The Franchise Law Review: Iran
Iran is the second-largest economy in the Middle East and North Africa region after Saudi Arabia, with gross domestic product (GDP) in 2019/2020 of US$440 billion. GDP is projected to be around US$415 billion in 2021.2 It also has the second-largest population of the region after Egypt, with a population of 82.8 million people in 2019/2020.3 Official statistics indicate that over 23.9 per cent of the Iranian population is aged between 15 and 29.4
The retail market has been growing steadily despite the partial re-imposition of international restrictions. As a result of the transition from street shopping to modern shopping malls, the country is estimated to have around 16 million square metres of commercial property nationwide (mainly shopping malls).5 It had been estimated that with Iranians having, on average, a relatively upper-middle income per head, the country's consumers could exercise more purchasing power than consumers in comparable developing countries such as India, Brazil, Egypt and China.6 This, however, is unlikely to have been achieved largely because of the recent international restrictions and devaluation of the Iranian rial. Nonetheless, it is generally acknowledged that there is high demand in the Iranian market for the presence of western brands and that Iranian consumers, particularly the growing young population, want more choice in areas such as fashion, retail and food and beverage concepts (with the latter generally being exempt from international restrictions).
The retail market in Iran has also been expanding through the emergence of e-commerce companies. Digikala, for example, an Iranian online e-commerce platform, is among the biggest in the Middle East, with around 5.4 million visitors per day in 2019/2020.7 It was estimated to be worth US$150 million as at May 2015.8 Various other online retailers are developing fast, especially in light of recent covid-19 restrictions.
There is also potential for service industries in Iran, including a great deal of interest in children's development and well-being, for all ages, from toddlers to university students. With an ageing population and poor local provision, there would also be demand for domiciliary care franchises that would train staff to provide care at a higher standard. Fitness and weight management is another area with potential in Iran, particularly for full-service gyms segregated at different times for men and women.
The lifting on 16 January 2016 of the economic and financial nuclear sanctions through the Joint Comprehensive Plan of Action (JCPOA) allowed Iran to trade more freely globally. This trend slowed down rather significantly with the withdrawal of the United States from the JCPOA. However, optimism is growing again in the local market with the upcoming changes in the US administration. It remains to be seen how political developments will impact the local market, but there is still considerable thirst for international retail products among local consumers in what is one of the largest emerging markets in the region.
It is recommended that proper advice be sought in relation to sanctions and that due diligence checks are carried out for parties either directly or indirectly involved in a transaction before entering into any legally binding arrangement.
There are in principle no restrictions per se imposed on local or foreign franchisors wishing to operate a franchise business in the Iranian market. No prior approval by regulatory bodies is required before entering into a franchise agreement. Indeed, Iranian law adopts a fairly flexible approach towards franchise agreements. This authorises the parties to regulate their business freely in all sorts of franchise schemes, including setting up area development agreements or master franchise agreements, to the extent that mandatory provisions of the Iranian law are complied with. These mandatory provisions are generally enforced in the form of a requirement to obtain specific licences for a certain activity or in the form of payment of statutory taxes and duties.
As a temporary measure, the government has suspended the issue of import authorisations for a number of consumer goods and capital goods. The government's objective in doing this is (1) to control capital outflow as a means of reducing the impact of international restrictions on the local market; and (2) to encourage local manufacturing. It is recommended that proper advice and information be sought on these suspensions before entering into commercial arrangements.
Franchisors have the option to set up a business directly or enter into an arrangement with a local franchisee. In principle, there exists no legal restriction on shareholdings by foreign persons in companies established in Iran, and foreign persons may hold up to 100 per cent of the shares in an Iranian company without the need for Iranian participation, sponsorship, or any special formalities or licences such as are required in other jurisdictions.
Further, to the extent that the area of activity triggers a requirement for a special licence, including by way of example a licence from the Ministry of Health (MOH) in the case of import and sale of health-related products, or a licence from different affiliates of the Ministry of Industry Mine and Trade (MIMT) in the case of the sale of durable goods, the licences, in the vast majority of cases, are required regardless of whether the franchisee's shareholders are of Iranian or foreign nationality. These licences must be obtained by any company trading in the applicable sector, whether it is franchising or not.
There are a number of corporate vehicles available to foreign entities and individuals investing or doing business in Iran. From a legal point of view, the foreign investor is free to choose from any type of entity permitted under the Iranian Commercial Code, or it may register a branch or representative office.
In practice, the most common vehicle used by foreign investors in Iran is the private joint stock company, followed by the limited liability company. These two types of entity have proven themselves to be the most suitable for the purposes of modern business. Once established, the company will be deemed of Iranian nationality irrespective of the percentage of the foreign shareholding.
