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Business Entities

PARTNERSHIPS

There are three categories of partnership:

  • General partnership (Société en Nom Collectif - SNC)
  • Partnership in commendam (Société en Commandite Simple - SCS).
  • Co-Partnership (Joint Ventures)

GENERAL PARTNERSHIP

Partnerships are associations of two or more people. Partners may manage as well as own the business. The main characteristic of such an entity is the "intuitus persona", i.e. the personal involvement of each associate. There is no required initial minimum capital but all partners are personally liable for the company's obligations. The company name must include the names of some or all of the partners and is usually followed by the words 'and Co.'. In practice, a general partnership is commercial in nature, so it must be registered with the Commercial Register.

PARTNERSHIP IN COMMENDAM

Partnership in commendam is a limited partnership with two types of partners. General partners own and manage the business and are liable for all its obligations. Limited - or silent - partners are financial backers who take no management role. Their liability is limited to their investment. The contract of association usually defines the circumstances under which the partnership can be terminated and what happens in case of death of one of the partners, disputes, or a desire by one partner to sell out to one or more of the other partners.

CO-PARTNERSHIPS (JOINT VENTURES)

A co-partnership is known only to the parties concerned. It is secret and cannot be registered. An association agreement sets down the partners' rights and obligations, as well as their participation in profits and losses. Each party is responsible for their own liabilities. Despite their secrecy, the agreements inherent in a co-partnership are enforceable by law in cases of dispute.

CORPORATIONS

The five categories of corporations are:

  • Joint Stock Company (Société Anonyme Libanaise - SAL)
  • Limited Liability Company (Société à Responsabilité Limitée - SARL)
  • Corporation in Commendam (Société en Commandite par action - SCPA)
  • Holding Company
  • Offshore Company

JOINT STOCK COMPANY

The main characteristic of a joint stock company (Société Anonyme Libanaise or SAL) is the "intuitus pecuniare", i.e. the financial involvement of each associate. Partners are called shareholders and are legally liable only up to the amount of their shares in the company. Joint stock companies can issue shares and bonds convertible to shares. No one with a criminal record (in Lebanon or abroad) or who has been declared insolvent within the previous 10 years (unless rehabilitated) can participate in company activities.

SAL has a minimum of three shareholders and capital of at least LBP 30 million ($ 20,000), with a minimum payment of one-fourth of the capital paid up at the time of registration. Capital can consist of cash or in kind.

In addition The name of the company, followed by the phrase 'Société Anonyme Libanaise or SAL' and the amount of its capital are required to be placed on all printed matter, advertisements, publications, and other documents issued by the company. Two auditors should be appointed. One is appointed by the general assembly, and the second auditor is appointed by the commercial court.

LIMITED LIABILITY COMPANY

A limited liability company (Société à Responsabilité Limitée or SARL) combines traits from both a partnership and a corporation. This type of hybrid company consists of between three and 20 partners, except in the case of the inheritance of shares when the number of partners may extend to a maximum of 30. If it exceeds that number, the company must register as a joint-stock company (SAL) within two years or dissolve its operation.

Because no shares as such are issued, the partners own a fixed percentage of the company and their personal liability for the company debt is strictly limited. The name of the company, followed by the phrase 'limited liability company' and the amount of its capital are required to be placed on all printed matter, advertisements, publications, and other documents issued by the company.

A minimum capital of LBP 5million ($3,300) wholly paid at the time of registration is required. A lawyer must be retained and an auditor appointed regardless of the capital investment. Company results must be approved at an annual meeting of the partners. Banking, insurance and air transport activities are forbidden from registering as SARL companies. back to top

CORPORATION IN COMMENDEM

A company in commendam is a limited partnership company with no specific capital requirements. The company's capital is divided into shares and the silent partners are under the same legal obligations as a shareholder in a joint stock company. back to top

HOLDING COMPANY

  • LEGAL FORM AND SYSTEM OF THE HOLDING

The holding company is incorporated by virtue of Legislative Decree # 45/83. The holding company is incorporated under the form of a joint-stock company and is subject to the same legal system governing joint-stock companies as provided by the Commercial Law. However, Legislative Decree # 45/83 specified some exceptions set forth in this analysis.

Minister of Finance issued instructions in order to clarify the application of some provisions of the above-mentioned legislative decree related to the special tax system governing holding companies.

