Legal Aspects of Doing Business in I.R. Iran Legal, Financial & Business Advisors
Methods of Doing Business with Iran Appointment of Agents Three kinds of commercial representatives are permitted in Iran : Brokers who act as intermediaries between the parties to a transaction Commission Agents who undertake business in their own name but on behalf of the principal. Commercial Agent is a person or company who is entrusted by the principal (e.g. a foreign company) with negotiation or negotiating and conclusion of transactions on behalf of the principal. In such a situation, the agent s signature binds the principal and makes the principal liable for all acts done by the agent within the scope of the power and authority allowed and granted to the agent by the principal. Under Iranian law there is no requirement for agents to be of Iranian nationality. However in practice, since only Iranian nationals or companies can obtain a trade license (i.e. a commercial card), which is required for importation and exports, commercial agency has to be through Iranian natural or legal persons.
Agency Agreements After a principal appoints an agent in Iran, the responsibilities of the two parties are generally recorded in an agency agreement. Such responsibilities may vary widely, and legal advice is required to determine the appropriate detailed rights and obligations of the parties under the governing law of Iran. Generally speaking, under the Iran's Conflict of Laws, the governing law of a contract is the law of the jurisdiction where the contract is concluded, unless the parties are foreign nationals and shall, expressly or impliedly, subject the contract to another law. However, if the contract has provisions for resolution of disputes through arbitration, then the choice of governing law by the parties shall be valid irrespective of the place of conclusion of the contract and the nationalities of the parties.
Establishment of Branch Office According to the law and regulations applicable to the establishment of Branch Offices of foreign companies, the Branch operates under the exact trading name of the Principal. The foreign company Principal is fully responsible for the activities of the branch. The law permits the branch office to be active in the areas of : - gathering marketing information - providing after sales service and warranty in respect of goods and services - performing the execution operations of contracts made between Iranian parties and the Principal. - appraisal and facilitation of investment by the foreign company in Iran - increasing exports of Iranian non-oil goods - providing engineering & technical services, transfer of know-how and technology - performing activities the license for which is issued by government organizations which are legally authorised to issue the licences for such activities such as for providing services in the areas of transportation, insurance & goods inspection, banking, marketing, etc.). Branch Offices enjoy tax exemption on condition of no commercial transactions and contract income.
Forming Joint Ventures Foreign contractors and manufacturers increasingly form joint ventures with local companies in order to be able to fulfill the requirements of the Local Content Law (requiring minimum 51% Iranian content) and bid competitively in public sector tenders for implementation of projects and supply of equipment and material. Establishment of an Iranian Company Establishment of an Iranian company by foreign entities and persons (private joint stock or limited liability) with up to 100% foreign shareholding, with or without a foreign Investment Licence under the Foreign Investment Promotion & Protection Act (FIPPA). It is possible to establish a company for carrying out trading, services and other activities, however foreign investment licenses are for the purpose of development and productive activities including industrial, mining, agriculture and services.
Tendering for Government Contracts General Iran awards virtually all large government contracts through tenders. Some tenders are advertised in the press (Iranian and foreign), whereas others may be in the form of invitations to bid sent to selected companies. There are, however, certain procedures for awarding contracts without tendering. The law requires that any government transactions exceeding a certain price threshold must be awarded exclusively by tender, unless otherwise provisioned for by the Law. Foreign Bidders Foreign companies that wish to be included in bid lists should contact the relevant ministry or government organization, and complete a process of pre-qualification. This process involves the submission of documentation establishing the company s credentials for supplying certain types of goods and services.
Import Regulations Order registration must be performed at the Ministry of Industry, Mine and Commerce for imports, followed by application for allocation of foreign currency at the official Transaction Rate, with the approved applicants being referred to the banking system for their foreign currency requirement. Normal payment method for imports is through L/C but also increasingly through advance cash payment transfer due to banking sanctions imposed on Iran. Cases of under invoicing and over invoicing happen. Customs have established benchmark prices for most goods to protect against significant under invoicing cases. In cases of the price of goods declared being significantly less than customs value, if discovered by the customs then benchmark prices would be applied and penalties of up to 100% may also be imposed.
