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Alemanha
How to set up a Company in Germany
15 Abril 2016
- Empresa
Recently People’s Republic of China central government has unveiled and adopted a wide range of initiative to reduce the regulatory burden on daily business operations and provide greater autonomy in investment decision-making.
The reforms aim to give both domestic and foreign investors more autonomy and should make investments in the private sector much easier by reducing bureaucracy and increasing transparency. Investors will have more flexibility to determine the form, amount and timing of their business contributions. In addition, a system of publicly-available, electronic information (including annual filings and a corporate blacklist) will replace the old annual inspection system. Thanks to these reforms China’s requirements will become one step closer to international standards.
In this post I will analyze which are the enterprises affected by the reform; the Negative-list – setting out the industries that still need the approval to be established – and the new application process for company establishment.
Foreign invested enterprises
Generally speaking, foreign invested enterprises are the vehicle through which foreign investors may establish a presence to do business in China, choosing among one of the several different statutory forms recognized by the existing regulatory regime (such as: Wholly Foreign Owned Enterprise – WFOE; Equity Joint Venture – EJV; Contractual Joint Venture – CJV; Foreign Invested Company Limited by Shares; Foreign Invested Partnership Enterprise; or Holding companies). These entities are regulated under stricter laws than domestic companies, and are also subject to the same generally-applicable regulations.
The establishment of FIEs in Mainland China up is currently subject to a rather lengthy and bureaucratic examination and approval process by different Authorities. The same stringent requirements and burdensome procedure apply also to any major change related to FIEs structure, such as: increase or decrease of total investment/registered capital; change of business scope; shares or equity transfer; merger, division or dissolution; etc.
Nowadays, the set-up procedure of a WFOE undergoes through the following steps, having an average time frame of at least 3-4 months for the whole process:
Pre-issuance Business License
- Collection of the basic information from Investor’s side (7 working days)
- Company name pre-approval (5-7 working days)
- Lease agreement (it depends on Investor/Landlord)
- Legalized documents prepare by the Investor for the incorporation (few weeks)
- Certificate of Approval issued by MOFCOM (4 weeks)
- Business license issued by AIC (at least 10 working days)
Post-issuance Business License
- Carve company chops (1-2 working days)
- Foreign exchange registration certificate (around 10 working days)
- Open a CNY bank account (depends on the bank)
- Open a Foreign capital account (at least one week)
- Capital injection, in compliance with company Article of Association
- Capital verification report (it depends on accounting firm)
- Foreign trade operator filing before MOFCOM (at least 5 working days)
- Basic Customs Registration Certificate – if any (at least 5 working days)
- Advance Customs Registration (at least 30 working days)
- SAFE Preliminary Foreign Trader filing (2-3 working days)
- VAT general taxpayer application (1-2 working days)
- VAT general taxpayer invoice quota (30-60 working days)
On September 3rd 2016, the China National People Congress (NPC) Standing Committee adopted a resolution introducing several amendments related to the establishment of foreign-invested enterprises (FIEs) in China, which has taken effect starting from October 1st 2016. The resolution is going to produce its effect for some of the FIEs statutory forms only (WFOE, EJV, CJV).
These amendments repeal the current examination and approval regime to set-up legal entities, shifting to a different system where a FIE may be established following a streamline procedure of filing requirements before the competent authority, as long as the industry in which it engages is not subject to any national market access restrictions.
Negative List
Within October 2016 a Negative List will be issued, setting out the industries in which FIE establishment must still be examined and approved under the existing laws and regulations: a complicated and time consuming process, involving verification, approval and registration with several Authorities. The current list includes:
- Agriculture and fishery (crop seed, animal husbandry, etc.)
- Infrastructure (airports, railroads, postal service, telecom and internet, etc.)
- Wholesale and retail (newspaper and magazine, tobacco, lottery, etc.)
- Finance (investment in banks or other financial companies, etc.)
- Professional services (accounting, legal advisors, market research, etc.)
- Education (establishment of schools, management of educational institution, etc.)
- Healthcare (EJV or CJV are required to set-up medical institution, etc.)
The publication of this list is a fundamental step, in order to better understand how the new regime will operate, as it will determine which sectors and matters are covered by the new filing requirements and, on the other hand, which items continue to undergo through a pre-approval process (basically all the sectors indicated in the Negative List).
The Negative List approach towards foreign investment was originally introduced by the Shanghai Free Trade Zone and subsequently extended to other Free Trade Zones in Mainland China (FTZs): according to the Negative List foreign investors were granted “national treatment” and were allowed to invest in several different business activities, with the exception of those listed in the Negative List form.
Essentially established as testing ground for new reforms, the FTZs were also established to drive regional growth by encouraging selected industries to cluster in specific geographical areas and, at the same time, served as a mean to promote experimental economic reforms and facilitate foreign direct investments.
New application process
In order to simplify bureaucracy cutting down time and costs, FTZs introduced a new application process for company establishment, the so called “one stop application procedure”. The applicant (foreign investor) may submit an online application through the relevant FTZs website, and then the business will be checked in order to verify whether it falls into the Negative List or not.
In case the requested business does not fall under the Negative list, all the application materials can be submitted and handled through one Authority (AIC – Administration for Industry and Commerce) within the Zone. All the relevant license and certificates (included but not limited to the business license, enterprise code certificate and tax registration certificate) will be issued altogether by AIC. In this way, the applicant can obtain all the relevant documents for company establishment in one place, contrasting with the outside Zone process where applicants must move between different authorities for the issuance of the different varieties of documents.
Thanks to the adopted amendments under the latest resolution (September 3rd 2016), this pilot scheme will apply also nationwide. The simplified filing requirement process will replaces the burdensome examination and approval procedure for the formation and change of key elements of FIEs, starting from October 1st 2016.
In the next post I will examine the main essential features of the new filing regime and the future perspectives following the reform.
Under the freedom of trade and industry, every person in Switzerland (including foreigners, provided that they have a regular work and residence permit) may exercise any industrial or commercial activity, without any special official authorisation.
Swiss civil law distinguishes between partnerships (sole proprietorship, limited partnership, general partnership) and legal entities (public company and limited liability companies). A foreign investor can chose the most appropriate type of company, according to her or his activities and strategic objectives. She or he may also establish a branch in Switzerland, as well as establish a joint venture or a strategic alliance. An interesting possibility for venture capital is also the new limited partnership for collective investments and capital.
The time required for setting up a company is different, but it usually does not take more than three weeks and the procedure can often be performed via the Internet.
Sole Proprietor
This type of business is carried out by a sole proprietor and has to be registered in the commercial register if it produces at least CHF 100,000 gross income per year. It is not a legal entity (i.e. the proprietor is personally liable for his/her business without any limitation) and the proprietor is subject to taxation. This form of business organisation is commonly used for smaller enterprises.
Simple Partnership (Einfache Gesellschaft)
An ordinary partnership is based on a contract of association between two or more partners and is a very loose formation without being a legal entity. Each partner is individually subject to taxation rather than the partnership itself. For business debts, each partner is personally liable with his/her own private assets. An ordinary partnership cannot be entered into the commercial register. This form of business organisation is often used for activities of short duration or for specific projects only (consortia or joint ventures).
Main use: joint ventures; consortiums in the construction or banking industry; shareholders under a shareholders’ agreement; founders of a company until the company has been duly established.
General partnership (Kollektivgesellschaft KG)
To form a general partnership, two or more individuals enter into a contract of association in order to operate an enterprise based on commercial principles. A general partnership has a trade name and must be registered in the commercial register.
Although it can acquire rights, incur liabilities, take legal action and be sued, the general partnership is not in itself a legal entity. Liability for debts is not limited to the capital of the partnership but is extended to the private assets of the partners in the form of joint and several liabilities. Only individuals can set up this form of business organisation and liability is limited to the capital of the company. Especially used for small family businesses or businesses run by a few trusted partners (might achieve better credit-worthiness than legal persons due to partners’ liability).
Limited partnership (Kommanditgesellschaft)
A limited partnership has two kinds of partners. One must be liable for the business without any limitation, while others are only liable to the extent of their capital contribution. Only individuals can be partners with unlimited liability, whereas partners with limited liability may also be legal entities, such as corporations. Since the limited partnership is derived from the general partnership, other characteristics (such as rights and duties) are the same as described in the section above.
Unlimited partners with unlimited liability (at least one) and limited partners with limited liability up to the fixed amount as registered in the commercial register (at least one).
Unlimited partners must be individuals, limited partners may be individuals, legal entities or general or limited partnerships Also similar use as with general partnerships, used in situations where not all partners are willing or able to be actively involved in business or for small businesses in the form of general partnerships looking for private investors.
Limited Liability Company (Gesellschaft mit beschränkter Haftung, GmbH)
A limited liability company is a legal entity with fixed capital. The minimum capital is CHF 20,000 and this has to be fully paid in cash or in-kind. For the formation of a limited liability company, at least one founder is required. Each partner (individual or company) participates with a capital contribution (minimum CHF 100 per share) and must have a name and domicile registered in the commercial register. The management and representation of the company may be transferred to people who are not partners, but at least one of the managing officers must be domiciled in Switzerland. All partners and managers may be non-Swiss citizens.
The legal form of a limited liability company is especially intended for small and medium sized companies and so requires an equity capital of only CHF 20.000 for its formation.
As is the case with joint stock companies, the limited liability company has sole liability for its debts; recourse against the equity holders is not possible. Unlike a joint stock company, however, the articles of incorporation can impose obligations requiring the equity holders to pay in additional ancillary obligations. If the limited liability company is unable to continue to function without an injection of capital or new equity capital is required for specific activities, the equity holders are obliged, if such an obligation was agreed upon, to provide the new capital (to a maximum of twice the value of the existing capital). Typical examples of ancillary obligations set out in the articles of incorporation are the obligation to supply or purchase goods and the obligation to perform certain services for the benefit of the company.
In the absence of any rules to the contrary, the general management of a limited liability company is delegated to all of its members. By contrast, shareholders of a joint stock company are not automatically empowered to act in the name of the company and require separate authorization to function as a member of the board of directors or a duly authorized signatory.
The law allows comprehensive restrictions on the transferability of quota shares. Unlike a restriction on transferability contained in a shareholders’ agreement, a restriction on transferability provided for in the articles of incorporation of a limited liability company is also binding on the company and can therefore be more easily enforced. In addition, the articles of incorporation of a limited liability company can impose a non-competition clause on to its members.
In a limited liability company resolutions of both the general meeting and of the general management can be adopted by written consent.
Only individuals may be elected as members of the board of directors. The board of directors has to include at least one member resident in Switzerland. Shareholders are entitled and obliged to manage the company without being appointed (principle of self-management). The articles of association may provide that the managers are appointed and dismissed from office at the shareholders’ meeting.
The board of directors/management of limited liability companies has the same non-delegable and inalienable duties as the directors/management of a corporation except for the appointment and dismissal of management.
The principle of non-delegable duties of the management may be overridden as the articles of association may provide for a mandatory or optional presentation of certain decisions for the approval of the shareholders’ meeting.
A shareholder may for valid reasons bring an action in court for permission to withdraw from the company. The articles of association may also grant shareholders a right to withdraw and may make this dependent upon certain conditions. The law provides for a mandatory right of expulsion by way of the company bringing an action in court. The articles of association may go further and permit the shareholders’ meeting to expel shareholders for valid reasons. The special squeeze-out provisions of the Merger Act also apply to limited liability companies.
