Iran or abroad;
  • Iranian natural persons residing outside of Iran, in respect of all their income earned in Iran;
  • All Iranian legal persons that generate income in Iran or abroad; and
  • Any non-Iranian person (whether natural or legal), earning income in Iran as well as incomes from granting licenses or other rights, or for providing trainings and technical assistance, or for the transfer of cinematographic films (whether the latter income is received as fees or exhibition rights, or any other title).

 

Individuals Not Responsible for Paying Taxes in Iran

On the other hand, according to Article 2 of the DTA, certain individuals are exempt from paying taxes in Iran. These include:

  • Government ministries and institutes;
  • Government budgeted enterprises;
  • Municipalities; and
  • Islamic Republic Foundations and statutory bodies authorized to be exempted from taxation by the late Imam Khomeini and the Supreme Leader

 

Types of Taxes in Iran

 In Iran’s tax system, taxes are imposed on various items and are divided into two main categories: direct tax and indirect tax. Each category has different tax subcategories, which we will describe in detail below.

  1. Direct Tax

Direct tax is a type of tax collected directly from the income or assets of individuals or companies, with the responsibility of paying it resting on them. For natural persons, direct tax rates are progressive, increasing with income levels. However, legal entities such as companies are generally subject to a flat tax rate of 25%, as prescribed under Article 105 of the Direct Tax. Direct taxes are primarily divided into two categories: property tax and income tax, each with their own subcategories. The main examples of direct taxes include:

1.1. Property Tax:

Property tax is a tax that is based on property or wealth. In other words, property tax is imposed on assets that the owner has obtained or inherited. Property tax is commonly used as a mechanism to adjust wealth, particularly in societies with significant wealth inequality. Examples of property taxes include inheritance tax and stamp duty tax, which are explained below.

  • Inheritance Tax: If, as a result of a person’s death, property remains from the deceased, it will be taxed as described in Article 17 of the Direct Taxes Act.
  • Stamp Duty Tax: Stamp duty is charged on all negotiable commercial instruments issued or negotiated and used in Iran, as well as on documents indicating title to merchandise, such as air and sea bills of lading and merchandise insurance policies.

 

1.2. Income Tax:

Income tax is a type of tax that is imposed by the government on individuals and entities. It varies depending on the income and gains of the tax payer. Generally, the tax amount is a percentage of taxable income, with rates increasing as income rises. The rates may also differ based on the type or characteristics of the income. The main types of income tax are as follows:

  • Real Estate Income Tax: This category includes earnings from real estate transactions, such as rental income, vacant house tax, real estate transfer tax, goodwill tax, and revenue from sales of newly constructed properties.
  • Agriculture income tax: Agriculture income is also subject to taxation, but in Iran it has been considered as an exemption. This means that in Iran, the income derived from all agriculture activities —including animal rearing, stockbreeding, fish farming, beekeeping, poultry husbandry, fishery, sericulture, revival of pastures and forests, horticulture of any type and palm trees— is exempt from payment of tax (Article 81 of DTA).
  • Salary Income Tax: Whenever a person works for another natural or legal person and receives salary and income in exchange for this work, these salaries are subject to salary income tax. Salary income tax constitutes a significant portion of state revenue and is typically withheld at source by employers in accordance with the law. The way to pay this tax is that the employers who know the salary of their employees in advance, deduct the tax from their salaries and pay it to the government account before paying them. The amount of annual salary income allowance is determined by the state annual public budget laws.
  • Taxes on Income from Professions: This type of tax is a direct tax that is taken from the income of the professionals and independent business owners, such as tradesmen, mine operators, doctors, lawyers, etc.
  • Tax on Income Earned by Legal Entities: According to article 105 of the DTA, the aggregate income earned by the companies, and the income from the profit-making activities of other legal persons, derived from different sources in Iran or abroad, less the losses resulting from non-exempt sources and minus the exemptions, is taxed at a flat rate of 25%, except the cases for which separate rates are provided under the DTA.
  • Incidental Income Tax: According to Article 119 of the DTA, cash or non-cash income that a natural or legal person earns ex gratia or as an award or under any other similar titles, is subject to incidental income tax.
  • Tax on Aggregate Income Earned from Various Sources: When an individual earns income from multiple sources, the tax liability is is calculated based on their total income over the year.

 

* Income Tax Rate for Natural Persons

 According to Article 131 of the DTA, the rates of income tax for natural persons —except where separate rates are specified elsewhere in this Act—are as follows:

  • For annual taxable income up to IRR five hundred million (500,000,000), a tax rate of 15% shall apply;
  • For annual taxable income exceeding IRR five hundred million (500,000,000) up to IRR one billion (1,000,000,000), a tax rate of 20% shall apply;
  • For annual taxable income exceeding IRR one billion (1,000,000,000), a tax rate of 25% shall apply.

 

  1. Indirect Tax

Indirect taxes are levied on goods and services and are imposed on the consumer. They are categorized into three main types: import tax, consumption and sales tax, and value-added tax. These will be discussed below:

  • Import Tax: Also known as customs tax, this tax is imposed by each country on the import of various goods. It is determined based on the macroeconomic policies and conditions of each country. The import tax rates are usually calculated based on the price and characteristics of the goods imported. The most important subcategories under import tax include tax on customs duties, commercial profits and imported cars duties.
  • Consumption and sales tax: Governments often impose taxes on the purchase of certain goods, and people who buy these goods in large quantities must pay more tax. Consumption tax is applied to a range of products, including petroleum products, medical and industrial alcohol, audio and video tapes, luxury items like caviar and etc.
  • Value-Added Tax (VAT): VAT represents the variance between purchase tax and sales tax within a specific timeframe. Ultimately, it is the customer who bears the burden of this tax. Sellers collect VAT in exchange for providing goods or services, and they are responsible for remitting this tax to the relevant tax authority. VAT is a continuous process from production to distribution, with each stage along the supply chain requiring payment at each stage. According to paragraph (I) of Note (1) of the Single Article of Iran’s Budget Act approved on February 6, 2025, the value-added tax rate has been set at 10 percent.

