Openness to Foreign Investment
Lebanon is a country open to foreign direct investment by tradition. Over the last five years, the GOL passed several laws and decrees to encourage investment. The Investment Development Law grants the Investment Development Authority of Lebanon (IDAL), a public agency under the Prime Minister, the authority to award licenses and permits for new investments, as well as to grant special incentives, exemptions and facilities to large projects. In an attempt to attract foreign investments, IDAL launched in 2003 the “Investors Matching Service” to facilitate the creation of strategic international-local partnerships through joint venture, equity participation, acquisition, and others. IDAL is currently setting up the Investor Support and Information Center (ISIC), a data bank that will provide comprehensive, reliable, and up-to-date investment related information to prospective investors. The ISIC should be launched in the first quarter of 2008.
Lebanon has many investment enabling strengths that have encouraged foreign companies to set up offices in recent years. Lebanon’s key advantages include a free market economy, the absence of controls on the movement of capital and foreign exchange, a highly educated labor force, good quality of life, and limited restrictions on investors.
However, the domestic political and security situation has had a negative effect on investment. The closure of parliament since December 2006 has prevented legislation affecting investment from being implemented. In 2007, some foreign and local investors preferred to adopt a wait-and-see attitude, while others had to close their branches in Beirut downtown area due to the year-long sit-in by the opposition. A resolution to the political crisis will attract more investments to Lebanon. In addition, some issues continue to cause frustration among local and foreign businessmen. Impediments include red tape and corruption, arbitrary licensing decisions, complex customs procedures, archaic legislation, an ineffectual judicial system, high taxes and fees, flexible interpretation of laws, and a lack of adequate protection of intellectual property. These factors have pushed the International Finance Corporation (IFC) to rank Lebanon 85 among 176 countries and 7 among 17 countries in the Middle East and North Africa (MENA) region in terms of ease of doing business in 2007. In declining order, the survey gave Lebanon poor scores in the areas of starting a business, enforcing contracts, closing a business, dealing with licenses, registering property, trading across borders, and protecting investors.
The government has expressed a strong commitment to improving the business environment in its reform program submitted at the Paris III International Donors’ Conference in January 2007. In January 2006, the Ministry of Economy and Trade (MOET) signed an agreement with the IFC to help streamline business registration procedures in Lebanon. A short-term business registration simplification solution was endorsed in September 2007 and is expected to reduce time, cost, and number of procedures by 50 percent. The MOET is working on new legislation to further reduce time, costs, and procedures in the long run.
In 2007, 44 foreign companies, including seven U.S. companies opened offices, representative offices, or branches in Lebanon, according to statistics from the MOET.
Lebanon received mixed results in the recently released World Bank report on governance. The report, entitled "Governance Matters 2007: Governance Indicators for 1996-2006," uses six dimensions of governance to rank 212 countries. Lebanon’s MENA ranking improved in terms of freedom of expression, accountability, and regulatory quality on a yearly basis; it declined in the categories of government effectiveness and control of corruption. Lebanon’s rank was unchanged for political stability, violence, and rule of law.
Privatization is a key component of the current Siniora government’s economic reform program, and the government is eager to attract foreign investors. In the last quarter of 2007, the government moved forward in privatizing the telecommunications and power sectors. The Telecommunications Regulatory Authority (TRA) made available an online data-room for potential bidders for the country's GSM network. Information on the auction for the two cellular licenses is available online at http://www.lebanonmobileauction.com. The deadline for bidding is currently undetermined and will not be decided until the current political crisis is resolved. In order to privatize power production and distribution at Lebanon's national power company, Electricite du Liban (EDL), the government has contracted three separate advisory teams to help corporatize EDL and set up the regulatory framework for its privatization within 18 months. Moreover, the Ministry of Energy and Water (MEW) signed two memoranda of understanding on November 9, 2007, with two separate local private companies to build private power plants, in line with the government's plan to privatize the electricity industry and switch to cheaper and more environmentally friendly fuels. One company will build a new 50 megawatt plant to supply the national power grid and the other company will construct the country's first wind-powered plant in the Biqa' region. Both projects await issuance of the license and offer good opportunities for U.S. technology.