Public Company (Aktiengesellschaft, AG)
The most common form of a company in Switzerland is the public company. The minimum capital is CHF 100,000 and at the time of incorporation the founders must pay at least the 20% of the nominal value of the capital (with a minimum of CHF 50,000). The capital of the company is represented by shares. Each share must have a minimum nominal value of CHF 0.01.
Shares can be either registered or bearer. Whereas the former have the name of the shareholder, the latter protect the confidentiality of the investor and can be freely transferred. In order to issue bearer shares all minimum capital must be paid.
Capital contribution can also be in kind. In this case, the following items can be contributed:
- Goods;
- Equipment and machinery;
- Assets;
- Real estate;
- Participations and interest in other companies;
- Patents and trademarks.
The public company is a very flexible form of business organisation and it is often chosen by foreign investors because of the ease in which shares can be transferred. For the formation of a public company at least one founder is required, which can be either an individual or a company. The management and representation of the company may be carried out by people who are not shareholders, but at least one of the managing officers must be domiciled in Switzerland. Shareholders and managers may be non-Swiss citizens.
I. Introduction
The 1919 American legal case of Dodge v. Ford Motor Company provides a lens through which an analysis of disputes between majority and minority shareholders can start to be conceived. After allowing the Dodge Brothers, already a supplier to Ford, to become minority shareholders within the company, majority shareholder and executive Henry Ford unilaterally decided to terminate special dividends for shareholders in order to maintain further investment in new plants. This measure served as a way to sustain the production of cars at lower prices, a feature of the car manufacturer that Ford saw as tantamount to the public good and, perhaps less ostensibly, represented the preservation of a business model seen by Ford as essential to the Ford Motor Company’s long-term success. The development spurred the Dodge brothers to bring civil action against the Ford Motor Company, citing it as an injustice that deprived them of deserved dividends. In 1919, the Supreme Court of Michigan, ruled in favor of the Dodge brothers and stated that the action of Ford was not justified under the rule of “shareholder primacy,” thereby awarding the Dodge Brothers of the dividends to which they were entitled. The Supreme Court simultaneously decided, however, that the case also shaped the “business judgement rule,” which reserves the right of final judgment to the executive or relevant directors.■ This example testifies to the unmediated conflict between the interests majority and minority shareholders that exists at the heart of a limited company and corporations: namely, the majority’s stronghold over the corporation’s operations and its preference to reinvest the corporation’s profits in the business itself, which fundamentally runs counter to the common desire of minority shareholders to obtain the maximum return on their capital. Further, the outcome in Dodge v. Ford illuminates how, in the case that the majority seeks to abuse its power and circumvent the minority, it is often necessary that the minority exercise its ability to react. ■ The minority shareholder’s “right to control,” which includes the right to be informed and the right to inspect certain documents of the corporation, along with the right to exit, typically serve as the chief devices at its disposal. This derives from the fact that such rights are, in the common practice of law, considered sovereign and do not fall under the majority shareholder’s umbrella right to exercise propriety and “good faith.” In simpler terms, this means that the minority shareholder possesses the principle rights to veto and to exit.
II. Pre-existing Realities of Minority Shareholder Participation
Beyond a situation in which majority and minority shareholders have an already established relationship within a corporation or enter into special arrangements before acquiring or selling an equity interest, this article seeks to approach first the circumstances under which such a relationship lacks clear definition, for example in a succession mortis causa i.e. where the shares are owned by the heirs of a common relative and new minorities are thereby created. This happening typically occurs in family owned corporations in which the rights reserved to the minority shareholders are, therefore, even more crucial. Further, it should be noted that in the absence of applicable provisions within the corporate charter (also known as articles of incorporation), the corporation’s bylaws, and shareholder agreements governing the majority – minority shareholder relationship, the rights protected under the Italian Civil Code (“Codice Civile,” abbreviated as “c.c.”) solely take jurisdiction. On the surface, this would seem to preclude any advantage on the part of the majority shareholder and constitute a neutral majority – minority shareholder relationship. It should be noted that the present examination solely regards the so-called “Società per azioni” (abbreviated “S.p.A.”) “chiuse,” to which the English term “closely held corporations” in the U.S.A. stands as an equivalent. The main feature of a S.p.A “chiusa” is that it does not possess recourse to the risk capital market. ■ Further, unlike “Società a responsabilità limitata” (abbreviated “S.r.l.”) akin to a limited liability company in the U.S.A., shareholders in S.p.A.s do not possess the right of direct supervision over operations of the company. In S.p.A.s, in fact, supervision over operations is reserved to the Board of Statutory Auditors, which oversees that the directors of the corporation act in uniformity and in respect of the law, the charter and the bylaws, thus safeguarding, inter alia, the interest of the minority shareholders. In any case, however, the law stipulates that certain rights on the part of the minority in a S.p.A. are first and foremost reserved, namely the right to inspect some corporate records and the general right to information. These rights are, above all, limited to particular cases such that the shareholders cannot intervene in the corporation’s management, which is exclusively reserved to its administrators. It is important to note that the right of inspection, as protected under Article 2422 c.c., recognizes the shareholder’s right to verify the book of shareholders, which contains the information of all shareholders, in addition to the minutes of shareholders’ meetings. Such verification can be carried out also by means of an agent and copy of said records can be obtained at his or her expense. This right, however, is limited exclusively to the aforementioned records without offering the possibility to examine the other corporate records indicated under Article 2421 c.c., which include the minutes of the Board of Directors, the Board of Statutory Auditors, etc. Such further records can only be inspected by the directors, the statutory auditors, and other subjects whose duty lies in the control of the corporation, thereby not possessing any limitation in the right of general access to them. This reality derives from the fact that such examination constitutes the necessary instrument by which they can exercise their supervision powers over the company’s administration, organization, and proper accounting in respect to the law, the articles of incorporation, the corporation’s bylaws, the principles of sound management, the administrative system, the accounting system, and the organizing structure of the corporation. That being said, the single shareholder does possess the following channels through which he or she can exercise control over operations within a privately held S.p.A. which the legislature explicitly places at his or her disposal:
(i) To file a petition within the Board of Statutory Auditors, denouncing in any shape or form deemed appropriate by the shareholder a behavior on the part of the directors considered outside of compliance related to not adequately addressing proper organizational, administrative, and accounting duties under Article 2408 c.c.. The said denounce must obligatorily be taken into account and relayed to the management by the Board of Statutory Auditors who, if the petition is filed by a proportion of one – twentieth of the equity (i.e. 5%) must, in a prompt fashion, investigate this claim and inform the shareholders’ meeting of the results of the subsequent investigation in the conclusions of its report in the course of the annual shareholder’s meeting. Statutory Auditors have the duty to convene a general shareholders’ meeting in the following cases (a) omission or unjustified delay of such action on the part of directors (b) the recognition of reproachable practices on the part of the directors whose seriousness and urgency recommends that a meeting should be convened as covered under the second section of Article 2406 c.c. (it should be noted that this latter described ability and duty is not necessarily limited to the petition of the shareholders, but instead to the aforementioned practices considered to be of serious weight that must be correspondingly addressed in an urgent manner).
(ii) Shareholders further reserve the right to report to the Court in case of grounded suspicions that the Board of Directors and the Board of Statutory Auditors are in violation of their fiduciary duties and have committed serious mismanagement that could be the precursor to substantial damages for the corporation or for one or more controlled companies by such a S.p.A. In this case, shareholders who together constitute one-tenth (i.e. 10%) of equity interest have the ability to call for the procession of an investigation, while the cost of such investigation should be borne by the acting parties and as ordered by the Court. If such an investigation finds such a violation to be the case, the delivering of and appropriate decision follows. In the case that the responsible Board members or auditors resign, however, and/or are replaced with a new slate of duly proven professionals, the investigation can be avoided and suspended to a later determined date at the discretion of the Court. These professionals, however, have the obligation to address and eliminate in haste the practices of relevant mismanagement found in violation following the exclusion of their predecessors. The Court reserves the further right to convene a general shareholders’ meeting in the case that it believes the measures that have been undertaken failed to properly address the wrongdoing within the organization in an appropriate manner. In the most serious of cases, the Court can remove the directors and the statutory auditors, appointing a judicial administrator with envisioned powers for a duration deemed necessary. This individual, as appointed by the Court, therefore, has legal standing and is entitled to exercise the so called “azione di responsabilità” (the “liability action”) namely an action against the directors for their liability for breach of fiduciary duties, as stipulated in the last provision in Article 2393 c.c.
(iii) Shareholders also reserve the right to exercise the liability action in case of breach of fiduciary duties, namely the breach of the duty of loyalty and the duty of care and in case of mismanagement, on the part of the directors or the Statutory Board of Auditors, as provided in Article 2393 bis c.c.. This action requires the shareholders together composing at least one – fifth (i.e. 20%) of shared capital ownership; it should be noted that the bylaws might otherwise stipulate a greater threshold than one – fifth, but such can never exceed one-third ownership (i.e. approximately 33%). Article 2393 further specifies that the exercising of the liability action shall not be carried out if shareholders constituting one- fifth (i.e. 20%) of total capital vote to the contrary. If, however, shareholders constituting one – fifth of ownership approve such a measure, Italian law dictates that the incumbent directors are automatically removed.
(iv) The right is reserved to challenge and vacate shareholders’ meeting resolutions (including that relative to the approval of the financial statement as protected under Article 2434 bis c.c.) which are considered contrary to the law or the corporation’s bylaws as by Article 2377 c.c. In order to exercise this right, there must be a number of shareholders comprising one – twentieth (i.e. 5%) of shared capital. Further, acting upon this right can be accompanied by the commensurate action of the shareholders aimed at recovering the damages produced through the resolution undertaken. (v) As by Article 2429 c.c., the right to examine, during office hours, the companies’ project of financial statement in addition to the report of the directors, the report of the Board of Auditors, the report of the supervising auditing firm, on top of a summary of the data essential to the last financial statement of associated companies, in the fifteen day period preceding the general shareholders’ meeting scheduled for the approval of the corporate financial statement.
(v) The right to participate in the deliberations of the shareholders’ meeting and exercise the right of “veto” in the so called case of an extraordinary Shareholders’ Meeting, on second call, involving “modifications of the bylaws, corporation’s name, substitution of its liquidators, and other matters expressly attributed to the extraordinary meeting by law,” as stipulated in Article 2365 c.c. in the case that there exist shareholders who hold a quorum of one – third (i.e. approximately 33%) of the shared capital only in the second meeting.
(vi) The right to call a summons for a general meeting convened without any delay, under Article 2367 c.c., which can be exercised by any quorum of shareholders constituting one – tenth (i.e. 10%) of shared capital.
(vii) The right to call for the postponement of the meeting if not sufficiently informed prior, in the case that shareholders holding a third (i.e. approximately 33%) of shared capital vote for such a measure, pursuant to Article 2374 c.c.
