Entering Iran’s market: What German companies need to know

By Shaghayegh Smousavi

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A unique market

The partial lifting of international sanctions following the conclusion of the Joint Comprehensive Plan of Action (JCPOA) in July 2015 reopened the Iranian market to foreign investors after years of semi-isolation. Having been out of reach for many during the years of sanctions, its reopening has offered unique investment opportunities to explore. With the second largest economy in the MENA region and a population of more than 80 million, the size of Iran’s largely untapped market has made it even more attractive.

Although the enthusiasm for foreign trade is not universally shared inside the country, domestic policies also promise to welcome and even facilitate more expansive trade ties with the international community. Amendments to the legislation and the practice of offering protection to foreign investment through the FIPPA framework were among the chief measures implemented to achieve this goal. A FIPPA license will, inter alia, protect foreign investment against expropriation and changes in laws, guarantee the repatriation of capital and profit, facilitate visa procedures and offer the possibility of dispute resolution in arbitration tribunals outside the country.

Moreover, although the ambitious plans and growth projections for foreign investment and, more generally, the economy after the JCPOA eventually gave way to more sober and moderate expectations, the outlook is still positive. The current (sixth) five-year development plan projects 8% economic growth annually for 2016-2021.

Where German companies stand

German investors were among the first to appreciate the new openings in post-JCPOA Iran. In the past year alone, more than 100 delegates from different sectors have visited Iran. Export-oriented companies as well as manufacturers were pioneers in assessing the various opportunities. Interest has been greatest in the plant-engineering and construction, automotive and energy, and particularly, renewable energy, sectors.

Although many of them were kept out of the country during the years of sanctions, German companies are by no means newcomers to the Iranian economy. For decades prior to the sanctions, strong economic ties existed between the two countries, which have resulted in bilateral investment and double taxation treaties. Indeed German technology can take credit for a considerable portion of Iran’s industrial base and Germany was Iran’s largest export partner for many years, a position occupied by China during the sanctions era.

If economic ties with Germany, along with those of other western countries, were weakened as a result of interna­tional sanctions positive relations between Iran and Germany remained unaffected by cultural and political tensions. This shared history has safeguarded the goodwill shown to German companies by Iranians who have had no cause to relinquish their positive attitude toward and trust in German brands. This is perhaps the greatest advantage that German companies have over other nations as they enter or reenter the Iranian market.

What to expect

The opportunities will of course come with challenges. Sanctions have been partly lifted but not before the years of isolation had left their mark on the economy. The lingering restrictions, and the possibility of new ones being imposed or old ones being reintroduced, are also risks to be reckoned with. Banking ties have proved hard to restore and financing remains a major challenge, but these are relatively well-known drawbacks. There are also other, less widely appreciated points to consider when entering the Iranian market.

The legal system

The modern Iranian legal system, established nearly a century ago, was inspired by European legal systems of the time, in particular those of France and Belgium. The system itself is therefore similar to other civil law jurisdictions.

While Sharia (Islamic Law) has always been a source of legislation and no laws that are contrary to it are to be enacted or enforced, its impact is more prominent in criminal and family law, for example, than in the commercial and civil codes. The latter were adopted in the 1920s and were heavily influenced by the French codes. The Islamic banking system is an area that is uniquely influenced by both Sharia rules and conventional banking norms.

The judiciary is composed of civil, criminal and administrative courts of first and second instance, with the Supreme Court as the highest judicial body. Within the civil courts, specialized branches are devoted to specific disputes such as commercial, arbitration, etc.

Although well established in most areas and relatively easy to comprehend for foreigners, the legal system does prove difficult to navigate at times. There are areas where laws are vague, underdeveloped or even nonexistent. Jurisprudence, especially court decisions, is more obtuse than in countries like Germany. Moreover, there are areas such as competition, where a precedent has yet to be established. Good preparation for successful entry into the market would therefore include seeking the expert advice of local law firms familiar with both the market and the regulatory environment.

In almost any area, whether regulated or not, practice is the prevailing factor. Since practice is more inclined to change than legislation, outcomes are often unpredictable. This uncertainty becomes particularly problematic for German investors when permits and licenses are necessary for the intended activities. This is also where the added value of a local partner who is better placed to deal with local authorities and obtain the requisite permits becomes more evident.

Investment protection

The business risks of investing in Iran cannot be completely eliminated. Nevertheless, German companies should gain maximum advantage from the benefits offered by the bilateral investment treaty (BiT) with Germany and the additional protection offered by a FIPPA license, which is a prerequisite under the BiT.

Protecting intellectual property rights

In addition to its domestic legislation, Iran is a signatory to several international IP treaties, including the 1883 Paris Convention and its subsequent amendments, the 1967 WIPO Convention and the 1891 Agreement and its Protocol, and PCT. It also has an established system for the registration of IP rights. The most crucial step towards protecting IP rights is to register them in Iran before they are transferred to the country, since this would offer the maximum possible protection.

Arbitration

As a signatory to the 1958 New York Convention, Iran also adopted its own legislation on international commercial arbitration in 1997 that offers certain flexibility, such as a choice of governing law of arbitration, and is generally considered a major change in the field of commercial arbitration.

The two arbitration centers, ACIC and TRAC, are playing an increasingly active role in settling disputes and shaping practice in this field.

In terms of the enforcement of arbitration awards by Iranian courts, there is no established practice yet; but as arbitration gains more prominence, the prospect for reliable practice improves, too.

Timeline for investment

Bureaucracy is a major challenge in its own right. It is therefore important not to underestimate the time needed for each stage of investment in Iran, as these are always unpredictable and often long-winded.

Outlook

In spite of the advantages offered by a century-old legal system that has recently been undergoing some promising transformation, Iran is still a relatively high-risk market for foreign investment.

The challenges for tapping into the newly reopened market are considerable. The risks associated with potential sanctions and financing problems as well as the problems caused by Iran’s legal and administrative system are all factors to be cautiously evaluated.

Nevertheless, German companies have found the opportunities well worth exploring, aided by the long history of cross-border relations between the two countries, by the enduring goodwill of “Made in Germany”, and by being Iranian businesses’ favorite foreign partners.

shaghayegh.smousavi@cms-hs.com