Investment laws of Iraq and the Kurdistan Region - International Law Office

Introduction
Investment laws
Benefits for investors
Obligations and penalties on investors
Investor due diligence

Introduction

Iraq and the Kurdistan Region's investment laws provide significant benefits for investors in qualified projects, principally tax and customs fees and duty exemptions. The National Investment Commission in Baghdad, regional Iraqi commissions and the Kurdistan Investment Board are well established, fully functioning agencies that actively seek to assist investors in Iraq and the autonomous Kurdistan Region (also known as Iraqi Kurdistan).

Iraq's main law is contained in the Investment Law (13/2006), which was amended in 2010, and subsequent regulations. The Kurdistan Region's law in this area is the Investment Law (4/2006). Amendments to this law are before the region's Parliament. While these laws continue to be developed, the roles played by the investment agencies are rapidly becoming more prominent.

Investment laws

Iraq
The federal Iraqi government's Investment Law gives Iraqi and foreign investors certain "privileges, facilitations and guarantees" - the most important being a 10-year exemption from taxes and duties - and creates the Iraqi National Commission for Investment and regional or governorate commissions. The Investment Law revoked in its entirety Coalition Provisional Authority Order 39/2003 on foreign investment, and annulled the 2002 Revolutionary Command Council Investment Law. Order 39/2003 was a hastily drafted and fairly basic law that replaced all existing Iraqi foreign investment law and gave foreigners investment rights that were 'no less favourable' than those of Iraqis in most economic sectors. The Investment Statute (2/2009) fleshes out the details of much of the Investment Law by, for example:

• providing timeframes for licence issuance;
• establishing committees to administer the functions and the structure of the National Commission for Investment;
• regulating matters that the commission must observe when deciding whether to grant a licence, and appeals against commission decisions; and
• establishing a 'single window' through which all authorisations relevant to the project are obtained.

More significantly, the regulations elucidate 'strategic projects of a federal nature' that are eligible for licences (12 categories that cover essentially infrastructure projects, other than natural resources extraction and processing, and banking and insurance), and require the commission to draw up a national strategy in this regard in consultation with the regions. Generally, projects with capital investment of at least $250,000 are eligible to be licensed, including infrastructure projects in areas over which specific ministries exert control. Key ministries, such as the Ministry of Electricity, must therefore now work closely with the commission on projects implemented by foreign investors.

In response to concerns about delays in project implementation, the regulations require the commission to introduce measures to monitor and assess investor performance. In relation to two areas of particular concern to the Iraqi and Kurdistan Region governments, the regulations dictate that national manpower must make up at least 50% of the total project employment, and the National Commission for Investment must be given authority to allocate land to foreigners, in coordination with relevant ministries - principally the Ministries of Finance, Defence and Agriculture.

The 2010 amendment to the Investment Law focuses on facilitating investment in the housing sector and brings all future mixed public or private sector projects under the law.

Kurdistan Region
The Kurdistan Investment Law (4/2006) nullifies an earlier decree regarding investment promotion in Iraqi Kurdistan, establishes the Kurdistan Investment Board (headed by a chairman) and a Supreme Council for Investment (headed by the prime minister and composed of the ministers of all key ministries). The law provides an exemption for licensed projects from non-customs taxes and duties for a 10-year period. Foreign investors and their capital are to be treated in the same way as national investors, and certain legal guarantees are provided for.

Proposed amendments to the law introduce the concept of 'strategic investment projects' that are eligible for licensing - generally, projects for which land is provided, covering all sectors except oil and gas extraction and production. The amendments touch upon a myriad of other areas, the most important of which are:

• allowing foreign ownership of land for residential purposes (provided that there is reciprocity in the country of origin);
• allowing for the sale of projects once completed;
• acknowledging the need to register bank security for loans against projects;
• toughening penalties against licensees for contravening the law;
• shortening the timeframes for licence issuance; and
• creating a single window covering all ministerial permit and authorisation requirements.

In addition, the Ministry of Justice is required to form a new court to handle disputes involving foreign investors.

