4 Foreign Investment Opportunities in Iran
Investment in Iran Is Picking Up
The Iranian government incentivizes companies that create job opportunities, facilitate the transfer of technology, and are active in the exportation of their products from Iran. With business picking up because of the governmental incentives, investment opportunities in Iran are also on the rise. Other than the obvious benefits of having a presence in a burgeoning market, Investing in Iran can also be seen as the launching pad for expansions into the other Persian Gulf States and Central Asia.
If you want to get a more in-depth look at how these new government incentives are working out, you can take a look here, but my general advice is to use Iranian expertise and consultants when you want to invest in Iran to ensure that your achievements and successes continue. Avoid making decisions and potential partnerships with people/companies who insinuate they have the right connections in the right places.
The companies and people you choose to have relationships with should be selected based on their merits and experience and not because of the people they might know. Foreign companies who are sincere and make efforts to transfer good management and technical know-how are usually received with open arms. Generally, in Iran, foreign companies are presented through a branch or maintaining shares in an Iranian registered company about a specific investment.
Although a business might be as successful as planned, it is imperative to have a future vision and start planning. Experience shows that foreign companies who did not have a clear idea or were here to make a quick buck have not been very successful.
Analysis of Legal Vehicles Available for Entry to Iranian Market
Investment opportunities in Iran, however enticing, should be dealt with tact and care. Fortunately, there is ample precedence for foreign direct investment in the Iranian market, and you can follow their lead in taking advantage of the Investment opportunities in Iran. Here are four of the most common ways companies invest in Iran:
1. Investment Opportunities in Iran: 100% Foreign Legal Entity
Under the current practice, foreign companies can have total ownership of a company, with no special formalities, in the Free Trade Zones. FTZ companies can only benefit from the incentives the Free Trade Zones offer (15 years tax holiday) if their activities are focused in that area. Whilst foreign ownership in mainland Iran has no legal limitation, there is always a preference for Iranian involvement in investment opportunities and projects there.
Currently, FTZs are used by some Foreign Investors taking advantage of investment opportunities in Iran’s industrial sector. They use FTZs as a station for assembling or manufacturing the final goods exported to Mainland Iran or other countries of the region. Given the fact that foreign investment in Iran will be primarily focusing on mainland projects, I do not believe an FTZ registered company to be an optimal solution for most foreign investors in Iran.
2. Investment Opportunities in Iran: Iranian Company through a Joint Venture
Foreign companies looking to make direct investments in Iran typically commit to a joint venture with an Iranian company active in their field of business. The Iranian government consistently promotes this form of market entry. This is because a joint venture ensures long-term commitment on the part of the foreign investor, creates jobs, and involves Iranian nationals in the endeavor.
Currently, there are no “joint venture” laws in Iran. Instead, companies that intend to take advantage of the investment opportunities in Iran follow the commercial code and form a joint corporate structure with their Iranian partner. Typically, this structure is in the form of a private joint-stock company that requires a minimum of three shareholders. However, under the Iranian commercial code, other forms of corporate structures such as limited liability companies, limited partnerships, and general partnerships are also permitted. The Iranian commercial code concisely delineates the rights and duties of the shareholders under each structure. Moreover, shareholders also regulate their relationship through a shareholder agreement executed among the parties.
In the case of a foreign party being a minority shareholder, adequate legal safeguards must be designed through a shareholders agreement and articles of association to safeguard the rights and interests of the foreign party investing in Iran.
In my experience, the foreign investment board will not support an Iranian company that is not formed for a specific project. This means that such a structure may be inappropriate if the investor’s main task is to establish a presence in Iran for future projects. Moreover, it is doubtful that the company registration office will register an Iranian company with a significant foreign shareholding without FIPPA approval and licensing.
Aside from the above, a corporate entity registered in Iran will be deemed 100% independent and not related to the shareholders, including the foreign shareholder. There are also certain requirements for having regular board and shareholder meetings. This will be further compounded by THE CLIENT’s need to manage its relationship with other shareholders in the entity. Finally, foreign companies investing in Iran will be represented through an entity with existing shareholders for all future projects in such a structure. This may limit THE CLIENT’s ability to independently pursue projects and decide on Iranian participation on a case-by-case basis.
