Doing Business in Iran - elexica

Doing business in Iran

09 September 2015

Introduction and agenda EU, US and UN government-imposed sanctions – Adrian Nizzola, Partner, Simmons & Simmons

Temporary limited easing of sanctions – Adrian Nizzola, Partner, Simmons & Simmons

The Joint Comprehensive Plan of Action ("JCPOA") – Adrian Nizzola, Partner, Simmons & Simmons

Post-sanctions era in Iran – an end to isolation? – Najib Hashem, Principal Director, Deloitte Corporate Finance Limited

Reputation and Integrity Risk Concerns - Ralph Stobwasser, Managing Director, Deloitte Corporate Finance Limited

Establishing a Presence in Iran – Cyrus Shafizadeh, Partner, Atieh Associates

An overview of the Iranian tax regime – Alex Law, Partner, Deloitte & Touche (M.E.)

Questions and answers

© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities. 1

EU, US and UN government-imposed sanctions – Adrian Nizzola, Partner, Simmons & Simmons

EU, US and UN government-imposed sanctions


Sanctions imposed by EU, US and UN for Iran’s failure to comply with treaty obligations of non-nuclear proliferation

EU Sanctions: prohibitions and/or restrictions on:

the import, purchase, transport, financing and insurance of Iranian crude oil and petroleum products

transfers of funds between EU and Iranian banks and financial institutions

EU based credit and financial institutions establishing a new presence in Iran

the sale, supply, export, transfer, purchase, import or transport of equipment or technology in relation to crude oil, natural gas and the petrochemical industry

the provision of technical assistance, brokering services, financing services or financial assistance in relation to oil and gas technology

Who do the EU sanctions apply to? Any:

legal person, entity, or body organised under the law of an EU Member State;

individual nationals of a Member State, wherever located;

activity occurring within the territory of the EU; and

aircrafts or vessels under a Member State's jurisdiction

How are the EU sanctions enforced?

Direct application to all EU Member States

Member States are responsible for implementing regulations

Fines and imprisonment apply for convictions



US sanctions

The US sanctions on Iran relate to:

Iranian petroleum industry

Imports from Iran

Exports to Iran

Dealing in Iranian-origin goods or services

Financial dealings with Iran

"Pre-zero contracts" (Letters of Credit and other financing arrangements with respect to trade contracts)

Banking services

Who do the US sanctions apply to?

US citizens, including:

permanent resident aliens regardless of where they are located;

all persons and entities within the United States; and

all US incorporated entities and their foreign branches

How are the sanctions enforced?

Through the Office of Foreign Assets Control ("OFAC") which operates under the auspices of the US Treasury Department

Fines and imprisonment apply for convictions



UN sanctions

UN sanctions include provisions calling on Member States to: prevent the provision of financial services, or the transfer of any financial or other assets or

resources where such services, assets or resources could contribute to Iran’s proliferation-sensitive nuclear activities or the development of nuclear weapon delivery systems;

take appropriate measures that prohibit the opening of new branches, subsidiaries, or representative offices of Iranian banks; and

prohibit Iranian banks from establishing new joint ventures

Temporary limited easing of sanctions – Adrian Nizzola, Partner, Simmons & Simmons

Temporary limited easing of sanctions


The JPOA

A Joint Plan of Action ("JPOA") was signed in Geneva back in 24 November 2013 between Iran on one side, and the USA, France, Germany, UK, China and Russia (the P5+1) on the other

The agreement that was reached temporarily eased sanctions on Iran (in certain limited areas) in return for Iran committing to curb its nuclear programme

The temporary Limited relief has been effective since 20 January 2014, and will continue until wider sanction relief becomes effective under the JCPOA (the "JPOA Period")

Under the JPOA, the US will not impose: certain financial sector sanctions on foreign financial institutions that conduct or facilitate financial

transactions for non-US persons for the sale, supply or transfer to Iran of good or services used in connection with sectors where sanctions have been temporarily lifted; and

certain blocking sanctions on non-US persons who provide assistance (including goods or financial, material or technological support) to or in support of dealing within the sectors where sanctions have been temporarily lifted

However, activities must begin and end during the JPOA Period for it to fall within the scope of the JPOA

The EU has announced that it will prolong the suspension of EU restrictive measures agreed in the JPOA until 14 January 2016 . The US has also announced its intention to extend the JPOA sanctions relief and is likely to adopt an approach similar to the EU



