German Business Network (GBN)
Webcast – Iran: Everything possible again?
September 1, 2016
Page 2
German Business Network (GBN)
GBN Webcast - Iran: everything possible again? (c) 2016 EYGM Limited
Naveed Ahmed Jeddy
Partner Business Tax Services
Ernst & Young Middle East
Kingdom of Bahrain
Office: +97317514940
Mobile: +97339970541
Mail: [email protected]
Your contacts for all Iran matters:
Tino Boller
Partner International Tax Services
Phone: +49 211 9352 22276
Mobile: +49 160 939 22276
Mail: [email protected]
Page 3
Your hosts today
GBN Webcast - Iran: everything possible again? (c) 2016 EYGM Limited
Dirk Egbers
Partner Global Leader of the German Business Network (GBN)
Phone: +49 211 9352 18500
Mobile: +49 160 939 18500
Mail: [email protected]
Tino Boller
Partner International Tax Services
Phone: +49 211 9352 22276
Mobile: +49 160 939 22276
Mail: [email protected]
Dirk Nolte
Senior Manager International Tax Services, German Tax Desk London
Phone: +44 20 7951 6335
Mobile: +49 160 939 16718
Mail: [email protected]
Amit Zutshi
Partner
Leader – Strategy Middle East & North Africa
Ernst & Young Middle East
Mobile: +971 561 777 280
Mail: [email protected]
Page 4 Doing business in Iran
AGENDA
Political Environment and Status of Sanction Lift
Business opportunities in Iran
Taxation in Iran Regulatory aspects of doing business in Iran
Page 5 Doing business in Iran
AGENDA
Political Environment and Status of Sanction Lift
Business opportunities in Iran
Taxation in Iran Regulatory aspects of doing business in Iran
Page 6 Doing business in Iran
The Joint Comprehensive Plan of Action overview
► The P5+1 (Security Council members plus Germany) and
the European Union (EU) negotiated a rollback of
sanctions in exchange for a commitment by Iran to cease
certain nuclear-related activities.
► The Joint Comprehensive Plan of Action (JCPOA)
provides for phased sanctions relief based on the
achievement of certain milestones by Iran.
► The first, and most significant, phase of sanctions relief
came into effect on 16 January 2016.
JCPOA
Page 7
US companies
► The JCPOA does not significantly affect the primary US trade embargo:
Trade between US and Iran remains prohibited
US dollar-cleared transactions still restricted (no “U-
turn” payments)
Limited exception for Iran-origin carpets and
foodstuffs
Favourable licensing policy for civilian aircraft and
related services
► This means US persons must not deal, directly or indirectly, with:
The Government of Iran and its controlled entities
Companies and individuals in Iran
Goods and services of Iranian origin or for export to
Iran
Iran-related Specially Designated Nationals (SDNs)
or Foreign Sanctions Evaders (FSEs)
► Primary sanctions also apply to foreign companies acting in the US, or their dealings with US companies and individuals.
► Most secondary sanctions, which seek to restrict non-US companies from trading with Iran, are now waived.
► Remaining secondary sanctions target transactions with:
Iranian persons on the SDN List
The Islamic Revolutionary Guard Corps (IRGC)
Persons placed on the SDN List in connection with
Iran’s proliferation of weapons of mass destruction
or their means of delivery
Persons placed on the SDN List in connection with
Iran’s support for international terrorism
► Secondary sanctions may also apply to sales of graphite, semi-finished metals (including aluminium and steel) and industrial process software.
Non-US companies
Page 8 Doing business in Iran
Can I pursue business opportunities in Iran?
► Non-US subsidiaries of US companies may now pursue a wide
range of Iran-related business opportunities and enter into
agreements with Iranian persons.
► However, US persons remain prohibited from engaging in or
facilitating Iran-related transactions.
► Non-US subsidiaries must ensure that they act independently of
the US parent, affiliates and personnel in all Iran-related business.
► Yes – most businesses are now permitted to do business with
Iran.
Page 9 Doing business in Iran
Can US dollars be used for Iran-related business?
► Non-US companies are not prohibited from conducting business in US dollars involving Iran, including providing US bank notes to Iran:
However, they are prohibited from directly or indirectly exporting US financial goods and
services, such as US dollar clearing, to Iran.
► US financial institutions and their non-US branches remain prohibited from conducting any Iran-related business, even indirectly:
This prohibits the use of US banks for dollar clearing in support of any Iran-related transactions.
