shine webinar - doing business in iraq

Doing business in Iraq

Overview of business and investment regulatory framework

Tawfiq Tabbaa

Partner, Baghdad and Erbil

13 February 2014

Presentation outline

• Iraq challenges and opportunity

• Investment environment

• Investment law

• Starting a business

• Structuring joint ventures

• Agency & distribution

• Taxes

Iraq: the opportunity

• Growth Rate 12% in 2012 and 10% in 2013 (WB/IMF)

• Budget increased by 35% to $100 billion

– based on an av oil price of $85 per barrel and 2.6 million bpd in crude exports (=95% of budget)

– One third earmarked for capital projects (35% increase)

• National Plan (2012 to 2014) calls for $186 billion in investment, create 3.5 million new jobs and cut unemployment to 7.5% (currently 15%)

• More than 115 bbl proven reserves oil reserves

– aims to reach 8.5 million bpd in 2017

Iraq: the challenge

• Iraq is ranked 165 out of 185 countries in World Bank’s Ease of Doing Business (2013)

– 177our of 185in starting a business

• Investment related Laws are generally good but lack details

– Distorted by complex procedures and administrative requirements

• Security

• Economy in Transition so is Regulatory Framework

Investment environment

• 100% foreign ownership is permitted in all sectors (except agency and distribution activities)

• Since 2004 various laws have been passed to improve Iraq’s business environment:

– Banking Law

– Law on Securities

– Amendment to Companies Law

– Insurance Regulatory Laws

– Amendment of IP Laws

– Amendment to Income Tax Law

– Communications and Media Commission Law

– Investment Law

Investment law

• First issued in 2006 and amended in 2010

• Applies to investments of no less than $250,000 that obtain an Investment License

• All sectors except oil and gas, banking and insurance

• Permit ownership of land and real estate for the purpose of the establishment of housing projects (for Iraqi nationals)

• National Investment Commission + 15 provincial Investment Commission

• Kurdistan Investment Law

– Kurdistan Investment Board

Investment law

• Incentives and Guarantees under Investment Law:

– Repatriation in hard currency of profit and capital brought into Iraq.

– Leasing land for term not exceeding period of 50 years (renewable)

– Exemption from fees and taxes for 10 years and custom duty exemption

• Period can be renewed and extended up to 15 years in case of min 50% of Iraqi Participation.

Establishing a business in Iraq

Establishing a business in Iraq

• Companies Law enacted in 1997 amended in 2004

• Companies Registry plays a significant role in the establishment and monitoring of companies and branches in Iraq.

• Not simply a registry of information but plays central role for approval of various company secretarial acts

• There are two Registrars: in Baghdad and Erbil

• Apply the same Companies Law but with significant procedural differences

Establishing a business: the options

Option 1: Limited Liability Company (LLC)

• Minimum Capital is IQD 1 million

– Higher for some sectors: (e.g. IQD 2 billion oil and gas, IQD 1 billion for finance company)

• Arabic names only

– No applicable in Kurdistan

• LLC is not managed by a Board of Directors but a General Manager

• Requires pre approval of Ministry of Interior and competent department in case sector specific (e.g. Ministry of Oil)

– Procedures change frequently (often unpublished)


Option 2: Branch Office

• Allowed only in case of implementation of Government Contract or a contract with a prime contractor of the Government

• Must present letter of support from contracted government dept and the public sector entities illustrating the nature of the contract and other relevant details.

• Appoints Branch Manager to undertake day-to-day management

• Registration in Kurdistan has no requirement for Government or other contract (except Oil and Gas)


Option 3: Representative Office

• Allows company to only do business development and marketing. Cannot conduct any business in the country

• Can convert registration from Rep Office to Branch if government or prime contract is secured

Structuring joint ventures

• Iraqi Companies Law has mandatory provision that apply to LLC and other forms of companies. Therefore, Articles of Association of company cannot have:

– Preferred shares or difference classes of shares

– Tag and drag along right

– Any variation on right of first refusal

– Dividends distributions

• Shareholders Agreements may be enforced as contractual obligations but largely untested in the JV context

