Attracting foreign investments has always been an effective means for developing countries to boost their economy and increase economic growth. Now an essential criterion enhancing foreign investment-friendliness of a jurisdiction pertains to the legal environment set out by its government to regulate the different phases of foreign investments.
In this respect, the first law aiming at assuring legal protection of foreign investments in Iran was The Foreign Investment Protection Act 1954, which truly helped promoting foreign investments in Iran following the opposite effect produced by the nationalization of the oil industry a few years before that. Again, foreign investment underwent a rescission after the Islamic Revolution 1979 and the massive wave of nationalizations which followed in major economic sectors in Iran. Today, the Government of Iran is the main player in Iran’s economy, the private sector merely playing a complementary role.
However, a range of historical and contemporary factors have created today a breeding ground for redeployment of foreign activities in Iran. The termination of Iran-Iraq eight-year war and the need for reconstruction and development of the economy led to the establishment of new free trade zones, new interpretation of Iran’s Constitution, the boost of privatization of the economy and enactment of a new law for foreign investment, the Iran Foreign Investment Promotion and Protection Act 2002 (“FIPPA 2002”). FIPPA 2002 improved foreign investments regime in Iran by expanding the scope of the definition of foreign investments, opening protection to new methods of investment such as project financing, BOT and buy-back agreements and certain other concessions to new investors.
Today, the partial lifting of international economic sanctions against Iran and implementation of the Joint Comprehensive Plan of Action (“JCPOA”) between Iran and the European Union, together with the United States, the United Kingdom, Germany, France, Russia, and China on January 2016 have made Iran entered into a new era of economic development. International companies view Iran as a new untapped market which is open to investments after decades. However, investors still call for a more transparent, precise, comprehensive and updated set of rules which could correspond to the current needs of the Iranian economy.
To meet this end, Iran has started an initiative under the forum of Tehran Chamber of Commerce to study obstacles to foreign investments under FIPPA 2002. It has now come up with proposals to improve the foreign investment environment in Iran as it is widely believed that the current foreign investment regime in Iran, in comparison with other developing countries, suffers from significant inadequacies and ambiguities. The respective committees in Tehran Chamber of Commerce has highlighted few of these problems:
1. A license-oriented legal regime
The Organization for Investment, Economic and Technical Assistance of Iran (“OIETA”), is currently the sole official body responsible for licensing foreign investments and their related affairs. According to Article 5 of FIPPA, all requests for admission, entry, utilization and repatriation shall be submitted to this Organization. The Foreign Investment Board (“FIB”) is the highest authority in the investment licensing process which makes decisions on the foreign investment applications submitted to the OIETA and the Members of the FIB are deputies of various Ministries and Central Bank of Iran (FIPPA, Article 6).
The license-oriented legal regime of foreign investment in Iran has caused inefficiencies and has made the foreign investment process in Iran a costly process. The system is considered as outdated which shall be evolved to reflect the requirements of the current world and the necessity of an independent and professional organization with a new legal regime is under examination in the Tehran Chamber of Commerce’s committee.
2. System of Ownership
As the legal status of ownership of real assets in Iran has a complex nature and faces many limitations, it is expected that at least one of the improved aspects of the new law concentrates on this issue and resolves the existing complications.
Article 2 of FIPPA 2002 provides that “The Law pertaining to the Ownership of Immovable Property by foreign nationals” enacted on June 6, 1931 shall remain in effect. According to this later Act, the ownership of land in any type and in any extent in the name of foreign nationals is not permitted and FIPPA 2002 restate this provision with regards to the foreign investors.
On the other hand, companies established in Iran by foreign companies are considered as Iranian entities and according to Article 34 of FIPPA Executive Regulation 2002, in cases where the foreign investment leads to the formation of an Iranian entity, the ownership of lands in the name of the company will be authorized within the framework of the foreign investment. However, there are limits as well as restrictions, and certain aspects of this element are unclear or include uncertainties.
3. Applicable Exchange Rate
According to FIPPA, transfers of capital from outside to Iran, transfers of profits and dividends flowing from foreign investments to outside of Iran (FIPPA Article 14) and transfers of funds related to the installments of the principal of the financial facilities of foreign investors and relevant expenses (FIPPA Article 15) are guaranteed by Central Bank of Iran (“CBI”). FIPPA covers the applicable exchange rate for expatriation and repatriation of funds and will protect the foreign investment with regards to the exchange rates in case any financial problem occurs in Iran in future.
Foreign investors protected under the FIPPA can transfer and repatriate funds related to their investments at the official exchange rates and this is a major issue for foreign investors investing in Iran. The CBI allows foreign investments licensed by OIETA to be exchanged at the official exchange rate and not the market rate. Currently there is a 15-20% difference between the official and the market exchange rates. While Iran’s Central Bank has announced that it has planned to unify both rates soon, the exchange rate applicable to transfer of funds to and from Iran under foreign investment license is a major obstacle in investing in Iran.
4. Dispute Settlement
Settlement of disputes greatly influences decision to invest. Foreign investors need access to an easy, predictable, unbiased and impartial process of settling their disputes as, for example, access to international arbitration in case of decision by the host government which affects negatively the investor’s rights.
Iran is not member of the International Centre for Settlement of Investment Disputes (“ICSID”) and therefore the only available forum for dispute settlement between the Iranian government and a foreign investor under FIPPA 2002 are Iranian courts. The exception to this are the bilateral investment treaties signed by Iran and countries which have provided the possibility of direct recourse to UNCITRAL arbitration against the Iranian state in the event of an alleged violation of the treaties. As an example, Iran has a bilateral investment treaty (BIT) with France and according to Article 8 of the treaty, any dispute between the Iranian government and the French investor could be referred to as an ad hoc UNCITRAL arbitration. This requires that the French entity has already obtained a FIPPA license (Article 10 of BIT).
The dispute settlement mechanism in the absence of any applicable bilateral investment treaties or a FIPPA license act today as a major obstacle in the process of promoting foreign investment in Iran. This is why the improvement of current law and removal of limits and restrictions applicable to initiating an arbitration proceeding in case of dispute, is on the top list of the agenda of the Committee.