Lebanon is considered one of the most liberal economies in the Middle East, with an open and free market economy. The Lebanese government has minimal interference in the private sector that encourages the free market competition and enhances the development of the private sector. Throughout modern history the Lebanese economy is characterized by monetary stability and managed exchange and interest rates, with no restriction on movement of capital and exchange of foreign currencies for both residents and non-residents.
The economy is based on the service sector, whereby banking, insurance, tourism, media, education, and healthcare are considered to constitute the essence of the Lebanese economy. However, the Lebanese economy has been facing significant pressure for the past few years, mainly due to the regional and local political instability. This has been reflected by the main economic indicators, whereby the public debts to GDP ratio which reached 147% in 2016, and the balance of payments which reflected a cumulative deficit of USD1.76 billion and then turned into a cumulative surplus of USD1.24 billion as of December 31, 2016 after BDL financial engineering. In spite of that, the Lebanese economy has realized a 2% annual growth in real GDP and achieved an inflation rate close to zero for 2016.
On the other side, BDL monetary and economic policies and incentives applied during the past years, leveraged with the promulgation of the initial oil and gas laws, and the electoral law and some other regulatory reformation in respect of anti-money laundering and international tax compliance and the election of the President of the Republic contributed to the continuity of trust in the Lebanese currency and economy.
Lebanon offers a series of incentives to national and foreign investors through certain exemptions and tax breaks. In its role as a national investment promotion agency IDAL offers a series of financial and tax incentives through Law No. 360 in the sectors of agriculture, tourism, information technology, telecommunication, and media. The incentives are based on investment size, sector type, geographical location, and jobs created. There are other tax incentives granted in case of merger of banks and tax breaks granted to specialized and long-term investment banks.
In order to enhance and develop the industrial sector, the Lebanese government has enacted several tax incentives.
Investments in new industrial equipment can benefit from 50% tax exemption of taxable profit for four consecutive years from the date of investment, with the exemption reaching up to 75% in certain regions of the country. Moreover, an industrial entity may be exempt from corporate income tax in the event it invests in new equipment worth more than USD330,000, aims to produce new products not previously produced in Lebanon, and is established in a region that the government wants to develop. Moreover, companies can benefit from a reduction of 50% of the tax due on the profit realized from the export of products manufactured locally.
Main legal forms of entities:
The most common types of entities in Lebanon are:
-Joint stock company (SAL)
The shareholders of a joint stock company are only liable for their capital contribution and do not have liability for the entity’s debt beyond their contributions. The minimum share capital needed for the establishment of joint stock company is LBP30 million, capital can be supplied by cash or in-kind contributions. A minimum of three shareholders are needed for the establishment of a joint stock company. Joint stock companies are governed by a board of directors formed from a maximum of 12 members, 51% of which are required to be Lebanese with no restriction on the nationality of the chairman and CEO. In general, there are no restrictions or limitations imposed on the percentage of foreign ownership, except in case of ownership of property that exceeds 3,000sqm by a company that is required to be wholly owned by Lebanese individuals or companies wholly owned by Lebanese, otherwise foreign ownership requires Council of Ministers approval. Certain types of business are required to be established as a joint stock company, such as banks, financial institutions, and insurance companies.
-Limited liability company (SARL)
To establish a limited liability company, the number of members should range between a minimum of three and maximum of 20. The minimum capital needed for the establishment of a limited liability company is LBP5 million. There is no restriction on the ownership of a limited liability company by foreigners. The company may be managed by a non-Lebanese.
-Offshore company regime
A Lebanese offshore company should be formed in the form a joint stock company. Offshore companies are governed by legislative decree No. 46 whereby the activities of an offshore company are limited to negotiation and signing contracts in respect of agreements and deals to be executed outside Lebanese territory, the preparation of studies and consultations that will be used outside Lebanon, and holding of foreign investments. An offshore company’s share capital may be denominated in foreign currency provided that the accounts of the company are prepared in the same currency. The members of the board of directors may be of non-Lebanese nationality. Offshore companies are exempt from corporate income tax, tax on dividend distribution, withholding tax on interest paid to non-residents, withholding tax on amounts paid to non-residents in respect of services rendered outside Lebanon, and tax and salaries for employees working abroad. The company’s shares are exempt from all types of Lebanese transfer, inheritance, and other related taxes. Offshore companies are subject to annual lump sum tax amount of LBP1 million, which is currently being revised based on exposure draft legislation.
