With Iraq's security improving, is it time to do business there? Here's how to navigate Iraqi laws, incorporate, and deal with political risk and corruption
Doing business in Iraq does not have to be scary. In July, Iraqi Prime Minister Nouri al-Maliki visited the U.S., and part of his mission was to convince American companies to invest in his country. He made the case that security has improved substantially. By any measure, he is correct. Although Iraq is not yet completely stable, a window of opportunity has opened there for companies willing to take a risk in one of the ultimate emerging markets. Indeed, Iraq has the second-largest oil reserves in the world and, after many years of war and sanctions, it needs infrastructure and development across all sectors of the economy. Once you become comfortable with the security situation, you will find the possibility of profits is great.
Yet companies entering Iraq also worry that they face conflicting laws and a dearth of information on how to do business there. Whether you have previously done business in the country or not, here are 10 things to ease your anxiety:
1. No immunity from Iraqi laws. Until this year, companies operating in Iraq under contracts with the U.S. government or other coalition countries enjoyed absolute immunity from the laws of Iraq. On Jan. 1, the Status of Forces Agreement went into effect and abolished that immunity. Loss of immunity means foreign companies and individuals are subject not only to criminal and civil liability in Iraq, but also must obey all legal and regulatory requirements for doing business there, including the entry and exit procedures, tax laws, and vehicle registration requirements. Moreover, all foreign individuals or companies engaged in commercial activities must obtain a license from the government of Iraq. It can be a cumbersome process, but the government of Iraq is working to make it easier and is not yet rigorously enforcing the law.
2. Forming a trade representative office. The simplest way to establish a commercial presence in Iraq, especially for foreign companies seeking contracts with the government, is to register as a trade representative office. By registering as a trade representative office, a foreign company receives the right to engage in business development activities in Iraq and to enter into negotiations for contracts with specific Iraqi ministries. The procedure to register as a trade representative office is simple, requiring the filing of a few forms, appointment of a "manager," and payment of a small fee. Most ministries in Iraq do not require any further licensing to bid on a contract. If and when a foreign company secures a contract with the government, it can then transfer its trade representative office into a "branch office."
3. Incorporation or forming a branch office. C.P.A. Order No. 93, which has been incorporated into Iraqi law, provides that non-Iraqi companies may form and operate through a "branch office." In recent years, registering a branch office has been the quickest way to set up an office to engage in commercial activities in Iraq (as compared to a trade representative office that can engage in business development activities only). Many companies now operating in Iraq are set up as branch offices, but face some restrictions on what they can do. For foreign companies wishing to establish a separate corporate entity for doing business in Iraq, rather than a branch office, there are a range of incorporation options, including the limited liability company, joint stock company, joint liability company, sole owner company, and simple company. Selecting the best entity depends upon the extent investors want to be shielded from liability, the number of investors, whether public and private investors will be involved ,and the tax implications. The most popular forms of incorporation for foreign-owned entities are the limited liability company and joint stock company.
4. Paying taxes. Foreign companies doing business in Iraq are often perplexed by the tax system. Iraq's tax rules are antiquated and contain numerous ambiguities. In general, Iraqis and non-Iraqis residing in Iraq must pay tax on income that originates there. The income tax laws of Iraq define taxable income as net income earned from commercial activities or from activities having a commercial nature. Income from limited liability companies and joint stock companies is taxed at a fixed rate of 15%. Foreign companies should seek specific advice on how their business will be treated under Iraq's tax laws and how to track and report that income.
5. Obtaining an investment license. During the Saddam Hussein regime, the law discouraged foreign investment. Only Iraqis could form companies in Iraq, and those foreign companies that opened branch offices faced strict rules related to their commercial activities. In October 2006, the government of Iraq enacted the National Investment Law, which contains incentives for foreign companies to invest, including an exemption from taxes and fees and a guarantee that foreign investor capital will be treated equally to domestic investor capital. Under the law, companies must apply for and receive a project-specific investment license from either the national or a regional investment commission to avail themselves of the incentives. In addition to receiving 10 years of tax-free treatment, licensed projects are guaranteed full repatriation of investment profits, the right to employ foreign workers, and a three-year exemption on import fees for equipment required for the project. The Kurdistan regional government has passed its own investment law which contains a few additional incentives.
