Lebanon Corporate Tax Guide

Lebanon

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Business Tax Services

 Zeina Frenn +961 (1) 760-800 Email: zeina.frenn@lb.ey.com

Business Tax Advisory

 Romeo Gedeon +961 (1) 760-800 Email: romeo.gedeon@lb.ey.com Zeina Frenn +961 (1) 760-800 Email: zeina.frenn@lb.ey.com

Tax Policy and Controversy

Romeo Gedeon +961 (1) 760-800 Email: romeo.gedeon@lb.ey.com

A. At a glance

Corporate Income Tax Rate (%) 17

Capital Gains Tax Rate (%) 15 Branch Tax Rate (%) 17

Withholding Tax (%)

Dividends 10 (a) Interest 10 (a)(b)

Royalties from Patents, Know-how, etc. 10 (c) Payments for Services Provided by Nonresidents 7.5 Branch Remittance Tax 10 (d)

Net Operating Losses (Years)

Carryback 0 Carryforward 3

(a) Applicable to both residents and nonresidents. (b) Bank interest is subject to a 10% withholding tax for residents and nonresi dents. (c) Applicable if the royalties are received by Lebanese holding companies (see Section B). (d) Profits derived by branches operating in Lebanon are presumed to be distrib uted and consequently are subject to remittance tax.

B. Taxes on corporate income and gains

Corporate income tax. Lebanese companies and branches of for eign companies carrying on business in Lebanon are subject to tax only on their income derived from Lebanon. A company is considered Lebanese if it is registered in Lebanon. The following

are the two main conditions for registering a company in Lebanon:

• The company’s registered office is located in Lebanon.

• The majority of the company’s board of directors is of Lebanese nationality (unless the government authorizes the company to have less than a majority).

Rates of corporate income tax. In general, companies are subject to tax at a flat rate of 17% under Law No. 64, published on 26 October 2017.

Under Law No. 64, the gain realized from the revaluation of fixed assets (not exceptional revaluation) is subject to 10% capi tal gains tax unless certain conditions are met. The tax is payable with the corporate income tax (that is, within five months follow ing the end of the fiscal year).

Profits derived in Lebanon by branches of foreign companies are presumed to be distributed and consequently are subject to the 10% remittance tax.

Contractors on government projects are subject to tax at the regu lar corporate income tax rate on a deemed profit of 10% or 15% of actual gross receipts, depending on the type of project.

Lebanese holding companies and offshore companies are exempt from corporate income tax. However, special taxes apply to these companies (see Section D). A Lebanese holding company is a special type of company that is formed to hold investments in and outside Lebanon (“holding company” is not synonymous with “parent company”). An offshore company is a company that engages exclusively in business transactions outside Lebanon.

Insurance companies are subject to tax at the regular corporate income tax rate of 17% under Law No. 64 on a deemed profit ranging from 5% to 10% of their premium income.

Lebanese air and sea transport companies are exempt from corpo rate income tax. Foreign air and sea transport companies are also exempt from corporate income tax if their home countries grant reciprocal relief to Lebanese companies. However, dividends dis tributed remain subject to movable capital tax.

Profits derived by industrial enterprises established in Lebanon after 1 January 1980 are exempt from income tax for up to 10 years from the date of commencement of production if such enter prises satisfy all of the following conditions:

• The factory is built in certain areas the government intends to develop.

• The object of the enterprise is to manufacture new goods and materials that were not manufactured in Lebanon before 1 January 1980.

• The total value of property, plant and equipment used in Lebanon by the new enterprise and allocated for the production of new goods and materials is at least LBP500 million.

Profits qualifying for this tax holiday may not exceed the original cost of the property, plant and equipment used by the enterprise on the date production begins.

Under Law No. 248, dated 15 April 2014, an exemption of 50% applies to profits realized from the exportation of goods produced

in Lebanon. A certificate-of-origin document is needed to prove that the exports are from Lebanon. Companies engaged in the extraction of natural resources are excluded from this exemption. Decision 854/1, which was released in September 2016, explains the mechanism of the application of this law.

Capital gains. Capital gains on the disposal of fixed assets are taxed at a rate of 15% under Law No. 64.

If a company reinvests all or part of a capital gain subject to the 15% rate to construct permanent houses for its employees during a two-year period beginning with the year following the year in which the gain was realized, it may obtain a refund of the tax imposed on the reinvested gain.

