Chapter 5: Tax on Income Earned by Legal Entities Article 105 The aggregate income earned by companies, and the income earned from various sources in Iran or abroad, through profit making activities by other juridical entities shall, after levying the damages resulting from non-exempt sources and after having deducted tile exemptions as prescribed, excluding the cases subject to different rates under the provisions made in the present Act, be liable to 25% tax rate. Note 1: Concerning non-commercial Iranian juridical entities which have not been established for earning profit, in case they shall render profit-yielding activities, the total taxable income earned by same through profit-yielding activities shall be liable to taxation as per the rates laid down in Article 105. Note 2: As for foreign juridical entities and the entities domiciled outside Iran, excluding the ones liable under Note 5 of Article 109 and Article 113 of the present Act, tax liability shall be at the rates mentioned in the present Article 105 and on the basis of the total amount of taxable income earned by (hem in Iran and arising from use of their capital or the activities carried out directly by them or through their agencies such as branch offices, representatives; agents and the like, or on such incomes as they earn in Iran through the assignment of their concessions, turning over of their rights, transfer of technical know-how, or providing technical training or assistance and concession of Iranian movie films. Note 3: On the date when the income tax of juridical entities, including both Iranian and foreign, shall be assessed, the taxes paid prior to the date of assessment by the juridical entity shall be deducted from the amount of applicable tax in conformity with the relevant provisions, and the excess payment, if any, shall be reimbursed. Note 4: The natural persons and legal entities shall not be liable to any other taxes in respect of the dividend or the contribution they may collect from the companies requesting investment. Note 5: In cases where, in conformity with the approved laws and regulations, certain sums, under any title or name, except the income tax, shall be collectible out of the taxable income of natural persons or legal entities. Tax liability of such persons or entities shall be calculated at the rates set forth, after having deducted such sums, if any. Article 106 The taxable income of legal entities shall be assessed by verifying their statutory accounts books, in conformity with the provisions made in Article 94 and Clause (a) of Article 95 hereof, except for any income which may be assessed in a different manner according to the regulations of the present Act. In cases described under Article 97 of the present Act, assessment shall be carried out on arbitrary basis. Article 107 The taxable income of foreign legal entities and the institutes domiciled outside Iran shall be assessed in the following manner: a. Concerning the contracts in Iran, in proportion to the operations of any construction works, technical establishments including supply, erection and installation as well as transportation and the operations relevant to preparation of the design of buildings and various establishments, topography, cartography, supervision, technical calculations, providing training and giving technical assistance, transfer of technical know-how as well as other services, 12% tax rate shall apply to the total amount collected annually. b. As for the transfer of rights, assignment of concessions arising from Iran and the concession of movie films, the income which shall be earned by them as the price or royalty or any other title whatsoever, a tax rate ranging between 20% to 40% shall apply to the aggregate of the sums earned by them during one fiscal year. The coefficient for determination of taxable income applicable to each and every one of the cases mentioned in the present Clause (b) shall be proposed by the Ministry of Economy and Finance and shall subsequently be approved by the Council of Ministers. Tile entities bound to pay the sums mentioned above as well as the ones which shall pay the sums described in Clause (a) of the above Article 107 shall be required to deduct and withhold, from any payment they shall make, the tax applicable to the sums they have paid as of the beginning of the year up to the date they shall effect a new payment, and shall pay, within ten (10) days, such withheld amounts to the Taxation Affairs Administration of their place of residence. Otherwise, the ones collecting such sums shall collectively be liable to pay the original tax as well as any other sum applicable thereto. c. Concerning the exploitation and utilization of the capital as well as other activities which shall be rendered in Iran by the said legal entities and institutes, through their branch offices, representatives, agents and the like the provisions laid down in Article 106 of the present Act shall apply. Note 1: In cases where the operations of the contracts mentioned in Clauses (a) and (b) of Article 107 above shall be assigned, either totally or partially, to Iranian legal entities acting as contractors, on payment of any sums by such entities to