6. Owning property. Most countries in the Middle East restrict ownership of property by foreigners. For now, the government of Iraq has kept in place these traditional prohibitions. Although it permits long-term leases for foreign companies, ownership of real property is not permitted. The Kurdistan regional government, through its regional investment law, does allow ownership of real property within the three northern provinces that make up the Kurdistan Region. The central government is currently considering a similar change in the law, which is supported by Prime Minister Maliki and the chairman of the National Investment Commission, Sami al-Araji.
7. Political risk. The risk of political instability poses the potential for disruption to business activities of foreign firms throughout the Middle East and North Africa. In Iraq, the risk is multifaceted. The country has made great strides since reaching the brink of civil war three years ago. This progress is demonstrated in the improved security situation. However, there are still significant fault lines. The majority Shiite Arab population is divided, and discord remains among rival militias that have been more quiet but still exist. Major steps toward reconciling Sunni Arabs have been accomplished by the Shiite-led government, but the situation is fragile and more progress is necessary to incorporate private Sunni fighters, including the Sons of Iraq, into Iraqi Security Forces and other government jobs.
The Kurdistan Region faces its own set of challenges to future stability. It is surrounded on all sides by neighbors who oppose its semi-autonomous state. Turkey, in particular, is threatened by Kurdish aspirations, even as Turkish companies have become the Kurdistan Region's most significant trading partners. Also, the unification of the main political factions in the Kurdistan Region is relatively new and subject to a delicate compromise among the charismatic leaders of each party. There is also tension between the Kurdistan regional government and the federal government over certain economic and political issues, including management and sharing of revenues for Iraq's new oil fields. The key point to take from this is that foreign companies must obtain a keen understanding of the political landscape in the regions and provinces of Iraq in which they do business to evaluate fully the risk to their business ventures.
8. Corruption. Iraq ranks near the bottom in Transparency International's annual Corruption Perception Index. The problem of corruption is widespread, and foreign businesses operating in Iraq are impacted in a number of ways. For instance, foreign companies have had local partners forced on them and have faced problems in receiving full payment for services or products. American companies operating in Iraq must be particularly careful not to engage in any actions that could be deemed a violation of the U.S. Foreign Corrupt Practices Act (FCPA), which prohibits providing anything of value to influence an award of government business. U.S. companies should consider training their business development personnel on FCPA. The good news is that the government of Iraq is committed to attracting foreign investors, especially U.S. companies, and therefore will try to resolve specific acts of corruption. Therefore, foreign companies that find they are facing a corruption issue should seek to elevate it quickly to the highest levels of the government of Iraq.
9. Enforceability of contracts. The legal system in Iraq is centuries old with long-established traditions. Yet it deteriorated greatly under Saddam Hussein and further during the recent conflict. Assistance from the U.S. and other coalition countries has introduced some modern concepts, but more work is required to incorporate international standards for regulating business and resolving disputes. Whenever possible, foreign companies should incorporate arbitration and forum selection clauses into their contracts to take advantage of more familiar venues and laws for resolving disputes. Companies also should keep in mind, though, that Iraq is not yet a signatory to the New York Convention, the main treaty that ensures enforcement of foreign arbitral awards.
10. Entry and exit. Obtaining permission to enter Iraq was nearly automatic for U.S. government contractors before the Status of Forces Agreement. Removal of immunity made all foreign company employees subject to Iraq's visa procedures. Visas now must be obtained from an Iraqi embassy in advance of any trip there. The visa process can sometimes take weeks or even months. Obtaining a letter of approval from an Iraqi trade official, such as the Commercial Attaché, National Investment Commission, Kurdistan Regional Investment Commission, or other Iraqi representative offices can significantly expedite that process. Moreover, any foreign company that receives an investment license should receive guaranteed entry and exit for its employees.
While any business expanding abroad is certain to face unexpected challenges, understanding and planning around the 10 points above should make the prospect of investing in Iraq safer and more productive.