Administration. The official tax year is the calendar year. Companies or branches may use a different tax year if they obtain the prior approval of the tax authorities.

Corporations with a financial year-end of 31 December must file their tax returns by 31 May of the year following the year in which the income is earned. Other corporations must file their returns within five months of their financial year-end. The tax authorities may grant a one-month extension at the request of the taxpayer if the taxpayer’s circumstances warrant the extension. Tax must be paid by the same deadline.

If a taxpayer does not submit timely returns, the tax authorities may levy tax on an amount of deemed profit and impose a fine of 5% of the tax due for each month or part of a month that the return is late. The minimum penalty is LBP750,000 for joint stock companies, LBP500,000 for limited liability companies, and LBP100,000 for other taxpayers. The maximum penalty is 100% of the tax due. For failure to pay tax by the due date, a penalty of 1% of the tax due is imposed for each month or part of a month that the tax remains unpaid.

Dividends and interest. Dividends are subject to a withholding tax of 10%. Interest is subject to a 10% or 7.5% withholding tax, depending on each case.

Dividends received by a Lebanese corporation from another Lebanese corporation are excluded from the taxable income of the receiving company. However, dividends redistributed by a parent company to its shareholders or partners are subject only to a withholding tax of 10%.

Dividends distributed by Lebanese holding companies and off shore companies are exempt from dividend withholding tax.

Dividends and interest income earned by banks and financial institutions and generated from trading activity are subject to tax at the regular corporate tax rate of 17%.

Dividends received by banks from their subsidiaries are subject to a 10% dividend tax at the level of subsidiary.

C. Determination of trading income

General. Taxable income is calculated based on the accounting profit together with the tax adjustments. Lebanese taxpayers

should follow International Financial Reporting Standards in maintaining their books of accounts.

Deductions are allowed for expenses incurred wholly and exclu sively for business purposes. Branches, subsidiaries and affiliates of foreign companies may deduct the portion of foreign head office overhead charged to them if the auditors of the head office present to the tax authorities a certificate confirming that the overhead was fairly and equitably allocated to the various subsid iaries, associated companies and branches and that the amount of head office overhead charged back to the Lebanese entity is in accordance with the limits set by the Ministry of Finance. However, the deductible portion of the overhead charged back to the Lebanese entity is subject to a tax of 7.5% (see Section D).

Inventories. Inventories are normally valued at the lower of cost or net realizable value. Cost is usually determined using the firstin, first-out or weighted average cost method.

Provisions. The following are the only provisions that are allowed for tax purposes:

• The actual amount due at the balance-sheet date for employees’ end-of-service indemnities

• Doubtful debts owed by debtors that have been declared legally bankrupt

• A provision for obsolete inventory if the procedures described below are followed

Banks and financial institutions may deduct provisions for doubt ful debts before declaration of bankruptcy of the debtor if they obtain the approval of the Banking Control Commission of the Central Bank of Lebanon.

Tax depreciation. Depreciation must be calculated using the straight-line method. The Ministry of Finance has specified the minimum and maximum depreciation rates. A company may select appropriate rates within these limits for its activities. Companies must notify the relevant income tax authorities of the adopted depreciation rates before the declaration deadline. Otherwise the company is considered eligible for the minimum depreciation rates only.

Minimum Maximum Assets rate (%) rate (%)

Developed buildings from concrete for use in the commercial, tourism and service sectors (for example, offices, shops, stores, restaurants, hotels and hospitals)

Developed buildings from concrete that are used for industry and handcrafts

Developed buildings from metal for commercial and industrial use

5

10

20 Large renovations, maintenance and decoration works for buildings

25 Technical installations, industrial equipment and accessories

25 Computer hardware and software

50 Cars

25

Minimum Maximum

Assets rate (%) rate (%)

Vehicles for transportation of goods and people 6 20 Means of sea transport 5 10 Means of air transport 20 25 Office equipment, furniture and fixtures 8 25

Non-consumable tools in restaurants and coffee shops (for example, glass cups and silver spoons)

* – * Gas bottles 8 20

* These items are subject to count each year and are valued at cost.

Relief for tax losses. Tax losses may be carried forward for three years.

Groups of companies. Parent companies are not required for statu tory purposes to prepare consolidated financial statements that incorporate the activities of their associated companies and sub sidiaries. Each legal entity is taxed separately.

D. Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate

Value-added tax (VAT); imposed on the supply of goods and services by a taxable person in the course of an economic activity in Lebanon and on imports; certain supplies are exempt; registration with the Directorate of VAT is required if an entity’s total taxable turnover exceeded LBP100 million in any period varying from one to four prior consecutive quarters; all persons performing taxable economic activities have the option of registering if their turnover exceeds LBP50 million in a period varying from one to four prior consecutive quarters; importers and exporters of VAT-able or zero-rated activities are now required to register with the Directorate of VAT, regardless of their turnover Standard rate 11%

Tax on portion of foreign head office overhead allocated to a Lebanese subsidiary, associated company or branch 7.5% Customs duties on imported goods Various Social security contributions Sickness and maternity, on monthly salaries up to LBP2,500,000; paid by Employer 8% Employee 3% Family allowances, on monthly salaries up to LBP1,500,000; paid by employer 6%

Nature of tax Rate

End-of-service indemnity, on monthly salaries; paid by employer 8.5%

Proportional stamp duty; imposed on deeds and contracts, except for some contracts that are subject to a lump-sum stamp duty such as the issuance of share capital, commercial bills and other agreements; employment contracts for Lebanese employees are exempt from stamp duty if the employees are registered with the National Social Security Fund; contracts related to foreign transactions of Lebanese offshore companies are also exempt

General rate 0.4%

Built property tax; imposed on rental income generated by entities subject to income tax; such income is not subject to corporate income tax and is excluded from the taxable results together with the related expenses; the annual net income from each parcel of real estate is separately subject to built property tax

Net income not exceeding LBP40 million 4%

Net income exceeding LBP40 million, but not exceeding LBP80 million 6%

Net income exceeding LBP80 million, but not exceeding LBP120 million 8%

Net income exceeding LBP120 million, but not exceeding LBP200 million 11%

Net income exceeding LBP200 million 14% Municipal taxes on developed property Sidewalk and sewage tax, paid by landlords on annual gross rental from buildings (since 1989, the municipalities have collected this tax from tenants)

1.5% Security and cleaning tax, paid by tenant on a percentage of the rental value of buildings (nonprofit enterprises are exempt from this tax)

Residential buildings (minimum tax of LBP5,000) 5%

Nonresidential buildings (minimum tax of LBP10,000) 7%

Registration duty; paid by purchaser of land or buildings; levied on the fair-market value of the building at a rate of 3% on the part that does not exceed LBP375 million and a rate of 5% on the part that exceeds LBP375 million

3% to 5% Fee on the sale contract amount; payable within 15 days of the contract date; considered as a tax credit with respect to the total registration fees, provided that the registration occurs within one year after the contract date 2%

Nature of tax Rate

Annual tax on total capital and reserves of Lebanese holding companies, up to a maximum tax of LBP5 million (tax is due in full from the first year of company’s operations, regardless of the month operations begin); imposed on amounts

Not exceeding LBP50 million 6%

Exceeding LBP50 million but not exceeding LBP80 million 4%

Exceeding LBP80 million 2%

Annual tax on Lebanese offshore companies (tax is imposed in full from the first year of company’s operations, regardless of the month operations begin)

E. Miscellaneous matters

LBP1 million

Foreign-exchange controls. Lebanon does not impose any formal foreign-exchange controls.

Anti-avoidance legislation. Under the Lebanese tax law, criminal or tax penalties may be imposed for specified tax-avoidance schemes.

Related-party transactions. Transactions with related entities must be carried out on an arm’s-length basis.

F. Tax treaties

Lebanon has entered into double tax treaties with Algeria, Armenia, Bahrain, Belarus, Bulgaria, Cuba (not enforced), Cyprus, the Czech Republic, Egypt, France, Gabon (not enforced), Iran, Italy, Jordan, Kuwait, Malaysia, Malta, Morocco, Oman, Pakistan, Poland, Qatar, Romania, the Russian Federation, Senegal, Sudan (not enforced), Syria, Tunisia, Turkey, Ukraine, the United Arab Emirates and Yemen.

A double tax treaty between Lebanon and Saudi Arabia is cur rently under negotiation; however, at the time of writing, its content was not yet available and there was no information regarding its date of entry into force.