Iranian contractors, an amount equal to 2.5% shall be deducted and withheld as “Tax on Account”, and shall be deposited, within thirty (30) days after the date of payment, in an account to be specified and determined by the State Taxation Affairs Organization. Note 2: In the case of contracts mentioned in Clause (a) of Article 107, if the employer shall be included among the ministries, government Institutes and companies or the municipalities, the portion of the Contract price which shall be allocated for the purchase of equipment and accessories through local or international procurements, shall be tax exempt, provided that the sums allocated to the supply of equipment and accessories shall separately be cited and recorded in the contract or in the amendments or addenda made subsequently thereto. Note 3: The branches and representative offices of foreign companies and banks in Iran which shall proceed to render activities for marketing and gathering of economic data and information in Iran for the holding company, without having the right to enter into a transaction in Iran, and which shall collect amounts from the holding company in order to meet the expenses and its financial requirements, shall not be liable to income tax. Note 4: In cases where foreign contractors shall assign, either totally or partially, to Iranian legal entities acting as sub-contractors, the contracts mentioned in Clause (a) of Article 107, equal to the amount which is allocated in the original contract for the supply of equipment and accessories, and which shall be expended by the sub-contractor for tile procurement of equipment and accessories, shall be exempt from payment of income tax due by the original contractor. Note 5: The taxable income of the activities mentioned in Clause (a) of Article 107 of the present Act, the contracts concerning which shall be concluded as of the beginning of Iranian year 1382 (March 21,2003), shall be assessed ill conformity with the provisions made in Article 106 of the present Act. Accordingly, the provisions made in the present Note 5 shall not apply to the activities which shall be rendered in connection with the contracts concluded before the beginning of Iranian year 1382 (March 21,2003). Article 108 In the case of reserves on which tax has not been paid before the date on which the present amendment shall take effect, If they shall be divided or transferred to capital, such reserves shall not be liable to taxation. However, if such reserves shall be divided or transferred to profit/loss account, or if the capital shall be reduced by tile amount of the reserve added to the capital account, they shall be added to. the taxable income of the year in which such reserves were divided or transferred or in which the capital was reduced. This provision shall not apply to the reserves of profits derived from tax-free activities of the institutes during the exemption periods, and the reserves mentioned in Article 138 of the Direct Taxation Act as amended, approved in February 21, 1988 up to the date of approval and ratification of the present amendment, after the relevant requirements prevailing up to the said date shall be established. In the case of reserves on which the applicable taxes have already been collected before the date of indispensability of the present amendment, if such reserves shall be divided or transferred to profit/loss or capital accounts, or if the institute shall. be dissolved, they shall not liable to any other taxation. Article 109 Taxable income of Iranian insurance institutions shall comprise as follows: l. Technical reserve funds at the end of the preceding fiscal year. 2. Premiums received on direct insurance after deducting there from the rebates. 3. Premiums of the collected re-insurance policies after deducting there from the rebates. 4. Commissions and shares of profit ill the assigned re-insurance transactions. 5. Profit accruing on the deposits of the re-insurer kept by assignor insurer. 6. The shares of profit of the re-insurers on account of indemnity paid on account of any policies other than life-insurance and redemption capitals and stipends of life insurance. 7. Other incomes. After deducting there from: 1. Stamp duty paid for the policies. 2. Medical expenses incurred for life insurance. 3. Commissions paid for direct insurance transactions. 4. Premiums paid for the assigned re-insurance policies. 5. Contribution paid to the Physical Injury Compensation Fund out of the premiums received on the compulsory insurance covering the civil liability of the land motor vehicles against third party. 6. Amount paid on account of redemption, capital and stipend of life insurance and indemnity paid on account of policies other than life Insurance. 7. Shares of the participation of the insured in profits. 8. Commissions and profit sharing of the insurers in the profits of the accepted re-insurance policies. 9. Interest accruing on the deposits of assigned re-insurance policies. 10. Technical reserve funds at the end of the fiscal year under consideration. 