Iran Country Profile & Business Guide
Geography, Population & Climate

Geography

Located in the expanse between the Persian Gulf and the Caspian Sea, Iran borders Armenia, Azerbaijan and Turkmenistan to the north, Afghanistan and Pakistan to the east, and Turkey and Iraq to the west. With an area of 1,648,000 square kilometers, Iran is one of the largest countries in the Middle East. The central plateau is mostly sand or rock desert, and the settled areas are largely confined to the foothills of the mountain ranges – the Alborz in the north and the Zagros in the south and west.

The Caspian Sea in the north of Iran is the world's largest lake. Its altitude is about 25 meters below sea level. Meanwhile, in the south, the Persian Gulf and the Sea of Oman provide Iran with its main access to international waters.

Population

The years following the 1979 revolution saw a rapid increase in the population of Iran. The latest official figures for the Iranian year that ended in March 2001 show that the annual growth has now been stabilized at about 1.7%. The present population size, provided by the Iran’s Statistic Center, is about 64.5 million. (It is worth mentioning that the same statistic estimated by the United Nation Information Center surpasses 70 million; though, when contacted, the UN said that they are currently studying the discrepancy.)

Based on the last census taken in 1996, over half (51%) of the country's population is under 20 years old, while two-thirds of the country is under 30 years old. The urban areas accommodate over 63% of the Iranian population. Greater Tehran is inhabited by over 10 million persons.

Iran's unique location at the crossroads of Arabia, Turkey and Central Asia has resulted in many ethnic groups being found within its borders. Just over half of the population is of Persian origin; while a quarter is Turkish-speaking Azeri. A large group of Kurds and smaller minorities of Lors, Arabs and Baluchis also exist in certain regions.

Climate

Iran experiences four seasons and extremes of climate, ranging from very cold winters in most parts of the country to hot, dry summers. The northwest is the coldest part of the country, with temperatures from December to February falling well below zero. To the south, on the central plateau and bordering the Persian Gulf, summer temperatures can reach 50°C (122°F). Humidity along the southern coast can be very oppressive during the summer months. Spring and autumn are generally pleasant in most parts of the country.

The severe climatic difference between the north and south of the country means that in late winter, one can ski down the slopes nearby Tehran, and take a night dive later that evening after a short flight to Kish Island.

Most of the country is quite arid and the majority of rain falls on the mountainous areas in the north and along the shores of the Caspian Sea, where the annual average is up to 20 centimeters (12 inches).
Political Structure & Decision-making

System of Government

On February 11, 1979 a diverse coalition that included the clergy, merchants (bazaaris), liberal reformists, leftists and students, among others who were led by Grand Ayatollah Ruhollah Khomeini ended the monarchy of Shah Mohammad Reza Pahlavi in Iran. Shortly afterwards, on March 1979, Iran became an “Islamic Republic” following a carefully worded referendum which gained 98.2% of the vote.

The Islamic Republic is a unique form of government where “Islamic” and “Republican” structures run parallel to each other. For example, while there is a president as the head of the executive branch, there is also a supreme leader as the head of state; similarly, regular courts are matched by revolutionary courts; the army by the revolutionary guards; there is an elected Majles (parliament) but also an appointed Guardian Council, which serves as the upper house of parliament; etc.

The fundamental concept of this Islamic government is modeled after Ayatollah Khomeini’s ideas the rule of the jurisprudent (velayat-e faqih). This means that the state is to be guided by a learned religious jurist who rules in the absence of the Twelfth Imam or messiah. Ayatollah Khomeini, endowed with unique popular and religious authority, headed the Islamic Republic as the first Supreme Leader up to his death in June of 1989.

The arrangement of each institution and political body in the Islamic political structure is such that makes it vertically and horizontally accountable. Even the supreme leadership is subject to a system of checks and balances through the elected Assembly of Experts, a body that appoints and has the power to dismiss the supreme leader. Therefore, Iran's system of government may be acknowledged as a blend of democracy and theocracy, with authority derived from the constitution enacted in 1979 and revised in 1989.

