End of embargo in Iran: what about taxation for French companies?

With the end of the embargo and the visit of Laurent Fabius next week, French companies are in the starting blocks to come back on this market of 80 million inhabitants. France had a longstanding economic relationship with Iran and may be well positioned in some sectors like automobile, oil and gas, engineering and infrastructures. This is the opportunity to analyses the provisions of the tax treaty between France and Iran which is in force since 1975.

The definition of permanent establishment is classical although it provides that a building site will be a permanent establishment if it lasts more than 6 months. The rules to determine the taxable profits of a permanent establishment is OECD compliant, stating that the allocation of profit shall be done as if the permanent establishment was an independent enterprise. These profits will be taxed in Iran at a rate of 25%. As for income coming from Iran subsidiaries, the tax treaty provides for rather unfavorable rates: 15% on dividends provided that the French parent holds at least 25% of the capital of the Iran subsidiary,15%on interest, 10% on royalties (which includes the compensation of the use of an industrial equipment) but internal tax law is generally more favorable.

Regarding intra group transactions and transfer pricing, the tax treaty confirms the full application of the arm's length principle but does not include any mechanism to eliminate double taxation in case there is an adjustment in one country. There is however an amicable procedure clause.

French expatriates will be classically taxed in Iran if they are paid by a local subsidiary or if they spend in Iran more than 183 days. If not taxable, they will be able to benefit from the French favorable provisions which offer an income tax exemption for missions realized outside from France.

Finally, the tax treaty includes a non-discrimination clause and an exchange of information clause which is sufficiently large to allow the application of French favorable tax provisions which are all subordinated to the condition that the country has with France a comprehensive administrative assistance clause.