  1. HOLDING BUSINESS ACTIVITIES
  1. Object of the Holding Company
The object of the holding company is restrictively defined in article 3 of Legislative Decree # 45/83.
  1. Owning shares or interest in existing Lebanese or foreign joint stock companies or limited liability companies, or participating in the formation of same.
  2. Managing companies in which it holds shares or interest.
  3. Lending to companies in which it holds shares, and guaranteeing such companies toward third parties. For this purpose the holding company shall be entitled to borrow from banks and to issue bonds according to Article 122 and subsequent articles of the Commercial Law, provided that the total value of such bonds does not exceed, at any time, five times the capital of the holding company plus the reserves.
The holding company is not permitted to lend to the compania that operates in Lebanon unlees it's investment is greater than 20%
  1. Owning patents of inventions, discoveries, concessions and registered trademarks and other protected rights, and leasing same to enterprises situated in Lebanon or elsewhere.
  2. Owning movables and immovable provided that they are allocated to the needs of its business only, and in compliance with the provisions of the law governing the acquisition by non-Lebanese nationals of real estate rights in Lebanon. back to top
  1. EXCEPTION TO THE GENERAL LEGAL SYSTEM GOVERNING JOINT-STOCK LEBANESE COMPANIES
  1. Capital and Accounting
  1. The company's capital may be set in a foreign currency.
  2. The holding accounts may be kept and the balance sheet drawn up in the same currency as the capital. The holding is exempted from publishing its balance sheet in the Official Gazette, as well as in an economic daily newspaper and local newspaper. However, it must deposit its balance sheet with the clerk office of the special Trade register of holding companies.
  3. The holding company is also exempted from the obligation of appointing a complementary auditor. Furthermore, by virtue of legislative Decree #45/83, holding companies may appoint the principal auditor(s), that remains mandatory or renew its appointment, for a three-year period (the joint-stock company must appoint an auditor or renew his appointment each year).
  1. Holding management
  1. Holding companies are exempted from the obligation to have two Lebanese board members in their board of directors. Since according to the Commercial Law, a member of the board must be necessarily a shareholder, the lifting of this condition implies that the holding total capital may be held by foreigners, unless otherwise provided by the law, as for instance regarding the purchase of real estate properties in Lebanon.
  2. By virtue of legislative Decree #45/83, the chairman of the board of directors is not required to hold a work permit should be a foreigner residing outside Lebanon.
  3. While there are no specific provisions in the Commercial Law regarding this issue, Legislative Decree #45/83 expressly specifies that the shareholders general meetings and board of directors meetings may be held outside Lebanon, should the by-laws stipulate this. However, the annual general meeting in charge of examining the accounts in particular, and the case being, approving such accounts, must be necessarily held in Lebanon. Filling another gap of the Commercial Law, which does not specify a time limit for the holding of the annual general meeting, Legislative Decree #45/83 required that this meeting be held within five months following the end of the financial year. back to top
  1. TAXATION REGIME AND EXEMPTIONS
Some tax exemptions specified in article 6 of Legislative Decree #45/83 are in favor of the holding itself, while others are in favor of its shareholders.
  1. The Holding Income Tax
Holding companies are exempted from income tax. They pay a fixed tax, with a maximum of 5 million Lebanese pounds, calculated on the total capital (plus the reserves) in accordance to the following tax scale:
  • 6% on its total capital and reserves, should this total not exceed 5o million Lebanese pounds.
  • 4% for the portion of said total between 5o million and 8o million Lebanese pounds.
  • 2% for those exceeding 8o million Lebanese pounds. This tax shall apply to the holding company as of the first financial year, whatever the duration is.
  1. Taxation of the distributions made by the holding
  1. The distributions made by the holding to its shareholders are exempted from the tax on movable capital income.
  2. lf the holding takes out loans by issuing debenture loans, it must levy the tax due on the income of some movable capitals, calculated on the 5% reduced rate (Legislative Decree # 144/59 on the income tax, Article #51 of Law #497/2oo3 (Finance Act) and instruction #2499). However, if the company fails to abide by the condition related to the maximum value of the issued bonds, the debenture loan shall be deemed an ordinary loan, and the-reform the interest paid (by the holding) shall be subject to the movable capital income tax, at 10% instead of 5%. (Instruction #2499).Moreover, the holding company shall be subject to either the income tax applied to corporations operating in Lebanon plus a fine of 20% of the income tax due, or to a 3% fine on capital plus reserves, whichever is the highest.
  1. Taxation of incomes generated by loans granted by the holding
  1. The principle: the legislative Decree 45/85 exempted from the movable capital income tax, interests earned by the holding from loans granted to companies operating in Lebanon, should the duration of the loan be more than three years. The interests earned by such loans, should this interest result from loans for less than three years, are subject to a 10% movable capital income tax.
  2. The interpretation of the Ministry of Finance: the Minister of Finance issued several instructions aiming at specifying the conditions of application of the exemption principle, and the interest rate that the Ministry considers deductible by subsidiaries. Interests earned by a holding from loans granted to companies operating abroad are not subject to the movable capital income tax (instruction #1365), whatever may be the duration of said loans (instruction #2499). The holding, however may only lend companies in which it holds a contribution (Instruction #2499). Finally, the loan must be granted by virtue of a duly written agreement (instruction #2499). back to top
The loans granted to companies operating in Lebanon are subject to the following conditions (instruction #1366):
  • The competent departments are requested when controlling the interest paid to a holding company by subsidiaries, to treat said interest by taking into account:first, the subsidiaries' need for a loan, but also the source of funds of the holding company that granted a loan to its subsidiaries, so that the tax treatment is as follows:
  1. If the funds were advanced from the holding company shareholders' equity; the interest rate may not exceed the average interest rate calculated on the treasury bonds of duration similar or close to the loan's duration. Upon calculation, the tax of 5% tax shall be deducted, that is, if the interest rate on the dollar is 6%, the accepted interest rate will be : 6 - 6 x 5/100 = 5.7%.
  2. If the funds come from bonds, subscribed to by the holding company›s shareholders, or from loans taken out with said shareholders or with banks; the interest rate on the loan granted to subsidiaries may not exceed by more than 2 points the interest rate paid to banks by the holding company. The subsidiaries may deduct from tax, the interest calculated on this basis.
  3. If the funds come from loans granted by the shareholders, without interest, the interest paid by the subsidiaries and calculated at an interest rate of not more than 3% may be deducted from tax. back to top
The loan must be granted by virtue of a duly written agreement (instruction #2499).

