Focus: Legal

The Set Up

The Set Up

May. 14, 2013

FIPPA seeks to create an investment-friendly regime by offering incentives, privileges, and protection to foreign investors to invest in Iranian industries. FIPPA guarantees a national treatment standard, transfer of funds, compensation for expropriation and nationalization, export license, and access to dispute resolution. FIPPA does not contain provisions concerning the organization and structure of the business entities and procedures for the registration of companies that are dealt with under the Commercial Code.

Admission & Establishment of Foreign Investment

The Organization for the Investment, Economic and Technical Assistance of Iran (OIETAI) is the authority responsible for the approval and admission of foreign investments into Iran. OIETAI reviews the applications submitted by foreign investors and after consultation with the Foreign Investment Board, which is comprised of various ministries, will grant an investment license for qualified investments containing the information regarding the investment project. The procedure for approval of a proposed investment project by OIETAI will usually take up to 40 days from the date of submission of an application, after which it will forward the draft investment license to the investor for confirmation and finalization.

Generally, with the exception of national security and defense industries, all sectors of the economy are open to foreign investments, and there are no restrictions on the scope of activities of multinational corporations provided that the investment qualifies for protection under the FIPPA and complies with municipal laws and regulations. The Implementing Regulations contain a list of sectors and sub-sectors of economic activities permitted for foreign investment activities.

FIPPA defines investment as the utilization of foreign capital in a new or existing business entity after obtaining the investment license by the foreign investor; said capital can be imported into the country in the form of cash or assets.

The type of assets (cash and non-cash) include foreign currencies, machinery, equipment, accessories, operational facilities and tools, raw materials and individual parts that are part of factory equipment, complete knock-down (CKD) kits, foreign patents, technical know-how, and trademarks.

Foreign investors are defined as Iranian and non-Iranian (natural and legal) persons using capital with foreign origin who have obtained an investment license.

As a condition for admission of investment, it should not be a threat to national security on public interest, harm the environment, interrupt the national economy, or distort domestic production. The investor must also show that the investment will increase exports and employment opportunities, enhance the quality of goods, and supply the domestic production market.

FIPPA recognizes two types of investments: a) foreign direct investment (FDI) and, b) non-equity based contractual arrangements. Therefore, both types of equity and debt investments qualify for FIPPA protection.

Equity Investment

FDI is permitted in sectors of the economy that are open to the private sector and include the acquisition of ownership in the Iranian market through the:

a)incorporation of a new company;

b)purchase of shares of an existing Iraniancompany;

c)registration of a branch office; and,

d)participation in a joint-venture companywith a local partner.

Debt Investment

Foreign investors may undertake investments through non-equity based contractual arrangements. The investment law specifies three types of financial agreements for the funding of public infrastructure and development projects, which are as follows:

a)civil partnership,

b)buyback schemes, and

c)build-operate-transfer (BOT).

The characteristics of debt investments are that the foreign investor does not hold equity ownership in the investment and is appointed as a contractor by the government for public utility projects, including the onshore and offshore drilling and excavation of petroleum resources, the construction of oil and gas pipelines, transportation, housing, and other projects in which private ownership is prohibited.

The investor has the responsibility of transferring capital and machinery for the implementation of large, capital-intensive projects, and after the completion of the project the management and ownership of the assets are transferred to the government in accordance with the terms of the contract and the provisions of investment law.

The return of capital and profits in civil partnership, buyback, and BOT contracts should not be guaranteed by the government, state banks, or other entities. The investor is allowed to recoup the costs incurred for implementing the project together with the profit margin and mark up from the proceeds of the sale of products generated by the respective project.

The government guarantees the purchase of the goods and services produced by the investment project provided that it is the sole purchaser and supplier of the goods and services.

Under Iranian law, foreign companies are required to conduct commercial activities through a locally incorporated company, which can either be a foreign, wholly owned Iranian company, a registered foreign branch office, or a joint-venture company.

FIPPA guarantees investors the right to set up an Iranian company without any restriction as to the percentages of shareholding. Therefore, the investment license allows investors to incorporate an Iranian company and enjoy majority ownership and management control.

Available Company Structures & Vehicles

The Iran Commercial Code specifies different forms of business enterprises. A Private Joint-Stock Company (PJSC) is the appropriate vehicle for structuring foreign investments.

Private Joint-Stock Company (PJSC)

The founding members are subscribers to the entire capital, which is divided into shares. The liabilities of the shareholders are limited to the amount of capital contributed to the company. There must be at least three shareholders to form a PJSC and a minimum of amount of capital of IR1 million. The establishment of a PJSC involves corporate governance, disclosure of company accounts, and compliance with company procedures under the Iranian Joint-Stock Companies Act. The formalities include convening regular meetings by boards of directors and shareholders, the filing and registration of board resolutions, and the recording of meeting minutes.

