Iranian Business Practice & Regulation

What is the text of Foreign Investment Promotion and Protection Act of Iran?

The full text of this act ratified on 10, March 2002 by the Parliament and can be found by clicking here

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What are the differences between an agency, representative and branch of a foreign company in Iran?

A foreign company known and admitted as a legal company in the country of registration, shall be authorized to have its branch or representative office registered in Iran for the activities listed below, in case of reciprocal treatment of Iranian companies there and also with due regard to the requirements intended herein, as well as the other pertinent regulations:

  • After-sale services for goods and services supplied by the foreign company.
  • Executive works of the contracts signed between Iranian and foreign companies.
  • Review and preparation of grounds for investment by the foreign company in Iran.
  • Cooperation with technical and engineering companies in Iran, for performance of works in a third country.
  • Promotion of Iranian non-oil exports.
  • Technical and engineering services and transfer of technology and technical know-how to Iran.
  • Activities legally licensed by the Iranian government, in areas such as transportation, insurance, goods inspection, banking, marketing and so forth.

Sole article approved by The Council of Ministers on March 31, 1999

In case the office of the company shall become engaged in carrying out the works undertaken by the head office of the company, such as executing the works under a contract concluded by and between the head office of the company outside ban and a client in ban, the registered office shall be known as a Branch Office.

In cases where the office shall represent its head office before its clients and sells the products of its head office in Iran or carries out after sales services and negotiation of the terms of agreements to be concluded by and between the company and its clients in Iran, concludes agreements with those clients, etc., the office shall be known as a Representative Office. In cases where the office of a company shall be solely engaged in conducting market research activity on behalf of its head office and shall report the business opportunities available to the company to its head office in order that the relevant proposals (Performa Invoices) shall be made directly by the head office to the clients in Iran and therefore the office shall not be in a position to generate any income of its own in Iran and its expenses shall be covered by transfer of funds by its head office from outside Iran, the office shall be called a Liaison Office.

According to Note 3, Article 107 of the Direct Taxation Act of Iran as amended in 2002, the branches and representative offices of foreign companies and banks in Iran rendering marketing activities and gathering economic data and information in Iran for the use of their head offices, without having the right to enter into any transaction in Iran and receive money from their head offices to meet their expenses and financial needs, shall not be liable to income tax in Iran.

The management of affairs of agencies registered in ban in accordance with the Executive By-Laws of the Law Permitting Registration of Branches and Representative Offices of Foreign Companies must be carried out by one or more natural persons domiciled in Iran. The duties and Responsibilities of a Branch of Foreign Company is as follow:

  • Winding up and liquidation of the branch office in case of revocation of the permission granted to the foreign company to operate in Iran.
  • Submission of the annual report on the activities of the head office comprising fiscal statements audited by independent auditors in the country of origin of the company, to the authority concerned in Iran.
  • Submission of the activity report of the branch or representative office in Iran together with the audited fiscal statements within four (4) months after expiry of the fiscal year, to the authority concerned in Iran.
  • Management and running the affairs of the branch or representative office by one or more natural person(s) domiciled in Iran.

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How do I register an agency, a representative or a branch of a foreign company in Iran?

The issued and non issued minimum capital needed to establish a company in Iran.

A minimum capital, at time of formation, of Rials 1,000,000 (U$100) is required for the private company. This amount is the same in a Joint Stock Company or a Limited Liability Company. Payment for shares may be either in cash or in kind. If payment is made in kind, the value of the property involved must be appraised by an official appraiser of the Ministry of Justice. In the case of payments in cash, only 35% need be paid in the time of formation and the remainder within five years upon the call of the board of directors or shareholders. In the case of payments in kind, the full amount of the property must be transferred to the company at the time of formation. The share capital may be increased or decreased at any time by a two-third (2/3) vote taken at an extraordinary general meeting. There is a legal requirement for the reduction of capital whenever half of the company's capital is lost.

Articles 5 and 6 of the Commercial Act

The tax applicable to the Agencies & Branches of foreign companies in Iran

Representatives and branches of foreign companies in Iran that are working for parent company to gather economical information and data as well as marketing, without right to carry out transaction, and receive money from the parent company to compensate for their expenses shall not be subject to income tax.

Taxation Organization of Iran

Note 3 of the Article 107 of the Direct Tax Act illustrate this more clearly:

Note 3: The branches and representative offices of foreign companies and banks in Iran which shall proceed to render activities for marketing and gathering of economic data and information in Iran for the holding company, without having the right to enter into a transaction in Iran, and which shall collect amounts from the holding company in order to meet the expenses and its financial requirements, shall not be liable to income tax.

