By the verdict of the General Board of the Administrative Justice Court of Iran, legal entities are required to obtain a license from the Bar Association or the Judicial Advisory Center for Legal Affairs from now on if the wish to engage in providing legal services.
According to the former circular of director-general of Company Registration Office, there was no need for legal entities to obtain a license from mentioned institution. This circular was misused for the registration of legal entities without the presence of an attorney or a legal counsel paves the way for the involvement of non-specialized persons and will bring harm to the public.
The legal basis for this verdict is to protect people’s rights and to exercise their rights to be consulted by persons who are specialized in this matter.
According to the current tax regulation by the government of Iran (Direct Tax Act) Residential units located in cities -which are identified as “Unoccupied” based on the information derived from the National Database of Real Estates and Housing of the Direct Act- shall be subject to the rental income tax.
Recently the government has taken steps for the activation of the National Database and this move shows that the government is eager to receive this kind of tax from unoccupied houses and apartments.Calculation of such tax is based on following formula:
– For the second year: an amount equivalent to one-half of the due tax of the Properties Schedule;
– For the third year: an amount equal to the due tax of the Properties Schedule; and
– For the fourth year onward: an amount equivalent to 1.5 times the due tax of the Properties Schedule.
The Iranian government is planning on launching this National Database by the end of the current Iranian calendar year (March 19, 2020). It is estimated that there are more than 2.6 million empty homes, a figure which is three times more than the global average.
Perhaps one of the first questions for starting a business concerns the corporate structure of the business. In this regard, it is necessary to fully identify the available corporate vehicles and then proceed to establishment of company. This article provides a short comparative study of two important corporate vehicles under the Iranian law.
A. Corporate Vehicles
Legal or natural persons whether Iranian of foreigner can establish a company in Iran under the Commercial Code. The Commercial Code has provided the following corporate vehicles:
• Public Joint Stock Company (Sherkat Sahami Aam);
• Private Joint Stock Company (Sherkat Sahami Khas);
• Limited Liability Company (Sherkat ba Masouliyat Mahdoud);
• General Partnership (Sherkat Tazamoni, cooperative partnership);
• Limited Partnership (Sherkat Mokhtalet Gheyr Sahami);
• Joint Stock Partnership (Sherkat Mokhtalet Sahami);
• Proportional Liability Partnership (Sherkat Nesbi);
• Production and Consumption Cooperation Company (Sherkat Tavavoni Tolid va Masraf).
In practice most persons choose either the Private Joint Stock Company (PJSC) or the Limited Liability Company (LLC) mainly because in both vehicles the liability of shareholders is limited to value of their share. In general LLC is contemplated to be appropriate for trading and small investments and PJSC is suitable for large investments or joint ventures. In any case selecting either vehicles require studying and reviewing the business plan and also legal framework of the business sector since for example in some sectors the only available option is PJSC.
B. Limited Liability & Private Joint Stock Company in a Glance
Limited Liability Company (Sherkat ba Masouliyat Mahdoud) is formed between at least two partners whether individual or company. The main characteristic of such company is that liability of shareholders is limited to the amount contributed to the company capital. Also, capital is divided into partnership portions and not shares. The term “Limited Liability Company” must appear immediately before or after the company’s name; otherwise, if it does not appear in the aforementioned manner, the company shall be considered as a general partnership. The name of the company must not include the name of any partners, otherwise the partner whose name appears will be considered as a member of a general partnership with unlimited liability towards the third party. Regarding management, LLC may be managed by one or more directors, with or without salary from within the partners or outside of their circle for unlimited period. LLC has a distinct and independent legal personality and is able to start proceedings against others and also it may be sued.
Private Joint Stock (Sherkat Sahami Khas) shall consist of at least 3 shareholders. The capital is divided into shares and the liability of each shareholder is limited to the nominal value of their shares. Like the LLC, PJSC enjoys from a separate legal personality which is distinct from its shareholders. Consequently, personal property of shareholders is immune from debts of the company and no creditor may be able to use such property for payment of debt. Also, due to distinct legal personality of such company, it may sue others and it may be sued. As it is inferred from the term “private”, shares are not offered to the public. Transfer of shares may be restricted in articles of association. Furthermore, the term “Private Joint Stock Company” must be appeared immediately before or after the name in a legible printing in all letter heads, notices and etc.
