Doing Business In Lebanon A Tax And Legal Guide

Lebanese holding companies are exempt from CIT andfrom WHT on dividends. However, they are subject to atax on their paid-up capital and reserves. In any given taxyear, total tax payments on paid-up capital and reserves arecapped at LBP 5 million.months of the date of their occurrence. Upon initialregistration, a written summary of the memorandum ofassociation should be submitted in two copies containingthe stamps and signatures and containing a list ofinformation.Offshore companiesThe estimated time to complete the registration isbetween 10 and 15 days after receipt of the documentsappropriately authenticated by the competent authoritiesand legalised by the Lebanese Embassy or Consulate.The business objectives of an offshore company are limited.They are involved in trade and other restricted activitiesstrictly outside the Lebanese territories.Offshore companies require only one auditor. They areregistered as SAL companies and are exempt from CIT andfrom the WHT on dividends, and are instead subject to alump-sum annual tax of LBP 1 million. Contracts relatedto offshore activities outside Lebanon are exempt fromLebanese stamp duty.Branches of foreign companiesIn addition to dealing through wholly or partially ownedlocal companies, foreign companies can also choose toestablish a branch in Lebanon.Brief facts of a branch office: Foreign companies can open branch offices that canundertake any business activity not illegal underLebanese law. Registration procedures are simple and there are noperformance requirements or other conditions. Profits of branches are taxed at a rate of 15% and aredeemed to be distributed as dividends subject to adividend distribution tax rate of 10%. They are not subject to capital requirements. Branch offices require only one auditor.Representative officesForeign companies may open representative offices inLebanon. Representative offices are not allowed to engagein activities that would generate profits in Lebanon. Eventhough they are required to maintain financial records, theyare not subject to income tax since they do not generateincome in Lebanon.Joint VenturesUnder Lebanese law, joint ventures are commonly usedfor specific projects in the construction industry and othersectors, but are not recognized as separate corporateentities under local laws and are established through acontract between two or more local and/or foreign parties.Process and Time for EstablishmentAll Lebanese and foreign individuals and companiesintending to undertake business in Lebanon must registerat a commercial court within two months of the date ofcommencement of business or acquisition of an officialbusiness address. Any subsequent changes or modificationsrelating to the nature or ownership of the business mustalso be registered in the commercial register within two6Doing Business in Lebanon – a tax and legal guideSole proprietorships and partnershipsForeigners wishing to operate sole proprietorships orpartnerships must first obtain a work and residence permit.Joint-stock companies (SAL)It takes up to a week to register a company once all therequired documents are available.Branch officesBranch offices are not subject to minimum capitalregulations.If the head of the branch office is a foreigner, he mustobtain a residence and work permit.Applications for the establishment of a branch office shouldbe addressed to the Ministry of Economy. They mustinclude the name of the parent company, the address of itsregistered head office and details of its capital structure.Representative officesRegistration requirements for representative offices are thesame as for branch offices.Other entitiesRegistration costs of a SARL (LLC), holding and offshoreentities are approximately the same as for a SAL.Key considerationsBy way of summary, investors in Lebanon may chooseto invest through a range of types of entities. Legalstructures commonly used by foreigners in conductingbusiness in Lebanon are joint-stock companies (SAL),limited liability companies (SARL) or branch offices. Itis worth noting that joint stock companies have highercapital requirements than limited liability companies.With only few exceptions in areas such as real estatecompanies and exclusive commercial representation,foreign investors are allowed to own in a Lebanesecompany without limitation. Investors may acquireshares of existing local firms or establish their owncompanies in Lebanon.Registration process is an easy process and theestimated time to complete the registration shouldn’texceed 10 to 15 days after receipt of the appropriatedocuments by the competent authorities.