The minimum shareholders of a Joint Stock Company or a Limited Liability Company.

The law specifies that a Joint Stock Company must have a minimum of three shareholders.

Article 3 of the Commercial Act

A Limited Liability Company can have at least 2 shareholders.

Article 94 of the Commercial Act

There are no legal restrictions with respect to the nationality of persons who form joint stock or Limit Liability Companies.

The procedure of registering a company in Iran

The relevant administration for registering a company in Iran is the Bureau of Registration of Companies and the cost of such operation depends on the type of company and the timing and might be varied from U$100 to U$500. The minimum time to register is 15 days.

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What is the issued and non issued minimum capital needed to establish a company in Iran?

A minimum capital, at time of formation, of Rials 1,000,000 (U$100) is required for the private company. This amount is the same in a Joint Stock Company or a Limited Liability Company. Payment for shares may be either in cash or in kind. If payment is made in kind, the value of the property involved must be appraised by an official appraiser of the Ministry of Justice. In the case of payments in cash, only 35% need be paid in the time of formation and the remainder within five years upon the call of the board of directors or shareholders. In the case of payments in kind, the full amount of the property must be transferred to the company at the time of formation. The share capital may be increased or decreased at any time by a two-third (2/3) vote taken at an extraordinary general meeting. There is a legal requirement for the reduction of capital whenever half of the company's capital is lost.

Articles 5 and 6 of the Commercial Act.

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Is foreign banking allowed in Iran?

According to article 44 of the constitution, foreign banking in Iran is forbidden. Recently due to Government's application, the Guardian Council revised that article and allowed some activities for foreigners that were restricted so far. Privatization of state owned banks is among those amendments and Foreign banks can buy their shares and start activities through it. The Central bank is preparing required legal aspects and formalities. It is foreseen that the new government which comes to power on the coming August will authorize it officially and new mixed banks can start operation in the mainland from the beginning of year 2006. Although, the Iran - Europe bank is now active in the Kish Free Trade Zone and the British Standard Charter will start its work from this coming June. A short report on the revisions made by Guardian Council is followed:

New interpretations of article 44 of the constitution:

The Expediency Council provided a new interpretation of that article for the first time providing as great leeway for the private sector (Iranian or foreigner) to participate in economic activities which have been so far under the monopoly of the government. The main topics of this liberal interpretation are as below:

  • Government has to withdraw from all areas that private sector can participate by the end of 4th plan.
  • Private sector can participate in large industry, mother industry (including downstream oil and gas)
  • There will be no monopoly in all international trading for the governmental companies.
  • Banks and insurance companies can be privatized/li>
  • Private sector is allowed to build up power generations, dams and large irrigation networks, all post and telecom except main networks, transfer of frequencies, roads and railways, aviation and shipping.
  • Up to 65% of shares of government companies to be privatized including:
    • All government banks except Central Bank, Bank Melli, Bank of Industry and Mine, Agriculture Bank, Bank Maskan, Bank Sepah and Export Development Bank.
    • All commercial insurance companies.
    • Power provision companies.
    • All post and telecommunications except of mother telecommunication networks, transfer of frequencies.
    • All government aviation and shipping organizations except for Civil Aviation Organization and Port and Shipping Organization.

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What are the regulations concerning the investment of foreign entities in the Tehran Stock Exchange?

According to a joint proposal of the ministry of Economic Affairs and Finance, and the Central Bank of Islamic Republic of Iran concerning the investment of foreign entities in the Tehran Stock Exchange, the Ministers approved the following document, which can be found by clicking here, and which was ratified on 1/6/2005

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Are standard audit systems like GAAP valid in Iran?

The actual audit system of companies in Iran meets all international standard audit criteria. Moreover systems like GAAP are accepted and recognized by tax authorities and there is no restriction for foreign companies to use their own systems. After registering a company in Iran, one inspector from the local tax department will be introduced to the company as a liaison officer and is recommended to send a report on the audit system of the company to him for further references.

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Do private companies in Iran require "audited financial statements" by independent auditors?

Accountants of company can make arrangement to prepare financial statement and to prepare and submit tax declaration.

Article 272 of Direct Taxes Law

In case of tax auditing by chartered accountants their view and opinion shall be considered and accepted by Tax Department. The income subject to tax declared by them shall be basis for computing tax prior to tax auditing. But according to provisions of Direct Taxes Law the financial statements shall be considered by Tax Department or chartered accountants subject of article 272 of Direct Taxes Law and necessary steps shall be taken to determine income subject to tax and issuance of slip for tax determination.

