The legal corpus governing foreign investment in the Islamic Republic of Iran constitutes the Foreign Investment Promotion and Protection Act ( FIPPA) and the FIPPA’s Implementing Regulations, as well as legislation applicable for the establishment and conduct of economic activities in the country. While the prospective investors are recommended to get full knowledge about the legislation directly related to their interest, they are also advised to get familiar with certain legislation which is fundamental in their daily affairs, such as laws pertaining to companies formation and administration (Commercial Code- Company Law), registration of companies, branches and representative offices, import/export regulations, taxation, industrial and intellectual property protection, status of foreign nationals ( entry, resident and work permits), banking and insurance, free and special economic zones regulations,etc.
Standing of FIPPA:
Since 1955, the legal framework of Iran’s foreign investment regime was defined under the Law for the Attraction and Protection of Foreign Investments (LAPFI). Moreover, in line with reforms in the overall economic framework, Iran’s parliament undertook to propose and approve a plan concerning a new foreign investment law entitled: The Foreign Investment Promotion and Protection Act (FIPPA) which was ratified in May 2002. FIPPA replaced the LAPFI which was in effect since 1955. FIPPA’s replacement of LAPFI has further enhanced the legal framework and operational environment for foreign investors in Iran.
Some specific enhancements introduced by FIPPA for foreign investments in Iran can be outlined as follows:
Broader fields for involvement by foreign investors including in major infrastructure,
Recognition of new modes of foreign capital exposure in addition to Foreign Direct Investment, e.g. project financing, Buy-Back financing arrangements and BOT investment schemes,
,Streamlined and fast-track investment licensing application and approval process
Creation of a one-stop institution called the “Center for Foreign Investment Services” at the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI), for focused and efficient support for foreign investment undertakings in Iran,
,Further liberalization of foreign exchange mechanisms as enjoyed by foreign investors
Introduction of new legal options governing the Government-Investor(s) relations.
Clearly, the ratification of FIPPA and the approval of its implementing regulations by the Council of Ministers represented a significant complement to a whole host of reforms taking place in Iran’s general macroeconomic framework and structural mechanisms. The trend in foreign investment applications in Iran since the ratification of FIPPA demonstrates that the new economic environment and the enhanced foreign investment legal and regulatory regime have tapped a great foreign investment potential for Iran that can be realized at a more accelerated pace through a concerted effort aimed at transparent communication of the latest status of Iran’s dynamic economic and foreign investment framework.
Highlights of FIPPA:
1. General Features: The Government of the Islamic Republic of Iran welcomes foreign investment in all areas of economic activities by foreign persons including real persons as well as juridical entities. In accordance with Article (1) of FIPPA, the term foreign investor is defined to be natural persons and legal entities as well as Iranian nationals and companies either residing in Iran or abroad. The foreign investors by importing capital as defined in a very broad and diversified form, being in cash or in kind, or being machinery and equipment, raw materials, parts, specialized services as well as intellectual property for the purpose of investment in industry, mining, agriculture and services shall be eligible to enjoy the privileges and facilities provided under FIPPA. The advantages and facilities shall be granted to foreign investors who obtain the investment license. In general, foreign investment in Iran is free for all investors but such facilities and privileges are only granted to those investors who seek the FIPPA coverage by way of submission of application to the OIETAI, which is the central government agency to receive, license and protect the interests of foreign investors throughout the lifetime of their operation in Iran, notwithstanding the type and manner of investment. In fact, the interests and rights of foreign investors under FIPPA are fully recognized and secured against non-commercial risks which would simply commit the Iranian Government not only to facilitate the free flow of capital repatriation but also the full and fair compensation against acts of Government towards expropriation as well as interruption of activities of the foreign investor.
It should be noted that under FIPPA, no restriction of what ever nature is legally permissible to be imposed on the manner of investment , type of investment, volume of investment, percentage of shareholding, profit and capital repatriation as well as internal relations between the parties to an investment project.
2. Risks Covered: Generally speaking, FIPPA provides full security against the risks which are generally referred to as non-commercial risks. These risks are usually insured by the export credit and investment insurance agencies. The risks related to transfer issues and expropriation remains as the cornerstone of the risks attributed to an investment in a recipient country. FIPPA honors all the rights and entitlements of investors by way of facilitating and making available the necessary foreign exchange for transfer purposes, being issues related to transfer of profit as well as issues related to capital repatriation. In fact, FIPPA recognizes the transfer right as the most fundamental right of foreign investors. There is no limitation to the amount of the profit to be transferred as well as to capital and gains on capital to be repatriated. In the area of expropriation and nationalization of foreign assets FIPPA recognizes the rights of the investors to receive compensation based on the fair market value of the expropriated assets immediately the day before expropriation takes place.