Although liability of the shareholders in both LLC and PJSC is limited to their shares, these two company types have the following differences:
• LLC is based on an old law which has been enacted in 1928 and does not contain detailed provisions on governance of the company and overall is not transparent enough for third parties. On the other hand, PJSC is governed by relatively newer regulations enacted in 1969. Such law contains detailed regulations on the internal structure and decision making of the company and is more appropriate for investment;
• In LLC, there should be at least 2 partners but if shareholders are more than 12 persons, then a Inspector Board shall be formed in accordance with article 109 of the Commercial Code. However, in PJSC, there should be at least 3 partners and inspectors shall be appointed in any case;
• LLC may have paid or unpaid directors or director for unlimited period from among or outside of the shareholders. In contrast, A PJSC may have paid or unpaid directors or director for a limited period, only chosen from among the shareholders;
• On the one hand, LLC governance structure is comprised of a General Assembly of Shareholders and Directors; If the shareholders are more than 12 persons, then appointment of an Inspector Board is mandatory. On the other hand, PJSC governance structure is comprised of General Assembly of Shareholders (Founding, Ordinary or Extraordinary), Director or Board of Directors and also inspectors;
• In accordance with Iranian Commercial Code, in PJSC one-twentieth (1/20) of gross profit shall be deducted as “Legal Reserve Fund” until such Reserve amounts to one-tenth (1/10) of the company capital; after that this requirement would not apply. However, no such provision applies to LLC;
• LLC shall be dissolved by the decisions of the shareholders who own more than 50 percent of the capital. But PJSC may be dissolved by convening an Extraordinary General Assembly meeting and passing a resolution on dissolution of the company, the company goes into the process of liquidation; for this purpose, a liquidator shall be chosen by the said assembly and usually takes around 2 years to finish the liquidation;
• In Joint Stock Company we have the concept of subscribed share capital which means although the shareholders must subscribe 100% of the capital, only 35% of the company’s capital need be paid at the time of formation. In LLC, all the capital must be acknowledged to have been received by the directors but no amount shall be paid at the time of formation;
C. Registration Procedure
In this part, an overview of the company registration has been provided. There is no difference between PJSC and LLC from registration point of view EXCEPT in PJSC 35% of the capital shall be paid to the bank in the process of formation. The practical phases are:
• Documents Preparation: The applicants are required to prepare some documents for the purpose of registration;
• Translation: In case of foreign applicants whether company or individual, all documents shall be translated by certified and official translator;
• Obtaining FIDA Code: In case of foreign applicants, FIDA is an identification code given to foreign natural and legal persons regardless of their title whether partner or manager or inspector; such code is issued by Iranian Tax Administration based on the information of such persons and their ID cards;
• Online Registration: Upon preparation and/or translation of all required documents and obtaining FIDA code, online registration of the company will begin.
• Signing the Documents: After online registration, the applicant shall sign all relevant documents; such documents shall be mailed to Company Registration General Office. After check and control of documents by the Office, the company registration applicant shall pay all costs and fees to obtain registration code and official newspaper.
A brief introduction on LLC and PJSC was provided in this essay; more detailed and elaborate insight on such corporate vehicles requires a deep and thorough analysis of the contemplated business. As a result, it is necessary to make decision in regard to company registration in accordance with the business plan and also legal advice.
Renewable energies including solar energy would play an important role in future of power generation. In this regard a brief introduction on some of the legal elements of construction of solar power plants has been provided in this article. This essay does not reflect the full picture but only provides a glimpse.
A. Protective & Promotional Governmental Policy
Iran is situated in a highly suitable location for generation of power from solar energy. According to studies, 90% of the country has enough sun to generate solar power 300 days a year. To fully utilize this geographical position, the Iranian government has taken a very protective and promotional approach towards construction of solar power plants. In this regard, one of the key applicable instruments is National Instrument on Iran Energy Strategy adopted and approved by Energy Supreme Council which is headed by the Iranian president. In this instrument, paucity of renewable energy share in Iran power sector is recognized as a challenge of power sector. To overcome this challenge, it sets forward macro-objectives of power sector which includes:
• Diversification of energy resources;
• A shift from oil and gas as financial sources of budget to investment resources with emphasis on renewable resources.
To achieve such objectives, the following strategies have been designated:
• Commercialization of renewable energies’ technologies;
• Increase in share of renewable and clean energies in electricity production.
