While it's true that Iraq is positioned towards the lower end of the World Bank's ease of doing business report, this ranking only scratches the surface of what the country has to offer. As one of the globe's richest nations in terms of natural resources, Iraq boasts significant hydrocarbon reserves that form the backbone of its economic potential. Coupled with a large and youthful population, the country is a burgeoning market with immense prospects for growth and development. However, navigating the intricacies of company formation, employment laws, taxation, and arbitration in Iraq requires a nuanced understanding of its legal and business environment. The landscape is marked by complex regulations that can vary significantly from one region to another, making it imperative for international companies and investors to grasp the local legal nuances to avoid pitfalls and capitalize on opportunities. This guide, "Iraq Business Guide: A Legal Guide for Company Formation, Employment, Taxation, Arbitration Success in Iraq" aims to serve as a comprehensive resource for international entities looking to establish or expand their operations in Iraq. It delves into the essential aspects of doing business in this dynamic market, offering insights into the legal frameworks governing company formation, the recruitment and management of local and expatriate talent, navigating the tax regime, and resolving disputes through arbitration. By providing a detailed overview and practical advice, this guide seeks to demystify the process of entering and thriving in the Iraqi market. As Iraq continues to open its doors to international investment and seeks to diversify its economy beyond oil and gas, understanding the legal and regulatory environment becomes crucial. From leveraging the country's strategic geographic location to tapping into its vast human and natural resources, the opportunities for growth and success are substantial. This guide is designed to equip businesses with the knowledge and strategies needed to make informed decisions and to thrive in Iraq's complex yet rewarding market landscape.  

COMPANY FORMATION:

PROCEDURES FOR STARTING A BUSINESS

Iraq has indeed become one of the top choices of global investors and companies to invest in and launch their business ventures. One such reason is the country’s improving economic growth and standing. If you are planning to register an LLC in Iraq or a branch, we’d say it’s a great idea. However, as a law firm in Iraq with decades of experience, we’d advise you to read this guide first before you begin. We say this because the laws for registering and launching a business in modern-day Iraq witnessed many changes in the past few years.  

The Changing Dynamics

Published in Gazette 4554, the Iraqi Companies Law No 21 of 1997 was amended with Iraqi Law 17 of 2019. It came into effect on 9th September 2019. Various changes were made in the Iraqi Companies Law. These include the following:

• The first amendment was the introduction of the holding company.
• The law stated that a legal or foreign natural individual could acquire membership in his capacity as the founder or a shareholder of a limited company or joint-stock only if the contribution percentage of the Iraqi person is more than 51% (fifty-one percent) of the invested capital. Also, in addition to the managing director, the company should appoint a deputy managing director for practicing the powers of the managing director in case of his absence.
• The license of the holding company shall be suspended or canceled if they are unable to establish their activities in Iraq within two years from the date of registration.
• Moreover, if the company does not issue the liquidation recommendation in conformance with Article 147, and two months (sixty days) have lapsed, then by law, the company liquidation decision will be issued by the registrar.
• Company shall be penalized for carrying out business activities in Iraq if it doesn’t have a registration certificate. The penalties have increased, including a minimum of three months’ imprisonment and fines of not more than five million Iraqi Dinars.
• Also, by law, the government will prioritize Iraqi companies for governmental contracts if they have foreign companies as partners.

 

LLC Registration—Understanding the Essential Steps

Under Iraqi law, an LLC (Limited Liability Company) can be established between two and twenty-five shareholders. However, under the Companies Law, there is an exception to the Iraqi general rule. It allows a single person, judicial or natural, to form a Limited Liability Company. Furthermore, when registering an LLC in Iraq, foreign investors must have Memorandum of Association (“MoA”). This works as a foundation document between the shareholders. However, if one founder creates the LLC, you must prepare a statement with the same requirements as the Memorandum of Association as per Commercial law. Foreign natural individual could acquire membership in a capacity as the founder or a shareholder of a limited company or joint-stock only if the contribution percentage of the Iraqi person is equal to or more than 51% (fifty-one percent) of the invested capital. As per the Companies Law, the items to be included in the MoA are:

• The company’s proposed name, along with the company form
• The company’s proposed location (it should be in Iraq)
• The proposed company’s purpose of establishing in Iraq and the nature of activities it will engage in
• The capital of the proposed company, such as the number of shares and the value of the shares
• Founder names with their professions, nationalities, permanent addresses, percentage of capital owned.