• One solution is to have holding structure outside Iraq

Offshore Co Shareholders

(Iraqi and Foreign) SH Relationship

governed by appropriate law and jurisdiction

Structuring joint ventures

Iraqi LLC 100%

Agency and distribution agreements

• Governed by Commercial Agencies Law of 2000

• Wide application/definition: agent, broker, distributor etc

• Has to be Iraqi and registered agent with Ministry of Trade

• Substantially different from other ME countries in that it offers little protections to agents

– Does not mandate exclusivity

– No mandatory compensation in case of non renewal or expiry

• Compensation is left to Iraqi Civil Code

– Claim for compensation by agent in an inopportune moment and without just cause

Business tax

Permanent establishment

• There is no definition of “permanent establishment” set out in the Iraq tax law

• Instructions No. 2 of 2008 set out relevant provisions

Trading “in” vs. Trading “with” Iraq

• Non-resident considered to be “trading in” Iraq where contracts are concluded in Iraq, payments for the services are made into an Iraq bank account, or services are physically provided in Iraq

• A contractor “trading in” Iraq will need to be registered in Iraq, and obtain a tax clearance from the Iraq authorities

• Goods or services provided outside of Iraq should not be subject to corporate taxes in Iraq on the basis that you are considered to be trading “with” as opposed to trading “in” Iraq

Business tax

Tax rates

• Under the Federal Income Tax Law (“FITL”) the current tax rate for all industries is a flat rate of 15%

• New Iraq oil and gas tax law was passed in February 2010 and applies to oil and gas companies operating in Federal Iraq. The new law provides for a corporate income tax rate of 35% applicable to oil and gas companies (including subcontractors and supporting industries)

Compliance requirements

• Annual tax filings supported by audited financial statements prepared under Uniform Accounting Standards

• Filing deadline of 31 May

• Accounts profits vs. Deemed profit

Oil and gas tax

Law #19 for the year 2010, imposing income tax law on foreign oil companies (“Oil & Gas Law”)

• Oil & Gas Tax Law was passed in February 2010 and applies to oil and gas companies operating in Federal Iraq

• Law provides for:

“An income tax of 35% of the income generated in Iraq shall be

imposed on contracts with foreign oil companies contracted to work in

Iraq… and its subcontractors in the field of oil and gas production and

associated industries.”

• Oil and Gas Tax Law is only a few lines long, and is supported by Instructions #5 of 2011 – “Oil & Gas Instructions”

Latest developments: others laws

• Hydrocarbon Law

• The following Laws are currently before Parliament or in last approval stages:

– Labor Law

– Telecommunications Law

– Comprehensive IP Law

– WTO Compliant Laws

• Technical Barriers to Trade

• Customs

• Services

Doing business in Iraq

Enforcement of contracts

John Kemkers

Partner, UK and Middle East

13 February 2014

Key legislation/treaties

• Civil Code

• Civil Procedure Code (“CPC”)

• Investment Law (“IL”)

• New York Convention (“NYC”)

• Riyadh Convention (“RC”)

Jurisdiction options

• Local courts

• Local arbitration

• Foreign arbitration

• Foreign courts

• Permitted by IL (Art 27(4))

Local courts

• Reasonably quick and efficient

• Court appointed experts

• Not for complex/high value disputes

• Enforcement:

– Straightforward in Iraq

– Difficult to enforce abroad

Local arbitration

• No arbitration law

• No recognised arbitration centres

• Enforcement

– Difficult to enforce in Iraq (Art 273 of CPC – “substantial error”)

– Difficult to enforce internationally (signatory to RC; not NYC)

Foreign arbitration

• Enforcement difficult in Iraq:

– Not signatory to NYC; signatory to RC

– CPC: no express reference to foreign arbitration

• Ease of international enforcement

Foreign courts

• Enforcement issues in Iraq

– Reciprocity/treaties

– UK - Iraq treaty

– RC: “public order” exception

– Easier than foreign arbitration awards

• Enforcement internationally

– Can be difficult to enforce

Preferred options

• DIFC/LCIA arbitration seated in the DIFC

– Enforcement outside Iraq (under NYC/RC)

– Should be enforceable in Iraq (ratify award in DIFC Courts, then enforce judgment under RC)

• Untested in Iraq

• UK Courts?

Questions