TaxationCorporate – taxesSource modelCorporate Income tax (CIT)In Lebanon, tax is charged on the total income or profitsderived in Lebanon. Based on the income tax law and theprinciple of territoriality, the main premise for considering aprofit to have been realised in Lebanon is if it was generatedthrough an effort or activity exerted in Lebanon. Tax islevied on all corporeal/natural and incorporeal/artificialpersons, resident in Lebanon or outside, on all profits thatthey generate in Lebanon.Not all businesses are taxed in the same manner. Dependingon the relative size and structure of a business, the taxmethod applied is assessed depending on real (or actual)profits or deemed profits.General taxation considerationsUnder the income tax law in Lebanon, tax is levied basedon income type. Accordingly, the income tax law dividesincome into the following three categories:Chapter I - profits from industrial, commercial, and noncommercial professions.Chapter II - salaries and wages and pension salaries.Chapter III - revenues from moveable capital. This chaptermainly covers all types of dividend income, board memberappropriations from profits and interest income, includinginterest on bonds and treasury bill.The income tax law does not provide for a single tax onincome treatment. Accordingly, where a taxpayer hasincome from different sources, each type of income is taxedaccording to the tax chapter it falls under.TaxpayersResidency rulesIn Lebanon there is no clear definition of residency howeveran individual, establishment or company is consideredresident for tax purposes, even if not physically residentin Lebanon, when any of the following two conditions aresatisfied: Having an office or a fixed place of business in their namein Lebanon, even when they are not undertaking theirbusiness in a normal and repetitive manner. Practising a profession or business activity in a normalor repetitive manner in Lebanon, even if they do nothave a known registered place of business in Lebanon.This is because they are considered to have practisedtheir profession from the place in which they contacttheir customers, even if such place is a hotel.Non-resident taxpayers can consist of persons residingin Lebanon and outside Lebanon. Any person residing inLebanon is subject to the non-resident WHT if neither of theabove conditions are satisfied.A person residing outside Lebanon is subject to thenon-resident WHT on the amounts, revenues, profits, orproceeds obtained from Lebanon as a result of undertakingan activity in whole or in part on Lebanese territory or as aresult of exploiting rights in Lebanon.Permanent Establishment (PE)There are no clear provisions in the Lebanese income taxlaw to define PE.1- Real profit methodTax is computed based on the real profit method on thetaxpayer’s net profits. The tax rate is fixed at 15% of thetaxable result.2- Deemed profit methodA deemed profit method is imposed on insurance andsavings institutions, taxable transport companies, oilrefineries, and public work contractors. For insurancecompanies, the deemed profit rate ranges from 5 to 10%depending on the type of insurance activities.For income derived from personal business, tax is leviedon deemed profits at progressive rates of 4%-21% forsole proprietorships and partnerships.Permanent exemptions from CITCompanies and organisations that are granted an indefiniteexemption from CIT include the following: Educational institutions. Hospitals, orphanages, asylums, and other shelters thatadmit patients free of charge. Shipping, sea, and air transport associations (subject tocertain restrictions). Farmers, provided they do not display farm produce andcattle outlets or sell products and meat after conversiontax. Syndicates and other types of professional associations. Miscellaneous non-profit organisations and cooperatives. Holding companies and offshore companies. Public sector bodies that do not compete with privateinstitutions.Non-resident WHTRevenues earned by non-residents in Lebanon are subjectto an effective WHT of 2.25% on revenue from the sale ofmaterials and equipment, and 7.5% on the revenue in the caseof sale of services.Capital gains taxUnder local legislation, companies are permitted to revaluetheir fixed assets every five years. Capital gains recognisedfrom such a revaluation, as well as any profits that may berealised from the disposal of fixed assets, are subject to acapital gains tax of 10%.Income from disposal of shares realised by a company issubject to 10% capital gains tax when the shares are classifiedas financial assets on the company’s balance sheet.Income from disposal of shares realised by a company whosemain activity is the acquisition of investments is subject to15% CIT.Doing Business in Lebanon – a tax and legal guide7

