Iran Sanctions Agreement
The 14th July announcement that the Islamic Republic of Iran and the E3 + 3 nations (the United States, Great Britain, France, Germany, Russia and China, together also known as the P5 + 1) have, after long running negotiations, entered into a comprehensive agreement whereby Iran accepted substantial limits on its ability to develop nuclear technology, in exchange for the E3 + 3 nations withdrawing the crippling regime of economic sanctions against Iran.
The so-called Joint Comprehensive Plan of Action (JCPOA) must be formally approved by the primary nations and international bodies that are parties to the agreement and which have enacted varying levels of sanctions, before it can go into effect. The first step in this process took place when the United Nations Security Council issued Resolution 2231 on 20th July 2015, endorsing the JCPOA, calling for its member states to take the requisite steps to implement the plan, and directing the International Atomic Energy Agency (IAEA) to verify that Iran has taken the steps set forth in the JCPOA to ensure that all of nuclear activities are peaceful within the meaning of the JCPOA. Once the IAEA certifies to the Security Council that Iran is in compliance, the various UN Resolutions sanctioning Iran will be terminated.
Assuming the JCPOA is approved by Iran, the Agreement’s formal “Adoption Date” will be in mid-October. The process thereafter is that Iran will provide the IAEA with proof of its compliance with the relevant terms of the Agreement. Under the terms of the Agreement, the IAEA then has until December 15, 2015 to certify compliance to the Security Council, at which time the signatory parties are expected to implement the Agreement.
This means that sanctions are likely to be lifted in late 2015 or early 2016. At that point, sanctions which have cut Iran off from the international financial system will be lifted, as will sanctions related to its industries engaged in shipping, oil and gas, certain transportation activities, insurance, and trade in key raw commodities.
Implementation of the Agreement does not mean that all sanctions will be lifted. Most importantly, certain US OFAC sanctions relating to terrorism and human rights considerations will not be affected by the Agreement. This means that the majority of US sanctions that prohibit US Companies and US Persons from doing business in Iran will remain in effect, and most US entities will still be prohibited from entering the Iranian market.
European companies, however, will have a much easier time in doing business in Iran, as the EU sanctions that remain are far less intrusive than the remaining US sanctions, and many of the US “secondary” sanctions that currently have extra-territorial effect on non-US companies will also be lifted.
Additionally, the Agreement states that sanctions relating to Arms and Ballistic Missile provisions will extend for another five to eight years. Certain companies, as well as some individuals affiliated with the Iranian Revolutionary Guard Corps (IRGC) will have sanctions continue to apply for an eight year period, and in the case of US sanctions, indefinitely. The IRGC owns or has a controlling interest in many companies, and some of their holdings have been specifically named by the US Treasury as Specially Designated Nationals (SDNs), for which the outlook as to whether sanctions will be lifted is extremely doubtful.
The Agreement also provides for a “snap back” of sanctions should Iran later be found in violation of any of its obligations under the Agreement, as well as a Dispute Resolution process setting forth a method for settling any disputes that might arise.
It should be recognized that the JCPOA does not have the legal standing that an international Treaty has. This means that it might be more susceptible to geopolitical considerations and events, as well as action by the various parties to modify their obligations, depending on that nation’s view of the Agreement. This is a risk factor that needs to be considered by market entrants.
What next for businesses?
For any business considering entering into the Iranian market, in addition to the above issues, the key points to consider are:
• Due diligence on potential Iranian partners must be thorough to ensure that any potential partner is not doing business with an entity or individual who might still be exposed to sanctions after the implementation of the Agreement.
• Whether the company wishes to establish a legal entity in Iran, or work through a representative in Iran.
• If the company chooses to establish itself as an entity in Iran, they will need to determine if a separate company, branch office, or Representative Office is most appropriate for its particular business model. There are differing tax consequences and processes for establishing these forms of businesses. It should be noted that foreign ownership of companies in Iran is permitted, unlike some MENA jurisdictions that require at least 51% local ownership.
• Employment of its own personnel or Iranian nationals. It is much easier under Iranian employment law to hire Iranian citizens and correspondingly more difficult to employ foreign citizens. The Iranian Labor Code includes various restrictions on foreign workers, including visa requirements that impose a precondition that work permits will be issued only when “there are no qualified Iranian citizens with similar specialization who are ready to perform the work in question”, and “the expertise of the foreign citizen is used to train Iranians with a view to the eventual substitution of the foreign citizen by a trained Iranian.”
More generally, businesses interested in operating in Iran will need to follow the progress of the Agreement’s implementation and the various nations’ lifting of sanctions. This will include monitoring the OFAC lists of SDN’s. Businesses should also closely monitor ongoing developments even after establishing in Iran in order to mitigate the risks of any potential snap back provisions. Iran has the potential to be an extremely attractive destination for investors – already one of the world’s largest markets in Islamic finance with low debts, rising income levels, plentiful natural resources and a young and highly educated population, the opportunities for businesses in all sectors are numerous, with a gap in the market for goods and services that are currently under-serviced in Iran. New entrants who can mobilise quickly and efficiently will be able to reap the benefits of early market entry.