Legal Points For Doing Business With IRAN – Foreign Investment

Foreign Investment

By: Jahanbaksh Nouraei ( Esq. )
Barrister and Solicitor

This is copyrighted material. Permission for use is granted, provided that the names of the author and publisher are mentioned.

January 2016–If I decide to invest in the Islamic Republic of Iran, what advantages or risks should be expected? What legal guarantees are there for protecting my capital and how will I be able to transfer my profits abroad? Below, we shall try to answer the fundamental questions concerning the existing criteria for foreign investment in Iran.

In which forms are foreign investment possible in the Islamic Republic of Iran?

Any foreign investment in the Islamic Republic of Iran can be materialized in two ways.

A- In accordance with the Companies Registration Act which enables the foreign investors to buy existing Iranian companies or acquire partnership therein or to set up a new company fully owned by them or with Iranian partnership. The foreign investor, under the current practice of the Companies Registry, is authorized to hold 100% of the capital of the company, though in some cases such as banking, international transport and advertisement activities, special permits are needed from the respective ministry or governmental organizations. In this mode of investment the foreign investor has no special privileges or incentives not ceded to Iranian investors.

B- In accordance with the provisions of the Foreign Investment Promotion and Protection Act (FIPPA) and its Implementing Regulations. Under this measure, the partnership ratio of the foreign investor can reach 100% except in the areas wherein according to law a smaller ratio might be stipulated. In this type of foreign investment, certain privileges and incentives are offered to the foreign investor.

What are the specific laws concerning foreign investment in the Islamic Republic of Iran?

The Foreign Investment Promotion and Protection Act (FIPPA), passed on 10 March 2002 and its Implementing Regulations of 15 October 2002, are the governing guidelines in this respect. The Law Pertaining to the Establishment of the Free Trade-Industrial Zones in the Islamic Republic of Iran approved in 1993, the Implementation of Regulations Governing Capital Investment in the Free Trade-Industrial Zones in the Islamic Republic of Iran approved in 1994 and subsequent amendments thereto, the Law on the Establishment and Administration of the Special Economic Zones in the Islamic Republic of Iran, that came into force in January 2006 with subsequent amendments, specify clearly foreign investors are free to invest on mainland Iran, The free zones and special economic zones. the Five-Year Economic, Social and Cultural Development Plans, annual national budgets of the Islamic Republic of Iran, bilateral investment agreements with the respective state of the foreign investor, and miscellaneous laws and decrees, have also stipulated how foreign investors may invest in various economic sectors through direct foreign investment (FDI) or financing, unincorporated partnership, buy-back, build-operate-transfer (BOT) and the like.

Which institution is in charge of authorizing foreign investments? 

The Foreign Investment Board of the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI) is authorized by law to handle the applications for foreign investment. The investment license shall be issued by the Board and signed by the Minister of Economic Affairs and Finance of behalf of the government. The investment license shall include the particulars of the investor(s), type and method of investment, the manner for transfer of dividends and profit gained as well as other terms and conditions relating to the approval of every investment project.

Under FIPPA and its by-law, who is entitled to invest in Iran?  

Private non-Iranian natural and juridical persons or Iranian individuals and entities using capital of foreign origin are allowed to invest for setting up new firms or investing in existing firms. It should be noted that investments by foreign government companies are deemed private under the regulations of FIPPA.

According to the said law, in what areas are foreign investments allowed?

Foreign Investments are permitted for the purpose of development and promotion of industry, mining, agriculture and services. Foreign direct investment may be made in all areas where Iranian private sector activity is allowed, except for some fields where foreign investment is not allowed to participate due to special laws.

Are there specific criteria for admission of foreign investment?

Foreign investment should bring about economic growth, upgrade technology, enhance the quality of products, increase employment opportunities and exports; should not pose any threat to national security or the public interest and must not cause damage to the environment; disrupt the country’s economy or jeopardize the production of local investments; does not entail the grant of concessions by the government to foreign investors. Here, concession means special rights which place the foreign investors in a monopolistic position.

Are there any restrictions on the expansion of the foreign investors’ activities under FIPPA?

The ratio of the value of the goods and services produced by the foreign investments to the value of the goods and services supplied to the local market at the time of issuance of the investment license, must not exceed 25% in each economic sector and 35% in each sub-sector of the Iranian economy.

