ARTICLE 1
In these Regulations, the following words are used in the place of the Corresponding full terms:

 Mainland: the Islamic Republic of Iran, excluding the Free Trade and Industrial Zones 

Authority: the Authority of each Free Trade and Industrial Zone of the Islamic Republic of Iran 

Zone: each Free Trade and Industrial Zone of the Islamic Republic of Iran. 

Investment: the utilization of capital in different forms in any economic activity for the purpose of manufacturing goods and providing services. 

Foreign Capital: All the types of capital mentioned in Article 3 of these Regulations (save Rial amounts) imported into the Zones by foreign investors. 

Foreign Currency Capital: the capital mentioned in Article 3 of these Regulations (save Rial amounts) that is imported into the Zones from outside the Mainland by Iranian nationals 

Net profits: the excess of realized income earned by an entity over expenses incurred in a financial period resulting from profit-making activities, identified and measured in accordance with generally accepted accounting principles 

ARTICLE 2
All natural and legal persons and institutions, both Iranian and foreign, as well as international organizations, may either separately or jointly with the Authority and affiliates thereof or jointly with each other invest in the Free Zones in accordance with these Regulations; their accepted capital shall be subject to these Regulations. 

ARTICLE 3
For the purposes of these Regulations, capital shall comprise: 

• Rial amounts and foreign currency amounts convertible in the Zones (each Zone);
• machinery, equipment, parts and tools;
• industrial property rights including patents, technical know-how, trademarks and names;
• land, air and sea-going vehicles relating to the Investment;
• all or part of transferable net profits generated in the Free Zones and added to the initial capital or utilized in another authorized activity governed by these Regulations.

ARTICLE 4
Capital shall be accepted and made subject to these Regulations under the following conditions: 

• it is utilized in activities authorized by a Zone;
• it has completed the entire procedure for the grant of the investment permit mentioned in Articles 6 and 7;
• it does not involve the grant by the Authority to the investor of a concession or monopoly rights.

ARTICLE 6
The investors mentioned in Article 2 of these Regulations that wish to import their capital in any of the Zone must submit to the Zone Authority their application together with a questionnaire (prepared by the secretariat and the Zone Authorities and placed at said investors disposal). Applications received in a Zone shall be examined by the Zone Authority and an investment permit issued by the Authority of that Zone. 

Note 1
Alterations to the contents of the questionnaire and the investment permit may only be made with the knowledge and, where necessary, approval of the Zone Authority. 

ARTICLE 7
Within the period specified in the investment permit, the holder of an investment permit must import into the Zone a set percentage of the capital in order to commence implementation of the activities mentioned in the investment permit. 

ARTICLE 8
The importation and registration of capital in Free Zones shall be undertaken in the following manner: 

• The capital mentioned in Article 3 (a) of these Regulations shall be deposited in the bank (or authorized credit institution) account of the entity in which the investment is to be made and,, after computation of the Rial or foreign currency countervalue, as the case may be, at date of the deposit and in a accordance with the certificate of the bank (or the authorized credit institution), registered as the capital of the investor in the register of the Zone' Authority.
• The capital mentioned in Article 3 (b) and (d) of these Regulations and as specified in the investment permit and evaluated as per their CIF value evidenced by documents and relevant invoices shall, after review by the Zone Authority, be converted in total at date of customs clearance into a convertible foreign currency; the foreign exchange value thereof and, concurrently, its Rials equivalent (at the current rate of exchange posted in the Zone) shall be registered as of that date as the capital of the investor in the register of the Zone Authority.
• The capital mentioned in Article 3 (c) of these Regulations shall, after its evaluation has been confirmed by the Zone Authority, be registered as capital in the register of the Authority.

