Iran’s Oil market, a Doing Business - Pole · PDF fileIran’s Oil market, a Doing Business Perspective ... OFAC grants Airbus, Boeing licence to ... Government Intervention and

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Iran’s Oil market, a Doing Business Perspective

Romain KERAVALCountry Manager,BusinessFranceTehran

AGENDA

1. General economy

2. Doing Business In Iran1. Numbers Talk

2. Incorporating in Iran

3. Employment in Iran

4. Foreign investment protections & regulations

5. Tax regime

6. Finding a good Commercial Partner

7. divers points

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General economy

2014/2015 2015/2016 2016/2017projection

Nominal GDP(b USD) 415 374 377

Real GDP’s growth rate 4 % -1,8 % 6,6 %

Real GDP’s growth rate( just oil) 7,3 % 6,4 % 52,2 %

Real GDP’s growth rate(without oil) 3,7 % -2,7 % 0,8 %

Inflation rate(average) 15,6 % 11,9 % 8,9 %

Inflation rate(end of the period) 16,2 % 8,3 % 10,5 %

Unemployment rate 10,6 % 11 % 12,5 %

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IRAN4

Macro economic prospective

IRAN5

IRAN6

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DOING BUSINESS IN IRAN

Doing Business in Iran - FAQ

Sanctions and counter party due diligence• Are there any sanctioned activities or

individuals involved?

Banking:• Can I get paid? Or pay to Iranian parties

in Iran?

Local Partner: • Do I need one?

Structure• Direct investment?• Offshore arrangement? Where?• Free Zones• How long will it take?

• Local presence– Branch? Subsidiary?

• Shareholding– Is majority shareholding by foreigners

allowed?

– What are minority shareholders’ rights?

• Contracts– Should they be in Farsi?

– Governing law?

– Arbitration?

• Day-to-day issues– Licences

– Bidding requirements

– Work permits

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Due diligence

− 16 January 2016: JCPOA Implementation Day.

− February 2016: Iran regains access to SWIFT.

− 15 April 2016: CBI Governor meets with US Treasurer in Washington.

− 12 May 2016: US Secretary of State meets with European Bankers to discuss business with Iran.

− 19 May 2016: Joint EU-US statement.

− 24 June 2016: the Financial Action Task Force suspends certain restriction on Iran’s banking sector for 12 months.

− 21 September 2016: OFAC grants Airbus, Boeing licence to sell airplanes to Iran.

− 20 October 2023: Transition Day where all provisionally-lifted sanctions to be removed permanently.

“We want to make it clear that legitimate business, which is clear under the definition of the agreement, is available to banks. As long as they do their normal due diligence and know who they’re dealing with, they’re not going to be held to some undefined and inappropriate standard here.”

− US Secretary John Kerry (12 May 2016)

“We will not stand in the way of permitted business activity with Iran and we will not stand in the way of international firms or financial institutions’ engaging with Iran, as long as they follow all applicable law.”

− Joint EU-US statement, (19 May 2016)

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Numbers Talk

• Iran, stands at 102 in the ranking of 190 economies on the ease of starting a business.

• Ranked 92 / 143 in networked readiness

• Ranked 131 / 176 in Corruption Protection Index ( 136/176 in 2016)

(www.transparency.org/country/IRN )

• Ranked 100/189 in paying tax ( 123/189 in 2016)

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DB year Reform

DB2011 The Islamic Republic of Iran eased business start-up by installing a web portal allowing entrepreneurs to search for and reserve a unique company name.

DB2013 The Islamic Republic of Iran made starting a business more difficult by requiring company founders to obtain a criminal record clearance to register a new company.

DB2015 The Islamic Republic of Iran made starting a business easier by streamlining the name reservation and company registration procedures.

DB* Doing Business Report by World Bank annually

global ranking on the ease of doing busines

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Doing Business In Iran

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Doing Business In Iran

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Due diligence

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Lack of Market and Economic Data

• Economic data is not current or is sometimes considered state secret.

