Reality check for international companies interested to set-up business in Iraq. Live account by Advisor of a leading Iraqi Bank.

1. IRAQ <br />Improved Business Conditions<br />Reality Check – April 2011<br />Rohail A. Khan <br />E-mail rohailkhan00@gmail.com <br />Profile http://www.linkedin.com/in/rohail<br />Iraq – Improved Business Conditions <br />Business condition in Iraq have gradually improved in various dimensions. Here is an “eye-witness account” for the international business community. The author has spent over 18 months inside Iraq managing a financial services group from downtown Baghdad, travelled extensively to major Iraqi cities, witnessed routine life and socio-economic conditions, conducted business with Iraqi and Foreign nationals on-the-ground. <br />Following key areas would serve as reality checks to restore confidence, remove misconceptions, and guide the foreign business entities; in a fair crisp manner: <br />Risk Reward Rationale<br />Senior Banker with hands-on Middle-East and Iraq expertise, I must start out by advising the global and regional conglomerates: when it comes to frontier economies and emerging markets like Iraq, the “risk-reward rationale” has to be re-modelled and broadened.<br />Recent initiatives from Iraq’s commercial and diplomatic chambers to reach out to the developed world are having positive impact on mellowing down the media-dominated reflections. Senior level Iraqi trade and diplomatic missions have been visiting North American, Asian, and European countries to update the Public and Private sector and trade circles on the recent socio-economic development and to convince foreign companies to invest in Iraq and facilitate technical collaboration. Series of exhibitions and road shows (recently in London and Erbil) to attract Foreign Direct Investment, are paving ways to develop positive and meaningful initiatives. <br />Joint ventures and allied influx of financial, technical, and managerial resources by British, German, Chinese, Indian, and Arab companies in financial services, oil and gas, infrastructure, telecommunications, property development, industrial and consumer trading have picked up speed from 2009 onwards. <br />Security and Stability<br />The case that security in Iraq has improved (compared to 2007), is largely correct. Now that the post-election chaos has been amicably resolved, Iraq’s judiciary, executive, and administrative structure has by and large been re-installed. The newly elected Government led by H.E Prime Minister Nouri Al-Maliki is functioning across 360 degrees and its focus on both short and mid term economic reforms and reconstruction is ubiquitous. <br />Although Iraq is not yet completely out of the woods, a window of opportunity is open for international companies willing to take a risk in one of the ultimate emerging markets. <br />Indeed, Iraq has the second-largest oil reserves in the world and, after many years of war and sanctions, it needs infrastructure and development across all sectors of the economy. Once you become comfortable with the security situation and how to mitigate the risks, you will find the possibility of growth and profitability is above average. <br />Experienced security and life-support companies are playing a substantial role to provide the required services for expatriates. Whether a military base or an oilfield installation or a business facility, there are ample expertise available to protect and safe guard human and financial assets. Compared to 2003, its safer to live and conduct business in metro cities like Baghdad, Basra, Erbil, Sulemanya, Anbar, Najaf, Karbala, others. Not only are these security and life support services reliable but they meet international standards. Now more than ever, risk management and insurance products can be availed both tailor-made and over the counter; from experienced western and Arab insurance companies.<br />Telecommunications and Media <br />Contrary to common perception portrayed in war-torn countries, Iraq is charting out state-of-the-art internet and telecom facilities. Zain, Iraqna, Asia Cell (4th licence in June 2011) are offering mobile phone and internet services that meet comparable international standards. The Government has commissioned the conversion of old backbone into fibre optics in various Governorates. A combination of two dozen domestic TV channels, thirty odd newspapers, business and social magazines, advertising and P.R companies; provide a robust and real time media platform for business entities to gather multi-layered multi-sector business-related information.<br />Power, Utilities, Transport and Logistics<br />Electricity generation and distribution has been a problem and load shedding is rampant. However, on a positive note, electricity is available 12 of the 24 hours in metro cities and generators are handy to ensure 24 hour power supply. Water and sewage facilities are managed well by the municipalities. Historically (even during Saddam regime) Iraq has enjoyed an effective network of airports, dry docks, warehouses, water and oil pipelines, bridges, rail and bus system and inter-city roads and highways. Trade and bulk cargo is facilitated through roads, airlines and the sea port. Cross-country motorways (Turkey, Syria, Jordan, Iran, Kuwait) are utilised 24/7 for transportation and imports of consumer good and industrial equipment. These facilities though fully functional, do require up gradation to meet the growing demand. Irregular allocation of resources and deficient civil administration are obvious hindrances. <br />Domestic & International Travel <br />It is safe for expatriates to travel inside and between the cities on cars and jeeps. Check posts on motorways are common to ensure safety. National airline and chartered flights are common means to travel to metro cities and towns across Iraq. From 2009, various international airlines (Gulf Air, Austrian Airlines, PIA) have started frequent scheduled flights to all major cities to and from Iraq. DHL and FedEx are fully functional in key cities.