The JPOA (continued)

Iran benefits from easing of certain US sanctions related to: the release of USD4.2bn of Iranian assets held abroad in eight instalments between USD450m and

USD550m exports of petrochemical products from Iran (petrochemical products defined as including any

aromatic, olefin and synthetic gas and their derivatives) the provision of automotive goods and services to Iran including shipping, warranty underwriting

services, insurance or reinsurance and maintenance services in connection with the sector the trading with Iran in gold or precious metals, permitting non-US persons to sell, supply or transfer

to or from Iran precious metals, including gold the supply of commercial aviation parts and services to Iran – licensable transactions may involve

Iran Air, but may not involve other Iranian airlines listed on OFAC's Specially Designated Nationals and Blocked Persons List ("SDN List")

the establishment of a financial channel to facilitate humanitarian trade for Iran's domestic needs using Iranian oil reserves held abroad



The purchase of crude oil

The US State Department will not seek further reductions from the current purchasers of crude oil (China, India, South Korea, Turkey, Japan and Taiwan)

The six authorised import jurisdictions would be allowed to continue buying current average amounts of crude oil – 1 million b/d

Banks in the consuming countries will not face being cut off from the US financial system during the JPOA period

The Joint Comprehensive Plan of Action ("JCPOA") – Adrian Nizzola, Partner, Simmons & Simmons

The Joint Comprehensive Plan of Action ("JCPOA")


The Joint Comprehensive Plan of Action ("JCPOA") was signed between Britain, China, France, Germany, Russia and the US (EU+3) and Iran on 14 July 2015

Under the JCPOA, UN, US and EU sanctions will begin to be relaxed once there is an IAEA-verified implementation of agreed nuclear-related measures outlined under the JCPOA (what is being referred to as 'Implementation Day')

UN Security Council ("UNSC") sanctions

The proposed lifting of UNSC sanctions applies only to UNSC sanctions relating to the Iranian nuclear issue (please refer to UN sanctions described on slide 5)

The UNSC passed a resolution, Resolution 2231 (2015), endorsing the JCPOA on 20 July 2015

Specifically, the JCPOA proposed to lift UNSC sanctions provided for under UNSC Resolutions 1696 (2006), 1737 (2007), 1803 (2008), 1835 (2008), 1929 (2010) and 2224 (2015)

UNSC Resolution 1929 (2010)

This resolution was key for its assertion that Iran's energy, financial and other sectors of the Iranian economy supports Iran's nuclear programme

Calls for voluntary restraint on sanctions with Iranian banks, particularly Bank Melli and Bank Saderat

Calls for vigilance on international lending to Iran and providing trade credits and other financing

UNSC Resolutions 1737 (2007), 1803 (2008) and 1929 (2010)

Freezes the assets of Iranian persons and entities names in the annexes

The Joint Comprehensive Plan of Action ("JCPOA") (continued)


EU sanctions

The relevant EU sanctions to be lifted are:

transfers of funds between EU persons and entities, including financial institutions, and Iranian persons and entities, including financial institutions

banking activities, including the establishment of new correspondent banking relationships and the opening of new branches and subsidiaries of Iranian banks in the territories of EU Member States

provision of insurance and reinsurance

supply of specialised financial messaging services, including SWIFT, for persons and entities set out the JCPOA, including the Central Bank of Iran and Iranian financial institutions

financial support for trade with Iran (export credit, guarantees or insurance)

commitments for grants, financial assistance and concessional loans to the Government of Iran

transactions in public or public-guaranteed bonds

import and transport of Iranian oil, petroleum products, gas and petrochemical products

export of key equipment or technology for the oil, gas and petrochemical sectors

investment in the oil, gas and petrochemical sectors

export of key naval equipment and technology

design and construction of cargo vessels and oil tankers

provision of flagging and classification services

access to EU airports of Iranian cargo flights



EU sanctions (continued)

The relevant EU sanctions to be lifted are: export of gold, precious metals and diamonds delivery of Iranian banknotes and coinage export of graphite, raw or semi-finished metals such as aluminium and steel, and export or software

for integrating industrial processes designation of persons, entities and bodies (asset freeze and visa ban) set out in the JCPOA associated services for each of the categories above.



