Legal Structure and Lender Requirements

Legal Structure and Lender Requirements Project finance where debt is repaid from the cash flows generated by a specific project rather than from the general assets of a sponsor is the financing model of choice for major infrastructure, energy, and industrial projects in Iraq. The country’s significant infrastructure deficit, substantial oil and gas sector, and ambitious reconstruction programmes create substantial project finance opportunities. However, the legal framework for project finance in Iraq presents unique challenges that require careful navigation by sponsors, lenders, and their legal advisers. This article examines the key legal and regulatory considerations for project finance transactions in Iraq. The Investment Law Framework The primary legal framework for project investment in Iraq is Investment Law No. 13 of 2006 (as amended), which established the National Investment Commission (NIC) as the central body for regulating and promoting investment. The Investment Law provides a framework of incentives for qualifying investments including: exemption from taxes and fees for a period of up to ten years from project commencement; guarantee against non-commercial risk expropriation; right to repatriate capital and profits; and permission to employ foreign workers in technical and managerial positions. Investment Law protections apply to investments approved by the NIC or the relevant regional investment commission. The Kurdistan Region operates under a separate investment law Law No. 4 of 2006 administered by the Kurdistan Board of Investment. Project Company Structure and the SPV Project finance transactions in Iraq typically involve establishing a special purpose vehicle (SPV) a separate project company incorporated specifically for the project. The SPV is the borrower under the project finance loan agreement and the project developer under the project agreements. Under Iraqi Companies Law No. 21 of 1997, project SPVs are typically structured as limited liability companies (sharikat mahduda al-masouliya). Foreign sponsors may hold equity in the SPV, subject to any sector-specific foreign ownership restrictions. The NIC investment licence is typically obtained in the name of the SPV. Key Project Agreements and Their Legal Basis A project finance transaction in Iraq involves a suite of project agreements including: concession or BOT agreement with the relevant government ministry or authority, the legal basis for the project company’s right to develop, operate, and collect revenues from the project; off-take agreement securing the purchase of the project’s output, often by a government entity such as the Ministry of Electricity; EPC contract governing the construction of the project by the engineering, procurement, and construction contractor; O&M agreement governing the operation and maintenance of the project; and government support agreements including direct agreements and support letters from the relevant ministry confirming the project’s legal status and government support. Lender Requirements — Security Package International lenders financing Iraqi projects require a comprehensive security package. Given the limitations of Iraqi security law, the project finance security package typically includes: mortgage over the project’s real property and fixed assets; assignment of the project company’s rights under key project agreements off-take agreements, EPC contracts, and insurance policies; pledge over the shares of the project SPV; assignment of the project company’s accounts including the revenue account, the debt service reserve account, and the distribution account; and direct agreements between the lenders and key project counterparties including the government offtaker and EPC contractor giving lenders step-in rights in the event of project company default. Government Support and Sovereign Risk Government support is a critical element of project finance in Iraq, given the significant role of government entities as offtakers, land providers, and concession grantors. Lenders typically require: a government guarantee or support letter confirming the government’s commitment to the project; a direct agreement with the relevant ministry acknowledging the assignment of project agreements to lenders and confirming step-in rights; and comfort on the government’s obligations under the concession or BOT agreement. Political risk insurance from multilateral institutions such as MIGA (Multilateral Investment Guarantee Agency) or export credit agencies is commonly used to mitigate sovereign risk in Iraqi project finance. International Development Finance Institutions Several international development finance institutions (DFIs) are active in Iraqi project finance, including the International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD), and bilateral DFIs such as the US International Development Finance Corporation (DFC). DFI involvement brings significant benefits: it provides additional comfort to commercial lenders and sponsors on project viability; DFIs typically conduct extensive environmental and social due diligence, reducing reputational risk; and DFI financing may be available on more favourable terms than pure commercial lending. DFI participation also subjects the project to IFC Performance Standards or equivalent environmental and social requirements. How Etihad Law Firm Assists Etihad advises sponsors, lenders, and government authorities on project finance transactions in Iraq. Our services include advising on NIC investment licence applications, structuring project company arrangements, drafting and reviewing project agreements, advising on the Iraqi law security package, negotiating direct agreements with government counterparties, and advising on dispute resolution provisions in project documentation.