-Holding company regime:
A Lebanese holding company should be formed as a joint stock company. The activities of a holding company are limited to owning of shares or interests in SAL and SARL companies, management and lending of companies in which it holds shares or parts. Holding companies have their own tax system, whereby they are exempt from income tax and capital gains resulting from disposal of its investments outside Lebanon. Capital gains resulting from disposal of investments in Lebanese subsidiaries if held for more than two years are exempt from tax. Holding companies are subject to tax on capital and reserves capped at USD3,316 per year.
Branch of a foreign company:
The most common legal form utilized by foreign investors in establishing business in Lebanon is a branch of a foreign company. The branch should have the same object as its head company. The establishment of a branch is only available for foreign companies whose liability is limited by shares. The profits of a branch of a foreign entity are deemed to be distributed and are automatically subject to remittance tax whether actually remitted or not. Other filing and tax requirements are similar to those of the joint stock companies.
The representative office activity is restricted and limited to the promotion of the head office services and products. Hence, a representative office is prohibited from engaging in any commercial or trade activities. It has to be registered with the Ministry of Economy and the Ministry of Finance. The representative office is not subject to corporate income tax. However, it has to file an annual corporate income tax return. Its foreign and local employees are subject to payroll withholding tax and the representative office has to pay social security contributions on those employees.
Registration requirements For establishment of a Lebanese entity, the company has to register in the commercial register by submitting all the required documents; the registry will then issue a certificate of incorporation. Specific regulated activities such as banking, insurance, pharmaceutical industries, and travel agencies should obtain approvals from the relevant authorities before registration at the commercial register.
Accounting principles/Financial statements
Financial statements must be prepared according to International Financial Reporting Standards (IFRS) and filed annually. Accounting books and records can be held in Arabic, English, or French and financial statements can be prepared in any language for submission to the authorities.
Residence — A moral person is considered resident if it is established or registered in accordance with the Lebanese law. According to a recent decree issued by the Ministry of Finance, an entity is considered to be resident when it commences work at a fixed place for a period exceeding six months in any 12 consecutive months for public contracting work and for a period exceeding three months for other activities.
Basis — Resident companies are taxed on their worldwide income, unless earned through foreign branches or subsidiaries.
Taxable income — Income tax is levied on taxable income related to all business activities, unless exempt by law. Taxable income is calculated as revenue less eligible expenses, except for insurance companies, public contractors, oil refineries, and international transport, where taxable income is calculated as a percentage of total revenue.
Taxation of dividends received — Dividends received from a foreign entity are taxable at a rate of 10%. Dividends received from a Lebanese company are deducted from taxable income for purposes of the corporate income tax calculation.
Capital gains — Capital gains derived from the disposal of tangible and intangible assets and financial assets are taxed at a rate of 10%, which is currently being revised by virtue of an exposure draft legislation.
Losses — Tax deductible losses may be carried forward for three years. The carryback of losses is not permitted.
Rate — 15%, which is currently being revised by virtue of an exposure draft legislation.
Surtax — No Surtax
Alternative minimum tax — Not required
Foreign tax credit — Not allowed
Dividends — Dividends paid to a resident or nonresident entity are subject to a 10% withholding tax, unless the rate is reduced under a tax treaty or certain conditions related to the listing of the company’s shares or its parent’s share are satisfied, in which case the dividends benefit from a 50% reduction in tax, which is currently being revised by virtue of an exposure draft legislation.
Interest — Interest received on bank deposits or bonds is subject to a 5% withholding tax (which is currently being revised to 7% by virtue of an exposure draft legislation); other interest received is subject to a 10% withholding tax. Interest paid to a non-resident is subject to 7.5% withholding tax, unless the rates are reduced under a tax treaty.