US sanctions

The US will cease the application of sanctions covering:

financial and banking transactions with Iranian banks and financial institutions as specified in the JCPOA, including the Central Bank of Iran and specified individuals and entities identified as 'Government of Iran' by the US Treasury Department's Office of Foreign Assets Control ("OFAC") SDN List, as set out in JCPOA (including the opening and maintenance of correspondent and payable through-accounts at non-US financial institutions, investments, foreign exchange transactions and letters of credit)

transactions in Iranian Rial

provision of US banknotes to the Government of Iran

bilateral trade limitations on Iranian revenues abroad, including limitations on their transfer

purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt, including governmental bonds

financial messaging services to the Central Bank of Iran and Iranian financial institutions set out in the JCPOA

underwriting services, insurance, or reinsurance

efforts to reduce Iran's crude oil sales

investment, including participation in joint ventures, goods, services, information, technology and technical expertise and support for Iran's oil, gas and petrochemical sectors

purchase, acquisition, sale, transportation or marketing of petroleum, petrochemical products and natural gas from Iran

export, sale or provision of refined petroleum products and petrochemical products to Iran



US sanctions (continued)

The US will cease the application of sanctions covering:

transactions with Iran's energy sector

transactions with Iran's shipping and shipbuilding sectors and port operators

trade in gold and other precious metals

trade with Iran in graphite, raw or semi-finished metals such as aluminium and steel, coal, and software for integrating industrial processes

sale, supply or transfer of goods and services used in connection with Iran's automotive sector

sanctions on associated services for each of the categories above

removal of individuals and entities set out in the OFAC's Foreign Sanctions Evaders List

US sanctions that prohibit US firms from doing business with Iran are not affected by the JCPOA:

The US trade ban does not bar subsidiaries of US firms from dealing with Iran – as long as the subsidiary has no operational relationship to – or control by – the parent company, discussed further below

Foreign subsidiaries are considered foreign persons and are subject to the laws where incorporated

US trade sanctions apply to foreign subsidiaries if:

the subsidiary is more than 50% owned by the US parent;

the parent firm holds a majority on the subsidiary's board of directors; or

the parent firm directs the operations of the subsidiary



The US Government will however license non-US persons that are owned or controlled by a US person to engage in activities with Iran consistent with the JCPOA and license the importation into the US of Iranian origin carpets and foodstuffs and sales to Iran of commercial aircraft. The OFAC has stated that they will provide further guidance on the JCPOA closer to 'Implementation Day'

The US sanctions that are to be suspended are primarily those that sanction foreign entities and countries for conducting specified transactions with Iran. US sanctions that generally prohibit US firms from conducting transactions with Iran are not being altered under the JCPOA. However, the JCPOA does commit the US to license the sale to Iran of commercial aircraft, and the importation of Iranian luxury goods such as carpets, caviar, and some fruits and nuts

Under the JCPOA, the US is to revoke the designations made under various Presidential Executive Orders of numerous Iranian economic entities and personalities, including the National Iranian Oil Company (NIOC), various Iranian banks, and many energy and shipping-related institutions. This includes several ships and planes. That step would enable foreign companies to resume transactions with those Iranian entities without risk of being penalised by the US

Not all US sanctions will be lifted, only those relating to nuclear proliferation, e.g. the embargoes on exporting arms and missiles to Iran will remain for five and eight years respectively, and will apply to all UN members as well. US sanctions toremain in place include those, amongst others, under:

the OFAC-issued Iranian Transactions and Sanctions Regulations;

Iran-Iraq Arms Non-Proliferation Act;

Iran-North Korea-Syria Non-Proliferation Act; and

certain provisions of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 ("CISADA") and the Iran Threat Reduction and Syrian Human rights Act



Iran's commitments

Under the JCPOA, Iran's commitments include:

imposing limitations on uranium enrichment and uranium enrichment activities (including research and development) for the first eight years, followed by enrichment at a reasonable pace strictly for peaceful purposes

redesigning and rebuilding the Arak reactor and Fordow facility to be used for peaceful functions

maintaining its uranium stockpile under 300kg of up to 3.67% enriched uranium hexafluoride (UF6 - used in the uranium enrichment process)

clarifying past and present outstanding issues relating to its nuclear program with IAEA

allowing the IAEA to monitor voluntary transparency measures stated in the JCOPA:

a long-term IAEA presence in Iran;

