Lebanon: Project Finance

Last Updated: 21 September 2017
Article by Rima Abou Mrad and Mazen Fakih

1. What are the key differences in the legislation in this jurisdiction and other key international jurisdictions?

Lebanon is considered to be a civil law country. Indeed, the Lebanese legal system is based on/inspired mainly by the legal system in France, even though few Ottoman and Islamic legal principles apply on few matters. The Code of Obligations and Contracts (COC), which is the prevailing legislation, was promulgated in 1932, under the French mandate over Lebanon. The said code is the equivalent of the French Civil Code. However, the COC does not apply on personal status matters (such as marriage/divorce, inheritance etc) which are governed by the laws set by the 18 sects recognised in Lebanon. According to the COC, parties are free to structure contracts/projects as they see fit provided such contracts/projects do not violate or contradict mandatory legal provisions, public order, morality or core public policy.

2. Are there differences in the way project finance operates in freezones and secondary jurisdictions?

There are no free zones or secondary jurisdictions in Lebanon.

3. Do Islamic finance concepts impact the way the project finance is structured?

Islamic banks were introduced to Lebanon around nine years ago. However, despite the Central Bank's efforts to regulate the industry, Islamic finance has failed to impact the banking sector in Lebanon. Due to the way project finance is structured (including a competitive banking sector, a lack of marketing to create awareness about the various Islamic banking options and a lack of focus on equity-based contracts), the Lebanese fiscal laws consider Islamic financing as operational tools instead of financing tools that are not exempt from stamp duty, value-added tax and double taxation.

4. What types of collateral can be used?

Under Lebanese law, four types of collateral can be used:

  1. Guarantee over real estate which provides the creditor with a right over property in order to secure the repayment of a debt. Once registered, the guarantee follows the property and is redeemed only when the full amount of the loan is settled. The default of the debtor leads to seizure of the property and its sale to pay for any remaining debt.
  2. Mortgage over real estate which grants the creditor a retention right on the property of the debtor until settlement of the debt. In the event of default of debts, the property becomes a security that gives the creditor priority on collecting the debt he is owed.
  3. Pledge taken over movable property which grants the creditor the right to withhold a movable property (tangible or intangible) of the debtor until settlement of the debt.
  4. Assignment of insurance rights or payouts in order to ensure the creditor is paid first in case of default of the debtor.

5. How does a creditor assure themselves?

The creditor needs to execute an agreement with the debtor in order to perfect a security interest in anticipation of a collateral becoming extracted. Additional requirements apply for specific kinds of security interests. For example, pledges for shares of stock should be registered with the Commercial Register. Security interests over some movable property (e.g. boats, vehicles, etc.) must be registered with special registers specifically established for each type of good. Mortgages and guarantees over real estate must be registered with the Real Estate Register. It is important to note that any preexisting lien on movable or immovable property will provide its owner a priority over the lien of the creditor who will have a right of preference over any owner of a succeeding lien.

6. Outside bankruptcy/insolvency procedures how can project lender enforce their rights as a secured creditor?

Outside bankruptcy/insolvency procedures, the project lender will have to submit a petition before the execution department along with the instrument subject to execution requesting the notification of the debtor and seizure of the security (the good or property serving as a collateral) simultaneously. He will also have to pay an execution fee to the execution department.

The execution judge will either approve the request of the project lender, or decide to notify the debtor and give him a certain time period (usually ten days as of the date of notification) to settle his debt or submit an objection to the project lender's petition.

If the debtor submits an objection before the execution judge, the execution will be postponed until the execution judge issues his decision regarding the said objection. It should be noted here that the debtor could request to be granted an extra time period for the settlement of his debt provided that such time period does not exceed six months (such request will not affect the right of the creditor to take provisional measures in order to ensure the protection of his rights).

If the debtor fails to pay his debt or submit an objection to the execution department within the above mentioned time period, the execution judge will order the seizure of the security and its sale in a public auction.

If the debtor fails to settle his debt within the given time period, the execution department will seize the security and sell it at a public auction. The execution department will then give the project lender the amount due to him by the debtor.

7. Are there preference periods or clawback rights, creditor rights which can impact collateral?

Under Lebanese law, the transactions below shall be considered null towards the debtor's joint creditors if the debtor performed these transactions during the suspect period (which starts from the date of suspension of payment as determined by the court or within twenty days prior to this said date – such period shall not exceed 18 months as of the date of the declaration of bankruptcy by the court):

  • Gratuitous transactions or donations except the usual small gifts or the constitution of a wakf (mortmain property);
  • Any form of settlement of debts prior to their maturity date;
  • The settlement of due monetary debts by means other than cash, money orders, bill of exchange, or bank drafts;
  • The establishment of a conventional or judicial mortgage, pledge over movable property or pledge to benefit from the goods of the debtor in order to guarantee the payment of a former debt.