B. Feed-in Tariffs
To implement such strategies, the Renewable Energy and Energy Efficiency (SATBA) has been formed to manage and coordinates all the efforts. One of the key advantages is that the Ministry of Energy, acting through the SATBA, purchases all electricity generated from renewable sources belonging to the approved private sector projects at specific Feed-in Tariffs (FiTs). Under the current regulatory framework, developers will be granted a 20-year Power Purchase Agreement (PPA) negotiated on the basis of SATBA’s model- form. The level of FiTs available depends upon a number of factors, including project size (i.e. generating capacity) and technology-type. The Ministry of Energy determines and publishes revised FiTs (in Iranian Rial per kWh) each year. The Iranian government has endeavored to set the FiTs at a level that is designed to attract investors, both domestic and foreign and for this purpose the rate of purchased electricity from renewable sources is higher than the rate government pays to buy electricity produced by fossil fuel power generators. Current rates are as follows:
Above above 30 MW capacity *:3200 IRR per KWh
with the capacity of 30 MW and less: 4000 IRR per KWh
with the capacity of 10 MW and less:4900 IRR per KWh
* SATBA determines the maximum capacity for the large solar farms according to the total 2000 MW annual capacity development policy.
C. Practical Procedure
It is foreseen that an investor should apply for a construction permit and subsequently at the end of the process the PPA is concluded by either a newly-registered company in Iran or partnering with an existing Iranian company, subject to receiving respective permits in Iran. These extra permits include environmental permit, grid connection permit and land use permit (for state owned lands), PPA will also be signed with applicants. The detail of this summarized procedure is as follows:
• Applying for Construction Permit: At this stage, applicants should fill two worksheets and submit to Non-Governmental Partnerships Office of SATBA. This form shall be accompanied by relevant information pertaining to a developer’s technical and financial capability and general details of the proposed project, so that SATBA would be able to evaluate whether the application should proceed;
• Issuance of Grid Connection Permit: The application is forwarded to TAVANIR which is responsible for management of generation, transmission and distribution of electric power; this organization will then also analyze the applicant’s proposals and if satisfied with the proposals, approve the issuance of a Grid Connection Permit. The issuing body for plants of more than 7 MW will be the relevant regional electricity company;
• Environmental Permit and Land Right: The applicant will also need to obtain an Environmental Preservation Organization Permit from the Department of Environment. This will only be issued if such Department is satisfied that the project complies with certain environmental criteria. Where the land on which the plant is to be developed is state-owned (as is usually the case), the applicant must enter into a lease with the Land Affairs Organization of Iran;
• Concluding PPA: Once the applicant has received all the required permits, SATBA will invite it to start negotiating for a PPA. It is important to note that Construction Permits are not transferable so must be obtained in the name of the legal entity that is intended to own the plant.
D. Power Purchase Agreement Terms
Payment of the rates provided in section B is provided in the Power Purchase Agreement (PPA) of power plants for a 20-year period with the specified tariffs. This agreement starts from the signing date of the agreement which includes the progress and the construction period of power plant. It should be mentioned that a maximum delay of 9 months since the commercial operation date allows SATBA to terminate the PPA, cancel the construction permit and inform the authorities to return back the state lands which are intended for the construction of the power plant. If an agreement is terminated due to delay, the new request will be taken in to consideration after 2 years.
During the period of PPA and after that, the investor is allowed to sell electricity across the country in the form of bilateral contract, power exchange, electricity day-ahead market, or any other form approved by the Ministry of Energy. The export of electricity from clean and renewable power plants is allowed but depends upon separate permits. If such mechanisms are decided by the electricity producer, it replaces the guaranteed purchase of the electricity by the Iranian government.
Above-mentioned tariffs are multiplied based on the hourly coefficient which is announced and updated by Iran Grid Management Co. Moreover, to compensate for devaluation of money, the tariffs will be annually adjusted during the contracts based on Euro exchange rate fluctuations and internal inflation; It can be increased up to a maximum of 30% for power plants constructed, using local know-how, design and manufacturing.
The above-mentioned rates are valid for the PPAs which the power plants will be constructed and commercially operated within a maximum of 30 months for a maximum of 15 months for different types of solar power plants since the signing date of the PPA. In case of delay in finishing the project, a lower rate which is applicable to later agreement shall be applied to the previously- signed agreement. All tariffs will be multiplied by 0.7 starting from the first day of the second 10 years till the end of the contract.