The Companies Law sets forth the minimum share capital requirement. This requirement must be paid in full and nominal values of one Iraqi dinar, and it can be withdrawn upon completion of company registration. Furthermore, when registering your LLC in Iraq, you must:

1. Reserve your company’s name with the Baghdad Chamber of Commerce and Federation of Chambers of Commerce. You need to make sure that the name is unique to get approval.
2. Next, deposit your share capital in the proposed LLC. The deposit must be in an Iraqi bank. Once you deposit the amount, you will receive a deposit receipt letter. This letter should then be submitted to the Ministry of Trade in Iraq. The Ministry of Trade will provide you with a deposit letter.
3. Now, from the General Commission for Taxes, you will have to apply for and receive tax clearance certificates. These are no objection letters addressed to the Registrar of Companies.
4. Next, make sure to submit the following documents to the Registrar of Companies: The MoA duly signed by the founders with names and objectives of the company, business address and contact details, and complete details of the shareholders and directors along with the ownership structure.
5. Moreover, you must also furnish:

• Legalized and notarized passport copies of the directors and shareholders
• Notarized and legalized registration certificate copies of the corporate shareholders
• A bank statement that certifies the deposit of the share capital

In a situation where the founder of the new business entity in Iraq is a company, the application should include the following information:

• The resolution of the board of directors or shareholders of the founding company planning to launch the LLC in Iraq
• Copy of the founder’s constitutional documents
• The lease agreement and title deed copy of the proposed LLC head office in Iraq
• The letter issued by the Iraqi bank shows that the share capital has been received as well as deposited in the bank.
• Tax clearance letter in respect to the founder.
• Power of attorney issued by the founder appointing a local lawyer to undertake the procedure of setting up the LLC in Iraq.

It is important to note that in some situations, steps may vary depending on legal complexities or business structure. But don’t worry, our lawyers are here to help. We can provide you with quality assistance unique to your situation, ensuring that registering an LLC in Iraq for you is simple, smooth, and stress-free.  

Branch of a Foreign Company

The governmental entity responsible for regulating and establishing foreign branches and granting the certificates of regulation is the Ministry of Trade/Registrar of Companies Department. A new law, Regulation No. 2 of 2017 was issued to regulate the registration of foreign companies in Iraq. According to the law: If the foreign companies that intend to set up a branch in Iraq have established their operations for at least two years in the country of their origin, they will be permitted to conduct business in Iraq if they obtain any of the following:

• A governmental contract or a sub-contract with an entity that is contracted with the Iraqi government, or a contract with either a state or mixed sector companies.
• Have investor license as per the applicable investment laws.
• Have a business license that is granted from an authorized Iraqi governmental entity, or
• Is conducting business in a private sector in a project or contract value is not less than 1 million US dollars.

It is important to note that you shall not be granted a license to carry out commercial activities in Iraq, even if you have a certificate of registration. At times, the sector-related license requirement is pronounced by the RoC after the registration certificate issuance. It is subject to the activities that are listed in the AoA (Article of Association) if the RoC declares the license acquisition necessary.  

TAXATION IN IRAQ

Iraq’s current tax law is set out in Law No. 113 of 1982 (as amended) (the Income Tax Law). Under the GCT’s current interpretation and application of tax laws and instructions in Iraq, the factors that would create a taxable presence for a non-resident in Iraq can be summarized as follows, whereby meeting any one of the below factors causes a non-resident company to be ‘doing business in Iraq’ and, therefore, taxable in Iraq; whereas, avoiding all four factors means that a company is ‘doing business with Iraq’ and should, therefore, avoid taxation in Iraq: The place of signing the contract by the party executing work under the contract (vendor or service provider) is in Iraq;

• The place of execution of work is in Iraq;
• The place of delivery of goods or services is in Iraq; or
• The place of receiving the payment for the work is in Iraq.
• All registered entities inside of Iraq must register with the GCT, and obtain a tax identification number ‘TIN’.
• There are three different type of taxes applicable in Iraq.

 

Corporate Income Tax

In Iraq, corporate income tax (CIT) is imposed on taxable profits from all sources arising, or deemed to arise, at a flat rate of 15% (a 35% CIT rate is applicable only in Iraq for oil and gas companies). Any revenues and expenses related to any services rendered in Iraq should be booked and reported locally by the Iraqi entity. The Iraqi entity would need to prepare local financial statements (prepared in Arabic under the Iraqi Unified Accounting System (local Iraqi GAAP) (IUAS) and CIT return, and file them with the GCT on an annual basis. The net income reported in the locally prepared financial statements and CIT return would then become the basis for the GCT in assessing the due CIT on the Iraqi entity. It should be noted that the GCT reserves the right to reject a company’s reported net profits and instead impute a deemed profit if the actual profit, as reflected in the IUAS financial statements, is less than the deemed profit percentage as communicated in the GCT’s indicators. If the actual profit as reflected in the financial statements is more than the deemed profit percentage, the tax will most likely be based on actual profit.  

