New Tax Rules Could Force Changes in Investment Funds

EghtesadOnline: The decision to tax bank deposits of legal entities may force investment funds in the capital market to change track in their asset portfolios, Mohsen Khodabakhsh, the vice chairman of board of directors of the Securities and Exchange Organization said Monday.

News ID: ۷۸۷۷۷۳

15 March 2022

During the debate on the 2022-23 budget, the Majlis in February lifted a ban on taxing interest on bank deposits of legal and institutional bodies.

“Because bank deposits constitute a segment of the asset portfolios of fixed income investment funds, the (Majlis) decision is a source of concern,” Khodabakhsh was quoted as saying by IRNA.

The official noted that the decision has created a legal paradox as existing rules exempt the income of investment funds from tax.

“There are permanent rules that exempt investment funds from income tax. Therefore taxing their deposits has no legal basis.”

However, if such rules come into effect investment funds may replace their deposits with other assets, namely bonds.

“The SEO is of the opinion that investment funds must be exempted from paying tax because of their role in bolstering the share market,” he added.

So far the Iranian National Tax Administration was not allowed to tax interest on bank deposits for both natural and legal clients as per the Direct Law Act. But the new decision is in line with government policy to increase tax revenues.

The Majlis, however, exempted key institutions from the new tax rule including the sovereign wealth fund, pension funds and insurance companies.

The National Development Fund of Iran, Iran National Innovation Fund, the Central Insurance company of Iran and Physical Damage Fund are some noted exemptions.

As per data released by the SEO, as of early 2021 the total value of assets of 86 investment funds operating in the capital market stood at 2,600 trillion rials ($10.8 billion).

As for their asset composition, they invested 258 trillion rials in stocks, 1,068 trillion rials in bonds and 1,188 trillion rials in bank deposits, respectively, accounting for 9.9%, 41% and 45% of the their total assets.