a world of opportunity our guide to doing business in iran · 3 a world of opportunity our guide to...

A world of opportunityOur guide to doing business in Iran

SANGLAJ INTERNATIONAL CONSULTANTS

March 2016

Contents

About the Eversheds Iran Practice Group 03

About Sanglaj International Consultants 03

Foreword 05

Iran overview 06

1 An introduction to Iran 081.1 Overview of Iran’s history 081.2 Iran’s constitutional system 091.3 Iran’s economy 101.4 Key sectors 11

2 Sanctions 122.1 Implementation Day: what does it mean? 122.2 What sanctions and risks still remain? 13

3 Establishing a presence in Iran 143.1 Overview of the different ways to establish a presence in Iran 143.2 Tax considerations 163.3 Potential restrictions on foreign ownership 163.4 Other considerations when establishing a presence 16

4 Foreign investment incentives – Free Trade Zones and Special Economic Zones 184.1 Free Trade Zones 184.2 Special Economic Zones 19

5 Protecting your investment 205.1 Available BIT protections 205.2 The protection of foreign investment under Iranian law 205.3 Arbitration in Iran 225.4 Export Credit Agencies 23

6 Iranian financial sector 246.1 The banking sector 246.2 The Tehran Stock Exchange 256.3 Payment channels 256.4 Opportunities for investment funds 25 Main sources 26

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A world of opportunity Our guide to doing business in Iran

About the Eversheds Iran Practice Group

Eversheds’ Iran team has been acting for clients in Iran and in relation to Iran for over thirty years. Our work has included non-contentious and contentious advice for international entities conducting business in Iran, private Iranian entities, the Iranian State and State-owned entities. Our longstanding and uninterrupted work in Iran means that we are intimately aware of the corporate challenges associated with incorporating and managing companies in Iran. We have a track record of advising on matters concerning the specific area of administrative law relating to public tenders, and on the structuring of foreign investments via Iranian incorporated companies. With regard to investment protection, we are very familiar with Iran’s network of bilateral investment treaties (“BITs”), as well as their inter-relationship with applicable national investment laws and investment licence requirements. Specifically, we have extensive experience in dealing with the Organisation for Investment, Economic and Technical Assistance of Iran (“OIETAI”) and the Foreign Investment Promotion and Protection Act (2002) (“FIPPA”). We have excellent connections with numerous organisations, both public and private, which places us in a unique position to advise on the most effective way to tap into the Iranian market.

The twelve lawyer team at Sanglaj International Consultants (“Sanglaj”) is Eversheds’ best friend law firm in Iran. Sanglaj was established in 2008 by Dr. Moshkan Mashkour, who has acted as senior legal advisor to numerous government agencies and State-owned companies as well as many private entities. In that capacity, he has negotiated BITs as well as a variety of loan and financial facility agreements, and has drafted major oil and gas supply contracts, as well as various agreements in other sectors such as telecommunications, construction of industrial facilities, sale and purchase of goods and commodities. From 2005 to 2010, he acted as the Director of the Tehran Regional Arbitration Centre. His experience in private practice includes, inter alia, corporate law, finance, telecommunications, joint ventures, foreign investment as well as Alternative Dispute Resolution (“ADR”) and international commercial arbitration. The lawyers at Sanglaj are familiar with, and have first-hand knowledge of, the practical application of Iranian laws and regulations, notably with respect to foreign investment. They are uniquely positioned to provide professional legal and practical advice to businesses, and are currently advising, together with Eversheds, numerous major foreign entities on doing business in Iran.

About Sanglaj International Consultants

David Sellers Head of the Eversheds Iran Practice Group

Tel: +33 1 55 73 40 00 [email protected]

Dr. Moshkan MashkourHead of Sanglaj International Consultants

Tel:+ 98 21 88 31 12 19 / +98 21 88 49 01 03/[email protected]

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Foreword


David Sellers Head of the Eversheds Iran Practice Group

Dr. Moshkan MashkourHead of Sanglaj International Consultants

The signing of the Joint Comprehensive Plan of Action relating to Iran’s nuclear programme and the easing of international sanctions on 16 January 2016 have paved the way for the opening up of the Iranian market. Iran represents a great opportunity for businesses wishing to expand their foothold in what will surely constitute one of the most vibrant economies of the region in the period ahead. With its population of almost 80 million and its ownership of some of the largest oil and gas reserves in the world, Iran has a vast range of business opportunities, in virtually all sectors of its economy.

Iran nonetheless remains a challenging jurisdiction. Proper legal advice should be sought well in advance of any decision to invest, and throughout the conduct of any investment project until its completion.

Eversheds and Sanglaj have been advising numerous non-Iranian entities on doing business in Iran and with Iranian entities, including, as regards to the impact of sanctions, sanctions relief, available investment protection instruments, financing/tax structuring schemes, due diligence of potential Iranian partners, and forms of establishing a corporate presence in Iran. In recent months, we have advised on numerous transactions involving abroad spectrum of sectors, notably in the renewables, automotive, oil and gas, petrochemicals, telecoms, financial (including establishing funds) and banking sectors.

Eversheds and Sanglaj are delighted to provide you with this Guide to Doing Business in Iran. We hope you will find it helpful and informative.