• Companies looking to enter may have difficultly finding accurate market and corporate information.

Challenges of Project implementation in Iran

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− Developing issues

• Lack of clear strategic development plan

• Continuous revision in projects parameters

• Some critical projects are viewed as a national security matter e.g. airports

− Regulatory issues

• Gap in regulations e.g. no legal infrastructure for developing waste projects

• In certain sectors lack solid, modern and stable legal and regulatory framework

• Competing interpretations of existing regulations

Challenges of Project implementation in Iran

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− Tender Issues

• Lack of clarity in tender and bidding process• Lack of information on projects

− Local content requirement

• Businesses must comply with Maximisation Law (2012) that requires the contractor in public projects to purchase 51% of tools, equipment and services supplied by domestic manufacturers.

• Not an unreasonable requirement in certain sectors considering the pool of skills available

− Bankability Issues

• Lack of feasibility and bankability studies that meets international standards; and

• Project owners lacking financing capability or Government unable to provide financial guarantees e.g. Power or Renewable Projects.

Setting up a Business in Iran: Representative Office or Branch

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− The relevant By-law uses “branch” and “representative office” interchangeably.

− Branch/rep office may engage in the following activities:

• After-sale services for the goods or services of the foreign company;

• Implementing contracts signed between Iranian and foreign companies;

• Studying and preparing the necessary conditions for the foreign company's investment in Iran;

• Cooperating with Iranian technical and engineering companies for undertaking activities in third countries;

• Promoting Iran’s exports (other than petroleum export);

• Providing technical and engineering services and transfer of know-how;

• Activities permitted by licences/concessions granted by the Iranian government agencies, in areas such as transport, insurance, goods inspection, and banking.

Setting up a Business In Iran: Agency/Distribution

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− No commercial agency law in Iran. Agency and distribution arrangements are governed by the Civil Code and regulations issued by the Ministry of Industry, Mines, and Trade (“MIMT”).

− Registration with MIMT is required. The MIMT requires mandatory terms to be included in the agreement such as term, termination procedure, payment upon termination, and dispute resolution.

− The MIMT normally requires “Letter of Appointment” to provided by the principal.

− Pay attention when drafting distribution contracts and Letter of Appointment e.g. official vs non-official and exclusive vs non-exclusive arrangements.

− The existing distributor/agent’s consent is required for de-registering the distributor/agent and the distribution/agency agreement

Finding a good Commercial Partner

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– Importers-Distributors

• It’s more than necessary to have a distributor/importer in Iran, not only for the Iranian custom’s procedures which are very complicated and time consuming, but also, for developing your business in a market with a very little transparency in which financial data are rare and somehow unreliable.

– Agents, commercial representatives

• Foreign companies exporting to Iran usually use a commercial agent ( exclusive or not) in order to have some one to represent their brand locally.

• These agents are rarely exclusive, unless for big foreign companies who can guaranty the cash flow for the agent.

• Finding an appropriate agent is the first step to succeed in this market which is complicated, with a BAZAR culture in which tenders are not published in a very clear and standardized manner.

Setting up a Business in Iran: Subsidiary

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− 100% foreign ownership allowed. The company will be considered an Iranian person for the purpose of applicable laws.

− No requirement for local sponsorship (cf. GCC companies).

− The registration process is normally straightforward.

− No specific licence required for registration (but note: licence, permits, approvals may be required depending on the activities to be undertaken by the company).

− No restriction on foreign shareholder’s right to be represented on the board of directors.