Foreign Currency Loans in Iraq

Foreign Currency Loans in Iraq Foreign currency particularly the US dollar plays a central role in Iraq’s economy, driven by oil revenues denominated in USD and the dollarisation of significant portions of the private sector. Yet the Central Bank of Iraq imposes important restrictions and requirements on foreign currency lending that both Iraqi banks and their borrowers must navigate carefully. This article examines the CBI’s foreign currency lending framework, cross-border loan requirements, and the practical implications for structuring USD and other foreign currency financing arrangements in Iraq. The Role of the US Dollar in the Iraqi Economy Iraq’s economy is heavily dollarised. Oil revenues which account for the vast majority of government income are received and managed in US dollars. Large commercial transactions, real estate dealings, and significant portions of trade finance are conducted in USD. The Iraqi dinar (IQD) is pegged to the USD at a rate set and maintained by the CBI. This dollarisation creates both opportunities and regulatory complications for lenders: while USD lending is natural in the Iraqi market, it is subject to CBI foreign currency management requirements designed to maintain the exchange rate peg and control capital outflows. CBI Foreign Currency Lending Restrictions The CBI regulates foreign currency lending by Iraqi licensed banks through a series of instructions addressing: the purposes for which USD loans may be extended, CBI instructions specify eligible purposes for foreign currency lending, typically including import financing, trade finance, and specific investment purposes; foreign currency lending limits banks are subject to open position limits restricting their net exposure to foreign currency assets and liabilities; foreign currency reserve requirements , banks maintaining USD deposits must hold specified reserves; and reporting requirements, banks must report their foreign currency loan portfolios and exposures to the CBI on a periodic basis. Cross-Border Loan Requirements When an Iraqi borrower receives a loan from a foreign lender whether a foreign bank, development finance institution, or international capital market, CBI requirements apply to the cross-border flow of funds. Key requirements include: CBI registration or notification of cross-border loans above specified thresholds; compliance with foreign exchange regulations governing the remittance of loan proceeds into Iraq and repayment of principal and interest to foreign lenders; AML documentation requirements on the source of the lender’s funds; and compliance with sanctions screening requirements particularly given US sanctions implications for USD transactions. OFAC Sanctions and USD Transactions Any transaction involving US dollars including foreign currency loans denominated in USD, is subject to OFAC jurisdiction because USD transactions are cleared through the US financial system. For Iraqi borrowers and lenders, this has direct practical implications: USD lending transactions involving Iraqi parties require OFAC sanctions screening of all transaction parties; any involvement of individuals or entities on the OFAC Specially Designated Nationals list will block the transaction; and Iraqi banks must implement OFAC-compliant sanctions screening programmes as a condition of maintaining US dollar correspondent banking access. The US Department of the Treasury has in recent years taken enforcement action against Iraqi banks for OFAC violations, resulting in the loss of USD correspondent banking access for affected institutions. Practical Structuring Considerations Foreign lenders extending USD loans to Iraqi borrowers should consider: the governing law of the loan agreement, English law is commonly chosen for international loan transactions but Iraqi law implications of security enforcement must be considered; remittance of repayment, ensuring the loan agreement contains mechanisms for the borrower to obtain necessary CBI approvals for remitting USD repayments offshore; security structuring, security over Iraqi assets must comply with Iraqi law regardless of the governing law of the loan agreement; and dispute resolution, international arbitration (ICC, LCIA, or DIFC-LCIA) is commonly chosen to avoid reliance on Iraqi courts for disputes with international lenders. Exchange Rate Risk Management Borrowers taking on USD-denominated loans while generating revenues in Iraqi dinars face significant exchange rate risk. The IQD/USD peg reduces but does not eliminate this risk devaluation of the dinar against the USD directly increases the IQD cost of USD loan repayments. Borrowers should consider: revenue dollarisation where possible, structuring commercial arrangements to generate USD revenues that naturally hedge USD debt service; hedging, limited hedging instruments are available in the Iraqi market; and maintaining adequate foreign currency liquidity buffers. How Etihad Law Firm Assists Etihad advises on the structuring and documentation of foreign currency loan transactions involving Iraqi parties, advises on CBI foreign currency requirements and approval processes, assists with OFAC sanctions compliance in USD transactions, and advises international lenders on Iraqi law requirements applicable to cross-border lending arrangements.

