Profit Distribution in Iranian Companies: From Book Profit to Shareholder Cash

Between the profit you see in the income statement and the cash a shareholder can actually take out sit several legal filters. This note is for directors and shareholders who need to know how distributable profit is calculated, what approval it requires, when it must be paid, and where a routine decision turns into a tax problem.

Company tax comes first

The logic in the Iranian system is relatively clean: tax is collected at the level of the legal entity. Taxable corporate income is charged under Article 105 at 25%, and what remains is post-tax profit.

The practical consequence is that distributing post-tax profit to Iranian shareholders does not create a new taxable event for the recipient. Dividends are not taxed a second time in the shareholder's hands. This differs from systems with a separate dividend tax, which is a frequent source of confusion for managers used to other jurisdictions. Two carve-outs to keep in mind: foreign shareholders and branches of foreign companies have their own arrangements, and specific incentives or exemptions can change how taxable profit is computed in the first place. Filing mechanics for the return that finalises this tax are a separate subject.

Three different profit figures

This distinction takes up more meeting time than anything else in the subject.

The common error is to read the bottom line of the income statement and treat it as available for distribution. If the company carries accumulated losses, there is no distributable profit until those losses are absorbed. Which costs get added back is something to settle before the books close, as set out in the year-end closing checklist.

The legal reserve is not optional

Under the amended Commercial Code, the company must appropriate one twentieth of net profit each year to a legal reserve, and that duty continues until the reserve reaches one tenth of share capital. After that, further allocation is discretionary.

Two practical points. The legal reserve cannot be distributed to shareholders; its purpose is to protect the capital structure. And in many small companies the appropriation is simply never recorded, so the distribution minute is drafted from the wrong base, which is awkward to correct in later years.

The legal route, step by step

1. Prepare the financial statements for the year and package them for the meeting.
2. Convene the annual ordinary general meeting within four months of the fiscal year end.
3. Where the company has a statutory inspector, obtain and present that report.
4. Appropriate the legal reserve and any other approved reserves out of net profit.
5. State the distributable amount and each shareholder's share explicitly in the minutes.
6. Register the minutes with the companies registration office.
7. Pay within eight months of the meeting's decision.
8. Book the entry by debiting retained earnings and raising a "dividends payable" liability, never as an expense.

One provision often overlooked: where distributable profit exists, distributing a portion of it to shareholders is mandatory unless the meeting properly resolves otherwise. Retaining profit indefinitely while ignoring a minority shareholder is not a strong legal position.

Board bonuses run through the same approval

Board member bonuses are also paid out of distributable profit, require a general meeting resolution, and are subject to a statutory ceiling. Because they come out of post-tax profit, they are not deductible business expenses. How they differ from executive salary and non-executive attendance fees is set out in the note on director remuneration; conflating those three is one of the most common audit findings.

Capitalising profit instead of paying it out

If the company needs liquidity or the shareholders do not want cash out, the meeting can resolve to transfer retained earnings to share capital and allocate new shares pro rata. The benefit is a stronger capital structure and better ratios; the cost is the registration process and stamp duty on the capital increase. That route is examined in capital increase and asset revaluation.

Mistakes that create files

Withdrawing before approval. The most common pattern in family companies: a partner draws cash through the year and calls it a profit share at year end. Until the meeting approves it, that money is not a dividend and belongs in the shareholder current account, where a large, persistent balance invites questions.

Distributing while carrying accumulated losses. In substance this is a return of capital rather than a distribution, and it can create personal exposure for directors.

Ignoring unsettled tax years. If prior-year assessments are still open, distributing everything can leave the company without the cash to meet a finalised liability. In practice I advise holding part of the profit until those years close.

Minutes that do not match the ledgers. The approved figure must be exactly the figure recorded in the books and in the statement of changes in equity.

Key takeaways

• Tax on profit is settled at company level at 25%, and distribution usually adds no further tax for Iranian shareholders.
• Book profit, taxable profit and distributable profit are three different numbers.
• The legal reserve is mandatory up to one tenth of capital and cannot be distributed.
• The route runs through the ordinary general meeting, with payment due within eight months.
• Drawings taken before approval are not dividends and leave a visible trace in the accounts.