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When a foreign company starts conducting business in Iran, whether through local representatives, agents, or joint ventures, it faces a crucial question: Does it create a “Permanent Establishment” (PE) under Iranian tax law?
This concept determines whether Iran’s Tax Administration can tax a foreign business on its income earned in Iran. Misunderstanding this rule can expose companies to unexpected tax liabilities, penalties, and compliance risks.This article explains the meaning of Permanent Establishment in Iran, how it is interpreted under Iranian tax law, and the practical steps international companies can take to mitigate risk.
1. What Is a Permanent Establishment in Iran?
Definition under Iranian Law
Under the Direct Taxation Act (DTA) of Iran, a Permanent Establishment refers to a fixed place through which a foreign enterprise conducts all or part of its business in Iran.
Article 1 and Article 107 of the DTA are the key legal bases defining the scope of taxable activities of foreign entities.
A PE in Iran typically includes:
- A branch office, factory, workshop, or mine;
- A construction site, installation project, or assembly operation lasting over a certain duration;
- A dependent agent authorized to conclude contracts on behalf of the foreign enterprise.
Even without formal registration, the substance-over-form principle applies if the business operations show continuity and control from Iran, tax authorities may still deem it a PE.
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2. When Foreign Companies Are Deemed to Have a PE in Iran
a. Through Local Agents or Representatives
If an Iranian individual or company habitually negotiates or concludes contracts on behalf of a foreign enterprise, that foreign enterprise may be considered to have a PEeven without direct physical presence.
b. Through Construction and Service Projects
Foreign contractors or consultants operating in Iran under engineering, procurement, or construction (EPC) contracts are often considered to have a PE once they have personnel or operational activity inside the country.
c. Through Branch or Subsidiary Offices
Registering a branch office with the Iranian Ministry of Industry, Mine and Trade automatically establishes a taxable PE.
By contrast, a subsidiary company is treated as a separate legal entity subject to standard corporate tax, not as a PE.
3. Tax Implications of Having a PE in Iran
Once a PE is established, the foreign enterprise becomes subject to Iranian corporate income tax on the profits attributable to its Iranian operations.
a. Tax Rate and Scope
- Standard corporate tax rate: 25% on net taxable income.
- The PE must maintain books of account in Iran, in Persian, and in accordance with Iranian accounting standards.
- Profits remitted abroad after taxation are not subject to additional withholding tax.
b. Withholding Tax and Non-PE Income
Even if no PE exists, payments made to foreign entities for services rendered inside Iran may still be subject to withholding tax, typically ranging from 3% to 25%, depending on the contract type and approval from the Iran National Tax Administration (INTA).
4. Common Scenarios That Create PE Risk
a. Misclassified “Independent Agents”
Businesses often believe that appointing an “independent” local agent avoids PE exposure. However, if the agent works exclusively for one foreign principal or habitually signs contracts, the tax authority may reclassify the relationship as dependent.
b. Short-Term Projects with On-Site Supervision
Even short-term construction or technical projects can trigger PE risk if foreign staff supervise operations inside Iran.
c. Digital and Remote Services
With the rise of digital services, Iranian authorities increasingly examine whether remote or online activities create a “virtual PE” when local clients or data servers are involved.
5. How to Mitigate PE and Tax Risks in Iran
Foreign businesses can reduce their exposure through strategic structuring:
- Carefully draft agency and service agreements to limit authority to conclude contracts in Iran.
- Document offshore activities clearly to show that management and control remain outside Iran.
- Use separate Iranian legal entities (e.g., limited liability company or joint venture) if local operations are continuous.
- Obtain tax rulings or clearances from INTA for major projects.
- Engage a local tax and legal adviser experienced in cross-border structuring and compliance.
6. MJK Law Firm’s Approach
At MJK Law Firm, our international commercial and tax lawyers help foreign clients:
- Assess whether their activities in Iran may constitute a PE;
- Structure contracts and operations to minimize tax exposure;
- Handle INTA communications, tax filings, and dispute resolution;
- Represent clients in tax audits and appeals related to PE assessments.
We combine deep knowledge of Iranian corporate and tax law with practical experience advising global clients entering the Iranian market.
7. Frequently Asked Questions (FAQ)
1. What is the difference between a branch and a PE in Iran?
A branch is a registered legal presence, while a PE can arise automatically from business activity even without registration.
2. Can a foreign company operate in Iran without creating a PE?
Yes, if activities are limited to preparatory or auxiliary services (e.g., market research) and no contracts are concluded or executed inside Iran.
3. How long does a construction project have to last to create a PE?
Typically, a continuous presence beyond 6 months may trigger PE recognition, though case-by-case evaluation applies.
4. What are the penalties for failing to declare a PE?
Non-declared PEs can face back taxes, fines, and penalties for the unpaid tax, as well as restrictions on future business permits.
5. Does Iran follow OECD guidelines on PE?
While Iran is not an OECD member, Iranian tax authorities may reference OECD principles when interpreting cross-border business activities.
8. Conclusion
Understanding Permanent Establishment in Iran is essential for any foreign company entering the Iranian market.
Misjudging the threshold for PE can lead to costly tax exposure and compliance challenges.
Professional structuring and early legal advice can prevent such risks.
Contact MJK Law Firm’s international tax and commercial team today for tailored advice on establishing, operating, or restructuring your business presence in Iran.