In what forms can foreign capital be imported into Iran?

Various types of capital, whether in cash and/or in kind, can be imported into the country by a foreign investor in the following ways:

a- Cash funds in the form of convertible currency, imported into the country through the banking system or other methods of transfer acceptable to the Central Bank of the Islamic Republic of Iran;

b- Machinery and equipment;

c- Tools and spares, CKD parts and raw, addable and auxiliary materials;

d- Patent rights, technical know-how, trade marks and names, and specialized services;

e- Transferable dividends of foreign investors;

f- Other permissible items approved by the Council of Ministers.

What legal protection and incentives is foreign capital entitled to?

The government of Iran extends its protection to all foreign capital imported into the country under the FIPPA rules. Foreign investments shall equally enjoy all rights, protections, and facilities available to local investments. Legal entitlements, exemptions and incentives for capital investment provided under different laws, such as the laws pertaining to taxation and agreements with other countries on avoidance of double taxation, will also be applicable to foreign investors. If foreign capital investments are subjected to nationalization or are expropriated as a result of any special legal enactment, the owner so deprived is entitled to a government guarantee of fair compensation for any resulting damages and losses. The freedom to export goods produced by the investing firm is guaranteed and, in the event of any prohibition on the export, the goods produced may be sold in the domestic market and proceeds of sale shall be transferable abroad in the form of foreign currency through the country’s official monetary network. The foreign exchange earnings from the exports of foreign investment, within the limits prescribed in the investment license is exempt from any regulations restricting exports as well as from foreign exchange regulations such as commitments for reintroducing the export earnings to the country pursuant to future governmental regulations. In cases where the foreign investment results in the establishment of an Iranian company, the ownership of land in the name of the company is permitted at a size appropriate to the investment project, at the discretion of OIETAI.                         

There are also certain degrees of flexibility and privileges foreseen for foreign investors and their directors, experts and immediate family members with respect to obtaining multiple entry visas, residence and work permits.

How is repatriation of profits accomplished?

Transfer of all the principal capital, profit and capital gains derived from utilization of capital is permitted and shall be effected in the form of foreign currency or, as the case may be, in the form of goods as set out in the investment license.

Can foreign capital be covered by an insurance policy?

Yes. It is possible. When the foreign investor insures his investment in Iran and in accordance with the terms of the insurance policy, on account of a payment made under the insurance policy to the investor for the compensation of a loss incurred from non-commercial risks, the insurance institution subrogates the investor. The subrogated entity is entitled to enjoy the same rights on the basis of which the payment for losses has been made. This subrogation shall not be in principle considered as assignment of capital.

Following issuance of the investment license, where are joint foreign-Iranian ventures registered?

The articles of association of joint-venture companies are drafted as one of the types of companies, such as private joint stock or limited liability, set out in the Commercial Code of Iran. Depending on their location, the joint venture companies are registered in the Office for Registration of Companies and Non-commercial Establishments, either in Tehran or in one of its regional departments across the country.

How do disputes between the foreign investor and the Iranian partner and government get resolved?

If amicable efforts for settlement of differences fail, disputes between the foreign investor and the local partner can be resolved, as the case may be, through arbitration or referring to the competent court. Disputes between the Iranian government and the foreign investor with regard to their respective mutual obligations within the context of investments under FIPPA, if not settled through negotiations, shall be referred to domestic courts, unless a law of bilateral investment agreement with the respective government of the foreign investor provides for another method for settlement of disputes.

What about investing in the stock exchange? Foreign investors are allowed to make Indirect Investment (Foreign Portfolio Investment) in the Tehran Stock Exchange or any similar entity and purchase listed securities for gaining profit and access to the management of the related company. The ratio of ownership and respective conditions are outlined in the relevant by-laws.

What is the taxation regime of foreign companies operating in Iran?

As stipulated in Article 105 of the Direct Taxation Act, foreign legal entities must pay taxes at the flat rate of 25% on all taxable income earned through investments in Iran in the form of an Iranian company /firm or from direct or indirect activities (through branch offices, agencies etc.), assignment of their royalties and any other rights, transfer of technical know-how, rendering training and technical assistance or ceding of movie rights.