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Iran overview

Key Statistics

Area 1,745,200 km2 (World Bank estimate)

Population 78,470 million (2014 WTO estimate)

Unemployment rate 11.9% (2015-2016 IMF forecast)

GDP USD 425,3 billion (2014 World Bank estimate)

GDP Per Capita (PPP) USD 16,590 (2014 World Bank estimate)

Growth rate expected 5.8% (2016 World Bank estimate)

6.7% (2017 World Bank estimate)

Inflation rate 15.6% (2015 World Bank estimate)

Deposit interest rate 16.9% (2014 World Bank estimate)

Lending interest rate 14% (2014 World Bank estimate)

Merchandise exports USD 88,8 billion (2014 WTO estimate)

Merchandise imports USD 51 billion (2014 WTO estimate)

CO2 emissions 586,599 kilotons (2011 World Bank estimate)

Key Energy Statistics Source: OPEC Annual Statistical Bulletin 2015

Crude oil proven reserves (2015) 157,530 million barrels

Crude oil production (2015) 3,117,000 barrels per day

Natural gas proven reserves (2015) 34,020 billion cubic meters

Exports of petroleum products (2015) 470,000 barrels per day


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International Organisations Membership

– Economic Cooperation Organisation (“ECO”)

– International Atomic Energy Agency (“IAEA”)

– International Civil Aviation Organisation (“ICAO”)

– International Criminal Police Organisation (“Interpol”)

– International Finance Corporation (“IFC”)

– International Labour Organisation (“ILO”)

– International Monetary Fund (“IMF”)

– International Telecommunications Union (“ITU”)

– Islamic Development Bank (“IDB”)

– Organisation of the Islamic Conference (“OIC”)

– Organisation for Petroleum Exporting Countries (“OPEC”)

– Permanent Court of Arbitration (“PCA”)

– United Nations (“UN”)

– United Nations Educational, Scientific and Cultural Organisation (“UNESCO”)

– United Nations Conference on Trade and Development (“UNCTAD”)

– World Customs Organisation (“WCO”)

– World Intellectual Property Organisation (“WIPO”)

– World Trade Organisation (“WTO”)


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A wide spectrum of opportunity Structuring UK real estate investments

1. An introduction to Iran

1.1 Overview of Iran’s history

Pahlavi Dynasty, 1925-1979– 1951 – nationalisation of the oil industry, which is

dominated by the British-owned Anglo-Iranian Oil Company

– 1963 – the Shah launches a campaign to modernise and

westernise the country, the “White Revolution” – 1978 – the Shah’s policies alienate the population and

his authoritarian rule leads to riots, strikes and mass demonstrations. Martial law is imposed

Islamic Revolution of 1979 and establishment of the Islamic Republic of Iran– January 1979 – exile of the Shah – February 1979 – Ayatollah Ruhollah Khomeini returns to

Iran and becomes Supreme Leader – April 1979 – the Islamic Republic of Iran is proclaimed Iran-Iraq War 1980-1988– January 1981 – signature of the Algiers Declaration – July 1988 – an Iran Air Airbus is shot down by the USS

Vincennes

– July 1988 – Iran accepts a ceasefire agreement with Iraq following negotiations in Geneva under the aegis of the UN

– 1989 – death of Ayatollah Khomeini. Ayatollah

Khamenei becomes Supreme Leader

Nuclear crisis and key milestones leading to Implementation Day, 1995-2012– Several waves of international sanctions (UN, US, EU)

from 1995 onwards ultimately impose an almost total ban on several sectors of the Iranian economy including oil imports and restrictions on the Iranian financial sector in 2012

– June 2013 – Hassan Rouhani wins presidential elections

JPOA and JCPOA– November 2013 – Iran agrees to curb uranium

enrichment above 5% and to give UN inspectors better access in return for an estimated USD 7 billion in sanctions relief during talks with the P5+1 Group (China, France, Germany, the Russian Federation, the United Kingdom and the United States, with the High Representative of the European Union for Foreign Affairs and Security Policy) in Geneva. An agreement on a Joint Plan of Action (“JPOA”) is reached, and implemented in January 2014, with some limited sanctions relief

– July 2014 – nuclear negotiations between Iran and the P5+1 Group begin in Vienna

– July 2015 – the P5+1 Group and Iran sign a Joint Comprehensive Plan of Action (“JCPOA”), which will “ensure that Iran’s nuclear programme will be exclusively peaceful, and mark a fundamental shift in their approach to this issue.”

– January 2016 – “Implementation Day”. Sanctions are substantially relaxed


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1.2 Iran’s constitutional system

Policymaking in Iran is not determined by a single individual or body. Iran’s main political institutions are reflected in the below chart.

Constitutional System:– President – Head of the Executive – Majlis – Parliament with 290 members– Guardian Council – has to approve Majlis legislation;

determines who is qualified to run for public office; consists of twelve experts in Islamic law, namely six “faqih” (expert of sharia) members and six lawyers

– Expediency Council – an administrative assembly set up to resolve deadlocks between the Majlis and the Guardian Council; appointed by the Supreme Leader (but includes key State officials)

– Supreme Council for National Security – safeguards the national interest, preserves sovereignty and protects revolutionary ideals

Role of the Supreme Leader: – the Supreme Leader is appointed by the Assembly of

Experts, and the candidates for the Assembly of Experts are vetted by the Guardian Council

– the Supreme Leader determines the general policies and commands the Armed Forces

– the Supreme Leader can appoint six “faqih” members of the Guardian Council, the Expediency Council, the Head of the Judiciary, the Head of the State Radio and Television Network, the Commander of the Armed Forces and the Revolutionary Guard Corps

Legal and Judiciary System:– the legal system is based on codified laws, i.e. a civil system (Civil code, Commercial code etc.)– laws are based on Islamic principles and the Guardian

Council reviews all legislation to ensure that laws are in conformity with the Constitution

– There are five types of courts in Iran: - General courts - Administrative courts - Clerical courts - Revolutionary courts - Armed forces courts– General courts are classified into civil and criminal

branches. Administrative courts are authorised to review regulations and decisions made by the government, public officials and State organs


Guardian Council

President

Cabinet

Parliament

Electorate

Expediency Council

Head of Judiciary

Supreme Leader

Elected Appointed or appoved Vets candidates Source: Eversheds LLP

Assembly of experts

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1.3 Iran’s economy

Iran is the second largest economy in the Middle East and North Africa region after Saudi Arabia. It has one of the world’s largest hydrocarbon reserves, as well as significant and diversified non-oil sectors including agriculture, industrial production and services. Although sanctions led to a contraction in economic activity, economic growth has resumed since 2014 and is projected to increase, with some commentators suggesting that Iran’s GDP might surpass that of Saudi Arabia and Turkey within a decade.

