Economy

The Set Up

The Lebanese legal framework remains robust, with strong laws that are applied judiciously by legal practitioners and judges alike. Admittedly, many laws are showing their age, and a refresh of […]

The Lebanese legal framework remains robust, with strong laws that are applied judiciously by legal practitioners and judges alike. Admittedly, many laws are showing their age, and a refresh of some of the major laws is certainly in order. However, the Lebanese legal community has developed some creative techniques to allow for the introduction of more modern legal evolutions and structures in Lebanon. Furthermore, the relative openness of Lebanese commercial law means that foreign entities can operate with ease in Lebanon, subject to following the proper procedures. Lebanese courts continue to uphold the rule of law, although there is an increase in inefficiency in the judicial system, in part due to the increase in the number of cases. The enforcement of foreign judgments in Lebanon is subject to similar rules as abroad, with Lebanese judges having very limited power to re-examine a case’s merits. Specific conditions for obtaining the exequatur of a foreign judgment in Lebanon include, among others, that the judgment not violate Lebanese public policy.

Arbitration, both international and local, continues to grow in popularity, much like in most other jurisdictions. Some of our clients rely on arbitration for all of their agreements. The Lebanese Arbitration Centre, established by the Chamber of Commerce and Industry and Agriculture of Beirut and Mount Lebanon, is a popular choice for local or regional arbitration. However, international ad hoc and institutional arbitration (ICC, LCIA, etc.) is also on the rise in Lebanon. Lebanon is a signatory of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and foreign arbitral awards can be enforced in Lebanon, subject to specific conditions.

FOREIGNERS OPERATING IN LEBANON

While nothing prevents foreign entities from providing services to Lebanese entities (please see below for financial services as this is more tightly regulated), Lebanese law is also very open to foreign companies wishing to establish a presence in Lebanon. In order to do so, foreign companies can choose from a host of structures, ranging from a representation office on the lighter side, right through to a fully fledged subsidiary. There are some restrictions on the foreign ownership of real estate, which require certain structuring considerations.

BRANCHES & REPRESENTATIVE OFFICES

A representative office allows for a foreign company to establish a sales, and after-sales, office in Lebanon. It does not, however, allow for actual transactions to be undertaken from it with clients, and the legal link between the client and the foreign entity remains with the foreign entity itself. Slightly more robust is the branch, which allows the foreign entity to conduct its commercial activities in Lebanon. Both the branch and the representative office do not have limited liability, and both require the requisite permits to be obtained from the relevant authorities. The fact that the representative office cannot undertake commercial activities, and that obtaining the permit for the branch is not much less costly than incorporating a subsidiary, leads many foreign entities to opt for establishing a fully fledged subsidiary, usually in the form of a joint stock company or a limited liability company—the latter having lower capital requirements and annual fees—if they intend to operate in, or from, Lebanon.

JOINT STOCK COMPANIES

There are various forms of companies or limited liability entities available in Lebanon, but the most common one by far is the joint stock company (JSC), which can be regular, offshore, or a holding.The regular JSC must have a minimum initial capital of $20,000 (one-quarter of it paid up on incorporation; the initial capital can be used for the operating expenses of the JSC), should have at least three shareholders, and should have a majority of Lebanese board members. Much like elsewhere, the JSC’s main governing bodies are the shareholders’ general assembly, the board of directors, and the management, led by the Chairman/General Manager. Currently, the law requires all board members to hold at least one share. Shareholder responsibility for the JSC’s liabilities is limited to their capital contributions.

THE OFFSHORE JSC

Of great interest for entities wishing to serve the MENA market from Lebanon is the offshore JSC (Offshore). The Offshore is, for all intents and purposes, a JSC that benefits from extensive tax exemptions, but that cannot transact business in Lebanon, save with regard to running its operations. Notably, an Offshore may hire its staff, rent/own its offices, open bank accounts, and purchase supplies, but cannot transact with clients in Lebanon. Furthermore, thanks to a recent amendment to the law, Offshores no longer carry the requirement of Lebanese citizenship for the majority of board members. The key benefit of Offshores is the fact that income tax is limited to a lump-sum tax of approximately $667, and, in general, they are exempt from the 15% income tax on profits usually applicable to JSCs and from the tax on dividends and capital gains tax for shareholders.