11. Other deductible expenses and acceptable depreciation. Note 1: Various types of technical reserve funds of insurance institutions (the technical reserves funds constituting the subject-matter of Article 61 of the Act Governing the Establishment of the Central Insurance of Iran and the Insurance Activities) for each branch of insurance, the scope and the manner of their calculation shall be in conformity with an Administrative Regulation which will be prepared by the Central Insurance of Iran, approved by the High Council of Insurance and finally ratified by the Minister of Economy and Finance. Note 2: Various types of technical reserves of the Central Insurance of Iran for each branch of insurance, their scope and the manner of calculation shall be determined by the General Meeting of the Central Insurance of Iran. Note 3: In direct insurance transactions, the premiums, commissions, reduction on premiums and share of insurers in the profits and the manner of calculation thereof shall be in conformity with the regulations laid down by the High Council of Insurance. All the items hereinabove mentioned, with the exception of commission, shall be specified in the insurance agreement. Note 4: The items concerning the re-insurance transactions, whether accepted or assigned, shall be subject to the terms and conditions stipulated in the contracts or agreements reached between the relevant insurance institutions. Note 5: Foreign insurance companies which shall earn any profit through re-insurance transactions with Iranian insurance companies, shall be subject to a tax at the rate of 2% of the premium they collect and the interest accruing on their deposit in Iran. In cases where Iranian insurance companies shall be active in the respective country of a reinsurance company, and if the Iranian insurance company shall be exempt from payment of taxes on income earned through reinsurance transactions, then the foreign insurance company shall as well be exempt from taxes in Iran. The Iranian insurance companies shall be under the obligation to withhold 2% of the amount they pay to a foreign re-insurance company covered by provisions of this Article and pay, within a maximum period of thirty (30) days, the amounts so withheld during each month to the local Taxation Affairs Administration together with a list containing the particulars of the re-insurer and the amount of the applicable premium. Article 110 Legal entities shall be required to submit to the Taxation Affairs Administration of the place where the principal place of activity of the legal entity is situated, not later than four (4) months after the end of any fiscal year, the tax declaration, balance sheet and profit/loss account supported by the accounts books, documents, evidences and vouchers, together with a list of particulars and addresses of their partners and shareholders with the amount of participation or the number of shares of the said partners and shareholders, and to pay the applicable tax, After submission of the first list, it shall be sufficient report changes, if any, in the following years, The place where tax declaration is to be submitted and where the taxes are to be paid by foreign legal entities and institutes domiciled abroad which have no domicile or representative office in Iran, shall be Tehran. The provisions of the present Article shall also apply to the owners of factories and legal entities during the period of their tax exemption. Note: Legal entities shall not be required to file separate tax declarations for their incomes concerning the tax assessment of which a different manner was laid down in conformity with the provisions of the present Act. Article 111 The companies which shall consolidate and undergo merger through establishment of a new company or through retaining the legal entity of a company, for taxation purpose shall comply with the following provisions: a. Establishment of a new company or effecting increase in the capital of the existing company, maximally equal to the amount of the registered capital of merged or consolidated company shall be exempt from payment of 0.002 (two per mill) stamp duty mentioned in Article 48 of the present Act. b. Transfer of the assets of merged or consolidated companies to the new company or the existing one, as the case may be, on the basis of their book value, shall not be liable to the taxation laid down in the present Article. c. The operations of the companies merged or consolidated into the new company or the existing one, shall not be subject to Dissolution Period Tax mentioned under income tax in the present Act. d. Depreciation of the assets and properties transferred to the new or existing company shall comply with the procedure and method which was in effect prior to the merger or consolidation. e. In cases where, as a result of the merger or consolidation, an income shall be allocated to the shareholders of the merged’ or consolidated company, such income shall be subject to taxation in conformity with the relevant provisions. f. All tax undertakings and obligations of the merged or consolidated companies shall be taken up by the new company or the existing one, as the case may be. g. The executive by-laws of above Article 111 shall be jointly proposed, not later than six (6) months after the date of approval of the present Amendment, by the ministries of