Openness to Foreign Investment
Lebanon is a country open to foreign direct investment by tradition. Over the last six years, the GOL has 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 ventures, 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 2009.
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.
Moreover, Lebanon has not been affected by the global financial crisis due to sound banking regulations that prohibit investing in structured products. Commercial banks record high liquidity levels. Although they are the largest lenders to the GOL, commercial banks are interested in financing the government’s privatization programs. Meanwhile, Lebanon is one of the few countries that has benefited from the global financial crisis; there was a significant increase in capital inflows mainly from the Lebanese Diaspora from July to October 2008, which perceived Lebanon's banking sector as relatively safe given its high liquidity and high interest rates on deposits.
However, the domestic political and security situation may affect investments in 2009. The political situation remains fragile, and tensions could increase before the parliamentary elections in spring 2009. 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 weak enforcement of intellectual property rights. These factors have pushed the International Finance Corporation (IFC) to rank Lebanon 99 among 181 countries in terms of ease of doing business in its 2009 report. The "Doing Business" report ranks economies based on ten indicators: ease of starting a business, dealing with construction permits, employing workers, registering property, access to credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business.
The government continues to express 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 2008, 30 foreign companies, including one U.S. company (in the services sector) opened offices, representative offices, or branches in Lebanon, according to statistics from the MOET.
Lebanon received mixed results in the World Bank's annual governance survey for 2007, falling in five out of six categories compared to the previous year. Out of 212 countries worldwide and 19 MENA countries, Lebanon's rank regressed in the categories of government effectiveness, political stability, regulatory quality, rule of law, and control of corruption. Meanwhile, Lebanon's rank rose by seven places worldwide and two places within the MENA region in the voice and accountability indicator.
Privatization is a key component of the current government’s economic reform program, as it is eager to attract foreign investors. But progress on privatization will depend on political will and global market conditions. In the last quarter of 2007, the government moved forward in privatizing the telecommunications and power sectors, starting with the sale of two cellular licenses. 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 .
However, political tension stalled the auction process, despite nine international companies expressing interest in the deal. Due to the global financial crisis, the government decided to wait for better market conditions before moving forward with the auction. Meanwhile, the management of the two GOL-owned cellular companies expired and the government tasked the Ministry of Telecommunications (MOT) to launch a tender for a one-year management contract, renewable for one additional year, for both companies. The MOT is expected to submit legislation for the sale of the two companies’ assets in early 2009.
In March 2007, Booz Allen Hamilton completed the plan for setting up Liban Telecom, consisting of the merger of MOT directorates and Ogero (the public company in charge of fixed lines maintenance and ADSL provider). Implementation awaits a political decision to appoint Liban Telecom’s Board. Liban Telecom will also hold a third cellular license and will be open for privatization
As for the power sector, in order to privatize power production and distribution at Lebanon's national power company, Electricite du Liban (EDL), the government contracted three separate advisory teams in November 2007 to help corporatize EDL and set up the regulatory framework for its privatization within 18 months. Meanwhile, current Minister of Energy and Water (MEW) Alain Tabourian is preparing a new reform plan for the power sector and is expected to announce it in the first quarter of 2009. The IFC has helped in preparing the due diligence for an Independent Power Producer (IPP), however Tabourian rejects the idea of having the private sector build new power plants.
In November 2007, the MEW signed two memoranda of understanding 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 and investment.
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 of July 2008, there were 1,074 projects in progress valued at USD 2.472 billion by the end of December 2007. Public infrastructure opportunities mainly lie in roads and highways, ports, electricity, education, solid waste, wastewater, and water supply. As of the end of 2008, the CDR had a total of USD 2 billion in loans and protocols ratified by parliament, but not yet disbursed. As of September 2008, the CDR had a total of USD 691 million in loans awaiting parliamentary approval. In addition, the CDR has nearly USD 600 million in grants mainly related to pledges prior to Paris III and earmarked for public investments for post-July 2006 war reconstruction; CDR has already spent part of this assistance. In addition, donors pledged USD 2.7 billion in project financing at the Paris III Conference. The CDR has a limited absorptive capacity and targets annual spending at around USD 750 million.
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 USD 67,000 and that the investor pledges to hire three Lebanese and register them at the National Social Security Fund (NSSF) 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 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.
The establishment of joint-stock corporations, limited liability, and offshore and holding companies are allowed under Lebanese law. A joint-stock corporation (Societe Anonyme Libanaise - SAL) is governed by Decree Law No. 304, dated January 24, 1942, under the Commercial Law. Limitations related to foreign participation include: 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 No. 34/67, dated August 5, 1967). In the financial sector, most establishments, including banking and insurance, must take the form of a joint-stock company.
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.
A limited liability partnership (Societe a Responsabilite Limitee - SARL) is governed by Decree Law No. 35, dated August 5, 1967.
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, and amended by Law No. 19, dated September 5, 2008. A foreign non-resident Chairman/General Manager of a holding or an offshore company is exempt from the obligation of holding work and residency permits. 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 Registry. Offshore banking, trust, and insurance companies are not permitted in Lebanon.
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 the country.
Conversion and Transfer Policies
There are no restrictions on the movement of capital, capital gains, remittances, 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 three 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 two public companies, "ELYSSAR" for the southwest suburbs of Beirut, and “LINORD” for northern Beirut. While LINORD has been dormant for years, the government is seriously considering reactivating it to attract investors. 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 13 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. The government has also recently settled a dispute with a Chinese contracting company working to expand the northern port of Tripoli. 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. Since 2005, political interference has stalled the appointment of new judges to fill vacancies in some courts and to handle the increased workload. There is occasional interference by politicians and powerful lobbying groups in the court system. Local courts accept investment agreements drafted subject to foreign jurisdiction, if they do 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 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 ratified in 2007 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, 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 an 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. Products with special import requirements 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) tax incentives ranging from 50 percent tax reduction for five years on income tax and tax on the distribution of dividends to 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 may 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 No. 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 NSSF.
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 Global Depository Receipts (GDRs) amounting to a minimum 20 percent of their shares listed on the BSE.
Domestic and foreign investors may benefit from a five to seven percent subsidy on interest on loans amounting to up to USD 10 million provided by banks, financial institutions and leasing companies to industrial, agricultural, tourism, and information technology establishments. The subsidy covers a maximum of seven years.
Custom exemptions are granted to industrial warehouses for export purposes. Companies located in the Beirut Port or Tripoli Port Free Zone benefit from customs’ exemptions and are exempt from the value-added tax (VAT). They are also not required to register their employees with the NSSF if they provide equal or better benefits.