WHT on interestBuilt property tax (BPT)The income, revenues, and interest earned from accountsopened at Lebanese banks and from treasury bonds aresubject to a 5% WHT that is non-refundable and cannotbe carried forward. This WHT is considered as an advancepayment on the current CIT due.The BPT is an annual progressive tax, ranging between4% and 14% of net rental proceeds.WHT on dividendsTax is withheld from dividends paid to resident andnon-resident shareholders/partners at a rate of 10%. Thedividend distribution tax rate may be reduced to 5% underspecific conditions.Movable capital WHTA 10% WHT is levied on income derived from movablecapital generated in Lebanon. Taxable income is comprisedof the following: Distributed dividends, interest, and income from shares.Directors’ and shareholders’ fees.Distribution of reserves or profits.Interest from loans to corporations.Payroll taxesEmployers are responsible for withholding and declaringpayroll taxes on behalf of their employees. Payroll tax islevied at progressive rates of 2% to 20%.Payroll tax is subject to the territoriality principle.Salaries and wages are subject to tax in Lebanon when thebeneficiary from the salary is resident in Lebanon, whenthe service against which the salary is paid is performedin Lebanon or when the salary is charged to an entity inLebanon.Social security contributionsSocial security contributions are the following: Borne by the employer: 7% for the maternity andsickness benefit schemes, on a maximum of LBP 2.5million per month, and 6% for the family benefitschemes, on a maximum of LBP 1.5 million per month,in addition to 8.5% of total annual earnings for the endof service indemnity, with no ceiling. Borne by the employee: 2% for the maternity andsickness benefit scheme, on a maximum of LBP 2.5million per month.Value-added tax (VAT)The standard VAT rate in Lebanon is 10%. Unlessspecifically exempt, VAT is levied on all commercialtransactions undertaken by business entities. Exportof goods and services and export-related services,international transport, and some of the intermediateoperations are zero-rated. Banking, financial services, andinsurance operations are exempt from VAT.Note that since 17 May 2013, the recharge of expensesfrom an entity in Lebanon to another entity abroad is notconsidered an export activity and therefore is subject toVAT at 10%.8Doing Business in Lebanon – a tax and legal guideNet rental proceeds are defined as gross rental proceedsless allowable deductible expenses, such as depreciationand management costs.Stamp dutyTwo kinds of stamp duties are levied on contracts andagreements. A proportionate stamp duty of 0.3% islevied on all deeds and contracts (written or implied)that mention specific payments or other sums of money.A fixed stamp duty ranging between a minimum of LBP100 and a maximum of LBP 2 million is applicable ondocuments in accordance with schedules appended to thestamp duty law.Custom dutiesCustoms rates are imposed and modified according todecisions from the Lebanese customs authorities. Thesedecisions are adopted based on the need of the Lebanesemarkets for some goods and the will to protect nationalproduction sectors.Safeguard measures are provided for in relation toimported goods. The purpose behind such measures is toprotect the domestic production sectors when an increaseof imports is witnessed when compared to the sameperiod during the previous year.Customs rates in Lebanon are either determined inpercentage or paid as a lump sum per unit of importedproducts.The rates are determined based on a specific schedulecreated in conformity with the Harmonised System ofNomenclature. This conformity with the unified systemallows Lebanon to represent an ‘importer friendly’environment for importers.The normal rates are applied where there is nopreferential agreement. When the origin of the good orpart of the good is from a country with which Lebanonhas a preferential customs treatment, preferential ratesapply.Excise taxesExcise taxes are mainly applicable in Lebanon on certainbeverages and spirits, tobacco products, gasoline, andvehicles.License feeA new Decision no. 142/1, dated 23 February 2015,relating to imposing an annual lump sum licence fee wasintroduced.This Decision will become effective in 2016. With someexception for certain types of companies (holdings andoffshore companies, institutions exempt from tax as perArticle 5 of the income tax law), the annual lump sumlicence fee for joint stock companies is as follows:

LBP 2 million for joint stock companies. LBP 750,000 for limited liability companies. LBP 550,000 for establishments assessed based on realprofit. LBP 50,000 for taxpayers assessed on assumed profits.The above mentioned licence fees apply to local headoffices, branches, outlets, and to any place in whichthe taxpayer carries on its activity or receives customers.For income tax purposes, the lump sum licence fee isconsidered as a non-deductible expense.Corporate – Other issuesAccounting requirementsAll business enterprises are required to maintain adequatefinancial records which should not be maintained in Arabic.Companies are required to adopt an accrual basis ofaccounting for financial accounting purposes and followingthe International Financial Reporting Standards (‘IFRS’).Electronic filingTaxpayers are required to submit their payroll tax, VAT, andBPT declarations electronically.Taxpayers