Iran has vast mineral reserves, a strategic geographic location, and the second largest population in the region estimated at around 78 million with promising demographic characteristics (an 85% literacy rate and 64% of the population falling within the 15-54 age group). There is a large middle class population with increased income distribution equality and changing consumption patterns.


Iran GDP growth rate projections

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8

6

4

2

0

-2

-4

2013 2014 (estimate)

2015 (estimate)

2016 (forecast)

2017(forecast)

2018 (forecast)

World Bank

International Monetary Fund

Iranian Bill submitted in February 2016 by the Government for Parliamentary approval (2016-2021)

The Economist Intelligence Unit

Source: Eversheds LLP (data from World Bank, IMF and Economist Intelligence Unit)

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1.4 Key sectors

Despite reliance on oil and gas exports, Iran also possesses sizeable agricultural, industrial and service sectors. The main industries are petrochemicals, fertilizers, textiles, cement, construction materials, food processing (notably sugar refining and vegetable oil production), ferrous and nonferrous metal fabrication.

Sanctions relief and an improved economic outlook are expected to particularly impact the following key sectors as the Iranian market expands:

– oil, gas and petrochemical products – Iran holds proven oil reserves of 158 billion barrels, equivalent to more than 150 years of production at the rate of extraction recorded in 2014. In addition to the world’s largest untapped natural gas reserves, Iran has the potential to become a leading liquefied natural gas (“LNG”) exporter if access to the right technology becomes available. Petrochemicals is Iran’s second largest industrial sector. The lifting of sanctions will ease trade in the oil and gas sector. Production is expected to grow significantly – the IMF projects the oil and gas GDP of Iran to grow by 16% in 2016, which will result in investment ramp-up, including for enhanced oil recovery projects and the construction of LNG export facilities.

– export driven industries – increasing international trade will create opportunities for the auto manufacturing, mining and processing industries for building materials, auto parts and industrial manufacturing. Iranian industries will need to source more raw materials to avoid producing below capacity, whereas the mining sector needs investment to explore gold, zinc, copper, iron and aluminium reserves.

– transport and infrastructure – Iran has 54 airports and a rail network of 10,223 km. The aviation infrastructure is in need of investment and the government plans to extend the rail network to 25,000 km by 2025. The Iranian Ministry of Roads and Urban Development has published a report presenting numerous investment projects in excess of EUR 25 billion in the transportation sector, including the following:

- EUR 2 billion in airport expansion or development projects - EUR 3 billion in road expansion or development projects

- EUR 6 billion in urban development projects - EUR 13 billion in railroad expansion and development projects - EUR 1 billion in port expansion and development projects

– banking and financial sector – the lifting of economic sanctions is expected to generate significant benefits for Iran’s financial system as financial transfers, including SWIFT operations, have now been re-authorised. Iranian companies will need access to international financial markets to finance projects and the Iranian government aims to establish a regulated debt market in its upcoming Sixth Five Year Development Plan.

– renewables – Iran is seeking to develop renewable energies and to reduce air pollution. The country is continuing its effort to have 5 gigawatts of renewable energy installed by 2020 which would rank it, alongside France and the UK, as an industry leader. According to a recent report by the Iranian Ministry of Energy, the wind energy potential of Iran is estimated at more than 30,000 megawatts. Moreover, the Ardebil and East Azerbaijan provinces are considered rich in geothermal energy, and the central and southern regions have a high solar energy potential.

– water and waste management – as Iran is expected to access wider sources of international finance, recent estimates are that Iran is set to spend USD 20 billion on water and wastewater infrastructure over the next 5 years, including on seawater desalination and advanced wastewater treatment and reuse. The Iranian Ministry of Energy has recently published a long list of potential projects in various cities and provinces, including small scale hydroelectric power stations (mainly for clean drinking water transmission lines), dams, irrigation and drainage networks.

– consumer goods, pharmaceutical and retail sectors – many Iranian companies active in these sectors are now seeking investment and joint ventures with foreign companies to increase the quality and competitiveness of their products, as well as to expand production lines.


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2. Sanctions

Sanctions: the pre-Implementation Day Structure Prior to recent sanctions relief following Implementation Day on 16 January 2016, different sanctions regimes against Iran were applicable. The UN and the EU had issued multilateral/regional sanctions in the form of Security Council Resolutions implemented into national legislation and EU Regulations. Unilateral sanctions were also adopted by various countries in particular the United States, as well as Norway, Switzerland and Canada. The United States adopted very wide-ranging “primary sanctions” preventing US firms and entities from entering into most kinds of business with Iran, and non-limited “secondary sanctions” which are directed against non-US firms and entities engaging in business in certain sectors in Iran.

Background: the JPOA and JCPOAIn 2013, Iran and the P5+1 countries (China, France, Russia, the United Kingdom, the United States and Germany) agreed on the JPOA that was implemented in 2014 and which gave rise to limited sanctions relief under EU sanctions (Regulation 42/2014) and a similar suspension of US secondary sanctions.

On 14 July 2015, Iran and the P5+1 agreed on the JCPOA which provided for further sanctions relief to be granted upon verification by the IAEA that Iran had complied with the nuclear-related commitments it had undertaken in the JCPOA. This was achieved on 16 January 2016 (i.e. Implementation Day).