There are opportunities for attracting foreign investors in infrastructure projects. The government pledged at the Paris III Conference to maintain an appropriate level of investment spending. The Council for Development and Reconstruction (CDR) is responsible for tendering and procuring funding for government physical infrastructure projects (electricity, telecommunications, roads and public transport), social infrastructure (education, public health, social and economic development, land use and environment), basic services (water supply, wastewater, solid waste management), and productive sectors (agriculture, irrigation, ports, airports, tourism, and government buildings). According to the latest CDR progress report (September 2007), there are 650 projects in progress for a value of $2.376 billion. Public infrastructure opportunities mainly lie in roads and highways, ports, electricity, education, solid waste, wastewater, and water supply. As of end 2006, the CDR had a total of $1.8 billion in loans and protocols ratified by the Lebanese parliament but not yet disbursed. As of end September 2007, the CDR had a total of $842 million in loans awaiting parliament's approval. In addition, the CDR has nearly $600 million in grants mainly related to pledges prior to Paris III and earmarked for public investments for post-July 2006 war reconstruction. In addition, donors pledged $2.7 billion in project financing at the Paris III Conference. The CDR has a limited absorptive capacity and targets spending around $750 million annually.
A foreigner can establish a business under the same conditions that apply to a Lebanese national, provided the business is registered in the Commercial Registry. Foreign investors who do not manage their business in Lebanon do not need to apply for a work permit. However, foreign investors who own and manage their business in Lebanon must apply for an "Employer Work Permit" and a residency permit. The Employer Work Permit stipulates that the investor's share in the capital not be less than $67,000 and that the investor pledges to hire three Lebanese and register them at the National Social Security Fund within six months. All companies established in Lebanon must abide by the Lebanese Commercial Code and regulations, and are required to retain the services of a lawyer. There are no sector-specific laws on acquisitions, mergers, or takeovers, except for bank mergers.
Lebanese law does not differentiate between local and foreign investors, except in land acquisition (see real property section below). Foreign investors can generally establish a Lebanese company, participate in a joint venture, or establish a local branch or subsidiary of their company without difficulty. Specific requirements apply for holding and offshore companies, real estate, insurance, media (television, political newspapers), and banking.
Lebanese laws allow joint-stock corporations, limited liability, and offshore and holding companies. A joint-stock corporation (Societe Anonyme Libanaise - SAL) is governed by Decree Law No. 304, dated January 24, 1942, on Commercial Law. There are some limitations connected with foreign participation: a general limitation on management participation (Article 144 stipulates that the majority of the Board of Directors should be Lebanese), indirect limitation with regard to acquisition of capital shares (Article 147), limitation on capital shares with regard to public utilities (Article 78), and limitation on capital shares and management with regard to exclusive commercial representation (Decree-law 34/67, dated August 5, 1967). In the financial sector, most establishments, including banking and insurance, should take the form of a joint stock company.
A limited liability partnership (Societe a Responsabilite Limitee - SARL) is governed by Decree Law No. 35, dated August 5, 1967.
A limited liability company (Societe a Responsabilite Limitee - SARL) is governed by Decree Law No. 35, dated August 5, 1967. It can be fully owned by non-Lebanese and the management of the company can be conferred to non-Lebanese.
Holding and offshore companies follow the legal form of a joint-stock corporation and are governed by Decree Law No. 45 (on Holdings) and Decree Law No. 46 (on Offshore companies), dated June 24, 1983. A foreign non-resident Chairman/GM of a holding or an offshore company is exempt from the obligation of holding work and residency permits. The recent Law No. 772, dated November 2006, exempts holding companies from the obligation of having two Lebanese persons or legal entities on their Board of Directors. All offshore companies must register with the Beirut Commercial Registrar. Offshore companies must have at least two Lebanese on their Board of Directors; this obligation should be abrogated when parliament endorses a new law governing offshore companies to make it WTO compliant. The draft has been pending in parliament since October 2005.