Furthermore, if the holding company, before the expiry of the duration of the loan, no longer meets the condition authorizing it to grant a loan, for any reason whatever, and the loan is initially granted for a duration of three years or more, interest resulting from this loan shall be subject to movable capital income tax, and the tax must be calculated from the date of existence of the debt and until its payment (instruction #2499).
  • Special case: A holding company may not grant a loan to a natural person, whether or not a shareholder in the company (instruction #2499). However, instruction #2499 provides that the current account of a shareholder in the holding company, whether a natural person or legal entity, may be a debtor account, up to the shareholder's share in the profits carried forward. If the amount of the withdrawals exceeds the share of the shareholder in the profits carried forward, interest must be calculated in favor of the holding company on the part of the debit current account that exceeds said share, based on the prevailing interest rate. Therefore, the company must be subject to the movable capital income tax, on the calculated interest. back to top
  1. Taxation of incomes earned by the holding from its credit accounts opened with banks
  1. The interests earned by the holding from its credit accounts opened with banks are subject to a 5% tax due on some movable capital income. The holding company may not deduce this tax from any other tax already paid (legislative Decree #144/59 on income tax, Article #51 of Law #497/2003 (Finance Act) and instruction #2499).
  1. Taxation of income resulting from investments made abroad
Instruction #1365 specified that the company's income resulting from the investment of its assets abroad is not subject to the movable capital income tax.
  1. Tax treatment of management fees received from subsidiaries
Article 6 of the law issued by virtue of Legislative Decree #45/83 specifies that the amounts received by Holding companies from their subsidiaries in Lebanon against management and services and other, are subject to a 5% tax, provided said fees do not exceed a certain limit, set by decree.

The Minister of Finance issued on September 3, 2007, instructions #1386 by virtue of which management fees that are deductible from the subsidiaries' charges are set at a maximum of 2% of the total income of the subsidiaries operating in Lebanon, provided the services are supported by documents, and are specified by a written agreement between the holding company and the subsidiary.

Furthermore, Instruction # 2499 specifies that, while taking into consideration instruction #1366, determining the ceiling of interest that may be deducted from taxation, within the charges of the subsidiaries to whom the holding company granted a loan, except for the amounts borrowed by the Holding company in order to grant loans to subsidiaries, the holding company may obtain the restitution of the interest and commissions paid to banks on behalf of the subsidiaries, if said interest and commissions are paid within the scope of the financial management acts, are evidenced and not exaggerated. Said interest and commissions do not enter in the calculation of the 2% of the turnover of the subsidiaries, which are deductible from taxation by virtue of instructions #1386. back to top
  1. Tax treatment of appreciation profits (capital gain)
According to Article 6 of Legislative decree #45/83, the appreciation profits (capital gains) resulting from the assignment of its interest and shares in Lebanese companies shall be subject to a 10% tax, should these interest and shares be held by the company for less than two years.