THE HOLDING JSC

Another entity proposing significant tax savings is the Holding JSC (Holding). This, too, is primarily based on the JSC. Similarly to the Offshore, there is no longer a requirement for any Lebanese board members. Much like the Offshore, its activities are also limited. In the Holding’s case, its activities are primarily limited to owning shares in Lebanese and foreign companies and managing such companies. Much as its name suggests, it is designed to be a holding vehicle for securities in other entities. Like the Offshore, the Holding can undertake those commercial activities that are necessary for it to conduct its business. Therefore, it can own or rent its premises, hire its staff, and so on. It can even provide, subject to certain limitations, loans to its subsidiaries, on which interest is, generally, exempt from tax. Also like the Offshore, the key benefit of a Holding is the fact that its income tax is limited to a lump-sum tax regardless of income; however, in the Holding’s case, this varies according to the capital of the company. The Holding is, in general, exempt from the 15% income tax on profits usually applicable to JSCs; it is also, in general, exempt from the tax on dividends and capital gains tax for its shareholders.

COMMON STRUCTURES

It is very common for Lebanese or foreign multinational groups operating from Lebanon to comprise three entities at least: a Holding, which owns an Offshore and a JSC. The Offshore is used to conduct all international business while benefiting from relevant tax exemptions, and the JSC serves the Lebanese market. There are many other creative uses of these and numerous other structures available in Lebanon, to operate in Lebanon or the region efficiently and with minimized tax exposure, all while benefiting from one of the most developed legal frameworks in the region.

EMPLOYMENT OF FOREIGN NATIONALS

With the exception of some liberal professions, foreign nationals can work in Lebanon subject to obtaining a work permit and residency permit from the relevant authorities. While the process for obtaining such permits is often straightforward, in practice it can be somewhat time consuming. It is therefore advisable to process such requests as soon as possible. It is also advisable to work with an agent or lawyer experienced in such matters.

BANKING & FINANCE

Perhaps the anchor of Lebanon’s economic stability, the banking and finance sector continues to flourish under the careful stewardship of the Banque du Liban (BDL), Lebanon’s central bank. Despite the establishment of the Financial Markets Authority (FMA) in a 2011 law in line with regulatory best practice, the BDL remains the primary regulator of both banking and finance activity pending the commencement of FMA operations. Once the FMA is activated, it will regulate all financial market activities, while the BDL will continue to regulate the banking sector. Also regulated by the BDL, as the fiduciaire must be a bank, is the fiducie, which is a structure similar to a trust. The BDL is highly regarded globally for its tight regulation of the banking and finance sector. Lebanon’s banking sector is known for having had no direct exposure to the high-risk instruments that led to the collapse of numerous foreign banks in the recent financial crisis, primarily due to a BDL ban on banks investing in such instruments. The BDL is also credited for having continuously evolved the regulatory framework over the years, notably through the issuance of regular “circulars” that govern new aspects of the sector. The BDL has also managed to chart a balanced course between maintaining Lebanon’s traditional banking secrecy on the one hand, while remaining in compliance with international anti money-laundering best practice on the other. It is no surprise, therefore, that Lebanese banks are enjoying a renewed wave of success, with clients from all over the world choosing to deposit their funds, amid continuing regional expansion. In line with international practice, no banking or finance activities can be undertaken in Lebanon without the proper banking, brokerage, or financial licenses from the BDL. Distribution and solicitation for the distribution of financial products in Lebanon by foreign entities is also regulated, and cannot be undertaken without both the entity and the product being registered with the BDL, subject to certain exemptions. It is thus common for such products to be distributed via a duly registered intermediary.

LOOKING AHEAD

There are some interesting legal developments currently being discussed by the government and/or parliament. One potential change relates to the Code of Commerce’s chapters governing JSCs, in which a more modern approach allowing, notably, for variations of voting and other shareholder rights, single-shareholder companies, and so forth is being proposed. Long ongoing though, one would be forgiven for not expecting such reforms any time soon. Another highlight of the near future is the offshore natural gas potential. The companies servicing this nascent sector, directly or indirectly, will no doubt generate much economic activity in Lebanon, and the legal framework has yet to be finalized. The Lebanese legal framework, while not flawless, provides a secure environment in which foreigners do business. But as in all new endeavors, it is necessary first to obtain the right advice from qualified tax, legal, and financial professionals. Lebanon remains open for business.

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