Protecting investments in a foreign country is a chief concern for international investors. In Iran, the government provides protection against a range of common risks through the FIPPA License.
In this article, we will take a closer look at different aspects of FIPPA and why it is important for foreign investments to receive a FIPPA license.
What is FIPPA?
The Foreign Investment Promotion and Protection Act a.k.a. FIPPA is the law designed to mitigate foreign investment risks in Iran.
Ratified in 2002, FIPPA promises to protect foreign investments in Iran. Also, the act provides a range of incentives for the investors and the projects that employ foreign funds.
Being a government guarantee, the investors must apply to the government organization to receive an investment permit. This license is known as the FIPPA license or the foreign investment permit.
The license is the highest guarantee that Iran provides to foreign investors. The Minister of Economic Affairs signs the license for every single approved case, so you get the government’s promise to protect your investments in the country.
Obtaining the permit is not mandatory for making any investments in Iran. However, you need to get the FIPPA license to benefit from FIPPA’s coverage and incentives.
The good news is that you can apply for the FIPPA license at any stage during your investment in Iran. You can obtain the permit before you bring the capital into the country, during the transfer, or even after you have made your investments.
What Are the Risks That FIPPA Doesn’t Cover?
Before we get to what you should expect from FIPPA, it is necessary to understand what you should not expect from it. We have seen many investors looking for a thorough coverage against risks of investing in Iran. But, FIPPA is not a solution for all of your concerns.
So, what are the primary risks that FIPPA does not insulate you against?
FIPPA does not protect you against currency depreciation
FIPPA will guarantee the amount of cash or the value of equipment that you import into Iran. What FIPPA guarantees is to provide you with the foreign currency needed to repatriate your investments at any time you wish.
However, it does not guarantee to cover you against exchange rate fluctuations. So, when does it hurt your investments?
Under FIPPA, you have the permission to repatriate the principle and profits without the regular currency limitations. To get the currency, you have two options:
- If your company in Iran is earning foreign exchange through exports of goods and services, you can use that money to extract your investments. Here, you are not exposed to any exchange rate risks.
- But, if you are making money in the local currency, you must purchase the foreign currency. FIPPA allows you to buy the currency either from the free market or from the national banking system. Since there is no fixed rate, if the IRR experiences depreciation, you will lose money.
So, it will be in your best interest to find solutions to shield your investments against exchange rate swings.
FIPPA is NOT a sovereign guarantee for non-governmental buyers
In contractual arrangements, i.e., BOT, BOO, etc., the off-taker’s defaulting creates a huge risk on the feasibility of the project. It is a standard practice for governments to undertake the buyer’s commitments in case of such defaults.
The FIPPA license does act as a sovereign guarantee if your project’s off-taker is Iran’s government or one of its affiliate organizations. However, if you are selling the project’s output to a private-sector company, you will not receive any protection under FIPPA.
What Are the Risks That FIPPA Covers?
Now that you know what you should not be expecting from the FIPPA license, it is time to take a look at the mitigated risks.
The license covers you against nationalization
In the past few decades, after Iran’s revolution, nationalizations and expropriations have occurred quite rarely. So, you don’t need to worry about losing your business. But, having the insurance against it is a relief.
Under FIPPA, you are guaranteed that in cases of nationalizations and expropriations, the government will compensate you fairly. How?
If the government expropriates your business, it commits to paying the company’s value the day before the expropriation happens. To get the compensation, the investor must apply for receiving the payment within one year of the seizure.
The government guarantees to facilitate your extraction of investments, both the principal and the profit
If you decide to extract your investments from the country, the government promises to facilitate the process. You will have the permission to repatriate the principal and profits that your investments produced without any restrictions.
As the first step, an auditor firm will assess your investment’s performance and determine how much profit you made. You will then obtain the foreign exchange either from your company’s cash or from the banking system. If you have IRR and need to buy the foreign currency, the government obligates the central bank to provide you with the needed cash.
Also, you can repatriate your investments in the form of commodities/products if you find it more attractive.
But why is this facilitation significant?
Because the Iranian regulations place strict limitations on the amount of foreign exchange one can extract from the country. So, if you are an investor and you ever decide you want to repatriate your money, you will face a huge problem. Having the FIPPA license, allows you to get your money out of the country comfortably.
FIPPA is a sovereign guarantee if you are selling to the government
In a project finance arrangement, it is crucial to cover the risks of the off-taker’s default. Having a guarantee against this default will considerably reduce the investment’s risks and decrease the costs of financing.
