Doing business in Lebanon

Pursuant to the European Directive on administrative cooperation in the field of taxation (2011/16/EU), Member States must cooperate with each other with a view to exchanging information relevant for tax purposes. The directive allows, inter alia, that a Member State (the requesting Member State) requests another Member State (the requested Member State) to provide information concerning a specific taxpayer. The requested information must be ‘ foreseeably relevant ‘ to the tax authorities of the requesting Member State.

Based on the aforementioned directive, the tax authority of the requested Member State may request information from e.g. an affiliated company, a financial institution, an employer, … of the taxpayer. The tax authority of the requested Member State forwards the collected information to its counterpart in the requesting Member State.

A question that arises is whether that affiliated company, financial institution, employer, … may ask its national courts to verify the legality of the sanction imposed by its tax authority because of an incomplete answer and whether it may ask to vary the penalty. Another question is whether a court in the requested Member State may verify the relevance for tax purposes of the requested information.

These questions were raised in the Berlioz case of the Court of Justice (judgement of 16 May 2017): Berlioz (a Luxembourg company) only partially answered the request for information from the Luxembourg authorities (at the request of France). Berlioz stated in this regard that certain questions were irrelevant for tax purposes in the requesting Member State.

The answers to the questions raised are not obvious, as the starting point is that the requesting State has a margin of discretion as to what is foreseeably relevant for its tax purposes. This explains why (in this case the Luxembourg) courts doubted whether a relevance test was possible. The questions were referred for a preliminary ruling to the Court of Justice.

In its assessment, the court took into consideration the EU Charter of Fundamental Rights and, more specifically, the right to a fair hearing by an impartial judge.

The Court of Justice ruled that courts in the requested Member State may review the foreseeable relevance for tax purposes of the requested information and that they may vary the penalty imposed. The courts in the requested Member State should be reluctant however upon review of the legality of the request for information: the review is limited to verification whether the requested information manifestly has no relevance for tax purposes.

To this end, the courts must have access to the request for information. The affiliated company, financial institution, employer, … is only entitled to receive the identity of the person under investigation and to be informed about the tax purpose for which the information is sought. The Court of Justice indeed emphasizes in the interest of the investigation the principle that the request for information must remain secret.

Relevance of the judgment: When requested by a national tax authority to respond to a request for information from another Member State, it is important to check the relevance for tax purposes of the requested information. If the information requested is irrelevant to the tax investigation, a proceeding against the request for information or against the penalty may succeed. Regarding the foreseeable relevance for tax purposes, the national courts may only review whether the requested information manifestly has no relevance to the tax investigation in the requesting Member State.

Individuals coming to Portugal and here becoming residents for the first time, can be entitled to some important tax benefits under the “non habitual resident rules”. These rules are an important contribution for making Portugal one of the most attractive destinations for retired individuals, but also for entrepreneurs.

Who can benefit?

A non habitual resident is an individual becoming resident for tax purposes in Portugal for the first time in the last five years period. To become resident for tax purposes, one should be in Portugal for more than 183 days in any 12 months period or for a shorter period but in such conditions that the intention of becoming resident is sufficiently clear. After becoming resident for tax purposes and register as such before the Tax Authorities, the individual must register as a non habitual resident to be able to benefit from this regime.

High Value Added Activities.

Some of the benefits under the non habitual resident rules are only applicable to income arising from high value added activities. These activities include architects, engineers, artists, auditors and tax consultants, medical professions, university teachers, top managers and other liberal professionals in areas such as informatics (software and hardware) development and consultancy, science investigation and design.

For how long?

The benefits arising from the non habitual resident status are valid for a ten year period and depend on the individual remaining as resident in Portugal for tax purposes. If, for any reason, the individual ceases to be resident, he can later benefit from the remaining period by becoming resident again.

What are the benefits?

Individuals becoming non habitual resident benefit from a more favorable tax treatment regarding both income from Portuguese source and income from foreign sources.

As to the income from Portuguese source arising from employment and self-employment, it is subject to a special tax of 20%. This benefit is only applicable to non habitual residents earning income from high value added activities.

As to the income from foreign sources arising from employment and pensions, it is exempted from taxes in Portugal, in most cases. This exemption also includes income arising from self-employment in high value added activities, and from intellectual and industrial property, capital and real estate gains.