Royalties — Royalties paid to a nonresident are subject to a 7.5% withholding tax (which is currently being revised to 8.5% by virtue of an exposure draft legislation), unless the rate is reduced under a tax treaty.
Technical service fees — Technical or management fees paid to a nonresident are subject to a 7.5% withholding tax, unless the rate is reduced under a tax treaty.
Branch remittance tax — In addition to being subject to the normal corporate income tax rate, profits generated by a branch of a foreign entity are automatically subject to an additional 10% tax on the net profit.
Payroll tax — Payroll tax is withheld from salary. Tax brackets are at rates ranging between 2% (for the lowest bracket) and 20% (for the bracket in excess of USD80,000 a year). The employer withholds the tax amounts from the salary and remits them to the authorities on a quarterly basis.
Other taxes on corporations:
Capital duty — A one-time stamp duty of 3 per thousand (currently being revised to 4 per thousand by virtue of an exposure draft legislation), is levied on capital subscription and on any increase in the capital of a company; there are also surtax paid as formalities, which makes the average cost at 6 per thousand on capital.
Real property tax — A built property tax is levied on rental income generated from leasing out Lebanese real property, at rates ranging between 4% and 14%. See also “Transfer tax,“ below.
Social security — Currently, there are three mandatory social security schemes: (1) a family scheme contribution of 6% on earnings up to USD12,000 per year; (2) a medical scheme contribution of 9% on earnings up to USD20,000 per year (of which 2% is the employee share); and (3) an end-of-service indemnity scheme contribution is 8.5% of total earnings. Contributions are made by the employer.
Recently, a new medical scheme was approved for the post-retirement period whereby the employer, government, and employee each have to contribute an additional 1% on the annual earnings up USD20,000. This scheme is not yet applied.
Stamp duty — A stamp duty is levied on most contracts, at a rate of 0.3% (which is currently being revised by virtue of an exposure draft legislation.). See also “Capital duty,“ above.
Transfer tax — A 5% tax is levied on the transfer of real estate property, plus sur tax.
Transfer pricing — The arm’s length principle applies to determine the taxable base of related party transactions (both resident and nonresident).
Thin capitalization — No capitalization rules on loans from shareholders. Certain capitalization rules apply on bonds issued by joint stock companies whereby only bonds to the extent of twice of capital may be issued, the ratio is five times of capital and reserve in case the joint stock company is established under the holding company regime.
Controlled foreign companies — No
Disclosure requirements — The balance sheet and the names of the directors and auditors are required to be published in the official gazette and two newspapers annually.
Compliance for corporations:
Tax year — The calendar year is the tax year, although exceptions are granted when a parent company has a special fiscal year.
Consolidated returns — Consolidated returns are not permitted; each company must file a separate return.
Tax filing requirements — The tax return must be submitted by May 31 of the year following the calendar year, unless the company has different authorized special fiscal year. In that case, the return must be filed within five months after the preceding period. Audited financial statements must be submitted to the income tax department within eight months after the end of the fiscal year.
Rulings — No rulings system, but the taxpayers may enquire about the tax treatment of a business transaction.
Taxable transactions — VAT applies to most transactions involving goods and services. Financial services, insurance services, real estate sale transactions, medical and education services are exempt.
Rates — The standard rate is 10%; exports are zero-rated, which is currently being revised by virtue of an exposure draft legislation, based on which VAT may increase by 1-2%.
Registration — Taxpayers whose turnover exceeds USD100,000 for four consecutive quarters must register for VAT purposes; otherwise, registration is voluntary from the starting date of the activity.
Filing and payment — VAT returns must be filed and tax paid on a quarterly basis.
Penalties — Non submission of a return is subject to a penalty of 5% per month, capped at 100%, and a delay in payment is subject to a penalty accruing at a rate of 1% (1.5% for withholding tax and VAT) per month. In the case of an adjustment of the tax return, a 20% penalty applies on the difference between the net tax paid and the net tax due.
Source of tax law: Income Tax Law, tax procedures and VAT law.
Tax treaties: Lebanon has concluded 34 tax treaties.
Tax authorities: Ministry of Finance.