2.1 Implementation Day: what does it mean?

All EU nuclear-related sanctions were lifted on Implementation Day. In particular, the easing of sanctions marked the following:— freedom of transfer of funds— reinstatement of SWIFT services— delisting of most persons and entities— lifting of prohibitions on business operations, such as

those in the energy sector

US secondary sanctions were suspended, meaning that since Implementation Day, the US no longer seeks to penalise non-US persons and entities who enter into business in certain sectors in Iran such as the energy and automotive sectors. However, the US continues to prohibit non-US persons and entities from entering into business with persons and entities who remain on the List of Specially Designated Nationals and Blocked Persons (“SDN List”).

A “US Nexus”: How it may affect youUS primary sanctions remain in place: persons and entities subject to US jurisdiction will continue to be generally prohibited from entering into Iran-related transactions.

Nonetheless, primary sanctions on civil aviation were lifted and US persons will be able to enter into transactions with Iranian airlines for the sale of civilian passenger aircraft, parts and components. Non-US persons may also sell aircraft and civil aviation equipment having more than 10% US content to Iran.

The United States has issued a general licence, called “General License H”, which allows non-US subsidiaries of US companies to engage in business transactions with Iran. US personnel in such subsidiaries must however be ring-fenced from any Iranian business. Non-US companies involved in business in the US will have to ensure that they comply with remaining secondary sanctions.


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2.2 What sanctions and risks still remain?

What about a “Snap-back”?According to the JCPOA, UN sanctions may be re-imposed by the Security Council if it is deemed that Iran has failed to comply with its commitments. If sanctions are re-imposed, they will not apply with retroactive effect to contracts signed in the interim. This is, however, subject to different interpretations, as follows:

– US position: - no penalty for having entered into a contract when

it was legal to do so following Implementation Day - however, no “grandfathering” – contracts must be wound down within a reasonable period after the

re-imposition of sanctions

– EU position: - the preamble to EU Regulation 2015/1861 which grants the sanctions relief, seems to suggest that investments made when it was legally permissible to do so should be protected and allowed to run their normal course - however, EU Guidelines published on Implementation Day suggest that the EU position will be similar to the US one, as follows: - companies will be allowed a reasonable time to wind down activities if these activities are prohibited by new sanctions - however, contracts that were permitted under the previous sanctions regime will not be targeted by the reintroduction of sanctions

What should you do to ensure compliance? - business with persons and entities who remain listed as subject to the asset freeze under EU sanctions for EU persons and entities continues

to be prohibited. The listed entities include certain banks and other prominent companies.

Due diligence as to contractual partners therefore remains necessary

- if there is a US nexus such as a US presence of a company that exposes it to US secondary sanctions, or if any financing arrangement requires compliance with US sanctions, care should be taken not to contract with persons and entities on the SDN list - USD transactions which are cleared through

the US financial system remain prohibited - US employees and directors must be ring-fenced from any Iranian business - the risk of snap-back should be provided for contractually


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3. Establishing a presence

Different forms of presence and corporate structures are available to foreign investors wishing to invest in Iran.

3.1 Overview of the different ways to establish a presence in Iran

Establishing a presence through an agent – foreign companies may enter into an agency agreement

with a local agent– a straightforward contractual relationship, rather than

a corporate structure, will thus define the limits and aims of the company’s presence in Iran

Registering a branch office – companies can set up an Iranian branch office of a

foreign company– the branch office will be considered a foreign company

and will operate under the name and the responsibility of its mother company. As such, it will not constitute a separate legal entity and will have no distinct legal personality

Establishing a representative office– foreign companies may use a representative office

for promotion and prospection purposes. The representative office cannot be engaged in commercial activities, issue invoices, conclude contracts and receive payments amongst others

– the scope of the work carried out by the representative office and the terms under which it will operate in Iran are defined in the letter of appointment to be filed with the commercial registrar

Establishing a corporate structure – setting up an Iranian entity There are seven corporate structures available under Iranian law, namely: – Joint Stock Company (Sherkat ba Masoliat Mahdoud)– Limited Liability Company (Sherkat Sahamie Khas)– Collectively Guaranteed Company (Sherkat-e

Tazamoni)– Limited Partnership (Sherkat-e Makhtalet-e Gheir-e

Sahami)– Joint Stock Limited Partnership (Sherkat-e Makhtalet-e

Sahami)– Proportionate [Liability] Company (Sherkat-e Nesbi) – Cooperative Company

The most frequently used corporate structures are the Joint Stock Company and the Limited Liability Company, which are generally perceived as being the most advantageous forms.

Joint Stock Companies (“JSCs”)Advantages and Protections – JSCs may either be private companies or, if their shares

are traded on the stock market, public companies– they provide the benefit of being limited liability

structures– except for a number of reserved sectors designated

by Principle 44 of the Iranian Constitution (see Section 3.3), there currently exist no limits on foreign shareholding in Iranian companies, and thus 100% of the capital of an Iranian JSC may be owned by non- Iranian natural persons or legal entities incorporated outside of Iran

– however, it is often helpful to establish a JSC with an Iranian partner. In this case, the joint venture relationship will typically be governed by a shareholders’ agreement which could be subject to a foreign law and which may provide for international arbitration

– JSCs may also benefit from BIT as well as investment law protection, subject to obtaining an investment licence from OIETAI (see Section 5.1)


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Incorporation Requirements The main requirements to set up a JSC in Iran are as follows:– a minimum of three shareholders– directors must hold at least one share– directors can be companies or foreign nationals– a minimum registered capital of 1,000,000.00 Iranian

Rials, which is equivalent to approximately EUR 30 at the exchange rate as of February 2016

– shares subscribed by the founders must be paid up to the level of at least 35% of their initial value by the shareholders at the time of incorporation