The debts of secured creditors should be satisfied prior to the debts of unsecured creditors, after settling the expenses and charges of the bankruptcy proceedings and the debts of preferential creditors.

8. What procedures other than court procedures can be used to seize project company assets?

Court procedures are the only procedures that can be used to seize project company assets.

9. Are there any relevant tax, fee or foreign currency restrictions which can impact project finance?

Lebanese companies are usually subject to taxes on corporate profits and to withholding taxes on dividends (few exceptions apply). Furthermore, services and goods are subject to a value added tax (VAT). However, Lebanese laws, in general, do not impose any foreign currency restrictions which can impact project finance. The Lebanese currency (Lebanese Pound – LBP) is currently pegged to, and readily tradable with, the US dollars..

10. What are the rules governing how project companies can maintain foreign currency accounts locally and outside the jurisdiction?

Project companies can freely maintain foreign currency accounts with banks in and outside Lebanon.

11. How does repatriation of foreign earnings work?

No restrictions apply, in Lebanon, on the repatriation of foreign earnings. However, a new law, dated 24 December 2015, stipulates that any money entering or exiting Lebanon, carried out by a person or shipped in a luggage or any other mean, which exceeds the amount of USD 15,000 or its equivalent in other currencies, should be declared to Lebanese customs.

Furthermore, Lebanese laws (e.g. the circular issued by the Bank of Lebanon number 7818/2001 issued on 18/5/2001, Lebanon Law No. 44/2015 etc) stipulate that banks and other financial institutions are obliged to report any operations they suspect to be related to money laundering operations or operations funding terrorism to a Special Investigation Committee at the Bank of Lebanon regardless of the amount of such operations.

12. Does any financing and project documentation need to be registered with authorities - if so who?

It is not usually required, under Lebanese laws, to notarise or register project documentation or financing documentation except for specific kinds of security interests (such as pledges for share of stock, security interests over some movable property, mortgages and guarantees over real estate etc) which usually need to be notarised and registered with the appropriate register for validity and/or to facilitate enforceability. In addition, pledges usually require the possession of the pledged asset. As for project documentation, it is not usually required to register them.

13. Are government or government agency approvals needed for project finance transactions?

There is no need to obtain approval from the government (i.e. Lebanese Ministries) or government agencies for project finance transactions (e.g. the financing structure or documents). Approvals are usually needed for the underlying project (and not for the project finance transaction per se) and should be granted by the Lebanese ministries having jurisdiction over the project involved. For example, the approval of the Ministry of Public Health and the Ministry of Environment is needed before initiating any project in relation to environmental concerns. A building permit is needed prior to beginning the construction of a new building etc.

14. Are any incentives provided to foreign investors?

There are many incentives provided to foreign investors in Lebanon. Among them:

  1. Investment Insurance Programs:

    There are many investment insurance programs encouraging new investments in Lebanon by insuring them against war, civil unrest, expropriation, confiscations and assisting them in entering the Lebanese market e.g. (i) The National Investment Guarantee Corporation (NIGC); (ii) The Multilateral Investment Guarantee Agency (MIGA) which protects investments against non-commercial risks; Overseas Private Investment Corporation (OPIC-US) which provides financial innovations that help U.S. businesses successfully enter the Lebanese market; (iii) COFACE (France); (iii) Export Credits Guarantee Department (ECGD- UK); (iv) Hermes Kreditversicherungs-AG (HERMES-Germany); (v) Istituto per i Servizi Assicurativi e il Credito all'Espotazione (SACE-Italy); (vi) Inter-Arab Investment Guarantee Corporation (IAIGC) etc.
  2. IDAL – Investment Law No. 360:

    Through Investment Law No. 360, Investment Development Authority of Lebanon (IDAL), offers investors various financial and non-financial incentives (e.g. tax exemptions, reductions, immediate issuance of work permits etc). There are two incentives schemes: (i) Investment Project by Zone Scheme which provides small and medium-sized projects in specific sectors such as information technology, media, tourism, agriculture, etc and pre-defined geographical zones in Lebanon with various benefits; and (ii) Package Deal Contract scheme for large-scale projects that have a high impact on employment.
  3. Investment Agreements:

    Bilateral Investment Agreements:

    The Lebanese government has signed bilateral agreements with various states (Canada, UAE, UK etc) by virtue of which the host contracting state grants investors and investments from the other contracting state the national treatment or the most favoured national treatment depending which one is more advantageous for the investor and its investment.