FOREX, Finance & Banking Support for Foreign Trade Cost of Iran s foreign trade under sanction conditions increased by 20-30% including 7-10% which is just paid for transfer of funds out of the country but also higher insurance and shipping costs and prices of goods. Deposited oil revenues in China, India, Korea, Turkey, Japan and Taiwan are used to pay for imports from these countries through bilateral agreements facilitating for conversion of part of the oil proceeds to local currencies of some of these countries. A number of banks from these countries work with Iran and accept Iranian LCs. Yuan, Rupees and WON are more readily allocated to importers by Iranian banking system. In comparison, UAE Dirham, EURO and USD are not as easily allocated. Banks in a number of other countries also work with Iran including some small and regional banks in Europe. Iranian public sector banks which are not on the EU sanction list include Bank of Agriculture and Bank Maskan (Housing Bank). None of the private sector banks also currently appear on the EU sanction list. SWIFT services operate for these banks. Under sanction conditions Exchange Bureau companies of banks and licensed Bureaus of Exchange play a very important role in arranging financial transactions and transfer of funds and FOREX on a large scale for imports and other requirements of the country. Previously goods and raw materials of factories were imported by making a down payment in the range of 10% to 20% for opening the LC, however the down payment has increased up to 100% and in some periods it was even as high as 135% in order for the banks to cover against risk of currency fluctuation. This places huge burden on industry and importers.
Bank Guarantees When a foreign company wishes to participate in a bid or conclude a contract for supply of goods, works and/or services, the Iranian client may require its foreign supplier/contractor to provide certain bank guarantees. There is actually no mandatory provision requiring Iranian private sector companies to demand such guarantees from foreign companies, therefore it is entirely up to them to decide whether to ask for a guarantee or not. Requiring and requesting such guarantees are, however, mandatory when dealing with state enterprises, governmental companies and public bodies. The range of bank guarantees that may need to be provided by foreign suppliers/contractors in connection with governmental and public sector tenders and contracts are mainly of four types: 1) bid bonds; 2) performance bonds; 3) good performance bonds; and 4) down-payment guarantees.
Taxes There are tax incentives provided for activities in certain sectors such as industry & mining, agriculture, exports, tourism, education & sport services, cultural activities, handicrafts and also in less developed regions of the country. Investors can enjoy tax exemptions of up to 10 years in mainland Iran in respect of establishment of new productive units depending on the sector, location, number of personnel employed, and type of product manufactured in their investment units. Total tax liabilities on business activities and dividends have reduced substantially to a fixed rate of 25. VAT is levied on most foreign goods imported into the country at the rate of 9% in the current year 1394 and collected together with the import duties by the customs at the point of clearance of the goods. In respect of the applicability of VAT to foreign services supplied to the territory including engineering/construction services, if the contract for the services is directly between the foreign company and the Iranian client/customer, then it is the client who is responsible for the payment of VAT on the imported services (Note 2 of Article 20 of the VAT Law). However, if the contract for the services is executed between the Branch Office of a foreign company in Iran and an Iranian client then it is the Branch Office which is obliged to include the VAT applicable in the contract and the invoices issued for payment by the client and to pay the VAT received to the Tax Office.
Taxes In respect of those foreign companies which establish branch offices in Iran for the purpose of execution of their contracts in the territory, their taxable contract income shall be assessed by reference to the Branch s statutory books of accounts. In case of contracting business in Iran by foreign juridical persons and enterprises residing abroad with regard to all types of work, the taxable income in all cases shall also be assessed through the examination of statutory books. Withholding taxes are applicable to all foreign contracts, which are deducted by the client from every invoice at the rate of 3% and paid to the tax authorities. Foreign contractors using Iranian subcontractors should also withhold 3% from each payment to such subcontractors and remit it to the relevant tax authorities. In respect of incomes derived from Iran by foreign juridical persons and enterprises residing abroad for the granting of licenses and other rights, the taxable income shall consist of between 20-40% of all payments received by the licensor during a tax year, which will be taxed at the ate of 25%. Those making such payments must withhold from each payment the applicable tax by taking into account the total payments made from the beginning of the fiscal year up to the date of each relevant payment. They should remit the withheld amounts within 10 days to the local tax affairs office. Interest and fees payable on foreign bank loans as well as loans granted by foreign investors to Iranian parties are subject to withholding tax in Iran. The acceptable ceiling for interest and fees charges as tax deductible expenses is LIBOR plus maximum 0.75%. In most loan/financing agreements, the borrower accepts all liability of the lender in Iran in respect of payment of any taxes and levies applicable.
Social Security Organisation Insurance Levy SSO levy is payable on all contracts for works and services at the rate of 7.78% and 16.67% of the value of the contract depending on whether it includes material or not respectively. However, government development projects are treated differently. Further, that part of the contract price relating to the purchase of equipment from abroad as payable through LC and that part of the works performed outside of Iran will be exempted from SSO levy. If certificates are submitted to the SSO relating to the payment of social security contributions for foreign staff of contractors in their home countries, duly endorsed by the Iranian embassies in such countries, then prorata exemption is granted in respect of SSO insurance premium payable for the foreign staff working in Iran and deductions are also accordingly made from the above amount of levies payable, as appropriate. For the purpose of SSO levies applicable to contracts, the client is required to deduct and withhold 5% from each payment to the contractor as per the invoice as well as retaining the whole of the last instalment/payment relating to the Contract, to ensure that the contractors pay the required levy to the SSO, which are returned to the contractor upon submission of a certificate of clearance/settlement of dues with the SSO to the client relating to the SSO levy applicable to the contract.