Economy and Finance, and Industries and Mines, to be subsequently approved by the Council of Ministers. Article 112 Article 99 and the Note thereto shall apply to the contractors being legal entities, whether Iranian or foreign. Article 113 Income tax from all foreign shipping and airways concerns shall be collected at a flat rate of 5% on all amounts received by them as passenger fare or freight on merchandise, etc., carried from Iran irrespective of whether such amounts are received in Iran or en route or at destination. The representatives or branch offices of the above-said concerns are required to submit to the local Taxation Affairs Administration by the 20th day of each month, a statement of their receipts for the previous month and to pay the applicable tax accordingly. The above-said concerns shall not be liable to any other payment on account of income tax on such incomes. Should the said branch offices or representatives fail to submit the above statement in a timely manner, or if the statements submitted by them shall not correspond with actual facts, the tax in question shall be assessed on arbitrary basis according to the number of passengers and the volume of freight handled. Note: Where the tax applying to the income of Iranian shipping and airways companies in a foreign country shall exceed by 5% on the amount of fares collected, the Ministry of Economy and Finance shall be required, upon notification by the Iranian entity concerned, to increase the rate of tax applying to the income of shipping and airway companies of the said countries up to the amount of tax collected by tax authorities in the said countries. Article 114 The last director or directors of a legal entity shall have joint responsibility to submit, to the respective Taxation Affairs Administration, prior to the date on which the general meeting or other competent authorities of the company shall be called to decide on the winding up of the legal entity, a declaration demonstrating the assets and liabilities as on the date of the said call. Such declarations shall be made out on special forms which shall be provided for this purpose by the State Taxation Affairs Organization. A declaration signed at least by the authorized signatory(ies) of the legal entity and stamped (sealed) by the entity shall be valid for the Taxation Affairs Administration. Article 115 The basis for calculation of the tax applicable to the last term of operation of a legal entity which are to be wound up and dissolved shall be the value of such entities assets less its liabilities, paid-up capital and the reserves as well as the balance of the profit on which the tax has already been paid. Note 1: The value of the assets of legal entity shall be assessed at the sale price in respect of the items sold, and at the prices prevailing on the date of winding up and dissolution in respect of the remainder . Note 2: In cases where, among the assets of a legal entity which is to be dissolved, there shall be an asset(s), mentioned in Chapter 1 of Book III of the present Act, or the shares, contributions or right of priority of the shares of companies, and if upon the final transfer and conveyance of such asset(s), as the case may be, they shall be subject to the regulations of Article 59 arid the Notes under Article 143 of the present Act, when determining the basis for calculation of the tax applicable to the last term of operations of dissolved legal entities, the book value of the said assets shall not be included among the assets and properties of dissolved Legal entities. However, an amount equal to the book value of such Assets shall be deducted from the total amount of the capital and liabilities of such entities. The tax applicable to such asset(s), as the case may be, shall be calculated and claimed in conformity with the provisions made in Article 59 and the Notes under Article 143 of the present Act. Note 3: That part of the assets and properties of dissolved legal entities which, on the date of dissolution, shall be subject to final taxes mentioned in Article 59 and the Notes under Article 143 of the present Act, shall not be liable to taxation in the first transfer taking place after the date of winding up. Article 116 The liquidators shall be duty-bound to submit to the Taxation Affairs Administration concerned, within six (6) months after the date of winding up (i.e. the date of registration of dissolution with the Registrar of Companies), a tax declaration in respect of the company’s last term of operations drawn up and prepared in compliance with the provisions made in Article 115, and to arrange for the payment of the taxes due prior the winding up. Note: The tax applicable to the last term of operations of tile legal entities which are to be dissolved shall be calculated in conformity With Note 2 under Article 115 of the present Act, on the basis of the rates laid down in Article 105. Article 117 The Taxation Affairs Administration shall give priority to the examination of the declarations submitted in respect of the last term of operations of a legal entity according to the provisions of this Act, and in case the said Administration shall have any objectioJ1 to the contents