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Lebanon

Executive Summary

Lebanon’s economy is in crisis.  GDP contraction could top 20 percent in 2020, the local currency has lost more than 60 percent of its value on secondary exchange markets, and most banks are dollar insolvent.  Since October 2019, Lebanon’s financial sector imposed ad hoc capital controls, preventing most Lebanese from transferring any money overseas or withdrawing dollars from their bank accounts, despite the fact that 75 percent of accounts in Lebanese banks are denominated in dollars.  On March 7, 2020, Lebanon announced it would default on and restructure its nearly USD 31 billion in dollar-denominated debt, the first such default in Lebanon’s history.  On April 30, the government published an economic plan with a focus on restructuring its financial sector and attracting foreign assistance; the next day Lebanon signed an official request for IMF assistance.  Most analysts assess that Lebanon’s near- and medium-term economic future is bleak, with likely fiscal austerity, continuing capital controls, further devaluation, and a potential loss of value applied to wealthy accountholders to recapitalize the banking sector.  The Minister of Finance in May said Lebanon needs USD 28 billion in financial assistance over the next four years.  The World Bank projected that the poverty rate will reach 40-50 percent by the end of this year.

These developments hold consequences for Lebanon’s potential as a destination for foreign investment.  Much depends on how Lebanon implements overdue economic and governance reforms, including in connection with its negotiation and implementation of a potential IMF program.  If the country is able to implement necessary reforms, attract foreign capital, stabilize the exchange rate, and recapitalize its financial sector, opportunities remain for U.S. companies.  To date, Lebanon has the legal underpinnings of a free-market economy, a highly-educated labor force, and limited restrictions on investors.  The most alluring sector is the energy sector, particularly for power production, renewable energies, and oil and gas exploration, though challenges remain with corruption and a lack of transparency.  Information and communication technology, healthcare, safety and security, waste management, and franchising have historically attracted U.S. investments.  However, corruption and a lack of transparency have continued to cause frustration among local and foreign businesses.  Other concerns include over-regulation, arbitrary licensing, outdated legislation, ineffectual courts, high taxes and fees, poor economic infrastructure, and a fragmented and opaque tendering and procurement processes.  Social unrest driven by a decline in public services and growing food insecurity may further hamper the investment climate.

If Lebanon is able to reform its business environment – a likely condition as part of an overarching IMF program – it may one day regain its role as a hub for foreign investment in the Middle East.  Lebanon’s economic crisis is likely to be long and painful, however, and recovery can only be accelerated through quick but careful implementation of reforms.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 137 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 143 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 88 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $407 million  https://apps.bea.gov/international/
factsheet
/
World Bank GNI per capita 2019 $7,600 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

3. Legal Regime

Transparency of the Regulatory System

Private firms should exercise caution when bidding on public projects.  Lebanese Government agencies often sole-source contracts, undertaking direct contracting processes that operate according to differing standards and without a formal competitive solicitation.  Public institutions evade regulations that promote full and open competition by splitting contract requirements into smaller solicitations whose values do not exceed government agency procurement limits.  There is no unified procurement law.  A modern procurement law is currently under preparation and will require the Cabinet’s and Parliament’s ratification.  The Public Procurement Management Administration (PPMA), known as the “Tender Board,” technically has the authority to review terms of reference and evaluate bids for GoL contracts.  The Tender Board is generally transparent, but corruption often arises within the scope of the tenders and the ministries that issue them.  The Central Inspection Board (CIB), an oversight body within the Office of the Prime Minister, oversees government administrative processes, and the Court of Audit has oversight over public expenditures. The Social Security Fund and the Council for Development and Reconstruction, public entities that manage large funding flows, remain outside the CIB jurisdiction.

Excessive regulation hampers procedures for business entry, operation, and exit.  However, the process does not discriminate against foreign investors.  International companies face an unpredictable and opaque operating environment and often encounter unanticipated obstacles or costs late in the process.

Trademark registration, economic and trade indicators, and market surveillance reports are available online at:  http://www.economy.gov.lb .  Some procedures, including those related to branch offices or representative offices of foreign companies, or to protecting intellectual property rights, still require the right-holder to visit the ministry in person to finalize and pay required dues.

All legislation, government decrees, decisions, and official announcements are published in the Official Gazette.  The government does not publish proposed draft laws and regulations for public comment, but a parliamentary commission may invite private sector stakeholders to comment on legislation.  Telecom Law No. 431 requires the Telecommunication Regulatory Authority (TRA) to issue regulations in draft for public consultation to promote transparency and enable the general public to shape future regulations.  The TRA has not introduced new regulations since the term of its executive board expired in February 2012.  Publicly listed companies adhere to international accounting standards.  In general, legal, regulatory, and accounting systems for Lebanese businesses in the formal sector accord with international norms.

