Doing Busines in Iran
1. Iran Overview and Business Life in Iran
Iran is located on an area of 1,648,195 km2 and official language of the country is Farsi. Iranian rial is the currency of Iran whose capital is Tehran and other main cities are Mashhad, Isfahan, Tabriz and Shiraz. As main ports, Abadan and Khorramshahr are located in Persian Gulf Region and, Behshahr and Bandar-e Anzali are located in Caspian Sea.
Dominance in centrally planned economy, state ownership over oil and other main sectors, mainly agricultural adopted production and restricted private enterprise system play significant role in basic features of Iranian economy. Although Iran is covered by long land border of Turkey, Armenia, Azerbaijan, Turkmenistan, Afghanistan and Pakistan and, has a wide sea border from Persian Gulf to Caspian Sea and Arabian Sea; Iranian economy has remained on mainly oil market for last four decades. Whereas 85 % of Iranian economy is controlled by government, only 15 % of economy is under control of private sector (bazaar) whose political aim may be deemed conservative.
Demographic structure and vast natural resources are the most valuable assets of Iran. Furthermore, while 80 million people are living in Iran whose 90 % of child population is studying in secondary school, increase by 5 % of working ratio will be expected in short-term1. Iran has 4th largest oil reserves and 2nd largest natural gas reserves in world’s total2. As a short-term expectation, demand in energy sector will go up and, correspondingly, significant infrastructural investments will become crucial to satisfy this demand by that sanctions on Iran were lifted. Aside from oil sector, investable sectors are industry, mining, tourism, automotive and construction. Sum of 150 billion dollars investment in Iran is expected in following 5 years by enhancement in business life.
2. Effects and Assessments of Lifted Embargos in Iranian Economy
According to the Agreement concluded in 2015, the United Nations (“UN”), United States (“US”) and the European Union (“EU”) will lift the embargo imposed on Iran in case it is approved by “International Atomic Energy Agency” that Iran has performed its commitments in accordance with this Agreement. This date on the other hand is defined as the “enforcement date” in the Agreement and the enforcement date is stipulated to be in the early 2016.
In accordance with the Agreement, most parts of UN imposed embargos were lifted, even preapplication process for trade of sensitive products and related services, and all decisions of UN Security Council are revoked.
On the Implementation day3, EU sanctions were lifted on: (i) finance, banking and insurance sectors, (ii) oil, natural gas and petrochemical sectors, (iii) transportation, shipping and shipbuilding, (iv) gold, other precious metals, banknotes and coinage and (v) aforementioned sectors related specially designated persons.
On the Implementation day, US sanctions were lifted on: (i) energy and petrochemical sectors, (ii) insurance measures (ii) finance and banking restrictions (iii) shipping, shipbuilding and port management sectors (iv) gold and other precious mines, (v) software and metal related transactions, (vi) automotive sector and (vii) restrictions related to proliferation of nuclear weapons. In addition to these lifted sanctions, US government has approved sale of commercial aircraft to Iran and imposed licensing process for importation of Iran originated food products and Iranian carpets.
a. Sectoral Effects of Lifted Embargos
General condition with regard to restrictions and sanctions should be indicated before starting evaluation. General condition is prohibition for the American citizens to be included in the proceedings relating to specific sectors. In defiance of this general prohibition, sectoral effects of lifted embargos are stated below:
- Energy and Petrochemical Sectors
- Financial and Banking Measures
- Insurance Measures
- Shipping, Shipbuilding and Port Sectors
- Gold and other Precious Metals
- Software and Metals
- Commercial Passenger Aviation
- Imports of Iranian-Origin Carpets and Foodstuffs
The restriction within Iranian petroleum and petroleum products which was previously applied to the 20 jurisdictions by USA will be no longer applicable. Transactions of petroleum products including USA financial system or USA person or legal entity are still prohibited. However, non US.A citizens or legal entities are entitled to invest in petrol, oil and petrochemical sectors nor trade products regarding these sectors.