IAEA monitoring of uranium-ore concentrate produced by Iran from all uranium-ore concentrate plants for the next 25 years;

containment and surveillance of centrifuge rotors and bellows for the next 20 years;

use of IAEA approved and certified modern technologies including on-line enrichment measurements and electronic seals; and

commitment to a reliable dispute resolution mechanism to ensure a speedy resolution of IAEA access concerns for the next 15 years


© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.18

Dispute Resolution Mechanism and 'snap-back' a procedure to ensure that both the E3/EU+3 and Iran uphold their commitments drawn out under the JCPOA

Process and timeline:

The commercial risk of doing business in Iran is in effect that sanctions could be reinstated at no more than 65 days’ notice

The JCPOA only refers to UNSC sanctions with regards to the 'snap-back' mechanism, and does not make specific provisions relating to EU or US sanctions. However, the ability of complaining parties to cease performing JCPOA commitments suggest parties could unilaterally re-impose sanctions

Issue is discussed by Joint

Commission consisting of

representatives from both the

E3/EU+3 and Iran

Step One Step Two Step Three

The ministers of foreign affairs of each JCPOA to consider issue

Joint Commission may consider the Advisory Board's

opinion 15 days 15 days 5 days

UNSC to consider issuing

resolution to continue sanction

relief

30 days

Step Four

UNSC Sanctions 'snap-back'if no UNSC resolution

Issue may be referred to an Advisory Board consisting of three members (one from either side of the complaint and a third independent member) to provide non-binding opinion

19

The Joint Comprehensive Plan of Action ("JCPOA") (continued)Timeline:

Adoption Day

18 October 2015

Implementation Day

Q1/Q2 2016

Termination Day 2025 or

2026

Transition Day 2023 or 2024

Endorsement by UNSC

20 July 201590 Days

8 Years 10 Years

Submit to US Congress

19 July 2015

10-day window for US Congress to

override the Presidential veto

82 Days

'Implementation Day' will occur once the Iranian Parliament has reviewed or

ratified the JCPOA and, importantly, when the IAEA issues a report

verifying that Iran has indeed

implemented its nuclear related

obligations

Any remaining nuclear related sanctions on Iran

will be removed

Iran will also have to abide with additional enhanced

inspections and 'Transition Day' will only occur once the IAEA issues a report stating that all nuclear

materials in Iran remain in use for peaceful activities.

On 'Transition Day‘, the EU will terminate all

remaining proliferation-related sanctions

Provided that no UNSC sanctions have

been reinstated.

This date marks the termination of the

JCPOA, closing the file related to the

Iranian nuclear issue

Duration for US Congress to review or approve

JCPOA

The initial vote for disapproval

of the bill implementing the JCPOA

17 September 2015

Finalisation Day

14 July 2015

12-day window for Presidential

veto against any disapproval by

the US Congress

29 September 2015

60 Days

12 Days 10 Days

9 October 2015

© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

Post-sanctions era in Iran – an end to isolation? – Najib Hashem, Principal Director, Deloitte Corporate Finance Limited

Iran has a large, young and well-educated population…

Cities with 500k+ population

Population 78.5 mn

Population growth p.a.(2009-2014) 1.31%

Median age 28.3

Population breakdown

0-14 23.9%

15-29 28.3%

30-44 24.8%

45-59 14.5%

60+ 8.4%

Mean years at schooling 1 15.1

Source: EIU (2014), Worldatlas (2014)1 Most recent data - 2012

Urbanization 73%

Cities with 500k+ population 17

Cities with 100k+ population 67

21Najib Hashem, Principal Director, Deloitte Corporate Finance Limited

…that has been suffering from the sanctions, slowing growth, depreciating currency and decreasing purchasing power

GDP (2014) $425.3 bn

GDP Growth p.a.(2012-2014) -1.5%

GDP per capita (2014) $5.4k

Source: EIU

CPI Change (2014) 17.2%

CPI Change p.a. (2012-2014) 27.2%

IRR depreciation against $ p.a. (2012-2014) 34.7%

2002 4.9% -1.5%

22

2012 2014GDP

Growth p.a.

