In Iran, employers are obligated to contribute to the social security system on behalf of their employees. This is a crucial aspect of payroll processing and tax compliance.

Social Security Organization (SSO) Contributions

The Social Security Organization (SSO) manages the primary social security program in Iran. Both employers and employees contribute a portion of their earnings to the SSO, which provides various benefits such as pensions, unemployment insurance, and healthcare.

Employers contribute 23% of the employee's monthly gross salary to the SSO. The total SSO contribution is 30% of the employee's salary, split between employer (23%) and employee (7%). Employers are responsible for withholding the employee's contribution from their salary and submitting the combined employer and employee contribution (total 30%) to the SSO. There might be slight variations in contribution rates for specific professions like commercial drivers who have a different employee contribution rate (9.5%).

Additional Employer Considerations

In addition to SSO contributions, employers are required to withhold income tax from employee salaries according to a progressive tax system. The tax rate depends on the employee's annual taxable income, with exemptions and deductions applied before calculating the tax amount. Employers must also file regular reports with the Iranian tax authorities detailing employee salaries, taxes withheld, and SSO contributions.

The Iranian tax system deducts a portion of an employee's salary towards income tax and social security contributions. Here's a breakdown of the deductions taken from an employee's paycheck:

Income Tax

Iran follows a progressive income tax system, meaning the tax rate increases as the taxable income rises. However, employees benefit from an annual tax exemption threshold. Here's how it works:

• Taxable Income: This is the employee's gross salary minus any exempt benefits or deductions allowed by law.
• Exemption Threshold: The Iranian tax authority announces an annual tax exemption threshold. Any income below this threshold is not taxed.
• Tax Rates: Once the taxable income surpasses the exemption, progressive tax rates are applied. The specific rates can change, so it's recommended to consult the official Iranian tax authority for the latest information.
• Employer Withholding: Employers are responsible for withholding income tax from employee salaries based on tax tables provided by the authorities. These tables consider the employee's declared income and marital status.

Social Security Contributions

Employees contribute a portion of their salary to the Social Security Organization (SSO) for social security benefits.

• Employee Contribution Rate: Employees contribute 7% of their gross salary towards social security.

Total Social Security Contribution: The total SSO contribution is 30% of the employee's salary, split between employer (23%) and employee (7%).

Important Note: There might be slight variations in contribution rates for specific professions like commercial drivers who have a different employee contribution rate (9.5%).

Additional Deductions:

In some cases, additional deductions may be applied to an employee's salary, such as private health insurance contributions or union dues, if the employee has opted for these benefits.

The Value-Added Tax (VAT) system in Iran applies to most goods and services sold within the country, including complexities specifically for services.

Standard VAT Rate and Exemptions

The current standard VAT rate in Iran is 9%. This rate applies to the taxable value of most services provided. However, several services are exempt from VAT, including financial and banking services. Service providers need to identify if their services fall under the VAT regime. If unsure, consulting with a tax advisor is recommended.

VAT Registration Requirements

Businesses exceeding a specific annual turnover threshold must register for VAT. This threshold is periodically adjusted by the Iranian tax authorities. Businesses below the threshold can choose to register for VAT voluntarily, which might be beneficial for businesses claiming VAT credit on their business purchases. Registered businesses receive a VAT registration number and are required to follow specific record-keeping and reporting obligations.

VAT Treatment for Service Providers

Registered service providers charge VAT on top of their service fees at the standard rate (currently 9%) unless the service is exempt. Businesses can claim Input VAT credit for VAT paid on qualifying purchases related to their service provision, which reduces the overall VAT burden. Registered service providers must issue VAT invoices for their services that include details like the VAT amount charged.

VAT Compliance Obligations

Registered businesses must file periodic VAT returns with the Iranian tax authorities. These returns detail the VAT charged on sales, input VAT claimed, and the resulting VAT liability. The VAT return filing process determines the net VAT payable (VAT charged on sales minus creditable input VAT). This amount needs to be paid to the tax authorities within the specified timeframe. Failure to register for VAT, inaccurate record-keeping, or late VAT payments can result in penalties and fines.

The Iranian government offers various tax incentives to attract foreign investment and stimulate specific sectors of the economy. Here's a breakdown of some key tax breaks available to businesses in Iran:

Corporate Income Tax (CIT) Exemptions

Businesses operating in specific industries can benefit from a complete exemption on CIT for an initial period. This includes sectors like mining and mineral extraction, hospitals and hotels, tourism-related services, and information technology with a focus on export. The base exemption period is typically 5 years. This can be extended depending on the location of the business:

• Up to 7 years in Free Trade Zones (FTZs) and Special Economic Zones (SEZs)
• Up to 10 years in less developed regions of Iran
• Up to 13 years in less developed regions with FTZs and SEZs

Companies with significant job creation (over 50 employees with a 50% annual increase) might qualify for an extended exemption period. Businesses in certain regions may benefit from a partial CIT exemption even after the initial tax holiday period, based on their reinvestment or export performance.

Tax Benefits in Free Trade Zones (FTZs) and Special Economic Zones (SEZs)

Businesses operating within designated FTZs and SEZs benefit from significant tax advantages, including reduced or eliminated customs duties on imported machinery and raw materials, reduced or eliminated income tax (CIT), and simplified tax procedures. These zones aim to attract foreign investment and promote export-oriented industries.

Tax Breaks for Specific Activities

Companies engaged in exporting non-oil goods, services, and agricultural products can enjoy a full exemption on CIT on their export income. Additionally, a 20% exemption applies to the income derived from exporting raw materials. Businesses investing in R&D activities may qualify for tax deductions on their R&D expenses.

Understanding Eligibility and Requirements

To benefit from these tax incentives, businesses need to meet specific eligibility criteria and application processes set by the relevant Iranian authorities. Consulting with a professional tax advisor familiar with the Iranian tax system is crucial to ensure proper utilization of these benefits.