Foreign Direct Investment (FDI) is one of the most known methods of investment by a company or an individual in another country which refers to purchase of an asset giving the purchaser direct control over it. This can include buying lands, buildings, or even owning a controlling stake in a business or productive assets like factories.
We have previously explored and detailed the “Protections and Incentives under FIPPA“ in an article available on our website which offers insights into the legal framework, advantages, and procedural guidance for foreign investment in Iran. In this article, we aim to delve into the conditions and requirements for accepting foreign investment in Iran, covering both general and specific criteria. We will explore the regulations applicable to investments in the mainland as well as those unique to the free economic zone. Karimi & Associates Law Firm, with its team of experienced and specialized lawyers across various legal fields, is committed to providing tailored legal advice to safeguard your interests and guide you through this process with dedicated support.
General Conditions for Accepting Foreign Investment in Iran
The Investment Law considers certain criteria and standards for issuing licenses applicable to all investment projects and plans and refers to those as “general conditions for the acceptance of foreign investment.” Meanwhile, other conditions are outlined within the Investment Regulations and will be addressed in the following section.
The general conditions for the acceptance of foreign investment can be divided into two categories:
- Conditions concerning alignment with Iran’s national interests as categorized under Article 2 of the Investment Law.
- Conditions related to the legal structure and form of the investment, which are provided under Article 3 of the Investment Law.
Conditions Concerning Alignment with Iran’s National Interests
Article 2 of the Investment Law stipulates:
Acceptance of foreign investment under this law and in compliance with other current laws and regulations of the country must be carried out for the purposes of development, reconstruction, and productive activities, including industrial, mining, agricultural, and service sectors, based on the following criteria:
- It must contribute to economic growth, technological advancement, improvement of production quality, job creation, and increased exports.
- It must not threaten national security and public interests, harm the environment, disrupt the economy, or undermine domestic investments.
- It must not involve the government granting concessions to foreign investors. A concession refers to any special rights that place foreign investors in an exclusive position.
- The value share of goods and services produced through foreign investment under this law, compared to the value of goods and services offered in the domestic market at the time of licensing, shall not exceed 25% in each economic sector and 35% in each field of activity. Foreign investment for the production of goods and services intended for export – except crude oil – is exempt from these ratios.
It is important to note that If the Investment Board fails to adhere to the conditions outlined in Article 2 of the Investment Law during the approval process or if it issues a license with a lenient approach despite the strict provisions of Article 2, it cannot later revoke the protections granted under this law on general grounds. Naturally, if subsequent actions by the foreign investor result in harm, other applicable laws and regulations, such as the Islamic Penal Code or the Civil Code, will govern the matter—except in cases explicitly addressed in the Investment Law and its regulations.
Conditions related to the legal structure and form of the investment
The second category of general conditions for accepting foreign investment relates to the legal structure and form of the investment. This means that not only is the issuance of a license for any foreign investor contingent upon the investment meets all the conditions outlined in Article 2 of the Investment Law, but the investor must also structure their capital in accordance with one of the investment forms specified in Article 3 of the law.
According to Article 3, “Foreign investments accepted under the provisions of this law are entitled to the facilities and protections provided by this law. These investments are acceptable in two ways:
- Direct foreign investment in areas where private sector activities are permitted.
- Foreign investments in all sectors within the framework of the methods of “civil partnership,” “buyback,” and “build-operate-transfer (BOT).”
The first point is that, based on the structure of this article and its restrictive nature, the only acceptable investment methods are either direct foreign investment or one of the three methods: “civil partnership,” “countertrade,” or “BOT.” The investment regulations refer to these as contractual arrangements. Therefore, apart from the legal forms mentioned, the foreign investor cannot convert their capital into any other legal structure and invest through it. However, investment in stock market is currently considered as an accepted legal structure of investment.
Specific Conditions for Accepting Foreign Investment in Iran
In addition to the general conditions for foreign investment, the legislator, through Article 5 of the Investment Regulation, requires Iranian natural and legal persons who intend to invest in Iran with foreign-sourced capital to provide documentation confirming their economic and commercial activities abroad in order to benefit from the protections of the law. What can be inferred from this article is that the legislator shows no willingness to accept foreign currency derived from the export of domestic products as foreign investment. For this reason, Iranian persons must prove their economic and commercial activities outside the country.
Pursuant to Article 6 of the Investment Regulation, the legislator has facilitated the process for investors who, after years of investing in Iran, wish to obtain an investment license and benefit from this legal right. According to this article, a foreign investor who has previously invested in Iran without benefiting from the coverage of the law can, by completing the acceptance process, secure the protection of the law for the principal amount of the investment made.
Foreign investment may either take place through the utilization of foreign capital in a new economic enterprise or through investment in an existing economic enterprise. The legislator has established a specific condition for accepting the latter type of investment under Article 7 of the Investment Regulation. Such investments (in an existing economic enterprise) will only be accepted if the investor creates added value. According to the legislator, “new added value” can result from an increase in capital within the economic enterprise or the achievement of objectives such as improving management, expanding exports, or enhancing the level of technology in the existing enterprise.
Conditions for Accepting Foreign Investment in Free Trade and Special Economic Zones
Unlike the detailed regulations governing the conditions for accepting foreign investment in the mainland, the conditions for accepting foreign investment in Free Trade Zones are relatively simple. Article 4 of the Investment Regulations in Free Trade Zones outlines the conditions for acceptance as follows:
“Capital will be accepted and subject to the regulations under the following conditions:
- It is utilized in authorized activities within the zone.
- The full process of obtaining the investment license and registering the capital, as stipulated in Articles 6 and 7, is completed.
- It does not require granting exclusive rights or privileges to the investor by the organization.”
Articles referred to in condition B address two key points, the foreign investor must have obtained the investment license in accordance with the regulations and within the timeframe specified in the investment license, the investor must bring a certain percentage of the capital, as stipulated in the license, into the zone to commence operational activities. The provisions of this clause are largely similar to those of Article 32 of the Investment Regulation, which governs investment projects in the mainland.
A notable point is that, as observed, the regulations for foreign investment in Free Trade Zones do not specifically refer to the types of investments that are anticipated. Therefore, not only are the types of foreign investment mentioned in Article 3 of the Investment Law permissible, but investments in other legal forms are also possible within the framework of the general laws and regulations of these zones. For expert guidance and support in navigating the complexities of foreign investment laws, trust Karimi & Associates Law Firm.