$bn

0

100

200

300

400

500

600

700

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Najib Hashem, Principal Director, Deloitte Corporate Finance Limited

Iran has diversified economy. Sanctions have had adverse impacts on industry sectors, with infrastructure suffering most due to cancelled or delayed projects

Source: Iran Central Bank, 1 2008-2012 CAGR


The sanctions have resulted in a trade imbalance and a shift towards the East. Imports have been steady while recent exports have suffered from the reduced oil price

Import Origins 2014

China 43.8%

India 7.9%

Korea 7.5%

Turkey 7.0%

Germany 5.7%

Export Destinations 2014

China 42.8%

India 17.5%

Turkey 15.3%

Japan 9.6%

S. Korea 7.1%

14 18 25 31 38 3751 59

46 54 60 53 46 56

22 19 29 3649

6880

108

6690

117

8464 64

0

50

100

150

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Imports Exports

Source: ITC Trademap

Foreign Trade Volume ($ bn)


Iranian exports are heavily hydro-carbons dependentImport categories are fragmented

Source: ITC Trademap

Foreign Trade Volume ($ bn)

Import Categories 2014Machinery, nuclear reactors, boilers, etc. 14.6%

Electrical, electronic equipment 9.6%

Cereals 8.8%

Vehicles other than railway, tramway 5.6%

Iron and steel 5.5%

Plastics and articles thereof 4.4%

Articles of iron or steel 3.5%

Furniture, lighting, signs, prefabricated buildings 3.0%

Optical, photo, technical, medical, etc., apparatus 2.7%

Paper and pulp 2.5%

Pharmaceutical products 2.2%

Residues, wastes of food industry, animal fodder 2.2%

Animal, vegetable fats- oils, cleavage products, etc. 2.1%

Others 33.2%

Total - $ 55.7bn

Export Categories 2014Mineral fuels, oils, distillation products, etc. 79.0%

Plastics and articles thereof 5.0%

Organic chemicals 3.6%

Ores, slag and ash 3.4%

Edible fruit, nuts, peel of citrus fruit, melons 2.1%

Iron and steel 1.0%

Salt, sulphur, earth, stone, plaster, lime and cement 0.9%

Inorganic chemicals, precious metals, isotopes 0.7%

Fertilizers 0.7%

Copper and articles thereof 0.4%

Edible vegetables and certain roots and tubers 0.3%

Aluminum and articles thereof 0.3%

Carpets and other textile floor coverings 0.2%

Others 2.3%

Total - $ 65.2 bn


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Iran exports of crude oil and condensates (million barrels per day)

Source: EIA

Iran’s oil exports decreased from 2.4 million barrels per day (2011) to 1.4 million barrels (2014). Once sanctions are lifted, pre-sanctions export levels can be expected within 6-12 months

US sanctions on Iran

Central BankEU import ban

startedJoint Plan of

Action is established

Najib Hashem, Principal Director, Deloitte Corporate Finance Limited

Iran has a number of well established stock markets

Source: Tehran Stock Exchange, 1 July 2015

23%

14%9% 8% 7% 7% 5% 4% 3% 3%

17%

0%5%

10%15%20%25%

Chemicals &Byproducts

MonetaryIntermediation

Basic Metals Holdings Post &Telecom

Refined &Nuclear Fuel

Metal Mining Automotive Logistics Pharma Others

0

50

100

150

200

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 July

Tehran Stock Exchange market cap - $bn

Top 10 Industries, as a % of total market cap 1


Sanctions have constrained trade and distorted the business environment but the Iranian economy continues to function

Najib Hashem, Principal Director, Deloitte Corporate Finance Limited28

The post-sanctions era will be subject to major uncertainties: the basis of competitive advantage can shift and apparently successful business strategies can become obsolete


When examining market opportunities and potential target companies, buyers will need to exercise caution and perform careful due diligence


Reputation and Integrity Risk Concerns - Ralph Stobwasser, Managing Director, Deloitte Corporate Finance Limited

Lifting of international sanctions? Not quite there yet…

• For the time being, international sanctions remain in place and will be, in a best case scenario, only be lifted from early 2016.

• While the route to lifting UN and EU sanctions has been clearly laid out in the JCPOA, the US has not committed to a specific timetable for lifting nuclear related sanctions, but has indicated that they would be eased over a 6-12 months of the accord.

• Even after that there will be residual terrorism-related US sanctions in place which means that foreign investors and banks need to remain vigilant of any direct or indirect potential exposure to SDNs, particularly if the investor / bank is considered a US person.

