Date: 02 Jun 2000
Time: 09:14:53
Remote Name: 156.29.145.175
http://www.menas.co.uk/ http://www.ftz-services.com/
Despite the passing of the Third Five-Year Development Plan, and the prospects for change brought about by the recent victory of the reform camp in the sixth Majlis elections, it is clear that for some time Iran will rely on its free trade zones (FTZs) as the main way in which foreign capital can be attracted. In this article, Dr Albrecht Frischenschlager, managing director of FTZ Services Ltd (www.ftz-services.com), a joint venture between the three governmental Free Zone Organisations of Iran and a private London-based consulting company, offers advice on setting-up in Iran’s FTZs.
Because of constitutional restraints and the lack of competitiveness of many domestic companies, Iran cannot open and liberalise its economy from one day to another. Instead the government has decided to establish two economic systems. The first is on the Iranian mainland and is characterised by slow economic reforms, taking one step at a time. The second type of economy is in a limited number of free trade zones that offer immediate access to a liberal and market-oriented economic system and work as a gateway for foreign companies to come to Iran as well as for Iranian companies to go international.
Three areas, Chabahar (a port city close to Pakistan), Kish (an island in the Persian Gulf) and Qeshm (an island in the Strait of Hormoz) were designed to:
attract local and foreign capital with the potential, manpower, resources and infrastructure of each zone; promote exports and earn foreign currency from a deregulated economic environment and; act as a centre for re-export of goods to landlocked countries in Central Asia.
Iran’s free trade zones are under the direct supervision of the High Council of Free Trade & Industrial Zones, which is presided over by the President of the Islamic Republic of Iran and comprises among others 11 ministers and the governor of the Central Bank of Iran.
The High Council has delegated the administration of the FTZs to independent government-owned companies, the Free Zone Organisations that have been exempted from much of the red tape regulations existing on the Iranian mainland.
Advantages of the FTZs
The FTZs offer foreign companies various privileges compared with an investment on the mainland:
foreign companies can own up to 100% of any company operating in the FTZs. On the Iranian mainland their share is restricted to 49%;
a 15-year tax exemption is granted on income and assets; capital and profits gained from economic activities can freely enter and exit the FTZs; labour and employment regulations are more flexible than on the mainland; in the case of direct entry into the FTZs from abroad no visa is required (there are several flights a day from Dubai to Kish and Qeshm); a specified proportion of goods can be imported from the FTZs to the Iranian mainland without the usual customs formalities and limitations; goods manufactured in the FTZs can be exported to other countries without being subject to mainland export regulations; liberal banking and foreign exchange laws based on the free market rate apply.
These privileges (and there are actually many more) have been designed to offer a suitable climate for foreign
investment.
However, in addition to providing a suitable location for investment, the FTZs can also be used to facilitate the business of foreign companies on the Iranian mainland. Many features of Iran’s FTZs are similar to those of well-known offshore destinations such as Delaware, Jersey or the British Virgin Islands.
Many different types of foreign companies, no matter if they are trading, service or industrial companies, can benefit from the legal structure of the FTZs. Examples of benefits include:
Company taxes By setting up your registered Iranian office in one of the FTZs, you ensure that your company is exempted for a minimum period of 15 years from paying taxes.
Expatriates Companies set up in the FTZs can employ foreign nationals and apply for work permits and residency. Expatriate managers are exempted from paying income tax, which on the Iranian mainland is currently between $2,500 and $3,500 a month.
Imports Importing via the FTZs may save you and your customers money. Customs duties in the FTZs are in general lower than in the rest of the country.
Warehousing If your operation in Iran requires certain equipment and material, the best option is to set up a warehouse in one of the FTZs. You could import and store your equipment and materials in the FTZs without the usual customs formalities. In case you need the goods or equipment on the Iranian mainland you go through the customs procedures necessary for transfer to the mainland. If you don’t need them,
you take them back home without formalities.
Customs procedure If you bring your equipment and goods via a FTZ into the Iranian mainland, customs clearance takes place in the FTZ. Theoretically, customs procedures for the import of equipment and goods to the Iranian mainland are the same all over the country. However, in practice customs procedures are much faster in the FTZs. Customs officials in the FTZs are under direct supervision of the
Free Zone Organisations, which are eager to ensure that there are no unnecessary delays and a minimum of bureaucracy.
Assembly If you assemble in the FTZs the products you want to sell to Iran, you may save considerable amounts of import duty. The law exempts duty payments for all the value added to the goods in the FTZs.
Concluding advice
So what concrete steps should a foreign company that already has some experience in Iran take and what should newcomers do?
Businesses that have been established for some time in Iran know that it is in many ways different to other markets. One faces a large market and a vast consumer base of more than 60 million, but business is not always easy. In addition, foreign companies frequently get unpleasant surprises: as soon as the operation is up and running and the firm has started to earn back its business development costs, the tax man stands at the door presenting a huge bill or your expatriate representative is suddenly requested to pay income tax for the previous two years. In addition, companies frequently face problems of increasing their import quotas, or having a small quarrel with a local employee that may turn into a court case.
Very often the reason for all these problems is that in the very beginning the foreign company only concentrated on marketing efforts and had not paid enough attention to the legal and administrative side of its business.
Although the FTZs cannot solve problems retroactively, they can assist the avoidance or minimising of potential future problems. Contrary to the Iranian mainland where the legal and tax system is sometimes arbitrary and clear definitions are missing, the FTZs have already established during their short history a track record of clear and transparent rules and regulations.
Furthermore, if a problem occurs it can usually be solved very quickly. As mentioned before, each FTZ is governed by a Free Zone Organisation. The Free Zone Organisation, with one managing director on top of it, supervises and is responsible for all government activities in the FTZs, from issuing work permits to providing access to the sewerage system. This ensures that interaction between different authorities is working well and that foreign companies are granted unbureaucratic and fast assistance in all issues.
It might therefore be a good idea for foreign companies to have a second look at the set-up of their operation in Iran and to consult with a qualified professional. This costs time and money, but it can save foreign companies from even bigger surprises.
If you are planning to enter Iran as a newcomer, take a careful and a step-by-step approach. It will be essential for your long-term business perspective to select the right partners and distribution channels and to build lasting contacts with potential clients.
Don’t try to make a fortune in a short time. Iran is not the right country in which to get rich overnight, but you can build a solid foundation for long-term business, based on personal relations and mutual trust.
Iran is also quite different from many other emerging markets since it has appropriate regulations and laws and implements them, as unclear as they might sometimes be. Money and good contacts usually do not present a way around rules and regulations that you don’t like.
From time to time this might be disturbing, but at the end of the day it ensures that foreign companies can rely on Iran for having a general climate of “rule of law”.
If we now put all the pieces together, we see that Iran and its FTZs offer a stable political environment with a modern framework of laws and regulations. Combining the moderate risk with the potential return from the Iranian market, the risk/return ratio becomes highly attractive for foreign companies.
And those foreign companies that are among the first to study these new realities will enjoy the additional success multiplicator that is awarded to those who come first.