Islamic and Conventional Lending

Islamic and Conventional Lending Iraq’s banking sector operates a dual system: conventional interest-based banking alongside an Islamic banking sector that has grown significantly since the enactment of the Islamic Banking Law. For borrowers and lenders in Iraq, understanding how interest is regulated under both frameworks and the increasingly important role of Islamic finance structures is essential for structuring lending transactions correctly. This article examines the regulatory framework governing interest and profit rates in Iraqi lending, the legal basis for Islamic finance in Iraq, and the practical implications for financing arrangements. Conventional Interest — The CBI Framework In conventional banking, the CBI plays a central role in setting the benchmark for lending rates through its policy rate the rate at which the CBI lends to commercial banks. Commercial banks price their lending based on the CBI policy rate plus a spread reflecting the credit risk of the borrower and market conditions. The CBI monitors interest rate practices of licensed banks and may issue guidance on permissible lending rate ranges to ensure financial stability and prevent predatory lending practices. Under the Iraqi Civil Code, excessive or usurious interest provisions could be subject to challenge a consideration that lenders should bear in mind when structuring high-rate lending transactions. Islamic Banking Law No. 43 of 2015 The Islamic Banking Law No. 43 of 2015 provides the legal foundation for Islamic banking in Iraq. The law permits banks to obtain a licence from the CBI to conduct banking business in accordance with Islamic Sharia principles meaning the bank does not charge or pay interest (riba), but instead uses profit-sharing, cost-plus financing, and leasing structures to generate returns. The Islamic Banking Law requires Islamic banks to establish a Sharia Supervisory Board to ensure that all products and transactions comply with Islamic law. The CBI has issued complementary instructions governing the licensing, operation, and supervision of Islamic banks in Iraq. Key Islamic Finance Structures Used in Iraqi Lending The most commonly used Islamic finance structures in Iraqi bank lending include: Murabaha a cost-plus sale arrangement where the bank purchases an asset and resells it to the customer at a marked-up price, with deferred payment; this is the most widely used structure for trade and asset finance. Ijara, a leasing arrangement where the bank purchases an asset and leases it to the customer, with ownership transferring at the end of the lease term; used for equipment and property finance. Musharaka a partnership arrangement where the bank and customer jointly invest in a project or asset, sharing profits and losses according to agreed ratios; used for project and business finance. Mudaraba a profit-sharing arrangement where the bank provides capital and the customer provides expertise and management, with profits shared according to agreed ratios. AAOIFI Standards and Their Relevance in Iraq The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) publishes Sharia standards that are widely adopted by Islamic financial institutions globally. Iraqi Islamic banks are expected to align their products and practices with AAOIFI standards, which provide detailed guidance on the Sharia permissibility of specific transaction structures. The CBI’s instructions on Islamic banking reference AAOIFI standards as the benchmark for Sharia compliance. For foreign Islamic banks and Islamic finance investors considering transactions in Iraq, familiarity with AAOIFI standards is essential for assessing the Sharia compliance of Iraqi Islamic banking products. The LIBOR Transition and Iraqi Banking The global transition away from the London Interbank Offered Rate (LIBOR) completed at end of 2021 for most currencies has implications for Iraqi banks that reference international benchmark rates in their lending transactions, particularly for USD-denominated facilities. Iraqi banks involved in cross-border lending or participating in international syndicated facilities must ensure that their loan documentation incorporates the appropriate alternative reference rates primarily the Secured Overnight Financing Rate (SOFR) for USD transactions. Existing loan agreements referencing LIBOR should have been amended to incorporate fallback provisions and transition to SOFR or other relevant risk-free rates. Practical Implications for Borrowers Borrowers in Iraq choosing between conventional and Islamic finance should consider: the total cost of financing Islamic finance structures may have equivalent or higher effective costs than conventional lending depending on the structure and market conditions; the regulatory treatment certain CBI requirements apply differently to Islamic and conventional finance; tax implications the treatment of Islamic finance returns under Iraqi tax law should be verified; and documentation complexity Islamic finance transactions require additional Sharia compliance documentation including Sharia board approvals and fatwa opinions. How Etihad Law Firm Assists Etihad advises on both conventional and Islamic finance transactions in Iraq. We assist clients in structuring and documenting murabaha, ijara, musharaka, and mudaraba transactions compliant with CBI requirements and AAOIFI standards, review conventional loan agreements for interest rate provisions, and advise on the LIBOR transition implications for existing Iraqi loan documentation.