Allocation of the value of the value of the technical know-how to the capital account shall be concurrent with the transfer of said technical know-how. 
• The capital mentioned in Article 3 (e) of these Regulations shall, after confirmation by an auditing firm acceptable to the Zone Authority, be registered as capital in the register of the Zone Authority in the following manner: 
• after obtaining the approval of the Authority, with the aim of increasing the capital to expand investment in the same entity;  
• after obtaining the approval of the Authority, with the aim to expand investment in activities other than activities for which permission has been granted.  
• after following the procedure set forth in Article 6 of these Regulations, if the aim is to invest' in activities other than the activity for which the investment permit was issued.  
• Whenever all or part of imported capital in kind is deemed in the judgment of the Authority as defective, damaged or useless, or do not conform with the specifications declared in the application, or whose declared value exceeds its real value, such portions of its price are not confirmed by the Authority shall be carried into the capital account. 
• In cases where capital goods mentioned in Article 3 (b) and (d) of these Regulations belonging to foreign investors were previously used on the Mainland and transferred to the Zones with the authorization of relevant Mainland authorities, the transfer of such goods shall be deemed as a transfer of domestic capital and shall be subject to the provisions of these Regulations.

ARTICLE 10
The legal rights of foreign investors are guaranteed and protected. Equitable compensation for damages shall be paid by the Authority in cases where the capital of foreign investors is nationalized by law in the public interest and/or said investors property is taken. In such cases, investors must within a period of six months from date of the expropriation file with the Authority a request for compensation for damages incurred. The Authority shall evaluate at current prices the amount of damages incurred and within a period of three months pay compensation thereof. The Zone Authority may undertake the aforementioned guarantees through contractual arrangements with the Central Bank and other banks, credit institutions and insurance companies. 

Note
In case the investors subject to this article are inclined that the guarantee mentioned in the Law on Attraction and Protection of Foreign Investments (approved in 1334), to be fulfilled, their proposal of investment has to be submitted to the body subject to the Article (2) of above-mentioned law. 
Issuance of guarantee shall be allowed in compliance with the procedures and formalities defined in that Law. 

ARTICLE 11
Each year all entities set up in a Zone pursuant to investment permits must communicate to the Authority a report on their operations and their financial accounts; the financial accounts must be confirmed by an auditing firm acceptable to the Authority. 

ARTICLE 12
Repatriation from the Zones of net profits, the initial capital and gains resulting from economic activities undertaken with Foreign Capital and Foreign Currency Capital as well as the proceeds of the sale or transfer of these types of capital is permitted. 
Upon the request of such investors, and after verification that the amounts for which repatriation from a Zone is requested result from utilization of the investors registered capital in the activity specified in the investment permit, and after ensuring that the circumstances set forth in the following Note have been taken into account, the Zone Authority shall issue the necessary authorizations within one week from date of receipt of said request. 

Note
In its review, the Zone Authority must take into account whether the investor may benefit from the tax exemptions mentioned in Article 13 of the Law on the Administration of the Free Zones and whether the amounts for which repatriation is requested are net amounts. 

ARTICLE 13
Payments of installments of the principal of loans and related expenses, as well as payments pursuant to patent, technical know-how, technical assistance and engineering, trademark, management and similar contracts are authorized if the Authority is informed and if they are made within the framework of investment projects based on relevant contracts and financial statements. 

ARTICLE 14
Investors may transfer their shares of stock to other investors with the authorization of the Zone Authority. In such case, the transferee shall be deemed in every respect the successor of the original investor. 

ARTICLE 15
The transfer of capital from one Zone to another Zone shall be subject to the investment regulations of the Zones from which the capital departs and in which it enters. 

ARTICLE 16
Disputes between foreign investors and Iranian parties shall be settled in accordance with contracts and written agreements. 
 
F.A.Q ON INVESTING IN IRAN

Are there specific laws concerning foreign investment in the Islamic Republic of Iran?