■ An analysis of the aforementioned critical percentage thresholds necessary for such shareholders’ participation within a closely held S.p.A, in fact, demonstrates that the relevant legal infrastructure provides a meagre pathway to minority representation. Beyond the 5% provision in Article 2377 c.c., which concerns the extenuating circumstance of challenging decisions made by the Board, minority shareholders remain relatively powerless in a private, closely held limited company and without the possibility to challenge decisions made by the majority shareholders (S.p.A. chiusa). Therefore, in order for a minority to be considered “qualified” and have its voice heard within the corporate governance of a closely held Italian corporation, it is necessary for it to hold a) the 5% shareholder ownership, which allows it to petition for the investigation of the Board of Directors or the Board of Statutory Auditors for behavior considered out of compliance (as by Article 2408 c.c.), and to vacate the decisions made in shareholders’ meetings (as by Article 2377 c.c.). b) the 10% quorum for a petition to the Court of the above cited serious wrongdoings on the part of the Board of Statutory Auditors and the Board of Directors, as by Article 2409 c.c., and to convene without hesitation the shareholder’s meeting, as by Article 2367 c.c.; c) the 20% threshold in total shared capital to bring about action of liability against the Board of Directors or the Board of Statutory Auditors, as by Article 2393 bis. c.c., or to oppose the resolution as by Article 2393 c.c. d) the 33% (+1%) quorum for the exercising of a veto in an extraordinary shareholders’ meetings on second call and for the request for the postponement of the shareholders’ meeting as by Article 2374 c.c.
■ Exit (withdrawal). The right to exit is the right of the minority to exit from the group of shareholders. The natural modality of exit is the sale of equity. Standing as the principal alternative to selling shares, in case of external events that place a significant change on the conditions of risk, the shareholder who cannot control such changes within the corporate scheme can employ the prospect of divesting, in full or in part, by means of this right of withdrawal. It is necessary for the shareholder to cite the exact cause, which prompts his or her exercising shareholder’s right to exit by means of withdrawal: namely, on one hand, such that the majority is able, in an informed manner, to influence managerial decisions regarding the corporation’s vitality and, on the other hand, the minority, in the case of feeling as a “prisoner” to the corporation, has a mechanism at its disposal to, in plain terms, get out. The withdrawal becomes, therefore, a powerful instrument of influence to be executed on the majority by the minority shareholder in addition to serving as a bargaining chip, which changes the premise of negotiation initially established by the shareholders, with the induction of specific motives of withdrawal. The right of withdrawal is disciplined by Article 2438 c.c. withdrawal and is exercisable in the case verified by the following circumstances: a) modification of the corporate purpose that influences in a significant manner the activity of the corporation; b) the transformation of the corporation; c) the transferring of corporate headquarters abroad; d) the revocation of its state of liquidation; e) the elimination of one or more of the causes for withdrawal stipulated within the bylaws; f) the modification of the bylaws that has bearing on the value of the equity interest of the shareholder in the case of his or her exit; g) modifications of the bylaws concerning the rights of voting and administration; h) postponement of its terms; i) introduction or removal of obligations or legal limitation regarding the circulation of shares; l) if the corporation is acknowledged for an indeterminate period of time, the shareholder can exercise withdrawal with a notice of 180 days in advance; m) in the case that the corporation is subject to direction and coordination in the sense of Article 2497 c.c. Relative to the circumstances above cited, it is of fundamental importance to remember how some of these cases, most precisely those indicated by letters a) through g), are causes of withdrawal considered mandatory, that is to say, which are not susceptible to modification even in the case of voluntary compliance on the part of the relevant shareholders, while those indicated by letters h) and i) are subject to change and might be derogated in the case of the approval of the shareholders. The first part of Article 2437 c.c., second section, in fact, explicated, “unless the bylaws stipulate differently,” these causes, referring to those belonging to the first group (a through g), are recognized implicitly as much as independently sustained. One might therefore, configure a partition of the causes for exit into three categories: those legally mandatory, those legally non-binding and subject to change, and those stipulated in the corporate bylaws. For the exercising of the right of withdrawal, it is necessary to respect the modalities foreseen in Article 2437 bis c.c.; further, it should be noted that the exercising of this right involves the liquidation of the equity interest according to the relevant criteria of determination disclosed in Article 2437 part 3 c.c.
The Foreign Investment Protection and Promotion Act of Iran of 2002 (FIPPA) does not give a precise definition of investment. However, according to article one of the law, it shall include any cash or non-cash flow of investment into the country and could encompass cash flows in foreign currency through the Iranian banking system or other legitimate means, machinery, spare parts, raw materials, CKD (knock-down-kit) and SKD (semi-knocked-down-kit) parts, intellectual property such as knowhow, patents and registered names, technical services, transferable share dividends and anything else if approved by the Council of Ministers. Foreign direct investments are allowed only in sectors in which private ownership is permitted. Build Operate Transfer (BOT) agreements and Civil Partnerships can be used in all areas, including upstream oil and gas industry, where foreign direct investment is prohibited due to a constitutional ban.
With the enactment of FIPPA, obtaining an investment license has become very straightforward. As a rule of thumb, there is a minimum amount of $ 300,000 to apply for a FIPPA license. The entire process of obtaining a license should take no longer than 45 days since the date of submission of documents to the Organization for Economic and Technical Assistance of Iran (hereinafter “OIETAI”), the main foreign investment authority in Iran. The application can be submitted directly by the foreign investor or their legal representative in Iran. The application form is downloadable online, must be completed in Persian or in English language and is reviewed by the OIETAI in coordination with the relevant Ministry. This stage may last up to 15 days. OETAI refers the application to the Foreign Investment Board which shall make the final decision regarding the admission of the foreign investment. The Foreign Investment Board is the highest-ranking authority and is the authority which finally issues the FIPPA license. The board includes six high-ranking official members of the government, the head of OETAI and some other prominent figures.
Should the Board reject the application, the decision can be appealed; in case the application is accepted, the license is signed by the Minister of Economic Affairs and Finance. The license is then communicated to the foreign investor by OETAI. The latter stage might take a maximum of 30 days, without considering the delay which may be caused by an appeal request.
A FIPPA license lists the amount of foreign investment, name of foreign and Iranian partners, type and area of investment, means for transference of capital contributions and the requirements regarding the investment project. The license is issued for a specific period during which at least part of the investment must be transferred to Iran. Foreign investors can file a request for an extension prior to the expiry of the deadline set by the Board of Investment, mentioning justified reasons for such a request. This request will be reviewed by the Board of Investment. If no investment is made during before the given deadline, absent justifiable excuses, the license will be revoked.
In general, merely commercial or trading activities do not qualify for FIPPA license unless they are accompanied by production. Investment in services may qualify for a FIPPA license subject to the decision of the Board.
Expats require a work permit, or employment license, in Iran for any type of employment. The organ in charge is the “Department General for Employment of Foreign Nationals”, a division of the Ministry of Cooperative, Labor and Social Welfare. The requirements are set in articles 120-129 of Iran Labor Law. In general, a work permit will be issued to a foreign worker only if there are no Iranians having the same level of education or expertise. This sets the bar very high. Foreigners cannot apply for a work permit on their own, unless they establish an enterprise in Iran. Employers need to submit their request and documents as are listed and announced by the Department General for Employment of Foreign Nationals for verification. This list normally requires identification documents of applicant including resume and expertise documents, letter of request from the employer attached with company official documents (registration notice, latest changes, chart and etc.). Prior to this stage, employers cannot enter into an employment contract with foreigners. Then, the documents are sent to the Technical Board for Employment of Foreign Nationals which is very strict regarding issuance of work permits.
FIPPA (“Foreign Investment Promotion and Protection Act”) allows foreign investors, directors and experts and their immediate family members to acquire visa, residence permit and work permit. This was introduced in art. 35 of the executive directive to FIPPA. Yet, there are incentives for employment of Iranian nationals.
Work permits are, in any case, valid for one year. Renewal requires an application by the employer. The application, which must be written and should explain the need for renewal of the permit, must be handed by the employer at least one month before the work permit expiry date. Upon the end of the one-year validity of work permits, employers can refrain from renewing the contract. However, termination of work contract requires confirmation by the Ministry of Employment, which will result in termination of work permit. Working without a permit or employing an unlicensed employee are punishable by law.
According to the executive directive to FIPPA, the Ministry of Foreign Affairs has an obligation to ask Iranian embassies to issue a single or a multiple-entry visa clearance (with a validly of three years) and a three-month residence permit upon receiving a request from the Organization for Investment Economic and Technical Assistance of Iran (OIETAI), which is also in charge of issuing a FIPPA license for foreign investors. People who enter in Iran using this type of visa can obtain a three year residence permit and will get a work permit, which is valid for one year but is renewable once the FIPPA license of the investor is issued.
Employment insurance of foreigners is similar to the one for Iranian and can be obtained from the Organization of National Welfare (Ta’min Ejtemae’i) at similar rates. According to article 5 of Iran Social Welfare Law, when foreigners are insured in their own country, the employer might be exempted from their Iranian insurance if the foreign insurance covers work accidents, pregnancy, damages relating to wages, disability, retirement and death.
As mentioned above, in order to subject foreigners to Iranian taxation, they have to obtain work and residency permits from the Labor and Social Welfare Organization of Iran. In this light the long term multiple visa is also granted to foreigners to facilitate their entry and exit from the country. If foreigners without the necessary permits start working in Iran, even though through occasional trips to Iran, they will be subject to payment of fine and income tax as determined by the Tax and Organization and Labor and Social Welfare Organization of Iran. Iranian Law does not quantify the minimum number of days of presence in Iran to be considered as a working immigrant. Normally it is the duty of the Immigration Police to verify if a foreigner is working in Iran.
As far as taxation of foreigners’ income is concerned, the salary paid to foreign employees is taxable with the same rates of Iranian salaries. According to Art. 131 of Iran law on direct tax, income tax payable in Iran is between 15% and 35%, depending on income brackets.
| Annual Taxable Income | Rates | Of the excess over |
| Up to IRR 30,000,000 | 15% | |
| Up to IRR 100,000,000 | 20% | IRR 30,000,000 |
| Up to IRR 250,000,000 | 25% | IRR 100,000,000 |
| Up to IRR 1,000,000,000 | 30% | IRR 250,000,000 |
| Over IRR 1,000,000,000 | 35% | IRR 1,000,000,000 |
Furthermore, Iran signed the Treaty on Avoidance of Gaining Double Taxation with many countries around the world, including Italy, France, Germany, Austria, Spain, China, Turkey and recently Cyprus. Under the rules of this Treaty, the amount of tax that has been paid by one applicant shall not be fully taxable again by the other country, but the percentage of difference between the tax rates of two countries shall be calculated on the whole income of the applicant.
The tax rate for foreign companies is also the same provided for Iran companies. Either the company is 100% owned by foreigners and is registered in Iran, or the company is a representative or a branch office of a foreign company, the same rules of tax are applicable. Some tax exemptions are provided for branch offices of foreign companies that only conduct research, feasibility study and marketing, without gaining incomes. Tax rate for companies in Iran is 25% of the annual profit.
Foreign companies willing to operate in Iran have two main options. They can either register a company in Iran or establish a branch or representative office (hereinafter: “Rep. office”) of their own company. Each option offers a number of privileges.