thereof, it shall determine and notify the applicable amount of tax through the medium of a Tax Assessment Notice, within a maximum period of one ( 1) year from receiving the declaration, otherwise the applicable tax as given in the declaration submitted by the liquidators shall be considered as finalized. Should it transpire later on that any of the items of the legal entity’s assets were .not mentioned in the declaration, the tax applicable to such items as were not mentioned therein shall be demanded within the respite mentioned in Article 118 of this Act. Article 118 It shall not be authorized to portion out the assets of a wound up legal entity before obtaining a tax settlement certificate or giving security equal to the amount of the applicable tax. Note: The last directors of a legal entity, in case of failing to submit the tax return mentioned in Article 114 of the present Act, or if they shall submit unreal tax return, as well as the liquidators failing to observe the provisions laid down in Article 116 of this Act and the above Article 118, and the guarantor(s) of the legal entity and the guarantor partners (as described under the Commercial Code) and all the individuals to whom the assets of tile legal entity were portioned, commensurate with their share of the legal entity’s assets, shall be jointly and severally liable for the payment of the tax and the fines applicable to the legal entity, provided that tile tax shall be claimed within the period of respite laid down in Article 157 of the present Act, beginning as of the date of publication of the winding-up notice through the Official Gazette. Chapter 6: Incidental Income (Windfall Earning) Tax Article 119 The income earned in Iran in cash or in kind by any natural person or legal entity gratuitously in the nature of award or under any other title, shall be liable to tax on incidental income at the rates stipulated in Article 131 of the present Act. Article 120 The income liable to taxation under the present Chapter shall consist of 100% of tile income earned, and in the case of non-pecuniary income, it shall be assets according to the provisions of the present Act at the rate prevailing on the day the income is earned, excluding such property for which transactional value had been fixed under the terms of Article 64 hereof, in which case the transactional value shall be taken as tile basis for tax assessment purpose. Note: In case of settlement against consideration (exchange) and donation against consideration, except for instances enumerated in Article 63 hereof, the income liable to tax under this Chapter shall be the difference between the value of the objects of transaction as determined according to the provisions of this Article and considered to be earned by the party profiting by the transaction. Article 121 Settlement against consideration (exchange) with the option to cancel and revocable donations shall, for the purpose of taxation, be deemed to be final transfer, However, should a cancellation, termination by mutual consent or revocation take place within six (6) months from the effective date of the transaction, any amounts collected as tax under this Chapter shall be refundable. If, in such cases, any profits shall accrue to the transferee during the interim between the execution of the transaction and the date of cancellation, termination by mutual consent or revocation, the transferee shall be subject to tax in respect of the profits thereof. Article 122 In the case of settlement of a property, whose profits shall be granted for life or for a specific period on the grantor or some third party, the value of the property in question, assessed on the basis of the aggregate value of the property itself and the profit on the date, shall be the basis of tax liability for the grantee on the above date. Note: should any transfers take place before profits accrue, the value of the property as indicated on the deed of such transfer shall be taken as the basis for taxation to which the transfer shall be liable, as provided for in this Chapter. However, the basis for assessment of taxes applying to the last party to whom the property shall be transferred and who as well shall receive the profits accruing on the property shall consist of the difference between the price of the property under the above ruling and the sum which the transferee has paid as mentioned in the deed of transfer. Article 123 In cases where the profits of a property shall be transferred gratuitously on temporary or permanent .basis to anybody, such transferee shall pay the tax applicable to the profits of each year in the following year. Article 124 Property transferred to certain persons under a will, as far as a will is legally effective, shall, after the will becomes definite, be liable to taxation, In the case of heirs, the said property shall be added to their inheritance and the total Sum shall be subject to taxes on inheritance, In the case of other persons, the entire property shall be liable to taxation under this Chapter. Article 125 The regulations of this Chapter shall not apply to any transfer which shall be subject to provisions of taxation under the Chapter of death duty (inheritance tax).