Laws Concerning Foreign Companies
Generally speaking, Iran has two types of laws concerning foreign companies. The first are laws that address issues concerning foreign companies directly such as the Foreign Investment promotion and Protection Act (FIPPA) and the second are general laws of which certain articles or by-laws address foreign companies, for instance the Taxation Law and the Labor Law.
Although an overview of laws concerning foreign companies is presented below, it should be noted that the following has been provided only for general information purposes and should not be seen as, nor is it been intended to be, legal advice. Given the complexity of laws and regulations in Iran, foreign companies should seek legal advice prior to initiating any activity in Iran. For more information please contact
Atieh Associates
Tel: +98 21 872 1112
Fax: +98 21 872 0077
Website: www.atiehassociates.com
FIPPA
Following months of dispute between the Parliament and Guardian Council, the Expediency Council ratified the final version of a new foreign investment law in Iran coined as the Foreign Investment Promotion and Protection Act (“FIPPA”) on 26 May 2002.
Under FIPPA and similar to the previous foreign investment law, commercial risks are not covered but any expropriation or nationalization will be compensated by the government. In some cases, if an act of the government disrupts the business activity, the government will be under obligation to make payments for any loan installments that are due on behalf of the project company. The law also permits more options for repatriation of profits in hard currency combined with a broader definition of foreign investment. For the first time, project financing schemes such as buy back agreements and BOT projects (only under an operator status) are specifically covered under the foreign investment law.
Under the FIPPA, any foreign natural or legal person – including Iranian expatriates -- importing capital in Iran will enjoy the benefits and privileges of this law as long as:
. • The investment leads to economic growth, promotes technology, promotes quality of products, increases employment opportunities, increases exports and entering the international markets.
. • The investment does not jeopardize national security and public interests or harm the environment or interrupt national economy or disrupt products of domestic investments.
. • The investment does not involve the granting of any special rights resulting into a monopoly.
. • The value ratio of goods and services produced by aggregate of foreign investments does not exceed 25% in each economic sector and in each economic branch shall not exceed 35%.
FIPPA will be applicable based on the nationality of the Foreign Capital as opposed to the investor. As long as the capital comes from foreign sources, any one importing it will be eligible for FIPPA protection including Iranians residing in Iran or abroad.
Tax Laws
All foreign investors doing business in Iran or deriving income from sources in Iran are subject to taxation. Depending on the type of activity the foreign investor is engaged in, various taxes and exemptions are applicable, including profit tax, income tax, property tax, etc. The Ministry of Finance and Economic Affairs is the government agency authorized to levy and collect taxes.
Corporate and Profit Tax
Prior to the distribution of profits, a company must pay a flat 10% of its taxable profit as corporate tax. Additionally, the company must calculate each shareholders tax liability (25%) plus 3% municipality tax. [Note: public companies listed on the Tehran Stock Exchange are exempt from the 10% corporate tax]
Tax on Liaison, Representative and Branch Offices
The same corporate and profit taxes will be applied to the taxable income of branches of foreign companies (contractors, consultant engineers, et al.).
Personal Income Tax of Local Employees
Taxable income consists of salary and benefits. As presented in the following table, income is taxed at 0-35%. Employers are required to make the necessary tax deductions from their employees’ payroll and submit them to the tax authorities. However, when calculating taxable income, exemptions and deductions are allowed. In addition to income tax, employers are required to contribute to the State Social Security Fund and the Employment Fund.
Personal Income Tax of Foreign Employees
Foreign nationals working in Iran are also subject to income tax based on their salary. Foreign employees cannot obtain an exit visa from Iran unless they provide proof that they have paid their due taxes, and since they need to obtain an exit permit when their presence in Iran is based on a work permit, the government can easily enforce this rule.
The government assumes a certain salary for employees depending on their position and country of origin. The following table presents assumed monthly salaries and benefits of foreign nationals. The latest tax circular, issued in 1999, drastically increased the tax liability of foreign nationals working in Iran. As indicated, the assumed minimum monthly salaries range from US$2,500 for unskilled European workers to US$7,000 for European managing directors. The income of foreign nationals are subject the tax rate of 35%.
Value Added Tax (VAT)
There is no VAT in Iran.
Tax Advantages & Exemptions
Income tax exemptions are available to new factories established in special areas, and last from four to eight years, from the first day of operations. In addition, 20% of the reported profit of all manufacturing, mining, assembly plant and related engineering companies are exempt from income taxes.
Tax incentives, meanwhile, are available to manufacturing, mining, agricultural activities, exports and investment in special areas.
Labor Law
The comprehensive Labor Law covers all labor relations in Iran, including hiring of local and foreign staff. The Labor Law provides a very broad and inclusive definition of the individuals it covers, and written, oral, temporary and indefinite employment contracts are all recognized.