Withholding Tax

To the extent that the Iraqi entity is a customer under a contract for ‘doing business in Iraq’ (a taxable contract), the Iraqi entity would be required to act as a withholding agent and retain tax from payments made to its vendors/service providers who are undertaking work and generating income in Iraq and then remit the retentions to the GCT. The retention rates vary and are dependent on the nature of activities carried out under each contract (which typically range from 1.8% to 10%, as per the GCT’s income tax law and indicators). Recently, Iraq issued new regulations to include SOMO oil contracts under the withholding tax regulations. Therefore, oil companies dealing with SOMO or Ministry of Oil have to comply with withholding tax regulations and complete necessary procedures at the General Commission of Taxes in Iraq.  

Employee Income Tax

Employee income tax in Iraq must be withheld by the Employer at rates that graduate from 3%-15%. The Iraqi entity must then remit the withheld amounts to the GCT’s Direct Deductions Department (DDD) by the 15th day of each month which follows the month of deduction. An annual employee income tax filing is also required by 31 March of each year. After the annual employee income tax filing is made, the DDD would undertake an audit of the filing and assess the employer’s compliance with its employee income tax obligations and may impose an additional employee income tax liability if the DDD concludes that the employee income tax paid is less than the required minimum tax obligation. In addition, the Iraqi entity would be obligated by law to operate payroll and maintain records of salaries, allowances, and wages for all of its employees (Iraqis and non-Iraqis) who are working in Iraq. By law, employees of the Iraqi entity must have local employment contracts that include details of basic salary and allowances. Salaries of foreign employees seconded to Iraq by a non-resident party are subject to income and social security taxes in Iraq in the same manner as Iraqi employees.  

EMPLOYMENT

Iraqi Labor Law No. 37 of 2015 extends to all employees in the private sector in Iraq regardless of their nationality and does not extend beyond the borders of Iraq. Irrespective of the legislation choice in their work contracts, Iraqi Labor Law No. 37 of 2015 applies to all foreign and domestic employees who work in Iraq. Furthermore, while written contracts of employment are required to have minimum terms, including but not limited to, stating the position, salary, and working hours. It is also not necessary to have written agreements to prove employment relationship. The business relationship is governed and defined by Iraqi Labor Law. Unless extra rights are provided under contract, all minimal rights under Iraqi Labor Law No. 37 of 2015 are assumed into contractual arrangements by default. Iraqi Labor Law No. 37 of 2015 prohibits the termination of work contracts by imposing restrictions on the manner in which a business relationship can be ended. When an employer terminates an employee, the employer must provide prior notice to the employee of one month, provided that the termination should have occurred for cause. Unfair dismissal is defined as any termination that does not strictly follow the statute’s reasons for termination. In such cases, the employee is eligible to double severance pay and can also request reinstatement to their previous post. In Iraq, employer must register all employees with the Ministry of Social Security and pay monthly social security contribution. The proportion of monthly social security contribution is 5% of the employee’s total salary to be deducted from the employee and 12% of the total salary to be paid by the employer, which form a combined monthly payment of 17%. The oil and gas sector has its own social security payment rates, which vary based on the type of activity performed by the employer. In certain circumstances, the country may need to hire foreign employees, expats, to meet the local needs of the labor force, whether due to a lack of manpower, the lack of skilled labor. The labor law dealt with the regulation of foreign workers in Article 30 and subsequent articles. It prohibited administrations and employers from employing any foreign worker in any manner without obtaining a prior work permit. This work permit is issued according to the law by the Ministry of Labor and Social Affairs through a request duly filed at the relevant department of the Ministry. The Minister of the said ministry shall issue the necessary instructions concerning the recruitment of foreign workers to Iraq. The employment and registration of a foreign worker and obtaining a work permit for an employee shall be subject to some fees exacted by the Ministry of Labor. The labor law imposes a fine of three times the minimum daily wage, and three times the minimum monthly wage, for each worker upon the entity or person who violates the provisions of the law in this regard. Where the activity of a foreign worker is located inside Iraq, it shall be covered by the Iraqi Taxation system and in accordance with the instructions for the tax deduction by means of direct deduction according to Direct Deduction Instructions No. (1) of 2007.  

Arbitration and Foreign Judgment Enforcement

A foreign judgment is a decision made by a court that is not located in Iraq. Foreign verdicts were not upheld or acknowledged in Iraq before 1928 because, at the time, it was believed that doing so would violate their sovereign rights. The maintenance of rights protected by international judgments and the significance of protecting people’s business interests became more crucial as opinions started to shift. Many nations, including Iraq, started to respond to this by allowing the incorporation and execution of foreign judgments rendered by non-national authorities either through statute or through numerous multinational treaties.  

