Article 132 of the Direct Taxation Law includes a tax exemption with conditions for economic actors and is considered one of the most practical articles in the Direct Taxation Law. This article was approved in 1987 and was amended once in 2001. Finally, in 2015, concurrently with the approval of the Law for Removing Production Barriers, this legal article was amended again. In the 2015 amendment, all tax exemptions in this article were converted to a zero rate. Before this amendment, there were other rates for tax exemptions in Article 132 of the Direct Taxation Law.

The exemption in this article covers a wide range of economic actors based on the type of activity and their geographical location, providing significant tax facilities that, if not known, could cause irreparable damage to them.

At the beginning of this article, the legislator refers to “the declared income of non-governmental legal entities in production and mining units.” This means that only the declared income of the taxpayer is subject to exemption (or is calculated at a zero rate), and undisclosed income will not be subject to tax at the zero rate.

Another point is that this legal article pertains to non-governmental legal entities. Therefore, legal entities whose 50% or more of their shares are owned by the government will not qualify for the zero-tax rate. Additionally, this exemption applies to production and mining companies and does not include trading and service companies.

However, according to this legal article, the service incomes of hospitals, hotels, and tourist accommodation centers mentioned are also subject to the zero-tax rate.

What is the Zero-tax Rate?

The application of the zero-tax rate provided in this legal article is a type of tax exemption that is considered for the taxpayer after submitting the tax return, accounting documents, and legal books within a specified time. This law helps economic actors to be exempt from paying taxes for a certain period.

The zero-tax rate means that the taxpayer is obliged to fulfill tax obligations for their income in accordance with this law and within the specified deadlines to the tax administration, but when calculating the taxpayer’s tax, it is multiplied by the zero rate, and the tax administration is also obligated to review the return and determine the taxable income of taxpayers based on the documents, records, and returns mentioned. After determining the taxable income of taxpayers, their tax is calculated at the zero rate.

In other words, the condition for receiving and utilizing the zero-tax rate is that all tax obligations, including records and returns, must be submitted on time to the tax administration. Otherwise, not only will taxpayers not qualify for the zero-tax rate, but they will also face substantial penalties.

It may initially be assumed that the zero-tax rate is the same as a tax exemption, and individuals and legal entities are exempt from their taxes based on certain conditions. However, in reality, the concept of a zero-tax rate is separate from a tax exemption, and they are in fact two different concepts in tax law.

The main difference between the zero-tax rate and tax exemption is that the zero-tax rate applies to specific income or products over a specified period, whereas tax exemption does not have a time limit, and that business may be entirely exempt from paying taxes, such as in the handwoven carpet industry.

Duration of Zero-tax Rate Benefits

The zero-tax rate for production and service units is applicable for five years from the start of operation, after which they will be subject to tax like other individuals. In less developed areas, the zero-tax rate continues for ten years. According to subsection (p) of Article 132 of the Direct Taxation Law, the duration of tax calculation at the zero rate for economic units located in industrial zones or special economic areas is extended by two years, and if industrial zones or special economic areas are established in less developed areas, it is extended by three years.

Geographical Scope of the Zero-tax Rate and Legal Incentives

The zero-tax rate and incentives specified in this article apply to the income of production and mining units located within a radius of 120 kilometers from the center of Tehran and 50 kilometers from the center of Isfahan, and 30 kilometers from the centers of other provinces and cities with over 300,000 inhabitants based on the latest population and housing census.

It is also important to note that the industrial zones of Qom, Semnan, Eshtehard, and Caspian are exempt from the rule of being within the 120-kilometer radius of Tehran.

The list of less developed areas, including provinces, counties, districts, and villages, is prepared quarterly in each five-year plan by the Organization of Management and Planning of the country in collaboration with the Ministry of Economic Affairs and Finance, taking into account the unemployment rate and investment in production, and is approved by the Cabinet.

Additionally, information technology production units with licenses from legal authorities throughout the country are subject to this article’s zero rate. Additionally, hotels, hospitals, and tourist accommodation centers throughout the country are eligible for the zero rate.

Article 132 of the Direct Taxation Law also includes investment in fixed assets for tax support. However, this article considers land as outside the investment rule, and this support does not apply to investments in land. Nevertheless, the legislator has considered the land acquired by non-governmental legal entities in transportation units, hospitals, hotels, and tourist accommodation centers as part of investment in fixed assets and subject to zero-tax. This, of course, applies to the amount of land specified in legal permits, not more than that.

Incentives for Zero Rate in Article 132 of the Direct Taxation Law

In Article 132 of the Direct Taxation Law, items are specified that, if observed, can extend the duration of the benefits of this article. These incentives are categorized into three types: incentives related to increasing the workforce of enterprises, incentives related to economic investment, and encouragement and support for investment.

Accordingly, to encourage and increase economic investment in economic enterprises, in addition to the support period through the zero-tax rate specified in Article 132 of the Direct Taxation Law, investment in less developed areas and other regions can be extended according to the law for the period of zero-tax rate utilization.

Initially, it was mentioned that the zero-tax rate in less developed areas is for ten years. According to the law, this rate continues after the exemption period until the total taxable income reaches twice the registered and paid capital (the amount of capital declared for the company), and after that, the tax is calculated and collected at the rates specified in Article 105.

In other areas, the equivalent of economic investment made is exempt from 50% of the tax in the years following the zero-exemption period, with the remainder calculated according to Article 105. This process continues until the total taxable income equals or exceeds the registered and paid capital, after which 100% of the applicable tax is calculated and collected at the rates specified in Article 105 of this law and its notes.

Another condition for extending the duration of the zero-tax rate relates to the workforce employed in a production unit. If a unit has more than 50 employees and hires 50% of its previous year’s workforce in the new year, the possibility of extending the zero-tax rate utilization period is considered.

This extension must be approved by the labor department and accompanied by substantiating documents, and under these conditions, the tax exemption period is extended by one year. For example, the tax exemption could increase from five years to six years. However, to prevent violations by companies and production units under this clause, if workforce reductions occur after the tax exemption, the tax due for that year will be demanded from the production units. It is worth noting that according to the executive regulations of this legal article, retired, resigned, and repurchased individuals are not considered workforce reductions.

Additionally, all tourism and travel facilities with operating licenses from relevant legal authorities qualify for a maximum of six years from the effective date of approval for a 50% tax exemption on declared income. However, according to the executive regulations of this article, income from leasing tourism and travel facilities is not exempt. Also, the income generated from sending tourists abroad is not subject to this exemption.

It should be noted that the ownership type of tourism and travel facilities, whether real or legal, public, private, cooperative, governmental, and non-governmental public, does not affect the application of this exemption. Furthermore, tourism and pilgrimage offices with licenses from relevant legal authorities that send individuals to pilgrimage destinations or attract foreign tourists are subject to a 100% zero-tax rate on their declared income according to Article 132 of the Direct Taxation Law.

 

Support for Research and Development Costs

According to the Direct Taxation Law, up to 10% of the declared tax of the year in which research and development costs are incurred may be exempted, provided that these costs are incurred by legal entities in production and industrial units under contracts with universities and authorized research centers, contingent upon the annual progress report being approved by the relevant university research council, and the gross declared income from their production and mining activities being no less than 5 billion rials.

To confirm research and development costs, the following are required:

• A list of ongoing projects must be submitted to the tax administration.
• The research project must exclusively relate to the institution’s activities and be aimed at generating income for the institution.
• Supporting documents and detailed expense records related to the project must be sent to the tax administration.