    Multilateral Agreements related to Investment:

    Lebanon has signed various regional and multilateral agreements related to investment such as:

    Agreements regarding the settlement of investment disputes and the enforcement of foreign arbitral awards (e.g. Convention on the Settlement of Investment Disputes between States and Nationals of other States of 18 March 1965 and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 - UNCITRAL);

    Agreements encouraging investment of regional capitals and their protections (e.g. the Unified Agreement for the Investment of Arab Capital in Arab countries of 26 November 1980 and Agreement on the Promotion and Protection of Investment and Transfer of Capital among Arab countries of 7 June 2000)
  4. Double Taxation Treaties:

    Lebanon has signed double taxation treaties with various countries (e.g. Cyprus, France, Italy, Russia, Turkey etc.) in order to relieve investors from the burden of double taxation.
  5. Banking Secrecy/Foreign Currency:

    Banking secrecy law in Lebanon still attracts foreign investments and deposits even though some laws were issued in Lebanon to combat money laundering and tax evasions. Furthermore, the fact that Lebanese laws do not usually impose any restrictions on foreign currency and foreign currency exchange, or the repatriation of foreign earnings encourages investors to invest in Lebanon.

15. Which jurisdiction's laws typically cover project agreements?

When it comes to project agreements, the parties usually typically agree that Lebanese laws are the laws having jurisdiction over their agreements. According to Lebanese law, the parties can freely agree on the form and content of their contractual arrangements as well as the applicable laws. However, such agreements should not violate public order or morals, and are subject to the Lebanese mandatory and imperative laws.

16. Which arbitration bodies are typically cited in project agreements?

The arbitration bodies typically cited in project agreements are the following:

  1. The Lebanese Arbitration Centre at the Chamber of Commerce, Industry and Agriculture of Beirut in Lebanon that was established in 1995. Arbitration of local and international dispute can be performed at this centre in accordance with the rules of arbitration of the Lebanese Arbitration Centre or any other rules agreed upon between the parties.
  2. ICC Lebanon which is a national committee for the International Chamber of Commerce of Paris (ICC).
  3. CIArb Lebanon which is the national branch of the Chartered Institute of Arbitrators (CIArb).

It should be noted that the Beirut Bar Association recently launched an arbitration centre.

17. What are the typical structures of project companies?

The typical structures of project companies in Lebanon are joint ventures, joint stock companies and limited liability companies.

  1. Joint Ventures:

    Joint ventures may take a number of forms in Lebanon. They could be a simple contractual arrangement between the parties without the establishment of any separate legal entity, or a business structure agreed upon between the parties such as joint stock companies, limited liability companies, holding companies etc. Joint ventures are not required, under Lebanese law, to have a specific percentage of Lebanese ownership unlike other countries in the region.
  2. Joint Stock Companies (Société Anonyme Libanaise – SAL):

    Lebanese joint stock companies are established with a minimum capital amounting to LBP 30,000,000 (USD 20,000). Under Lebanese law, the shareholders of a joint stock company do not have the status of commercial traders and their liability is limited to their contribution to the equity capital (except in the case of fraud). A SAL can take several forms in Lebanon. It could be a regular joint stock company which can carry out all kinds of business activities in Lebanon (certain activities might be subject to specific requirements). Regular joint stock companies are subject to 15% tax on corporate profits and 10% withholding tax on dividends.

    There are special kinds of joint stock companies: holding companies and offshore companies. Holding companies are exempt from income tax on profits and withholding tax. A proportionate tax of 6% of its capital and reserve fund apply (up to 5 million LBP). The activities of holding companies are limited to the acquisition of share in existing Lebanese or foreign companies, managing its subsidiaries, granting them loans and securing them against creditors, holding of Intellectual Property rights.

    Offshore companies are only subject to a flat annual tax of 1,000,000LBP (660USD); however their activities are limited to servicing customers outside of the Lebanese territory, except for banking, finance or insurance activities.
  3. Limited Liability Companies (Société à Responsabilité Limité – SARL):

    A SARL is established with a minimum capital of LBP 5,000,000 (USD 3,300). As is the case with joint stock companies, the liability of partners in a SARL is limited to their contribution to the equity capital (except in case of fraud). A SARL is subject to 15% tax on corporate profits and 10% withholding tax on dividends.

Originally published by LexisNexis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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