Thanks to recent changes in the laws and practices of company incorporation in Iran, it is possible to establish companies in Iran with 100% foreign capital. There is no need to have Iranian partners either. According to article one of the Company Registration Act of Iran Commercial Code: “any company formed in Iran is an Iranian company”. This is true regardless of the nationality of partners. Therefore, as Iranian companies, companies formed by foreigners can access to all the incentives, facilities and possibilities available for Iranian companies. For example, an important advantage of incorporating a company in Iran for foreign nationals is that it enables the company to come in possession of immovable property. In fact, according to the Iran Ownership of Immovable Property Law, foreign persons are not legally competent to possess any land. However, foreigners who become partners in an Iranian legal person can buy and possess real estate in the company’s name. It is also possible for such companies to rent immovable property for any span of time as long as it does not contradict the laws and regulations of the country. The two most popular company types in Iran are Limited liability companies and joint stock companies.
A limited Liability Company is a company formed between two or more natural persons for trade purposes without the capital being divided into shares. In this company type, the liability of each partner is strictly limited to the capital they have invested. The name of the company should not contain any of the partner’s names, otherwise that partner will have unlimited liability vis-à-vis third parties. The minimum number of partners for this company type is two people, which differs from Joint Stock Companies.
The other very commonly used corporate vehicle in Iran is Joint Stock Companies. This company type is characterized by the division of capital into shares. Joint Stock companies are divided into public and private joint stock. The distinction lies in the possibility of trading the shares publicly in public joint stock companies. The minimum number of shareholders in private joint stock companies is three, while public joint stock companies require a minimum of five shareholders who should all together provide at least one-fifth of the total capital.
In addition to incorporation of Iranian companies, foreign entities have the option of registering a branch or a Rep. Office in Iran. In order for foreign companies to be allowed to work in Iran through a branch or a Rep. Office, such companies need to be legally recognized in their country of origin.
A single-article law, passed in the Iranian Parliament In 1997, allows companies legally registered in foreign jurisdictions to register a branch/ representative in Iran. Such branches/ Rep. Offices can engage in the following activities:
- Offering after-sales services of foreign products/services.
- Operating contracts signed between Iranians and foreign companies.
- Conducting investigations and providing the pre-requisites for foreign investment in Iran.
- Cooperating with Iranian technical/engineering companies to do projects in other countries.
- Increasing none-petroleum exports of Iran.
- Rendering technical/engineering services and transfer of technology.
- Engaging in activities that have been authorized by legally competent authorities in Iran such as rendering services in transportation, insurance/ inspection of goods, banking, marketing and etc.
Management of a branch or a Rep. Office needs to be done by one or more natural persons residing in Iran. A branch is a local unit of the foreign company directly responsible for conducting activities of the foreign company locally. The branch shall act in the name and with the responsibility of the company. In contrast, the representative, who could be a natural or legal person, shall act in its own name and responsibility.
For branches, foreign companies desiring to register a branch in Iran need to submit some documents attached to their application to the office of Company Registration and Industrial Property.
As for Rep. Offices, an Iranian legal or natural person must be introduced as a representative. Each company is allowed to have one official Rep. Office registered in Iran. The representative will, subject to the agency agreement, deliver parts of the duties of the foreign company in Iran. The Representative shall submit certified translation and original documents enclosed to an application to the office of Company Registration and Industrial Property.
Rep. Office and branches that are not allowed to conduct transactions and exclusively deal with market research for their mother company and receive payments from mother companies to cover their costs are not taxed for such payments received from mother companies.
Located in the heart of the Middle East, and Asia’s main pathway to Europe, Iran has a geopolitical and economical key role in the region.
Iran is the world’s 18th largest economy by Power Purchasing Parity. It is an economy in transition, member of the Goldman Sachs’ next eleven and the biggest economy outside of the WTO. The Institute of International Finance has speculated a GDP growth of over 6 per cent for Iran following the implementation day, the biggest economic growth in the world. In 2011, Iran had the fastest rate of scientific growth in the globe and it currently has one of the fastest developing telecommunication industries in the world. Iran has a population of over 80 million people and a high rate of unemployment (13 %).
The predominantly urban population is an ideal untapped middle-class market with huge potential. Because of the sanctions in the previous decade, the market is far from being saturated and offers invaluable opportunity for foreign investors and producers. Its young educated population, for example, can provide ideal skilled local workforce for foreign investors.
Now, with the actual removal of international and unilateral sanctions, which burdened the Iranian economy in the previous decade, there is the hope that Iran will attract ample foreign investments.
Iran has signed Bilateral Investment Treaties and Double Taxation Agreements with numerous OECD countries. Iran has enacted a law encouraging and protecting foreign investment (FIPPA). It has also acceded to the New York Convention on the enforcement of arbitral awards and has adopted UNCITRAL international commercial arbitration model law with only minor adaptations. The Iranian law also affords foreign investors reasonable protection of their intellectual property rights. There are up-to-date enforceable electronic commerce and IT laws as well.
The government has revised the legal requirements for making investments in Iran with the aim of simplifying and accelerating the procedure. Now, there is much more transparency and obtaining an investment license has become very straightforward and could be done in only a few weeks.
Foreigners can establish companies in Iran with 100% foreign ownership, but at the same time enjoy all the rights and privileges available to Iranian national companies (e.g.: purchase real estate). Foreign companies can also establish a representative office or a branch in Iran. If the foreign investment is eligible for a FIPPA license, it can have access to many more incentives. Besides, there are tax exemptions or reductions available in Iranian Free Trade Areas and also for productive activities in the less developed areas of the country.
Evidently, by far the most attractive sector for foreign investors is the petroleum sector, due to the possibility of producing low-cost oil in Iran. With current low oil prices, Iran is one of the very few safe countries where investment in oil can actually produce an economic return. With the introduction of Iran Petroleum Contracts, foreign investors are further encouraged to bring capital to Iran’s petroleum reserves.
Another appealing sector is electricity production. Upon a successful restructuring of its power market, Iran is aiming to diversify its power generation, providing attractive incentives and tax reductions for investments made in renewable energy. Opportunities in this area abound and many foreign companies are already on their way to contribute.
In the wake of sanctions removal, there is also hope for a real boost to Iran tourism industry. Such a boom requires expansion of tourism infrastructure as hotels, luxury accommodation and railways, which would not be possible without foreign investment. As an ancient country with moderate temperatures and spectacular scenery, Iran’s tourism industry looks very promising.
FIPPA provides three main vehicles for foreign investment: Direct Foreign Investment in all areas where private participation is allowed; in the other areas investment can only be made by means of Build Operate Transfer, Build Operate Own, or Buy-Back mechanisms.
There are, however, still some significant barriers. The main stumbling block is the complicated bureaucracy that is deeply embedded in the Iranian legal system, despite the new administration’s attempts to increase transparency. In addition, foreign investment in certain industries is forbidden without State participation. The Iranian banking system has also been isolated during the last years because of the sanctions. All these shortcomings can easily be resolved once the Iranian economy is further integrated into global economy. For now, Iran is ready to embrace the new circumstances to give its economy a real boost and in so doing it requires the collaboration and participation of foreign enterprises. Very similar to the rhetoric governing Iran’s nuclear negotiations with the Five Plus One, the Iranian economy is exploring win-win solutions that would benefit not only itself but also its trade partners.
The Bolivarian Republic of Venezuela (“Venezuela” or the “Republic”) is one of the largest Latin American economies, given its status as one of the world’s largest oil producers and exporters.
Over the last few years, however, the Venezuelan Government has nationalized a number of businesses in the telecom, power, oil, oil service, bank, and several other industries. The Government has also imposed price controls on many core goods and significant exchange control restrictions that limit the ability to purchase foreign currency.
Despite all these setbacks, Venezuela continues to be a country with significant business opportunities for foreign investors willing to assume risks.
Venezuela has the fifth largest proven oil reserves in the world (and the largest in the Western Hemisphere), and the second largest proved natural gas reserves in the Western Hemisphere. If we include an estimated 235 billion barrels of extra heavy crude oil in the Orinoco Belt region, Venezuela holds the largest hydrocarbons reserves in the world. PDVSA, Venezuela’s oil and gas state-owned company, is one of the world’s largest oil companies: they have acknowledged that significant additional foreign investment would be required to achieve its production goals. The Government has signed joint venture agreements for the development of oil and gas projects with international partners from China, India, Italy, Japan, Russia, Spain, the United States of America, and Vietnam among others. All of this creates enormous business opportunities for companies in the oil and gas sector.
The Venezuelan market is also a significant source of profits for several multinational consumer-productsmakers operating in the country since Venezuelans spend a relatively high proportion of discretionary income on personal products and services, beverages and tobacco, apparel, communications (mobile and smartphones), TV and electronic products. In the next few years, imports are expected to increase much faster than exports with the expansion of consumer demand and the decreasing in the national production of consumer goods.
Venezuela has signed economic cooperation treaties with several countries, including Brazil, China and Russia, providing an adequate framework for investments in projects by companies from such countries.
Venezuela is also a party to international treaties to avoid double taxation with several countries that protect investors against certain changes in tax legislation and is a party to bilateral investment treaties with several European, Latin American and Asian countries, which provide for adequate compensation in case of expropriation or nationalization and access to international arbitration in a neutral forum. Despite Venezuela’s withdrawal from the International Centre for Settlement of Investment Disputes, several of the existing bilateral investment treaties permit arbitration under the UNCITRAL Arbitration Rules and the ICSID’s Additional Facility rules. In certain cases, the Venezuelan Government has reached agreements with foreign investors in businesses subject to nationalization and has paid compensation in U.S. dollars.
The Venezuelan government has engaged in infrastructure and other strategic projects with foreign investors under contracts providing for payments in foreign currency and, in certain cases, for international arbitration to settle potential disputes.
Venezuela is divided into three levels of government: the national level, the state level and the municipal level. There are 23 states, a capital district and various federal dependencies, and each state is divided into several municipalities. The political structure of Venezuela is governed by the Constitution of 1999, as amended in February 2009.
At the national level, the government is divided in the executive, legislative, judicial, civic and electoral branches. The President of Venezuela (the “President”) is the head of state, head of the national executive branch, and the commander-in-chief of Venezuela’s armed forces. All executive powers are vested in the President. The President is also entitled to veto laws passed by the National Assembly.
The national legislative power is vested in the Asamblea Nacional or National Assembly. The National Assembly has only one chamber, and its members (diputados) are elected by universal suffrage for terms of five years, and may be re-elected for unlimited five-year terms. The National Assembly is empowered to enact laws, which require the promulgation of the President and its publication in the Official Gazette to become effective. The work of the members of the National Assembly is done through several Commissions and Sub-Commissions.
The judicial branch is vested in the Venezuelan Supreme Tribunal (Tribunal Supremo de Justicia) and various lower tribunals. The Supreme Tribunal is the final court of appeals. It has the power to void laws, regulations and other acts or decisions of the executive or legislative branches that conflict with the Constitution or the laws. The current number of justices of the Supreme Tribunal is 32. Justices of the Supreme Tribunal are appointed by the National Assembly for twelve-year terms
The Supreme Court has five chambers, the Constitutional Chamber, the Social Cassation Chamber, the Civil Cassation Chamber, the Criminal Chamber, Electoral Chamber and the Political-Administrative Chamber. Each Chamber is composed of three justices, except for the Constitutional Chamber which is composed by five.
The Venezuelan court system is a national system; there are no state courts, but there are national courts sitting in each respective state. Judges are appointed by the Supreme Court. The jurisdictions of courts are divided by subject matter: civil, commercial, labor, tax, administrative, criminal and family, among others.