Within the political structure, there are three branches of authority under the chief of state, or supreme leader: the judiciary, the parliament, and the executive. While the top law-making body, the Majles, and the president are elected through universal suffrage, the head of the nation, the Supreme Leader, is an appointed religious leader; albeit an elected body, namely the Assembly of Experts, appoints him.

The following chart summarizes the power structure of Iran.

Leadership: The Supreme Leader

The Supreme Leadership is inseparably linked to the late Grand Ayatollah Ruhollah Khomeini’s religious-political theory. By means of Article 107 of the 1979 Constitution the concept of velayat-e faqih was recognized as a state principle. The Assembly of Experts, consisting of numerous high-ranking clergymen has the right to elect, supervise and if necessary, dismiss the supreme leader.

Since June 4, 1989, Iran's head of state has been Supreme Leader Ayatollah Ali Khamenei. Article 110 of the 1979 Constitution, firmly recognizes the authority and rights of the Leader, and states that the Leader determines the general guidelines of Iranian domestic and foreign policy and can veto legislation at any time. Furthermore, he acts as commander in chief of all armed forces, commands all security organs and the armed forces and may declare war or peace. Moreover, in accordance to Article 110, the Leader must sign the order formalizing the election of the president and has the authority to dismiss the president if the Supreme Court declares him politically incompetent.

The Supreme Leader also has the responsibility to appoint or dismiss the following people:

The supreme commander of the regular army and the security services
The head of the Judiciary
The supreme commander of the Islamic Republic Revolutionary Guards Corps (IRGC)
The head of the state-run television and radio, Islamic Republic of Iran Broadcasting (IRIB)
The six clerical jurists of the Council of Guardians

Although, the supreme leader does not usually intervene in the concerns of the state executive branch, he supervises executive policies and has the constitutional right to set the general policy frameworks of the regime. Among others, the Leader has the ability to wield his power in the following five diverse spheres:

Ministries in the executive branch
The armed forces and the security forces
Friday Imams (Provincial representatives)
Iranian cultural centers in foreign countries
Religious and revolutionary organizations

Executive Branch: The President

The president of the Islamic Republic is elected by a majority of votes cast for a four-year term, and he could be re-elected only once for a successive term, though he could run again after sitting out a term. The president presides over a cabinet of ministers and vice-presidents. The official powers and responsibilities of the president are rather vague in the Iranian constitution. Two elements vest power within the hands of the executive:

Firstly, Article 113 of the constitution that states: After the office of Leadership, the president is the highest official in the country. He is the responsible for implementing the constitution and acting as the head of the executive, except in matters directly concerned with [the office of] the Leadership.

Secondly, the main and real power of the executive branch rests in its control over Iran’s oil revenue, which accounts for nearly three-quarters of the country’s foreign exchange income.

As the head of the government, the president has the responsibility to appoint and dismiss ministers, who must be confirmed by the Parliament. The president also acts as a chairman to the Supreme National Security Council – an influential committee that supervises all government activities related to defense, foreign policy and intelligence services. In addition, the president wields considerable influence in two institutions:

The Management & Planning Organization (MPO - formerly the Plan and Budget Organization) – the president controls this organization, extraordinarily crucial to the drafting of economic policies.
The Supreme Council of the Islamic Cultural Revolution – responsible for educational and cultural issues. The president is the chairman and possesses influence over the personal composition of this council.

Even though the strongest power center in the Islamic republic lies in the hands of the supreme leader, without the cooperation of the president, the stability of the Islamic Republic could not be maintained. In view of this, the executive branch is the second most powerful body of the Islamic republic, with its influence primarily on socio-cultural and economic policies of the country.

On 23 May 1997 Mohammad Khatami, a liberal cleric, won the presidential elections with nearly 70% of the vote. He has since promoted a reformist agenda primarily targeted at increasing political and civic freedoms. On 8 June 2001 Khatami swept to another landslide victory after winning close to 76% of the votes cast.