Indeed there are. The Law Concerning Attraction and Protection of Foreign Investment in Iran, passed in November of 1955, and the rules for its execution ratified in 1956, are the governing guidelines in this respect. The law Pertaining to the Establishment of Free Trade-Industrial Zones in the Islamic Republic of Iran approved in 1993, and the Regulations Governing Capital Investment in the Free Trade-Industrial Zones in the Islamic Republic of Iran approved in 1994, have specified the manner in which foreigners can invest in Iran. The laws of Five-Year Economic, Social and Cultural Development Plans of the Islamic Republic of Iran, have also confirmed that foreign investors may invest in various economic sectors in partnership with Iranian nationals. 

According to the Law Concerning the Attraction and Protection of Foreign Investment in Iran and the rules made thereunder, who is entitled to invest in Iran?

Only private individuals, companies and establishments of foreign origin are allowed to invest in Iran.

According to the said law, in what areas are foreign investments allowed?

Foreign investment is allowed only in the fields of development and rehabilitation, and industrial, mineral and agricultural production, transportation and related activities. Financing institutions providing assistance to Iranian establishments, engaged in the aforementioned activities, are also entitled to the advantages issuing from the Law. 
Development and rehabilitation and productive activities mean activities which help raise the production level and income of the country, or, directly or indirectly earn foreign exchange, or cause economization on foreign exchange expenditures.

In what forms can foreign capital be imported into Iran?

In the form of foreign currencies, machinery, tools, spare parts, raw materials, land, air and sea means of transportation, patent rights, and wages and salaries paid to experts in foreign exchange. All net profits earned in Iran, added to the original capital or invested in other enterprises falling under the Law Concerning Attraction and Protection of Foreign Investment, shall be treated as foreign capital.

What legal protection is foreign capital entitled to?

The government of the Islamic Republic of Iran extends its protection to all foreign capital imported into the country according to the Law Concerning Attraction and Protection of Foreign Investment, and the profits earned therefrom. Legal entitlements, exemptions and facilities for capital investment provided under different laws, including laws pertaining to taxation, will also be applicable to foreign investors. If foreign capital investments are expropriated as a result of any special legal enactment, the owner so deprived is entitled to a government guarantee of fair compensation for any resulting damages and losses.

Can foreign capital be covered by an insurance policy?

Foreign investors may insure their capital imported into Iran. In the event of an accident, insurance companies will become successors to the capital investor, under the provisions of the relevant insurance policy. This successorship shall not be deemed as a transfer of capital.

Is there no limit on the transfer of profits earned as a result of business activities of a foreign investor in Iran?

In principle, the transfer of the original capital and profits accrued from it in Iran meets with no legal limitations.

The owner of foreign capital must keep at least 10 percent of his initial capital in Iran, for a period of six months from the date of transfer of the capital, as a security deposit to meet his contingent obligations. The foreign investor can transfer abroad the net profit derived from the investment of his capital in Iran after deducting taxes, dues and statutory reserve requirements in the same currency in which he originally imported the foreign capital.

If the government happens to have limited foreign currency possibilities for this remittance, how will the problem be resolved?

With regard to the principal of the capital, the foreign investor may transfer it abroad within a period not exceeding three months, unless the amount of the capital is such that its remittance might create foreign exchange difficulties. In this case, a longer period before it is transferred can be foreseen. In any case, the amount of the remittance in one year shall not be less than 30 percent of the total amount to be transferred. If the foreign exchange possibilities of the government do not allow for the transfer of all or a portion of the profits of a foreign investor, the party concerned will have the permission to export authorized goods without committing himself to returning the export-earned foreign exchange to Iran.

What rate of foreign exchange will be applied to the transfer of the principal of foreign capital and the profit accrued from its investment in Iran?

The foreign exchange rate applicable to the remittance of profits or the repatriation of capital, will be the selling rate set by the bank on the day of the transfer.

In what foreign currency will the remittance of profits be expected?

The transfer shall take place in the same foreign currency imported into Iran, including the non-cash capital appraised as part of the total foreign capital investment.

Following approval, where are joint foreign-Iranian ventures registered?