The author of this post is Fulvio Italiani
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4 Abril 2016
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Recently People’s Republic of China central government has unveiled and adopted a wide range of initiative to reduce the regulatory burden on daily business operations and provide greater autonomy in investment decision-making.
The reforms aim to give both domestic and foreign investors more autonomy and should make investments in the private sector much easier by reducing bureaucracy and increasing transparency. Investors will have more flexibility to determine the form, amount and timing of their business contributions. In addition, a system of publicly-available, electronic information (including annual filings and a corporate blacklist) will replace the old annual inspection system. Thanks to these reforms China’s requirements will become one step closer to international standards.
In this post I will analyze which are the enterprises affected by the reform; the Negative-list – setting out the industries that still need the approval to be established – and the new application process for company establishment.
Foreign invested enterprises
Generally speaking, foreign invested enterprises are the vehicle through which foreign investors may establish a presence to do business in China, choosing among one of the several different statutory forms recognized by the existing regulatory regime (such as: Wholly Foreign Owned Enterprise – WFOE; Equity Joint Venture – EJV; Contractual Joint Venture – CJV; Foreign Invested Company Limited by Shares; Foreign Invested Partnership Enterprise; or Holding companies). These entities are regulated under stricter laws than domestic companies, and are also subject to the same generally-applicable regulations.
The establishment of FIEs in Mainland China up is currently subject to a rather lengthy and bureaucratic examination and approval process by different Authorities. The same stringent requirements and burdensome procedure apply also to any major change related to FIEs structure, such as: increase or decrease of total investment/registered capital; change of business scope; shares or equity transfer; merger, division or dissolution; etc.
Nowadays, the set-up procedure of a WFOE undergoes through the following steps, having an average time frame of at least 3-4 months for the whole process:
Pre-issuance Business License
- Collection of the basic information from Investor’s side (7 working days)
- Company name pre-approval (5-7 working days)
- Lease agreement (it depends on Investor/Landlord)
- Legalized documents prepare by the Investor for the incorporation (few weeks)
- Certificate of Approval issued by MOFCOM (4 weeks)
- Business license issued by AIC (at least 10 working days)
Post-issuance Business License
- Carve company chops (1-2 working days)
- Foreign exchange registration certificate (around 10 working days)
- Open a CNY bank account (depends on the bank)
- Open a Foreign capital account (at least one week)
- Capital injection, in compliance with company Article of Association
- Capital verification report (it depends on accounting firm)
- Foreign trade operator filing before MOFCOM (at least 5 working days)
- Basic Customs Registration Certificate – if any (at least 5 working days)
- Advance Customs Registration (at least 30 working days)
- SAFE Preliminary Foreign Trader filing (2-3 working days)
- VAT general taxpayer application (1-2 working days)
- VAT general taxpayer invoice quota (30-60 working days)
On September 3rd 2016, the China National People Congress (NPC) Standing Committee adopted a resolution introducing several amendments related to the establishment of foreign-invested enterprises (FIEs) in China, which has taken effect starting from October 1st 2016. The resolution is going to produce its effect for some of the FIEs statutory forms only (WFOE, EJV, CJV).
These amendments repeal the current examination and approval regime to set-up legal entities, shifting to a different system where a FIE may be established following a streamline procedure of filing requirements before the competent authority, as long as the industry in which it engages is not subject to any national market access restrictions.
Negative List
Within October 2016 a Negative List will be issued, setting out the industries in which FIE establishment must still be examined and approved under the existing laws and regulations: a complicated and time consuming process, involving verification, approval and registration with several Authorities. The current list includes:
- Agriculture and fishery (crop seed, animal husbandry, etc.)
- Infrastructure (airports, railroads, postal service, telecom and internet, etc.)
- Wholesale and retail (newspaper and magazine, tobacco, lottery, etc.)
- Finance (investment in banks or other financial companies, etc.)
- Professional services (accounting, legal advisors, market research, etc.)
- Education (establishment of schools, management of educational institution, etc.)
- Healthcare (EJV or CJV are required to set-up medical institution, etc.)
The publication of this list is a fundamental step, in order to better understand how the new regime will operate, as it will determine which sectors and matters are covered by the new filing requirements and, on the other hand, which items continue to undergo through a pre-approval process (basically all the sectors indicated in the Negative List).
The Negative List approach towards foreign investment was originally introduced by the Shanghai Free Trade Zone and subsequently extended to other Free Trade Zones in Mainland China (FTZs): according to the Negative List foreign investors were granted “national treatment” and were allowed to invest in several different business activities, with the exception of those listed in the Negative List form.
Essentially established as testing ground for new reforms, the FTZs were also established to drive regional growth by encouraging selected industries to cluster in specific geographical areas and, at the same time, served as a mean to promote experimental economic reforms and facilitate foreign direct investments.
New application process
In order to simplify bureaucracy cutting down time and costs, FTZs introduced a new application process for company establishment, the so called “one stop application procedure”. The applicant (foreign investor) may submit an online application through the relevant FTZs website, and then the business will be checked in order to verify whether it falls into the Negative List or not.
In case the requested business does not fall under the Negative list, all the application materials can be submitted and handled through one Authority (AIC – Administration for Industry and Commerce) within the Zone. All the relevant license and certificates (included but not limited to the business license, enterprise code certificate and tax registration certificate) will be issued altogether by AIC. In this way, the applicant can obtain all the relevant documents for company establishment in one place, contrasting with the outside Zone process where applicants must move between different authorities for the issuance of the different varieties of documents.
Thanks to the adopted amendments under the latest resolution (September 3rd 2016), this pilot scheme will apply also nationwide. The simplified filing requirement process will replaces the burdensome examination and approval procedure for the formation and change of key elements of FIEs, starting from October 1st 2016.
In the next post I will examine the main essential features of the new filing regime and the future perspectives following the reform.
Under the freedom of trade and industry, every person in Switzerland (including foreigners, provided that they have a regular work and residence permit) may exercise any industrial or commercial activity, without any special official authorisation.
Swiss civil law distinguishes between partnerships (sole proprietorship, limited partnership, general partnership) and legal entities (public company and limited liability companies). A foreign investor can chose the most appropriate type of company, according to her or his activities and strategic objectives. She or he may also establish a branch in Switzerland, as well as establish a joint venture or a strategic alliance. An interesting possibility for venture capital is also the new limited partnership for collective investments and capital.
The time required for setting up a company is different, but it usually does not take more than three weeks and the procedure can often be performed via the Internet.
Sole Proprietor
This type of business is carried out by a sole proprietor and has to be registered in the commercial register if it produces at least CHF 100,000 gross income per year. It is not a legal entity (i.e. the proprietor is personally liable for his/her business without any limitation) and the proprietor is subject to taxation. This form of business organisation is commonly used for smaller enterprises.
Simple Partnership (Einfache Gesellschaft)
An ordinary partnership is based on a contract of association between two or more partners and is a very loose formation without being a legal entity. Each partner is individually subject to taxation rather than the partnership itself. For business debts, each partner is personally liable with his/her own private assets. An ordinary partnership cannot be entered into the commercial register. This form of business organisation is often used for activities of short duration or for specific projects only (consortia or joint ventures).
Main use: joint ventures; consortiums in the construction or banking industry; shareholders under a shareholders’ agreement; founders of a company until the company has been duly established.
General partnership (Kollektivgesellschaft KG)
To form a general partnership, two or more individuals enter into a contract of association in order to operate an enterprise based on commercial principles. A general partnership has a trade name and must be registered in the commercial register.
Although it can acquire rights, incur liabilities, take legal action and be sued, the general partnership is not in itself a legal entity. Liability for debts is not limited to the capital of the partnership but is extended to the private assets of the partners in the form of joint and several liabilities. Only individuals can set up this form of business organisation and liability is limited to the capital of the company. Especially used for small family businesses or businesses run by a few trusted partners (might achieve better credit-worthiness than legal persons due to partners’ liability).
Limited partnership (Kommanditgesellschaft)
A limited partnership has two kinds of partners. One must be liable for the business without any limitation, while others are only liable to the extent of their capital contribution. Only individuals can be partners with unlimited liability, whereas partners with limited liability may also be legal entities, such as corporations. Since the limited partnership is derived from the general partnership, other characteristics (such as rights and duties) are the same as described in the section above.
Unlimited partners with unlimited liability (at least one) and limited partners with limited liability up to the fixed amount as registered in the commercial register (at least one).
Unlimited partners must be individuals, limited partners may be individuals, legal entities or general or limited partnerships Also similar use as with general partnerships, used in situations where not all partners are willing or able to be actively involved in business or for small businesses in the form of general partnerships looking for private investors.
Limited Liability Company (Gesellschaft mit beschränkter Haftung, GmbH)
A limited liability company is a legal entity with fixed capital. The minimum capital is CHF 20,000 and this has to be fully paid in cash or in-kind. For the formation of a limited liability company, at least one founder is required. Each partner (individual or company) participates with a capital contribution (minimum CHF 100 per share) and must have a name and domicile registered in the commercial register. The management and representation of the company may be transferred to people who are not partners, but at least one of the managing officers must be domiciled in Switzerland. All partners and managers may be non-Swiss citizens.
The legal form of a limited liability company is especially intended for small and medium sized companies and so requires an equity capital of only CHF 20.000 for its formation.
As is the case with joint stock companies, the limited liability company has sole liability for its debts; recourse against the equity holders is not possible. Unlike a joint stock company, however, the articles of incorporation can impose obligations requiring the equity holders to pay in additional ancillary obligations. If the limited liability company is unable to continue to function without an injection of capital or new equity capital is required for specific activities, the equity holders are obliged, if such an obligation was agreed upon, to provide the new capital (to a maximum of twice the value of the existing capital). Typical examples of ancillary obligations set out in the articles of incorporation are the obligation to supply or purchase goods and the obligation to perform certain services for the benefit of the company.
In the absence of any rules to the contrary, the general management of a limited liability company is delegated to all of its members. By contrast, shareholders of a joint stock company are not automatically empowered to act in the name of the company and require separate authorization to function as a member of the board of directors or a duly authorized signatory.
The law allows comprehensive restrictions on the transferability of quota shares. Unlike a restriction on transferability contained in a shareholders’ agreement, a restriction on transferability provided for in the articles of incorporation of a limited liability company is also binding on the company and can therefore be more easily enforced. In addition, the articles of incorporation of a limited liability company can impose a non-competition clause on to its members.
In a limited liability company resolutions of both the general meeting and of the general management can be adopted by written consent.
Only individuals may be elected as members of the board of directors. The board of directors has to include at least one member resident in Switzerland. Shareholders are entitled and obliged to manage the company without being appointed (principle of self-management). The articles of association may provide that the managers are appointed and dismissed from office at the shareholders’ meeting.
The board of directors/management of limited liability companies has the same non-delegable and inalienable duties as the directors/management of a corporation except for the appointment and dismissal of management.
The principle of non-delegable duties of the management may be overridden as the articles of association may provide for a mandatory or optional presentation of certain decisions for the approval of the shareholders’ meeting.
A shareholder may for valid reasons bring an action in court for permission to withdraw from the company. The articles of association may also grant shareholders a right to withdraw and may make this dependent upon certain conditions. The law provides for a mandatory right of expulsion by way of the company bringing an action in court. The articles of association may go further and permit the shareholders’ meeting to expel shareholders for valid reasons. The special squeeze-out provisions of the Merger Act also apply to limited liability companies.