Law No. 296, dated April 3, 2001, which amended the 1969 Law No. 11614, governs foreign acquisition of property. The new law eased legal limits on foreign ownership of property to encourage investments in Lebanon, especially in industry and tourism, abolished discrimination for property ownership between Arab and foreign nationals, and lowered real estate registration fees from six percent for Lebanese and 16 percent for foreigners to five percent for both Lebanese and foreign investors. The law permits foreigners to acquire up to 3,000 square meters of real estate without a permit; acquiring more than 3,000 square meters needs Cabinet approval. Cumulative real estate acquisition by foreigners may not exceed three percent of total land in each district. Cumulative real estate acquisition by foreigners in the Beirut region may not exceed 10 percent of the total land area. The law prohibits acquisition of property by individuals not holding an internationally recognized nationality. This is primarily aimed at Palestinian refugees residing in Lebanon to prevent them from permanently settling in Lebanon.
Conversion and Transfer Policies
There are no restrictions on the movement of capital, capital gains, remittances, or dividends, or on the inflow and outflow of funds. The conversion of foreign currencies or precious metals is unfettered. Foreign currencies are widely available and can be purchased from commercial banks or money dealers at market rates. There are no delays in remitting investment returns except for the normal time required by the banks to carry out transactions.
Expropriation and Compensation
Land expropriation in Lebanon is relatively rare. The Law on Expropriation (Law No. 58, dated May 29, 1991, Article One), as well as Article 15 of the Constitution, clearly specifies the purpose of expropriation and calls for fair and adequate compensation. The Government may expropriate property for public utility projects, such as enlarging highways and streets. Compensation is paid at the time of expropriation and is often perceived as below market value. The Government does not discriminate against U.S. or other foreign investors, companies, or their representatives, in expropriation.
The Government, with the agreement of the Parliament, established two private and public real estate companies to encourage reconstruction and development in Greater Beirut (a private corporation "SOLIDERE" for Beirut's downtown commercial center, and a public company "ELYSSAR" for the southwest suburbs of Beirut). These companies have been granted the authority to expropriate certain lands for development, although in doing so they have faced serious legal challenges from landowners and squatters. Several court cases are still pending against SOLIDERE after 12 years of litigation.
Dispute Settlement
Over the last few years, the government has faced problems with previously awarded contracts. It has resorted to international arbitration to resolve them. In 2005, the International Chamber of Commerce’s Arbitration Court issued rulings favorable to the two private operators of the cellular network, Cellis (which is two-thirds owned by France Telecom) and Libancell, whose contracts were terminated by the government in 2001. The government negotiated a settlement and paid them compensation.
There is currently one US company, owned and operated by a Lebanese-American citizen, which started an ISP company in Lebanon in early 2006, which is currently involved in a dispute with the government. Due to the July 2006 war and the delay in implementing a legislated change in fees, the company incurred extensive financial obligations to the government. Despite all efforts to negotiate a settlement with the Ministry of Telecommunications, the owner sought Embassy assistance, which has also been unsuccessful in resolving this issue. Because of the pending dues, the company is also unable to expand its capacity. Other Lebanese ISP providers have similar complaints.
Cases in Lebanese courts are not settled rapidly because of archaic procedures, a shortage of judges, inadequate support structures, and a traditional slowness in the handling of cases inherited from the days of the French mandate. There is occasionally interference by politicians and powerful lobbying groups in the court system. Local courts accept investment agreements drafted subject to foreign jurisdiction, if the latter does not contradict Lebanese Law. Judgments of foreign courts are enforced subject to the "exequatur" obtained. The Commercial Code (Book No. 5, Articles 459-668) and the Penal Code govern insolvency and bankruptcy. By law, a secured creditor has a right to share in the assets of a bankrupt party. Verdicts involving monetary values in contract cases are made according to the currency of the contract or its equivalent in Lebanese pounds at the official conversion rate on the day of the payment.
The "Lebanese Center for Arbitration" became operational on May 8, 1995. Created by local economic organizations, including the four Lebanese Chambers of Commerce, Industry and Agriculture, the Center acts as an arbitrator in solving Lebanese and international conflicts related to trade and investment. Its statutes are similar to those of the International Chamber of Commerce in Paris.
Lebanon has an administrative judicial system that handles all kinds of disputes involving the State. The government accepts binding international arbitration of investment disputes between foreign investors and the State related to contracts. In the case of a concession granted by contract by the State, the government does not accept binding international arbitration unless the contract includes an arbitration clause that obtained prior approval by decree issued by the Cabinet. However, there is an exception for investors of countries that have signed an investment protection agreement (ratified by the Lebanese Parliament) that stipulates international arbitration in case of dispute.
