Entering the Iranian market involves more than selecting a commercial partner or entering into a contract with an Iranian company. The legal structure chosen by a foreign company for its presence in Iran may affect the scope of its permitted activities, the liabilities of the parent company, its tax treatment, employment arrangements, auditing requirements and even the process for terminating its operations.

A foreign company may operate in Iran through different structures, including registering a branch or representative office, establishing a new company, acquiring an interest in an Iranian company, making a direct investment or entering into contracts with Iranian individuals or legal entities. Each of these structures carries different legal and tax consequences. Before entering the Iranian market, a foreign company should therefore determine precisely what activities it intends to undertake, what authority its local operation will have and which legal structure is most appropriate.

Registration of a branch or representative office is one of the available methods for establishing a presence in Iran. Registration, however, is only the first step. Following registration, the foreign company will remain subject to continuing corporate, tax, accounting, employment, social security and regulatory obligations. The scope of these obligations depends on the nature of the company’s activities, the relevant industry, the contracts it enters into, the manner in which it generates income and the licences issued to it.

The Difference Between a Branch and a Representative of a Foreign Company

Before examining the applicable legal obligations, it is important to distinguish between a branch and a representative of a foreign company. These two structures differ in terms of liability and their legal relationship with the parent company.

Under the Implementing Regulation of the Law Permitting the Registration of Branches or Representatives of Foreign Companies, a branch is a local unit subordinate to the parent company that directly carries out part of the foreign company’s objects and functions in Iran. The branch operates in the name and under the responsibility of the parent company.

Accordingly, a branch does not constitute an Iranian company with a legal personality separate from its parent company. Rather, it is regarded as an extension of the foreign company’s operations in Iran.

By contrast, the representative of a foreign company may be either a natural person or a legal entity that, under an agency or representation agreement, undertakes part of the foreign company’s activities and functions in Iran. The representative is responsible for the activities performed in Iran within the scope of the representation agreement.

The representative’s authority, the services to be provided, the geographical and commercial scope of representation, the authority to enter into contracts and the arrangements for receiving payments should therefore be clearly defined in the representation agreement.

The decision between establishing a branch and appointing a representative should not be based solely on the ease of registration. Factors such as the parent company’s degree of control, liability towards third parties, authority to conclude contracts, ability to generate income, tax exposure, employment requirements and sector-specific licensing obligations should also be considered.

Establishing an Iranian company with foreign investment is another possible structure. Unlike a branch, such a company will have Iranian legal personality and will be legally distinct from its foreign shareholders. Its obligations and liabilities will therefore differ from those applicable to a branch or representative office.

Must a Foreign Company Register Before Operating in Iran?

The answer depends on the nature of the foreign company’s presence in Iran. Not every cross-border transaction or contract between a foreign company and an Iranian person necessarily requires the registration of a branch in Iran.

However, where a foreign company intends to conduct commercial, industrial or financial activities in Iran through a branch or representative, registration becomes a fundamental legal requirement. Under Article 3 of the Law on the Registration of Companies, the foreign company must be legally recognised in its country of incorporation and must also complete the registration formalities prescribed under Iranian law.

The Law Permitting the Registration of Branches or Representatives of Foreign Companies further provides that a foreign company may register a branch or representative in Iran within the specified fields of activity, provided that it is legally recognised in its country of registration and the reciprocity requirement is satisfied.

Reciprocity generally means that the foreign company’s home jurisdiction must similarly permit Iranian companies to register branches or representatives in that country.

In Which Fields May a Branch or Representative Operate?

Registration of a branch or representative does not give a foreign company unrestricted authority to carry out any activity in Iran. Article 1 of the relevant Implementing Regulation identifies the principal fields in which branches and representatives may operate. These include:

  • providing after-sales services for the foreign company’s goods or services;
  • performing contracts concluded between the foreign company and Iranian persons;
  • examining and facilitating the foreign company’s investment in Iran;
  • cooperating with Iranian technical and engineering companies for the implementation of projects in third countries;
  • contributing to the expansion of Iran’s non-oil exports;
  • providing technical and engineering services and transferring technical knowledge and technology; and
  • carrying out regulated activities, including certain transportation, insurance, commodity inspection, banking and marketing activities, subject to obtaining the required licence from the competent authority.