There exists an additional restriction with respect to direct ownership of real property by foreign persons (i.e., individuals and legal entities). Such ownership is conditional on the specific permission of the Iranian Council of Ministers and this is rarely granted. The restriction does not apply to registered Iranian entities (as described above) irrespective of the percentage of the foreign shareholding.
No restrictions on the rent of real property exist, whether in relation to a foreign company or a local entity owned fully or partly by a local company.
ii Tax and foreign exchange
The Iranian Direct Taxation Code applies tax liability to foreign persons (individuals and entities) deriving Iran sourced income from payments of royalties by Iranian entities. Therefore, to the extent that foreign investors enter into a franchise agreement with a local entity (even those fully owned by the foreign company) and royalties are charged, the liability for payment of royalty tax is triggered. Depending on the category of royalties (i.e., type of contract), from 10 to 40 per cent of the received royalties are deemed profit, which is taxed at a rate of 25 per cent.
Following the withdrawal of the United States from the JCPOA, the government imposed restrictions on foreign exchange transactions as a means of controlling the volume and types of imports into the country. Additionally, there are anti-money laundering regulations that must be complied with. The rial had been under considerable pressure during the period prior to this, and this was seen as way of controlling the slide in value of the currency. As the government is seemingly providing sufficient foreign exchange to satisfy the requirements of importers, this should not in principle impact franchise businesses.
i Brand search
Searches for trademarks, patents and industrial designs, as well as searches for trade names and information on corporate entities, can be made in the database of the Official Gazette available at http://www.rrk.ir. The State Organization for Registration of Deeds and Properties Intellectual Property Center (the Registry) also provides for a database search of all intellectual properties available at http://iripo.ssaa.ir.
ii Brand protection
Trademark registration is not compulsory for franchisors under Iranian law; this is only a legal requirement for advertising purposes. Registration of a trademark will, however, provide the trademark owner with the maximum protection available under Iranian law. Such protection is highly recommended, given the various common infringements found in the market. Protection is granted under the umbrella of the Law on the Registration of Patents, Industrial Designs and Trademarks 2009. Iran is also a member of the following international agreements, and therefore offers the protections and mechanism provided by these treaties:
- Madrid Agreement Concerning the International Registration of Marks of 1891 together with its Protocol (1989); and
- the Paris Convention for the Protection of Industrial Property 1883.
To register a trademark an application must be submitted with information on the applicant as well as details and descriptions of the trademark itself.
Upon receipt of the application, the Registry reviews the application within 30 days to ensure compliance with the relevant laws and regulations. It also cross-checks and confirms that the trademark classes applied for are in conformity with the international trademark classes. If the application is rejected because of any faults or discrepancies, the Registry will require the modification of the application within 30 days. If the application is approved, the trademark will be published in the Official Gazette.
Third parties will have the right to object to the application within 30 days of it being published. Otherwise, the registration will be finalised. The validity of the registration will be for a period of 10 years, with the possibility of renewal for an unlimited number of times.
Violations of trademark rights are handled by a specialised court sitting in the capital (i.e., Tehran), which processes all lawsuits related to trademark and trade name disputes in all civil and criminal claims. There is also a special prosecution office vested to hear criminal complaints made for breach of trademark and trade name rights. In dealing with breach of trademark rights (including, for example, the sale of counterfeit products) a number of remedies are available. These are, inter alia, imposing pecuniary penalties, requesting compensation, ordering product recalls and issuing necessary injunctions or preventive measures.
iv Data protection, cybercrime, social media and e-commerce
Data protection is a relatively new area of law under the Iranian legal regime and is not particularly well regulated. There is no specific law on private data, but this is an area dealt with in a number of laws and regulations including, inter alia, the Law on Electronic Commerce 2003 (EC), the Publication and Free Access to Information Law 2009, the Law on Cyber Crimes 2009 (LCC), and the newly amended Penal Code 2014.
Private data are protected from disclosure and all state, public or private organisations and entities dealing with such data and information must comply with the pertinent regulations.
Private data are defined as 'data belonging to a real person' including the name, surname, residential and work address, family situation, personal habits, physical disorders, bank account number and passwords of the relevant person. Data are defined as 'any representation of facts, information and concepts which is produced, sent, received, stored or processed by electronic, optical or other new technological means'.
As noted above, regulations exist in areas of e-commerce, namely the EC, the LCC in relation to cybercrime, and various by-laws issued by the Ministry of Culture regulating the activities of social media, in particular, the Implementing By-laws on Regularising and Development of Digital Media 2010.
