LEBANON: An Introduction to Corporate & Finance

LEBANON: 2022 - A YEAR OF CHANGES 

As we come close to the end of 2022 it is important to highlight that despite the continuing political, economic and banking crisis in Lebanon, things are starting to move and change, even if at a gradual pace.

The Long-Awaited Public Budget is Finally Voted 

After months of preparation, the public budget for 2022 was voted and published in the Official Gazette on 15 November 2022 (“Public Budget”).

The Public Budget brought amendments to a number of existing taxes, having considerable effect on the corporate, real estate and employment levels. To mention a few:

On the corporate level, holdings and offshores are subjected to a higher lump-sum tax of LBP50 million per year, and to stricter measures in case of failure in the observance of the business requirements and prohibitions.

The Public Budget has also granted start-ups tax incentives to encourage their establishment and facilitate their expansion. For a period of five years therefrom, start-ups benefit from a full income tax deduction for a period of five years as of their incorporation, provided 80% of their employees are Lebanese.

Industrial institutions also benefit from an important reduction on tax applicable to the income generated from export activities, provided that the funds resulting from the export are transferred to the banks for investment in Lebanon.

Consideration is also given to mergers that are encouraged by the economic situation; for a period of three years following a merger, merged companies are exempted from income tax on profits, under certain determined conditions.

On the real estate level, the main change relates to the tax applicable to the transfer of shares in real estate companies (and those properties which exceed 50% of the total of their fixed assets) which has become subjected to the same tax applicable to the transfer/registration of real estate properties among physical persons.

On the employment level, given the social unrest caused by the economic crisis, the Public Budget has granted employees a number of exemptions, notably relating to dismissals that occurred between 1 July 2019 and 30 September 2022, and bonuses that were given during 2022. The tax on salaries and wages was also revised, as well as the family tax deductions.

It is noteworthy to mention that the Ministry of Finance is still in the process of identifying the rate of the Lebanese pound upon which all taxes are to be indexed.

News of the Banking Sector 

In 2022, Lebanese banks continued the imposition of strict limits on cash withdrawals, and have adopted retrenchment measures to face the severe economic and financial crisis that is persisting with no efficient corrective measures.

These policies have led to massive protests against banks, which have compelled the Association of Lebanese Banks in September 2022 to decide the closure of banks for several days in order to avoid additional protests.
The draft of the 'haircut law' was never voted until date. Alternative 'haircut' and de facto capital control measures are still adopted by banks and inter alia. Basic Circular 161 was entered on 16 December 2021 and is still in force and subject to renewal on monthly basis. Also, international transfers from Lebanese banks are still quasi-impossible, unless the transferor holds an account in the so-called “Fresh” currency.

The parallel exchange market is still highly active and the free market rate is still subject to daily fluctuations. It is worth noting, however, that in response to the persistent demand of the International Monetary Fund and with the aim to be aligned with international standards relating to fighting money laundry, tax evasion and corruption, law No 306 was voted on 28 October 2022 (“Law 306”), amending the Banking Secrecy Law of 1956 and other ancillary legislation. In light of the new amendments, banking secrecy does not apply anymore to (i) public officials, their spouse, their minor children and beneficial right owners; (ii) presidents of political associations, civil society bodies, their spouse and minor children as well as candidates for parliamentary and municipal elections; (iii) chairpersons and board members of banks along with their current and former auditors; and (iv) presidents and board members of media, audiovisual and electronic media companies, even after the resignation of the persons listed above, termination of their service or retirement, for a period of five years thereafter. Moreover, the access to banking information was broadened: banks are now compelled to submit any requested information upon receipt of a request by well-defined bodies. Law 306 has also forbidden banks to open or to keep numbered accounts and safe boxes for clients that are only known to the bank manager. Said accounts and safe boxes should be transferred to regular accounts and safes by end of April 2023 at the latest.

The Role of the Judiciary 

During the course of 2022, many judicial decisions have played in favour of depositors of Lebanese banks. 
This has enshrined the fiduciary duty of the Lebanese banks towards their clients, which involves unconditionally returning to the depositors any and all requested amounts at their actual and real value. Therefore, payment of cheques and any other manner of payment that fails to meet the real value of the requested deposit does not waive the fiduciary responsibility of the bank.

In this respect, important decisions were issued against prominent Lebanese banks, compelling them mainly to transfer deposits to bank accounts opened for their clients abroad. One of these decisions cost the bank a seizure of the bank’s funds abroad, as well as all its assets in Lebanon and abroad.

Financial Remedial Attempts 

Amid this crisis, on 20 May 2022, as a remedial measure, a financial and economic strategy was proposed and reviewed by the Lebanese Government in an attempt to improve the current economic, financial and social situation. The New Financial Restructuring Strategy is based on three pillars: (i) resolving the interconnections between the balance sheets of commercial banks, sovereign debt on one part and the balance of the Lebanese Central Bank (“BDL”) on the other part; (ii) recapitalising BDL and improving its financial reporting process in order to restore confidence; and (iii) restructuring and capitalising sustainable commercial banks, by injecting new capital after absorbing losses.

This matter is still subject to discussions, but undoubtedly reflects the tendency of the Lebanese Government to adopt financial reforms.

In a Nutshell 

2022 has made the Lebanese economy a largely “dollarized” economy. In fact, almost all products and services are now priced in USD and then converted to LBP based on the free market rate. This “dollarization” tendency is having hefty consequences on Lebanese citizens, especially civil servants who, on top of being still remunerated based on the official rate, do not have access to their deposits, and are suffering daily from the soaring prices of the products on the market. The Lebanese diaspora is playing a big role in creating some equilibrium in this respect.

However, against all odds, a number of hotels are reopening their doors to the public and real estate prices are picking up again at a fast pace, while major international financial organisations are collaborating with the Lebanese government in order to implement a rescue plan for Lebanon.