In addition to the foregoing, FIPPA also recognizes the rights of foreign investors in cases whereby as a result of enactment of a law and/or a decision by the government, the implementation of a project is seized or interrupted. In such cases the Government is under obligation to guarantee all the payments which should have been paid on maturity.
3. Facilities Provided. FIPPA produces and provides a bulk of new facilities all in line with and aimed at meeting the interests of foreign investors. Of importance is the establishment of the Center for Foreign Investment Services (CFIS) at the premises of the OIETAI which makes it possible for the new-comers, whether Iranian or foreign, to have a direct access to the relevant organizations and government agencies through the resident representatives of those organizations and at the same time to collect, first - hand and updated information from the most relevant agencies without any need to resort to those agencies. In fact CFIS is designed as a one-stop-shop to serve the investors’ needs and save their time and energy throughout the investment decision – making and implementation stage starting from preliminary studies on project feasibility, collection of information on regulatory framework and preparatory work for the investment licensing right to the operational stage which may require certain co-ordination and follow-up activities toward proper materialization of the investment project.
From the standpoint of FIPPA foreign investors will enjoy the same and equal treatment as accorded to local investors. There should be no discrimination vis-à-vis foreign investors and all facilities, privileges, exemptions will be equally extended to foreign investors. Anyhow, a most favoured nations treatment may also be applicable to the investors of countries with which the Iranian government has entered into a Bilateral Investment Treaty ( BIT) which provides for more favouable treatment over national treatment.
In addition to the foregoing, FIPPA introduces new legal options in respect of government-investors relations which symbolizes the receptive and constructive approach of the Iranian government toward safeguarding the interests of foreign investors. There are various instances in FIPPA as well as in the Implementing Regulations
which focuses at the liberty of the foreign investor to choose from among a variety of alternatives, the best choice compatible to his expectations, which interalia, may extend from a choice on the percentage of shareholding, the management, claims for compensation resulting from expropriation, application for complementary security umbrella for receiving compensation resulting from government intervention to a wide spectrum of transfer options ranging from access to the banking system as well as free access to export and other foreign currency revenues and the like.
Last but not least, are a series of facilities in the areas of entry and exit visas, residence and work permits for the investors, managers, directors and experts as well as their immediate relatives. These facilities are provided on a long term basis which creates comfort and confidence to those related with investment projects for constant presence over the asset in which they have invested.
4. Broad Outlook. FIPPA provides for investment in all areas of economic activities in Iran. In fact there is no area other than areas related to arms, ammunition and security which are closed to foreign investment. According to Article (3) of FIPPA, foreign investment is divided in two broad categories:
(a) Foreign Direct Investment in all areas open to Iranian private sector by way of direct equity participation in the share capital of Iranian companies whether in greenfield projects or in existing firms or companies . As was explained elsewhere, foreign shareholding in Iranian entities is not limited in terms of percentage as opposed to what was formerly publicized that a foreign investor can not hold more than 49% shares in Iran. Such restriction is totally irrelevant and even contradicts the current general policy and legislation.
(b) Foreign “Indirect” Investment under contractual arrangements which provides for any type of investment defined under FIPPA other than direct investments. Although the arrangements recognized under FIPPA are limited to Civil Participation* , Buy- Back and BOT arrangements, but each of the a.m. forms may be sub-divided by different types under the same title. Of importance, we may mention different types of BOOT, BOO, BLT, ROT, etc schemes as well as Project Financing and Profit Sharing arrangements. In other words, any type of investment in which the investor does not have an equity stake and/or is not qualified from ownership standpoint will fall under this broad category to be known as “Indirect” investment. This category provides for foreign investors to enter into areas which are closed to the private sector or areas in the upstream fields or national projects in which a direct participation in not, by law, permissible.
Irrespective of the type of investment, the foreign capital, as defined under FIPPA, is not only defined to be the funds disbursed to cover the investors’ share in the equity capital but also, it refers to the funds which may be provided to an Iranian recipient entity in the form of credits and financial facilities (shareholders’ loans and third party financing). The term Foreign Capital under FIPPA may cover both. It depends on the investor’s wish and consent on how the loan to be treated in the context of FIPPA. Such investors/financiers may be given two options. One option is to treat the loan as part of the investment of the foreign investor in the project . In this case, the repayment of the loan is dependent, upon the economic performance of the project without being supported by way of a repayment guarantee by the government, banking system and state-owned companies. The other option is to treat the loan as separate financing alternative outside the FIPPA coverage. In this case the repayment may be supported by a guarantee obtained from any of the a.m. authorities. In short, FIPPA’s coverage is only available for the funds brought into the country in the form of investment rather that the funds, the repayment of which is secured under banking instruments.
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* unincorporated partnership