 

Tax Exemption vs. Zero-Rate Tax:

In the field of the DTA, two terms are commonly used interchangeably: tax exemption and zero-rate tax. However, they have distinct differences that are crucial for a comprehensive understanding of the taxation system.

Tax exemption refers to the legal exclusion of certain sources of income from tax payments. This exemption is typically employed as a tool to implement government support policies. The primary objective behind granting tax exemptions is to support various businesses. Therefore, when certain companies and businesses are exempted from tax obligations, it is primarily to foster their growth and success.

Zero-rate tax, on the other hand, is a tax policy where individuals or companies are exempted from paying any tax for a specified period, such as five years. Zero-rate taxation aims to attract investment, stimulate employment, boost production, strengthen the private sector, and prevent private businesses from bankruptcy, given their vital role in the economy.

The differences between tax exemption and zero-rate tax are as follows:

  • In the case of tax exemption, certain businesses or industries —which will be discussed further—are exempt from paying taxes due to their specific roles or nature in the economy. In contrast, zero-rate tax applies temporarily, such as for five years.
  • Businesses that are exempted from paying tax are not required to file tax returns regularly; however, activities under zero-rate policies must adhere to the timely submission of tax returns. According to paragraph (A) of Article 132 of the DTA, in the case of zero-rate tax, the relevant taxpayers are obliged to tax returns and submit their statutory books and accounting documents to the Iranian National Tax Administration in accordance with the procedures and deadlines specified by law. After review of the tax returns by the Iranian National Tax Administration, the zero-tax rate will be applied.

 

Examples of Zero-Rate Tax

  • Production and Service Units with Over 50 Employees: To encourage employment creation, units with more than 50 workers can benefit from a zero-tax rate. According to Article 132 of the DTA, income declared from production and mining activities, generated by non-governmental legal persons, as well as income from services provided by hospitals, hotels, and tourist residential centers—also non-governmental legal persons—is subject to a zero rate tax for a period of 5 years. For less-developed regions, this provision applies for 10 years.
  • Tourism and Pilgrimage Offices: One hundred percent (100%) of the income declared by tourism and pilgrimage travel agents licensed by the relevant authorities is zero-rated, provided that such income has been derived from foreign tourists or from sending pilgrims to Saudi Arabia, Iraq or Syria.
  • Raw material export income: 20% of the income derived from the exportation of raw materials is subject to zero-rate taxation.
  • Non-oil goods and agricultural products: One hundred percent (100%) of the income derived from exportation of non-oil services and goods, and products of the agricultural sector is subject to zero-rate taxation.
  • Municipal Subsidiary Organizations and Institutions: if they are established for the purpose of undertaking tasks inherent to municipalities in the area of public, urban and service affairs and if one hundred percent (100%) of their capitals and assets is owned by municipalities, then they will be subject to zero-rate taxation. (Article 280 of the DTA)

 

Examples of Tax Exemptions

  • One hundred percent (100%) of the income derived by the Fund for Development of Agricultural Sector or by rural, tribal, agricultural, fishers, workers, employees, university and school students’ cooperative companies and their respective unions is exempt from taxation.
  • The income derived from educational and training activities by nonprofit schools, whether elementary, junior or senior secondary, technical or vocational schools, free technical and vocational schools licensed by Iran Technical and Vocational Training Organization or by nonprofit universities and higher education institutions and kindergartens located in less developed regions and villages, as well as the income derived from taking care of mental and physical invalids by the institutions engaged in such activities, shall be exempt from taxation, provided that the aforesaid institutions have permission from the respective authorities. The income of the institutions and clubs having permission from the Sports and Physical Education Organization is also exempt from taxation, if it is derived purely from sport activities.
  • Payments made by the insurance firms because of different types of life insurance, which the beneficiaries receive under insurance policies, is exempt from taxation.
  • The income of hand-woven carpet workshops and handicrafts, as well as the income of their respective cooperatives and production unions.
  • Movable dowry and marriage portion, whether movable or immovable; scientific awards; educational scholarships; as well as the income earned by inventors and discoverers based on their invention or discovery rights, shall be exempt from taxation in general. The income derived from research and studies by the centers holding research licenses from the competent ministries, is also exempt from taxation for a period of ten years.

 

Conclusion

 In conclusion, the tax system in Iran is a critical component of the country’s economic framework, providing essential revenue for public services and infrastructure development. For foreign investors, understanding the tax regime—especially the scope of liabilities, applicable exemptions, and sector-specific incentives—is essential for making informed and strategic investment decisions. Notably, the availability of tax exemptions and zero-rate policies presents significant opportunities in areas such as manufacturing, agriculture, tourism, and export-related activities. These fiscal tools are designed not only to attract foreign capital but also to foster long-term economic partnerships. However, the Iranian taxation framework is governed by a complex set of regulations and procedures, requiring detailed due diligence and local expertise. While this overview has outlined the foundational elements of the tax system, investors are strongly advised to seek professional guidance to fully navigate the regulatory environment and optimize their tax positions in Iran.