The articles of association of joint-venture companies are drafted in the form of one of the companies determined in the Commercial Code of Iran. Depending on their location, the joint ventures are registered in the Office for Registration of Companies, either in Tehran or in one of its branches elsewhere in the country.

What is the amount and limit of foreign investment in Iran?

The Organization for Investment, Economic and Technical Assistance of Iran (OIETAI) which is charged with handling the foreign investment applications, sets the ratio for the foreign investor partnership with Iranian nationals on a case by case basis. In certain instances, it can even allow for foreign partners to be majority shareholders in joint ventures. Resolutions of OIETAI shall then be ratified by the Council of Ministers in form of a Decree.

Is there a ratio set for foreign-Iranian capital investments in the Free Trade- Industrial Zones?

According to Article 5 of the Regulations Governing Capital Investments in the Free Trade-Industrial Zones, foreign investors may participate in the economic activities of these areas in any investment ratio they wish to. This is the most important fact concerning the facilities put at the disposal of foreign investors in the Free Trade-Industrial Zones.

What incentives and facilities have been foreseen regarding labor laws, social security regulations, etc.?

Like Iranian nationals wishing to engage in economic activities in the Free Trade-Industrial Zones, foreign investors will also enjoy a tax holiday of 15 years from the date their business operation commences. Also, provisions regarding labor and social security regulations have become more flexible. In this context, the employer is allowed to lay off workers after payment of due compensation.

How are foreign investments protected against various risks?

The legal rights of the foreign investors whose investment has been approved by the Council of Ministers shall be guaranteed and protected against possible risks arising from acts of expropriation and nationalization. The government is duly bound to make fair compensation for any damages suffered by the foreign investor in the Free Trade-Industrial Zones.

Under what regulations is the remittance of foreign capital abroad possible from a Free Trade-Industrial Zone?

The initial foreign capital, the net profit and benefits accrued from investment activities, and sums arising from sales and transfers of such capital can be legally transferred from the Free Trade-Industrial Zones.

How are disputes between the foreign investor and his Iranian counterpart in the Zone, settled?

Disputes between foreign investors and their Iranian counterparts are settled on the basis of written contracts and agreements concluded between the parties concerned.
 
 

LEGAL OBSTACLES TO FOREIGN INVESTMENT IN IRAN

Although the Iranian government has made it abundantly clear that attracting foreign investment is a top priority, the country’s legal regime presents obstacles. In recent years there have been many positive steps towards encouraging the flow of foreign capital. In this article, Babak Namazi, a Tehran-based international lawyer who specialises in corporate law, reviews the current legal challenges faced by foreign investors.

Iran’s legal framework has been in place for decades. The Islamic Revolution of 1979 left most commercial laws untouched. Laws dealing with the protection of foreign investment, contracts, trademarks, patents, property and securities exist. Moreover, Iran has a very well established Napoleonic commercial and civil code defining various types of corporations, agencies, pledges, contracts, etc.

Iran’s neighbours, especially the Caspian littoral states and the former Soviet republics, have only recently begun structuring modern legal frameworks. More important, the laws and regulations in these countries are in most cases ambiguous, untested and rely on the authority of the president alone. Iran, on the other hand, has for over 80 years had a very solid legal framework in place with laws that do not hinge on one person. As such, foreign investors in the region face much less legal ambiguity in Iran than in other countries regarding their ventures.

Because of revolutionary zeal, many existing laws have been dormant for many years or not been modified to respond to changes in the international community. Recently, because of extreme economic hardship, Iran has begun opening its doors to foreign investment. However, it has failed to provide the legal infrastructure necessary for attracting foreign investment.

This article will focus on key legal areas that are in need of change. The constitution, labour code, tax laws and foreign currency will be discussed. Although there are other areas worth examining, they are beyond the scope of this article.

