This article considers how a foreign company can close its Iraqi branch when it still has unfinished contractual obligations in Iraq. A branch is not a separate legal person. It is part of the foreign parent, registered in Iraq to conduct business there. When the branch closes, the parent’s obligations under contracts signed through the branch do not disappear. The parent remains responsible for performing them, and the closure of the branch may affect its ability to do so lawfully.
The tension is common. A parent may want to reduce costs by closing the branch while completing a final project, honouring warranties or collecting receivables. It may assume these activities can be managed from abroad. In practice, performing work in Iraq, receiving payment from Iraqi customers and dealing with authorities may require a registered presence, and customers may object to dealing with a parent that has no local footprint.
The Companies Law No. 21 of 1997, as amended, and Regulation No. 2 of 2017 on the branches and offices of foreign companies govern the registration and deregistration of foreign branches. The Iraqi Civil Code No. 40 of 1951 governs the parent’s contractual obligations. The Income Tax Law No. 113 of 1982, as amended, governs the branch’s tax position and clearance. The Labour Law No. 37 of 2015 and the Workers Retirement and Social Security Law No. 18 of 2023 govern branch employees. Public contracts are subject to their own terms and the applicable government contracting instructions.
Understanding the branch’s legal position
Because a branch is part of the parent, contracts signed by the branch are contracts of the parent. Liabilities incurred by the branch are liabilities of the parent. Closing the branch ends the parent’s registered presence in Iraq but does not transfer or extinguish its obligations. The parent must therefore decide how it will perform remaining obligations and whether it can do so without a registered branch.
Some activities may be lawfully conducted without a branch, such as supplying goods from abroad or providing services remotely. Others, such as performing works on site, employing local staff or receiving payment into an Iraqi account, may require registration. Corporate advice in Iraq can help determine which remaining activities require a registered presence.
Reviewing unfinished contracts
The parent should review each contract that remains unfinished:
- Performance obligations. What work remains, where it must be performed and whether it requires local staff or equipment.
- Warranty and defects obligations. How long these last and what response the customer expects.
- Payment arrangements. Whether payments are made to an Iraqi account in the branch’s name and whether the customer can pay the parent directly.
- Assignment and subcontracting. Whether the contract allows the parent to assign or subcontract remaining obligations to another party.
- Registration requirements. Whether the contract or the customer requires the contractor to maintain a registered presence in Iraq.
This review determines whether the branch can close immediately, must remain open until certain obligations are complete or can close once alternative arrangements are in place.
Choosing a closure strategy
Depending on the review, the parent may choose from several strategies:
- Complete before closing. Keep the branch open until all performance obligations are complete and close it during the warranty period, with a plan for warranty response.
- Assign or novate. Transfer remaining obligations to a local partner, subsidiary or third-party contractor with the customer’s consent.
- Subcontract and supervise. Retain the contract but subcontract the remaining work to a local contractor, if permitted.
- Convert to a subsidiary. Establish an Iraqi subsidiary to take over the branch’s business, which may be appropriate where the parent intends to retain some presence.
Commercial contract advice in Iraq can help negotiate assignments and novations with customers.
Managing customers and guarantees
Customers, especially public bodies, may be concerned about a contractor closing its branch. They may hold performance bonds or retention amounts and may require assurance that warranties will be honoured. Early communication with customers, supported by a clear plan, can prevent misunderstandings and protect the relationship.
Guarantees issued by banks in favour of customers will remain in place until released. The parent should identify outstanding guarantees and negotiate their release or replacement as obligations are completed.
Obtaining tax clearance
Deregistration of a branch commonly requires tax clearance. The branch must file all outstanding returns, prepare audited accounts and respond to the tax authority’s review. Where the branch has received payments under contracts still being performed, the authority may question how future income will be taxed. Tax advisory services in Iraq can help prepare the branch’s final position and address the treatment of continuing contracts.
Handling branch employees
Branch employees are employees of the parent. Their employment must be terminated in accordance with the Labour Law, or transferred to a successor entity. Final entitlements and social security contributions must be settled. Where employees are needed to complete remaining obligations, the parent should retain them until those obligations are fulfilled. Employment law advice in Iraq can help structure terminations and transfers.
Completing deregistration
Once obligations are addressed, the parent can apply to the registry for deregistration, supported by tax clearance, social security confirmation and other required documents. After deregistration, the parent should confirm that no notices remain outstanding and that remaining warranty obligations are managed through the agreed arrangements.
Managing receivables after closure
The parent may still be owed money under contracts performed through the branch. Customers, particularly public bodies, may pay only to an Iraqi bank account registered in the contractor’s name, and may require documents such as tax clearance letters before releasing final payments or retentions. If the branch’s account is closed too early, the parent may find it difficult to receive these amounts.
The closure plan should identify all outstanding receivables, the documents each customer will require for payment and the account into which payment will be made. Where final payments depend on events after closure, such as the end of a warranty period, the parent should agree an alternative payment mechanism with the customer before deregistration. Keeping the branch account open until the main receivables are collected, or obtaining the customer’s agreement to pay the parent directly, can avoid amounts remaining unpaid for long periods.
Illustrative example. A European engineering firm has a registered branch in Iraq performing a power plant maintenance contract. The firm decides to close the branch, but eighteen months of the contract remain. The customer insists on a registered local contractor. The firm establishes a joint arrangement with an Iraqi maintenance company, which takes over the remaining obligations by novation with the customer’s consent. The branch then files its final accounts, obtains tax clearance and is deregistered, while the firm provides technical support under a subcontract.
Conclusion & how Etihad Law Firm can help
Closing an Iraqi branch while the parent retains unfinished obligations requires careful planning, because the parent remains liable for the branch’s contracts. Reviewing contracts, choosing a suitable closure strategy, managing customers and completing tax and employment steps allow the parent to exit without breaching its obligations.
Etihad Law Firm advises foreign companies on branch closure, contract transitions and exit planning in Iraq. We help clients design closure strategies that protect their contractual position and their relationships with customers.