Personal Income Tax:
According to the principle of territoriality, taxes on salaries are due in Lebanon if one of the following conditions is met:
· The beneficiary of the salary is resident in Lebanon, regardless of the source of funding.
· The services that triggered the income are executed on Lebanese territory or have contributed to the welfare of a company located in Lebanon, even though the source of funding is outside Lebanon.
· The source of funding is in Lebanon, regardless of where the beneficiary resides or where the effort was made.
Personal income tax rates:
Personal income tax (PIT) is levied on wages and salaries at progressive rates between 2% and 20% and on business income (e.g. sole proprietorships, general partnerships) at progressive rates between 4% and 21%.
Tax on capital gains and investment income:
A new Law no.64 dated 26 October 2017 introduced new tax measures related to the capital gains on disposal of real estate (not other types of fixed assets) that is taxed at 15% instead of 10% (N/A for individuals up to two principal residency and if owned more than 12 years.
Tax on interest:
Income, revenues, and interest earned from accounts opened at Lebanese banks and from treasury bonds are subject to a 7% withholding tax (WHT).
Tax on piecemeal compensation:
Lump-sum wages paid to labourers and wage earners in an ad hoc manner to undertake temporary work on a piecemeal or quantity basis are taxed at 3%, regardless of their magnitude and without any deductions.
Revenues earned by non-residents in Lebanon are subject to an effective tax rate of 2.25% of the revenue in the case of revenue from sale of materials and equipment and 7.5% of the revenue in the case of sale of services. The non-resident tax is a WHT.
The Lebanese Parliament legislated a Law no.60, dated 3 November 2016, relating to the amendment of Law no.44 'Tax Residency in Lebanon', including that any individual is considered tax resident in Lebanon if one:
· has a place of business in Lebanon
· has a house in Lebanon permanently available to one's family members (i.e. the spouse and dependent children), or
· is present in Lebanon for more than 183 days in any given 12-month period. The 183 days will not include days:
o spent in transit at the International Airport Beirut, or
o in Lebanon, if the stay was solely for the purpose of undergoing a medical treatment
Under the income tax law in Lebanon, tax is levied based on income type. Accordingly, the income tax law divides income into the following three categories:
· Chapter I - profits from industrial, commercial, and non-commercial professions.
· Chapter II - salaries and wages and pension salaries.
· Chapter III - revenues from moveable capital (chapter III mainly covers all types of dividend income, board member appropriations from profits, and interest income, including interest on bonds and treasury bills).
The income tax law does not deal with what is known as global tax on income, where a progressive tax is levied on the individual's income grouped from different sources. Accordingly, where a taxpayer has income from different sources, each type of income will be taxed according to the tax chapter it falls under.
Income tax is imposed on all salaries, wages, bonuses, allowances, life annuities, pension payments, and other benefits in cash and kind derived by employees.
Certain types of income, such as those received by certain diplomatic representatives and nursing staff, are exempt from income tax.
The tax treatment of employee stock option benefits is not directly addressed in the income tax law or in its explanatory memos. In general, the benefit is a salary related benefit and is subject to tax in Lebanon. The benefit will be subject to social security contributions if it meets the criteria of continuity, consistency, and collectivity. The time at which a charge to tax or social security contributions can arise is shown below:
· Grant date: No income tax and no social security contributions.
·Vesting date: No income tax and no social security contributions.
· Exercise date: Income tax and social security contributions.
· Sale date: Whether it is an exercise gain or a sale gain, it is subject to income tax.
Moveable capital income
A WHT at a rate of 10% is levied on an income derived from moveable capital generated in Lebanon. Such taxable income is comprised of:
· Distributed dividends, interest, and income from shares.
· Directors' and shareholders' fees.
· Distribution of reserves or profits.
· Interest from loans to corporations.
Individuals are exempt from capital gains tax on the transfer of shares.
Any individual of Lebanese or foreign nationality may engage in a business activity as a sole proprietor or become a partner in an existing or newly formed partnership. Under Lebanese law, there are two distinct types of partnerships, general partnerships and limited partnerships.
Sole proprietorships and general partnerships are taxed at progressive rates of 4% to 21%.
Limited partnerships are taxed at a flat rate of 17%. Distributed post-tax profits are subject to the tax on moveable capital gains at the rate of 15%.
Deductions from Income:
Reimbursements for expenses and representation allowances below 10% of the basic salaries of managerial staff may be deducted from taxable income.
The following expenses may also be deducted from taxable income:
· Payments to pension schemes.
· Scholarships or payments granted by an employer on the birth of a child, on marriage, or death, provided they are granted to all employees and have been approved by the Ministry of Labour.
· End-of-service indemnities paid in accordance with the relevant laws and regulations.
· Transportation allowances of LBP 8,000 per day.
·Annual schooling allowance of a maximum total amount of LBP 1.5 million and for a maximum of three children.
University tuitions that teachers are exempt from on behalf of their children are not subject to tax within certain limits, with no need to obtain approval from the Ministry of Labour.
Individuals are entitled to family deductions ranging from LBP 7.5 million to LBP 12.5 million according to the taxpayer's family status.
For sole proprietorships and general partnerships, tax is levied on real profits or profits on a fixed lump-sum basis (a specified percentage, depending on the type of profession, applied to annual revenues to determine taxable profits). Accordingly, no deductions are taken into consideration.
Limited partnerships are allowed the same deductions as those available to corporations.
Tax Return and Compliance:
The fiscal year is the calendar year.
Income derived from personal business:
The deadline for filing tax returns for those taxed on real profits is before 1 April of the following year. For those taxed on a fixed lump-sum basis, the deadline is before 1 February of the following year.
It is the employer's responsibility to declare the payroll tax to the authorities on a quarterly basis during the first 15 days of the month following the end of the quarter. An annual declaration is also due by 28 February of the following year.
Tax on capital gains and investment income:
Tax on moveable capital income is withheld at source by the relevant company or organisation and is to be declared within one month of the declaration of any dividends, interest, or share revenue, or after the maturity of interest on bonds.
If taxpayers fail to submit a tax return, realisation penalties will be due.
Payment of tax:
The same deadlines for tax returns apply for tax payments.
If taxpayers fail to make payment, late payment penalties will be due.
Tax audit process:
The most common ways for the tax authorities to select companies or individuals for tax audits are the size of the business, the type of business, and certain risk assessment measures.
Tax audits typically cover a single type of tax.
In a typical situation, a tax audit is likely to take less than one year from first information request to substantive resolution.
Statute of limitations:
The tax administration has four years to collect its rights. The period is calculated from the end of the year that follows the current business year.
The taxable person may request a refund of excess tax within four years starting from the end of the year where the refund right was created.
The tax administration can exceed the statute of limitations in cases where a profit or revenue has been proven by a court order, arbitration, or inheritance clearance. The extension is limited till the end of the calendar year following the end of the year in which the tax administration was notified of such event.
Under the statute of limitations, a company should keep its accounting books and documentation for ten years.
Corporate Income Tax:
Corporate income tax. Lebanese companies and branches of foreign 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 15%.
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 regular 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. 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 15% on a deemed profit ranging from 5% to 10% of their premium income.
Lebanese air and sea transport companies are exempt from corporate 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 distributed 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 enterprises 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.
Capital gains on the disposal of fixed assets are taxed at a rate of 10%.
If a company reinvests all or part of a capital gain subject to the 10% 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.
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:
In general, dividends and interest are subject only to a withholding tax of 10%.
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 offshore companies are exempt from dividend withholding tax.
Dividends and interest income earned by banks and financial institutions are considered trading income and consequently are subject to tax at the regular corporate tax rate of 15%.
Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.