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5-Foreign Investment Environment in Iran

After nearly 48 years, the new law on foreign investemtment in Iran under the abreviation FIPPA was ratified by the parliament in 2002. FIPPA replaced the “Law for the Attraction and Protection of Foreign Investment  (LAPFI)”, which was in effect since 1955. The rest of the 1st part everybody may get in the “Forums” under Newsletter Archive.

FIPPA is a significant complement to a whole host of reforms taking place in Iran´s general macroeconomic framework and structural mechanisms. These economy-wide reforms are intended to stimulate and benefit both foreign and local investments.

Some key elements of economic reforms in recent years include:

  Introduction of a new tax regime with a single and competitive flat tax rate of 25% and a range of exemptions for manufacturing enterprises and total exemption for export-generated revenues
  Elimination of a wide range of non-tariff barriers and further liberalization of the foreign trade regime
  Creation of several private banks and other private non-banking credit institutions
  Unification of the foreign exchange rate and significant liberalization of the foreign exchange regime
  Legal reforms for the establishment of private insurance companies
  Continued emphasis and progress on the privatization of state-owned enterprises including public sector banks

Let´s start to have a look at FIPPA itself:

Terms

Foreign Investor: Non-Iranian natural or juridicial persons and /or Iranians using capital with foreign origin, who have obtained the Investment License referred to in Article 6 of FIPPA

Foreign Capital: Various types of capital, whether in cash and/or non-cash (in kind), imported into the country by the foreign investor and comprising the following:

  Cash funds in the form of convertible currency, imported into the country through the banking system or other methods of transfer acceptable to the Central Bank of the Islamic Republic of Iran
  Machinery and equipments
  Tools and spares, CKD-parts and raw, addable and auxiliary materials
  Patent rights, technical know-how, trade marks and names and specialized services
  Transferable dividends of foreign investors
  Other permissible items approved by the Council of Ministers

Investment License: The License issued for each foreign investment in accordance with Article 6 of FIPPA

Foreign Investment: Utilization of foreign capital in a new or existing economic enterprise after obtaining the Investment License

Contractual Arrangements: Includes a set of mechanisms under which the utilization of foreign capital is solely based upon contractual agreements made between the parties to the contract

Built-Operate-Transfer: The foreign investor by entering into contractual arrangements with an Iranian party will make available the cash and non-cash financial resources for the project in which the investment is made, under his own responsibility by way of establishing an Iranian company and/or establishing a branch office in Iran as the project company and as the case may be would embark onto construction and/or operation of the project. BOT has different varieties each of which enjoy specific features

Buy-Back Arrangement:  The foreign investor shall make available the cash and non-cash financial resources for the construction, expansion and/or renovations to the recipient investee firm. In this method the repatriation of capital shall be made in form of goods and services produced by the investee firm and/or other goods

Civil Participation: Is the contractual arrangements entered into for materialization of a joint activity for which establishment of a legal entity is not required and return of the investment as well as profit sharing of the parties to the partnership shall be withdrawable in accordance with the agreement. “Civil Participation” shall constitute all other forms of business undertaking in which the foreign investor without establishing a company is entitled to take advantage from the investment. Anyhow, all the financial precedents related to the “Civil Participation” shall have to be registered in Iran in the books of either party.

After nearly 48 years, the new law on foreign investemtment in Iran under the abreviation FIPPA was ratified by the parliament in 2002. FIPPA replaced the “Law for the Attraction and Protection of Foreign Investment  (LAPFI)”, which was in effect since 1955. The rest of the 1st part everybody may get in the “Forums” under Newsletter Archive.

FIPPA is a significant complement to a whole host of reforms taking place in Iran´s general macroeconomic framework and structural mechanisms. These economy-wide reforms are intended to stimulate and benefit both foreign and local investments.

Some key elements of economic reforms in recent years include:

  Introduction of a new tax regime with a single and competitive flat tax rate of 25% and a range of exemptions for manufacturing enterprises and total exemption for export-generated revenues
  Elimination of a wide range of non-tariff barriers and further liberalization of the foreign trade regime
  Creation of several private banks and other private non-banking credit institutions
  Unification of the foreign exchange rate and significant liberalization of the foreign exchange regime
  Legal reforms for the establishment of private insurance companies
  Continued emphasis and progress on the privatization of state-owned enterprises including public sector banks

Let´s start to have a look at FIPPA itself:

Terms

Foreign Investor: Non-Iranian natural or juridicial persons and /or Iranians using capital with foreign origin, who have obtained the Investment License referred to in Article 6 of FIPPA

Foreign Capital: Various types of capital, whether in cash and/or non-cash (in kind), imported into the country by the foreign investor and comprising the following:

  Cash funds in the form of convertible currency, imported into the country through the banking system or other methods of transfer acceptable to the Central Bank of the Islamic Republic of Iran
  Machinery and equipments
  Tools and spares, CKD-parts and raw, addable and auxiliary materials
  Patent rights, technical know-how, trade marks and names and specialized services
  Transferable dividends of foreign investors
  Other permissible items approved by the Council of Ministers

Investment License: The License issued for each foreign investment in accordance with Article 6 of FIPPA

Foreign Investment: Utilization of foreign capital in a new or existing economic enterprise after obtaining the Investment License