<br />Laws and Legal Framework<br />Until 2003, the legal system in Iraq was traditionally left open for misinterpretation. However, the Coalition Provincial Authority (from 2003 onwards) introduced and installed modern legal framework to incorporate international standards for regulating business and resolving disputes. One must not be un-necessarily worried about the Iraqi legal system. Of course, laws on all aspects of commercial and civil life are enacted in Iraq; albeit some are outdated. Local lawyers and seasoned western law firms with considerable Iraqi expertise are available for the required legal services. Companies should keep in mind that Iraq is not yet a signatory to the New York Convention, the main treaty that ensures enforcement of foreign arbitration awards. It is advised that foreign companies should incorporate arbitration and forum selection clauses into their contracts to take advantage of more familiar jurisdictions for resolving disputes. <br />Iraqi Laws – No immunity .<br />Until 31st December 2010, business entities operating in Iraq under contracts with the British, U.S, Canadian and other coalition countries enjoyed immunity from the laws of Iraq. Recently, the Status of Forces Agreement implemented on 1st January 2011, has nullified and abolished that immunity. Loss of immunity implies that all foreign business entities and foreign individuals are subject to criminal and civil liability in Iraq and must comply with all legal and regulatory requirements for doing business in Iraq (including the travel entry and exit procedures, tax laws, vehicle registration requirements). <br />Hitherto, all foreign individuals or companies engaged in commercial activities must obtain a license from the Government of Iraq. It does appear a tedious process, but the Government authorities are working to make it easier and transparent for everyone.<br />Setting up a Representative Office.<br />To pass through the red tape and save time, the most convenient way to establish a commercial presence in Iraq (especially for foreign companies seeking contracts with the Government) is to register as a trade representative office. By registering as a trade representative office, a foreign company receives the rights and privileges to engage in business development and marketing activities in Iraq and to enter into negotiations for contracts with specific Iraqi Ministries. The procedure to register as a trade representative office is quite simple (filing of forms, appointment of a manager, and payment of nominal fee). Most Ministries in Iraq do not require any further licensing to bid on a contract or solicit new business. If and when a foreign company secures a contract with the Government, it should then transfer its trade representative office into a quot;
branch office.quot;
. As such, it is advisable to roll out the process of establishing a branch; as soon as a trade representative office licence is in hand.<br />Establishing a Branch Office. <br />I normally refer this business route as: Plan A to start doing business in Iraq. <br />As per C.P.A. Order No. 93, (duly incorporated into Iraqi law), the non-Iraqi companies may form and operate through a quot;
branch office.quot;
A branch office is a simpler way to incorporate and set-up legal presence to engage in commercial activities in Iraq. Please note a representative office can engage in business development activities only. As such the branch office is the next and natural step upwards the representative office. A branch office can be associated to any parent company outside Iraq. To avoid complexities in taxation, to avail practical benefits & privileges, and to establish regional presence; I do recommend setting-up an offshore LLC in Dubai (JAFZA or DIFC) and incorporating the Iraqi branch under its umbrella.<br />Many companies now operating in Iraq are functioning as branch offices, despite some restrictions on certain business activities they can pursue. For foreign companies wishing to establish a separate corporate entity for doing business in Iraq (other than a branch office), there is a range of incorporation options i.e: limited liability company, joint stock company, joint liability company, and sole proprietorship. Selecting the best entity depends upon the extent investors want to be shielded from liability, the number of investors, whether public and private investors will be engaged, and the relevant tax, asset protection, inheritance implications. <br />Popular forms of incorporation for foreign-owned entities inside Iraq, are the limited liability company (LLC) and the joint stock company (JSC). These require a local sponsor or an Iraqi-domiciled joint venture partner. Finding a strong and well-connected local sponsor will always remain a key success factor for conducting business in the Arab world. Accordingly, if a sound and supportive Iraqi sponsor is sourced than it is strongly recommended to incorporate a LLC preferably in the Baghdad Governorate to maximise the corporate benefits and privileges of operating in Iraq. An LLC in Erbil as per the Kurdistan Investment Laws is equally viable but let us remember Baghdad is and shall remain the centre point for all practical purposes. Anyways, one can always live in Erbil to conduct the business from there, if one desires better living conditions keeping the legal entity domiciled in Baghdad.<br />I prefer to call this route as Plan B; since this is a formative step to evolve and expand business operations across all Governorates of Iraq.