The Legislative Branch: Majles

The Islamic Consultative Assembly (Majles-e Showra-ye Eslami) or Majles, is comprised of 290 members elected for four-year terms. The number of seats was raised in the 6th Majles from 270 to account for population growth (the Constitution allows an increase of up to 20 electoral seats in every decade).

Among the significant functions of the Majles are the following:

According to Article 52, investigating and approving the annual state budget.
Based on Articles 71 to 75, drafting legislation
Ratifying international treaties, protocols, agreements and contracts (Article 77)
Consenting to minor changes in the country’s boundaries that are in the national interest, through the support of four-fifths of Majles deputies.
Debating motions put forward by the government on the cabinet’s approval, as well as bills supported by at least 15 Majles deputies.
Approving the cabinet’s request for proclamation of martial law for a period of less than 30 days.
Finally, according to Article 76, investigating and examining any affair of the nation.

The Majles is Iran’s main lawmaking body and a key institution. However, the bills it passes must first gain the approval of the Guardian Council (GC), which acts like the upper house of parliament. The GC (see below), essentially checks the parliamentary bills against the Constitution and also Islamic teachings, before putting its stamp of approval of them.

Nevertheless, the constitution has carefully given the legislative branch powers proportionate to those of the executive and judicial branches. For that reason, even the supreme leadership, with its broad field of dominion, may not dissolve the Majles.

In the parliamentary elections of February 2004, the GC disqualified around 2500 - mostly reformist -candidates from running in the elections while more than 800 others withdrew their candidacies in protest. The disqualification of reformist candidates, in addition to the relatively low public turnout in larger cities handed the conservatives an easy victory in the 7th Majles elections.

The Guardian Council

The Guardian Council (GC – Showra-ye Negahban) consists of 12 members, 6 clerics canonists and 6 lay jurists. The Supreme Leader appoints the clerical members while the head of the Judiciary nominates 12 lay lawyers, out of which the Majles selects 6.

Each member serves for a three-year term, which is extendable by another three years. The GC essentially determines whether laws passed by the Majles (the parliament) are in compliance with both Islamic principles and the Constitution. Without the approval of the GC, the bills of the Majles would not become law, unless the Expediency Council intervenes (see the section on the Expediency Council below). In addition, the GC is responsible for interpreting constitutional law and supervising elections. At the present time, the conservatives control this powerful body.

The GC’s main responsibility in elections is vetting candidates that are deemed unqualified to run and also validating the election results, to protect against fraud.

The Expediency Council

Created in 1986 by Ayatollah Khomeini’s personal decree, the Expediency Council (EC) is one of the key institutions of the Islamic Republic and is anticipated to grow in terms of authority and influence in the coming years. The EC (Majma’-e Tashkhis-e Maslehat-e Nezam) is a mediator and arbitrator between the Majles and the Guardian Council. That is, in the case of a deadlock between the parliament and the Guardian Council, the EC steps in to resolve the dispute.

It is important to note that not only does the EC have the last say in the matter, but that this body could also overrule the Constitution if it is expedient and deemed in the interests of the regime to do so.

In March 1997, two months before the presidential elections in Iran, Ayatollah Khamenei reconfirmed Akbar Hashemi Rafsanjani as the chairperson of the EC. Furthermore, he affirmed that the Council was to assume greater responsibilities while serving as his main consultative body on general policies of the Islamic Republic of Iran. Moreover, it seems that the Council is legally authorized to make foreign policy in compliance with guidelines established in Article 152 of the Iranian Constitution.

The Assembly of Experts

The first Assembly of Experts, consisting of 75 members, was elected by the Iranian people in August 1979 in order to draft the Islamic Republic’s constitution. However, after the completion of that task, the first assembly was dissolved.

The second assembly, elected in 1982, consisted of 83 members. Presently the Qom-based body has 86 clerical members, elected for an eight-year term. In accordance with the 1980 decree of assembly, every province elects representative clerics based on the province’s population. However, if the population of any Iranian province exceeds a million people, the province has the right to elect one additional cleric for each additional half million residents. Currently, Tehran has sixteen representatives, Khorasan has six and Fars has five. The traditionalist right Ayatollah Ali Meshkini, also a Friday Imam in Qom, has been the chairman of the assembly since 1990.