The Iranian constitution

The Iranian constitution presents the main impediment to foreign investment in Iran. Article 81 provides that “the granting of concessions to foreigners for the formation of companies or institutions dealing with commerce, industry, agriculture, services or mineral extraction, is absolutely forbidden”. At face value, this clause seems to close the notion of foreign investment in all sectors of Iran’s economy. However, the Guardian Council (the body charged with interpreting the constitution) has offered various renditions of this article. Initially, the council stated that those foreign companies engaged in commercial activity with the government would not be affected by this clause and would be allowed to operate in Iran. Later, the council opined that foreign participation in private enterprise would be allowed so long as its level of participation was no more than 49 per cent. The concept of buy-back agreements also survived scrutiny since it was not deemed as a “concession” but rather a service agreement. Recently, the Guardian Council also allowed for registration of foreign companies without the need for a government contract and the establishment of foreign banks and insurance companies in the free trade zones.

Although recent interpretations tend to allow for more foreign investment, the reality remains that there is a clause in the Iranian constitution explicitly forbidding most foreign investment. The emergence of favourable interpretations, although encouraging, does not completely negate the existence of this clause. Interpretations are subject to change and until the clause itself has been amended foreigners will always face the danger of nationalisation and legal uncertainty about their status.

Labour laws

Another legal obstacle dissuading foreign investment has been the stringent labour laws. Under the current employment regulations, it is very difficult if not impossible to terminate an employment relationship. The law provides termination under very specific circumstances. These includes the death of an employee, his own resignation or termination of the term of employment if an employment period is specified. If an employee is jailed, has joined the army, or is pursuing education, his position must remain open until his return.

An employer has the theoretical right to fire an employee if the employee has violated the guidelines of the employer. In reality, however, this is very difficult. The employer must first provide the employee with written notice. After that, the employer will be obliged to go through a labour board in order to dismiss the employee. Presently, labour boards are very pro labour and only in very limited instances would they uphold an employer’s request.

All employment contracts survive change of ownership, death of the owner, restructuring of the workforce, etc. What this means is that any change in the shareholder structure of an enterprise can have no bearing on the employees and the new shareholder must retain all the labour force. This aspect of labour regulations provides perhaps one of the main challenges to privatisation of state-owned entities planned to take place under the Third Five-Year Economic Development Plan.

Finally, in the event that an employee is willing to depart from an entity, the employer must provide a comprehensive severance package. Under current regulations, the employee is entitled to one month of salary for each year of service based on the last salary. There are no exceptions to this severance package.

The Five-year Plan

The Five-year Plan intends to offer well over 530 state-owned entities for privatisation through listing on the Tehran Stock Exchange or by direct auction. Many of these companies are either overstaffed or on the verge of bankruptcy. To turn these companies around and make them profitable, it will be necessary to lay off at least 50 per cent of their current workforces. This translates to hundreds of thousands of terminations with millions of dollars in severance packages.

A bill was introduced this year that would have exempted employers with fewer than three employees from the labour laws. However, the Majlis tabled this bill for six months.

The government will need to introduce incentives making such challenges worthwhile for potential foreign investors. The government could accept the severance package liabilities, sell off the companies at a considerable discount, vest the employees with some ownership structure in lieu of severance or amend the labour laws. Otherwise, green-field projects would be much more attractive than taking over an Iranian company with all its hassles and liabilities.

The tax regime

The current tax regime also makes foreign investment in Iran very unattractive. Although new investments would enjoy various tax holidays, long-term investments would be exposed to extensive tax liabilities. Under the current tax structure in Iran, profits are taxed at between 12 and 54 per cent. The threshold to reach 54 per cent tax liability is rather low and most foreign investors would face maximum tax liability with any investments introduced into Iran.

The arbitrary assessment of tax also acts as a disincentive to investors. Rather than having a transparent system, tax authorities can randomly and arbitrarily assess taxes. The burden will be on taxpayers to prove that they do not have the level of income estimated by the tax authorities. Corruption is rampant among tax assessors and many expect regular payments from taxpayers.