Lebanon is a member of the International Center for the Settlement of Investment Disputes (ICSID - Washington Convention). Lebanon has ratified the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards.
Performance Requirements and Incentives
There are no performance requirements on investment imposed by law. There are no requirements on foreign investors regarding geographic location, amount of local content, import substitution, export expansion, and technology transfer, or source of financing. Investors are not required to disclose proprietary information as part of the regulatory approval process, except in the case of banks, which must have the Central Bank's approval for transfer of ownership.
Foreign investors enjoy the same incentives as local investors. Foreigners doing business in Lebanon through establishment must have work and residency permits. Registration with a Chamber of Commerce is required for the import and handling of a limited number of products that are subject to control requirements for safety reasons. These products with special import regime constitute less than one percent of total tradable goods. Registration at the Chambers of Commerce is required for ensuring that established facilities meet safety, handling, and storage requirements.
The Investment Law divides Lebanon into three investment zones located outside Beirut, with different incentives provided in each zone. The Law encourages investments in the fields of technology, information, telecommunications and media, tourism, industry and agriculture. Incentives include (a) facilitating issuance of permits for foreign labor; (b) allowing introduction of tailor-made incentives through package deals (for large investments projects), including tax exemptions up to 10 years and reductions in construction and work permit fees; and (c) exempting companies that list 40 percent of their shares on the Beirut Stock Exchange from income tax for two years. Investors who seek to benefit from facilities in the issuance of work permits under "package deals” must hire two Lebanese for every foreigner and register them at the National Social Security Fund.
The Investment Law divides Lebanon into three investment zones located outside Beirut, with different incentives provided in each zone. The Law encourages investments in the fields of technology, information, telecommunications and media, tourism, industry, and agriculture. Incentives include: (a) facilitating issuance of permits for foreign labor; (b) tax incentives ranging from 50 percent tax reduction for five years on income tax and tax on the distribution of dividends until total exemption of these taxes for ten years starting from the date of operation (issuance of first invoice); and (c) exempting companies that list 40 percent of their shares on the Beirut Stock Exchange from income tax for two years. The Investment Law allows the introduction of tailor-made incentives through package deals for large investments projects regardless of the project’s location, including tax exemptions for up to 10 years, reductions on construction and work permit fees, and total exemption on land registration fees. IDAL can exempt joint-stock companies that benefit from package deal incentives from the obligation of having a majority of their Board of Directors being Lebanese (Law 771, dated November 2006). Investors who seek to benefit from facilities in the issuance of work permits under "package deals” must hire two Lebanese for every foreigner and register them with the National Social Security Fund.
Other laws and legislative decrees provide tax incentives and exemptions depending on the type of investment and its geographical location. Industrial investments in rural areas benefit from tax exemptions of six or ten years, depending on specific criteria (Law No. 27, dated July 19, 1980, Law No. 282, dated December 30, 1993, and Decree No. 127, dated September 16, 1983). Exemptions are also available for investment in south Lebanon, Nabatiyeh, and the Biqa' (Decree No. 3361, dated July, 2, 2000). For example, new industrial establishments manufacturing new products will benefit from a 10-year income tax exemption. Factories currently based on the coast that relocate to rural areas or areas in south Lebanon, Nabatiyeh, and the Biqa' benefit from a six-year income tax exemption.
The Government reduces to five percent the tax on dividends for: (a) companies listed on the Beirut Stock Exchange (BSE); (b) companies that open up 20 percent of their capital to Arab companies listed on their country's stock exchange or foreign companies listed on the stock exchange of OECD countries; and (c) companies that issue GDRs (Global Depository Receipts) amounting to a minimum 20 percent of their shares listed on the BSE.
Domestic and foreign investors can benefit from five to seven percent $10 million) provided by banks, financial institutions and leasing companies to industrial, agricultural, tourism, and information technology establishments.
Custom exemptions are granted to industrial warehouses for export purposes. Companies located in the Beirut Port or Tripoli Port Free Zone benefit from a 10-year corporate tax holiday and are not required to register their employees with the National Social Security Fund if they provide equal or better benefits.