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Investing in Iran - Protecting investments through investment treaties

Iran remains an uncertain environment for foreign investors. Legal and political risks, together with uncertainties regarding Iran’s legal system, which has been largely untested by foreign investors, mean that careful thought needs to be given to planning investments in order to mitigate such risks. This briefing sets out some of the mechanism to help mitigate these risks, using the protections under Bilateral Investment Treaties (BITs).


Following the Joint Comprehensive Plan of Action agreed in July 2015 between Iran and the P5+1 countries, international nuclear-related sanctions against Iran may soon be lifted (although other sanctions will remain) in exchange for Iran agreeing to restrictions on its nuclear programme. In anticipation of the lifting of these sanctions, investors are already lining up in order to seize lucrative investment opportunities, with billions of Dollars expected to flow into Iran’s oil & gas industry, capital markets and general infrastructure projects. Nevertheless, Iran remains a high risk jurisdiction with inherent legal, regulatory and political risks. Proper investment structuring, undertaken at the right time, can help investors to manage such risks by providing recourse to investors against unlawful Government interference with their investments.

This briefing provides an overview of the protections available to foreign investors from Bilateral Investment Treaties (BITs) and Multilateral Investment Treaties (MITs) (together, investment treaties).


On 14 July 2015, Iran and the P5+1 countries (comprising the US, France, UK, China, Russia and Germany), along with the EU High Representative for Foreign Affairs, reached a comprehensive agreement regarding Iran’s nuclear programme, known as the Joint Comprehensive Plan of Action (JCPOA), which is intended to lift certain multilateral and national nuclear-related sanctions on Iran in return for the Iranian government’s commitment to decelerate its nuclear program. The implementation of the JCPOA and the lifting of sanctions is expected to open Iran to much needed foreign investment in a variety of industry sectors, including in particular the oil and gas and automotive sectors, as well as the civil aviation industry. 

Notwithstanding these promising developments, Iran remains an uncertain environment for foreign investors with an ever present risk of governmental interference in investments. One important way to mitigate these risks is to structure investments in order to bring them within the scope of protection of an investment treaty. BITs typically contain robust substantive protections for investors as well as the ability to enforce those protections through international arbitration.

Available Bilateral Investment Treaties

An investment will attract treaty protection to the extent that the host State of the investment and the home State of the investor have entered into an investment protection treaty and that the investor and investment in question fall within the scope of such treaty. Iran has concluded over 60 bilateral investment treaties of which approximately 45 are currently in force. Some of the countries with which Iran has signed BITs include France, Germany, Switzerland, Austria, Bahrain, Turkey, South Korea and China. However, there are no BITs in force between Iran and several prominent capital exporting countries such as the US, UK and Japan or with countries commonly used to host investment vehicles for investment structuring purposes, such as Luxembourg and The Netherlands. That being said, new investment treaties are likely to be entered into in the coming months and years as interest in investing in Iran grows. For example, it has recently been reported that Japan and Iran will begin negotiating an investment agreement as soon as sanctions are lifted.

BITs establish comprehensive substantive protections under international law for foreign investors backed up by the possibility of direct recourse to arbitration against the host state in the event of an alleged violation of such standards. The terms of each BIT will, however, differ and investors should carefully consider the terms of the relevant BIT before deciding upon a jurisdiction through which to invest in Iran. This is because some BITs may contain important carve-outs from certain types of protections or limitations on the types of investors or investments that are covered.

The Switzerland-Iran BIT, for example, applies to investors that are legal entities, including companies, corporations, business associations and other organisations, which are established under the law of that contracting party and have their “seat” and “real economic activities” in the territory of that same contracting party. It also applies to legal entities that are not established under the law of the contracting party but are effectively controlled by an entity described in the previous sentence. The Austria-Iran BIT similarly incorporates a “real economic activities” requirement.

The Germany-Iran BIT applies to both direct and indirect investments made by an investor, provided such investor is incorporated under the laws of Germany and has its “seat” in Germany. Many Iranian BITs impose similar requirements. The meaning of “seat” needs to be considered carefully in the context of the BIT.

