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The New Foreign Investment Law
Monday 31 January 2005

From: www.netiran.com

Iran Insurance Market Report; Insurance and Economic Magazine (Quarterly) Autumn 2000, Vol. 3, No. 1 Pages: 50 - 51 Word Count: 1275

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Text: On August 24, 2000 the Majlis (Parliament) ratified the first reading of the new Law on Attraction and Protection of Foreign Investment (New Investment Law). This law must now be approved by the Council of Guardians and signed by the President before becoming effective.


The new investment law had been debated in various formats for the past five years in both the Majlis and other institutions such as the Chamber of commerce. Its swift passage by the sixth Majlis is indicative of this new parliament’s commitment to attracting foreign investment to Iran.


The New Investment Law is not the first legislative measure aimed at protecting foreign investment and is very similar to its predecessor, the 1956 Law for the Attraction and Protection of Foreign Investment (LAPFI).


Under LAPFI, all recognized investments in Iran would enjoy the full protection of the Iranian government. This protection was both for permission to repatriate profits annually in the original hard currency and fair compensation in case of nationalization because of national interest.


The new investment law retains most of the provisions of LAPFI.


However, it goes further in providing for coverage of "investment" by including some investment schemes, such as buy-back agreements, that were not covered under LAPFI.


Moreover, the New Investment Law adds substantially to the areas in which foreign investors can enjoy the protection of this law.


Key Provision
Areas of coverage


According to LAPFI, only foreign investment in the fields of "development, productive, industrial, mining, transport or agriculture or for granting credit and financial assistance to Iranian firms engaged in the [aforementioned] activities can enjoy the privileges of this [ law]".


This definition excluded many investments that would not fall under the defined category. Examples would be buy-back agreements, build-operate- transfer (BOT) projects, investments in the service industry, and financing of foreign investments.


Under the new investment law " foreign investors who participate in investment schemes that are also open to the Iranian private sector can enjoy the protection and privileges of this law". Moreover, investments in the areas of finance provision, such as project finance, BOT projects, buy-backs, etc, will also enjoy the full protection of this law. So the new law provides for a board and comprehensive definition of sectors that could be covered for protection.


The foregoing provides two of the most important differences between The new investment law and LAPFI . The new investment law permits protection of foreign investment in all areas open to private investment ( as opposed to specific sectors) and it provides coverage for service contracts such as buy-back agreements. Since service contracts did not fall within the definition of " investment" because of restrictions in the Iranian Constitution and other laws, they could not be protected under LAPFI.


Qualifying Foreign Capital


The following are considered foreign capital subject to protection under The new investment law:


Hard currency
Machinery and equipment
Spare parts and tools, Complete
Knocked-down (CKD) components (for example for vehicle production), semi-knocked down (SKD) components, raw materials, etc.


Intellectual property in the form of patents, technical know-how, trade marks and trade names, and technical services.


Profits that are added to the capital of the investment


Other items that have been approved by the relevant authorities


The foregoing are very similar to the provisions in LAPFI.


Privileges of Foreign Investors


Those investors registering under The new investment law will benefit from the following privileges:


Nationalization can occur only in case of national interest, pursuant to legal regulations, in a nondiscriminatory manner, and only by providing for fair compensation according to the real value and before the nationalization occurs.


Foreign investors will enjoy the same privileges, exemptions, and mechanisms available to the local privet investors and capital.


Valuation, Entry and Repatriation of Foreign Capital


Investments and capital brought in to Iran will be subject to valuation by the relevant authorities. Upon valuation, the foreign capital will be registered and subject to protection from the date of registration.


Foreign investors are permitted to repatriate profits (after deduction of taxes, dues and statutory reserves) every year after approval of the relevant body. Repatriation can be in the form of foreign currency or goods.


Other Provision


Residency, work permits, and travel of foreign specialists and managers will not be subject to the general laws of Iran. A separated regulation will determine the above.


Investments registered under this law will benefit from the privileges of this law for a period of years unless a more favorable law is enacted.


Any dispute between the government and the investor can be resolved through an agreed upon method.


This means that the investors can provide for a foreign arbitration and choice of law clause.


Shortcomings


The main shortcomings of the new draft bill related to constitutional restrictions. The new investment law essentially allows foreign firms to invest in any area where private Iranian companies can invest.


However, article 44 of the Iranian constitution divides the economy into three spheres: public, cooperative and private. A strictly academic reading of the article leaves not more than 5 per cent to 10 per cent of the economy in the hands of the private sector, with the public sector having the lion’s share.


Such a strict approach has never in fact been applied and Iranian companies have had little problem in entering many areas that are not designated as the private-sector sphere in the constitution. More recently, such activities have even included the banking sector, the privatization of which took place through a new legal initiative. Next in line seems to be the insurance sector where a new law will provide for active private-sector participation. However, legal experts warn foreign clients that the new bill is not explicit in regards to whether foreign firms can count on legal protection in areas where private Iranian firms are widely and openly involved despite constitutional restrictions.


The dispute-resolution provision of this law is also subject to constitutional restriction. Specifically, whenever the government or a state-owned entity is party to an arbitration proceeding, it must first obtain Majlis approval. So a foreign investor would only be assured of the validity of any arbitration clause after a conflict has actually arisen and been referred to the Majlis for permission to arbitrate.


Concluding Remarks


The initiative of the Majlis in passing The new investment law is in line with the overall trend of creating a more investor-friendly environment, especially with an eye to foreign investors. The key problem area remains the strict reading of the Constitution. Evidently, only two scenarios could reduce the risk of a reversal of some of these laws based on the Constitutional interpretation. These are:


Constitutional Amendment


Many forces are in favor of such a move, but it is still too early for a comprehensive amendment, as a consensus on a number of key political issues will require more debates and time;


New Interpretations of the Critical Constitution


Article alternatively, the Guardian council or the Expediency Council could offer a new interpretation of some article of the Constitution.


In one way, the second scenario is already taking shape in the form of the Guardian Council approving a number of laws that seem directly to contradict article 44. The best example here is the law on creation of privately owned banks that was passed in April 2000. Therefore, it can be concluded that in a slow process, Iran is moving towards offering a new interpretation of Article 44 in which case the scope of activities that foreign firms can register their investments in will also increases.


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