Enforcing Foreign Judgments in Iraq

Foreign judgments rendered by international courts cannot be enforced in Iraq unless otherwise determined by a particular law, according to Article 16 of the 1951 Iraqi Civil Code. We must thus examine the Foreign Enforcement Law, which is the primary law addressing the subject, to comprehend the execution of foreign judgments in Iraq. Anyone seeking to have a foreign judgment enforced in Iraq needs to make a request to the Court of First Instance in line with Article 3 of the Foreign Enforcement Law. The appropriate court must be chosen based on its proximity to either the accused’s dwelling or the property subject to claim, whichever is closer. A ruling enforcing an international judgment may be made by the Court of First Instance. If the accused can show that the decision was obtained unfairly or that the international court did not follow justice, then the court may also decline to execute the foreign judgment.  

Foreign Arbitration

Iraq is a country whose economy is heavily dependent on its dealing with foreign investors, especially in the oil & gas field. Many of these foreign investors prefer arbitration as an alternative dispute resolution method due to the advantages it provides, such as a less rigid structure to litigation and the ability to choose a governing law they are more familiar with. Iraqi law has expressly endorsed the use of arbitration by investors (see Article 27 of Federal Investment Law Number 13 of 2006), as well as the use of arbitration in relation to government contracts (see Article 11 of Regulations Number 1 of 2008 for Implementing Government Contracts). Arbitration in Iraq is not codified in one separate law. Instead, relevant legal provisions could be found in many laws, such as Federal Law Number 30 of 1928 in respect of Enforcement of Foreign Judicial Awards and the Riyadh Convention on Judicial Cooperation of 1983 (the “Riyadh Convention”). This differs somewhat from the United Nations Commission on International Trade (UNCITRAL) Model Law on International Commercial Arbitration, which is adopted by many other countries. Recently the Iraqi government has taken a giant leap in respect of arbitration by signing the New York Convention for Arbitration (the “New York Convention”). The New York Convention’s principal aim is that foreign and non-domestic arbitral awards will not be discriminated against, and it obliges disputing parties to ensure international awards are recognized and generally capable of enforcement in their jurisdictions in the same way as domestic awards.  

What is the current legal position in Iraq?

Iraq's accession to the New York Convention On 31 May 2021. Iraq's recent ratification of the law of accession to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards marks a pivotal shift in its legal framework towards international arbitration. This momentous step underscores Iraq's commitment to fostering a pro-business environment and aligning its arbitration laws with global standards. By joining the New York Convention, Iraq has opened new avenues for international businesses operating within its borders, offering a more reliable and efficient mechanism for the enforcement of arbitral awards. This development is particularly significant for foreign investors and companies, as it provides a heightened sense of legal security and predictability in dispute resolution. The accession to the convention signals Iraq's readiness to integrate into the international business community, enhancing its attractiveness as an investment destination. It ensures that arbitration awards made in other member states can be recognized and enforced in Iraq, thus strengthening the country's position as a viable and competitive market for global business operations. Here are a few points regarding the New York Convention worth mentioning:

• The New York Convention will not have a retrospective effect. This means that it will apply only to foreign arbitral awards made after the publication date of the Law.
• The New York Convention deals only with commercial awards, so in other cases, such as a probate award, for example, existing arbitration laws apply.

The New York Convention will facilitate the enforcement of foreign arbitral awards in Iraq. Currently, the enforcement of a foreign arbitral award is mostly dependent on the Riyadh Convention. The Riyadh Convention demands conditions that often delay the enforcement process, such as the requirement for a statement from the local judicial authority certifying that the award is final. Under the New York Convention, no separate certification is required, and enforcement may be sought against state entities. Through its accession to the New York Convention, Iraq can assure potential foreign investors that, if a dispute arises, they will have access to a neutral venue with a highly enforceable award mechanism system. It is hoped that this will make Iraq more appealing to future investors.  

CONCLUSION

Iraq stands on the precipice of a transformative era, poised to turn the page on decades of adversity. A history marred by dictatorship, repression, foreign interventions, terrorism, and civil strife has not only tested the resilience of its people but has also primed the nation for a resurgence. With a population of 40 million yearning for renewal, Iraq presents an unparalleled market opportunity for investors willing to navigate its complexities. The challenges of entering the Iraqi market—ranging from nascent supply chains to the hurdles of securing insurance—speak less to insurmountable barriers and more to the untapped potential awaiting savvy investors. The lure of significant returns for those prepared to undertake calculated risks is undeniable. Yet, the importance of armed with comprehensive legal and strategic advice cannot be overstated, as navigating the intricacies of the Iraqi business landscape demands expertise and foresight. The promise of Iraq's market is not just in its recovery but in the vast economic opportunities that peace and reconstruction herald. For early investors, the rewards could be substantial, reflecting the substantial peace dividend that awaits as Iraq transitions from conflict towards prosperity. The journey ahead is fraught with challenges, but for those willing to invest in Iraq's future, the potential for impactful gains—both financial and societal—is immense. In embracing this new chapter, Iraq and its international partners can forge a path towards lasting growth and development.