Incorporating in Iran(1/2)

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ESTABLISHMENT

of Business in Iran

Through Companies and Corporations

Private Joint Stock

Company (Sherkat-e Sahaami-e Khaas)

Joint Stock

Company (Sherkat-e Sahaami-e Aam)

Limited Liability

Company (Sherkat baaMas'ouliyat-e Mahdood)

Through Limited PartnershipsThrough Branches or

Representative Offices

100 % ForeignShareholding Possible

Joint Stock

Company being the most common form used for foreign

investments

Incorporating in Iran(2/2)

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- Iran offers a variety of types of limited and unlimited companies but in practice the closed joint stock company (JSC) are usually preferred by foreign investors (LLCs are restricted in the kind of activities they can carry out)

- Foreign companies may also elect to operate in Iran through a branch

- Representative offices can be established but are limited in their scope of activity (they cannot pursue commercial activities)

- Many activities (banking, insurance, hospitality, mining, etc.) require a license or a certificate of activities issued by the relevant authorities in Iran

- Closed JSCs can be formed with a minimum of 3 shareholders and a minimum capital of IRR 1 M(about 40 Euros). Contributions in cash and in kind are permitted and 35 % of the contribution in cash must be paid before registration. The value of contributions in kind must be assessed by a certified auditor

- Shares can be nominative or bearer shares. A closed JSC can issue preference shares and bonds

- The business year is the Iranian solar calendar, but founders can opt for the Gregorian calendar

Foreign Investment Promotionand Protection Act (FIPPA)(1/3)

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FIPPA provides for certain protection and measures often found in BITs, but it covers all investors

The FIPPA license is important because it officially recognizes an investor as a “foreign investor” which may help avoid controversies should litigation come into play

The FIPPA license also facilitates certain administrative issues, such as residency and work permits for employees of the foreign investor

Foreign Investment Promotionand Protection Act (FIPPA)(2/3)

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Currency Transfer

Nationalization & Expropriation

Government Intervention and Breach

of Contracts by Government

covered underFIPPA

Setting up a Business in Iran: Obtaining Investment Approval

− The key legislation is the Foreign Investment Promotion and Protection Act (2002) (“FIPPA”)

− Advantages of FIPPA licence includes:

• National treatment of foreign investment;

• Repatriation of profits in foreign currency or goods;

• Dispute resolution outside Iran;

• Residence visas for senior executives and their family members;

• Straightforward application process; and

• One-stop-shop (in progress).

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Foreign Investment Promotionand Protection Act (FIPPA)(3/3)

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INVESTMENT

recognized under FIPPA

FDI

(Equity Participation)

Purchase of Shares of an

Iranian Company

Joint Venture Company

New Company or Branch Office

Investment throughContractual Arrangements

(Non-Equity Forms)

Buy Back Arrangements

Civil Partnerships

BOT Schemes

pure commercial/trade

activities are noteligible under FIPPA

Employment and labour law in Iran

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- Work time shall not exceed 8 hours per day. Weekly work time may not exceed 44 hours on a general basis

- Workers performing shift work may exceed daily and weekly limits, but the total work time during four consecutive weeks cannot exceed 176 hours

- Overtime gives rise to a 40% supplement to the standard hourly wage. Overtime may not exceed 4 hours per day (except for exceptional cases, but only up to 8 hours)

- The weekly rest day is Friday, but the employer may allow another weekly rest day

- Workers are entitled to 1 month paid leave p.a., including four Fridays (26 days of mandatory payed leaves per year and many “public holidays” in addition)

- Many activities (banking, insurance, hospitality, mining, etc.) require a license or a certificate of activities issued by the relevant authorities in Iran

TAX REGIME

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• 25% flat rate as fixed Corporate Income Tax

• 100% of Exemptions of Income Tax for 20 Yearsin Less Developed Regions (All Activities)

• 100% of Exemptions of Income Tax for 20 Years

in Free Trade Zones (All Activities)

• 100% Exemptions of Income Tax Derived from Exportation for Unlimited Time

• 100% Exemptions of Income Tax for Unlimited Time Derived from Agricultural Activities

• 80% Exemptions of Income Tax for 4 Years in Production Activities

• 50% Exemptions of Income Tax for Unlimited Time Derived from Tourism Activities