Non U.S. citizens or legal entities are entitled to take action in transactions regarding Iranian rial and/or Iran funds and regarding treasury stock and/or transactions associated with Iran’s Central Bank and/or transactions associated with undertaking operating in the banking and finance sector in Iran.
For the non U.S.A citizens or entities, U.S.A will lift certain sanctions on the insurance and reinsurance in connection with Iran. Insurance transactions occurring prior to the effective date of risk will take advantage of abolition of restrictions. Likewise, it is not sanctionable for non U.S.A citizens to provide underwriting services, insurance, or reinsurance to NITC or IRISL vessels or vessels owned by non U.S.A citizens when charted by NITC or IRISL, provided that the transactions do not involve persons.
The U.S.A will lift certain sanctions on transactions with Iran’s shipping and shipbuilding sectors and port operators for the non U.S.A citizens or entities U.S.A. In addition, it is no longer sanctionable for non-U.S. persons to own, operate, control, or insure a vessel used to transport crude oil, petroleum products (including refined petroleum products), petrochemical products, or natural gas (including liquefied natural gas) to or from Iran, or to sell, lease or provide vessels to Iran.
The U.S.A lifted sanctions on the direct or indirect sale, supply, export, or transfer to or from Iran, including the Government of Iran, by non-U.S.A persons of gold and other precious metals, as well as associated services that are required to facilitate such transactions.
The U.S.A lifted secondary sanctions on the direct or indirect sale, supply, or transfer to or from Iran of graphite, raw or semi-finished metals such as aluminium and steel, coal, and software for integrating industrial processes, including the provision of associated services in connection with the foregoing.
U.S.A sanctions on the sale, supply, or transfer of goods and services used in connection with Iran’s automotive sector were temporarily suspended. Yet, non-U.S.A persons continue to be prohibited from re-exporting from a third country to Iran, directly or indirectly, any automotive related goods or technology whose origin is in the United States.
In the event that there is a nexus to U.S.A jurisdiction, non-U.S.A persons may request specific authorization from OFAC (Office of Foreign Assets Control) to engage in transactions for the export, re-export, sale, lease, or transfer of commercial passenger aircraft and related parts and services to Iran, provided that the licensed items are used exclusively for commercial passenger aviation.
After Implementation, importation into the United States of Iranian-origin carpets and foodstuffs, including pistachios and caviar is permitted by U.S.A authorities. Yet, in order to perform transaction mentioned, general or special license has to be issued by an authorized institution.
b. Investment Available Sectors After Lifted Embargos
Iran re-establishes business relation with U.S.A partially and European Union (EU) member states completely and, returns to global banking system due to lifted embargos. From EU perspective, Iran’s return means cheaper oil prices and lower costs in energy demand for EU member states and save that high technology products of EU re-penetrate into Iranian market. Hence, foreign direct investments in varied scales are expected in accordance with lifted sanctions.
Despite of government control over all parts of importation transactions and import substitution policy in industrialization for decades, positive enhancement in external trade and lifted sanctions lead to abolish import prohibition on certain products.
Per capital income decreased by 50 % after cooperative sanctions on Iran are enforced. Yet, economic growth around 7-8 % is expected upon that countries have agreed to lift sanctions imposed on Iran whose enhanced economy will affect world market. Furthermore, most valuable and primary sectors in Iran are telecommunication, informatics, tourism and banking finance. In the forthcoming days, market and finance sector enhancement in capital investments in addition to direct foreign investments are awaited.
In the direction of all sectoral movements, demand for petrol and natural gas from Iran will increase. As a result of this situation, Iran’s production capacity of petrol and natural gas will have to increase. According to official authorities, new investments that cost between $130-145 billion dollars have to be made until 2020 in Iran to prevent decrease of the production capacity4. These investments and financing of investment projects will also create new employment opportunities. Aviation is the leading sector after petrol and automotive sectors. Opening of a closed market will assure increasing of air traffic and influx of visitors and it will also make a remarkable contribution for tourism.