Also, we may continue to see broad prohibitions in US banks’ lending agreements on doing
business with Iran, even if the borrower is permitted to do business with Iran (e.g., a non-US
borrower).
► US and international Anti Money Laundering (AML) authorities, Financial Crimes Enforcement Network and Financial Action Task Force continue to identify Iran as a high-risk jurisdiction for money laundering and terrorist financing.
► Therefore, there are significant practical difficulties in using US dollars.
Page 10 Doing business in Iran
► EU Member States agreed to an accelerated mechanism – no
consensus is required.
Can these sanctions “snap back”?
Yes, the JCPOA provides for a snapback of both the US and EU sanctions in the event
that the resolution procedures of the JCPOA fail to address concerns with Iran’s
compliance.
► The Office of Foreign Assets Control (OFAC) guidance states that:
A snapback would be clearly communicated to the public in advance.
Permissible activity taken prior to a snapback would not be retroactively penalized.
The US Government would work with companies to minimize the impact of a snapback on legitimate Iran-related activities already undertaken (i.e., potentially authorize a “wind-down” period).
Page 11 Doing business in Iran
AGENDA
Political Environment and Status of Sanction Lift
Business opportunities in Iran
Taxation in Iran Regulatory aspects of doing business in Iran
Page 12 Doing business in Iran
632,1
396,9 339,1
286,4
192,1 165,1
123,2
60,2 54,4 38,2 30,9
KSA Iran U.A.E Egypt Qatar Iraq Kuwait Oman Lebanon Jordan Bahrain
US
D b
illio
ns
Iran is one of the single biggest growth opportunity in MENA today
MENA 2015 Nominal GDP with 2020 forecasted Real GDP growth
Source: IMF
Additional potential
growth due to removal of remaining sanctions
3.1%
4.3%
3.3%
1.7%
2.7%
7.5%
3.8%
4.7%
3.5%
4.3%
2.9%
Real GDP
growth
Page 13 Doing business in Iran
There are a number of attractive verticals of opportunity
4 to 5 year growth outlook
Se
cto
r s
ize
(c
on
trib
uti
on
to
GD
P 2
01
4)
Medium High
0%
20%
Oil &
gas
Restaurants and
hotels
Manufacturing
Agriculture
Construction
Transport and
communication
Power and utilities
Pharmaceuticals: 12.2%
Automotive: 12.5%
Low growth attributable
to concentration of
domestic players
Mature
sectors with a
stable growth
Financial services
Retail and
consumer
products
Page 14 Doing business in Iran
Some sectors are favoured by the government and would provide a faster path to profitability
Exploration
Exploration
http://www.forbes.com/sites/drillinginfo/2016/02/29/ira
n-post-sanctions-oil-gas-opportunities-and-
challenges/#3ecb3786456a
Mining
https://en.wikipedia.org/wiki/Mining_in_Iran
Petrochem
http://theiranproject.com/blog/2016/03/17/iran-
petchem-industry-ready-foreign-investment/
Chemicals
https://companylist.org/Iran/Chemicals/
Pharma and food
https://en.wikipedia.org/wiki/Industry_of_Iran#Food_i
ndustry
Exploitation
Metals and metallic goods
Non-metallic minerals
Petrochemicals
Chemicals
Polymers
Cellulose
Food industry Pharma
Textile & garments
Electronic devices
Household appliances
Machinery & equipment
Medical
equipment
Automotive Trade
Consumer led
Private led
Government
led
Resource led Value added
Page 15 Doing business in Iran
Industry Key Players
Financial Services
Bank Mellat, largest commercial bank; 1600+ branches
Bimeh Iran - USD 1 bn. gross premium
Automotive
Iran Khodro, largest auto manufacturing company, Revenue - USD 12.8 bn.
SAIPA, second largest auto manufacturer, Revenue - USD 7.1 bn
Food &
Agriculture Solico food industries, Revenue USD 1 bn;
1,800+ products predominantly in dairy Dasht Group, large player in canned food, processed fruits and vegetables market
Construction and
energy MAPNA group, largest contractor for power and
industrial projects, Installed capacity of 35K MW Iran marine industrial company; one of the large construction players for energy sector
The market is characterised by strong incumbents
Steel
manufacturing Mobarakeh Steel Company, large steel player.
