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A Handy Insight to Methods of Incorporating Business in Iran

While foreign companies, unless restricted under certain laws and regulations, can have transactions with and even within Iran even without being registered, they might decide, for instance for a long-term and constant presence in Iran, to be incorporate in Iran. They have, since 2009, a wider range of choices than ever.

They might either decide to be registered as a branch or representative of their main company, or to establish a brand-new Iranian company wholly owned by their main company. These are all possible but only an informed decision based on specific needs and conditions of each company and the pertinent market .

We will shortly discuss each method trying to illuminate some most important legal aspects associate with each of them.

Although we discuss establishment of branch as a type of incorporation due to its formalities and questions always raised by foreign investors, it should be borne in mind that mere establishment of a branch is neither a real incorporation nor merely considered as investment. It could be however considered as investment when accompanied with contractual arrangements for investment.

Establishment of Foreign Representatives and Branch Offices

The Registration of Companies Act, the Law for Allowing the Registration of a Branch or Representative of Foreign Companies and its By-law, the Law on Protection of the Rights of Consumers and certain other legislation lay down rules for foreign companies acting in Iran through representatives and branch offices. Today, all foreign enterprises are in principle allowed to register and open branch and representative offices in the Islamic Republic of Iran in pursuit of their economic interests.

According to Articles 3 and 4 of the Registration of Companies Act, approved in 1931, any foreign company that wants to carry out commercial, industrial or financial activities in Iran through a branch office or a representative, must first have already been recognized in its country of origin as a legal entity and then it should be duly registered in Iran. According to Article 4 of the Law of Protection of the Rights of Consumers (ratified in 2009):  “all the suppliers whether producers or importers of capital goods including heavy or light vehicles, industrial or agricultural and road construction machinery, home appliances, electrical and electronic products, audio and video equipment and communication devices are bound to have registered agents and authorized repair shops, to supply spare parts and render after sale services”. The registration shall be done in the related department of the Ministry of Industry, Mines and Commerce.

Branch Office

According to Article 2 of the Executive By-Laws of the Law Authorizing Registration of Branches and Representative Offices of Foreign Companies, a branch of a foreign company is a local (Iranian) wing of the original company that carries out the business and functions of the head office of the company in Iran directly through one or more principal representative(s).

It is deemed to be carrying out business in Iran on behalf of the head office of the company for all such business the head office shall be responsible. Therefore, the head office of the company shall have all the duties and functions of the branch office for which it shall be answerable.

Agents (local) and Representatives

By “agent” of a foreign company, it is meant a natural person or a legal entity that, on the basis of an agency agreement, carries out some of the activities and functions of the principal company in Iran.

The Agent(s) of a foreign company shall be responsible for the activities in Iran carried out in the name of the principal company.

The management of affairs of agencies registered in Iran 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.

Establishment of an Iranian Company

Previously, there existed  a restriction for ownership by foreign companies of more than 49% of shares of a Company registered or to be registered in Iran.

The restriction was based on a practice resulted from an interpretation of  Principle  81  of  the  Iranian  Constitution.  This  practice  has  been  changed  upon  an  agreement between the Director General for Foreign Investment (Director General) and the Head of the Corporate Registration Bureau (“CRB”) on 21 October 2008. The new practice allows  the  wholly  ownership  of  shares  of  an  Iranian  company  by  foreigners  up  to  100%.

Considering  the  above  and  at  this  time,  there  exist  no  restrictions  for  the  foreigners  to acquire any percentage of the Iranian companies of any type.

From among the trade companies mentioned in the Iranian Commercial Code, two types of Companies  are  of  significant  importance  being  more  common  among  the  merchants  in private sector. They are: Private joint Stock Company and the Limited Liability Company.

The Private Joint Stock Company

This is the most common form of commercial enterprise in Iran and the one most frequently used by foreign investors.

The liability of shareholders is in  principle limited  to  their  capital  subscription.  The  Private  Joint  Stock  Company  (“PJSC”)  is  an independent legal entity  that  can  enter  into  contracts and  it  can  sue  and  be  sued. Shares can be transferred (subject to certain restrictions) without effecting the continued existence of PJSC, although they may in principle not be offered for public subscription or trading.

The Limited Liability Company

The Limited Liability Companies (“LLC”) can be established with two partners (as opposed to PJSC which calls for three shareholders at least) who in principle are liable only to the extent of the contributions they have made to the partnership’s capital.