Lebanon passed the Access to Information Law in January 2017 to promote transparency in the public sector.  The law permits anyone, including foreigners, to request information from government agencies.  A Whistleblower Protection law also passed in October 2018.  While the Whistleblower law is in force, the establishment of a National Anti-Corruption Commission to oversee the law’s implementation was only approved by Parliament in April 2020 and has yet to be staffed.  In January 2017, Lebanon announced its intent to join the Extractive Industries Transparency Initiatives (EITI), a global standard to promote transparency of the extractive sector, though it has not yet joined.  In September 2018, Parliament adopted the Transparency in Oil and Gas Law to facilitate the EITI accession process.  To complete Lebanon’s candidacy, the Minister of Energy and Water announced that Lebanon would form a Multi-Stakeholder Group (MSG), with representatives from government, private firms operating in Lebanon, and civil society.  In March 2019, the Minister of Energy and Water invited civil society to choose independently its representative to the MSG, as per the EITI’s requirements. EITI membership will require annual data disclosures on licenses, contracts, beneficial ownership, payments, revenues, and production.

Lebanon’s public finances are not transparent; budget documents did not present a full picture of Lebanon’s expenditures and revenue streams, and Lebanon has not published an end-of-year report.  Details regarding allocations to and earnings from state-owned enterprises were limited.  The information in the budget was not considered reliable or reasonably accurate and did not correspond to actual revenues and expenditures.  Lebanon’s supreme audit institution did not make its audit reports publicly available.  While Lebanon’s debt obligations are transparent, some analysts have questioned the Central Bank’s reported foreign currency position.  The Lebanese government hired three private auditors to audit its Central Bank as part of its economic reform plan, approved by the Cabinet on April 30.

International Regulatory Considerations

Lebanon is not part of any regional economic block.  It adopts a variety of standards based on the type of product and product destination.  Lebanon is not a member of the World Trade Organization (WTO), but has held observer status since 1999.  Lebanon does have a WTO/TBT (technical barriers to trade) Enquiry Point that handles enquiries from WTO Member States and other interested parties.

Legal System and Judicial Independence

Lebanon has a civil (roman and codified law) legal system inspired by the French civil procedure code (three degrees of jurisdictions:  First Instance, Appeal, and Supreme Court).  Ownership of property is enforced by registering the deed in the Property Registry.  Lebanon has a written commercial law and contractual law.  Lebanon has commercial, civil, and penal courts, but no specialized courts to hear intellectual property (IP) claims.  Civil and/or penal courts adjudicate IP claims.  Lebanon has an administrative court, the State Council, which handles all disputes involving the state.  Lebanon has a labor court in seven out of its nine governorates to hear claims of unfair labor practices.

Local courts accept investment agreements subject to foreign jurisdictions, if they do not contravene Lebanese law.  Judgments of foreign courts are enforced subject to the Exequatur obtained.  Weak judicial capacity (i.e., shortage of judges, inadequate support structures, administrative delays) results in delays in the handling of cases.  The Lebanese Constitution guarantees the judicial system’s independence.  However, politicians and powerful lobbying groups often interfere in the court system.

Laws and Regulations on Foreign Direct Investment

A foreigner may establish a business under the same conditions as a Lebanese national but must register the business in the Commercial Registry.  Foreign investors who do not manage their business from Lebanon need not apply for a work permit.  However, foreign investors who own and manage their businesses within Lebanon must apply for an employer work permit and a residency permit.  Employer work permits stipulate that a foreign investor’s capital contribution cannot be less than USD 67,000.  The investor must also hire three Lebanese employees and register them in the National Social Security Fund (NSSF) within the first six months of employment.

Companies established in Lebanon must abide by the Lebanese Commercial Code and are required to retain the services of a lawyer to serve as a corporate agent.  Local courts are responsible for enforcing contracts.  There are no sector-specific laws on acquisitions, mergers, or takeovers, with the exception of bank mergers.

Lebanese law does not differentiate between local and foreign investors, except in land acquisition (see Real Property section).  Foreign investors can generally establish a Lebanese company, participate in a joint venture, or establish a local branch or subsidiary of their company without difficulty.  Specific requirements apply for holding and offshore companies, real estate, insurance, media (television and newspapers), and banking.

Lebanese law allows the establishment of joint-stock corporations, limited liability, offshore, and holding companies.  However, offshore and holding companies must be joint-stock corporations (Société Anonyme Libanaise – SAL).  The Lebanese Commercial Code governs these entities.