Public Company (Aktiengesellschaft, AG)
The most common form of a company in Switzerland is the public company. The minimum capital is CHF 100,000 and at the time of incorporation the founders must pay at least the 20% of the nominal value of the capital (with a minimum of CHF 50,000). The capital of the company is represented by shares. Each share must have a minimum nominal value of CHF 0.01.
Shares can be either registered or bearer. Whereas the former have the name of the shareholder, the latter protect the confidentiality of the investor and can be freely transferred. In order to issue bearer shares all minimum capital must be paid.
Capital contribution can also be in kind. In this case, the following items can be contributed:
- Goods;
- Equipment and machinery;
- Assets;
- Real estate;
- Participations and interest in other companies;
- Patents and trademarks.
The public company is a very flexible form of business organisation and it is often chosen by foreign investors because of the ease in which shares can be transferred. For the formation of a public company at least one founder is required, which can be either an individual or a company. The management and representation of the company may be carried out by people who are not shareholders, but at least one of the managing officers must be domiciled in Switzerland. Shareholders and managers may be non-Swiss citizens.
I. Introduction
The 1919 American legal case of Dodge v. Ford Motor Company provides a lens through which an analysis of disputes between majority and minority shareholders can start to be conceived. After allowing the Dodge Brothers, already a supplier to Ford, to become minority shareholders within the company, majority shareholder and executive Henry Ford unilaterally decided to terminate special dividends for shareholders in order to maintain further investment in new plants. This measure served as a way to sustain the production of cars at lower prices, a feature of the car manufacturer that Ford saw as tantamount to the public good and, perhaps less ostensibly, represented the preservation of a business model seen by Ford as essential to the Ford Motor Company’s long-term success. The development spurred the Dodge brothers to bring civil action against the Ford Motor Company, citing it as an injustice that deprived them of deserved dividends. In 1919, the Supreme Court of Michigan, ruled in favor of the Dodge brothers and stated that the action of Ford was not justified under the rule of “shareholder primacy,” thereby awarding the Dodge Brothers of the dividends to which they were entitled. The Supreme Court simultaneously decided, however, that the case also shaped the “business judgement rule,” which reserves the right of final judgment to the executive or relevant directors.■ This example testifies to the unmediated conflict between the interests majority and minority shareholders that exists at the heart of a limited company and corporations: namely, the majority’s stronghold over the corporation’s operations and its preference to reinvest the corporation’s profits in the business itself, which fundamentally runs counter to the common desire of minority shareholders to obtain the maximum return on their capital. Further, the outcome in Dodge v. Ford illuminates how, in the case that the majority seeks to abuse its power and circumvent the minority, it is often necessary that the minority exercise its ability to react. ■ The minority shareholder’s “right to control,” which includes the right to be informed and the right to inspect certain documents of the corporation, along with the right to exit, typically serve as the chief devices at its disposal. This derives from the fact that such rights are, in the common practice of law, considered sovereign and do not fall under the majority shareholder’s umbrella right to exercise propriety and “good faith.” In simpler terms, this means that the minority shareholder possesses the principle rights to veto and to exit.
II. Pre-existing Realities of Minority Shareholder Participation
Beyond a situation in which majority and minority shareholders have an already established relationship within a corporation or enter into special arrangements before acquiring or selling an equity interest, this article seeks to approach first the circumstances under which such a relationship lacks clear definition, for example in a succession mortis causa i.e. where the shares are owned by the heirs of a common relative and new minorities are thereby created. This happening typically occurs in family owned corporations in which the rights reserved to the minority shareholders are, therefore, even more crucial. Further, it should be noted that in the absence of applicable provisions within the corporate charter (also known as articles of incorporation), the corporation’s bylaws, and shareholder agreements governing the majority – minority shareholder relationship, the rights protected under the Italian Civil Code (“Codice Civile,” abbreviated as “c.c.”) solely take jurisdiction. On the surface, this would seem to preclude any advantage on the part of the majority shareholder and constitute a neutral majority – minority shareholder relationship. It should be noted that the present examination solely regards the so-called “Società per azioni” (abbreviated “S.p.A.”) “chiuse,” to which the English term “closely held corporations” in the U.S.A. stands as an equivalent. The main feature of a S.p.A “chiusa” is that it does not possess recourse to the risk capital market. ■ Further, unlike “Società a responsabilità limitata” (abbreviated “S.r.l.”) akin to a limited liability company in the U.S.A., shareholders in S.p.A.s do not possess the right of direct supervision over operations of the company. In S.p.A.s, in fact, supervision over operations is reserved to the Board of Statutory Auditors, which oversees that the directors of the corporation act in uniformity and in respect of the law, the charter and the bylaws, thus safeguarding, inter alia, the interest of the minority shareholders. In any case, however, the law stipulates that certain rights on the part of the minority in a S.p.A. are first and foremost reserved, namely the right to inspect some corporate records and the general right to information. These rights are, above all, limited to particular cases such that the shareholders cannot intervene in the corporation’s management, which is exclusively reserved to its administrators. It is important to note that the right of inspection, as protected under Article 2422 c.c., recognizes the shareholder’s right to verify the book of shareholders, which contains the information of all shareholders, in addition to the minutes of shareholders’ meetings. Such verification can be carried out also by means of an agent and copy of said records can be obtained at his or her expense. This right, however, is limited exclusively to the aforementioned records without offering the possibility to examine the other corporate records indicated under Article 2421 c.c., which include the minutes of the Board of Directors, the Board of Statutory Auditors, etc. Such further records can only be inspected by the directors, the statutory auditors, and other subjects whose duty lies in the control of the corporation, thereby not possessing any limitation in the right of general access to them. This reality derives from the fact that such examination constitutes the necessary instrument by which they can exercise their supervision powers over the company’s administration, organization, and proper accounting in respect to the law, the articles of incorporation, the corporation’s bylaws, the principles of sound management, the administrative system, the accounting system, and the organizing structure of the corporation. That being said, the single shareholder does possess the following channels through which he or she can exercise control over operations within a privately held S.p.A. which the legislature explicitly places at his or her disposal:
(i) To file a petition within the Board of Statutory Auditors, denouncing in any shape or form deemed appropriate by the shareholder a behavior on the part of the directors considered outside of compliance related to not adequately addressing proper organizational, administrative, and accounting duties under Article 2408 c.c.. The said denounce must obligatorily be taken into account and relayed to the management by the Board of Statutory Auditors who, if the petition is filed by a proportion of one – twentieth of the equity (i.e. 5%) must, in a prompt fashion, investigate this claim and inform the shareholders’ meeting of the results of the subsequent investigation in the conclusions of its report in the course of the annual shareholder’s meeting. Statutory Auditors have the duty to convene a general shareholders’ meeting in the following cases (a) omission or unjustified delay of such action on the part of directors (b) the recognition of reproachable practices on the part of the directors whose seriousness and urgency recommends that a meeting should be convened as covered under the second section of Article 2406 c.c. (it should be noted that this latter described ability and duty is not necessarily limited to the petition of the shareholders, but instead to the aforementioned practices considered to be of serious weight that must be correspondingly addressed in an urgent manner).
(ii) Shareholders further reserve the right to report to the Court in case of grounded suspicions that the Board of Directors and the Board of Statutory Auditors are in violation of their fiduciary duties and have committed serious mismanagement that could be the precursor to substantial damages for the corporation or for one or more controlled companies by such a S.p.A. In this case, shareholders who together constitute one-tenth (i.e. 10%) of equity interest have the ability to call for the procession of an investigation, while the cost of such investigation should be borne by the acting parties and as ordered by the Court. If such an investigation finds such a violation to be the case, the delivering of and appropriate decision follows. In the case that the responsible Board members or auditors resign, however, and/or are replaced with a new slate of duly proven professionals, the investigation can be avoided and suspended to a later determined date at the discretion of the Court. These professionals, however, have the obligation to address and eliminate in haste the practices of relevant mismanagement found in violation following the exclusion of their predecessors. The Court reserves the further right to convene a general shareholders’ meeting in the case that it believes the measures that have been undertaken failed to properly address the wrongdoing within the organization in an appropriate manner. In the most serious of cases, the Court can remove the directors and the statutory auditors, appointing a judicial administrator with envisioned powers for a duration deemed necessary. This individual, as appointed by the Court, therefore, has legal standing and is entitled to exercise the so called “azione di responsabilità” (the “liability action”) namely an action against the directors for their liability for breach of fiduciary duties, as stipulated in the last provision in Article 2393 c.c.
(iii) Shareholders also reserve the right to exercise the liability action in case of breach of fiduciary duties, namely the breach of the duty of loyalty and the duty of care and in case of mismanagement, on the part of the directors or the Statutory Board of Auditors, as provided in Article 2393 bis c.c.. This action requires the shareholders together composing at least one – fifth (i.e. 20%) of shared capital ownership; it should be noted that the bylaws might otherwise stipulate a greater threshold than one – fifth, but such can never exceed one-third ownership (i.e. approximately 33%). Article 2393 further specifies that the exercising of the liability action shall not be carried out if shareholders constituting one- fifth (i.e. 20%) of total capital vote to the contrary. If, however, shareholders constituting one – fifth of ownership approve such a measure, Italian law dictates that the incumbent directors are automatically removed.
(iv) The right is reserved to challenge and vacate shareholders’ meeting resolutions (including that relative to the approval of the financial statement as protected under Article 2434 bis c.c.) which are considered contrary to the law or the corporation’s bylaws as by Article 2377 c.c. In order to exercise this right, there must be a number of shareholders comprising one – twentieth (i.e. 5%) of shared capital. Further, acting upon this right can be accompanied by the commensurate action of the shareholders aimed at recovering the damages produced through the resolution undertaken. (v) As by Article 2429 c.c., the right to examine, during office hours, the companies’ project of financial statement in addition to the report of the directors, the report of the Board of Auditors, the report of the supervising auditing firm, on top of a summary of the data essential to the last financial statement of associated companies, in the fifteen day period preceding the general shareholders’ meeting scheduled for the approval of the corporate financial statement.
(v) The right to participate in the deliberations of the shareholders’ meeting and exercise the right of “veto” in the so called case of an extraordinary Shareholders’ Meeting, on second call, involving “modifications of the bylaws, corporation’s name, substitution of its liquidators, and other matters expressly attributed to the extraordinary meeting by law,” as stipulated in Article 2365 c.c. in the case that there exist shareholders who hold a quorum of one – third (i.e. approximately 33%) of the shared capital only in the second meeting.
(vi) The right to call a summons for a general meeting convened without any delay, under Article 2367 c.c., which can be exercised by any quorum of shareholders constituting one – tenth (i.e. 10%) of shared capital.
(vii) The right to call for the postponement of the meeting if not sufficiently informed prior, in the case that shareholders holding a third (i.e. approximately 33%) of shared capital vote for such a measure, pursuant to Article 2374 c.c.