The activities actually carried out by the Iranian unit must correspond to its registered objects. A branch or representative may not rely solely on its registration certificate to engage in activities outside its registered scope or beyond the limits of a sector-specific licence.

For example, registration of a representative office of a foreign bank does not, by itself, authorise the office to conduct banking operations, open customer accounts, accept deposits or grant credit facilities. The scope of its activities will remain subject to the licence and regulations of the Central Bank of Iran.

Documents Required to Register a Branch of a Foreign Company

The documents required for registration may vary depending on the nature of the proposed activities, the foreign company’s country of incorporation and the requirements of the relevant regulatory authority.

Nevertheless, under the Implementing Regulation, a foreign company applying to register a branch will generally be required to submit a written application together with the following principal documents:

  • the foreign company’s articles of association, incorporation notice and latest registered amendments;
  • the company’s latest approved financial report;
  • an explanatory report regarding the company’s activities and the reasons for establishing a branch in Iran;
  • information concerning the nature and extent of the branch’s authority;
  • the address and proposed place of business of the branch;
  • an estimate of the Iranian and foreign personnel required; and
  • information regarding the method of financing the branch’s operations in Iranian rials and foreign currency.

Depending on the nature of the activities, it may also be necessary to submit the contract concluded with an Iranian person, a licence or letter of approval from a governmental authority, a power of attorney appointing the branch manager and additional registration forms or undertakings.

Documents Required to Register a Representative of a Foreign Company

The documents required for the registration of a representative are not identical to those required for a branch.

A natural person or legal entity applying to register as the representative of a foreign company will generally be required to submit, as applicable:

  • a certified copy of the representation agreement concluded with the foreign company;
  • the identification documents of an individual representative or the corporate registration documents of a legal-entity representative;
  • the registered address of the representative;
  • evidence of the applicant’s previous activities in the field covered by the representation agreement;
  • the articles of association, incorporation notice and latest amendments of the foreign company;
  • a report on the foreign company’s activities and the reasons for establishing a representative office in Iran;
  • the foreign company’s latest approved financial report; and
  • an introduction or approval letter from the relevant ministry or governmental authority, where required.

The representation agreement is one of the most important documents in the registration process. It should clearly define the subject matter and scope of the representation, the representative’s authority and responsibilities, the duration of the arrangement, termination provisions, the use of the foreign company’s name and trade marks and whether the representative is authorised to enter into contracts in the name of the parent company.

Documents issued outside Iran must generally be authenticated by the competent authorities in the country of origin and officially translated into Persian after completion of the applicable legalisation formalities. The detailed authentication requirements may vary depending on the country in which the documents were issued and the existence of any applicable bilateral agreement.

The Regulation implementing the Law on the Registration of Companies also contains requirements concerning the certification of corporate documents and powers of attorney issued to representatives.

Registration Is Not the End of the Company’s Corporate Obligations

Following registration, the foreign company must continue to keep its registered information up to date. Changes concerning the branch manager or representative, amendments to the scope of authority, establishment of additional branches, changes of address, changes to the person authorised to receive legal notices and certain amendments relating to the parent company must be notified to the registration authority.

Article 7 of the Law on the Registration of Companies requires changes relating to the representatives of a foreign company or the managers of its branches to be notified to the registration authority in writing.

This obligation is particularly important because, until the relevant change has been registered and formally notified, acts performed in the name of the company by a former manager or representative may continue to be attributed to the company, unless the company can establish that the relevant third party was aware of the change.

Annual Reports and Audited Financial Statements

One of the most important continuing obligations concerns the submission of financial and operational reports. The Implementing Regulation establishes two separate reporting obligations.

First, under Article 7 of the Regulation, a registered branch must submit the parent company’s annual report, including financial reports audited by independent auditors resident in the company’s home country, to the relevant authority each year.