Post-incorporation Requirements and Structure – a JSC must have its financial statements audited– shareholders participate in the company’s activities

through ordinary general meetings or extraordinary general meetings

– a board of directors and a managing director/general manager will be responsible for managing the company

Board of Directors– members are chosen for a period not exceeding two

years, subject to re-election. Directors may be removed at any time and for any reason by a general meeting of the shareholders

– directors must hold at least one share– a legal entity (such as a company) may be elected as

a Board member. In such a case, the elected member must appoint an individual as its permanent representative in order to attend Board meetings on its behalf and to vote according to its interests

– with the exception of powers reserved for general meetings by the law or the company’s articles of association, the Board has the authority to conduct and perform the company’s business and activities within the limits stated in the definition of the company’s object

– the Board must appoint a General Manager

Limited Liability Companies (“LLCs”)Advantages and Protections – LLCs may be 100% foreign-owned, subject to the

exceptions under Principle 44 of the Iranian Constitution (see Section 3.3)

– as with JSCs, LLCs could potentially benefit from BIT protection if they are granted a dedicated investment licence by OIETAI (see Section 5.1)

– the liability of the partners is limited to the amount of their respective registered capital contributions

Incorporation Requirements – the main requirement to set up an LLC in Iran is the

existence of two or more partners. There is no minimum registered capital required by law

Post-incorporation Requirements and Structure – LLCs are not legally required to have an auditor– control is effected by the shareholders, either on a

regular basis or through ordinary general meetings. The rules governing shareholders meetings are equivalent to those applicable for JSCs

– LLCs are managed by one or more directors who are appointed by the shareholders, either from amongst the shareholders themselves or externally, for a fixed or an unlimited period

– directors can be foreign nationals– when more than one director is appointed, it is

common for a Board of Directors to be constituted to manage the company. Such a body is, however, not required by law. If a Board is created, then the same rules as those applicable to a JSC’s Board will apply, and a General Manager will be appointed to act as an executive officer under the Board’s supervision


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3.2 Tax considerations

Corporate profits are taxable at the rate of 25%. Certain exemptions from the commencement of the activity and on 100% of the profits may apply if the investment is made in a Free Trade Zone (see Section 4.1). Foreign investments in Iran may be structured in order to benefit from available double taxation agreements (see e.g.the Iranian double taxation agreements with France, Switzerland, Germany and China).

3.3 Potential restrictions on foreign ownership

The general principle under Iranian law is that no restrictions apply with regards to the percentage of foreign shareholding in any of the above structures.

Some exceptions will, however, apply in certain instances thereby limiting foreign ownership to 49%. Such exceptions are derived from national laws and Principle 44 of the Constitution, which states that: “the State sector is to include all large-scale and mother industries, foreign trade, major minerals, banking, insurance, power generation, dams and large scale irrigation networks, radio and television, post, telegraph and telephone services, aviation, shipping, roads, railroads and the like; all these will be publicly owned and administered by the State”.

Investing in the Public v. Private SectorInvestments in the private sector can be made through foreign direct investment or through contractual arrangements. In this respect, it is worth highlighting that there are no restrictions on the authorised amount of investment for foreign investors. Investments in the public sector, on the other hand, may only be carried out through contractual arrangements, usually pursuant to a tender process (as per the Iranian Tender Law of 2005).

In the oil and gas sector, investments are made through special contractual arrangements (“buy-back contracts”) with the Iranian government. In order to attract further investment in this sector, a new model contract – the Iran Petroleum Contract – is expected to be published by the Iranian government imminently.

3.4 Other considerations when establishing a presence

Employment issuesEmployment issues will vary depending on whether the presence in Iran is established in a Free Trade Zone or not (see Section 4.1).

Employee-employer relationships are subject to Iranian law. Under Iranian law, the employer is obliged to pay 23% of the employee’s salary for social security and unemployment. Any non-payment or late payment will result in fines for the employer.

Any labour-related disputes are settled by a special labour council.

Work and residency permits are required for foreign expatriates working for more than 90 consecutive days in Iran. Such work permits will be issued by the Ministry of Cooperatives, Labour and Social Welfare, at the request of the employer. The application for a work permit must be made by an Iranian registered employer and cannot be made by a foreign entity.

Intellectual Property Rights Iran is a member of the WIPO, the Paris Convention, and the Madrid Protocol. However, Iran has not acceded to the Berne Convention on copyright.

Local Iranian regulations also protect patents, trademarks, and industrial designs that have been registered with the Industrial Property Office. The protection is granted for a limited, though renewable, period (5 years for an industrial design, 10 years for a trademark, and 20 years for a patent).


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4. Foreign investment incentives – free trade zones and special economic zones

Free Trade Zones (“FTZs”) and Special Economic Zones (“SEZs”) were introduced in Iran as from the 1970s and the 2000s, respectively, to encourage foreign direct investment in the country. They were aimed at diversifying the Iranian economy, and building on existing industry specific technical skills and know-how.

A framework of benefits and incentives is in place to attract foreign investors, including particular geographic industry-specific advantages (i.e. strategic locations as per the requirements of specific industries – e.g. harbours for the oil and gas producing hubs of Kish and Qeshm Islands), economic and business incentives favouring investments, tax incentives and tailored and favourable legal frameworks for employees.

Geographical location

4.1 Free Trade Zones

There are currently seven FTZs in Iran.

FTZs have attracted different industries and types of foreign investment depending on their locations. The Kish Island FTZ has, for example, attracted large international oil companies in light of the South Pars and Asalouyeh oil and gas hubs, as is the case of Qeshm Island, also located in the Persian Gulf.

The harbour-based Chahbahar FTZ specialises in trade and commercial services and in the tourism industry. It is located in south-eastern Iran, on the shore of the Gulf of Oman.