need to fill an electronic registration by visitingthe MoF website www.finance.gov.lbThe MoF provides the taxpayer with an envelope includingthe e-Pin needed to access his account on the MoF website.The E-filing service is currently available for VAT, payroll taxand BPT declarations only.CIT filing should be done through Libanpost since thee-filing for CIT is still not applied yet. The MoF is working toinclude the CIT declarations within the e-filing system.Foreign tax creditThere are no specific regulations concerning foreign taxcredit in Lebanon.Reinvestment incentivesIndustrial companies using operating profit to financecertain capital investments are exempt from up to 50% oftheir CIT liabilities for a period of up to four years, providedthat such exemptions do not exceed the original investmentsmade. In areas designated ‘development zones’, 75% of acompany’s tax liabilities may be exempt.In order to take advantage of this regulation, investmentsshould consist of capital expenditures designed to increasea company’s manufacturing capacity or of investmentsin housing facilities for the company’s staff and otheremployees.Key considerationsLebanon follows the principle of territoriality fortaxation purposes. It is worth noting that in Lebanonthere are no clear definitions of residency andpermanent establishment (PE). The local rules andregulations refer to basic principles of transfer pricingand anti-avoidance rules.Although there is no clear definition of residency,a person is considered tax resident based on manycriteria that should be taken into considerationwhen conducting business activities on the Lebaneseterritories.On the other hand, transfer pricing cases may bechallenged by tax authorities even though there’s noclear set rules.Transfer pricingIn Lebanon, there are no clear and detailed transferpricing or general anti-avoidance rules. However, even inthe absence of clear transfer pricing rules, exchanges ortransactions made between related parties should be doneon an arm’s-length basis.The tax administration has the right to reassess relatedparty transactions and adjust their value in order to reflectthe taxable amount related to the period under study.Tax ruling processIn practice, it is possible to obtain an advance tax rulingfrom the Lebanese tax authorities.Thin capitalisationIn Lebanon, there are no clear or detailed thin capitalisationrules.Controlled foreign companies (CFCs)There are no CFC rules in Lebanon.Doing Business in Lebanon – a tax and legal guide9

Additional legal considerationTotalisation agreementsEmployees – additional considerationsA foreign national employee working in Lebanon will benefitfrom the social security fund only if:Entry to Lebanon by employees There is a reciprocal agreement between the two countries(i.e. their home country offers the equivalent or betterEvery foreigner seeking entry to Lebanon to practice aprogram to Lebanese residents who are employed there)certain profession or work, with or without pay, is requiredandto obtain a prior approval from the Ministry of Labour. The Theemployee holds a valid work and residency permit.foreigner shall apply abroad, through the official Lebanesemission or an authorized representative of the concernedCountries with which there is a totalisation agreement thusperson in Lebanon.far include:If the foreign applicant is a salary earner, the employer isrequired to submit to the Ministry of Labour an application France Belgiumwherein he/she declares his/her approval to receive the Italyforeign worker. United KingdomWork PermitAny foreigner who obtains prior approval from theMinistry of Labour, is required to apply for a work permitat this Ministry within a maximum period of ten days asof the date of his/her entry to Lebanon. The Ministry mayrevoke the prior approval if the foreigner fails to arrive toLebanon within a maximum period of three months fromthe date of approval.Registration with the Chamber of CommerceIf a local or foreign company wants to engage in tradingactivities, it must also be registered at one of the four localchambers of commerce and industry.Intellectual propertyThe law in Lebanon does not contain a clear definition ofauthor’s rights. It protects all products of the human intellectThe work permit may be granted and renewed for amaximum period of two years from the date of its issuance. whether written, pictorial, sculptural, scriptural, or oralregardless of its value, importance, destination, or form ofexpression.Residency PermitAny foreign employer/employee should apply for aresidency permit at the General Security Directorate, andsubmit the required documents.Labour LegislationThe Ministry of Labour is the entity responsiblefor developing and implementing the Labour Law.Employment contracts are generally concluded in writtenform (although this is not

This guide is intended to provide an introduction to the taxation and legal aspects of doing business in Lebanon, particularly from the perspective of the items an inbound investor will have in mind. We hope you find the guide useful. Dean Kern Middle East - Tax