■ An analysis of the aforementioned critical percentage thresholds necessary for such shareholders’ participation within a closely held S.p.A, in fact, demonstrates that the relevant legal infrastructure provides a meagre pathway to minority representation. Beyond the 5% provision in Article 2377 c.c., which concerns the extenuating circumstance of challenging decisions made by the Board, minority shareholders remain relatively powerless in a private, closely held limited company and without the possibility to challenge decisions made by the majority shareholders (S.p.A. chiusa). Therefore, in order for a minority to be considered “qualified” and have its voice heard within the corporate governance of a closely held Italian corporation, it is necessary for it to hold a) the 5% shareholder ownership, which allows it to petition for the investigation of the Board of Directors or the Board of Statutory Auditors for behavior considered out of compliance (as by Article 2408 c.c.), and to vacate the decisions made in shareholders’ meetings (as by Article 2377 c.c.). b) the 10% quorum for a petition to the Court of the above cited serious wrongdoings on the part of the Board of Statutory Auditors and the Board of Directors, as by Article 2409 c.c., and to convene without hesitation the shareholder’s meeting, as by Article 2367 c.c.; c) the 20% threshold in total shared capital to bring about action of liability against the Board of Directors or the Board of Statutory Auditors, as by Article 2393 bis. c.c., or to oppose the resolution as by Article 2393 c.c. d) the 33% (+1%) quorum for the exercising of a veto in an extraordinary shareholders’ meetings on second call and for the request for the postponement of the shareholders’ meeting as by Article 2374 c.c.
■ Exit (withdrawal). The right to exit is the right of the minority to exit from the group of shareholders. The natural modality of exit is the sale of equity. Standing as the principal alternative to selling shares, in case of external events that place a significant change on the conditions of risk, the shareholder who cannot control such changes within the corporate scheme can employ the prospect of divesting, in full or in part, by means of this right of withdrawal. It is necessary for the shareholder to cite the exact cause, which prompts his or her exercising shareholder’s right to exit by means of withdrawal: namely, on one hand, such that the majority is able, in an informed manner, to influence managerial decisions regarding the corporation’s vitality and, on the other hand, the minority, in the case of feeling as a “prisoner” to the corporation, has a mechanism at its disposal to, in plain terms, get out. The withdrawal becomes, therefore, a powerful instrument of influence to be executed on the majority by the minority shareholder in addition to serving as a bargaining chip, which changes the premise of negotiation initially established by the shareholders, with the induction of specific motives of withdrawal. The right of withdrawal is disciplined by Article 2438 c.c. withdrawal and is exercisable in the case verified by the following circumstances: a) modification of the corporate purpose that influences in a significant manner the activity of the corporation; b) the transformation of the corporation; c) the transferring of corporate headquarters abroad; d) the revocation of its state of liquidation; e) the elimination of one or more of the causes for withdrawal stipulated within the bylaws; f) the modification of the bylaws that has bearing on the value of the equity interest of the shareholder in the case of his or her exit; g) modifications of the bylaws concerning the rights of voting and administration; h) postponement of its terms; i) introduction or removal of obligations or legal limitation regarding the circulation of shares; l) if the corporation is acknowledged for an indeterminate period of time, the shareholder can exercise withdrawal with a notice of 180 days in advance; m) in the case that the corporation is subject to direction and coordination in the sense of Article 2497 c.c. Relative to the circumstances above cited, it is of fundamental importance to remember how some of these cases, most precisely those indicated by letters a) through g), are causes of withdrawal considered mandatory, that is to say, which are not susceptible to modification even in the case of voluntary compliance on the part of the relevant shareholders, while those indicated by letters h) and i) are subject to change and might be derogated in the case of the approval of the shareholders. The first part of Article 2437 c.c., second section, in fact, explicated, “unless the bylaws stipulate differently,” these causes, referring to those belonging to the first group (a through g), are recognized implicitly as much as independently sustained. One might therefore, configure a partition of the causes for exit into three categories: those legally mandatory, those legally non-binding and subject to change, and those stipulated in the corporate bylaws. For the exercising of the right of withdrawal, it is necessary to respect the modalities foreseen in Article 2437 bis c.c.; further, it should be noted that the exercising of this right involves the liquidation of the equity interest according to the relevant criteria of determination disclosed in Article 2437 part 3 c.c.
The Foreign Investment Protection and Promotion Act of Iran of 2002 (FIPPA) does not give a precise definition of investment. However, according to article one of the law, it shall include any cash or non-cash flow of investment into the country and could encompass cash flows in foreign currency through the Iranian banking system or other legitimate means, machinery, spare parts, raw materials, CKD (knock-down-kit) and SKD (semi-knocked-down-kit) parts, intellectual property such as knowhow, patents and registered names, technical services, transferable share dividends and anything else if approved by the Council of Ministers. Foreign direct investments are allowed only in sectors in which private ownership is permitted. Build Operate Transfer (BOT) agreements and Civil Partnerships can be used in all areas, including upstream oil and gas industry, where foreign direct investment is prohibited due to a constitutional ban.
With the enactment of FIPPA, obtaining an investment license has become very straightforward. As a rule of thumb, there is a minimum amount of $ 300,000 to apply for a FIPPA license. The entire process of obtaining a license should take no longer than 45 days since the date of submission of documents to the Organization for Economic and Technical Assistance of Iran (hereinafter “OIETAI”), the main foreign investment authority in Iran. The application can be submitted directly by the foreign investor or their legal representative in Iran. The application form is downloadable online, must be completed in Persian or in English language and is reviewed by the OIETAI in coordination with the relevant Ministry. This stage may last up to 15 days. OETAI refers the application to the Foreign Investment Board which shall make the final decision regarding the admission of the foreign investment. The Foreign Investment Board is the highest-ranking authority and is the authority which finally issues the FIPPA license. The board includes six high-ranking official members of the government, the head of OETAI and some other prominent figures.
Should the Board reject the application, the decision can be appealed; in case the application is accepted, the license is signed by the Minister of Economic Affairs and Finance. The license is then communicated to the foreign investor by OETAI. The latter stage might take a maximum of 30 days, without considering the delay which may be caused by an appeal request.
A FIPPA license lists the amount of foreign investment, name of foreign and Iranian partners, type and area of investment, means for transference of capital contributions and the requirements regarding the investment project. The license is issued for a specific period during which at least part of the investment must be transferred to Iran. Foreign investors can file a request for an extension prior to the expiry of the deadline set by the Board of Investment, mentioning justified reasons for such a request. This request will be reviewed by the Board of Investment. If no investment is made during before the given deadline, absent justifiable excuses, the license will be revoked.
In general, merely commercial or trading activities do not qualify for FIPPA license unless they are accompanied by production. Investment in services may qualify for a FIPPA license subject to the decision of the Board.
Expats require a work permit, or employment license, in Iran for any type of employment. The organ in charge is the “Department General for Employment of Foreign Nationals”, a division of the Ministry of Cooperative, Labor and Social Welfare. The requirements are set in articles 120-129 of Iran Labor Law. In general, a work permit will be issued to a foreign worker only if there are no Iranians having the same level of education or expertise. This sets the bar very high. Foreigners cannot apply for a work permit on their own, unless they establish an enterprise in Iran. Employers need to submit their request and documents as are listed and announced by the Department General for Employment of Foreign Nationals for verification. This list normally requires identification documents of applicant including resume and expertise documents, letter of request from the employer attached with company official documents (registration notice, latest changes, chart and etc.). Prior to this stage, employers cannot enter into an employment contract with foreigners. Then, the documents are sent to the Technical Board for Employment of Foreign Nationals which is very strict regarding issuance of work permits.
FIPPA (“Foreign Investment Promotion and Protection Act”) allows foreign investors, directors and experts and their immediate family members to acquire visa, residence permit and work permit. This was introduced in art. 35 of the executive directive to FIPPA. Yet, there are incentives for employment of Iranian nationals.
Work permits are, in any case, valid for one year. Renewal requires an application by the employer. The application, which must be written and should explain the need for renewal of the permit, must be handed by the employer at least one month before the work permit expiry date. Upon the end of the one-year validity of work permits, employers can refrain from renewing the contract. However, termination of work contract requires confirmation by the Ministry of Employment, which will result in termination of work permit. Working without a permit or employing an unlicensed employee are punishable by law.
According to the executive directive to FIPPA, the Ministry of Foreign Affairs has an obligation to ask Iranian embassies to issue a single or a multiple-entry visa clearance (with a validly of three years) and a three-month residence permit upon receiving a request from the Organization for Investment Economic and Technical Assistance of Iran (OIETAI), which is also in charge of issuing a FIPPA license for foreign investors. People who enter in Iran using this type of visa can obtain a three year residence permit and will get a work permit, which is valid for one year but is renewable once the FIPPA license of the investor is issued.
Employment insurance of foreigners is similar to the one for Iranian and can be obtained from the Organization of National Welfare (Ta’min Ejtemae’i) at similar rates. According to article 5 of Iran Social Welfare Law, when foreigners are insured in their own country, the employer might be exempted from their Iranian insurance if the foreign insurance covers work accidents, pregnancy, damages relating to wages, disability, retirement and death.
As mentioned above, in order to subject foreigners to Iranian taxation, they have to obtain work and residency permits from the Labor and Social Welfare Organization of Iran. In this light the long term multiple visa is also granted to foreigners to facilitate their entry and exit from the country. If foreigners without the necessary permits start working in Iran, even though through occasional trips to Iran, they will be subject to payment of fine and income tax as determined by the Tax and Organization and Labor and Social Welfare Organization of Iran. Iranian Law does not quantify the minimum number of days of presence in Iran to be considered as a working immigrant. Normally it is the duty of the Immigration Police to verify if a foreigner is working in Iran.
As far as taxation of foreigners’ income is concerned, the salary paid to foreign employees is taxable with the same rates of Iranian salaries. According to Art. 131 of Iran law on direct tax, income tax payable in Iran is between 15% and 35%, depending on income brackets.
| Annual Taxable Income | Rates | Of the excess over |
| Up to IRR 30,000,000 | 15% | |
| Up to IRR 100,000,000 | 20% | IRR 30,000,000 |
| Up to IRR 250,000,000 | 25% | IRR 100,000,000 |
| Up to IRR 1,000,000,000 | 30% | IRR 250,000,000 |
| Over IRR 1,000,000,000 | 35% | IRR 1,000,000,000 |
Furthermore, Iran signed the Treaty on Avoidance of Gaining Double Taxation with many countries around the world, including Italy, France, Germany, Austria, Spain, China, Turkey and recently Cyprus. Under the rules of this Treaty, the amount of tax that has been paid by one applicant shall not be fully taxable again by the other country, but the percentage of difference between the tax rates of two countries shall be calculated on the whole income of the applicant.
The tax rate for foreign companies is also the same provided for Iran companies. Either the company is 100% owned by foreigners and is registered in Iran, or the company is a representative or a branch office of a foreign company, the same rules of tax are applicable. Some tax exemptions are provided for branch offices of foreign companies that only conduct research, feasibility study and marketing, without gaining incomes. Tax rate for companies in Iran is 25% of the annual profit.
Foreign companies willing to operate in Iran have two main options. They can either register a company in Iran or establish a branch or representative office (hereinafter: “Rep. office”) of their own company. Each option offers a number of privileges.