Total revenue USD 3,971m
Khouzestan Steel Company, large
steel player
Page 16 Doing business in Iran
You should however consider a number of challenges in relation to your market entry
Structural
Red tape
Banking system
Tax and licensing
regimes
Political risks
Commercial
Transparency
Related party
relationships
Lack of reliable data
Two currencies
Soft factors
Cultural approaches
Language
Low productivity
Relationships
Page 17 Doing business in Iran
The timeline is short as some of the key global players are considering entering Iran
Present in Iran Interest in Iran
Sources: Business Insider, and www.iranoilandgas.com
Page 18 Doing business in Iran
There are a number of key success factors that would determine your success in your market entry into Iran
Right market
entry
structure
Right
business
model
Deep
understanding
of on-ground
situation
Right
local
partners
Right
timing
Right
geographical
locations
1
Success!
Page 19 Doing business in Iran
To summarize…
Iran has a vast potential of
opportunities due to its large
population and economic
independence from the global market
Significant market
opportunities
1
Interest to enter the Iranian market
has vastly accumulated since 16
January 2016 with first-entry window
opportunities narrowing each month
Early mover advantage
3
There are a number of investment
opportunities, both greenfield /
organic and inorganic / M&A
opportunities
Multiple investment
opportunities
2
Given the special circumstances in
Iran, evaluating market entry and
strategy is critical to ensure success
and growth
Different landscape with its
unique challenges
4
Page 20 Doing business in Iran
AGENDA
Political Environment and Status of Sanction Lift
Business opportunities in Iran
Taxation in Iran Regulatory aspects of doing business in Iran
Page 21 Doing business in Iran
Regulatory framework to do business
Global
Competitiveness
►74/140
Paying Taxes
►123/189
Corruption
►136/174
Ease of Doing
Business
►118/189
Network
Readiness
►96/143
Sources: World Bank Group, World Economic Forum, Transparency International
Page 22 Doing business in Iran
Foreign Investment Promotion and Protection Act
(FIPPA)
Foreign Investment
Service Centre (FISC)
Regulatory framework to do business
FIPPA sectors
► Agriculture, fishing and
forestry
► Mining
► Manufacturing
► Water, electricity, gas
► Construction
(foundations, housing,
materials)
► Transport and
communications
► Services (financial,
tourism, education)
► Licenses, permits and
visa
► Company registration
► Import and export
matters
► Customs and tax
matters
FISC: Organization for
the encouragement,
rationalization and
facilitation of foreign
investment
Protection for foreign
investors
Capital is guaranteed
against nationalization and
expropriation
Additional benefits depend
on sector
Simplified procedures start
with filing an application
form in English
FIPPA License is now usually issued within 60 days
Page 23 Doing business in Iran
Regulatory framework to do business Legal forms for foreign business activities
Branch Private joint
stock company
Limited Liability
Company (LLC)
Legal personality Yes Yes Yes
Minimum number of person
to set up 1 3 2
Permitted activities Limited Not limited Not limited
Minimum capital None IRR1 million
(US$30) No minimum
Ease of registration Easy Easy Easy
Working visa and permit for
employees Yes Yes Yes
Physical address in Iran Yes Yes Yes
100 % foreign ownership possible
No local shareholder requirement
Page 24 Doing business in Iran
► Major international banks still refuse to
engage in Iran operations
► Mid-sized European and Asian banks
with no US exposure resume
operations
► SWIFT has completed on-boarding
process for non-sanctioned Iranian
banks
► German Hermes export guarantees
available again for Iran trade
Currency: Iranian Rial (IRR)
► Two different exchange rates
► Strict exchange control with regard to
transfer of money outside Iran.
