Lebanon: A Case Study on Efficient Inbound Investment - Tax Structures for Cross-Border Acquisitions
Contributed by Abousleiman & Co
10 January, 2019
The attractiveness of our country, like that of other jurisdictions competing to promote themselves as business hubs, is centred around the functionality of its Free Trade Agreements (FTAs) and Double Tax Treaties (DTTs) as the main tools in magnetising foreign investors either to domesticate their capitals or to use the local market as a platform for their international activities; both mechanisms are highly encouraged by Lebanon's sequencing governments in spite of regional political instability in the MENA region.
However, now more than ever with the OECD's BEPS legislations being adopted by the majority of countries, investors need to be more practical and aware in their tax structuring of their worldwide investments and in the management of their acquired capital assets. The substance of these new international requirements, in short, is that banks need to have full disclosure of all material beneficial owners to the tax authority both locally and oversees; hence investors should assume that any information given will end up with the authorities in their home countries, and so they should manage their positions on a strong foothold; several key points of interest should be kept in mind when considering some jurisdictions over others, that most importantly include: taxation schemes, incentives, exemptions and treaties; banking system's functionality and reputation; the easiness of company formation, among others.
As such, investors should always look towards employing experienced tax advisors capable of recommending the best vehicles to hold assets and making the best use of favourable tax treaties to reduce or altogether abolish withholding taxes. These advisors are most capable of understanding their local complex tax legislations allowing them to compliantly and efficiently structure the tax impact on transactions utilizing available tax incentives offered by their local governments to attract inbound investment. They are more than qualified to handle their local tax authorities knowing their practices and methods.
Frankly, Lebanon's strength as compared with nearby jurisdictions goes beyond tax low or nil income tax rates but in major decision making factors such as compliance requirements, skilled labour, work culture, non-residents opportunities, tax scheme and the banking system.
To start with compliance requirements, the country has no lengthy regulations to comply with, the Lebanese Labor Law ('LLL') stipulates an easy-come-easy-go method in hiring and firing employees, foreign companies may request exemptions from current restrictions imposed on foreign employees in white-collar professions; as Lebanon follows the territorial principle in determining entity's nationality, all companies and branches of foreign companies incorporated in Lebanon are automatically Lebanese and face no restrictions on acquiring assets, bidding in public tenders (with few exceptions such that of Joint Stocks that seek to service a public sector project where a third of the bidder capital should be held by Lebanese) or claiming benefits of FTAs and DTTs. Lebanon remains closer to Europe, its people enjoy keen business sense and a culture of commerce and trade, with the multilingual skills as most speak Arabic, English and French while some master other languages such as Spanish or German or Russian even among others. This factor indeed enriches the business environment in the country, strengthened by a highly educated and capable labour force with considerably lower salary costs in comparison with both Europe and the Gulf (the minimum wage in Lebanon set at 447 USD for 48 working hours week).
Moreover, Europeans and Arab entities do not need to be present in Lebanon to do business here, nor do they need a subsidiary or any type of affiliations; legally, they are only required to appoint a local representative towards the authorities to manage their due liabilities, when hiring local employees to carry out daily operational tasks on behalf of the non-resident investor, with the National Social Security Fund and the Ministry of Finance.
On the matter of tax, limited liabilities (LLCs) and joint stocks (JSs) are subject to a fixed 17% tax on profits while partnerships are subject to progressive tax rates starting at 4% up till 21%. Several privileges and incentives for businesses to optimize their tax structure exist to ensure a flexible system giving investors the right to: not distribute profits, owe and be owed to owners, carry forward losses for tax calculation to a maximum of 3 years, provision against assets' depreciation and market risks, and so forth. Tax exemptions exist most notably for exports and IT industries. It is of no surprise that corporate tax contributions comparing with the GDP is 1.5% about half of the average of OECD countries that stands at 2.9%. Other tax liabilities include a 10% on dividends, 10% capital gains tax and 11% value added tax with refund right for business-related costs and expenses.
The strength of the Lebanese economy lies in its sound banking system, banking secrecy and highly dollarized market: thanks to a very large diaspora remitting to their motherland, the Lebanese market enjoys a 10B US$ in market value with additional 20B US$ held by banks; this situation ensures among other things, fiscal stability, high liquidity, and the sustainability of the free exchange system of currencies and money; more importantly, the country is in full compliance with OECD requirements on reporting, sparing the banking system shocks and reputation-damages that are noticeably associated with the MENA region which has faced increasing scandals concerning money laundering, financing terrorism and illicit trade activities. The success of the system remains due to the dual oversight by both Bank du Liban, the central bank, and the Banking Control Commission of Lebanon, a public independent agency, keeping the local system harmonized with international norms.
Naturally, investment corporate vehicles options are standard as other jurisdictions. LLCs and JSs remain the most common. It is in fact much easier to transfer shares in JSs than in any other form of companies and it works well for foreign investors who would be shareholders sitting on the board of directors, with the exceptions of JSs acting in financial services and real estate. Alternatively, for much more sizeable investments, holding companies are more efficient in extracting tax free dividends while their income tax is capped annually at about 3,400US$. As for the offshore scheme, which although remains efficient and legal in itself, even though may be under scrutiny due to AML and OECD directives, Lebanon still encourages legitimate offshore entities more so since the government recently enacted a new law enabling the incorporation of offshores entities by one person, with no need for multiple shareholders; issuing the capital in foreign currencies (minimum capital at the equivalent of 19.9K USD), and totally abolishing nationality restrictions on ownership (shareholders), management (CEO and BOD) and operations (Staff).
In a globalized interconnected world with open and accessible markets, investors continue to look for flexibility to manage and protect their assets and vested interests. Their choice of jurisdiction hence may continue to vary as regulations change and new intergovernmental agreements are ratified.
Indeed, Lebanon is a good and safe nest for foreign capital. This encouragement is supported by our strong sense that our role is not limited to finding optimal tax structuring solutions, but just as much about enlightening investors on transparency requirements, business confidence and terms of discretion. Balancing these multiple indicators together is our client duty.
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