Lebanon, a Tax Haven for Foreign Companies

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The main tax law in Lebanon is Decree-Law No. 144 ("DL 144") of June 12, 1959.

which has four parts:

• Part One deals with the tax on the income of industrial, commercial, and non commercial activities
• Part Two regulates the tax levied on salaries and stipends
• Part Three governs the tax on the income derived from movable capital
• Part Four consists of general provisions.

On December 30, 1993, DL 144 was amended by law No. 282/94 which provides for drastic cuts in almost all tax rates.

In addition, on June 24, 1983, two decree-laws, DL 45 and DL 46, were enacted to authorize the establishment respectively of holding and offshore companies. These Decree-laws exempt holding and offshore companies from most of the tax provisions of DL 144 and other tax laws and subject them instead to more advantageous tax regimes. In fact, holding companies are assessed digressive tax rates on their capital and reserves and low tax rates on their profits. Offshore companies are assessed a symbolic annual flat tax regardless of their income.

Recently, DL 45 and DL 46 were amended by the 1995 budget law, dated February 7, 1995, which expanded the scope of activities in which offshore companies can engage, and also further reduced the tax rates that apply to certain profits generated by holding companies.

REGULAR TAXES ON CORPORATE INCOME AND GAINS

SCOPE OF COVERAGE

All legal entities, regardless of type, purpose, nationality or place of business, are subject to the income tax provisions of DL 144 (Article 4, DL144) on their net profits derived in Lebanon . The scope of coverage includes all Lebanese and foreign companies as well as their subsidiaries and branch offices, regardless of whether or not they are based in Lebanon. Article 4 of DL 144 provides a partial listing of the entities covered, as follows:

• entities acting as agents for the purchase or sale of real estate or business concerns
• entities renting furnished or equipped business or industrial concerns
• entities benefiting from the revenues of mining products
• entities engaging in all types of brokerage or agency activities
• and generally, all entities generating income from activities not covered by any other income tax legislation

EXEMPTIONS

The general applicability of these provisions is limited by exemptions provided in DL 144 itself and in DL 45 and DL 46.

DL 144 provides for two types of exemptions: an indefinite exemption and a ten- year exemption.

Indefinite Exemption : The indefinite exemption applies to the following companies and institutions:

• educational institutions
• hospitals, orphanages and shelters that admit patients without charge
• mental institutions
• agricultural ventures
• agricultural consumer cooperatives.

Ten-Year Exemption : The ten-year exemption applies to the profits generated by industrial entities that :

• established in Lebanon after 1980
• are established in areas that the government wants to develop
• produce new products not produced in Lebanon before January 1, 1980
• and own more than LP 500,000,000 ($300,000) in production assets.

The ten-year exemption commences as of the date production starts and is limited in its applicability to the amount of profits equal to the value, before devaluation, of the assets invested in the industrial venture. This exemption is granted on the basis of a government decree issued following recommendations by the Minister of Finance and the Minister of Industry and Oil.

As for DL 45 and DL 46, as noted earlier, they exempt holding and offshore companies, respectively, from most of the tax provisions of DL 144.

TAXABLE BASE

In determining the taxable base, Lebanese law uses a territorial, rather than a worldwide, approach. Article 5 of DL 144 subjects all net profits derived in Lebanon to the tax provisions of Part One.

Net profits consist of a company's total taxable income reduced by all expenses and charges that are customary in the industry, trade or profession. These expenses and charges, which are expressly stated in article 7 of DL 144, include:

• purchase price of all products and merchandise sold
• cost of services
• rent paid for the use of premises in which the activity is performed, or the equivalent of that rent if the premises are owned by the company
• interest on loans obtained for conducting the company's activities
• salaries, stipends and severance pay
• other customary expenses such as employees' insurance
• taxes and duties, except those of DL 144
• value of all amortization
• mandatory reserves
• contribution to charities within the limits of the law
• bad debts
• cost of advertising for the business or trade, within the limits specified by law
• municipal tax on revenues derived from developed real estate property

Article 7 also provides that the following expenses and charges cannot be deducted :

• interest incurred on the company's capital
• expenses for capital improvement
• taxes and duties paid or due to foreign countries on income derived in Lebanon (except as provided for in the double taxation treaty with France, the only country with which Lebanon has double taxation treaty)
• losses suffered because of the activities of institutions, branches, agencies, or offices located outside of Lebanon
• personal expenses such as the amounts deducted by the employer or partner for the management of the entity or to cover his/her own expenses
• taxes and personal fines of exceptional nature-such as penalties and interest on back taxes.