► Foreign currency received by Iranian
banks can only be paid out in cash in
Iranian rials at the official CBI
exchange rate
► Exchange houses use the free market
rate on inbound and outbound foreign
currency transactions
► Based on recent trends, the official CBI
rate and the free market rate differ by
around 15%
Regulatory framework to do business Financing and banking
Government targets to unify currency
conversion rate by end of March 2017
Key Islamic finance player which
holds over a third of the estimated
total of Islamic banking assets
Page 25 Doing business in Iran
► Protection of foreign investment
► Free entry/exit of capital and profits
► Easy entry and visa processes
► Corporate tax exemption
► Salary tax exemption
► Customs and VAT benefits
► Exemption from price regulation for
goods manufactured in SEZs, as well
as raw materials and those imported
as completely knocked down (CKD)
units
► No application of general import–
export laws for all goods imported into
SEZs
► Exemption from corporate income
tax for 5 years possible depending on
location and sector of activity
► Customs and VAT benefits for
activities performed in SEZs and
imports from foreign countries
Regulatory framework to do business Incentives: FTZ and SEZ
15 Special Economic Zones 7 Free Trade Zones
Page 26 Doing business in Iran
AGENDA
Political Environment and Status of Sanction Lift
Business opportunities in Iran
Taxation in Iran Regulatory aspects of doing business in Iran
Page 27 Doing business in Iran
Structuring the Iran business Available legal forms
Branch Private joint
stock company
Limited Liability
Company (LLC)
Legal personality Yes Yes Yes
Minimum number of
person to set up 1 3 2
Permitted activities Limited Not limited Not limited
Minimum capital None IRR1 million
(US$30) No minimum
Ease of registration Easy Easy Easy
Working visa and permit
for employees Yes Yes Yes
Physical address in Iran Yes Yes Yes
100 % foreign ownership possible
No local shareholder requirement
Page 28 Doing business in Iran
Iran Tax System Main features for Subsidiaries and Branches
25 % Corporate Tax Rate
Tax Holidays for
certain activities
0 % Dividend
Withholding Tax
Worldwide income
taxation of Iran
resident companies
Unlimited tax loss
carryforwards No loss carryback
Taxable Income
based on local
statutory
accounts
Corporate tax
filings 4 month
after end of the
fiscal year
No BEPS relevance
for Iran tax legislation
Page 29 Doing business in Iran
Tax Incentives for foreign investors Tax exemptions and incentives under the direct taxation law and other legislation
Activity Effective Income Tax
Exemption (%)
Duration of exemption Incentive type
Agriculture 100 Perpetual Permanent exemption
Industry and mining 100 5 years Tax holiday
Industry and mining in less
developed areas
100 10 years Tax holiday
Hospitals, Hotels, Tourist
accommodation facilities
100 5 years (10 years if located
in areas designated as
less developed)
Tax holiday
Export of locally manufactured
non-oil goods
100 Perpetual Permanent exemption
Handicrafts 100 Perpetual Permanent exemption
Educational and sports services 100 Perpetual Permanent exemption
Cultural activities 100 Perpetual Permanent exemption
Salaries in less developed areas 50 Perpetual Tax credit
Income from licensed economic
activities in FTZ
100 30 years Tax holiday
Page 30 Doing business in Iran
Iran Tax System Activities without local presence
Withholding Taxes
on cross border
payments
Technical Training and Assistance 3.75 %
Design and Engineering Services 5.00 %
Construction activities 5.00 %
Oil & gas services 5.00 %
License fees and royalties 5.00 % - 7.50 %
Other services 7.50 %
Page 31 Doing business in Iran
Key Features Tax Treaty
Signed 1968
Model Treaty Basis 1964
Construction PE 6 Months
WHT Rates (%) D/I/R 15-20/15/10
Employment Income 183 days (tax year)
Method Exemption
Sparing Credits
Page 32 Doing business in Iran
Individual Taxation and Social Security
Overview Salary Tax
Individual taxation Progressive rates of tax for employment
income
Top rate of 20% for income over IRR
1,248m (approx. US$41K)
Tax treaties There are comprehensive DTAs with 42 countries in force
Withholding ► Obligation starts for employees with Iranian work permit at day 1
► Local employees of foreign companies without local presence need local sponsor
► No salary tax on employees working in FTZ
All employees working in Iran should be covered under the national social
security contributory scheme.
► Social security levies on incomes up to a certain
ceiling (currently IRR 50 million per month)
► Employee’s contribution – 7%
► Employer’s contribution:
23% for Iranian employees
20% for expatriates
► Accident insurance payable by the employer on
expatriates without social security
► 3% – deductible from salaries
Expatriate employees might be exempted from Iranian social security contributions if
they can prove to the Social Security Organization (SSO) that they are insured under
a similar scheme in their country of domicile. Important
Page 33 Doing business in Iran
Questions and Answers
Page 34
The better the question. The better the answer.�The better the world works.
Thank you.
Page 35 Doing business in Iran
Disclaimer
► This material has been prepared for general informational purposes only and is not
intended to be relied upon as accounting, tax or other professional advice. Please
refer to your advisors for specific advice.
► The views expressed by the presenters are not necessarily those of EY.
► This presentation is © 2016 EYGM Limited. All Rights Reserved.
Circular 230 disclaimer
► Any US tax advice contained herein was not intended
or written to be used, and cannot be used, for the purpose of avoiding penalties that
may be imposed under the Internal Revenue Code or applicable state or local tax law
provisions.
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