Foreign oil services companies looking to establish a presence in the Kurdistan Region of Iraq are subject to the special directives and requirements of the Ministry of Natural Resources (MNR) in Erbil, most of which involve mandatory prerequisite approvals for the completion of the registration process for operations in Kurdistan.
The details of these conditions and the practical constraints posed by their application need to be fully understood and taken into account when planning the legal structure of any company’s presence in the Kurdistan Region. This is especially true with respect to the differences between requirements to register a branch of a foreign oil services company and the incorporation of a local entity.
The Republic of Iraq is divided into two legal jurisdictions– that of the Iraqi federal government and the separate jurisdiction of the Kurdistan Region of Iraq. This means that each company needs to be registered separately in each of the two regions. Furthermore, the Kurdish Parliament holds the power to ratify, amend, or reject laws enacted by the Iraqi Parliament in certain areas of constitutionally designated authority.
The laws pertinent to the registration of oil services companies are the “Iraqi Civil Law No. (40) of 1951,” “Companies Law No. (21) of 1997,” and “Foreign Branches and Representative Offices Regulation No. (5) of 1989,” all of which have been enacted by the Iraqi Parliament and ratified without amendment by the Kurdish Parliament. In addition, the Ministry of Natural Resources in Erbil regulates the registration process through the directives it issues. This array of laws and the powers reserved for Kurdish authorities mean that the legal framework discussed in this guide will apply primarily in the Kurdistan Region and differ greatly from the conditions and requirements imposed in the rest of Iraq, even though processes in both areas are based upon the same laws and regulations.
Registering a Branch of a Foreign Oil Services Company
Nearly all foreign entities have the ability to open a branch in the Kurdistan Region, though legal procedures differ based on their field of activity. As a prerequisite, oil services companies need to be registered on the vendors’ list at the Ministry of Natural Resources in Erbil. This registration can be initiated electronically and followed through with the Ministry in order to obtain a registration number. For the time being the Ministry is not issuing registration certificates, so a number issued by the MNR is a company’s only reference and proof of registration in the Kurdistan Region.
At the same time the registration process is initiated or shortly thereafter, firms must file an application accompanied by all required supporting documents from their parent company with the Companies’ Registrar at the Ministry of Trade and Industry in order to open a branch. The Companies’ Registrar will transfer the application to the Ministry of Natural Resources for preapproval of the branch opening, which will be suspended until the vendors’ list registration is completed. After preapproval is granted, a company’s application to open a branch is transferred back to the Companies’ Registrar, where the parent company’s application documents are examined in order to move forward with the standard branch opening process and complete the registration.
An oil services company’s decision to open a branch in the Kurdistan Region, rather than incorporating a new local company, offers the advantage of a quick, straightforward process for establishing a legal presence in the country. In many cases, this proves to be the decisive factor for companies that opt for the branch solution, despite the financial and legal risks such a setup poses for the parent company.
Incorporating a Local Oil Services Company
The most common legal entity in Iraq is the Limited Liability Company (LLC). Joint Stock Companies in particular need special approval from the Council of Ministers in order to be established and are generally chosen only when required by law, when other common legal forms of entities are still not available.
Much like the branch opening process, a registration application must be filed with the Companies’ Registrar at the Ministry of Trade and Industry. It should be noted that a local LLC can be wholly-owned by a foreign parent company or by foreign individuals.
After the application’s submission and its transfer to the Ministry of Natural Resources, proceedings start to differ considerably from those under the branch opening process. Unlike branches of foreign companies, local LLCs are required to insure a contract or a subcontract with a registered, currently operating oil company in order to get the mandatory preapproval of the Ministry of Natural Resources for the completion of their registration process.
After a company is incorporated, it can begin the process of obtaining a registration on the vendors’ list at the Ministry of Natural Resources. The Ministry has made vendors’ list registration a strict prerequisite for all oil companies and their suppliers in the Kurdistan Region, and it forbids companies currently operating in the oil and gas sector from dealing with any supplier whatsoever that is not included on the list.
Companies that opt for a local LLC frequently do so because of the legal and financial protection this route provides for the parent company, but often have to look for practical ways to overcome the obstacles associated with incorporation requirements and prerequisites.
The great promise of Kurdistan’s oil sector has placed it on the radar of most oil and gas companies operating in the Middle East, but planning that ignores the Region’s unique legal structure can quickly lead to detrimental consequences. It is therefore beneficial for any company looking to enter the Iraqi oil services market to fully understand the practical implications of the conditions imposed by Iraqi law and the Ministry of Natural Resources described above.