Accordingly, capital gains resulting from the sale of interest and shares the holding owns in Lebanese companies shall be exempt from tax, should these interest and shares be held by the company since more than two Years. back to top

Instruction #1365 also specifies that the capital gain resulting from the assignment of the holding company of its interest and shares in companies located abroad is exempted from the tax on capital gains; the capital gain resulting from the assignment of the Holding companies of its fixed assets located in Lebanon or abroad is exempted from this tax as well.
  1. Taxation of incomes earned by the holding from licensing agreements
The income that a holding company may earn from leasing invention patents and other protected rights that it owns to companies located in Lebanon, shall be subject to a 10% tax.

OFFSHORE COMPANY

  • LEGAL FORM AND REGIME OF OFFSHORE COMPANIES

The offshore company is incorporated by virtue of Legislative Decree # 46/83. Like the Holding company, the offshore company shall be incorporated in the form of a joint-stock company and shall abide by the provisions governing a joint-stock company. However, Legislative Decree #45/83 specified some exceptions set forth in this analysis. The Minister of Finance issued instructions in order to clarify the application of some provisions of the above mentioned Legislative Decree.

  1. OFFSHORE BUSINESS ACTIVITIES
Initially incorporated to carry out a very limited number of activities, the object of the offshore was expanded in 2008 by virtue of law # 19/2008, which also determined and increased the number of tax exemptions benefiting said companies, its shareholders and employees. back to top
  1. Object of the offshore company
Offshore companies are authorized to carry out exclusively the following activities:
  1. Negotiating and signing contracts and agreements concerning operations and transactions conducted abroad in relation to assets located abroad or in the free zones.
  2. Managing from Lebanon companies and institutions with offshore activities, exporting professional, administrative and regulatory services as well as all kinds of information services and IT programs to companies located abroad and upon the latter›s request.
  3. Carrying out tripartite or multipartite foreign trade transactions abroad. For this purpose, offshore companies may negotiate and sign contracts, ship goods and issue invoices with regards to activities and transactions performed abroad or via the Lebanese free zones. This includes the use of the facilities available in the Lebanese free zones for the storage of the imported goods intended for export.
  4. Carrying out maritime transport activities.
  5. Acquiring shares, interests, bonds and participation s in foreign non-resident institutions and companies, and granting loans to nonresident foreign institutions of which the offshore company holds more than 20% of the capital.
  6. Acquiring or benefiting from the rights reverting to agencies for products and goods, and representing foreign companies in foreign markets.
  7. Opening branches and representation offices abroad.
  8. Building, operating, managing and acquiring all kinds of economic projects, except for the prohibitions specified in paragraph 2 below.
  9. Opening credits and taking out loans for financing the above mentioned activities and transactions from banks and financial institutions residing abroad or in Lebanon.
  10. Renting offices in Lebanon and acquiring the real estate properties necessary for the activities thereof, subject to the provisions of the law governing the acquisition by foreigners of real estate rights in Lebanon. back to top
  1. Restrictions
  1. Article 2 of Legislative Decree #46/83:

While the business community wished that the legislator would authorize offshore companies to carry out insurance activities, article 2 of Legislative Decree #46/83 maintained this restriction as well as the restriction related to activities and transactions of banks, financial institutions and institutions that are subject to supervision of the central Bank of Lebanon. Moreover, said article specifies that offshore companies are not authorized to perform in Lebanon. They may not make any profits-or generate yields or revenues out of movable or immovable assets located in Lebanon, or from services provided to institutions residing in Lebanon, except for the revenues generated by their bank accounts and those resulting from the subscription to Lebanese Treasury Bills and related transactions. On the other hand, law # 19/2008 authorized the offshore companies to carry out industrial or holding activities

  1. Instructions of the Minister of Finance: the Minister of Finance had specified that:
  • On one hand, "and in accordance with the spirit of Article 1 of Legislative Decree #46/83", the sale through wholesale or retail operations, of goods imported by offshore companies or purchased from non-resident suppliers and stored in the free zone, shall be deemed operations carried out by offshore companies and authorized in the free zone, provided the goods are sold to persons located outside Lebanon or leaving the Lebanese territory; and on the other hand.
  • Contracts and agreements concluded among offshore companies related to operations and transactions executed outside the Lebanese territory, and concerning goods or materials located abroad or within the free zone, shall be deemed operations that the offshore companies are authorized to carry out. back to top
  1. Penalties
In the event that the company violates the provisions of Article 2 of Legislative Decree #46/83 quoted above, it shall be subject for the financial year during which the violation occurred, to the income tax applicable to the jointstock company operating in Lebanon, as well as to the payment of a penalty equivalent to 5% the value of the tax.

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Last Update: 03 April 2012

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