The Iranian Labor Law is very employee-friendly and makes it extremely difficult to layoff staff. Employing personnel on consecutive six-month contracts is illegal, as is dismissing staff without proof of a serious offence. Labor disputes are settled by a special labor council, which usually rules in favor of the employee.
The Labor Law provides the minimum standards an employer must adhere to when forming an employment relationship.
Provisions of Employment Contract
To have a valid contract concluded under the Law, the following provisions must be included:
1. Type of Work, vocation or duty that must be undertaken by the worker;
2. Basic compensation and supplements thereto;
3. Working hours, holidays and leaves;
4. Place of performance of duties;
5. Probationary period, if any;
6. Date of conclusion of contract;
7. Duration of employment; and
8. Any other terms and conditions required according to nature of employment.
The employer may require the employee to be subject to a probationary period. However, the probation time may not exceed one month for unskilled workers and three months for skilled and professional workers. During the probation period, either party may immediately terminate the employment relationship without cause or payment of severance pay. The only caveat being that if the employer terminates the relationship, he must pay the employee for the entire duration of the probation period.
Suspension of Employment Contract
The fact that the employment contract can be suspended by an employee under certain conditions presents yet another challenge to employers. What this allows is suspension of the employment contract under the following conditions:
1. The period of military service (active, contingency and reserve), as well as voluntary enlistment during conflicts. This period shall be considered part of the employee's service record at place of employment;
2. The closure of a workshop or parts thereof due to force majeure;
3. Educational leave for up to four years; and
4. The period of detention that does not lead to conviction;
Once the conditions giving rise to the suspension of the contract are removed, the employer must allow for return of the employee to work. If the position is filled or eliminated, the employer is obligated to provide a similar position for the employee. Failure to do the above is considered wrongful discharge and subject to legal action.
Termination of Employment Contract
The Law allows for termination of the employment contract only under the following instances:
1. Death of employee;
2. Retirement of employee;
3. Total disability of employee;
4. Expiration of the duration of the employment contract;
5. Conclusion of work in task specific contracts; and
6. Resignation of the employee.
The employer is bound to pay benefits under all of the above scenarios according to the years of service.
Dismissal of an Employee
An employee may only be dismissed upon approval of the Islamic Labor Council or the Labor Discretionary Board. Grounds for dismissal include an employee's neglect in carrying out his/her duties of violation of disciplinary by-laws of the employer. The employer must have provided written prior notice of the employee's violations. If the board is not convinced that the employee's dismissal is justified, the employer must reinstate the employee. Once an employee is dismissed, the employer is obligated to provide the legal severance package.
Severance & Termination Benefits
The Law mandates the following compensation for terminated, disabled and suspended employee:
1. Suspended Employee - Where an employee is suspended without cause the employer must reinstate the employee and pay for all damages and compensation resulted from the wrongful suspension;
2. Terminated Employee - An employer is under legal obligation to provide thirty (30) days salary for every year of service for employees made redundant or retired;
3. Disabled Employee - The employer must pay 30 days salary for every year of service. Moreover, if disability of an employee is due to working conditions, the employer must pay 60 days salary for every year of employee's service period.
Working Hours & Overtime
The workweek in Iran is based on a 44-hour week. Typically, employees work Saturday through Wednesday (8 hours per day) and a half a day on Thursday (4 hours). Any hours worked beyond these will entitle the employee to overtime. The Law mandates a payment of 40% above the hourly wage to employees for any accrued overtime. The employee must consent to overtime work.
Holidays & Leave
Employees are entitled to leave on all official state holidays (approximately 22 days a year) and Fridays. Any employee working during these holidays will be entitled to overtime pay. Additionally, employees are entitled to one-month holiday per annum. The annual leave for those employees engaged in hard and hazardous employment shall be five weeks per annum. Employees are entitled to save up to 9 days of their annual leave. In case of termination, disability or redundancies, employees must be compensated for any accrued leave.
Finally, employees are entitled to 3 days of paid vacation for marriage or death of a spouse, father, mother or child.
Maternity Leave
Women employees are entitled to 90 days of maternity leave. The employee's salary during maternity leave will be paid according to the provisions of the Social Security Act. Maternity leave must be considered part of an employee's service record. Employers must provide returning employees with the same position.
Employment of Foreign Nationals
The Law forbids employment of foreign nationals without a proper work permit. Diplomats, United Nations employees and foreign press reporters are exempt from this requirement. A work permit to a foreign national will be issued only if the following conditions are met:
1. Lack of expertise among Iranian nationals;
2. The foreign national being qualified for the position; and
3. The expertise of the foreign national will be used for training of, and later replacement by, Iranian individuals.
Work permits will be issued, renewed or extended for a maximum period of one year. Moreover, no exit visa will be granted to the foreign national unless the national has paid all due taxes, duties, etc.