3. Investment Opportunities in Iran: Branch Office
Under Iranian law, any foreign company recognized in its country of origin may apply for registration of a branch in Iran, subject to the condition that their country of origin allows for registration of Iranian companies. A foreign company may register a department or representative office for the following activities:
1. After-sale services of goods and services provided by the foreign company;
2. Executive works for contracts signed between Iranian and foreign companies;
3. Review and preparation of grounds for investment by the foreign company in Iran;
4. Cooperation with technical and engineering companies in Iran for the performance of projects in a third country;
5. Promotion of Iranian non-oil exports;
6. Technical and engineering services and transfer of technology and technical know-how to Iran; and
7. Activities legally licensed by Iranian government authorities authorized to grant such licenses in transportation, insurance, goods inspection, banking, marketing, etc.
Typically, the following types of companies investing in Iran have registered branches in Iran:
- Foreign oil companies have written branches to manage their service contracts with the National Iranian Oil Company (buyback and exploration agreements). Those contracts also require the registration of a unit to execute the relevant project and to provide accounting and books of expenditures in Iran for NIOC’s review;
- Foreign companies making sales of various products to Iran. These branches act as both marketing vehicles as well as after-sale service coordinators where required;
- Foreign banks with offices in Iran to promote relations and manage contracts between the parent and the Iranian banking system and clients;
- Foreign companies wished to establish a presence in Iran and use the branch to learn more about the market, investment opportunities in Iran, relationship building, etc.
In light of the current strategy of foreigners investing in Iran of establishing a presence for future projects, the registration of a branch and representative office seems to be the most appropriate vehicle for entry into the Iranian market and making use of the investment opportunities in Iran. Since foreign investors in Iran have formulated a long-term strategy for their access to the investment opportunities, this method can be utilized for the following purposes and advantages:
- Most direct and transparent route to Iran under current realities for foreign companies
- Can legally have a direct presence, market, and operate under foreign companies name
- Eliminates many legal hassles, including the ability to sign contracts as foreign companies, hire staff, lease office space
- The branch may open bank accounts in local and foreign currency.
- Will be an extension of the parent company subject to all its requirements – no subsidiary management control issues will exist.
- Will not have to worry about finding and controlling an agent/representative without knowing the market or the representative.
- Avoids conflicts of interest and management style with a local agent or representative or other shareholders
- Provides foreign companies with a solid platform to reposition themselves in the market, identify contacts, identify potential future partners, monitor developments, etc.
- From a tax point of view, the branch should have no tax liability if it is only a cost center. Otherwise, the unit will be taxed on a profit and loss basis by the officials, with profit being taxed at the rate of 25%. I recommend that this be discussed in more detail with your tax advisors.
- Registration of a branch should be a straightforward procedure requiring documents of the parent company to be legalized and translated for registration purposes.
- The branch would provide a platform for foreign companies to pursue specific projects. Once a project is identified – depending on the project’s requirements – foreign investors could either participate through the branch or incorporate a company with relevant Iranian shareholders for the operation of that project.
4. Investment Opportunities in Iran: Representative/Liaison Office
One method used by some foreign companies, especially those involved in trading goods and services in Iran, is a representative or liaison office in Iran. Typically, an Iranian firm or person engaged in a similar business is used as a conduit for presence and activity in the Iranian market. The representative or liaison office usually acts on behalf of numerous companies.
Depending on the type of activity of a foreign firm, this can be both an appropriate or inappropriate vehicle for entry and access to the Iranian market. In the case of companies involved in trading, this method is advantageous in that the foreign company can rely on the expertise and contacts of the representative to sell its products in the market. To such foreign companies, it is of no concern that the representative is active in various fields as long as their products are being sold and marketed effectively within the market. Such representatives usually work for a commission and, as such, have a direct incentive in marketing, selling the product, and ensuring a return on the investment in Iran.
However, in the case of foreign investors, this may not be an appropriate entry vehicle to the Iranian market for many reasons:
- Foreign investors would have to conduct extensive research and due diligence to find a suitable person or company for such purposes. This is very important since all the activities, reputations, and actions of such a person will directly impact the client’s standing and reputation in Iran.
- Such a company or individual will have financial interests in foreign investors’ continual support, and as such, a direct conflict of interest will arise in providing impartial advice.
- Foreign investors may be among a list of companies that such an individual or company would work for. This may result in inadequate attention to the interests of foreign investors.
- The person may not have the appropriate infrastructure to provide the needed services in pursuing foreign investors’ interests in Iran.
In conclusion, what do we think about investment in Iran?
Given the preceding discussions, combined with foreign investors’ strategic decision to establish a permanent presence in Iran, I believe the option of a branch as a starting point could best serve foreign investors’ purposes. The main advantage is that, absent a specific project, foreign investors should avail themselves of all options and potential partners by having a direct presence, discarding the need for managing external relationships until a suitable project or investment opportunity in Iran is Identified.