The ‘snapback’ mechanism

• The so called ‘snapback’ provision is a dispute resolution mechanism enabling the rapid re-imposition of existing sanctions that was included in the JCPOA. The intent is to deter Iranian defection from its obligations, by entrenching the costs of doing so.

• Such a ‘snapback’ scenario could leave foreign investors and banks exposed to Iran under a newly imposed sanctions regime. Iranian counterparts will be conscious of this threat, too, and may be asking for performance bonds / guarantees.

• The diplomatic and political cost of a ‘snapback’ however is high. Iran could counter this with threats of nuclear escalation.

The Lingering Sanctions Threat

32Ralph Stobwasser, Managing Director, Deloitte Corporate Finance Limited

From Khatami to Ahmadinejad and on to Rouhani – who and what next? • Assuming everything stays on track to lifting of sanctions which promises a large windfall and opening up of

markets, reformists and centrists are expected to dominate the upcoming parliament (to be elected in early 2016). This would give Rouhani’s administration more support to boost the economic reform agenda and support foreign investment.

• That saying, the investment landscape is not all friendly. The Islamic Revolutionary Guard Corps (‘IRGC’), in particular sees foreign - especially Western - investments not only as a potential threat to the country’s national security, but also to their influence in the economy.

• The reach of parastals and in particular the IRGC into the Iranian economy has been growing since the 1990s and further expanded under Mahmoud Ahmadinejad’s presidency. However ultimate ownership of IRGC linked companies is not necessarily apparent. Outside companies might therefore find themselves exposed, if they don’t do their homework, particularly when IRGC will largely remain under terrorism-linked U.S. sanctions.

• Investors will need to continue monitoring the interplay between the government, the religious establishment and the IRGC.

Looking outside• In the meantime, the prospect of Iran entering back into the global financial and oil markets received an uneasy

response from suspicious neighbours. GCC countries (with the exception of Oman), worried about an economically stronger Iran increasing its role as a regional power broker, have responded with caution, especially over Iranian supreme leader Ayatollah Ali Khamenei's remarks that Iran would continue to support movements against the state in Yemen, Palestine, Syria, Iraq and Bahrain. Investors need to consider their interests in the GCC countries vs. their potential gains in Iran.

• Israel and anti-Iran lobbying groups similarly are going to remain concerned over the lifting of sanctions and may look to campaign against companies and financial institutions that will become active in Iran.

The Political Economy of Iran


Corruption risk is high • Ranked 136 out of 174 in Transparency International corruption perception index 2014. The economy is

dominated by government and parastatals giving rise to bribery and corruption concerns. Need to identify whether the officers of a company can be deemed government officials or not.

• As a newly opening market, there will be agents and intermediaries swarming around interested investors and trade partners. There is a need to be cautious of who you choose to engage with and what are the proposed means of winning business. Anti-bribery and corruption legislation does not allow to hind behind third party actions.

Know who you are doing business with• The private sector is fairly small and enquiries in the market will help establish who are the key players in each

sector; where it becomes more difficult is where companies are government-owned or held by parastatals where there has been a change of guard or ownership following a wave of ‘privatization’ after 2006. Even companies that have historically invested and traded with Iran will find the that the faces in the companies they had previously dealt with have changed and will need to re-assess the suitability of their counterparties or investment targets.

• It is not always easy to distinguish between purely private-owned companies and those with direct or indirect involvement of the state. Investors need to understand who they are dealing with, what is the political exposure and which type of political exposure they are comfortable with.

Anti-money laundering / counter terrorist financing risk is high• Basel AML Index 2015 shows that Iran has the highest risk score out of 152 countries. The Financial Action Task

Force, a global anti-money laundering and anti-terrorism finance standards body, warned that Iran’s “failure to address the risk of terrorist financing” poses a “serious threat … to the integrity of the international financial system.”

• International banks are not likely to be first movers; they will follow after regional banks, as they weigh the cost of non-compliance vs. the rewards of getting exposure to Iran. USD14 billion worth of punitive fines and the residual risk, even after sanctions, of money laundering and terrorist financing will leave them cautious.