Real estate and construction sector is another sector that will come to the forefront in Iran. In metropolitans of the country, investment possibilities regarding plots, offices, houses and shopping malls will emerge and there is an enthusiasm for shopping malls at present. Retail sector is another important sector that has an improvement potential. The state assures encouragements in order that important retail chains enter the country. In particular, it is expected that luxury consumption domain will become prominent. Some trademarks that commence advertising activities in the country are Apple, Bulgari, Sony and Calvin Klein.
In respect of investments, in addition to this increasing potential, it is expected that commercial relationships between Turkey and Iran will improve. As a result of abolishment of embargos, Turkey will also spread to Iran like other countries and Turkish firms going to Iran will make various investments. Turkey resembles to Iran in terms of educational level, cultural similarity, population structure and religious perspective. Besides, Turkish businessmen liken Iran’s business manner to Turkey’s structure in 80’s. In this context, Iran will be a good commercial partner for Turkey in medium and long term. On the other hand, it will cause a competition in some matters. Turkey’s export volume with Iran is approximately 4 billion dollars and import volume is approximately 10 billion dollars. In this regard, enhancement of foreign trade between Turkey and Iran has a high potential.
3. Conditions Leading Contemporary Business Life in Iran
a. Legal and Financial Infrastructure Regarding Investor
Opportunities are divided in two parts as (i) Legal Opportunities and (ii) Financial Opportunities pursuant to the Iranian Law on Encouragement and Protection of Foreign Investment(“Law”):
- Legal Opportunities:
- Financial Opportunities:
These are the main legal opportunities pursuant to the Law; permission of profit transfer out of the country, permission of principal capital transfer out of the country, payment of a compensation in case of nationalization of the investment, recognition of other rights that recognized to investors in the country and import of cash capital or import of machine and technical information.
These are main opportunities recognized by the Law; at least 6 months tax exemption, tax reduction at the rate of 20 % after exemption terms (only 10 % of common tax), tax exemption at the rate of 100%for export proceeds and tax exemption for profits that reserved for improvement.
Iranian Law on Encouragement and Protection of Foreign Investment approved in 2002 and the Practice Direction ("Direction") have importance because of bringing out new applications for encouragement of investments and because of the fact that these new applications support rights and interests of foreign investors. This Direction defines notions as foreign investment, foreign investor as well as the utilization methods of capital such as "Direct Foreign Investment", "Financial Supply", "Build-Operate-Transfer" and "Mutual Sales" and it explains conveniences to be offered.
The main encouragements and opportunities regulated by the Direction are; no restriction for foreigners' share ratios in companies, possibility of establishment of a company in Iran with 100%foreign capital, possibility of the transfer of capital and profits by means of product and currency, no discrimination between foreign and domestic investors, possibility of investment for persons not living in Iran, no restriction for foreign investors to make investments, official recognition of foreign investors’ fundamental rights and providing the security that investors think, residency permit for three years to foreign investors, directors, experts and their families.
Establishment of commercial companies with 100%t foreign capital in Iran has been set free through the Direction. This matter is an opportunity and advantage for foreign investors who would like to join the Iran market. It is possible to be established limited liability company and joint stock company that all shares of company capital are formed by foreign capital in Iran. Limited liability companies and joint stock companies may be established at symbolic prices such as 35 USA dollars and 100 USA Dollars within one month. All establishment costs (document, translation, announcement documents etc.) except for capital do not exceed 200 USA Dollars. By virtue of the legal impossibility of changing company type, it is necessary to establish a new company by being liquidated the current company. Attaching importance to foreign investors, the Iranian government has been insuring investments of persons whom obtain foreign capital license.
In addition, earned incomes of all real persons and legal entities in Iran and earned incomes in respect of transfer of concessions or other rights, educational and technical aids or transfer of cinema films in Iran fall within the scope of tax. It is applicable various taxes to foreign investments depending on activity types such as profit tax, income tax, capital tax and applicable to immunities on the basis of these taxes. Foreign investors have equal rights to local investors with regard to tax payment, exemption from tax and tax cut.