IDAL’s website (http://investinlebanon.gov.lb/ ) provides investors information on investment legislation, regulations, and starting a business.  IDAL’s proposed changes to investment-related laws and regulations, including amending requirements for IT companies to benefit from IDAL incentives, are pending government approval.  IDAL is finalizing a detailed ICT plan aimed at expanding facilities, developing incentives, and facilitating investments in the ICT sector.  IDAL intends to focus its investment promotion strategy on attracting high value-added innovative investments related to all of the sectors under its mandate.

Competition and Anti-Trust Laws

Lebanon has not enacted a law that governs competition.  Local courts review claims on competition-related issues under various laws.

Expropriation and Compensation

Land expropriation in Lebanon is relatively rare.  The Law on Expropriation (Law No. 58, dated May 29, 1991, Article 1) and Article 15 of the Constitution specify that expropriation must be for a public purpose and calls for fair and adequate compensation.  The government pays compensation at the time of expropriation, but the rate is often perceived as below fair market value.  The government does not discriminate against foreign investors, companies, or their representatives on expropriations.

The government established three real estate companies in the mid-1990s to encourage reconstruction and development in Greater Beirut following the Lebanese Civil War:  1) private corporation Solidere for the development and reconstruction of Beirut’s downtown commercial district, 2) private corporation Linord, for northern Beirut, and 3) public institution Elyssar for the southwest suburbs of Beirut.  Linord has been dormant for years, and Elyssar’s projects have stalled since 2007.  The government granted these three companies the authority to expropriate certain lands for development under the Law on Expropriation.  Landowners and squatters have challenged the land seizures in court.

Dispute Settlement

ICSID Convention and New York Convention

Lebanon is a member of the International Center for the Settlement of Investment Disputes (ICSID Convention).  Lebanon ratified the 1958 Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) in 2007.  Lebanese law conforms to both conventions.

Investor-State Dispute Settlement

The government accepts international arbitration related to investment disputes.  In cases involving concessions or public projects, the government does not accept binding international arbitration unless the contract includes an arbitration clause that was obtained through prior approval by Cabinet decree.  However, there is an exception for investors from countries that have a signed and ratified investment protection agreement with Lebanon that provides for international arbitration in the case of disputes.  In the past, the government has faced challenges related to previously-awarded contracts and resorted to international arbitration for resolution.  To post’s knowledge, there are no known new cases.  In 2010, the government settled a dispute with a Chinese contracting company working to expand the northern port of Tripoli.

International Commercial Arbitration and Foreign Courts

International arbitration is accepted as a means to settle investment disputes between private parties.  The Lebanese Centre for Arbitration was created in 1995 by local economic organizations, including the Lebanese chambers of commerce, industry, and agriculture.  The Centre resolves domestic and international conflicts related to trade and investment.  Its statutes are similar to those of the International Chamber of Commerce (ICC) in Paris, and its conciliation and arbitration rules are modeled on those of the Paris ICC.  Judgments of foreign courts are enforced subject to the exequatur obtained.

Bankruptcy Regulations

Lebanon does not have a Bankruptcy Law.  However, the Commercial Code (Book No. 5, Articles 459-668) and the Penal Code govern insolvency and bankruptcy.  Workers may resort to the Labor Court and the National Social Security Fund to recover pay and benefits from local and foreign firms that go bankrupt.  The law criminalizes fraudulent bankruptcy.

10. Political and Security Environment

Sustained anti-government protests began on October 17, 2019, and  led to resignation of the previous government on October 29.  The protests continued for months, with demonstrators demanding an end to corruption, poor governance, and economic stagnation.  A new government, which drew support from Foreign Terrorist Organization (FTO) Hizballah, did not form until January 21, 2020.  Public demonstrations continued since October, albeit with lesser frequency.  Since October 2019, some protests have turned violent and targeted property, particularly banks and public institutions.

Hizballah continued fighting in Syria on behalf of the Assad regime, while some Lebanese Sunnis reportedly lent support to the Syrian opposition.  Lebanon continues to host more refugees per capita than any other country in the world.  The refugee presence led to increased social tensions and competition for low-skill jobs, and strained infrastructure and provision of public services.

The U.S. government considers the potential threat to U.S. Embassy personnel assigned to Beirut sufficiently serious enough to require all official personnel to live and work under security restrictions.  These limitations occasionally prevent the movement of U.S. Embassy officials and the provision of consular services in certain areas of the country.  U.S. citizen visitors are encouraged to contact the Embassy’s Consular Section for the most recent safety and security information concerning travel to Lebanon.  On March 18, 2020, the Department of State required the ordered departure of non-emergency U.S. government employees and associated family members in Lebanon due to COVID-19-related concerns, including travel restrictions and quarantine procedures that affected commercial flights.  More information may be found at https://lb.usembassy.gov/u-s-citizen-services.

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