The concept of a franchise is not explicitly provided for by Iranian law, including the Iranian Civil and Commercial Codes. Therefore, there are no specific commercial agency or franchise laws in Iran granting special rights to franchisees and agents. In addition, franchise and agency relationships are not regulated under Iranian legislation.
This distinguishes Iran from most other Middle Eastern countries, where there are regulations in place protecting local franchisees, distributors and agents and, in particular, commercial agency laws that provide the local party with enhanced rights on the termination of the relationship.
Given the lack of specific legislation addressing this matter in Iran, franchise agreements will be governed and regulated by ordinary contract principles. As such, the parties to a franchise agreement have the freedom to determine the different aspects of their relations such as the terms of the contract, notices, early termination, payment of damages, etc.
ii Pre-contractual disclosure
In general, no particular duty of good faith or recognition of the doctrine of culpa in contrahendo can be identified in Iranian contract law provisions. There is a school of thought that believes that a fraudulent disclosure of facts in a pre-contractual disclosure can result in liability based on the general civil liability provisions of Iranian law. However, this approach is not widely accepted in Iranian jurisprudence.
A factor that is quite distinct from the general freedom of parties to enter into a franchise agreement is that mandatory registrations must be made with certain authorities, namely the MIMT and the MOH for the import and distribution of foreign products. These registrations are the responsibility of the franchisee and not the franchisor.
In particular, in line with the provisions of the Consumer Protection Law 2009 (CPL), all importers of capital and durable goods must register with the Consumers and Producers Protection Organization to comply with CPL provisions. This relates only to franchisees and not franchisors. This registration should not be interpreted as granting or triggering commercial agency protection of registered franchisees in Iran, as there are no legal provisions regarding such protection under Iranian law.
The same applies to the import and distribution of health-related products, for which approval must be obtained from the MOH pursuant to Article 16 of the Law on Foodstuffs, Beverages, Cosmetics and Hygiene 1967. Numerous implementing regulations have been issued to implement the above in all different sorts of areas including pharmaceutical drugs, medical devices, foodstuffs, beverages, cosmetics, etc. by the Iranian Food and Drug Administration.
iv Mandatory clauses
There are no mandatory clauses required in franchise agreements under Iranian law.
v Guarantees and protection
No particular legislation addresses this matter. To the extent that a franchise agreement contains provisions relating to a personal guarantee and guarantees from entities to the franchisor, those guarantees are in principle valid and enforceable (subject to compliance with general mandatory provisions).
i Franchisor tax liabilities
As noted above, foreign persons receiving an income from Iranian persons (individuals or entities) for any grant of royalty, technical assistance, transfer of technology, rights to use property and any grant of rights, privileges or licences to Iranian persons, will be subject to withholding tax payments. Taxation is calculated on a deemed profit basis. Depending on the category of royalties (i.e., type of contract) between 10 to 40 per cent of the received royalties are deemed profit and are taxed at a rate of 25 per cent. Given the scarcity of foreign entities in Iran, it is the responsibility of the Iranian party making the payment to withhold and deduct the tax and pay it to the Tax Office on behalf of the foreign party. Previously, the provision of services was also subject to withholding service tax. However, pursuant to a recent amendment of the Tax Law approved in early 2016, the only withholding tax applicable to foreign entities is in relation to royalties. Therefore, in cases where a foreign franchisor provides support in the form of training of personnel, or if it charges the franchisee service fees for services provided under the franchise agreement, these will be free of withholding tax.
ii Franchisee tax liabilities
All corporate entities in Iran irrespective of their shareholding or nature of business (including representative offices and branches of foreign companies) must pay tax on their taxable income at a rate of 25 per cent. Taxable income is income less allowable expenditures and exemptions. All companies (as well as certain individuals) are required to maintain statutory records of accounts (comprising a journal and a general ledger) that must be sealed by the Tax Office prior to the commencement of each fiscal year.
There is additionally a value added tax at the rate of 9 per cent applicable on the purchase or supply of goods and services. In addition, withholding tax on salary and rent also applies.
iii Tax-efficient structures
Incentives exist for setting up entities in free trade zones or special economic zones. Most of which, however, apply to the income generated from those specific areas, so this would probably not be that helpful for a franchise business. Iran has also concluded a number of tax treaties with various countries, including Croatia, France, Germany, Norway, Russia and Turkey to avoid double tax payments on, inter alia, income, capital and transport, which can be used in adopting an efficient tax structure.