The main duties of the Assembly of Experts, established in the 1979 constitution include the election of the Supreme Leader (Article 107) and the dismissal of the Leader, if he fails to perform in office or fails to present the required qualifications (Article 111). The assembly convenes at least once a year for a two-day meeting in the capital, Tehran. Most members of the assembly hold other posts and functions in either the revolutionary organizations or institutions, including the Society of Teachers of Qom Theological Seminaries.

In 1989, the Assembly of Experts chose Ayatollah Khamenei as Iran’s supreme leader following the demise of Grand Ayatollah Khomeini.

Judicial Branch

The Iranian judicial system went through profound transformations after the Islamic Revolution. Not only did new procedural, penal and legal codes replace the old ones, but the actual structure of the judicial branch was also transformed. Today, the legal system strives to be compatible with Islamic teachings and principles.

In principle, Iran’s judiciary is an independent power. The supreme leader directly appoints (and may dismiss) the head of the judiciary, and hence the judicial branch is fully independent of the executive and legislative branches in that regard. The importance of the judiciary as a power center has become clear in the development of the Islamic regime, because the judiciary played the main role in defining a new framework of law and carrying out the component of justice in the process of state-building.

Trials are supposed to be held in the open and the public should be allowed to attend, unless this is deemed incompatible with public order, as in the cases involving national security. It should be added, however, that judges frequently proclaim cases unsuitable for public attendance.

The court system is generally overloaded due to the scarcity of qualified judges, which means that trials are often delayed. In January 1998, for the first time, a number of female judges were appointed. All the same, their number has never exceeded a handful. Besides the general courts that fall under the supervision of the head of judiciary, there is also a Special Court for the Clerics (SCC), over which the top judge has no say. The SCC reports directly to the supreme leader. Ayatollah Mahmoud Shahroudi currently heads Iran’s judicial branch.

Regional & Local Governments

Iran is currently divided into twenty-eight provinces (ostan), headed by governor-generals (ostandar). However, as a result of the rapid population growth and the urban boom, as well as political considerations, these divisions are constantly changing.

Provinces are divided into Counties (shahrestan) headed by governors (farmandar). Each county includes at least one city. City affairs are administered through municipalities headed by mayors (shahrdar). The Counties are further sub-divided into districts (bakhsh) administered by district executives (bakhshdar). Districts in turn are divided into townships (dehestan) led by town administrators (dehdar). Each township includes at least one village (deh), led by village headman (kadkhoda).

The Iranian constitution emphasizes the importance of decentralization and local elections in Article 100. Accordingly municipal and rural councils elected by the people of each locality should carry out its administrative affairs. However, it took until February 1999 (20 years after the Revolution) for the first local council elections to finally be held in Iran. Prior to this city and village affairs were managed by mayors and headmen appointed by interior ministry authorities.

Iran’s local and city council members are elected by direct vote in general elections to four-year terms.

Potential Approaches to the Market

Iran is certainly a unique market in the Middle East. It is populous, rich in natural resources and apt to technological progress and international developments. The country's natural resources create a significant, but mostly untapped wealth. In fact, based on a resource-based evaluation, the Iranian economy is the 20th strongest in the world.

Nevertheless, two decades of revolution, war and the economic mismanagement have led to a very different reality. Still, there are indications that Iranian officials have realized the extent of the damage caused by years of mismanagement and are trying to promote domestic and foreign private investment, as well as economic and political liberalization. These steps are paving the way for the emergence of a new market, albeit one that still has structural and other problems that must be appreciated by the players in it.

The Iranian Economy

According to the Constitution, the economy of the Islamic Republic of Iran is to consist of three sectors: state, cooperative, and private; and is to be based on systematic and sound planning.

The state sector is to include all large-scale 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.
The cooperative sector is to include cooperative companies and enterprises concerned with production and distribution, in urban and rural areas, in accordance with Islamic criteria.
The private sector consists of those activities concerned with agriculture, animal husbandry, industry, trade, and services that supplement the economic activities of the state and cooperative sectors.