The Aras FTZ is located in north-western Iran and shares borders with Azerbaijan and Armenia. It seeks to specialise in and develop the high-tech industries sectors, and is conveniently equipped with modern telecommunications and energy infrastructure.

The Arvand FTZ is located in south-western Iran of the country and shares borders with Iraq and Kuwait. It seeks to develop its commercial, industrial and warehousing capabilities and to position itself as a gateway to the Iraqi market. The strongest industry in the Arvand FTZ is the petrochemicalone, but the FTZ is aiming to diversify its market and attract foreign investors in other industries.

The Anzali FTZ is located in the north of the country on the shore of the Caspian Sea and is thus strategically located as a Central Asian hub. Due to the presence of the Anzali harbour, the FTZ specialises in warehousing, trade and commerce, notably in the petroleum and shipping construction sectors.

The Maku FTZ, which is located in north-western Iran and is very close to the Turkish border, is the largest FTZ. It focuses on the power and petrochemical industries, as well as on production facilities and refineries for metal resources such as aluminium.

All FTZs benefit from both air and road access, modern energy, and information, communication and technology infrastructure.


Special Economic Zone

Free Trade Zone

Approximate distances - Not to scale

Maku FTZ

Aras FTZNamin SEZ

Salmas SEZ Anzali FTZ

Mehran SEZ

Shahrekord SEZ

West Islamabad SEZ

Salafchegan SEZ

Lorestan SEZ

Payant Airport SEZ

Damghan SEZ

Semnan SEZ

Noshahr SEZ

Benshahr Amir Abad

Atrak SEZ

Dogharon SEZ

Sarakhs SEZ

Arvand FTZImam Khomeini Port SEZ

Petrochemical SEZ

Bushehr SEZ

Lamard SEZ

Yazd SEZ

Shiraz SEZ

Kazeroun SEZ

Pars Energy SEZ(Assaluye)

Sirjan SEZ

Rafsanjan SEZJazmourina SEZ

Arge Jadia SEZ

Sistan SEZ (Ramshar)

Chabahar FTZ

Kish FTZQeshm FTZ Shahid Rajaee Port SEZ

Persian Gulf Mine and Metal Industry SEZ

Source: Eversheds LLP

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Governance FTZs are administered by local authorities. Regulations dealing with all aspects of operation, management and governance of FTZs are covered by the Law on the Administration of Free Trade Industrial Zones enacted in 1993.

Tax Status and Exemptions – natural and legal persons, including foreign nationals,

involved in any kind of economic activity are exempt from income tax and property tax for varying periods starting from the date of the commencement of the operation in the FTZ – depending on the FTZ – as per the Direct Taxation Act

– custom duty exemptions apply for imported raw materials, construction materials, machinery and

equipment– tax exemptions for goods exported from FTZs do not

apply if goods are exported to mainland Iran

Labour and Employment Incentives – specific labour regulations have been adopted with

respect to FTZs, differing from the Labour Code applicable to the rest of mainland Iran– there are no visa requirements for foreign nationals and

procedures for residence permits have been eased– FTZs’ labour law frameworks provide for relaxed

employment and social security regulations, including regulations governing the termination of employment contracts

– trained and skilled local manpower is available in a wide-ranging number of industries and sectors.

Investment Guarantees and Protections – free transfer and repatriation of all capital and profits

gained from investment and economic activity is permitted in FTZs

– foreign investments in FTZs may also benefit from protections under FIPPA and BITs

4.2 Special Economic Zones

A law on the Establishment and Management of Special Economic Zones was enacted on 1 June 2005 (the “2005 law”).

As it currently stands, there are around thirty SEZs spread throughout Iran. These areas benefit from relaxed customs regulations, and the Iranian Customs Regulations applicable to mainland Iran do not apply.

As per the 2005 law, commercial transactions between SEZs on the one hand and other countries, other SEZs or other FTZs will be exempt from custom duties, as well as all import and export duties. Transactions with mainland Iran remain, however, subject to export and import regulations, as they are deemed to be domestic transactions and are thus subject to Iranian CustomsRegulations.


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5. Protecting your investment

Foreign investments in Iran are protected by Iranian law and international agreements.

5.1 Available BIT protections

Protection of foreign investments is available under existing Iranian BITs.

Out of the 62 BITs concluded by Iran, 52 are currently in force. The most recent BIT entered into by Iran was signed with Japan on 5 February 2016. Further BITs are currently being negotiated and are likely to be entered into over the coming years.

An entity or individual which qualifies as an investor under one of the BITs will be able to benefit from the protections afforded under that specific BIT.

Scope – a broad definition of investments is included in all Iranian BITs. However, the definition of “investor” under Iranian BITs is more restrictive and may limit investment structuring possibilities. Investors from countries that do not have a BIT with Iran must exercise caution when structuring their investment through a holding company in a third country which has a BIT in force with Iran.

Investment licence – all Iranian BITs explicitly require that an investment licence be delivered by OIETAI.

Substantive protections – the level of protection varies from one BIT to another. All of Iran’s BITs contain a prohibition against direct and indirect expropriation. Most BITs contain limited most-favoured nation (“MFN”) and national treatment provisions.

Dispute resolution – most of Iran’s BITs provide for an amicable settlement before a dispute can be settled through arbitration. The investor usually has the choice between resorting to the domestic courts of the host State or to arbitration. – the applicable rules for arbitration are usually either

UNCITRAL or ICSID, and sometimes ICC, but it should be noted that Iran has not ratified the ICSID Convention

– some BITs contain a “fork-in-the-road” provision– most BITs include a cooling-off period of six months

before a dispute can be taken to arbitration

To date, only one BIT claim has been brought against Iran. The claim, which was brought by a Turkish telecoms company under the Iran-Turkey BIT, was dismissed at the jurisdictional stage. The award is not publicly available.