Benefits for investors

The benefits for investors prescribed by the Iraqi and Kurdistan Region investment laws are very similar. In addition to the 10-year exemption from all taxes and duties, the following statutory benefits and protections are obtained when a licence is granted:

• guarantee of 'non-seizure or nationalisation';
• guarantee of repatriation of capital and profits in exchangeable currency;
• authority to obtain insurance with foreign companies;
• authority to open foreign currency bank accounts;
• residency for non-Iraqis and facilitation of entry into and exit from Iraq;
• rights to transfer salaries out of Iraq; and
• exemption from fees for assets required for expansion or modernisation and for spare parts, in addition to imported assets.

The grant of additional facilities and exemptions from taxes and fees is also possible for projects meeting certain criteria - for example, projects in under-developed areas or those conducted in a joint venture with Iraqi investors.

Hotels are granted additional exemptions from duties and taxes on imports of furniture, furnishings and requisites for renewing and updating purposes at least once every four years.

Obligations and penalties on investors

The investment legislation of both Iraq and the Kurdistan Region imposes various obligations on licensees. These follow similar themes:

• adherence to timeframes, with potentially draconian penalties for failure;
• obligations in relation to the employment of Iraqi and Kurdish nationals (eg, Iraq requires that 'priority' in employment be given to Iraqis), and commitments to training and developing the capabilities of nationals;
• obligations to keep and maintain audited records and to provide notification of certain milestones, as well as providing ongoing technical data and information regarding contracts, budgets and progress; and
• duties to protect the environment and to adhere to laws on security, health, public order, employment (Iraq's particularly employee-friendly labour laws also apply in the Kurdistan Region), and values of Iraqi society.

Guidance on the employment of non-Iraqis, where it is not possible to employ Iraqis with the required capabilities, is yet to be published.

With respect to penalties, the Iraqi National Commission for Investment sets particularly punitive measures for schedule delays, including those caused by disputes that involve lengthy work stoppages, such as withdrawal of licences and the imposition of damages. The commission also has the right to allow counterparties to retain their rights to demand compensation for damage caused by a violation of the law. Similarly, following certain breaches of the law, the Kurdistan Investment Board has wide powers to halt activity, recover land if remedial action is not taken, take possession of installations and allocate the project to a new investor.

Neither the commission nor the board has exercised these wide powers, but pressure on the government to speed up project implementation by foreign investors is increasing - justifiably so, as security conditions have improved. However, sudden changes in policy (eg, in granting rights to non-Iraqis to enter and depart Iraq) and a lack of laws and regulations - or the inability of government agencies to implement them - remain significant obstacles for the realisation of projects.

Investor due diligence

For an investor to safeguard its investment, it is necessary to carry out thorough due diligence on the legal environment in which it will be operating. It may also be expedient to seek protections from relevant government ministries or agencies, including from the commission or board (in Iraq and Kurdistan respectively), against certain risks. Banks that provide finance on a non-recourse basis (at least one project financing has now been closed in Iraq) will require this. The documentation of consent agreements has been arranged with the commission and the Ministry of Finance, and implementation agreements with the government, to provide contractual cover or relief against identified risks. Such risks may include:

• potential legislative ability to interfere with the project's contractual rights and obligations with counterparties;
• uncertainty as to the ability to fill key employment positions with reliable foreign employees;
• uncertainty as to charges for land needed for the project;
• limited timeframes in which to settle disputes and any potential pressure to do so; and
• legislative penalties for delays that may be caused by force majeure or the reality of conditions on the ground, for violations or contraventions that may not be material and can be cured given time, or for delays caused by government authorities.

Consent agreements and implementation agreements with Iraqi counterparties typically:

• allow lender step-in rights or the replacement of the investor;
• require the provision of support in interaction with government agencies, such as in obtaining authorisation;
• allow an asset sale if the project ends due to a catastrophic event; and
• clarify that international arbitration may be used for disputes.

For further information on this topic please contact David Lockhart at Iraq Law Alliance PLLC by telephone (+964 771 072 8958) or email (david.lockhart@iqilaw.com or david@lockhartda.com).