Depending on the case, the foreign natural and juridical persons residing abroad shall be taxed on the basis of 10% to 40% of the total sums earned by them within one fiscal year in Iran or from Iran with respect to designing plans for construction and installations, topographical surveying, cartography, supervision and technical calculations, training and technical assistance, transfer of technical know-how, other services and assignment of concessions and other rights as well as ceding of movie profit rights (earned as box office receipts, screening rights, or otherwise). Foreign insurance companies which earn profits through reinsurance shall be subject to a tax at the rate of 2% of the premium collected and the interest accrued from their deposits in Iran. In cases where Iranian insurance companies acting in the country of origin of the foreign reinsurance company, are exempt from payment of taxes on reinsurance activities, the foreign establishments shall also be exempted from payment of taxes to the Iranian government.

The flat tax rate applicable to foreign air and shipping lines engaged in transport of passengers and freight and the like from Iran shall be 5% of their income for such activities. In the event that Iranian air and shipping lines are taxed for more than 5% in the states of the aforesaid foreign entities, the tax rate applying to them in Iran shall increase accordingly.

The tax law in parts of Article 132 has set tax incentives for foreign companies which let Iranian factories produce goods under their famous brands. The joint ventures of Iranian and foreign nationals, allowed by the Iranian foreign investment organization to set up production enterprises, shall enjoy additional tax incentives as well.

How is foreign investment dealt with in the Free Trade-Industrial Zones of Iran?

According to Article 5 of the Regulations Governing Capital Investments in the Free Trade-Industrial Zones, foreign investors may participate in the economic activities of these areas in any investment ratio they wish to. They may invest independently or in partnership with Iranian persons. One hundred percent repatriation of capital and profit is allowed. Foreign investors may lease land and own the buildings and other installations built on it. No entry visa is required for foreign nationals in the free zones. For dealing with the mainland, the foreign investor admitted in the free zone, is subject to the regulations of the Export and Import Law and for maintaining a presence in the mainland, a branch might be set up.

In the free zone what incentives and facilities have been foreseen regarding labor laws, social security regulations, etc.?

Like Iranian nationals wishing to engage in economic activities in the Free Trade-Industrial Zones, foreign investors will also enjoy a tax holiday of 20 years from the date their business operation commences. Also, provisions regarding labor and social security regulations have become more flexible.

How are foreign investments protected against various risks in the free zones?

Each Free Trade-Industrial Zone Organization has been permitted–with the approval of the Council of Ministers–to undertake the commitment of its own finances, or enter into contracts with the Central Bank of Iran, or other banks, credit institutions, and insurance companies, to guarantee foreign capital against possible risks arising from acts of expropriation and nationalization. In any case, the Free Trade-Industrial Zones Organizations are duly bound to make fair compensation for any damages suffered by the foreign investor. The foreign investors can also put their investments in the free zones under the protection and compensation schemes of FIPPA.

Under what regulations is the remittance of foreign capital abroad possible from a Free Trade-Industrial Zone?

The initial foreign capital, the net profit and benefits accrued from investment activities and sums arising from sales and transfers of such capital can be legally transferred from the Free Trade-Industrial Zones. The Free Trade-Industrial Zone authority concerned must issue a permit of transfer within one week from the date of the receipt of an application.

How are disputes between the foreign investor and his Iranian counterpart in the free zone, settled?

Disputes between foreign investors and their Iranian counterparts are settled on the basis of written contracts and agreements concluded between the parties concerned. They may resolve the differences through arbitration or refer to the competent court as the case may be.

What about foreign investment in Special Economic Zones?

According to the Law on the Establishment and Administration of the Special Economic Zones in the Islamic Republic of Iran, effective from January 2006, the zones have been created to “support economic activities and organize international trade relations in regional economies and producing and processing goods, transfer of technologies, non-oil exports…attracting and protecting foreign investments…in provinces which have the requisite capacity and potential as Special Economic Zones”. According to Article 14 of the Law, issues related to attraction of foreign investment, the percentage and modality of foreign participation allowed, is to be based on the Foreign Investment Promotion and Protection Act (FIPPA) of 2002. Companies and individual investors engaged in producing goods and services are exempt from routine taxation and other customary charges assessed within the mainland. Article 8 of the law treats questions of exchanging of goods outside the mainland by the zones and among the zones domestically. It specifies that such transactions are “exempt from customs duties, commercial benefit taxes and all of the import and export charges under any category…and it will not fall under the limitations and prohibitions of the Export and Import Regulations.”