Recently, foreign individuals working in Iran were charged with exorbitant tax liability. The tax authorities assume a certain monthly salary for foreigners working in Iran. These rates vary according to position and the country of origin. For instance, a European managing director or country representative will be assumed to have a minimum monthly salary of $7,000. This implies a 54 per cent tax liability. Since foreigners cannot obtain an exit visa without tax clearance, they have no choice but to pay these taxes. Not surprisingly, these new tax guidelines have prompted outrage amount the foreign community in Iran and many companies have decided to withdraw many of their expatriate staff. These guidelines also discourage Iranian companies in need of foreign expertise from recruiting such individuals.

The tax authorities are also putting pressure on representative and branch offices of foreign companies regarding their tax liability. Traditionally, these offices incurred no tax liability since they did not engage in profitable activities. Rather, the representative companies would merely conduct research and marketing on behalf of their parent companies. However, under a new circular from the tax assessors, it is assumed that many of these companies are making profits and so must pay taxes. The circular has instructed tax assessors to monitor and scrutinize these offices by requiring disclosure of contracts between the country office and the parent company. This disclosure requirement makes many foreign companies uncomfortable.

Company registration

Registration of foreign branch and representative offices remains a challenge in Iran. Before 1997, only those companies that had a direct contract with the government were allowed to register branches or representative offices. This was because of constitutional restrictions on foreign participation in Iran’s economy. Even with the existing law, the task of registration remained very challenging.

Unnecessary bureaucratic hurdles combined with anti-foreign sentiments made registration a long, frustrating and tedious process. In 1997, the Majlis ratified a new law allowing for registration of branch and representative offices on condition of reciprocity with Iranian companies without the need for governmental contracts. However, the executive by-laws were only ratified in April 1999. Given the recent enactment of this law its effect on foreign company registration remains unclear. Moreover, informed sources indicate that the company registry office is looking into establishing its own regulations regarding registration of foreign companies. If this is true, it would create an unnecessary and burdensome restraint for those companies wishing to register a branch or representative office in Iran.

Profit repatriation

The issue of repatriation of profits concerns many present and potential foreign investors in Iran. The lack of a unified foreign exchange system contributes to lack of foreign investment. There are three different currency regimes in place – the Tehran Stock Exchange rate, the floating rate and the black market rate. Under the Law for Attraction and Protection of Foreign Investment (LAPFI) registered investments can repatriate their profits through the Central Bank of Iran once a year. However, those investments that do not qualify for registration will not be able to officially repatriate their profits. Moreover, the disparity between the official rate and the black market rate combined with major currency fluctuations present investors with tremendous currency risks.

Conclusion

Until the government presents a sustainable unified currency system that can be backed by the Central Bank of Iran, Iran cannot expect major foreign investment. The government and the Central Bank have indicated that there are serious plans for unification of the currency rates in the Third Five-year Plan. If this proves to be the case, a major barrier for foreign investment will be lifted.

In a country that is in dire need of foreign investment the above mentioned obstacles tend to discourage it. The government has taken unprecedented positive steps towards encouraging foreign investment. This includes allowing foreign banks and insurance companies in the free trade zones, ratification of the International Commercial Arbitration Law, ratification of a new registration law, a proposed bill for amendment of labour laws, the tax laws, foreign investment and securities. However, to attract foreign investment the government will need to address and rectify legal obstacles to foreign investment and to put in place modern and transparent legal regimes. Until then, the flow of investment into Iran will indeed be a very slow process.

IORNET has emerged as a major source of information on Indian Ocean Rim countries related issues and technologies. It is now among the top sites listed for Indian Ocean Rim countries related keywords on search engines.

Email us at iornet@ficci.com with a profile of your organisation and its objectives to get a special User ID and password which would enable you to contribute to the content of cleantechindia.

IORNET offers facilities for uploading information through simple online forms. You could upload simple text, html with or without images, and any kind of download file formats like.pdf, .doc etc.