A strict interpretation of the above has never been enforced in the Islamic Republic and the private sector has been able to play a much larger role than is outlined in the Constitution. In recent years, the role of the private sector has been further on the increase.

Macroeconomic Indicators

GDP - Based on the satisfactory level of oil prices, the country’s economic outlook appears positive. Iran’s GDP for 2002 was about $115 billion, up 7.4% compared to the previous year. The country’s GDP per capita for 2002 was $1,692.

GDP Distribution – While many believe that Iran is an oil-driven economy, and given the fact that about 75% to 90% of the country’s hard currency earnings are generated through oil exports, a closer look at the sector distribution of GDP indicates that it has a relatively diversified economy. Though the oil sector contributes to about 15% of the total economy, the service sector, with 51% enjoys the lion share of the GDP.

The chart and table below represents the breakdown of key sectors in the Iranian economy for Iranian year ending March 2002.

Source: Statistical Center of Iran

The table below presents the breakdown of service sector branches in the Iranian economy for 2001.

Service Branch Share	(%)
Trade, restaurants & hotels	14.3%
Real estate & professional services	13.9%
Public services	11.4%
Transport, storage & communications	9.0%
Financial & money institutions	2.2%
Social, personal & household services	2.5%

Source: Statistical Center of Iran

Inflation - Inflation in Iran has been in double figures since 1991 and reached its peak of 50% in 1995. However, during the recent years, the government has been able to bring inflation under control. In 2002, CBI’s inflation figure stood at 16.6%.

Unemployment – The unemployment rate for 2002 was 15.9%. The unemployment rate is relatively higher among females and, in recent years, in urban areas as opposed to rural areas. It is very likely that the official unemployment figures understate its true position as a result of the methodology used in the surveys.

Based on the most recent census, the total population aged 10 years and over in Iran numbered approximately 45 million, of which 18.6 million are economically active. The remaining was classified as students, homemakers (all men and women not being economically active) or income recipients.

Foreign Debt – In 2002, Iran’s foreign debt was about $9.2 billion, constituting only a mere 8% of the GDP, confirming a healthy economy.

Exchange Rate – Iran’s exchange rate system used to be based on multi-layered system, where state and para-state enterprises would benefit from the preferred rate (Rials 1,750 for $1) while the private sector would have to pay the market rate (8,000 Rials for $1) and hence creating an unhealthy competition environment. However, as of March 2002, the multi-tiered system has been replaced by a unified single market-driven exchange rate.

Macroeconomic Data

Latest Macroeconomics Data(21 March 2002 – 21 March 2003)
GDP:	US$ 115
GDP Growth:	7.4%
Inflation:	16.6%
Foreign Debt:	US$ 9.2 billion

Imports: US$ 23.8 billion
Non-Oil Exports: US$ 5.4 billion
Oil & Gas Exports: US$ 22.8 billion
Trade Balance: US$ 4.4 billion
Source: Central Bank of Iran

Economic indicators and forecasts, 1998-2003
1998/99 1999/ 00 2000/01 2001/02 2002/2003
Oil exports (m b/d) 2.333 2.205 2.605 2.213 2.100
Oil output (m b/d) 3.666 3.373 3.762 3.574 3.254
Oil & gas exports ($ million) 9,933 17,089 24,226 19,339 22,807
Non-oil exports ($ million) 3,185 3,941 4,181 4,377 5,379
Total exports ($ million) 13,118 21,030 28,407 23,716 28,186
Imports ($ million) 14,323 12,687 14,296 18,129 23,786
Trade balance ($ million) (-1,168) 7,597 13,138 5,775 4,400
Current account ($ million) (-2,140) 6,589 12.500 5,985 3,731
GDP (Rials trillion) 317 425 576 667 893
GDP growth (%) 1.6 2.4 4.5 4.8 6.5
Inflation (%) 18.1 20.1 19.9 11.4 15.8
Source: Central Bank of the Islamic Republic of Iran.

