Potential Approaches to the Market
First and foremost, it is crucial to realize that Iranian authorities insist on a long-term commitment and a transfer of technology as a requisite for getting a share in the market. Foreign companies are therefore advices to adopt a medium- to long-term strategy for the Iranian market. Iran will almost never honor the interests of a company that does not show long-term commitment.
Currently routes available for the presence of a foreign company in Iran are as follows:
1. 100% Foreign Legal Entity
Under the present laws of Iran, foreign companies can own 100% shares of a company only in the Free Trade Zones. The mainland has no provisions for absolute ownership unless a special permission has been granted by the government.
2. Joint Venture
Foreign companies looking at direct investment in Iran, typically form a joint venture with an Iranian company active in their field of business. This form of entry is one that is consistently promoted by the Iranian government. This is due to the fact that a joint venture ensures a long-term commitment on the part of the foreign company, creates jobs, and transfer technology to Iran. Furthermore, foreign companies that wish to have a majority shareholding in the company can do so by securing a permit from the government. Usually, with good justification, foreign companies can target a shareholding of 51 to 67%.
The existing level of technology and infrastructure makes many Iranian companies suitable for expansion and development in conjunction with foreign companies. Many Iranian companies, especially those in the private sector, are currently actively seeking joint-venture partners both to fill their technological as well as management gaps. Others are looking for a revival of their company through foreign capital.
Should a company decide to adopt this approach to the market, it is advisable to look for products and services that have both domestic demand as well as regional export potential. If a joint-venture company can earn hard currency through export of its goods, it will not be too dependent on the Iranian banking system for the repatriation of profits and dividends.
It should be noted that some joint ventures consist purely of the transfer of technology to Iran by the foreign partner without any capital commitment. Since Iranian authorities are very keen on the introduction of modern technologies, this path can prove very constructive.
Currently, there are no “joint venture” laws in existence in Iran. Rather, the foreign and Iranian companies refer to the commercial code and jointly form a corporate structure. Typically, this structure is in the form of a private joint stock company that requires a minimum of three shareholders. However, under the Iranian commercial code, other forms of corporate structures such as limited liability companies, limited partnerships and general partnerships are also permitted. The Iranian commercial code concisely delineates the rights and duties of the shareholders under each structure. In the case of a foreign party being a minority shareholder, it is imperative that adequate legal safeguards be designed through a shareholders agreement and articles of association to safeguard the rights and interests of the foreign party.
3. Branch or Representative Office of Foreign Entity
Prior to 1997, only foreign companies having direct contracts with the government of the Islamic Republic of Iran were allowed to register a branch or representative office in Iran. This was due to a strict Constitutional interpretation limiting foreign presence and participation. However, as of 1997, a new liberal interpretation of the Constitutional restriction allowed for registration of branch and representative offices without the need for a government contract. Although this law was ratified in 1997, the implementing regulations were only issued on March 31, 1999.
Under Iranian law any foreign company that seeks to carry out commercial, industrial or financial activities in Iran through a branch or representative office must first be registered. Failure to register will have civil repercussions through the payment of fines and ordering the cessation of the company’s activities in Iran.
Any foreign company that is recognized in its country of origin may apply for registration in Iran subject to their country allowing for registration of Iranian companies. A foreign company may register a branch or representative office for the following activities:
· After sale services for goods and services provided by the foreign company;
· Executive works for contracts signed between Iranian and foreign companies;
· Review and preparation of grounds for investment by the foreign company in Iran;
· Cooperation with technical and engineering companies in Iran, for performance of projects in a third country;
· Promotion of Iranian non-oil exports;
· Technical and engineering services and transfer of technology and technical know-how to Iran; and
Foreign companies registering a branch and representative office in Iran are required to comply with stringent reporting requirements under the Iranian law. Specifically, the branch office must provide an audited financial statement for its own activities in Iran once a year. Moreover, the parent company must also provide an audited financial report annually to the Iranian authorities.
4. Representative/Liaison Office
One method used by many foreign companies, especially those involved in trading is the appointment of a representative or liaison office in Iran. Typically, an Iranian firm engaged in a similar business is used as a conduit for presence and activity in the Iranian market. The representative or liaison office usually acts on behalf of numerous companies.
Depending on the type of activity of a foreign firm, this can be both an appropriate or inappropriate vehicle for entry and access to the Iranian market. In case of companies involved in trading this method is advantageous in that the foreign company can rely on the expertise and contacts of the representative to sell its products in the market. To such foreign companies, it is of no concern that the representative is active in various fields as long as their products are being sold and marketed effectively within the market. Such representatives usually work for a commission and as such have a direct incentive in both marketing and selling the product.
5. Buy-Bac k
The buy-back scheme is a formula used by the Iranian government to attract foreign investment. Following the end of the Iran-Iraq war in 1988, Iran faced a major problem: it needed foreign investment if it did not want to lose its vital income from the oil and gas industry, yet its revolutionary ideology and Constitution forbid granting “concessions”. A compromise solution was found in 1989 with the First Five-Year Economic, Social and Cultural Development Plan. Under Note 29 of the said plan, the Iranian government is allowed to employ “buybacks” in its effort to meet the industrial and mineral needs in connection with exports, production and investment. Put in laymen terms, a buy-back transaction is a method of trade where plants, machinery, production equipment and technology is supplied (by a domestic or foreign private firm), in exchange for the goods that will be produced directly or indirectly by means of such facilities.
Under this scheme, the foreign partner that makes the initial investment can repatriate the return on the investment (at a pre-agreed fixed rate) through goods and services produced by the project.
While many foreign companies believe that this method is a mere financing instrument for Iran, it is more accurate to say that it is a compromise formula for foreign investment in the short-run. In the medium to long-term, more appropriate laws and regulations will probably replace the buy-back scheme. In other words, once the constitutional concerns have been dealt with, the foreign partners of buy-back agreements can take over the projects that they are involved in, or they can enter into a joint venture with an Iranian partner.