• Numerous Double Taxation Conventions (e.g. Germany and France)

Free Trade Zones - General Advantages

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− Visa requirements: Entry visa issued at the port of entry to most nationalities

− Foreign ownership: 100% foreign ownership allowed

− Import/export: formal trade barriers such as import tariffs and export duties are eliminated and No customs duty payable on goods imported into the FTZs and goods and products from the FTZ to another country

− Employment regulations: FTZs have their own labour law regulations which is more flexible than the mainland Iran;

− Banking: foreign banks are permitted by law to open branches on any of the FTZ subject to the approval of the Central Bank of Iran; and

− Streamlined registration: Compared to the mainland, the registration and licensing process in FTZ is relatively quick and more efficient.

Key Free Trade Zones in Iran

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Free Zone name

Key Advantages Notable Projects

Kish Island • To become the future financial hub of Iran• 15-year tax holiday for all activities• Currently, the most advanced FTZ in Iran• Daily direct flights to and from Dubai (Iranian

airline) and major Iranian cities

• New airport passenger terminal allowing the airport to service 1m passengers per annum

• Various hotel and resorts

ChabaharPort

• Access to the Indian Ocean• Route for accessing markets in Pakistan,

Afghanistan and India• 15-year tax holiday for activities and operations

within Chabahar

• MOUs have been signed for USD1bn investment for developing the port of Chabahar by Indian companies

QeshmIsland

• Positioned to become the hub for petrochemical and LNG export

• Proximity to UAE, Oman, and Qatar• 20-year tax holiday for activities and operations

within Qeshm Island

• New international airport• Bridge connect the Island to

mainland Iran• Qeshm LNG

Free Trade Zones in Iran

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Free Zone name

Key Advantages Notable Projects

Anzali • Proximity to Azerbaijan and other CIS countries• Strategically located to become the transit route

for GCC goods to CIS (e.g. to Azerbaijan and Turkmenistan)

• Various infrastructure projects (road, utilities)

Aras • Strategic location within proximity to Azerbaijan, Turkey, Armenia and Nakhjavan Republic

• Various infrastructure projects (budget hotels)

Arvand • Arvand FTZ shares borders with Kuwait and Iraq• Strategically located in resources-rich Khuzestan

province

• 980 MW Saba combined cycle power plant

Maku • Proximity with Turkey and Azerbaijan• Abundant gas and water resources

• 1000 MW power plant project to export electricity to Azerbaijan, Armenia and Turkey

Day-to-day Challenges

Human Capital – talent recruitment and retention• Iran has a young and educated labour

force but in the last decade due to sanctions they had limited interaction with international world.

• Limited English speaking labour force.

• The demand for skilled educated work force is a lot higher than supply.

Corruption and Bureaucracy

• Intellectual Property– Typically enforcing IP rights are not easy.

– Iranian courts only hear IP disputes where the IP is registered in Iran.

• Infrastructure – Hotels, transport,

internet, etc

• Administrative Challenges of Entering the Country– On arrival visas not available for certain

nationalities, so plan your trips ahead of

time.

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Doing business in Iran – miscellaneous

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– Self-Protecting• Patent: Iran has signed the Patent Cooperation Treaty(PTC) so the law can applied

to Iran Internationally. But nationally, patent demand should be demanded from National Office of Industrial property, which should be in Persian and costs differently depending the process.

• Brand: Iran has signed the Madrid Treaty, so the same can applied to Iran internationally. A Brand must be distinctive, available and lawful, and can not be contrary to religion, public order or morality. Alcoholic products are prohibited from being deposited.

• CopyRight: Iran has not yet signed any international convention on copyright. The law only protects Iranian citizens.

– Keep yourself well informed About regulations– Use the services of a intermediary– Take into account the cost of inflation and the instability of prices– Keep in mind the importation costs– Smuggling – Turnover of the workforce is quite high– Free Zones

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Q & A session