Foreign Branch Office

Foreign investors are authorized to establish their branch or representative offices in Iran and engage in business activities. The branch office does not have the separate legal status enjoyed by limited-liability companies, and the overseas parent company will be responsible for the actions of the branch office. The branch office must comply with disclosure requirements including the financial statements of the parent company and the branch office, and the reporting of the operation of the branch office in Iran. Both foreigners and locals can be appointed as the general manager of the branch or representative office. Foreign investors are allowed to engage in export-import activities through a branch office.

Joint-Venture Companies

There are no specific laws on the establishment and regulation of joint-venture companies (JVCs). However, foreign investors may enter into agreements with local partners to establish an equity JVC on the basis that the foreign investor and the Iranian partner each hold certain numbers of share capital. The equity JVC is the most common form of company in which the foreign investor participates in the share capital of an existing company or through the incorporation of a new company. The PJSC is the suitable vehicle for structuring a JVC for undertaking investment activities in Iran. The contractual joint venture (civil partnership) is mostly used for certain projects with a limited time frame.

Guarantees And Protections Offered To Foreign Investors

Transfer of Funds

FIPPA guarantees the free and unrestricted transfer of foreign currency in and out of Iran by foreign investors. The methods of transfer of foreign capital into Iran include the conversion of cash into rials, cash used directly for purchases related to the foreign investment project, and non-cash items such as equipment, tools, and machinery. The foreign investor may transfer abroad all capital and profits and repay its borrowings including principal and interest after the fulfillment of its obligations concerning the payment of taxation. The applicable foreign currency exchange rate at the time of entry or exit of the foreign capital as well as all foreign currency transfers shall be the rate prevailing in the official banking system in the case of unified exchange rates, otherwise the free market rate as recognized by the Central Bank of Iran (CBI) will be the basis for the exchange rate.

The foreign currency required for the transfer of the principal, profit, and the installment payments can be obtained by a) the purchase of foreign currency from the banking system, b) from the proceeds of the export of manufactured products, or c) from the provision of goods and services. The CBI is under the obligation to provide and make available to the foreign investor the equivalent of the foreign currency for the transferable funds required for the purchase of foreign currency from the bank by the approval of OIETAI and confirmation of the Minister for Economic and Financial Affairs.

The transfer abroad of any part of the foreign capital admitted into the country within the framework of the investment license that remains unused will be exempt from all foreign exchange and export and import laws and regulations.

Compensation for Expropriation & Nationalization

FIPPA prohibits the expropriation and nationalization of foreign investments by the government unless it is for public purposes, in accordance with the due process of law in a non-discriminatory manner, and accompanied by payment of appropriate compensation. FIPPA requires the government to pay appropriate compensation to foreign investors on the basis of the real value of the investment immediately before the expropriation. The real value of investment refers to the net book value containing the assets and liabilities of the enterprise. The time limit for the submission of a claim for compensation by the foreign investor is one year from the date of expropriation or nationalization.

Arbitration Procedures

FIPPA guarantees access to dispute resolution procedures in case of disputes arising out of investment between foreign investors and the Iranian government.

Dispute resolution provisions contained in FIPPA recommend investors first to settle disputes amicably through negotiation, and should no settlement be reached the investor can refer to the Iranian courts.

Investors also have the choice to submit their claims to arbitration proceedings concerning disputes with Iranian investment partners provided the joint-venture agreement contains an arbitration clause.

The Iranian Arbitration Act, which is modeled on the UNCITRAL Model Law on International Commercial Arbitration, envisage the application of international standards to arbitration proceedings conducted in Iran, including the recognition of ad hoc or institutional arbitration proceedings.

Parties in the joint-venture agreement may select foreign law as the choice of law governing the contract provided that the jurisdiction clause refers to an arbitral tribunal (ad hoc or institutional) as the dispute resolution forum.

There are two major arbitral institutions in Iran: the Tehran Regional Arbitration Centre (TRAC), which was established to provide support for conducting arbitration proceedings with international dimensions, and the Arbitration Centre of the Tehran Commercial Chamber, which hears claims submitted by domestic and international companies.

Bilateral Investment Treaties (BIT)

Iran has signed more than 50 bilateral investment treaties with capital-exporting and developing countries to promote and attract foreign investment.

The dispute resolution provisions contained in BITs guarantee foreign investors access to international arbitration proceedings in accordance with the arbitration rules of ICSID, ICC, and the ad hoc arbitration rules of UNCITRAL.