What you need to be aware of…


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AML and Corruption Risk – Iran in comparisonTransparency International CPI Ranking 2014 and Basel AML

Index Ranking 2015

Transparency International CPI Ranking 2014

Bas

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Finland

UAE

France

US

Germany

UK

Saudi Arabia

Turkey

India

Egypt

China RussiaPakistan

Nigeria

IranMyanmar

Low corruption

High AML risk

Low

AM

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k

Hig

h co

rrup

tion

risk

Ralph Stobwasser, Managing Director, Deloitte Corporate Finance Limited

Establishing a Presence in Iran – Cyrus Shafizadeh, Partner, Atieh Associates

If all EU, US and UN sanctions were lifted in Iran, how would a foreign investor set up business in Iran?

Introduction

Legal vehicles available for establishing a presence in Iran

The Foreign Investment Laws

Dispute Resolution

37© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

Legal vehicles available

Companies

Branches

Distributorship


Legal vehicle: Companies

The Commercial Code of Iran provides for seven forms of companies.

The vast majority are formed as either: joint stock companies; or limited liability companies

Joint stock companies can be public (mainly used for listing purposes) and private

Most companies registered by foreign shareholders are registered as either private joint stock companies or limited liability companies

All companies have a legal personality that is separate to its members and can contract and sue/be sued in their own right

All companies are considered to be Iranian and can (save a few exceptions) perform all activities that are allowed by Iranian private persons (real and legal). Such activities include land ownership


The Foreign Investment Laws

The Foreign Investment Protection and Promotion Act ("FIPPA") and its Implementing Regulations 2002 – Main law for foreign direct investment

Bi-lateral Investment Treaties – amongst others Switzerland Poland South Korea Italy Qatar China Spain France


The Foreign Investment Laws (continued)FIPPA: types of investments

Direct Foreign Investment in the fields where private sector activity is allowed (Equity Investments)

Foreign investments that fit within one of the "Civil Partnerships", "Buybacks", or "Build, Operate and Transfer (BOT)" schemes (Non-equity Investments)

FIPPA: repatriation of profit and capital

The principal, interest and profits of Foreign Investment may be transferred abroad upon fulfilment of outstanding obligations.

Repatriation in one of several ways: through purchase from the banking network (Central Bank is obligated to supply the

foreign currency with proper approvals); by use of foreign currency earned from exports; and/or by export of other goods authorized under the applicable laws


Dispute resolution

Choices are Iranian courts, foreign courts and arbitration

Judgments handed down by foreign courts enforced in Iran under certain conditions, the most important of which is reciprocity

Foreign investors in Iran may feel uncomfortable with Iranian courts

Arbitration is a good compromise and is recommended


Arbitration

Iranian law recognises arbitration as a dispute mechanism procedure in its constitution and its laws

The courts of Iran refuse jurisdiction when an arbitration agreement is in place

Iran has adopted arbitration law based on the UNCITRAL model (with variations)

Local arbitration is enforced under the Code of Civil Procedure

International arbitration is enforced under the New York Convention

The parties are free to use the rules of arbitration of foreign arbitral bodies (ICC -LCIA etc)

Only issue is arbitration which involves government or public property


Arbitration: Principle 139

Principle 139 of the constitution provides: ‘The settlement of claims relating to public and state property of the referral thereof to arbitration is in every case dependant on the approval of the Council of Ministers, and the Assembly must be informed of these matters. In case where one party to the dispute is a foreigner, as well as important cases that are purely domestic, the approval of the Assembly must also be obtained. Law will specify the important cases intended here.’

This has far-reaching effects and can cause many problems for companies entering into contracts with government or public entities

Various mechanisms have been adopted to reduce the effect of the provisions of Principle 139, none of which are totally satisfactory


An overview of the Iranian tax regime – Alex Law, Partner, Deloitte & Touche (M.E.)

• Business entities − The principal business entities for foreign businesses operating in Iran are public and

private limited companies, and branches of a foreign company. − It is also possible to establish a representative office, for marketing and promotional

activities only. A representative office / branch performing such marketing activities (without entering into transactions) is not subject to income tax.

• All foreign investors doing business in Iran or deriving income from sources in Iran are subject to taxation. Depending on the type of activity the foreign investor is engaged in, different taxes and exemptions are applicable.

• Residence− A business entity is deemed to be resident in Iran if it is registered in Iran or if it is

managed and controlled in Iran. • Territorial coverage

− Resident companies are taxed on their worldwide income. Foreign sourced income is taxed in the same manner as income derived from Iranian sources.