Secured Lending in Iraq

Secured Lending in Iraq Secured lending where the borrower provides collateral to the lender as security for repayment is fundamental to credit markets in Iraq. However, the Iraqi legal framework for taking, registering, and enforcing security presents significant practical challenges that lenders must understand before extending secured credit. The absence of a comprehensive, modern personal property security law, combined with court-dependent enforcement procedures, means that taking security in Iraq requires careful legal structuring from the outset. This article provides a comprehensive guide to secured lending in Iraq, examining each major category of collateral and the applicable legal framework. The Iraqi Legal Framework for Security Security interests in Iraq are primarily governed by the Iraqi Civil Code (Law No. 40 of 1951), which contains detailed provisions on mortgage (rahn) over real property in Articles 1287 to 1391, and pledge (rahn hiyazi) over movable assets. The Commercial Law No. 30 of 1984 contains supplementary provisions relevant to commercial security arrangements. There is currently no unified modern personal property security law in Iraq equivalent to Article 9 of the US Uniform Commercial Code or equivalent regimes in other jurisdictions, a gap that creates complexity for lenders seeking to take security over movable assets, receivables, and intangible property. Reform of the secured transactions framework has been under consideration, and lenders should monitor legislative developments. Mortgage Over Real Property Mortgage over real property is the most commonly used and most reliably enforceable form of security in Iraq. To be valid and enforceable against third parties, a mortgage over Iraqi real property must be: executed before a notary public; registered with the Real Estate Registration Directorate in the governorate where the property is located; and entered in the real property register. The mortgage grants the mortgagee priority over other creditors with respect to the mortgaged property. Enforcement of a real property mortgage requires a court order the lender cannot enforce by private sale without judicial involvement. The court-supervised enforcement process, while potentially time-consuming, provides a legally robust mechanism for realising security over real estate. Pledge Over Movable Assets Pledge over movable assets (rahn hiyazi) under the Iraqi Civil Code requires, in its traditional form, delivery of possession of the pledged asset to the pledgee or a third-party custodian. This possessory requirement creates obvious practical difficulties for operating businesses that need to continue using their assets. Non-possessory security over movable assets essential for financing inventory, equipment, and machinery is not clearly provided for under the existing legal framework, creating uncertainty about the validity and priority of such arrangements. In practice, lenders taking security over movable assets in Iraq typically combine formal pledge arrangements with contractual restrictions on disposal, and ensure that the security is acknowledged in the loan documentation. Pledge Over Shares Security over shares of Iraqi companies is an important form of collateral, particularly in acquisition finance and holding company structures. Under the Iraqi Companies Law No. 21 of 1997, shares in limited liability companies (sharikat mahduda al-masouliya) can be pledged as security. The pledge must be documented and for limited liability companies registered in the company’s share register and notified to the Companies Registry Directorate. Enforcement of a share pledge in Iraq requires careful legal analysis: transfer of shares may require approval from the Companies Registry, and in some regulated sectors, prior regulatory approval is required. Assignment of Receivables and Contract Rights Assignment of receivables the transfer of the borrower’s rights to receive payments from third parties as security is an increasingly used form of collateral in Iraqi project finance and infrastructure transactions. The Iraqi Civil Code permits assignment of rights under Articles 347 to 358, subject to notification to the debtor. For effective security over receivables, the assignment must be documented clearly, the assigned contracts must be identified, and the relevant debtors (e.g. government offtakers or project counterparties) must be notified of the assignment. In transactions involving Iraqi government counterparties, the assignability of government contracts should be specifically verified. CBI Requirements for Collateral The CBI’s lending instructions impose specific requirements on Iraqi banks regarding collateral. Banks must use CBI-approved collateral valuation methodologies and must have collateral independently valued by qualified professionals. The CBI specifies the loan-to-value ratios applicable to different categories of collateral for example, the percentage of a property’s value that may be advanced against a mortgage. Banks must also conduct periodic revaluations of collateral and increase provisions if collateral values decline below required coverage ratios. Under Basel III as implemented by the CBI, the recognition of collateral for capital relief purposes is subject to specific eligibility criteria and operational requirements. Enforcement — Practical Considerations Enforcement of security in Iraq requires navigating the Iraqi court system. Key practical considerations include: all enforcement of security over real property requires a court order from the competent court in the governorate where the property is located; the enforcement process involves valuation of the secured asset, public auction, and distribution of proceeds; the timeline for enforcement through Iraqi courts depends on whether the debtor contests the process and the workload of the relevant court; lenders should ensure their loan documentation includes express enforcement rights and waivers of notice to the extent permitted under Iraqi law; and lenders should obtain an Iraqi law legal opinion on the validity, perfection, and enforceability of security before relying on it for credit approval. How Etihad Law Firm Assists Etihad advises lenders on structuring and documenting security packages in Iraqi transactions, prepares and reviews mortgage and pledge documentation, advises on registration requirements and procedures, obtains Iraqi law legal opinions on security validity and enforceability, and represents lenders in security enforcement proceedings before Iraqi courts.