Registration of Patents, Trademarks & Industrial Designs Iran has a new Law for Registration of Patents, Industrial Designs & Trademarks which was ratified in 2007. Iran joined the World Intellectual Property Organization (WIPO) in October 2001. Iran also joined the Madrid Convention in August 2003 in connection with the international registration of trademarks and the protocol relating to it. Accordingly, a separate section has been established at the Department of Registration of Companies & Intellectual property in Tehran, which registers trademarks for applicants under this convention. Foreign companies can register their trademarks for coverage of the Iranian jurisdiction either in their home countries under this convention or in Iran.
Free Trade Zones Islamic Republic of Iran has established 7 Free Trade-Industrial Zones (Kish, Qeshm, Chabahar, Arvand, Aras, Anzali and Maku. No restrictions on percentage of foreign shareholdings (up to 100%). Exemption from income tax and asset tax for the first 20 years. More flexible labour and banking regulations. Production value added in the zones provides for advantageous export of products to the mainland in respect of import duties. Special Economic Zones of the Islamic Republic of Iran Islamic Republic of Iran has established 17 Special Economic Zones such as special mining, textile, petrochemical, energy, metals, etc. zones. These zones offer ease of imports and exports of raw materials, machinery and products. The zones also offer flexible customs and warehousing regulations. These zones do not enjoy special tax exemption privileges of the free zones. Production value added in the zones provides for advantageous export of products to the mainland in respect of import duties.
Foreign Investment Under the new Foreign Investment Promotion & Protection Act (FIPPA), investment licenses for shareholdings of up to 100% in Iranian legal entities can be granted to foreign investors depending on the merits of the investment application as reviewed by the Foreign Investment Board (FIB). Many such licenses have been granted to date under FIPPA. The repatriation of dividends, capital and foreign loan repayments are protected under FIPPA. It is highly recommended that foreign investments have a minimum export potential to make their application to FIB for a FIPPA license attractive and also to safeguard for repatriations during periods of low oil income and limited foreign exchange resources/reserves. Export earnings are permitted to be used for the above repatriations, as well as for importation of any necessary equipment and raw materials relating to the operation of the investment. Government also provides various incentives to exporters including tax exemption, and export subsidies and prizes.
Legal System and Contracting Conditions in Iran Iranian law respects private contracts between parties unless they have provisions which are against the public policy, damage public ethics and/or go very clearly against the mandatory laws of the country. Iranian commercial law mainly originates from the old French Law and some aspects form Swiss and Belgian Trade Laws. Civil law, on the other hand, is predominately influenced by the Islamic Jurisprudence. Acceptance of Iranian law as the governing law of the contract together with provisions for international arbitration for dispute resolution are satisfactory and safe for entering into sensitive and large contracts with Iranian parties. UNCITRAL and ICC rules are frequently accepted by Iranian parties and the preferred venues for the conduct of arbitrations are in the order of Switzerland, The Hague and Paris. Although the Iranian constitution does not prohibit the acceptance of foreign law as governing law of contracts, ministries, government organisations, state enterprises and public sector companies are under strict order not to submit to foreign law. On exceptional cases and as justifiable, authorization may be given for submission to foreign law. Private sector companies do not face this limitation.
Legal System and Contracting Conditions in Iran Iran has acceded to the "Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York 1958)" through a bill passed by the Parliament in 2001. Since then, any foreign arbitral awards duly issued outside the country shall be recognized and enforced in Iran in accordance with the provisions of the Convention. The Convention limits the grounds based upon which the Iranian courts may intervene and stop the enforcement of a foreign arbitral award in Iran, regardless of whether such foreign arbitral award has been issued under the control and management of an institutional arbitration such as ICC or based on ad hoc arbitration under e.g. UNCITRAL Arbitration Rules. New legislation makes it difficult to claim and recover loss of profit. However, it is possible to provision for this in the contract through provisioning for liquidated damages. The most suitable method for retention of title/ownership under Iranian law is through leasing agreements. Pledge agreement would also be suitable security. It is highly recommended to always have comprehensive and precise contracts with Iranian parties to ensure for successful execution of contracts and prevention of disputes. It is very important that payment schedules are very precisely and clearly defined within the contract, based on and triggered by well-defined deliverables.