− Non-resident companies (e.g. branches and representative offices) are taxed on income derived from their contracts signed inside or outside Iran for work performed in Iran.

Introduction

46Alex Law, Partner, Deloitte & Touche (M.E.)

• The relevant tax authority in Iran is the Iranian National Tax Administration (INTA).• Corporate income tax

− The headline corporate income tax rate in Iran is currently a flat rate of 25%. All companies are subject to the same corporate tax rate, regardless of the nationality of the company (i.e. foreign or Iranian).

• VAT− The overall VAT rate as of March 21, 2015 is 9%.

• Withholding tax (“WHT”)− Dividends; There is no withholding tax on dividends paid by Iranian companies to non-

resident shareholders.− Interest; Interest paid by an Iranian company to a foreign company is subject to a

withholding tax of 5% on the gross amount.− Royalties; Payments received by non-residents for royalties (i.e. granting of licenses,

knowhow, patents etc.) should be subject to withholding tax of 5%/ 7.5%. • Income tax

− Income taxes are levied at progressive rates between 0% - 20%.

Headline tax rates


• Trade free zones; companies that are registered and licensed to operate in any of the free-zones below are exempt from corporate tax for 15 years on income derived from their activity in the free trade zone:− Kish Island− Qeshm Island− Chabahar− Aras− Anzali− Arvand− Maku

• Double taxation treaties - the countries which signed agreements for the avoidance of double taxation with Iran are:− Algeria, Armenia, Austria, Bahrain, Belarus, Bosnia and Herzegovina, Bulgaria, China,

Croatia, Cyprus, France, Georgia, Germany, Indonesia, Jordan, Kazakhstan, Kuwait, Kyrgyzstan, Lebanon, Malaysia, Pakistan, Poland, Qatar, Romania, Russia, South Africa, Spain, Sri Lanka, Sudan, Switzerland, Syria, Tajikistan, Tunisia, Turkey, Turkmenistan, Ukraine, Uzbekistan, Venezuela, Yemen and Zimbabwe.

Tax considerations for foreign investors


Questions

49

Appendix One: Potential Implications under JCPOA

51

Potential Implications under JCPOAGeneral Removal of 444 companies/individuals, 76 planes and 227 ships from sanctions list Ability to access USD115bn of frozen oil revenues (half of which will be available – roughly

USD58bn is tied up in contracts and non-performing loans)Oil and Gas Iran currently has the fourth largest proven oil reserves in the world Potential to double oil exports from 1.1 mbd level of JPOA Period within six months -

approximately 50 million barrels of oil currently stored Iran's Ministry of Petroleum is currently working on a new contract model, Integrated

Petroleum Contract ("IPC"), which is intended to replace the current buyback scheme Iran is the world's joint-third largest natural gas producer (with Qatar) Potential gas pipelines and LNG projects Refinery and oil and gas infrastructure


Potential Implications under JCPOA (continued)

52

Renewables and Power At the end of 2013, Iran's installed electricity capacity was around 70,000MW. Iran intends

to install 5,000MW of solar power by the end of 2018 European-based renewable energy companies have signed agreements for projects in Iran

- Italy's Fata was awarded a EUR 500m (USD 548m) contract to build a power station in Bandar Abbas

Spain's renewable energy specialist, Bester Generación, signed an 18-month contract to provide engineering services to the Iran Power & Water Equipment and Services Export Company (Sunir)

Transport Industries Iran's Civil Aviation Organisation recently announced that Iran plans to purchase 80 to 90

planes a year from Airbus and Boeing in the first phase of renovating its national carrier, Iran Air, until 300 planes are in place to replace its aging fleet

European automobile manufacturersFlow of Capital Re-joining SWIFT Tehran Stock Exchange (market cap. USD118bn) Iran Mercantile Exchange© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

Potential Implications under JCPOA (continued)

53

Life Sciences

Medical supplies and pharmaceuticals

Stem cell research and nanotechnology

Technology and Telecommunication

In 2014, MTN Irancell (Iran's second largest mobile phone network operator, 49 percent owned by South Africa-based MTN Group) launched the country's first 4G LTE network across nine cities

Fibre-optic network development

22.9-odd million internet users

Approximately 25 percent of Iranians are smartphone users with around 68.9 million cellular phone users


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