The overall legal framework for construction of solar power plants in Iran is favorable for investors. There are many advantages to invest in this field but a secure position requires many legal and commercial considerations to be taken into account and this short introduction provides a glimpse and not the full picture. It is necessary to gather all relevant data and then to proceed to the project in accordance with legal advice.
Leasing companies have existed in Iran since 1970s but they have expanded considerably in recent years since proper context has been created for activity and operation of such companies; many leasing companies were established especially by banks; currently 31 leasing companies exist in Iran with the License of Establishment issued by the Central Bank of Iran.
Although leasing companies and their share in Iranian economy especially automobile industry is considerable, there is no comprehensive and specific legislation or act regulating leasing companies and their activities; the main legal framework is a directive issued by the Central Bank of Iran in 2017; such directive replaced the older directive of 2007. The new directive provides legal ground for leasing activities especially establishment of leasing companies but it does not shed light to all aspects of leasing operations in Iran.
Establishment of a leasing company in Iran requires License of Establishment from Central Bank of Iran. In accordance with applicable regulations, foreign persons whether natural or legal are not eligible to apply for such License but they may own an existing leasing company or a company eligible to apply for such license through for example purchase of shares. A leasing company may be established only as a private joint stock or public joint stock company. Voluntary dissolution of a leasing company requires prior approval of Central Bank of Iran. In any case liquidation process would commence to finalize total elimination of legal person.
Joint Stock (SherkatSahami) consists of at least 3 shareholders. The capital is divided into shares and the liability of each shareholder is limited to the value of their shares. A significant feature of such company is that it enjoys from a separate legal personality which is distinct from its shareholders. There is no legal restriction in respect to nationality of the shareholders so both Iranians and foreign natural or legal persons may become shareholder of the company. Joint stock company has the following types:
- Public Joint Stock is a company in which the founders secure a part of capital through selling of the shares to public. In such companies the phrase “public joint stock” shall be included in the name of the company;
- Private Joint Stock is a company in which the founders of secure all of the capital themselves at the time of establishment. In such companies the phrase “private joint stock” shall be included in the name of the company.
Leasing operation in Iran is restricted to 2 legal formats/contracts; hire-purchase and credit-sale. By using either of these options, a leasing company may operate within Iranian market. The main element of such legal formats/contracts is that the ownership is transferred to the lessee at the end of leasing contract otherwise it is not leasing operation under Iranian law; in other words, Operational Leasing is not recognized as a format or contract for leasing operations by in Iranian legal system.
Hire-Purchase is a contract with a mixed nature of both sale and lease/hire but ultimately it may be considered as an unspecific contract since the Civil Code has not provided any conditions for the conclusion of such contracts. This legal format/contract is first introduced by the Banking Activity without Interest Act of 1983; according to article 12 of the act, banks may use hire-purchase contract to transfer movable or immovable properties for development of service, agricultural, industrial and mining affairs. However, no indication of nature or implications of such contract is provided. In any case the most important element of such contract is that ownership is transferred at the end of the contract time provided that all provisions of the contract are complied and installments are paid. This is what is known as finance lease both by the Directive and conventional standards.
Credit-Sale Contract is a type of sale contract, a specified contract under Iranian law; sale contract consist of transferring ownership of goods in return for a specified consideration. Ownership would be transferred upon conclusion of the contract.
The interest rate of facilities provided by the leasing company to customers shall not exceed more than 3 percent from the interest rate of credit institution which is determined by the Credit & Money Council.Last year’s interest rate has been designated18% so the leasing companies may give facilities with maximum 21% interest until further changes.
There are the following 3 types of taxes applicable to a leasing company:
- Direct Tax: Under Iranian tax system all legal persons are required to pay 25% as tax after deduction of all expenses from all incomes obtained from within or outside of Iran;
- Value Added Tax (VAT): According to Iranian law, the difference between the price of purchased goods and services and price of sold goods and services within a specific period is subject to 9% VAT;
- Payroll Tax: All employees are required to pay payroll tax;
Transfer of Ownership Tax: Under Iranian law for ownership transfer of immovable properties, 5% of contract price shall be paid as tax. The tax on ownership transfer of automobile is determined by the MEAF annually for each car model separately.
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