5.2 The protection of foreign investment under Iranian law

The Foreign Investment Promotion and Protection Act of 2002 (“FIPPA”)FIPPA and its Implementing Regulations, adopted in 2002, regulate foreign investments in Iran.

FIPPA addresses all stages of the investment process, namely admission, protection and repatriation of the investment. Foreign direct investment and various forms of project financing, such as buy-back arrangements and “build-operate-transfer” schemes, are covered. Investments can take the form of convertible currency, machinery, tools, intellectual property rights, dividends or any other form that is approved by the Council of Ministers.

Under FIPPA, an investor can be a natural or a legal person. FIPPA covers foreign investors, but also Iranian investors using capital from abroad. Investments by a foreign government require the approval of the Islamic Consultative Assembly.

OIETAI plays a key role in this process as it is Iran’s central investment promotion authority. It controls the admission of investments, but also the import, utilisation and repatriation of capital.

In addition, the Centre for Foreign Investment has been established as a one-stop institution to support foreign investment undertakings in Iran. It serves as a focal point for all referrals by applicants and advises foreign investors and helps them with administrative issues such as acquiring visas or work permits.


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Conditions for admission – OIETAI controls the admission process. Foreign investments must meet a number of conditions in order to be admitted. The investment must bring about economic growth, upgrade technology, enhance the quality of products, increase employmentopportunities or increase exports.

Exclusions – some areas such as armament, ammunition and security are closed to foreign investment. In addition, FIPPA does not cover agency agreements or representative offices.

Investment Licence – an investment licence must be delivered by OIETAI. The procedure for obtaining the licence is detailed in FIPPA and depends in part on OIETAI practice. The investment licence application must include compulsory information concerning the identity of the applicant and the investment project itself. FIPPA provides a timeline for the review procedure by OIETAI, which should not exceed one month and a half. The licence, once granted, includes the particulars of the investor, the type and method of investment, the manner in which dividends are to be transferred, and other terms and conditions. No other licence is required for foreign investors.

FIPPA licence application timeline


15 Days Max 30 Days

Investment License

Communicated

Issuance of Investment

License

Communication of Draft License

Review ofApplication

by FIB

Submission of Application

to OIETAI

Report to FIB

Request forReconsideration

Request forReconsideration

Source: OIETAI website

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Substantive protections – Under FIPPA, admitted foreign investors benefit from a number of rights and protections:– they benefit from the same rights and can expect the

same treatment as local investors– their investments cannot be expropriated unless it is

for a public purpose, by legal means, in a non- discriminatory manner and against payment of appropriate compensation

– they can transfer funds abroad freely

Dispute resolution – disputes arising under FIPPA are submitted to domestic courts, unless an applicable BIT provides for another method of settlement.

The Protection of Foreign Investments under the OIC Agreement Iran is also a party to the Investment Agreement of the Organisation of the Islamic Conference (“OIC Agreement”)]signed by 52 States.

Scope – the OIC Agreement covers a wide range of investors and investments.

Substantive provisions – the OIC Agreement includesnumber of protections: – free transfer of capital– MFN treatment, under certain restrictive conditions– national treatment in case of civil disturbances– guarantees against expropriation, unless it is in the

public interest, legal, non-discriminatory and against compensation

Dispute resolution – the OIC Agreement provides for conciliation before an investment dispute can be brought to arbitration. The Agreement does not refer to the arbitral rules of any institution. The only arbitral award that has been rendered so far under the OIC Agreement was against Indonesia.

5.3 Arbitration in Iran

Arbitration bodies – there are two main arbitration bodies in Iran:– the Arbitration Centre of the Iran Chamber (“ACIC”),

which was established by law in 2002 as an affiliate to the Iran Chamber of Commerce, but enjoys an independent legal personality. It was established for the settlement of domestic and international disputes

– the Tehran Regional Arbitration Centre (“TRAC”), which was established in 2004 as an independent international organisation, under the auspices of the Asian-African Legal Consultative Organisation (“AALCO”). The Agreement between AALCO and Iran was signed in 1997 and came into force in 2004. TRAC commenced its activities in July 2005. TRAC Rules are essentially based on the UNCITRAL Rules

The costs of arbitration fall into two categories: (1) a registration fee and administration costs, and (2) arbitrators’ fees.

Arbitration ProceedingsDomestic arbitration is governed by specific provisions of the Iranian Code of Civil Procedure. International arbitration is governed by the Law of International Commercial Arbitration (“LICA”), which was adopted in 1997 and is based on the UNCITRAL Model law.

The parties may agree on the procedures that will govern their arbitration, provided that they are consistent with the public policy and good morals of Iran, and with the exception of certain mandatory provisions of LICA. LICA recognises the principle of competence-competence, party autonomy in the choice of the applicable law, the appointment of arbitrator(s), language and seat of thearbitration.

An arbitral award can be set aside on limited grounds.

It must be noted that, under the Iranian Constitution, the referral of claims relating to public and State property, i.e. in practical terms claims relating to contracts between foreign parties and the Iranian State and government entities, require the prior approval of the Council of Ministers and the Majlis before being referred to arbitration. The dispute resolution clauses in such cases should therefore be carefully drafted.


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New York Convention on Recognition and Enforcement of Foreign Arbitral Awards Iran ratified the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards which entered into force in Iran in 2002, with two reservations: (1) Iran will apply the Convention only to recognition and enforcement of awards made in the territory of another contracting State, and (2) Iran will apply the Convention only to disputes arising out of legal relationships, whether contractual or not, that are considered commercial under the national law.


5.4 Export Credit Agencies

The Export Credit Agencies (“ECA”) of several countries have recently signed agreements with Iran. In particular, the French ECA COFACE and the Italian ECA SACE each concluded an agreement with Iran in January 2016, which should allow investors to obtain various forms of guarantees and insurances from their national ECAs to facilitate their investment in Iran.

