This article examines how a foreign company leaving the Iraqi market can identify and allocate the obligations that continue after operations end. A decision to exit is often driven by group strategy, project completion or changing market conditions. The commercial activity may stop quickly, but legal obligations rarely end at the same time. Warranties on completed projects, tax assessments for past periods, employee claims and guarantees issued to customers may continue for years.
If these obligations are not identified and allocated before the exit, the foreign company may find that it has no local entity, no staff and no bank account through which to respond when a claim arises. Its parent company may then face claims directly or reputational consequences with customers and authorities. Planning the exit around continuing obligations allows the company to choose the right structure and timetable.
The Companies Law No. 21 of 1997, as amended, governs the dissolution of Iraqi subsidiaries, while Regulation No. 2 of 2017 on the branches and offices of foreign companies, together with the registry’s practice, governs the closure of branches. The Iraqi Civil Code No. 40 of 1951 governs contractual liability and limitation periods. The Income Tax Law No. 113 of 1982, as amended, the Labour Law No. 37 of 2015 and the Workers Retirement and Social Security Law No. 18 of 2023 determine tax and employment obligations. Public contracts may be subject to the government contract instructions and the terms of the specific contract.
Identifying the obligations that survive
The first step is an inventory of obligations that will remain after the business stops trading:
- Contractual warranties and defects liability. Construction, supply and service contracts often contain defects liability periods, performance warranties and retention arrangements that continue after handover.
- Guarantees and bonds. Performance bonds, advance payment guarantees and retention guarantees issued by banks may remain outstanding until formally released by the beneficiary.
- Tax exposure. Returns for recent periods may not yet have been reviewed, and assessments can be issued after operations end.
- Employment and social security claims. Former employees may bring claims for unpaid entitlements, and the social security authority may audit contributions.
- Litigation and disputes. Pending court cases or arbitrations must be managed through to conclusion.
Each obligation should be assessed for its likely duration, the amount at risk and the parties who could pursue it.
Choosing the exit structure
The structure of the exit determines who will remain responsible for these obligations. A foreign company may close its Iraqi branch, liquidate its subsidiary, sell the subsidiary to a third party or keep a dormant entity in place. Each option has implications:
- A sale transfers the subsidiary with its liabilities to a buyer, subject to the warranties and indemnities negotiated. It requires a buyer willing to take on the business.
- A liquidation requires settlement of known liabilities before deregistration, but future claims may arise against shareholders or former managers in some circumstances.
- A dormant entity allows the company to respond to claims, but it must continue to meet filing, tax and registry obligations and may require a local representative.
Corporate advice in Iraq can help compare these options against the inventory of continuing obligations.
Managing customer and contract obligations
Customers, particularly public bodies, may require assurance that warranty obligations will be honoured after the company leaves. The company should consider negotiating early releases of guarantees, replacing guarantees with a parent company guarantee or agreeing a reduced retention in exchange for early release. Where a project is incomplete, novation of the contract to another contractor may be possible with the customer’s consent.
Each contract should be reviewed for termination rights, assignment restrictions and the consequences of ceasing operations. A unilateral exit that leaves a contract unperformed may expose the company to claims for damages and to the forfeiture of guarantees. Commercial contract advice in Iraq can help negotiate exit terms with counterparties.
Resolving tax and employment matters before closure
The company should aim to resolve its tax position before closing the Iraqi entity. This involves filing all outstanding returns, obtaining audited accounts, responding to queries and paying assessed amounts. Where the tax review cannot be completed before exit, the company should consider keeping the entity in existence or appointing a representative to handle the remaining process.
Employment matters should be addressed through proper termination procedures, payment of final entitlements and settlement of social security contributions. Records of these payments should be retained, because they may be needed to respond to later claims.
Preserving records and representation
After operations end, the company will still need its records to respond to claims, audits and disputes. Corporate records, contracts, financial statements, tax filings and employee files should be preserved and accessible. The company should decide who will hold them and how they will be retrieved.
It should also appoint someone with authority to receive notices and act on the company’s behalf. If the Iraqi entity is liquidated, the parent may need to appoint a local agent for specific matters. A clear allocation of responsibility prevents notices from going unanswered and default judgments from being entered.
Funding the residual period
Continuing obligations may require funds after the business has stopped generating revenue. The company should estimate the cost of resolving residual matters, including professional fees, potential assessments and settlement amounts, and decide whether to retain funds in Iraq, provide them from the parent when needed or purchase insurance where available. Tax advisory services in Iraq can help estimate the likely tax exposure for the remaining periods.
Communicating the exit to stakeholders
How the exit is communicated can affect the obligations that remain. Customers who learn of the exit informally may call guarantees or withhold payments as a precaution. Employees who hear rumours may leave before key work is finished. Authorities may question why filings have stopped. A communication plan should identify each stakeholder group, the message to be delivered, the timing and the person responsible.
Customers with continuing warranty or service rights should receive a clear explanation of how those rights will be honoured, including contact details for the person or company that will respond after the exit. Suppliers should be told how outstanding invoices will be settled. Employees should receive formal notice in accordance with the Labour Law and their contracts, together with information about final payments. Authorities should be informed through the appropriate filings. Consistent communication reduces the risk of claims arising simply because counterparties were uncertain about the company’s intentions.
Illustrative example. A foreign engineering contractor completes a hospital project for a public client and decides to leave Iraq. It closes its branch and repatriates its staff. Six months later, the client notifies defects within the warranty period and calls the performance bond. With no local presence, the contractor is unable to inspect the work or negotiate a remedy, and the bond is paid in full. Had the contractor planned for the defects period by retaining a local representative, negotiating replacement security or agreeing a defects procedure before exit, it could have managed the claim and potentially limited its exposure.
Conclusion & how Etihad Law Firm can help
A foreign company’s exit from Iraq is complete only when its continuing obligations have been resolved or reliably allocated. Identifying those obligations early allows the company to choose the right exit structure, negotiate with customers and authorities and preserve its ability to respond to claims.
Etihad Law Firm advises foreign companies on exit planning in Iraq, including branch closure, subsidiary liquidation, sale structures and the management of residual obligations. We help clients leave the market in an orderly way that protects their position after operations end.