Contractual Arrangements: Includes a set of mechanisms under which the utilization of foreign capital is solely based upon contractual agreements made between the parties to the contract

Built-Operate-Transfer: The foreign investor by entering into contractual arrangements with an Iranian party will make available the cash and non-cash financial resources for the project in which the investment is made, under his own responsibility by way of establishing an Iranian company and/or establishing a branch office in Iran as the project company and as the case may be would embark onto construction and/or operation of the project. BOT has different varieties each of which enjoy specific features

Buy-Back Arrangement:  The foreign investor shall make available the cash and non-cash financial resources for the construction, expansion and/or renovations to the recipient investee firm. In this method the repatriation of capital shall be made in form of goods and services produced by the investee firm and/or other goods

Civil Participation: Is the contractual arrangements entered into for materialization of a joint activity for which establishment of a legal entity is not required and return of the investment as well as profit sharing of the parties to the partnership shall be withdrawable in accordance with the agreement. “Civil Participation” shall constitute all other forms of business undertaking in which the foreign investor without establishing a company is entitled to take advantage from the investment. Anyhow, all the financial precedents related to the “Civil Participation” shall have to be registered in Iran in the books of either party.

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6 – Foreign Investment Environment in Iran

The Foreign Investment Promotion and Protection Act (FIPPA) consists of 7 Chapters and 25 Articles.

Chapter 1: Definitions (Article 1)
Chapter 2: General Conditions for Admission of Foreign Capital (Articles 2-4)
Chapter 3: Competent Authorities (Articles 5-7)
Chapter 4: Guarantee and Transfer of Foreign Capital (Articles 8-10)
Chapter 5: Provisions for Admission, Importation and Repatriation of Foreign Capital (Articles 11-18)
Chapter 6: Settlement of Disputes (Article 19)
Chapter 7: Final Provisions (Articles 20-25)

Chapters 2, 4 and 5 are significant.

Some Articles:

Article 2: Admission of Foreign Investment shall be made in accordance with the provisions of FIPPA and with due observance of other prevailing laws and regulations  of the Country, for the purpose of development and promotion of producing activities in industry, mining, agriculture and services and based on the following criteria:

a) Bring about economic growth, upgrade technology, enhance the quality of products, increase employment opportunities and exports;
b) Does not pose any threat to the national security and public interests, and cause damage to the environment;  does not disrupt the Country`s economy and jeopardize the production by local investments;
c) Does not entail grant of concessions by the Government to Foreign Investors. Concessions means special rights which place Foreign Investors in a monopolistic position;
d) The ratio of the value of the goods and services produced by Foreign Investments, contemplated in FIPPA, to the value of the goods and services supplied to the local market, at the time of issuance of the Investment License, shall not exceed 25 percent in each economic sector and 35 percent in each sub-sector (field). The sub-sectors and scope of investment in each sub-sector shall be determined in the Implementing Regulation to be approved by the Council of Ministers. Foreign Investment for the production of goods and services for export purposes, other than crude oil, shall be exempted from the aforementioned ratios.

Note: The “Law for the Ownership of Immovable Property by Foreign Nationals” enacted on June 6, 1921 shall remain in effect. Ownership of land of any type and to any extent in the name of Foreign Investors is not permitted within the framework of FIPPA.

Article 3: Foreign Investments admitted in accordance with the provisions of FIPPA shall enjoy the facilities and protections available under FIPPA. Such investments may be admitted under the following two categories:
a) Foreign Direct Investment (FDI) in areas where the activity of the private sector is permitted;
b) Foreign Investment in all sectors within the framework of “Civil Participation”, “Buy Back” and “Build-Operate-Transfer” (BOT) schemes where the return of capital and profits accrued is solely emanated from the economic performance of the project in which the investment is made, and such return of capital and profit shall not be dependent upon a guarantee by the Government or government companies and / or Banks.

Note: So long as the investment in BOT schemes referred to in Para (b) of this Article and its accrued profits are not amortized, the exercise of ownership right by the Foreign Investor over the remaining capital in the recipient economic enterprise is permitted.

Article 8: Foreign Investments under FIPPA shall equally enjoy all rights, protections and facilities available to local investments.

Article 9: Foreign Investments shall not be subjected to expropriation or nationalization, unless for public interests, by means of legal process, in a non-discriminatory manner and against payment of appropriate compensation on the basis of the real value of the investment immediately before the expropriation.

Article 10: Assignment of the whole or a part of the Foreign Capital to a local investor and / or, upon approval of the Board and confirmation by the Minister of Economic Affairs and Finance to another Foreign Investor is permitted. In case of assignment to another Foreign Investor, the assignee who shall have, at least, the same qualifications as the initial investor, shall replace and / or become a partner to the former investor from the standpoint of FIPPA.

Article 11: Foreign Capital may be imported into the Country by way of one or a combination of the following manners, to be covered under this Act:

a) Cash funds to be converted into Rials;
b) Cash funds not to be converted into Rials, but to be used directly for the purchases and orders related to Foreign Investments;
c) Non-cash items, after valuation by the competent authorities.

Article 14: The profit derived from Foreign Investment after deduction of taxes, dues and statutory reserves, upon the approval of the Board and confirmation by the Minister of Economic Affairs and Finance, shall be transferable abroad.