Douglas Badder and Sherry Sheibani, Associates, at Faegre Baker Daniels
Iran and the E3/EU+3 entered into a Joint Comprehensive Plan of Action (“JCPOA) on 14 July 2015, which specified that certain of the U.S, E.U. and U.N. sanctions against Iran would be lifted on “Implementation Day”. This was subject to the International Atomic Energy Agency (“IAEA”) verifying that Iran had complied with various agreed measures to reduce its nuclear programme. Implementation Day was confirmed on 16 January 2016, and the business community is now buzzing at the prospects offered by an “unsanctioned” Iran.
Iran has many characteristics which potentially provide a unique opportunity for investment and growth, including favourable demographics (e.g. a population of over 80 million with more than half under the age of 30, and an adult literacy rate of 87%), lucrative oil, gas and aviation industries, and a well-developed tech and knowledge sector. Iran has also been readying itself for foreign investment for some time. For example, in 2002, Iran passed the Foreign Investment Promotion and Protection Act, which enshrined various protections in favour of foreign investors. These include the repatriation of capital and profits and the settlement of disputes by way of arbitration (subject to certain conditions) rather than by referral to the Iranian courts.
Described by some analysts as an economy “set to be the biggest … to rejoin the global trading and financial system since the break-up of the Soviet Union over 20 years ago”, it is easy to understand why investors are excited. But is it truly full speed ahead for companies considering doing business in Iran? Not quite. There are still a number of important points to be aware of:
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- Not all of the E.U. sanctions have been lifted.
Although most of the E.U. sanctions relating to the financial, energy, shipping and precious metals sectors have been lifted with effect from Implementation Day, a significant number of sanctions will remain in place for at least five to ten years. These include the E.U. arms embargo and most sanctions relating to nuclear weapons/WMDs, human rights violations and terrorism. Businesses must therefore exercise caution to ensure that any proposed dealings are not prohibited by the remaining sanctions.
- U.S. sanctions remain largely unaffected.
Contrary to what may be expected, the majority of U.S. sanctions remain in place following Implementation Day. In particular, the U.S. trade embargo on Iran continues to generally prohibit U.S. persons from entering into business dealings with Iranian parties (subject to narrow exceptions). However, the U.S. has lifted certain secondary sanctions which allow non-U.S. persons (including non-US companies controlled by U.S. persons) to do business with Iran, but even these are subject to restrictions. Any U.S. persons therefore need to tread carefully before entering into any binding commitments relating to business dealings in Iran.
- Persons subject to financial sanctions.
Although certain names have been removed from the U.S. and E.U. restricted persons lists, many Iranian persons and entities (especially those with links to the Iranian government) continue to be subject to financial sanctions. E.U. persons are generally prohibited from making available, directly or indirectly, any funds or economic resources to such sanctioned persons or entities. Similar restrictions apply under U.S. law. Businesses will therefore need to conduct careful due diligence on customers and suppliers to verify that they are not restricted parties.
- Risk of snapback.
The lifting of the sanctions is still subject to Iran complying with its ongoing obligations under the JCPOA, which will be verified and monitored by the IAEA. Should Iran breach its commitments, the E.U. and the U.S. have reserved the right to immediately reintroduce the sanctions (known as “snapback”). It is unclear what effect this would have on foreign businesses that have already invested in Iran and/or entered into binding commitments with Iranian parties. Should snapback occur, it is likely to be very difficult or impossible to continue doing business in affected sectors in Iran.
Overall, the arrival of Implementation Day offers E.U. persons the opportunity to start doing business in Iran in certain key sectors. However, it is important that any investment be considered carefully and appropriate legal advice obtained in order to ensure compliance with the existing sanctions regimes. The importance of conducting thorough due diligence on all parties cannot be understated. Advice should also be sought on the most appropriate investment and tax structure to maximise foreign investment returns.