Before investment decisions are taken, therefore, the language of each individual BIT must be carefully considered and, if necessary, applicable laws of the investor’s home state should be analysed, because such analysis will determine whether routing an investment through an SPV incorporated in the investor’s home state will be sufficient to attract BIT protection. It is not enough simply to identify that a BIT is in force.

Registering Foreign Investments under Iranian Law

In order for investors to secure their treaty rights and benefit from the substantive protections provided therein, many BITs require that investors obtain a licence from the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI), the only competent authority to receive and approve applications of foreign investment into Iran. The issuance of an OIETAI licence is also important because it entitles the licence holder to the protections and guarantees offered under the Foreign Investment Promotion and Protection Act (FIPPA).

Where investors re-structure existing investments to take the benefit of an applicable BIT, it may be necessary to re-apply for an OIETAI licence, as the original licence may not apply to the new nationality of the investment.

Protections under Bilateral Investment Treaties

Generally speaking, the substantive protections in most Iranian BITs are typical of those an investor would expect. Of the key substantive protections commonly provided by investment treaties to qualifying investors and investments, the following are generally available:
  • Fair and equitable treatment (FET): This is the broadest BIT protection which has been interpreted as (i) requiring the host state to provide legal and business stability, predictability and transparency, in accordance with the legitimate expectations of the investors; and (ii) prohibiting the host state from taking arbitrary and politically motivated measures against investments.
  • National and Most Favoured Nation treatment: The national treatment standard grants the investor treatment not less favourable than that accorded to its nationals and the most favoured nation (MFN) treatment standard imposes an obligation on the host state to provide foreign investors a treatment that is no less favourable than that which it accords to investors of a third country (for example under another BIT).
  • No expropriation: This standard provides protection against expropriation (depending on the wording of the BIT, whether direct or indirect) without prompt, effective and adequate compensation.
  • Free transfer of funds: Iranian BITs also commonly contain provisions relating to the free transfer of payments or funds (which are broadly defined) relating to an investment.

In the event that a violation of a substantive protection contained in the BIT is proven, investors are entitled to reparation under principles of international law.

Dispute Resolution under BITs

In addition to broad substantive protections, BITs generally provide investors with recourse to a dispute resolution forum outside the host state. This is normally international arbitration under the ICSID Convention (which is an option only if both States are parties to the ICSID Convention) or the rules of the United Nations Commission on International Trade Law (UNCITRAL). Since Iran is not an ICSID contracting state, arbitration under the UNCITRAL rules would typically be the only international forum available to investors in the event of a dispute.

Access to international arbitration provides considerable advantages over national courts, such as neutrality, the application of international law rather than domestic law, assessment of damages under international law principles, and awards that can be enforced in over 150 countries under the New York Convention.

Other Protections

As discussed above, investments in Iran are also protected by FIPPA which provides a number of substantive protections to foreign investors holding an investment licence. These include both national treatment standards and a prohibition against direct or indirect expropriation as well as the free transfer of funds (subject to the approval of the Foreign Investment Board and confirmation by the Minister of Economic Affairs and Finance). The FIPPA does not, however, provide the same robust protection as contained in most BITs, including FET protection and other substantive protections commonly seen in the majority of BITs. Moreover, in the absence of a specific BIT, disputes are to be referred to the local courts.

The Agreement on Promotion, Protection and Guarantee of Investments among Member States of the Organisation of the Islamic Conference (the OIC Agreement) may provide protection to investors in the absence of applicable BITs. To benefit from the protections of the OIC Agreement, a foreign investor must be a qualifying investor and have a qualifying investment, as defined by the OIC Agreement. The term ‘investor’ is defined broadly and, unlike most BITs which only apply to corporate entities and natural persons, the OIC Agreement extends protection to governments of member states. The OIC Agreement also contains many of the substantive protections that are typically found in investment protection treaties, but a notable omission is the fair and equitable treatment standard. While the OIC Agreement can be a useful tool in the absence of an applicable BIT, it is preferable for investors to structure (or re-structure) their investments at the right time in order to obtain the benefits of a BIT.