Legal framework and advice for FDI in Iran

By Wang Jihong & Sun Lifeng, Zhong Lun Law Firm
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Foreign investors have polarized views on the investment environment in Iran. Some believe the country is so full of opportunities after the signing of the Joint Comprehensive plan of Action (JCPOA) that doing business there is like “sailing in the golden sea”, while others consider its geopolitical and foreign investment environment complex, and as treacherous as “sitting on a powder keg”.

Wang JihongPartnerZhong Lun Law Firm
Wang Jihong
Partner
Zhong Lun Law Firm

The Iran nuclear issue has always been the biggest factor affecting the country’s investment environment. According to the JCPOA, reached on 14 July 2015, all UN Security Council sanctions, as well as multilateral and national sanctions by the EU and US relating to Iran’s nuclear programme, will be gradually lifted as long as Iran meets its nuclear commitments. But it is undeniable that the Iran nuclear issue has not yet been completely solved, and the interest balance among all stakeholders is still fragile. Therefore potential deterioration of the situation brings a big uncertainty to the investment environment in the country.

For years, Iran has been isolated from the global financial system due to economic sanctions from the US and some European countries. It is difficult to make even normal exchange or settlement of foreign currency in the country. So far, both its inflow and outflow of foreign exchange are not yet free and still rely heavily on agent banks. For foreign investors, it is difficult to make transfer payments through normal financial channels.

As a contracting country of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Iran has a sound and comprehensive judicial system. However, in practice, the enforcement of court rulings and arbitral awards is complex and time consuming. Judicial processes can also be affected by various stakeholders, and corruption is widespread within its judicial system.

Sun LifengSenior associateZhong Lun Law Firm
Sun Lifeng
Senior associate
Zhong Lun Law Firm

According to the Foreign Investment Promotion and Protection Act (FIPPA), the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI) is the official authority in charge of foreign investment in Iran. All foreign investment applications are collected by the OIETAI and submitted to the foreign investment board for approval, which consists of officials from the Ministry of Economic Affairs and Finance, State Management and Planning Organization, Ministry of Foreign Affairs, Central Bank, etc. Foreign investment projects can also be permitted by the management committees of certain special economic zones, free trade and industry zones.

There are two major channels of foreign investment, one being direct participation in areas where activities of private facilities are permitted, and the other conducting investment in all sectors within the framework of “civil participation”, “buy-back” and “build-operate-transfer” (BOT).

Based on FIPPA’s implementing regulations, there is no restriction on the share proportion in areas where activity of the private sector is permitted. However, some industry laws and regulations stipulate that the share proportion of foreign investors may not exceed 50%. In practice, the OIETAI plays an important role in the approval of share proportion of foreign investment.

It is also permitted for foreign investors to transfer their investment to either a local investor or another foreign investor upon approval of the foreign investment board. The foreign capital and profits, or the balance of capital remaining in the country after fulfillment of all obligations and payment of legal duties, can be remitted abroad subject to approval of the board, which must be obtained three months in advance.

A solid political foundation is the key to successful investment. For years, China and Iran have developed a sound economic partnership. Chinese investors should obtain political support from both Chinese and Iranian governments by seeking alignment between their investment projects and Iran’s social and economic development strategies, so that a solid political foundation can be laid for successful co-operation. Geopolitical risks and currency outflow are outstanding risks for foreign investment in Iran. Therefore, the core of risk prevention is to ensure the liquidity of investment capital. It is advised to avoid putting too much money in one project with huge costs and a long payback period.

In infrastructure construction, EPC (engineering, procurement and construction) and EPC+F (engineering, procurement, construction and financing) projects are preferable to BOT and PPP (public-private partnership) projects. Foreign investors also need to pay attention to the capability of local owners and partners in providing qualified guarantee assets in early negotiations, because state-owned agencies and enterprises are forbidden to provide guarantees to foreign investors. This is crucial for timely financial closing and adequate fund supply for projects.

In conclusion, many countries along the Belt and Road are faced with both high yield and high risk, and Iran is typical. It is important for foreign investors to make sound opportunity identification and risk management based on comprehensive investigation on the investment environment of such countries.

Wang Jihong is a partner and Sun Lifeng is a senior associate at Zhong Lun Law Firm

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Contact details:

Email: wangjihong@zhonglun.com

Email: sunlifeng@zhonglun.com