Events of Default in Iraqi Loan Agreements

Events of Default in Iraqi Loan Agreements The events of default clause is arguably the most consequential provision in any loan agreement and in Iraqi transactions, its importance is amplified by the intersection of Iraqi civil law remedies, CBI supervisory requirements, and the practical challenges of enforcement in the Iraqi legal system. When a default is declared, a lender’s ability to protect its position depends entirely on how well the default triggers were drafted, whether security was properly registered, and how swiftly the lender moves. This article examines the full landscape of events of default in Iraqi loan agreements, from the legal framework to practical enforcement considerations. The Iraqi Civil Code Framework on Default The Iraqi Civil Code provides the foundational legal framework for default in loan transactions. Under Article 177, a creditor is entitled to demand performance of contractual obligations, and upon a debtor’s failure to perform, Article 178 entitles the creditor to seek judicial termination of the contract and compensation for loss. Article 180 addresses anticipatory breach where it becomes clear before the due date that the debtor will not perform. These civil code provisions form the backstop for contractually defined events of default, but parties in commercial lending transactions invariably supplement them with detailed contractual default provisions that provide clearer and faster remedies than judicial action alone. Common Events of Default in Iraqi Loan Agreements Standard events of default in Iraqi loan agreements include: non-payment failure to pay principal, interest, fees, or any other amount due under the loan agreement on the due date, typically with a grace period of three to five business days; financial covenant breach failure to maintain agreed financial ratios, subject to any cure period negotiated; misrepresentation any representation or warranty proves to have been incorrect when made or deemed repeated; cross-default, default under any other financial indebtedness of the borrower above a threshold amount; insolvency, the borrower becomes insolvent, is unable to pay its debts as they fall due, or is subject to liquidation or bankruptcy proceedings; cessation of business, the borrower suspends or threatens to cease its business operations; expropriation or nationalization, government seizure of the borrower’s material assets; and material adverse change a material adverse change in the borrower’s financial condition, business, or ability to perform its obligations. CBI Requirements and Default Provisions The CBI’s lending instructions require Iraqi banks to include specific default triggers in their loan agreements, reflecting prudential supervision requirements. CBI-mandated default triggers include: failure to maintain required insurance over secured assets; failure to provide financial statements and compliance certificates within required timeframes; any change in the legal status or ownership structure of the borrower without prior bank notification; loss or suspension of any material licence or permit required for the borrower’s business; and commencement of any legal proceedings against the borrower that could materially affect its ability to repay the loan. Banks must also classify loans as non-performing within specified periods following a payment default typically 90 days and report non-performing exposures to the CBI accordingly. Cross-Default in Iraqi Transactions Cross-default clauses present particular complexity in Iraqi transactions. A cross-default provision provides that a default under any other financial indebtedness of the borrower whether owed to the lending bank, another Iraqi bank, or an international creditor constitutes a default under the current loan agreement. In Iraqi practice, cross-default provisions should be carefully calibrated: the threshold amount triggering cross-default must reflect the borrower’s size and debt profile; borrowers should seek cross-acceleration rather than cross-default meaning the cross-default is triggered only when another creditor has actually accelerated its facility, not merely when a technical default has occurred; and existing indebtedness should be scheduled and carved out to avoid triggering default on day one. The Material Adverse Change Clause in Iraqi Context Material adverse change (MAC) clauses are particularly contentious in Iraqi transactions given the country’s dynamic political and economic environment. A broadly drafted MAC clause could theoretically be triggered by currency devaluation, oil price movements, or political developments events that are foreseeable risks rather than unexpected deterioration. Borrowers in Iraqi transactions should negotiate MAC definitions that exclude: general economic, political, or market conditions in Iraq or globally; changes in oil prices or government budget allocations; changes in applicable law or regulation that affect the sector generally; and any matter disclosed to the lender prior to the agreement date. Iraqi courts have limited jurisprudence on MAC clauses specifically, making careful drafting even more important. Consequences of Default and Enforcement in Iraq Upon the occurrence of an event of default, a lender under an Iraqi law-governed loan agreement may: issue a notice of acceleration demanding immediate repayment of all outstanding amounts; enforce security over the borrower’s assets in accordance with Iraqi law security enforcement procedures; apply to the Iraqi courts for a judgment debt; and in the case of a licensed bank, report the default to the CBI as part of non-performing loan reporting obligations. Enforcement of security in Iraq requires navigating the Iraqi court system, which can be time-consuming. Real property security enforcement requires a court order. Movable property security enforcement procedures depend on the type of security and the applicable registration system. International arbitration awards against Iraqi entities must be enforced through the Iraqi courts under the New York Convention, to which Iraq acceded in 2008. Grace Periods and Waiver Considerations Grace periods are a critical negotiating point for borrowers. Standard grace periods in Iraqi loan agreements include three to five business days for payment defaults, 30 days for covenant breaches capable of remedy, and immediate effect for insolvency-related defaults. Lenders should be aware that granting waivers of defaults without careful documentation can create arguments that the lender has waived its rights more broadly. Any waiver should be in writing, clearly specify the default being waived, state that it is a one-time waiver only, and reserve all other rights. How Etihad Law Firm Assists Etihad advises lenders on drafting robust default provisions in Iraqi loan agreements, advises borrowers on negotiating appropriate grace periods and cure rights, advises

