I've done a few Tekken cosplays: Steve Fox, Hwoarang- biker (I have a pic of this in my gallery), Hwoarang-army gear (T4), Unknown (2nd player costume), Jun Kazama (TTT start outfit), and I started a Jin Tekken 5 costume but I don't know if I finish. I'd really like to cosplay as Asuka Kazama and Hwoarang from T5 and Julia from t4. I'm a wicked fangirl, I even have Jin/Unknown's tattoo
A far as getting the dragon on the dress there's embroidery (as you mentioned). There might be places that can do it for you if you don't wanna, but they may be expensive. There's fabric paint which looks alright if done right.
As far as iron-on paper, I've had pretty bad luck with the paper for colored fabric, so I don't know how well it'd work. You can always try it on scrap first though. ^_^