With the Legge di Bilancio 2017 (Budget Law), in force since January 1^st 2017, the Parliament has implemented a new strategy in order to kick-start the Italian economy with the adoption of a wide array of measures to support startups and small-medium enterprises both financially and fiscally with the purpose of making them more appealing to foreign investors.

The Budget Law has designed a comprehensive plan that involves certain tax breaks, the possibility for SMEs to raise funds through crowdfunding platforms and for the so-called “innovative” startups (meaning early-stage companies that meet certain criteria set by the law: i.e. high level technology of the company’s scope, R&D expenditure or number of graduates employed, etc.) to sell transfer their tax losses to listed companies. Overall, these tools mainly aim at unlocking the economic system that so far has not proved to be capable enough to provide early-stage startups and SMEs both with financial resources and tax benefits they need to develop innovative assets and scale up their business.

This set of measures can be divided under four groups, based on the relevant purposes:

1. Fostering entrepreneurship and setting up innovative companies;
2. Stimulating private investments directed to innovative startup/small-medium enterprises;
3. Supporting R&D expenditure and
4. Modernizing existing companies’ assets by their digitalization and automation, along with the development of innovative technologies.

Economic relief for setting up new companies

The strategy laid down by the Parliament involves the Ministry of the Economic Development (Mise), the National Institute for Insurance against Accidents at Work (Inail), and other public agencies, such as Invitalia, in order to boost the incorporation of startup companies and the development of innovative SMEs.

As matter of fact, the endowment of the Fund for Sustainable Growth (FCS – Fondo per la Crescita Sostenibile), aimed at providing soft loans to support the incorporation of innovative startup companies, has increased by Euro 47,5 millions for 2017 and 2018, respectively.

Furthermore, the Budget Law has also allocated the same amount of Euro 47,5 millions for both 2017 and 2018 in order to foster self-employment and entrepreneurship. These funds will be managed by Invitalia, the Government agency for inward investment promotion and enterprise development, and will be mostly employed to sustain the incorporation of companies by women and young entrepreneurs (aged 18 to 35 years). Invitalia shall be able to grant subsidized zero-interest loans for a maximum of eight years, which could cover up to 75% of total expenses as budgeted for specific investments. Companies will then have to fund the remaining amount as allocated in the business plan and carry out the envisaged investment within 24 months of the signing the loan agreement.

The Ministry of the Economic Development (Mise) has also issued a sets of measures that grant subsidies to support development programs carried out by startup companies with a focus to the acquisition of new machineries and technological equipment; hardware and software technologies; patents and licenses along with non-patented technical know-how directly connected to production/managerial needs.

The Budget Law – pending the approval of the relevant Ministries – also introduces the possibility for Inail to invest in closed-end funds dedicated to innovative startups or to directly set up and participate in technological business ventures.

Streamlining bureaucracy

No need for a notary and exemption from stamp duty and other administrative fees are some of the measures aimed at streamlining the procedure to set up a startup company. It will also be possible to draw up the articles of association and its subsequent amendments through the online procedure by means of  qualified electronic signature.

Tax breaks for investments in innovative start-ups and SMEs

Pending the final approval of the European Commission, the Budget Law has introduced new incentives for those subjects that will invest in startup companies.
Tax breaks concerning this kind of investments are not something new. Introduced in 2012 and originally conceived as temporary, with the Budget Law, these measures has not only been converted into permanent incentives, but also increased from 19% and 20%, for individuals and companies respectively, to 30% with no distinction as to the status of the investor (potential shareholder) for investment capped at Euro 1 million for individuals and Euro 1,8 millions for entities.

Since these tax breaks are aimed at encouraging investments in startups, these benefits are balanced out by the condition that the investment which has benefited from these measures is maintained in the target company for three years (instead of two, as provided for under the previous Budget Law).
Furthermore, the Budget Law has extended these benefits also to innovative SMEs, that is all the small-medium enterprises operating in the field of technological innovation, regardless of their date of incorporation, since these companies will be relieved from presenting a plan attesting their innovative assets programs in order to access the benefits, as provided for previously.