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6. Iranian financial sector

6.1 The banking sector

The banking sector in Iran includes 30 registered banks of which 9 are State-owned and 21 are privately owned. The government is a shareholder in 9 of the privately-owned banks. While State-owned banks remain the largest by assets, the Central Bank of Iran (“CBI”) has stated that it will increase efforts to attract foreign investment in private banks. Investors are permitted to have up to 100% ownership in banks located in FTZs and 40 % in banks located in mainland Iran. A project to potentially establish cross-border joint bank ventures is currently being discussed.

Since Implementation Day, the Iranian government has been able to access its foreign exchange reserves held in foreign banks in an estimated net amount of nearly USD 60 billion. While the Iranian financial sector faces challenges from past policies and external shocks, the government has taken a number of steps to reintegrate Iranian banks in the international financial markets.

Increased independence of the Central Bank of IranThe government’s new Money and Banking Law, which is currently going through the Parliament, would strengthen the CBI’s supervisory framework. The CBI would ensure the stability of the banking sector with the adoption of minimum capital requirements, liquidity provisions and the implementation of stress tests in view of creating a regulatory framework consistent with Basel III, the global framework on banking regulations and standards.

Establishment of a regulated debt market The government has submitted two draft bills to the Parliament focusing on establishing a strong regulated debt market – a new USD 102 billion budget for 2016 and a new Five-Year Development Plan (2016-2021).

Anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) reforms Iran has expressed a commitment to advance reforms in its AML and CTF framework before the IMF, and has requested an IMF assessment of its current AMF/CTF regime against the Financial Action Task Force standard in view of joining the Eurasian AML/CTF group.


- Bank Sepah- Bank Melli- Post Bank

Largest three:- Export Development Bank- Bank of Industry and Mine- Co-operative Development Bank

Largest three:- Bank Mellat- Bank Saderat- Bank Tejarat

Largest three:- Bank Pasargad- Parsian Bank- Saman Bank

- Gharzol Hasssane- Ta’avoni

Mainly privateowned (12)

Specialised (6)With gov/quasi-gov

entities shareholding (9)Commercial (3)

Credit InstitutionsPrivately owned

banks (21)State owned

banks (9)

Banks (30)

Iranian Central Bank

Source: PwC Research, Shiraz Research, TSE Mkt Cap

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6.2 The Tehran Stock Exchange

The Tehran Stock Exchange (“TSE”) began operating in 1968 and is Iran’s primary equity market. It is currently the fifth-largest in the Middle East with a market capitalisation of approximately USD 90 billion and over 300 listed companies. The main index is the TEFIX30 blue-chip index, which tracks the leading 30 companies by free-float market capitalisation and liquidity.

Foreign companies have been able legally to participate in the TSE since 2005. Foreign investment on the TSE is governed by the 2010 Regulations Governing Foreign Investment in the Iranian Exchanges and OTC Markets (the “2010 Regulations”). Companies can invest either directly or through local funds. Investing requires a foreign trading licence and investment code from the Securities and Exchange Organisation which is required to buy and sell securities in Iran, as well as the use of an Iranian licenced broker registered with the TSE.

6.3 Payment channels

EU sanctions have mostly been lifted since Implementation Day, and US sanctions now allow non-US persons to engage in financial, banking transactions and associated services with Iran, the CBI, Iranian financial institutions and Iranian businesses listed in Attachment 3 to Annex II of the JCPOA. Authorised operations include the provision of loans, transfers, accounts, investments, securities, guarantees, foreign exchange, letters of credit and options.

According to the CBI, SWIFT services have been reinstated and the re-connection of Iranian banks has been completed following the normal connection process. However, transactions in USD or otherwise involving US financial institutions remain prohibited. While international banks are likely to remain cautious in their re-entry to the market pending the removal of US primary sanctions, banks without US exposure and local financial institutions are reportedly willing to conduct business.

6.4 Opportunities for investment funds

Once foreign investors obtain a trading licence and investment code, they can open bank accounts in local currency with Iranian banks and trade stocks on the TSE with some limitations. Licenced foreign investors can transfer funds to Iran to finance their operations. Under the 2010 Regulations, the original capital, as well as any capital gains and dividends earned can be repatriated.

Foreign investors have a platform choice including:– Tehran Stock Exchange – the primary equity market

and main exchange in Iran– Fara Bourse – an over-the-counter (“OTC”) market for

securities and other financial instruments which began operations in 2009

– Iran Mercantile Exchange – a commodities and commodity derivatives exchange which reportedly surpassed the volume of trade at the TSE in 2015

On the TSE, foreign investors can invest in stocks, bonds and derivatives. Investment instruments available are as follows:– stocks – common shares and rights– bonds – participation certificate (Islamic Bond) and

Sukuk (an Islamic bond instrument)– derivatives – single stock futures (and there is also a

plan to introduce stock options)

While foreign companies can participate in Iranian public markets, they should conduct careful due diligence in order to ensure that any activities or transactions that they may envisage are compliant with the remaining international sanctions.


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Main sources

List of main sources used in the preparation of this guide:

BP Statistical Review of World Energy, June 2015www.bp.com

FTZs and SEZs official websitewww.freezones.ir

IMF Country Report No. 15/349, Islamic Republic of Iran 2015www.imf.org

Iran Centre for Foreign Investment Serviceswww.investiniran.ir

Organisation for Investment Economic and Technical Assistance of Iranwww.investiniran.ir

Organisation for Petroleum Exporting Countrieswww.opec.org/opec_web/en

Tehran Stock Exchangewww.new.tse.ir

The World Bankwww.worldbank.org

United Nations Conference for Trade and Developmentwww.investmentpolicyhub.unctad.org


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