Foreign Investment Opportunities in Iran
Business Is Picking Up
The government of Iran tends to offer privileges to companies who create job opportunities and transfer technology and are active in exporting their products from Iran. Iran’s competitive advantage in this regard is that it can be used as a launching pad for expansion into the other Persian Gulf States and Central Asia.
My general advice is to use Iranian expertise and consultants 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 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
Some of the most common types of the presence of foreign companies under the Iranian legal system are as follows:
- 100% Foreign Legal Entity
Under the current practice, foreign companies can own 100% shares of a company without special formalities in the Free Trade Zones. FTZ companies may only benefit from the incentives (i.e. 15 years tax holiday) of the zones if their activities are focused in that area. Although the mainland has no legal limitations for foreign ownership in an Iranian company, in practice, there is a preference for some Iranian participation in a project.
Currently, FTZs are used by some Foreign Investors involved in industrial activities. They use FTZ as a station for assembling or manufacturing the final goods exported into Mainland Iran or other countries of the region. Given the fact that foreign investors will be focusing primarily on mainland projects, I do not believe an FTZ registered company to be an optimal solution for the foreign investor.
2. Iranian Company through a Joint Venture
Foreign companies looking at direct investment in Iran typically form a joint venture with an Iranian company active in their field of business. The Iranian government consistently promotes this form of entry. This is because a joint venture ensures a long-term commitment on the part of the foreign company, creates jobs, and provides participation by Iranian persons.
Currently, there are no “joint venture” laws in existence in Iran. Instead, the foreign and Iranian companies refer to the commercial code and jointly form a corporate structure. 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.
My experience has also shown that 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 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 license.
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 will be requirements for having regular board and shareholder meetings as well. This will be further compounded by THE CLIENT’s need to manage its relationship with other shareholders in the entity. Finally, foreign investors 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 the Iranian participation on a case by case basis.
3. 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 their country, allowing for registration of Iranian companies. A foreign company may register a department or representative office for the following activities:
1. After-sale services for 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 companies 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 are making sales to Iran of various products. 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, marketing, relationship building, etc.
In light of the current strategy of foreign investors to establish a presence for future projects in Iran, the registration of a branch and representative office seems to be the most appropriate vehicle for entry into the Iranian market. Since foreign investors have formulated a long-term strategy for their access to Iran, 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 control of subsidiary management 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 only a cost centre. 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 . 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 both marketing and selling the product.
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 an extensive search and due diligence to find a suitable person or company for such purposes. This is very important since all the activities, reputation, 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.
What can be concluded?
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 by itself without the need for managing other relationships until a project is identified.