THE SET UP

Lebanon 2012 | EXECUTIVE GUIDE | REVIEW: LAW

Dr. Omar Houri of Houri & Ghalayini Attorneys & Legal Consultants summarizes agency law and investment-related company forms in Lebanon.

Summary of Agency Law in Lebanon

Until 1967, Lebanon had no special law that organized commercial representation, which was subject to the general rules of civil law and the rules of commercial agency in the Commercial Code. From a Lebanese point of view, these rules did not provide the agent or distributor with the protection and stability that they needed. According to the abovementioned rules, the principal had the right to terminate the representation contract without being obliged to compensate the agent for the termination, provided the principal put the agent on notice, and the termination was not arbitrary.

For these reasons, amongst others, Legislative Decree No. 34 of August 5, 1967—a Decree with statutory force—was issued to reorganize all commercial representation transactions and to protect the agent, who had always been regarded as the weaker party in this commercial relationship. As a result, some regard the commercial representation law as one that seeks to achieve economic prosperity by protecting the Lebanese agent.

Article 1 of LD 34/67 has defined an agent as follows: “A commercial representative is an agent who, by virtue of his normal independent profession, and without being bound by an employment contract, carries out negotiations for effecting transactions of sale, purchase or lease, or for performing services, and where necessary, carries out such activities in the name of manufacturers or merchants and for their own account."

Article 1 goes on to define: “A merchant who, for his own account, sells what he buys on the basis of a contract that designates him as representative or sole and exclusive distributor shall also be considered a commercial representative." Thus, LD 34/67 equally protects the representative who carries out his activities in the name of manufacturers or merchants and for their own account, and the sole/exclusive distributor, who sells what he buys for his own account.

B.Conditions for becoming an agent

In order to qualify as an agent in Lebanon, one should satisfy the following conditions:

•Lebanese Nationality: the agent, natural person or company, should satisfy the nationality condition.

•Establishment: agents must be established in Lebanon, meaning that they must be registered in Lebanon as a merchant or a commercial company and must have an office in Lebanon, from which business is conducted.

C.Drafting agency agreements

LD 34/67 has regulated the form of agency agreements and their prerequisites, and its rules must be taken into consideration by the parties when drafting an agency agreement. According to LD 34/67, an agency agreement must be set in writing, may include either a limited or unlimited term, and it may include an exclusivity clause and, finally, the jurisdiction must always be reserved for Lebanese courts.

D.Compensation for terminating or not renewing an agency

Through LD 34/67, the legislator sought to improve and strengthen the position of the Lebanese agent. It started by changing the concept of agency. Article 4 of LD 34/67 states that “A commercial representation contract shall be deemed to be made for the mutual benefit of the contracting parties." Accordingly, the agent is entitled to compensation upon termination or non-renewal of his agency agreement.

In agency agreements of an unlimited term, Article 4 states that “in the event of its termination by the principal without any fault on the part of the agent or without any other lawful cause, the agent shall, notwithstanding any agreement to the contrary, be entitled to claim compensation equivalent to any damages he may have sustained or to any profits he may have lost."

Summary of Investment-related Company Forms

A.Joint Stock Company (JSC)

JSCs are intended for bigger business projects and are characterized by the following:

•The minimum number of shareholders is three.

•The majority of the board of directors (BOD) should be Lebanese persons.

•JSCs have three managing bodies: (a) the General Assembly (GA). This can take on three forms: constitutive GA, ordinary GA, and extraordinary GA; (b) the BOD; (c) the Chairman/General Manager.

•A BOD is composed of 3 to 12 members. All BOD members should be shareholders in the company.

•The minimum capital of the company is LBP30,000,000 (approximately $20,000).

Unlike other forms of companies, the scope of activities of the JSC is not restricted. Yet restrictions might affect the structure of the company, distribution of the capital, and the nationality of the shareholders and the value of their shareholdings.

B.Offshore Companies

According to Legislative Decree No. 46 of 1983 (Law on Offshore Companies, hereinafter referred to as “LD 46"), such companies have a limited scope of work, all of which is outside Lebanon.

According to LD 46, an offshore company is prohibited from carrying out any commercial activities in Lebanon including acquiring shares in other companies. If such an activity is carried out, the consequence would be that the new offshore company will be treated from a legal and a tax point of view as a regular joint stock company.

Offshore companies basically follow the rules on joint stock companies. The law sets the minimum capital of such companies at LBP30,000,000 ($20,000).

C.Holding Companies

Holding companies must exercise all their activities in accordance with the rules of Article 2 of Legislative Decree No. 45/83.

Holding companies belong to joint stock companies. The law sets the minimum capital of such companies at LBP30,000,000 (approximately $20,000).

The subject of this company is mainly limited to the acquisition of shares or stocks in existing Lebanese or foreign joint stock companies or limited liability companies, or participation in their establishment, management of companies in which it owns stocks or shares, granting of loans to the companies in which it owns stocks or shares, and guarantee against third parties.

D.Limited Liability Company (LLC)

This type of company is characterized by the following:

•It is designed for mid-size projects and can carry out any business except banking operations and insurance activities.

•The minimum number of partners in this company is three.

•The management of the company is carried out by one or more directors.

•The minimum capital of the company is LBP5,000,000 (or $3,333).

A LLC enjoys the ability to work in various sectors of the economy except for banking, financial services, and insurance. Such activities are reserved in Lebanon for JSCs.

E.Related aspects of Tax Law and Social Security Law in Lebanon

Lebanese JSCs and LLCs are subject to an annual income tax to the value of 15% of the net profit and a 10% tax on the distribution of dividends.

Any company with a turnover exceeding LBP150,000,000 ($100,000) will be subjected to Value Added Tax (VAT). VAT in Lebanon is at the value of 10%. The finance department returns any VAT paid by a company subject to certain restrictions. In this regard, we recommend consulting with an auditor.

All companies or private persons with employees in Lebanon need to register themselves and their employees at the National Social Security Fund (NSSF). Both employers and employees should pay monthly contributions to the NSSF in relation to their incomes.

Employers pay the majority of the contribution and the employees pay the rest. The total percentage of the value is approximately 23.5% of the salary of the employee. The employer pays 21.5% and the employee 2%.

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 Dr. Omar Houri of Houri & Ghalayini Attorneys & Legal Consultants for compiling this analysis.