Trade Policies & Composition
Trade Policies

Iran’s main interest in foreign trade depends on the long-term relationship and presence the country has to offer Iran. Therefore trade relationships with companies and countries that provide a transfer of technology and know-how, development of import-led substitution and export led growth activities are favored.

Composition of Trade

The table below represents Iran's trade by sector during 2001/2002.

Trade By Sector (2001/2002)
IMPORTS EXPORTS
Product Value ($ million) Value ($ million)
Animal products 105 66
Vegetable Products 1,689 762
Fats and Oils 394 46
Foodstuff 460 144
Mineral Products 695 766
Chemical Products 1,875 433
Plastic products 823 160
Hides and Skins 0.9 89
Wood Products 56 9
Fibrous and Cellulosic Materials 431 10
Textile 495 873
Footwear, Headgear, etc. 1 96
Articles of Stone 145 109
Precious Stones 3 412
Base Metals 2,360 95
Machinery 5,758 87
Transportation Equipments 1,726 3
Optical, Photographic, etc. 516 33
Arms and Ammunition --- ---
Miscellaneous manufactured Articles 36 0.2
Total 17,626 4,224
Source: Customs of the Islamic Republic of Iran

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.

Local Employees Salary Tax Rates

Annual Income/Profit (Rials) Tax Rate
Up to 17,400,00017,400,001 to 59,400,000 59,400,001 to 89,400,000 89,400,001 to 159,400,000 159,400,001 to 309,400,000 309,400,001 to 1,059,400,000 In excess of 1,059,400,000 0% 10% 15% 20% 25% 30% 35%

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.

Assumed Minimum Monthly Salaries of Foreign Nationals (US$)
Job Positions W. Europe, USA, Canada, Japan & Brazil S. Korea, Malaysia, Australia, New Zealand, S. America Russia, Near East & Eastern European countries Turkey, Poland, Hungary, Czech, Slovak, S. Africa, Greece, Cyprus & Persian Gulf countries India, Pakistan, Egypt, Libya Bangladesh Iraq, Afghanistan African countries & others
Managing directors of Iranian companies 7,000 4,900 3,220 4,200 1,800 1,100 2,450
Chief representatives (branch offices of foreign banks, insurance, inspection and other companies) 7,000 4,900 3,220 4,200 2,800 2,100 2,250
Deputies to managing directors or chief representatives, sales managers/ financial/admin, coordination, marketing (after sale service) managers, supervisors for installation & commissioning 6,000 4,200 2,760 3,600 1,400 1,800 2,100
Division managers, senior experts (technical, financial/admin, sales, marketing, after sales service), senior technicians 5,000 3,500 2,300 3,000 2,000 1,500 1,750
Employees (financial, admin, sales, marketing) supply & purchase employees, cooks, secretaries, translators 4,000 2,800 1,840 2,400 1,600 1,200 1,400
Skilled workers, technicians, stewards, nurses 3,000 2,100 1,380 1,800 1,200 900 1,050
Pilots 6,000 4,200 2,760 3,600 2,200 1,800 2,100
Co-pilots, flight engineers 5,000 3,500 2,300 3,000 2,000 1,500 1,750
Physicians, members of academic missions 6,000 4,200 2,760 3,600 2,400 1,800 2,100
Unskilled workers 2,500 1,750 1,750 1,500 * * *

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.

Exemption

A very recent law provides that workshops with less than five employees will not be subject to the labor laws.

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 there are three main routes that a foreign company can follow to establish a long-term presence in Iran.

Joint Ventures

One possible strategy is for the foreign company to enter into a joint-venture agreement with a public or private Iranian partner. 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.

Buy-Back

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 “buy-backs” 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.

Build-operate-Transfer (BOT)

This is a rather new possibility in the Iranian market. Recent regulations have also introduced the Build-Operate-Transfer (BOT) scheme for Iranian projects. In this scheme, the foreign partner invests in one project, which is then operated for a certain period of time by the foreign investor before it is fully transferred to the Iranian government. Iranian authorities are showing some flexibility regarding the BOT, which could potentially pave the way for more foreign investment in the market.

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