Thanks to recent changes in the laws and practices of company incorporation in Iran, it is possible to establish companies in Iran with 100% foreign capital. There is no need to have Iranian partners either. According to article one of the Company Registration Act of Iran Commercial Code: “any company formed in Iran is an Iranian company”. This is true regardless of the nationality of partners. Therefore, as Iranian companies, companies formed by foreigners can access to all the incentives, facilities and possibilities available for Iranian companies. For example, an important advantage of incorporating a company in Iran for foreign nationals is that it enables the company to come in possession of immovable property. In fact, according to the Iran Ownership of Immovable Property Law, foreign persons are not legally competent to possess any land. However, foreigners who become partners in an Iranian legal person can buy and possess real estate in the company’s name. It is also possible for such companies to rent immovable property for any span of time as long as it does not contradict the laws and regulations of the country. The two most popular company types in Iran are Limited liability companies and joint stock companies.
A limited Liability Company is a company formed between two or more natural persons for trade purposes without the capital being divided into shares. In this company type, the liability of each partner is strictly limited to the capital they have invested. The name of the company should not contain any of the partner’s names, otherwise that partner will have unlimited liability vis-à-vis third parties. The minimum number of partners for this company type is two people, which differs from Joint Stock Companies.
The other very commonly used corporate vehicle in Iran is Joint Stock Companies. This company type is characterized by the division of capital into shares. Joint Stock companies are divided into public and private joint stock. The distinction lies in the possibility of trading the shares publicly in public joint stock companies. The minimum number of shareholders in private joint stock companies is three, while public joint stock companies require a minimum of five shareholders who should all together provide at least one-fifth of the total capital.
In addition to incorporation of Iranian companies, foreign entities have the option of registering a branch or a Rep. Office in Iran. In order for foreign companies to be allowed to work in Iran through a branch or a Rep. Office, such companies need to be legally recognized in their country of origin.
A single-article law, passed in the Iranian Parliament In 1997, allows companies legally registered in foreign jurisdictions to register a branch/ representative in Iran. Such branches/ Rep. Offices can engage in the following activities:
- Offering after-sales services of foreign products/services.
- Operating contracts signed between Iranians and foreign companies.
- Conducting investigations and providing the pre-requisites for foreign investment in Iran.
- Cooperating with Iranian technical/engineering companies to do projects in other countries.
- Increasing none-petroleum exports of Iran.
- Rendering technical/engineering services and transfer of technology.
- Engaging in activities that have been authorized by legally competent authorities in Iran such as rendering services in transportation, insurance/ inspection of goods, banking, marketing and etc.
Management of a branch or a Rep. Office needs to be done by one or more natural persons residing in Iran. A branch is a local unit of the foreign company directly responsible for conducting activities of the foreign company locally. The branch shall act in the name and with the responsibility of the company. In contrast, the representative, who could be a natural or legal person, shall act in its own name and responsibility.
For branches, foreign companies desiring to register a branch in Iran need to submit some documents attached to their application to the office of Company Registration and Industrial Property.
As for Rep. Offices, an Iranian legal or natural person must be introduced as a representative. Each company is allowed to have one official Rep. Office registered in Iran. The representative will, subject to the agency agreement, deliver parts of the duties of the foreign company in Iran. The Representative shall submit certified translation and original documents enclosed to an application to the office of Company Registration and Industrial Property.
Rep. Office and branches that are not allowed to conduct transactions and exclusively deal with market research for their mother company and receive payments from mother companies to cover their costs are not taxed for such payments received from mother companies.
Located in the heart of the Middle East, and Asia’s main pathway to Europe, Iran has a geopolitical and economical key role in the region.
Iran is the world’s 18th largest economy by Power Purchasing Parity. It is an economy in transition, member of the Goldman Sachs’ next eleven and the biggest economy outside of the WTO. The Institute of International Finance has speculated a GDP growth of over 6 per cent for Iran following the implementation day, the biggest economic growth in the world. In 2011, Iran had the fastest rate of scientific growth in the globe and it currently has one of the fastest developing telecommunication industries in the world. Iran has a population of over 80 million people and a high rate of unemployment (13 %).
The predominantly urban population is an ideal untapped middle-class market with huge potential. Because of the sanctions in the previous decade, the market is far from being saturated and offers invaluable opportunity for foreign investors and producers. Its young educated population, for example, can provide ideal skilled local workforce for foreign investors.
Now, with the actual removal of international and unilateral sanctions, which burdened the Iranian economy in the previous decade, there is the hope that Iran will attract ample foreign investments.
Iran has signed Bilateral Investment Treaties and Double Taxation Agreements with numerous OECD countries. Iran has enacted a law encouraging and protecting foreign investment (FIPPA). It has also acceded to the New York Convention on the enforcement of arbitral awards and has adopted UNCITRAL international commercial arbitration model law with only minor adaptations. The Iranian law also affords foreign investors reasonable protection of their intellectual property rights. There are up-to-date enforceable electronic commerce and IT laws as well.
The government has revised the legal requirements for making investments in Iran with the aim of simplifying and accelerating the procedure. Now, there is much more transparency and obtaining an investment license has become very straightforward and could be done in only a few weeks.
Foreigners can establish companies in Iran with 100% foreign ownership, but at the same time enjoy all the rights and privileges available to Iranian national companies (e.g.: purchase real estate). Foreign companies can also establish a representative office or a branch in Iran. If the foreign investment is eligible for a FIPPA license, it can have access to many more incentives. Besides, there are tax exemptions or reductions available in Iranian Free Trade Areas and also for productive activities in the less developed areas of the country.
Evidently, by far the most attractive sector for foreign investors is the petroleum sector, due to the possibility of producing low-cost oil in Iran. With current low oil prices, Iran is one of the very few safe countries where investment in oil can actually produce an economic return. With the introduction of Iran Petroleum Contracts, foreign investors are further encouraged to bring capital to Iran’s petroleum reserves.
Another appealing sector is electricity production. Upon a successful restructuring of its power market, Iran is aiming to diversify its power generation, providing attractive incentives and tax reductions for investments made in renewable energy. Opportunities in this area abound and many foreign companies are already on their way to contribute.
In the wake of sanctions removal, there is also hope for a real boost to Iran tourism industry. Such a boom requires expansion of tourism infrastructure as hotels, luxury accommodation and railways, which would not be possible without foreign investment. As an ancient country with moderate temperatures and spectacular scenery, Iran’s tourism industry looks very promising.
FIPPA provides three main vehicles for foreign investment: Direct Foreign Investment in all areas where private participation is allowed; in the other areas investment can only be made by means of Build Operate Transfer, Build Operate Own, or Buy-Back mechanisms.
There are, however, still some significant barriers. The main stumbling block is the complicated bureaucracy that is deeply embedded in the Iranian legal system, despite the new administration’s attempts to increase transparency. In addition, foreign investment in certain industries is forbidden without State participation. The Iranian banking system has also been isolated during the last years because of the sanctions. All these shortcomings can easily be resolved once the Iranian economy is further integrated into global economy. For now, Iran is ready to embrace the new circumstances to give its economy a real boost and in so doing it requires the collaboration and participation of foreign enterprises. Very similar to the rhetoric governing Iran’s nuclear negotiations with the Five Plus One, the Iranian economy is exploring win-win solutions that would benefit not only itself but also its trade partners.
The Bolivarian Republic of Venezuela (“Venezuela” or the “Republic”) is one of the largest Latin American economies, given its status as one of the world’s largest oil producers and exporters.
Over the last few years, however, the Venezuelan Government has nationalized a number of businesses in the telecom, power, oil, oil service, bank, and several other industries. The Government has also imposed price controls on many core goods and significant exchange control restrictions that limit the ability to purchase foreign currency.
Despite all these setbacks, Venezuela continues to be a country with significant business opportunities for foreign investors willing to assume risks.
Venezuela has the fifth largest proven oil reserves in the world (and the largest in the Western Hemisphere), and the second largest proved natural gas reserves in the Western Hemisphere. If we include an estimated 235 billion barrels of extra heavy crude oil in the Orinoco Belt region, Venezuela holds the largest hydrocarbons reserves in the world. PDVSA, Venezuela’s oil and gas state-owned company, is one of the world’s largest oil companies: they have acknowledged that significant additional foreign investment would be required to achieve its production goals. The Government has signed joint venture agreements for the development of oil and gas projects with international partners from China, India, Italy, Japan, Russia, Spain, the United States of America, and Vietnam among others. All of this creates enormous business opportunities for companies in the oil and gas sector.
The Venezuelan market is also a significant source of profits for several multinational consumer-productsmakers operating in the country since Venezuelans spend a relatively high proportion of discretionary income on personal products and services, beverages and tobacco, apparel, communications (mobile and smartphones), TV and electronic products. In the next few years, imports are expected to increase much faster than exports with the expansion of consumer demand and the decreasing in the national production of consumer goods.
Venezuela has signed economic cooperation treaties with several countries, including Brazil, China and Russia, providing an adequate framework for investments in projects by companies from such countries.
Venezuela is also a party to international treaties to avoid double taxation with several countries that protect investors against certain changes in tax legislation and is a party to bilateral investment treaties with several European, Latin American and Asian countries, which provide for adequate compensation in case of expropriation or nationalization and access to international arbitration in a neutral forum. Despite Venezuela’s withdrawal from the International Centre for Settlement of Investment Disputes, several of the existing bilateral investment treaties permit arbitration under the UNCITRAL Arbitration Rules and the ICSID’s Additional Facility rules. In certain cases, the Venezuelan Government has reached agreements with foreign investors in businesses subject to nationalization and has paid compensation in U.S. dollars.
The Venezuelan government has engaged in infrastructure and other strategic projects with foreign investors under contracts providing for payments in foreign currency and, in certain cases, for international arbitration to settle potential disputes.
Venezuela is divided into three levels of government: the national level, the state level and the municipal level. There are 23 states, a capital district and various federal dependencies, and each state is divided into several municipalities. The political structure of Venezuela is governed by the Constitution of 1999, as amended in February 2009.
At the national level, the government is divided in the executive, legislative, judicial, civic and electoral branches. The President of Venezuela (the “President”) is the head of state, head of the national executive branch, and the commander-in-chief of Venezuela’s armed forces. All executive powers are vested in the President. The President is also entitled to veto laws passed by the National Assembly.
The national legislative power is vested in the Asamblea Nacional or National Assembly. The National Assembly has only one chamber, and its members (diputados) are elected by universal suffrage for terms of five years, and may be re-elected for unlimited five-year terms. The National Assembly is empowered to enact laws, which require the promulgation of the President and its publication in the Official Gazette to become effective. The work of the members of the National Assembly is done through several Commissions and Sub-Commissions.
The judicial branch is vested in the Venezuelan Supreme Tribunal (Tribunal Supremo de Justicia) and various lower tribunals. The Supreme Tribunal is the final court of appeals. It has the power to void laws, regulations and other acts or decisions of the executive or legislative branches that conflict with the Constitution or the laws. The current number of justices of the Supreme Tribunal is 32. Justices of the Supreme Tribunal are appointed by the National Assembly for twelve-year terms
The Supreme Court has five chambers, the Constitutional Chamber, the Social Cassation Chamber, the Civil Cassation Chamber, the Criminal Chamber, Electoral Chamber and the Political-Administrative Chamber. Each Chamber is composed of three justices, except for the Constitutional Chamber which is composed by five.
The Venezuelan court system is a national system; there are no state courts, but there are national courts sitting in each respective state. Judges are appointed by the Supreme Court. The jurisdictions of courts are divided by subject matter: civil, commercial, labor, tax, administrative, criminal and family, among others.
The author of this post is Fulvio Italiani