<br />Tax Planning <br />By and large, both Iraqis and non-Iraqis, residing in Iraq, must pay tax on income that originates inside Iraq. <br />Iraq’s income tax laws define taxable income as net income earned from commercial activities or from activities having a commercial nature. Income from limited liability companies (LLC) and joint stock companies (JSC) is taxed at a flat rate of 15%. It is recommended to retain a local tax expert to assess on how the business will be treated under Iraq's tax laws and how to report the income. <br />Going for an Investment License. <br />The National Investment Law of October 2006 has come as a fresh breeze and contains proper incentives for foreign companies to invest and operate inside Iraq. Business entities must apply for and receive a project-specific investment license from either the national or a regional investment commission to avail themselves of the said incentives. In addition to receiving 10 years of tax-free treatment, licensed projects are guaranteed full repatriation of investment profits, the right to employ foreign workers, and a three-year exemption on import fees for equipment required for the project. <br />I must mention the Kurdistan regional government has passed its own investment law which contains a few additional incentives. <br />To date, some five thousand investment licences have been granted. It is encouraging to note that mega projects (with foreign sponsors) have physically been started in oil and gas, infra structure, travel, telecommunications, hotel, commercial and mix-use property development sectors. Leading Chinese and Indian giants, UAE blue chips (Emaar, Al-Futtaim Group), Kuwaiti PE firms, and Saudi Entrepreneur HRH Al-Waleed bin Talal are at the forefront.<br />Housing and Property Ownership<br />Arab countries restrict the ownership of property by foreigners. UAE has acted progressively by launching property ownership laws, with some deficiencies. Bahrain appears promising and KSA is stalling the housing and mortgage laws. However, Iraqi Government must be commended for announcing liberal property ownership laws in June 2010, allowing long-term leases of land to foreign companies with clear intent to invest and develop the lands into profitable ventures for the general benefit of Iraqi citizens. Earlier in 2008, the Kurdistan regional government, through its regional investment law, formally allowed foreign ownership of land and properties. A foreigner can actually own and live in a Florida-style modern villa in Erbil.<br />Banking and Financial Services<br />With over 40 commercial banks, Iraq’s banking system has come a long way and does provide a range of commercial banking services. I must mention that HSBC and major Arab regional banks have strategic alliances at top ten Iraqi banks. Standard Chartered Bank and Citibank are finalizing their plans to enter the market. Parallel to the manual banking practice manned with conservative staff, the online banking and ATM transactions have recently become common. Inward and outward remittances can be made with ease at most banks and western union outlets. Iraqi dinar has been stable since last five years. Currency shortage or run on the bank are mishaps of the long gone past. Recent mandate by the Central Bank requires all banks to become fully automated and fully engaged online with the Central Clearing System by December 2011. <br />Capital adequacy regulations are being enforced to ensure that all commercial banks double their paid-up capital to USD 100 million before December 2011. Credit Bureau to collect consumer loan and default data is expected to be launched in early 2012. Trade Bank of Iraq (consortia of Citibank, JP Morgan, other international banks) has rapidly expanded its functions to facilitate international trade. Customer service quality is certainly debatable. However, a foreign business entity can avail all the banking and trade products and services that are available elsewhere in the World.<br />Business Ethos and Credit Collection<br />Iraq ranks near the bottom in Transparency International’s 2010 Corruption Perception Index. This problem is widespread and foreign entities are being adversely impacted. Examples: Foreign companies are approached by dummies posing as high net worth business persons, Government officials, or ex-Ministers who can make things happen for you in the upper echelons at a fee. Many foreign entities have had local partners and proxies forced on them. Collecting receivables for services provided remains painstaking. Getting paid can be facilitated if you possess high level influence and/or willing for illegal gratification. <br />US companies operating in Iraq must be particularly careful not to engage in any actions that can be deemed as violation of the U.S. Foreign Corrupt Practices Act (FCPA), which prohibits providing anything of value to influence an award of Government business. U.S. companies operating in Iraq should train their employees on FCPA. It is always strongly recommended to have a strong local sponsor or JV partner; along with an experienced bi-lingual Iraqi senior manager on-board to manage the routine Government Relations. <br />Nevertheless, at all senior levels, the Government of Iraq stays committed to attracting foreign investors and we do see Government-led reforms and punitive actions to resolve specific acts of corruption.<br />Travel Visas - Entry and Exit. <br />Travel to Iraq has hitherto been automatic for U.S and Coalition Government contractors before the Status of Forces Agreement. Removal of immunity in January 2011, made all foreign company employees subject to Iraq's visa procedures. Visas now must be obtained from an Iraqi embassy. The visa process can entail many weeks. Obtaining a letter of approval from an Iraqi Commercial Attaché or an official of National Investment Commission is advisable. However, securing a business visit/invitation letter from a strong Iraqi sponsor / business person can significantly expedite the entire process. Please note if and when a foreign entity receives an investment license, it becomes entitled to receive guaranteed entry and exit visa for all its employees. <br />Epilogue’:<br />Whilst any business expanding abroad in the emerging markets must tackle unexpected challenges, understanding and planning around the above “hands-on guidelines” would certainly “brighten the prospects of doing business in Iraq”.<br />Rohail A. Khan<br />Senior Banker / Business Developer, <br />Middle and Near East Specialist.<br />E-mail rohailkhan00@gmail.com Profile HYPERLINK quot;
http://www.linkedin.com/in/rohailquot;
http://www.linkedin.com/in/rohail<br />Cell +966 56 9224298 Saudi Arabia, +973 368 68573 Bahrain, +964 771 2985802 Iraq.<br />15th April, 2011.<br />