Impact of general law
i Good faith and guarantees
Iranian law and Iranian jurisprudence take a fairly formalistic approach towards contract interpretation and performance of contracts. Therefore, there are no statutory provisions under Iranian contract law pertaining to the principle of good faith in performing contractual obligations.9 Good faith can nevertheless be voluntarily incorporated as a contractual clause if the parties agree to this and, if it is incorporated, this obligation must be complied with. There exist other contractual principles, including, by way of example, the La Zarar principle, which is quite similar to the doctrine of abuse of right under the UNIDROIT principle of International Commercial Contracts.
ii Agency distributor model
The concept of 'franchise' under Iranian law, despite being known in many forms (e.g., agency, representation), is best described as having the form of a distributor agreement in which products are involved. In fact, in a franchise agreement involving products, the supplier (franchisor) sells products directly to the distributor (franchisee), who then sells the products on to its customers, adding a margin to compensate its costs and provide profits. The distributor cannot in principle create any legal relationship between the supplier and the customer.
Iranian law offers great flexibility in its contract law, as there are no mandatory contractual requirements for franchise agreements, and because of the fact that no specific commercial agency or franchise law exists in Iran. Therefore, parties to a franchise agreement are free to agree to extend, limit or materially alter the nature of their rights and obligations to one another insofar as mandatory provisions of the general law are complied with and the terms are agreed between the parties.
iii Employment law
Iranian law does not regard the parties to a franchise agreement as entering into an employer–employee relationship and therefore franchise agreements are excluded from employment law provisions.
iv Consumer protection
Under Iranian law, in particular, Article 4 of the CPL, importers and distributors of goods and services such as franchisees are defined as suppliers and therefore cannot benefit from the statutory protections provided under the CPL relating to consumer protection.
v Competition law
Iran adopted its Competition Law in 2008 (otherwise known as the Law Implementing Principle 44 of the Constitution 2008). The Competition Law addresses various issues including, inter alia, pricing, tying agreements and territorial restrictions. In principle, and as in many other jurisdictions, the Iranian Competition Law addresses, and prohibits, the two following main types of conduct:
- discriminatory behaviour and agreements, concerted or solo practices that restrict or impede free trade and competition between businesses, or those aiming to distort the market; and
- abusive behaviour by a company by dominating a market, or practices that tend to lead to a dominant position.
Furthermore, mergers and acquisitions of large corporations that may result in distortion of the market or creation of a dominant position in the market are also subject to supervision.
A number of prohibited anticompetitive behaviours that are potentially relevant to a franchise agreement are discussed below:
- Discriminatory pricing, which is defined as the provision of goods and services of a similar nature or condition at different prices to different parties or in different geographical areas.
- Concerted practices or agreements between parties with the aim of fixing prices, limiting or controlling the supply or sale or forcing discriminatory conditions on supply, sale or purchase of goods or services and dividing or limiting access to the market.
- Tie-in agreements by way of forcing the purchase of intended goods and services by the other party to be dependent on obtaining extra services or goods.
- Obligatory sale, whereby the sale of a product or service becomes subject to obligatory sale in a way that another party is barred from transacting with a competitor.
- Territorial restriction.
- Pricing restrictions, whereby it would be unlawful to make the sale of a product or service subject to a limitation or restriction on the resale price.
Implementation of the Competition Law is mainly carried out by the Competition Council, which also supervises the proper enforcement of the Competition Law's provisions.
vi Restrictive covenants
There are no statutory provisions of Iranian law preventing parties from entering into agreements on non-compete terms or restrictive covenants. Such agreements are binding and enforceable to the extent that they are not contrary to the mandatory provisions of Iranian law, in particular, the laws and regulations relating to the Competition Law. Notable examples of such provisions are territorial restrictions, restrictions on resale price and restrictions on entering into business arrangements with certain third parties.
In general, Iranian law takes a strict view on termination of an agreement. For the most part, termination is not automatically allowed and a party must either apply to a court to obtain a judgment of termination or the agreement must specifically empower a party with the right to terminate under certain circumstances including for cause or convenience. Given the above, even in cases of a breach, the non-breaching party may not exercise the right of termination and the right does not exist automatically. Rather, the non-breaching party must apply to a court to compel performance and, if this is not possible, to request a court order for a third party to perform and, if not successful as a last resort to request termination of the contract through a court order. Conversely, to the extent that parties to an agreement provide provisions for termination of their agreement and the agreement is subject to a foreign law where a contractual right to terminate under the agreement is permitted, Iranian law would generally recognise the rights of termination according to the terms of the agreement.
The termination of the franchise agreement will not have any effect on those terms and conditions of the contract that have been explicitly or implicitly (by custom) agreed to survive upon termination.
