By Mustafa Muayad – Head Of Baghdad Office
An Insight into Investment Vehicles in Iraq
After the defeat of terrorism in Iraq, the country entered a new era of economic growth in all aspects and become a promising market that attracts foreign investments in the country. Iraq’s recent history has been characterized by unrest, an ever-changing political regime, and economic fluctuations, these conditions, by their very nature, necessitated that new laws and regulations be introduced in order to adapt and amend the Iraqi legal framework as per the requirements of the changing regimes. The focus of this article will be on the most significant legislative initiatives and enactments issued in relation to the investment vehicles in Iraq.
There are several types of commercial activates in Iraq, depending on the type of activity aimed to be conducted inside the country. Most commercial activities require incorporating a legal entity in Iraq based on the applicable laws and regulations. The main commercial activities conducted in Iraq are as follows:
- Supply contracts
This is where a foreign entity enters into a contract with an entity, public or private, to supply goods or equipment to Iraq. This type of activity in most cases does not require registration of an entity in Iraq. Provided that the works contracted upon are not being implemented in part or whole inside of Iraq. In most cases the contractor’s contractual obligation is fulfilled with the shipment of the goods contracted upon to Iraq.
- Works contracts inside of Iraq.
This type of contracts requires that the contracted party to be incorporated in Iraq in order to be able to implement the obligations agreed upon. Those contracts are taxable, and the tax rate is based on the type of contract and activity the company is conducting inside of Iraq.
- Investment contracts
If an international entity obtains an Investment License to implement an investment project in Iraq, the company should also be registered inside of Iraq. Since that company will obtain the investment license, and all the privileges granted by the investment laws and regulations.
- There are other types of sector related investment Vehicles, which necessities on a certain formality to be followed e.g. Banking and Insurance. Which will be explained in the related section below.
Types of Investment Vehicles
A. Local Limited Lability Company
The Iraqi Parliament has issued Companies Amendments Law No. 37 of 2019 “Companies Law Amendments”. Companies Law Amendments has entered into force in September 2019. According to the newly issued amendments on the Companies Law No.21 of 1997, it is a requirement for Iraqi limited and joint-stock companies to have 51% Iraqi ownership. As such, there will be a need for a nominee arrangement in place for an Iraqi individual or legal Iraqi entity to hold at least 51% of the shares. Fforeign companies have the right to establish a Limited Lability Company and own 49% of its shares only. Incorporating a local entity has several leverages in the Iraqi market. It is noteworthy that incorporating an entity sometimes necessitate acquiring a sector related approval for some activities, which only local entities are licensed or may apply for a license to practice. The minimum startup capital for an LLC is one million Iraqi Dinar (equals to approx. eight hundred US dollars). The nominal value of each share is one Iraqi Dinar. The law prohibits issuance of shares with a higher or lower value. Share capital must be fully paid when the company is established. Cash contributions must be paid into an account at a bank authorized to operate in Iraq and must remain deposited until documents proving the completion of the establishment formalities are presented to the bank. Contributions in kind must be recorded in the memorandum of association, and the value must be approved by all founders. In practice, the Registrar of Companies, in accordance with internal instructions by the competent ministries, requires a higher capital for companies active in certain fields of business. The classification of contractors with the Ministry of Planning may also require additional share capital.
B. Foreign Company Branch Office.
Companies has the right to register a branch office in Iraq. Based on Regulation No.2 for 2017, the option of registering a representative office is no longer available and foreign entities were given the right to set up a branch directly to promote for their activities and services. The Ministry of Trade/Registrar of Companies Department is the governmental entity responsible for the regulation of the establishment of foreign branches, and the granting of registration certificates. In respect of the establishment of a branch in Iraq, a new Regulation No 2 of 2017 was issued in mid-March, which regulates the registration of foreign companies in Iraq.
The Regulation dictates that foreign companies that have been established for at least two years in the country of origin, and intend to set up a branch in Iraq, are permitted to conduct business in Iraq when the company has obtained one of the following:
- A contract with a governmental entity or a sub-contract with an entity contracted to the Iraqi government, or a contract with a state or mixed sector companies;
- Investor license according to the applicable investment laws;
- Business license granted from an authorized Iraqi governmental entity; or,
- Conducting business in the private sector, if contract value/project value is not less than one million USD (1,000,000).
It is important to note that obtaining the registration certificate alone does not license the company to conduct commercial activities. At times, the requirement of a sector-related license is pronounced by the RoC after the issuance of the registration certificate. This decision is subject to the activities listed in the Article of Association, if the acquisition of this license is deemed necessary by the RoC.
C. Joint Stock Company
In some specific activities, the Iraqi laws and regulations necessitate to establish a Joint Stock Company to be able to obtain a proper sector related license in Iraq. For example, banks and insurance companies must be joint stock companies and obtain sector related licenses from Central Bank of Iraq and Insurance Diwan.
D. Commercial Agent
The Commercial Agency Law obliges any person exercising works of a commercial agency, to be licensed as a commercial agent with the Ministry of Trade. In order for a distributor to be so licensed as a commercial agent, the distributor must satisfy the following conditions:
1. If the distributor is a natural person:
- Be an Iraqi.
- Have full legal capacity.
- Not have been sentenced for a felony or misdemeanor involving moral turpitude.
- Have a commercial office in Iraq for carrying on his business.
- Be affiliated with a chamber of commerce in Iraq and have a trade name.
- Not be a civil servant or public employee.
- Have at least one Commercial Agency agreement duly authenticated according to the Law, OR
2. If the distributor is a juristic person, and in addition to conditions (d), (e), and (g) mentioned above, shall be an Iraqi company with 100% Iraqi ownership and a manager who meets requirements of conditions (A), (B), (C) and (F) of Clause (1) above.
As mentioned, the responsibility to register a commercial agency is on the agent, not the principal, and any penalties to be imposed for failing to register a commercial agency fall on the agent. Accordingly, this is a matter for the Distributor. In order for a commercial agent/distributor to register agencies under its name, a commercial agent/distributor is generally required to submit a duly notarized and certified copy of the commercial agency/distribution agreement.