Loan Covenants in Iraqi Transactions

What Banks and Borrowers Must Know? Loan covenants define the ongoing obligations a borrower must satisfy throughout the life of a credit facility. In Iraqi transactions, covenants operate at the intersection of Iraqi civil and commercial law, CBI regulatory requirements, and where international lenders are involved internationally recognised documentation standards developed by bodies such as the Loan Market Association (LMA). Getting covenants right is critical: covenants that are too tight will lead to technical defaults; covenants that are too loose will fail to provide lenders with adequate early warning. This article examines how loan covenants work in Iraqi transactions and what both lenders and borrowers need to know. The Legal Basis for Covenants Under Iraqi Law Under the Iraqi Civil Code, loan agreements are binding contracts governed by general principles of contract law. Covenants whether financial, positive, or negative constitute contractual obligations of the borrower. Breach of a covenant that constitutes a material term of the loan agreement entitles the lender to treat the agreement as terminated and demand immediate repayment, in accordance with Articles 177 and 178 of the Iraqi Civil Code on breach and termination. The Iraqi Civil Code also recognises the principle of good faith in contract performance a principle that can be relevant when assessing whether a lender’s exercise of covenant enforcement rights is proportionate and commercially reasonable. Financial Covenants in Iraqi Lending Practice Financial covenants are periodic tests of the borrower’s financial health. In international lending, they are typically measured against audited or management accounts. In Iraqi transactions, the following financial covenants are commonly used: leverage ratio total debt to EBITDA, typically tested semi-annually against the borrower’s financial statements; debt service coverage ratio cash flow available for debt service divided by total debt service payments, critical in project finance transactions; minimum net worth requiring the borrower to maintain a minimum level of shareholders’ equity; and maximum capital expenditure limiting investment spending to protect liquidity. A key practical issue in Iraqi transactions is the quality and timeliness of financial reporting. CBI requirements mandate that licensed banks produce financial statements in accordance with IFRS, but non-bank corporate borrowers in Iraq may not produce IFRS-compliant accounts, creating challenges in defining and testing financial covenants. Positive Covenants — Iraqi Regulatory Requirements Positive covenants in Iraqi loan agreements typically include: an obligation to maintain all licences, permits, and authorisations required to carry on business in Iraq including licences issued by the Companies Registry, sector-specific regulators, and the CBI where applicable; an obligation to comply with all applicable Iraqi laws and regulations, including the AML Law No. 39 of 2015 and CBI instructions; an obligation to provide the lender with annual audited financial statements, quarterly management accounts, and immediate notification of any event of default or potential default; and an obligation to maintain insurance over charged assets at levels acceptable to the lender. Negative Covenants — Key Restrictions in Iraqi Transactions Negative covenants restrict the borrower from taking certain actions without lender consent. Standard negative covenants in Iraqi loan agreements include: a prohibition on incurring additional financial indebtedness above agreed thresholds; a negative pledge restricting the creation of security over the borrower’s assets in favour of other creditors; restrictions on disposal of material assets including real property registered in Iraq; restrictions on changes to the borrower’s corporate structure including mergers, demergers, and changes in the composition of the board of directors; and restrictions on distributions to shareholders where financial covenants are not met. In Iraqi practice, lenders must pay particular attention to Companies Law No. 21 of 1997 restrictions on distributions and capital reductions, which may interact with loan covenant restrictions. CBI Requirements Relevant to Covenants CBI lending instructions impose their own requirements that effectively function as regulatory covenants. Banks must include in their loan agreements: provisions requiring borrowers to maintain their primary banking relationship with the lending bank; provisions requiring notification of any material adverse change in the borrower’s business or financial position; provisions allowing the bank to conduct periodic reviews of the borrower’s financial condition; and provisions allowing the bank to demand additional collateral if the value of existing security falls below agreed thresholds. These CBI-mandated provisions must be incorporated into loan documentation alongside any commercially negotiated covenants. International Standards — LMA Covenant Approach Where international lenders participate in Iraqi transactions whether as lead arrangers, participants in syndicated facilities, or bilateral lenders LMA documentation standards are typically applied. LMA covenant provisions are detailed and highly negotiated. Key features of the LMA approach relevant to Iraqi transactions include: the distinction between maintenance covenants (tested periodically) and incurrence covenants (tested only when the borrower takes a specific action); equity cure rights allowing shareholders to remedy a financial covenant breach by injecting equity; and EBITDA definitions that must be adapted to reflect Iraqi accounting practices and the absence of standardised IFRS reporting among Iraqi corporates. Negotiating Covenants in Iraqi Transactions Borrowers in Iraqi transactions should focus on the following when negotiating covenants: ensuring financial covenant levels include adequate headroom above projected performance typically 20-30% cushion; negotiating cure periods of at least 30 days for covenant breaches before an event of default is triggered; seeking equity cure rights for financial covenant breaches; obtaining carve-outs from negative covenants for ordinary course transactions and existing indebtedness; and ensuring that financial covenant definitions align with the borrower’s actual accounting practices under Iraqi GAAP or IFRS as applicable. How Etihad Law Firm Assists Etihad advises corporate borrowers and lenders on the negotiation and drafting of loan covenants in Iraqi transactions, reviewing proposed covenant packages against CBI requirements and international standards, advising on covenant breaches and waiver negotiations, and representing clients in disputes arising from alleged covenant violations. We have particular experience in bridging Iraqi law requirements with international lender expectations.

What Banks and Borrowers Must Know?