Second, Article 8 requires all natural and legal persons falling within the Regulation, including branches and representatives, to submit a report on the activities of their unit in Iran together with audited financial statements within four months following the end of the financial year.

Accordingly, a branch may be required to prepare and submit two separate sets of documents:

  • the parent company’s annual report and financial statements in its country of incorporation; and
  • the branch’s operational report and audited financial statements relating to its activities in Iran.

At the outset of its operations, the foreign company should determine the branch’s financial year, identify the auditing firm that will be engaged, establish how the parent company’s documents will be translated and authenticated and determine which authority will be regarded as the relevant regulatory body for its particular field of activity.

The absence of income does not necessarily eliminate all reporting or tax obligations. Even a unit that merely receives funds from its parent company to cover expenses may still be required to register with the tax authorities, maintain accounting records, submit tax returns or provide the prescribed reports.

Tax Obligations of Branches and Representatives

The tax position of a foreign company depends on the structure of its presence, the nature of its activities, the place where services are performed, the relevant contracts, the manner of payment and whether the Iranian unit generates income.

The mere registration of a unit as a “representative office” does not automatically result in a tax exemption.

Under Article 105 of the Direct Taxation Act, the taxable income of legal entities is generally subject to tax at a rate of 25%, except where a separate rate applies.

Note 2 to Article 105 also subjects foreign legal entities and institutions resident outside Iran to Iranian tax in respect of income derived from the exploitation of capital in Iran, activities conducted directly or through a branch, representative, agent or similar arrangement, and income arising from the transfer of technical knowledge and certain other rights and services.

Article 107 provides a particular method for determining the taxable income of non-resident foreign natural and legal persons in relation to certain categories of income, including technical services, design, surveying, supervision, training, technical assistance, transfer of technical knowledge and the granting of concessions or other rights.

Depending on the type of activity and its profitability, an amount equal to between 10% and 40% of the total payments received may be treated as taxable income. This range should not be confused with the applicable tax rate. In general, the rate provided under Article 105 is applied to the taxable income calculated under Article 107.

The Iranian payer is also required to deduct the relevant tax at the time of payment and remit it to the Iranian National Tax Administration within the prescribed period. Failure to comply may result in the payer and the foreign recipient being held jointly liable for the unpaid tax and the applicable penalties.

Note 3 to Article 107 provides a limited but important exemption. Branches and representative offices of foreign companies and banks will not be subject to income tax on funds received from the parent company to cover their expenses, provided that they:

  • are not authorised to carry out transactions in Iran;
  • engage solely in marketing and the collection of economic information for the parent company; and
  • receive funds from the parent company only for the reimbursement of their expenses.

This exemption should be interpreted narrowly and applied only where all statutory conditions are satisfied. If the Iranian unit enters into contracts, receives payments, sells goods or conducts income-generating activities, its eligibility for the exemption must be assessed separately.

Certain sectors are also subject to special tax regimes. For example, Article 113 of the Direct Taxation Act provides a specific tax regime for foreign shipping and aviation enterprises in respect of income derived from transporting passengers and goods from Iran.

In addition to domestic tax legislation, it is necessary to determine whether a double taxation agreement is in force between Iran and the foreign company’s country of tax residence. Such an agreement may affect the determination of tax residence, the existence of a permanent establishment, Iran’s right to impose tax, the applicable tax rate or the availability of foreign tax credits.

Labour Law, Social Security and the Employment of Foreign Nationals

A branch or representative that employs personnel in Iran must comply with the mandatory provisions of Iranian employment law. The foreign nationality of the parent company, or the selection of foreign law in an employment agreement, does not by itself exclude an employment relationship performed in Iran from the mandatory provisions of the Iranian Labour Law.

Matters such as employment contracts, salaries and benefits, working hours, leave entitlements, termination of employment and end-of-service benefits must therefore be reviewed in accordance with Iranian law.

Employers subject to the Labour Law must also insure eligible employees under the Social Security Act and pay the relevant social security contributions within the prescribed periods. Responsibility for complying with these obligations will generally rest with the local employer.

