Withholding Tax in Iran: Which Payments Are Subject and Who Is Liable

If your company pays contractors, consultants, landlords or employees, part of the other party's tax bill is your legal responsibility. This note is for finance managers and owners who need to know which payments require deduction, how fast the money must be remitted, and what an assessor writes in the file when it is not.

The core idea

Withholding tax shifts the collection duty from the person earning the income to the person paying the money. The logic is straightforward: the state prefers to collect where cash is visibly moving. The practical consequence is that on certain payments you play two roles at once — buyer of a service and collection agent for the tax authority. Ignore the second role, and the other party's liability quietly becomes yours.

In the files I have handled, the real damage rarely comes from the tax itself. It comes from that transfer of liability: a company that failed to deduct a modest amount pays the principal plus years of monthly penalties later, with no realistic way to recover it from a contractor who has long since disappeared.

The duty attaches to the payment type, not the counterparty

The most common question I get is whether deduction can be skipped because the counterparty is a company rather than an individual. It cannot. What creates the obligation is the nature of the payment. Buying goods from a company triggers nothing; rent paid by that same company to its landlord does. So the working rule inside your finance function should be to classify the payment before you classify the payee.

What actually happened to Article 104

For years Article 104 of the Direct Taxes Act was the backbone of service-contract withholding, requiring employers to deduct a set percentage as an advance against the contractor's tax. It was repealed in the July 2015 amendment, and general application ceased from the beginning of the 1395 tax year. Its reporting function was effectively absorbed into the Article 169 quarterly transaction reporting regime.

The name survives for three reasons: pre-1395 years are still moving through audit and appeal; large employers keep recycling old contract language; and people confuse it with the withholding duties that do remain.

Common payments and their status

Several of the rates and coefficients above are revisited in annual circulars. For the current figure, check the latest bulletin from the tax administration and keep your accounting software updated accordingly.

Deadlines and mechanics

The general rule is remittance within thirty days of payment or accrual, with recipient details reported. Payroll is a monthly cycle. Three points routinely get missed:

• Accrual can precede payment. If you approved and booked a progress certificate but delayed the transfer, the clock may start at the booking date.
• Partial payments count. Splitting a contract into small instalments does not dissolve the duty.
• Issue the certificate in the same month. Producing it a year later creates problems for both sides.

An eight-step check before any payment

1. Classify the payment: salary, professional fee, rent, goods, or service.
2. Establish whether the payee is an individual or an entity, resident or non-resident.
3. Identify the governing article and write it on the payment voucher.
4. Use the gross amount as the base unless the contract clearly states otherwise.
5. Strip VAT out of the withholding base so tax is not calculated on tax.
6. Book the amount to a dedicated "withholding tax payable" account, never a suspense account.
7. Remit within the statutory window and file the receipt with the contract.
8. Issue the withholding certificate and keep proof of delivery to the contractor.

Penalties and joint liability

Under Article 199, a payer who fails to deduct and remit is jointly liable with the taxpayer for the principal, faces a penalty of ten percent of the unremitted tax, and accrues a further two and a half percent for each month of delay. Article 197 adds separate penalties for failing to submit payroll lists and contractor schedules. Which of these can realistically be waived is a separate question I cover in the note on tax penalties and legal routes to waiver.

Mistakes that keep recurring

The most expensive is deducting from a net figure when the contract promised a sum "net of all deductions" — that clause silently transfers the burden to you and requires grossing up. The second is parking withheld cash in the operating account until year end, which simply manufactures monthly penalties. The third is a mismatch between withholding records, quarterly reports and the ledgers; assessors reconcile all three, and any gap becomes an information request and then an adjustment. In project businesses, subcontractor payments are the usual blind spot — see contracting accounting for those entries.

Key takeaways

• Withholding follows the nature of the payment, not the legal form of the payee.
• Article 104 has not applied since 1395, but it still matters for old files and legacy contract wording.
• Deadlines are short and Article 199 penalties compound monthly, so delay is the costliest part.
• Joint liability means someone else's tax debt can land on your balance sheet.
• One control field in the payment request form beats any amount of remediation later.