By virtue of the fact that foreign investments take place by means of legal entities, it is beneficial to refer the legislation regarding corporate taxes. Incomes earned from investments of foreign legal entities which take place by means of directly or by proxy are taxed at 25%. Other expenses not being stipulated in this article but determined that payed by corporation incomes, are cut from acceptable expenses by way of Iranian Tax Offices’ proposition and the approval of Ministry of Economy and of Finance.
It is obliged to transfer to the tax office account the amount of 5% of every agreement by being cut from payers. The deduction from tax debt on withholding tax can be made. Salary payers are responsible to calculate accrued incomes, to cut and to pay amount of tax cut to tax office by means of noticing names and address information and salary amounts of wage earners within 30(thirty) days.
b. International Commercial Agreements
There is Preferential Agreement8 between Turkey and Iran. Accordingly, parties aim to make discount in tariffs reciprocatively in trade relations, to abolish non-tariffs and para-tariffs barriers, to create affair competition conditions, to establish secure and predictable environment and diversification of trade.
On the other hand, regarding aforementioned taxational arrangements, Iran has Prevention of Double Taxation Agreement with Turkey.
Other agreements between Turkey and Iran which provide convenience between the two countries regarding Taxation and Trade Law are; “Agreement on the reciprocal promotion and protection of investment between Government of Turkish Republic and Government of Iran Republic” and Protocol of this Agreement. Aim of this agreement is to enhance economic cooperation, to use economic sources and potential possibilities in investment area, to create convenient conditions to investors for their investments in other countries and incentive and protection of investments.
4. Practical Information for Those Who Want to Do Business in Iran
It is thought to be useful to put into practice alternative financial methods (credit of Eximbank, petrofinancial system, natural gas in exchange for product purchase etc.) considering Iran’s economic situation. To invest in Iran is an important way to trade enhancement. In parallel with the changes in Iran especially in recent years, Japan, South Korea and the European countries made effort to invest in Iran. Also Turkish investors should be informed about investment and have encouraged to invest in Iran.
Due to Iran uses Jelali calendar, March 20 or March 21 is suitable for new year’s day. Newroz festival holiday (March 17 - April 1) is not a good date to make job interviews in Iran. Also it should be considered that Fridays and Thursdays are holidays in Iran.
Turkish citizens can stay maximum 90 days continuously after they have had arrived to Iran. At the end of 90 days, they should leave and enter again to have 90 more days in Iran. However, Iran citizens can stay in Turkey totally 90 days in a year.
Turkish businessmen should not carry more than 1.000,00- US Dollars currency and if they leave Iran, they must declare such currency while arriving Iran again. Otherwise they might have significant problem with the customhouse.
For the agreements which are going to be concluded, selecting a foreign law and foreign place of arbitration and deciding to apply for example ICC arbitration in dispute resolutions, will be safer.
Natural gas, energy and labour costs are cheaper and tariffs may vary in Iran. Thus, it is recommended to manufacture by establishing company other than to export or import.
Because it is necessary to have permission from state institutions before entering in sensitive products or services sectors, permission procedure should be included while calculating time period.
Even though Iran’s currency is Rial, in practice they also use a fictive currency called Tomen. Tomen corresponds to one tenth of Rial.
Since there is no credit card system in Iran and they only use debit card, it is necessary to open accounts in banks. Also there is a serious investment opportunity for the POS device since they may start using credit cards.
Due to most of Iranian businessmen have bank account or saving in foreign countries, if they have problem with local partners or clients about warranty issues, these local partners or clients may request for a warranty from abroad.
Foreigners cannot directly obtain a real estate in Iran. Therefore, to obtain real estate, foreigners must establish a company and register that real estate in the name of the company. While establishing a company with Iranian partner, in the event of possible separation of shareholders, Iranian partner will obtain the real estate. For that reason, Shareholders Agreements should be prepared with considering these issues.
Iranian citizens may obtain real estate in Turkey. In this way, they may also have residence permit or obtain credit card.