One issue that must be addressed is the deregistration of the registered franchisee with the pertinent authorities, including the MOH. The practice of these authorities is that in cases of termination of the franchise agreement, so long as the marketing authorisation licence issued by these authorities remains valid, they will be likely to require the consent of the franchisee before they effect the termination and the deregistration. In particular, if the licence is still valid upon termination of the franchise agreement, the franchisee will, in the view of the Iranian authorities, still be authorised to continue trading the products or services under the franchise. The franchisor must ensure that the franchise agreement is drafted in such a way that the franchisor secures, to the extent possible, means to prevent the franchisee from continuing such trading, and requires the franchisee to promptly apply for deregistration. There have been trends recently for the lifting of this restriction in certain sectors (e.g., in the pharmaceuticals industry), whereby the foreign supplier-owned subsidiary takes over the local franchisee business.
viii Anti-corruption and anti-terrorism regulation
Numerous regulations exist under Iranian law that deal with fraud, anti-corruption and money laundering. Notable examples are the newly amended Penal Code 2014, Anti-Money Laundering Law 2008, the Law Intensifying the Penalties of the Perpetrators of Embezzlement, Fraud and Bribery 1985, and the Law on Anti-Corruption 2011. Iran is additionally a member of the United Nations Convention against Corruption 2004.
In accordance with the legislation mentioned above, fraud, corruption (including bribery) and money laundering are criminal offences and punishable by penalties including, for example, pecuniary penalties and imprisonment.
ix Dispute resolution
In general, there are no legal prohibitions in choosing a law other than the law of Iran to govern an agreement. There are procedural issues to be complied with for such a choice to be deemed valid under Iranian law. If these conditions are met, foreign governing law clauses will be recognised and enforced in Iran. However, Iranian law provides for the rejection of foreign laws if they are found to be against public order.
While Iranian law has restrictions on choice of forum in court, with regard to the dispute settlement mechanism, Iranian law provides for absolute freedom for parties to select domestic or international arbitration as a dispute resolution mechanism. Commercial arbitration is recognised under the Iranian Civil Procedure Act and the Law on International Commercial Arbitration. Iran is also a member of the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention). Therefore, to the extent that a foreign arbitration award has been obtained in a Member State of the New York Convention, such an award is in principle enforceable in Iran.
In the absence of parties' choice of forum for disputes in the agreement, disputes are settled by referring the matter to an Iranian court of law. Iranian courts are divided into civil and criminal courts governed by the Code of Civil Procedure 2000, the Law on Formation of Public and Revolutionary Courts 1994 as amended, the Law on Dispute Settlement Councils 2015 and the Code of Criminal Procedure 2015.
Commercial disputes (including any dispute over matters related to a franchise agreement) are treated the same as any other civil dispute, as there are no separate procedural regulations related to such disputes. Courts can, at the request of the claimant, grant injunctions and provisional orders, and preventive orders if the claimant's action is successful.
With regard to damages resulting from a breach of contractual obligations, two elements must exist in respect of a claim for damages: first, the loss must in fact have been suffered (or the suffering of it is a certainty) – therefore by implication it must be a monetary loss; second, the loss was a direct result of (1) the failure of the other party to perform or (2) a delay in performance by the other party. Claims for loss of profit or consequential loss are not recoverable. In our opinion, these losses should be recoverable if contractually expressly agreed to by the parties.
No other official dispute settlement mechanism exists under Iranian law.
We do not expect any major changes in the laws and regulations relating to franchising or franchise agreements in the near future.
1 Shelley Nadler is a legal director at Bird & Bird LLP and Farid Kani is a partner at Atieh Associates Law Firm.
2 Iran overview, The World Bank (2019/2020), available at http://www.worldbank.org/en/country/iran/overview; Iran GDP Forecast 2019–2020 Forecast, Trading Economics, available at http://www.tradingeconomics.com/iran/gdp/forecast.
4 Iran National Data Centre, Report of Year 13960 (2017), available at https://www.amar.org.ir/Portals/1/yearbook/1396/03.pdf.
5 'Tehran Teeming With Shopping Malls', Financial Tribune (2015), available at https://financialtribune.com/articles/economy-business-and-markets/23543/tehran-teeming-with-shopping-malls.
6 'Luxury tempted Iran is a dream market for retail', exportiamo.ir (2016), available at http://www.exportiamo.it/aree-tematiche/12836/luxory-tempted-iran-is-a-dream-market-for-retail/.
8 'From Digikala to Hamijoo: the Iranian startup revolution, phase two', The Guardian (2015), available at http://www.theguardian.com/technology/2015/may/31/amazon-iranian-style-digikala-other-startups-aparat-hamijoo-takhfifan.
9 Except for limited areas, including insurance laws.