A partnership between startups and listed companies that may benefit both parties

In the accompanying report to the Budget Law, the Government also has stressed the importance of involving listed companies in financing directly or indirectly startup projects and therefore it has introduced the possibility for startup companies to transfer the tax losses accrued in the first three fiscal years to a listed company provided that the certain requirements are met.

The transfer will be conducted according to the rule provided for the transfer of corporate tax credits; the transferee will be called to make up for the benefit received from the transferor and the remuneration paid to the startup will not be subject to taxation.
Through this mechanism, the companies would benefit one another: the startup would find a financial “sponsor” and the listed company would be able to fully offset its taxable income with the tax losses received, considering also the possibility to carry forward the exceeding part to the following year.

Crowdfunding

Through a tweak to the Italian Consolidated Law on Finance (i.e. Testo Unico Finanza), the  Budget Law got rid of some of the restrictions that prevented crowdfunding market to take off in Italy and introduced the possibility for any kind of SMEs to access equity crowdfunding. Previous legislation limited the possibility to raise funds through this system only to the innovative startups thus limiting the development of both SMEs and crowdfunding industry.

While  the rules governing equity crowdfunding will be the same from the operators’ side (i.e. crowdfunding platforms), small-middle size companies will now have a new mean for collecting capital aside from those traditional channels such as bank financing and stock exchange listing.

Tax credit on R&D expenses

The tax credit related to the Research & Development expenses, introduced in 2013, has been extended until December 2020 and enhanced passing from 25% to 50% on all the eligible expenses in R&D activities, with an annual threshold capped at Euro 20 million (five times higher than the previous maximum limit).

Companies will be able to reduce their tax bill and claim compensation as a proportion of their R&D expenditure. The provision is now applicable to all R&D expenses, including the hiring of staff dedicated to R&D activities (with no particular requirement as to their qualification) and to any kind of company (resident and non-resident), group or network of enterprises, regardless of the dimension of the firm, its legal status and industry of reference.

This fiscal incentive can be combined with another one applicable to any employee benefiting the tax incentives provided for under work for equity schemes by innovative startups. Breaking it down, this means that in case the staff carrying out the R&D activities is benefiting of any work for equity plan, the company at issue will benefit of both of the tax breaks.

Development contracts for large investment projects

The development contracts (Contratti di sviluppo) are agreements between the Ministry of Economic Development (Mise), Invitalia and one or several companies (the latter through network contracts) engaged in development projects.

First introduced in 2011, these contracts have been devised to support large industrial/productive investments with a size of at least 20 million euro (7,5 millions only with regards to the agro-food industry).

Development contracts are financed by the Mise, with the participation of the relevant Regions involved (which could also participate in the investment). Invitalia acts as a referent for the promoting companies and it is also the subjects in charge of managing the resources along with the assessment of the applications.

These “contracts” target Italian as well as Italian-based foreign companies and provide financial benefits such as block grants on plant and equipment, soft loans and interest subsidies, whose dimension could vary depending on the size of the company and the type of project at issue (R&D expenditure, innovation-directed investments).

Invitalia sets a fast pace for the admission procedure as well as for the subsequent development plan: once the project has been approved, the companies will have 90 days to submit all the documents required; they will then have 6 months to start and 36 months to carry out the investment project.

As a token of the country’s will to come through, the program also provides for special fast-track courses for particular productive and digitalization-related investment projects.

Super Depreciation and Hyper depreciation

With regard to companies as widely considered, the  Budget Law also extends the extra 40% depreciation deduction (which makes up a total tax depreciation of 140%) through 2017. Then, companies could deduct the expenses borne in order purchase tangible assets whose depreciation rate exceeds 6,5%. The incentive will be applicable only to those assets whose purchase order has been  accepted by the supplier and paid for at least 20% by 31 December 2017.
Aside from this, the Law has introduced a new extra 150% depreciation deduction (the so-called “hyper depreciation” that combined with the existing would make a total 250% depreciation deduction) for the purchase (or lease) of new technological assets, such as digitally-controlled machineries, equipment and so forth (the law outlines the complete range of eligible assets), acquired in order to  atomize and digitalize enterprises.