The government owns many large-scale projects in Iran. Foreign investors in sectors such as oil and gas, petrochemicals, transportation, and power plants can instantly benefit from the added security that FIPPA provides to them.
Also, some projects in the renewable sector, i.e., solar plants and wind plants, where the buyer is the government can rely on FIPPA as a sovereign guarantee.
The government promises unrestricted export of your products
You may invest in a company with a focus on exporting them to another market. If you have the FIPPA license for your investment, the government guarantees that you will not face any restrictions on exports.
What Are Other Incentives Offered by the FIPPA License?
Aside from mitigating investment risks, the license provides investors with a broad range of incentives. The following provides a quick overview of the incentives provided by the investment license.
- Your investments will receive the same treatment that a local investment receives. So, the government guarantees that you will not experience discrimination when dealing with government organizations.
- If you are a foreigner and have obtained the license, you will get residence and work permits for three years. Moreover, you can apply to get residence and work permits for your family, managers, and staff.
- If you reinvest your earnings back into the project, you can conveniently ask for increasing the covered capital in your investment license.
- Transfer of cash or non-cash investments into the country will not need any other permits. That means you can use your FIPPA license to clear the machinery/equipment from Iran’s customs.
Who Can Apply for the FIPPA License?
The license is for everyone who wants to invest in Iran using foreign funds. The only restriction is that the source of the capital must be external. So, an Iranian investor who can prove his/her money comes from outside Iran can benefit from the investment license.
You can apply for a FIPPA license if you are trying to do one of the following with capital that comes from outside Iran:
- Setting up a company using foreign capital
- Purchasing shares of an Iranian company
- Trading in Iran’s exchange markets
- Investing in a project in Iran, either through Foreign Direct Investment (FDI) or contractual arrangements, i.e., Buyback, BOT, Civil Partnership, etc.
You can apply for the license either as an individual person or as a company.
The government imposes no restrictions on where you can invest. Investments in any line of legal business in Iran are eligible for receiving the investment license.
Moreover, there is no restriction on the ownership of the project/company, meaning that you can own up to 100% of the investment.
Recently, the government introduced a minimum required capital for issuing the investment license. As of April 2017, the minimum required capital was $300,000. However, it is crucial to check with the government to get the latest amount.
What is the Procedure for Obtaining the License?
The Organization for Investment, Technical and Economic Assistance in Iran a.k.a. OITEAI is in charge of reviewing and issuing the FIPPA license.
To get the permit, you will need to apply to the OITEAI and provide the following information:
- Business plan including project’s specification, timelines, investment amount, sales projections, and the target market;
- Information about yourself as the investor and your operations outside of Iran.
The OITEAI team will review your case and decide whether or not you are eligible for getting the FIPPA license. As the last step, after you get the OITEAI’s approval, the Minister of Economy will sign the permit.
The whole process takes between 4-6 weeks if you submit the necessary documents and fill out the right forms in time.
What are the accepted investment items and how will OITEAI determine their value?
- Foreign currency
- Machinery and equipment
- Tools, spare parts, CKD and SKD parts, raw materials, and additives
- Patents, technical knowledge, brands, trademarks, and specialized services
- Transferrable dividends
- Other items with the approval of the government
If you have already made the investments, the OITEAI will require you to provide them with the bank transaction documents or the documents that show you have imported the non-cash capital into Iran.
But, how does the OITEAI determine the investment license amount?
- Cash (No. 1 in the above list): The amount of the money that you transfer to Iran, will be covered in the investment license at the date of transfer.
- Machinery, equipment, parts, etc. (No. 2 and 3 in the above list): The customs evaluation of the imported items will be covered in the investment license. The customs value will also include the freight and insurance costs of transmitting the items to Iran.
- Patents and other intangible assets (No.4 in the above list): The OITEAI will evaluate the assets and determine the value to cover in the investment license.
- Dividends (No. 5 on the above list): The OITEAI will add the dividend amount to the FIPPA license if you reinvent the dividends in the business.
If you are contemplating making investments in Iran, you should consider applying for the FIPPA license. This permit will accelerate your business in Iran through ridding you of the need to obtain multiple permits for your investments.
Although the investment license will not cover all of your risks, you will enjoy higher credibility for your project in Iran. You will also get direct assistance from the government should you get lost in the Iranian bureaucratic procedures.
If you have any questions about the license or your investments in Iran, feel free to contact us.