Taxing Organization of Iran

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How many shareholders are necessary in a Joint Stock Company or a Limited Liability Company?

The law specifies that a Joint Stock Company must have a minimum of three shareholders.

Article 3 of the Commercial Act

A Limited Liability Company can have at least 2 shareholders.

Article 94 of the Commercial Act

There are no legal restrictions with respect to the nationality of persons who form joint stock or Limit Liability Companies.

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Is it allowed to agree on outside arbitrations with an Iranian company?

According to the Iranian Law, two companies, even both Iranian, can agree to settle their disputes on a internal or international court by indicating it in their original agreement or an arbitration agreement or through a letter, telex and other methods of communication. So there is no obligation to refer an eventual dispute to a local court and any arrangement in this respect considers as an internal issue.

Based on the stipulation of Article 139 of the Iranian Constitutional Law, putting governmental and public companies to an international arbitration needs special permission which is normally provided upon request.

In addition, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards is being ratified and enforceable on Iranian territory since last April and awards issued on Iranian soil shall enjoy the same enforceability with respect to the member countries of the New York Convention. This Convention shall apply to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal. It shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.

In the event that one of the parties is not considered an Iranian national, as stipulated by Iranian law, at the time of the conclusion of the arbitration agreement, then the proceeding is defined as being international.

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Is the Gregorian calendar acceptable as a base for the fiscal year of a company?

Article of Association of each company has to introduce the beginning of its fiscal year so any period of time (e.g. Gregorian year) is fixable.

Article 8 of the Commercial Act

The Tax Year is a solar year which begins from 1st Farvardin (21st March) and closes at the end of Esfand of the same year (20th March of the following year); but in the case of such legal entities liable to taxation whose fiscal year according to their Articles of Association does not correspond with the above tax year, their own fiscal year's income is to be taken as the basis for tax assessment, and the time-limit for submitting their tax declaration, balance sheet and profit/loss account and also the deadline for payment of their applicable tax shall be four (4) solar months after the close of their respective fiscal year.

Article 155 of the Direct Taxation Act

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What are the rules of transfer of assets in Iran?

The companies which shall consolidate and undergo merger through establishment of a new company or through retaining the legal entity of a company, for taxation purpose shall comply with the following provisions:

  • Establishment of a new company or effecting increase in the capital of the existing company, maximally equal to the amount of the registered capital of merged or consolidated company shall be exempt from payment of 0.002 (two per mill) stamp duty mentioned in Article 48 of the present Act.
  • Transfer of the assets of merged or consolidated companies to the new company or the existing one, as the case may be, on the basis of their book value, shall not be liable to the taxation laid down in the present Article.
  • The operations of the companies merged or consolidated into the new company or the existing one shall not be subject to Dissolution Period Tax mentioned under income tax in the present Act.
  • Depreciation of the assets and properties transferred to the new or existing company shall comply with the procedure and method which was in effect prior to the merger or consolidation.
  • In cases where, as a result of the merger or consolidation, an income shall be allocated to the shareholders of the merged' or consolidated company, such income shall be subject to taxation in conformity with the relevant provisions.
  • All tax undertakings and obligations of the merged or consolidated companies shall be taken up by the new company or the existing one, as the case may be.

Article 111 of the Direct Taxation Act

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What are the limitations with regards to exporting foreign currency from Iran?

Any foreign investor who registers his investment in Iran through the Foreign Investment Promotion and Protection Act has the right to export the capital and dividends according to the articles 12, 13, 14 and 15 the mentioned Act:

Article 12- The rate of conversion of foreign exchange applicable at the time of importation or repatriation of Foreign Capital as well as the exchange rate for all foreign exchange transfers, in case of applicability of a unified exchange rate, shall be the same rate prevailing in the country's official network; otherwise, the applicable exchange rate shall be the free market rate as acknowledged by the Central Bank of the Islamic Republic of Iran.

Article 13- The principal of the Foreign Capital and profits there from, or the balance of capital remaining in the country, after fulfillment of all obligations and payment of legal deductions, and upon approval of the Board and confirmation by the Minister of Economic Affair and Finance, shall be transferable abroad subject to a three month prior notice submitted to the Board.

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.

Article 15- Payments related to the installments of the principal of the financial facilities of Foreign Investors and their associated expenses, agreements for patent rights, technical know-how, technical and engineering assistance, trade marks and names, management as well as similar agreements within the framework of the relevant Foreign Investment, upon approval of the Board and confirmation by the Minister of Economic Affairs and Finance, are transferable abroad.

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