Lending Regulations in Iraq: What Banks and Borrowers Must Know Lending in Iraq sits at the intersection of domestic banking law, Central Bank of Iraq (CBI) regulatory instructions, and internationally recognised prudential standards. Whether you are an Iraqi bank extending credit, a corporate borrower seeking financing, or a foreign institution considering participation in Iraqi lending markets, understanding this framework is not optional, it is the foundation of every credit decision. This article examines the full regulatory landscape governing lending in Iraq, from the primary legislative framework to international standards that Iraqi banks are increasingly expected to meet. The Primary Legislative Framework Lending in Iraq is principally governed by the Banking Law No. 94 of 2004, which establishes the legal foundation for the licensing, operation, and supervision of banks in Iraq. The law grants the Central Bank of Iraq broad supervisory powers over all licensed banks and financial institutions, including the authority to issue binding instructions on lending practices, capital requirements, and risk management. Complementing Banking Law No. 94 is the Iraqi Civil Code, which governs the contractual aspects of loan agreements including formation, validity, performance, and default. Articles 695 to 707 of the Civil Code address loan contracts specifically, establishing rules on interest, repayment, and the rights of creditors upon default. The Companies Law No. 21 of 1997 (as amended) is also relevant for corporate borrowers, governing the authority of company directors and officers to enter into borrowing arrangements on behalf of their entities. Central Bank of Iraq — Regulatory Instructions The CBI exercises its supervisory mandate through a series of binding instructions issued to licensed banks. Key CBI regulatory requirements affecting lending include: credit concentration limits restricting the maximum exposure a bank may have to a single borrower or group of connected borrowers, typically set at a percentage of the bank’s capital base; loan classification and provisioning instructions requiring banks to categorise their loan portfolios into performing, substandard, doubtful, and loss categories, with corresponding provisioning requirements; collateral valuation instructions governing the types of collateral acceptable for secured lending and the methodology for valuing such collateral; and lending to related parties restrictions imposing strict limits on banks’ ability to extend credit to their own shareholders, directors, and affiliates. The CBI also requires banks to establish formal credit policies approved by their boards of directors, covering underwriting standards, credit approval authorities, and portfolio concentration limits. Capital Adequacy — Basel III in the Iraqi Context The CBI has committed to implementing Basel III capital adequacy standards, bringing Iraqi banking regulation into alignment with international prudential norms. Under Basel III as adopted by the CBI, Iraqi banks are required to maintain: a minimum Common Equity Tier 1 (CET1) ratio, a Tier 1 capital ratio, and a total capital ratio calculated against risk-weighted assets. The capital conservation buffer and countercyclical capital buffer requirements are also being phased in. For borrowers, Basel III has a direct practical impact: higher capital requirements mean banks face greater constraints on their lending capacity, particularly for higher-risk credit exposures. Understanding how your lending transaction will be risk-weighted under the CBI’s Basel III framework affects both your ability to obtain financing and its pricing. Relevant Iraqi Regulatory Bodies The CBI has committed to implementing Basel III capital adequacy standards, bringing Iraqi banking regulation into alignment with international prudential norms. Under Basel III as adopted by the CBI, Iraqi banks are required to maintain: a minimum Common Equity Tier 1 (CET1) ratio, a Tier 1 capital ratio, and a total capital ratio calculated against risk-weighted assets. The capital conservation buffer and countercyclical capital buffer requirements are also being phased in. For borrowers, Basel III has a direct practical impact: higher capital requirements mean banks face greater constraints on their lending capacity, particularly for higher-risk credit exposures. Understanding how your lending transaction will be risk-weighted under the CBI’s Basel III framework affects both your ability to obtain financing and its pricing. Relevant Iraqi Regulatory Bodies Several Iraqi authorities play roles in the lending environment. The Central Bank of Iraq is the primary prudential regulator of all licensed banks and has authority to issue, amend, and enforce lending regulations. The Anti-Money Laundering and Countering Financing of Terrorism Office (AMLCFT Office) oversees compliance with AML Law No. 39 of 2015 as it applies to lending transactions particularly the requirement to conduct customer due diligence on borrowers. The Companies Registry Directorate is relevant for verifying the legal status and authorised signatories of corporate borrowers. The Board of Supreme Audit has oversight over lending by state-owned banks. For lending in the Kurdistan Region, the relevant regulatory authority coordinates with the CBI but has certain additional local requirements. Key Compliance Requirements for Iraqi Banks Iraqi banks extending credit must satisfy the following core compliance requirements: conducting thorough credit assessment of borrowers including financial analysis, purpose of credit, and repayment capacity; registering any security interests over movable property through the available registration systems; complying with AML customer due diligence obligations including verification of the borrower’s identity, beneficial ownership, and source of funds; obtaining CBI approval for certain categories of large exposures or related-party transactions; maintaining loan files with complete documentation including credit applications, financial statements, approval memoranda, and executed agreements; and reporting non-performing loans to the CBI within specified timeframes. International Standards — What Iraqi Banks Are Expected to Meet Beyond CBI requirements, Iraqi banks seeking correspondent banking relationships and participation in international financing transactions are expected to demonstrate alignment with: the FATF 40 Recommendations on AML and CFT critical given Iraq’s status on the FATF monitoring list; the Wolfsberg Group Principles on correspondent banking and financial crime compliance; Loan Market Association (LMA) documentation standards for any participation in syndicated transactions with international banks; and IFRS 9 financial instrument accounting standards for loan classification and expected credit loss provisioning. Foreign banks extending credit in Iraq or to Iraqi borrowers will typically require compliance with their own home jurisdiction standards as well as Iraqi law. Practical Implications for Borrowers Corporate borrowers in Iraq should understand that the regulatory

