Adineh and Rana are women from very different sides of the track. Wealthy, modern and rebellious, Adineh has fled the family home, harbouring a secret desire to become a man. Rana, from a conservative religious background, gives her a lift in the taxi she has been forced to drive since her husband was sent to jail.

The burgeoning relationship between the two forms the heart of Facing Mirrors, a film that hit cinemas in Tehran this week and brought the taboo subject of transsexuality to the big screen for the first time.

One of the many astonishing paradoxes about life in the Islamic republic is that transsexuality has been legal since a fatwa was issued in 1987 by the late Ayatollah Ruhollah Khomeini. Indeed, Iran permits more sex-change operations than any other country, except Thailand, and has long subsidised such surgeries. But, though transsexuals may have the support of the government, they remains highly controversial figures among the public.

The religious ruling was issued thanks to the activities in the 1980s of Maryam Khatoon Molkara, a campaigner for the rights of transsexuals in Iran, who wrote to Khomeini asking him to determine their fate. Molkara had herself previously been a man, and worked for the state TV before the Islamic revolution in 1979. In the mid-70s, she started to write to Khomeini, who was in exile, asking for religious authorisation for a sex-change operation. In 1987, after a decade of campaigning, she went in person to the home of Khomeini, by then the country's supreme leader, and came back with a fatwa in hand that allowed transsexuals to choose their sex.

Before making the film, its producer Fereshteh Taerpour said she did not even know the fatwa existed. "At the beginning, it was very strange for me to find out that sex-change operation is permitted in Iran," she told the Guardian. "The authorities give loans and even issue new ID cards after the surgery, something that is not legal in many countries."

Despite the fatwa, transsexuality is rarely discussed in public. The release of Facing Mirrors, which has attracted a great deal of attention, has created an opportunity for Iranian media to address the issue. Even the state-run television and radio channels, which typically avoid such topics, have reported on the film.

"Some of the young transsexuals who have seen the film have become so excited that they are now campaigning to encourage others to watch it," said Taerpour. Among its fans is Saman Arastu, a well-known Iranian actor who has himself undergone a sex-change operation. For Taerpour, the status of transsexuals in Iranian society is encapsulated in what Adineh's father says of her in the film: "I wish she was blind, dead, handicapped but not disgraced."

Soheil, a 33-year-old Iranian who has also had surgery, said the support of the law does not mean immunity fromharassment from various other state institutions.

Unlike transsexuality, homosexuality is punishable by death in Iran, but Soheil believes that being transgender is even more difficult than being gay or lesbian.

"When you're a transsexual, your appearance changes and that's something that many Iranian families can never come to terms with," he said. "But when you're gay, your family might tolerate you as long as you keep your sexuality secret."

For Shadi Amin, an Iranian rights campaigner based in Germany, the quality of sex-change operations in Iran is so poor that it amounts to little more than "butchery". She said: "In a democratic society, a sex-change operation is an option for transsexuals, but in Iran it's an obligation for their survival."

Amin pointed out that when a transsexual died after a failed operation in the central city of Isfahan earlier this year, she was denied an Islamic ritual washing before burial – by both men and women.

It has not helped Iranian sexual minorities that there's a confusion within society over differences between being a homosexual and transsexual. Many parents are believed to have forced their homosexual children to have sex-change operations, while psychologists and psychiatrists who still deem homosexuality as a mental illness have been known to prescribe "cures".

Bronwen Robertson, the director of operations behind a recent detailed report on Iran's LGBT community, said the issue over the confusion is far more complex.

"[The confusion] partially stems from the fact that Iranian law delineates homosexuality as a capital crime and transsexuality as a scientific, and 'correctable', anomaly," she said.

"The pressure, from both state and society, on young Iranians to conform to societal norms and adhere to tradition and specific behavioural codes is immense. Therefore, it is not surprising that many young gay and lesbian Iranians, who do not identify as transgender, say they have felt pressured to undergo surgery."