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Lebanon 2012 | EXECUTIVE GUIDE | REVIEW: ACCOUNTANCY

Understanding Lebanon's straight-forward tax code is the first step to doing smart business in the country.

The Lebanese Income Tax System

This document provides a brief description of the three taxes imposed under the Income Tax Act: (1) tax on business profits; (2) tax on salaries, wages and pension benefits; and (3) tax on investment income. This document is not intended to be a detailed description of the income tax system. For specific issues, the reader should refer to the Income Tax Act (Degree Law No.144 dated June 12, 1959) or consult a tax specialist.

Title I: Income Tax on Business Profits

Persons Subject to Tax

Title I tax is applicable to persons undertaking a business activity in Lebanon (whether resident or not in Lebanon), including incorporated companies, sole proprietorships, and professions. Entities exempt from Title I tax are listed under Article 5; they generally include non-profit organizations and public entities that do not compete with private companies.

Tax Base

There are three methods for the determination of the tax base: the real profit method; the lump-sum profit method; and the estimated profit method. The application of one these methods depends on the legal status of the entity and/or its size.

Real Profit Method

Entities subject to the real profit method are listed under Article 11 of the Income Tax Act. This method is mandatory for certain entities, including corporations, partnerships, manufacturing and commercial entities, as well as private businesses with more than four employees. In addition, any entity earning a business profit may elect to be taxed on the basis of the real profit method; the election is irreversible.

The calculation of taxable income is based on accounting and tax rules. It generally involves two steps. First, accounting profit is adjusted in order to obtain an income measure based on tax rules. Second, losses of prior years are deducted from that income measure to arrive at taxable income.

Lump-Sum Profit and Estimated Profit Methods

Entities not subject to the real profit method are taxable under the lump-sum profit method or the estimated profit method. Generally, those subject to the latter method are small businesses with less than four employees.

This method is mandatory for insurance companies, transport companies, and oil refineries.

The net profit rate under the lump-sum method depends on the business activity undertaken by the taxpayer. The rates range from 5% to as high as 50%. Typically, high-margin businesses and professions are subject to higher rates. The profit rates for insurance companies vary according to the type of insurance. For 1999, the rates were as follows: 5% for life insurance; 6% for accident insurance; 12% for fire insurance; 7% for sea transport; 5% for reinsurance; and 10% for unclassified types.

Under the estimated profit method, taxable income is determined directly by the Ministry of Finance based on a field audit of the taxpayer; the taxpayer is not required to file a tax return. The estimate is based on both financial and non-financial information that the taxpayer must make available to the tax authorities, which may take into consideration the taxpayer's lifestyle, the number of houses or apartments he or she owns, and so on. The estimate is valid for three consecutive years.

Capital Gains

Capital gains arising from the disposition of immovable assets are taxed at a rate of 10%.

Depreciation

The Income Tax Act specifies that depreciation charges must be calculated on a straight-line basis (Article 7), but it does not contain the rates and asset categories. The Ministry of Finance publishes the list of asset categories along with the depreciation rates.

The rates depend on both the nature of the asset and the user of the asset. Depreciable assets are classified into industries and then into categories within industries. For each category of assets, there is a minimum and a maximum depreciation rate. Taxpayers can file a depreciation program with the Ministry of Finance specifying the rate (within the allowed range) that best fits the nature of their assets.

Losses

Losses realized during a year, and arising from a business activity, can be carried forward and applied against the profits of the following three years.

Family Abatement

Table 3 shows the abatements that individual taxpayers can deduct from their income under Article 31 of the Income Tax Act.

Tax rates

The tax rate depends on the legal status of the taxpayer. Corporations and limited liability companies are subject to a flat rate of 15%. Other entities, such as sole proprietorships and professions, are subject to a progressive rate structure.

Non-resident persons earning business income in Lebanon are subject to tax under a method similar to the lump-sum profit method. Under Article 42, the taxable income of non-residents is considered to be 15% of total revenues generated in Lebanon, or 50% if the revenues arise from rendering services in Lebanon. The tax rate is 15% (i.e. the same rate applicable to corporations and limited liability companies).

Title II: Tax on Salaries, Wages & Benefits

Persons Subject to Tax

Under Article 52, it is the payer of salaries who must withhold the tax on behalf of the employee. Individuals who earn business income (subject to Title I tax), or who have worked for more than one employer during the year, must file their own Title II tax return; in this case, there is no withholding at the level of the employer.

Tax Base

Net income for purposes of Title II tax is determined as gross income (Article 49) less eligible expenses (Article 50). Family abatements are then deducted from net income to arrive at taxable income. These abatements are the same as those under Article 31, which are shown in Table 3.

Tax rates

The tax rate structure is shown in Table 4. It is a standard progressive structure where the rate increases with taxable income.

Tax on Passive Investment Income

The word “passive" is not defined in the Income Tax Act. Administratively, however, investment income is considered passive if the investor holds less than 20% of the shares (votes and values) of the issuing company or does not exert a de facto control over its operations.

Persons Subject to Tax

Unlike Title I and II, Title III of the Income Tax Act does not contain an article specifying the persons subject to the tax on investment income. Rather, it starts directly with the definition of taxable income (Article 69).

However, administratively, the tax is withheld at the level of the payer entity, which must file a tax form in that regard.

Tax Base

The main types of income subject to Title III tax are dividends, interest, and any payments that can be considered as substitutes (in substance) for interest and dividends. The types of income exempt from this tax are listed under Article 71; the most important are interest on current bank accounts and interest on Lebanese government treasury bills. Capital gains that arise from the disposition of stocks are exempt from Title III tax. However, they can be subject to Title I tax if the investment is not passive. Non-resident corporations carrying on business activities in Lebanon are deemed to have distributed all their after-tax profits at the end of the tax year.

Tax rate

The tax rate is 10%.

Filing Dates

Under the Lebanese income tax system, each type of income tax must be filed separately.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

TBY would like to thank the Republic of Lebanon Ministry of Finance for compiling this analysis.