Where foreign managers, specialists or employees are engaged, Article 120 of the Labour Law becomes particularly important. As a general rule, foreign nationals may not work in Iran unless they hold an entry visa granting the right to work and a valid work permit.

A business visa or the registration of an individual as the manager of a branch does not necessarily replace the requirement to obtain a work permit.

Sector-Specific Licences and Regulatory Requirements

Registration of a branch or representative does not replace the requirement to obtain a sector-specific operating licence.

A company operating in a regulated industry must obtain the required licences from the competent authority in addition to completing its corporate registration and must continue to comply with the conditions attached to those licences.

This may be particularly relevant in sectors such as transportation, oil and gas, energy, insurance, pharmaceuticals and medical equipment.

Depending on the nature of its operations, the company may also be subject to environmental, health and safety, occupational health, standardisation, consumer protection, import, customs or data-protection requirements.

Compliance with Mandatory Iranian Law and Public Policy

Contracts entered into by a branch or representative must comply with the mandatory laws of Iran.

Under Article 10 of the Iranian Civil Code, private contracts are valid to the extent that they do not expressly conflict with the law. Article 975 of the Civil Code also restricts the application of foreign laws or private agreements that are contrary to Iranian public policy or public morals.

Accordingly, the selection of foreign governing law or a foreign arbitral forum does not necessarily displace all mandatory Iranian rules.

Local mandatory provisions concerning registration, licensing, taxation, employment, social security, imports, competition, foreign exchange and other regulated matters may continue to apply.

Revocation of a Licence, Termination of Activities and Liquidation

The activities of a branch or representative do not legally terminate merely because the office is closed or operations are suspended.

Ongoing contracts, employees, taxes, social security liabilities, receivables, debts, bank accounts and potential disputes must all be properly addressed.

The Implementing Regulation provides that where the operating licence of a branch or representative is revoked by the competent authority, the registered unit must commence dissolution and liquidation procedures within the period specified by the registration authority. When applying for registration, the foreign company must also provide an undertaking concerning compliance with this process.

Failure to renew a sector-specific licence may also make the continuation of operations unlawful, even where the branch or representative remains formally registered in the corporate registry.

Consequences of Operating Without Registration or Breaching Legal Obligations

The Law on the Registration of Companies provides statutory sanctions for a representative of a foreign company or the manager of a branch that carries out commercial, industrial or financial activities before completing the registration required under Article 3.

Where the violation continues, the authorities may also prevent the continuation of the relevant operations.

Depending on the nature of the breach, other consequences may include:

  • suspension or restriction of activities;
  • revocation or non-renewal of licences;
  • assessment of unpaid taxes and tax penalties;
  • assessment of unpaid social security contributions and late-payment liabilities;
  • contractual liability towards customers or commercial partners;
  • civil liability towards persons who have suffered loss;
  • invalidity or unenforceability of certain acts;
  • banking, customs or immigration complications; and
  • dissolution and liquidation of the branch or representative office.

Conclusion

Registration of a branch or representative of a foreign company in Iran is not merely an initial formality for entering the Iranian market. It creates a range of continuing obligations for the foreign company, the branch manager and, where applicable, the local representative.

A legal review conducted before registration can help prevent the selection of an unsuitable structure, unexpected tax liabilities, activities beyond the scope of an operating licence, disputes with a local representative and complications at the time of termination or liquidation.

Following registration, the company should also establish an organised compliance system for the renewal of licences, submission of periodic reports, registration of changes, fulfilment of tax obligations and compliance with employment and social security requirements.

This article has provided a general overview of the principal legal obligations applicable to branches and representatives of foreign companies in Iran. However, the obligations applicable to each company may vary depending on its activities, the relevant industry, the terms of its contracts and the licences issued to it.

A comprehensive assessment of the applicable regulations and the adoption of an appropriate structure for a particular business will therefore require advice from lawyers experienced in Iranian corporate law, foreign investment and commercial regulation.