INCOME TAX RATES

The tax rate that applies to joint stock companies, limited companies and the partner en commandite in the commandite companies is a flat rate of 10% of net taxable income regardless of the amount of that income. All other companies and businesses are taxed as follows:

• 3% on the first LP 7,500,000 ($4,550) of taxable income;
• 5% on taxable income exceeding LP 7,500,000 ($4,550) up to and including LP 18,750,000 ($11,360);
• 7% on taxable income exceeding LP 18,750,000 ($11,360) up to and including LP 37,500,000 ($22,272);
• 10% on the excess above LP 37,500,000 ($22,272).

Tax rates are cut to half as for the profits of joint stock companies and limited companies derived from the following activities :

• erection of buildings for sale as apartments to third parties
• erection of residential units for sale to third parties.

Companies deriving income in Lebanon that do not have a place of business there are subject to a 10% tax on their net taxable income. Their net taxable income is equal either to 10% of the original revenues or 50% of those revenues when they represent compensation for services rendered. The amount of the tax is withheld by the payer of the taxable amount who then pays it to the Lebanese tax authorities.

OTHER TAX RATES

Other tax rates include :

• capital gains are taxed at the rate of 6%
• income generated from movable capital is taxed at the rate of 5%
• dividends distributed by companies are taxed at the rate of 5%
• profits made by foreign companies are deemed distributed in full and are subject to a 5% tax after deducting the 10% income tax and the 10% mandatory reserve required by the law on Money and Credits
• a stamp duty of 0.3% is levied on the amounts mentioned in various documents- such as issues of share capital, corporate bonds, commercial bills and contracts.

SPECIAL TAXES ON HOLDING COMPANIES

DL 45, which authorizes the establishment and operation of holding companies, describes the corporate form available for such companies and the activities in which they may engage. DL 45 also exempts holding companies from the income tax provisions of DL 144 (Part One) and substitutes various lower tax rates.
Holding companies can be incorporated only in the form of a Lebanese joint stock company. Their activities are limited to:

• acquisition of stock or shares in Lebanese and foreign joint stock and limited companies
• management of the companies in which they own stock or shares
• provision of loans and guarantees to the companies in which they own stock or shares
• acquisition of patents and trademarks and the licensing of such patents and trademarks to entities based in Lebanon or abroad
• acquisition of movable and real estate properties necessary for their activities.
  

• Under article 6 of DL 45, the following taxes are levied on the total amount of capital and reserves owned by a holding company:

• 6% on the first LP 50,000,000 ($30,300)
• 4% on the amount exceeding LP 50,000,000 up to and including LP 80,000,000 ($48,480)
• 2% on the amount above LP 80,000,000.
  

• In addition, holding companies are assessed:

• a 6% tax on capital gains if the stock sold was held by the company for less than two years
• a 5% tax on management fees collected from affiliated corporations provided that those fees do not exceed a certain limit to be specified by a government decree (this decree has not yet been issued)
• a 10% tax on revenues generated from licensing patents and all other protected rights to institutions based in Lebanon
• a 5% tax on the revenues derived from interest earned on loans made to companies operating in Lebanon if the term of such loans is less than three years.

SPECIAL TAXES ON OFFSHORE COMPANIES

DL 46, which authorizes the establishment and operation of offshore companies, describes the corporate form available for offshore companies and the activities in which they can engage. DL 46 also exempts offshore companies from the income tax on their actual profits and levies a flat annual tax on such companies.
Offshore companies can be incorporated only in the form of Lebanese joint stock companies and can engage only in the following activities :

• negotiation of and entry into contracts regarding operations or deals to be executed outside Lebanon or regarding merchandise or products located outside of Lebanon or in the Lebanese free zone
• banking, financial and agency activities outside of Lebanon
• preparation of studies and provision of advice for use outside Lebanon
• use of the facilities of the Lebanese free zone to store and reexport products.
  
• Offshore companies can lease or purchase offices in Lebanon for the purpose of conducting their own business.
  They are prohibited from engaging in manufacturing, banking, insurance, holding, industrial or any commercial activity within Lebanese territory.
  

Offshore companies are exempt from the income tax on their profits and are instead assessed a flat annual tax that amounts to LP 1,000,000 ($600) regardless of the amount of their profit. This tax is levied in full from the first year of the company's operation regardless of the month in which the company starts to operate.
Offshore companies are also exempt from the 0.3% stamp duty and the 5% tax on distributed dividends.
Capital gains derived from the sale or transfer of offshore companies' fixed assets in Lebanon are subject to the regular tax of 6% provided in Article 45 of DL 144.
As for foreign executives employed by offshore companies, 30% of their salary is considered as "representation allowance" and is thus exempt from the income tax provisions. The rest of their salary is taxed at the regular payroll tax rate, which ranges from 2% to 10% .

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