Sabatini-ter

The Budget Law has also reintroduced the so-called “Sabatini”, a special legislation aimed at facilitating the purchase (or lease) of capital goods by small-medium enterprises by covering part of the interests on bank loans between Euro 20,000 and Euro 2 million, that has been extended until 31 December 2018. A specific and more generous measure will apply to the purchase of new assets connected with the Industry 4.0 plan. Part of the resources allocated will be directed to support innovation, efficiency and the creation of a “digital” industrial system that invests in new technological equipment such as cloud computing, broadband connections, cybersecurity, robotics, mechatronics and so forth.

In conclusion, the above-mentioned measures, applicable to any company based in Italy, represent a strategic milestone in the way to making Italian companies more competitive in the global market, in terms of both technology and financial resources. Given the lack of regulatory barriers to entry, this set of new rules can vitalize the Italian economic system also attracting foreign investors.

The author of this post is Milena Prisco.

A small country, 10452 km sq. on the Mediterranean Sea, Lebanon is a multicultural and multilingual land of merchants directly descending from the ancient Phoenicians.  Due to its history and territorial position, it is characterized by a free market economy based on an unrestricted exchange of goods, services and capital, and serves as a privileged platform for access to the markets of the Middle East region and the Gulf.

As part of the strategy to integrate Lebanon further into the international community and the global economy, trade agreements were signed with many Arab and European Countries.

Since 2003 the Euro-Mediterranean Partnership provided the conditions for a progressive and reciprocal liberalization of trade in goods with a view to establishing a bilateral free trade area. Later on, in 2004, the Free Trade Agreement with the European Free Trade Association gave free access to Lebanese products into EFTA countries. Moreover, since 2005 Lebanon is a member of the Greater Arab Free Trade Area (GAFTA), receiving full exemption of tariffs on all agricultural and industrial goods traded between the 17 Arab member countries. Last but not least, the Council of Ministers recently signed the Extracted Industries Transparency Initiative (EITI), even before starting the exploration of its offshore. The EITI is a global standard by which information on the oil, gas and mining industries is published, to promote the open and accountable management of oil gas and mineral resources.

Lebanon is well known as a financial hub for banking activities. It has one of the most sophisticated banking sectors in the region: solid and growing, it is considered the true spine of the economy. Thanks to the strict control exercised by the Central Bank, among several factors, the system has showed good resilience to internal and external shocks and made its way through the overall context of the international financial crisis.

Tax regulation is also very favorable for those who want to restructure their global business and invest in the country. Nationals and foreigners can take advantage of the Double Taxation Agreements that Lebanon has signed with 32 countries, including Italy, France, Malta, Cyprus, Egypt, UAE, and Iran.

Business structures established under Lebanese law are governed by the Lebanese Code of Commerce (LCC) and the rules of the Code of Obligations and Contracts on Partnership Agreements, provided they do not contradict the LLC rules.

A joint venture may take a number of forms. This gives parties significant flexibility in designing a suitable structure for their projects. The joint venture can be a simple contractual arrangement or create a separate legal structure, either a stock corporation (société de capitaux) or a partnership (société de personnes) established to carry out the project.

Several factors must be considered when deciding which structure a business should adopt.

Hereby, the main characteristics of the corporations in Lebanon:

In addition, a call for foreign investments is now in place to improved infrastructure all over the country in various sectors like oil and gas, energy, information technology, telecommunications, water-sewage, and tourism.

While specific sector, such as oil and gas, follow their own procedure and tenders, there are two incentive schemes that investors can choose.  According to Law n. 360/2001, they differ in the extent of exemptions provided and in the eligibility criteria required.

Investment Project by Zone (IPZ) scheme

Package Deal Contract (PDC) scheme

To conclude this overview, it is worth to mention the young, dynamic, and polyglot population, that is another feature of Lebanon’s economic attractiveness, especially in sectors with high-value added, such as ICT, considered of the main drivers of knowledge-based economies.

In the latest Global Competitiveness Report by the World Economic Forum for 2016-2017, Lebanon ranked 18th globally in the overall quality of the educational system (for higher education and training), and 6th globally in the quality of math and science education. That surely makes it one of the best sources of talent not only to serve the region but also the international scene.

In general, salaries in Lebanon are relatively lower than regional averages.

According to the World Bank, 70% of the population generates an annual income of less than USD 10,000. The latter combined with the aforesaid highly skilled labor force would form an attractive combination for any company willing to invest in Lebanon.

The author of this post is Claudia Caluori.