Corporate Mergers & Acquisitions

Corporate Mergers & Acquisitions Mergers and acquisitions (M&A) are strategic transactions used to expand market presence, enter new sectors, acquire capabilities, or consolidate ownership. In Iraq, M&A deals require corporate approvals, regulatory filings, and comprehensive legal and financial due diligence to ensure compliance with Iraqi law and alignment with investor objectives. Types of Transactions Share acquisitions (purchase of shares in an existing entity) Asset acquisitions (purchase of discrete business assets or operations) Statutory mergers or consolidations Corporate transformations (change of legal form to enable M&A) Divestitures or carve-outs of business lines Group-level restructurings for ownership consolidation Key Drivers Market expansion and competitive positioning Vertical or horizontal integration Succession planning and ownership transition Foreign investor entry into the Iraqi market Access to technology, supply chains, or skilled labor Private equity and institutional investment activity Legal and Regulatory Considerations Corporate approvals under the Iraqi Companies Law No. 21 of 1997 (as amended) Sector-specific approvals for regulated industries (e.g., banking, insurance, telecom, oil & gas) Share transfer procedures and updating of shareholder registers Tax and social security implications of share or asset transfers Employment transfer and labor law compliance where applicable Due diligence typically covers: Corporate governance and ownership Regulatory licenses and approvals Financial and tax compliance Contractual liabilities Employment and social security Litigation and dispute exposure How Etihad Can Assist Etihad provides legal and regulatory advisory services to banks, financial institutions, and businesses, supporting compliance with applicable laws, regulations, and regulatory guidance issued by any competent authorities.  

Tax Registration Compliance in Iraq

Tax Registration Compliance in Iraq After incorporation, companies in Iraq must register with the tax authorities to obtain a tax identification number and begin meeting their corporate tax obligations. Tax registration is mandatory for all legal entities operating in Iraq and is required before issuing invoices, booking expenses, or submitting tax filings. Corporate Tax Registration Companies must complete corporate tax registration with the General Commission for Taxes (GCT) to establish their tax file and confirm their taxable presence in Iraq. Once registered, the company becomes subject to: Corporate income tax declarations Tax audits and assessments Annual tax filings and reporting obligations Corporate tax is generally calculated on the net profits of the business after allowable deductions and adjustments, in accordance with Iraqi tax regulations.   Monthly Payroll Tax (Personal Income Tax Withholding) Employers in Iraq are responsible for withholding personal income tax from employees’ monthly salaries and paying it to the tax authority. This system places the compliance burden on the employer rather than the employee. Key obligations include: Monthly payroll tax calculation Monthly submission of payroll tax declarations Monthly remittance of withheld taxes to the tax authority Maintenance of payroll records for audit and verification Payroll tax applies to both Iraqi and foreign employees working in Iraq. Tax Compliance Benefits Proper tax registration and compliance: Enables lawful invoicing and tax recognition of expenses Reduces tax exposure, penalties, and disputes Facilitates dealing with banks, clients, and government bodies Supports transparent financial reporting and accounting functions How Etihad Can Assist Etihad Law supports businesses in Iraq with: Corporate tax registration Payroll tax withholding compliance Monthly and annual tax filings Preparation and review of tax documentation Advisory on tax assessments, audits, and disputes

Corporate Governance in Iraq​

Corporate Governance in Iraq Corporate governance in Iraq determines how companies are directed, managed, and supervised to ensure accountability, transparency, and lawful decision-making. Governance rules vary by corporate structure, with Joint-Stock Companies (JSCs) subject to more formal governance obligations, including board oversight, shareholder protections, audit requirements, and reporting standards. Core Elements of Corporate Governance Corporate governance frameworks in Iraq generally cover: Appointment and powers of directors or managers Shareholder rights, voting procedures & resolutions Annual meeting requirements & decision-making processes Financial reporting, audit & disclosure obligations Conflict-of-interest rules & related-party controls Risk management & internal oversight mechanisms Benefits of Strong Governance Implementing robust governance practices provides several advantages: Enhances investor trust and transparency Strengthens regulatory and legal compliance Supports operational oversight and accountability Reduces governance-related disputes and risks Facilitates business continuity and institutional credibility How Etihad Law Supports Governance Compliance Etihad Law assists companies operating in Iraq with: Corporate governance advisory & documentation Shareholder & board procedure structuring Compliance with Iraqi corporate governance rules Development of internal policies and frameworks Ongoing legal support for corporate governance matters