Therefore, should there be a BIT in force between the investor's home state and the Iranian government, disputes arising out of investment shall be referred to the arbitration tribunal as specified in the BIT dispute resolution provisions.

Dispute resolution provisions in Iranian BITs set forth the procedures for the establishment of a tribunal, appointment of arbitrators, place and language of arbitration proceedings, consent of parties to arbitration, and applicable law and enforcement of the arbitral award.

Iranian BITs condition the application of substantive investment protection standards to the registration and approval of the investment with OIETAI. Therefore, the investor must obtain an investment license to benefit from BIT protections, including access to international arbitration.

The investor must meet the condition precedents before activating the dispute resolution procedure. The condition precedents are the requirement for negotiation and the amicable settlement of a dispute, a cooling-off period of three to six months, notification of claim, and waiver of local law remedies. In addition, the investor must satisfy the jurisdictional requirements of consent to arbitration. The scope of dispute resolution procedures covers any disputes arising out of investments between the investor and the Iranian government. Treaties define an investment as any kind of investment, direct or indirect, and entail a list of assets including movable and immovable property, shares, stocks, and other interests in companies, contracts, and claims to money and intellectual property rights.

The Iranian BIT guarantees foreign investors fair and equitable treatment, national treatment, most-favored-nation treatment, transfer funds, fair and full market value compensation for expropriation of investment property, observation of commitments by the Iranian government, and access to international arbitration.

Development of Commercial Law

The Iranian legal system is the combination of a civil law foundation and Islamic law. The Iranian Commercial Code is divided into four parts: merchant and trade activities, trade companies, negotiable instruments, and contracts and bankruptcy.

The development of the Iranian Commercial Code dates back to 1932 when radical reforms were adopted to modernize the legal infrastructure, including the enactment of civil and commercial laws and the establishment of courts to enforce laws and contracts, which were traditionally governed by sharia law—Islamic scholars (clerics) sat as judges in family and commercial disputes.

Following the Islamic Revolution in 1979, the Iranian legal system was transformed and the new Constitution adopted sharia law as the primary source of law on the basis of which all laws and regulations must be enacted. The Guardian Council, as the law-vetting body, ensures laws enacted by the parliament (Majlis) comply with the principles of the sharia and the Constitution.

Key Legislation Changes that the Government Is Aiming to Achieve

The legal system is undergoing reform in response to the advancement of technology, increase in the flow of trade and investment, and the integration of financial markets. Iran has adopted new securities and capital markets laws to facilitate foreign investment in the Iranian capital markets and establish investment funds. The government's policy is geared toward the opening up of the economy to foreign investors and the liberalization of capital markets, which lays the foundation for enacting laws and regulations to facilitate and support the market economy.

Iran, as a member of the international community, is adapting to the changing economic conditions by reforming its laws and regulations on business transactions. This includes setting up a commission in the Ministry of Justice for the revision and update of the existing Commercial Code. The government has approved a bill on a new Commercial Code and sent it to parliament for ratification, which is still pending.

The new Commercial Code envisages a broad and improved definition of trader and commercial activities, the rights and obligations of traders, commercial contracts, guarantees, trade documents, natural person and trading companies, and reconstruction after bankruptcy. Once entered into force it will provide many benefits to the business community, including new provisions on electronic trading and the promotion of fair competition.

Advice for Foreign Investors on What to Look Out for When Setting up

Establishing and setting up a legal presence in the Iranian market requires a local advisor that can provide a step-by-step advisory service concerning:

• registration and incorporation of companies in the mainland and free trade zones (FTZs)

• advice on employment issues including the drafting of employment contracts and calculation of severance payment after the termination of employment

• advice on obtaining work permits and residence visas for the expatriate employees of foreign investors

• assisting with the rental of office space and negotiating with Iranian landlords for the purchase of land for factories and after-sales service

• advising on the best company structure suitable for tax purposes

• advice on import-export regulations and customs clearance

• compliance with regulatory issues (environment protection etc.)

• drafting joint venture agreements with local partners

• supervision of liquidation proceedings and obtaining clearance from various agencies for closing down operations and transferring liquidation funds abroad.

Atai Associates has more than 30 years of experience in the provision of legal advisory services to international clients.

We have a team of arbitrators, lawyers, accountants, and financial and tax advisers who can help our clients achieve the best and optimal solution from the early stage of entry and establishment of investment and continue until the end of operations, including winding-up and liquidation of the company and repatriation of capital and profits.

Our lawyers, in addition to legal training and expertise in Iranian law, have received training and qualification from universities in the UK and possess skills and knowledge in international and English law. Atai Associates, as a reliable local partner, offers the above-mentioned services through the provision of timely, cost-effective, and efficient legal and practical solutions to its clients.

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