As the difficult transition unfolds, Libyans are working to expand their economy and attract international investment to develop their extensive oil and gas and mineral resources and to improve their infrastructure. With its rich history, diverse landscapes, and central Mediterranean location, Libya is also aiming to cultivate its tourism industry. Modernization of the country’s tax regime is crucial to attracting new investment, and recent years have seen Libya’s tax regime change for the better. Based on the outcome of the June 2012 elections, it seems likely that Libya will continue on its current path toward more business- and investment-friendly tax policies.
Currently, non-residents can carry on business in Libya through a branch or a domestically registered Libyan company. Branch profits on income earned from Libyan activities in Libya or offshore are subject to income tax at an effective rate of 24 percent. No value added tax, withholding taxes (except on employee remuneration) or transfer pricing rules are currently in place. The top personal tax rate is relatively low, at 10 percent. Formal exchange controls exist but, in practice, they can usually be avoided. On exit, profits can usually be repatriated from Libya tax-free with government approval.
Further, branches of foreign companies can only be formed to conduct specific activities in the oil services, industrial, environmental, power and utilities, information technology and other high priority sectors. Wholesale and retail trading activities must be conducted through wholly owned Libyan entities, while investment authority approval is required to open hotels and factories.
Many foreign investors choose to enter joint ventures or joint stock companies with Libyan resident countries. A minimum investment of LBY1 million is required, and the foreign ownership is limited to 49 percent. While joint ventures are highly regulated and the numbers of local joint venture partners may be limited, this option can present certain advantages, for example, when bidding for government contracts.
Foreign investors can also choose to set up operations in one of Libya’s offshore free zones. These zones are intended to foster the development of exports, revenue, and manufacturing facilities. Among other benefits, investors in free zone activities gain free repatriation of capital and profits, exemption from exchange controls and monitoring, continued exemptions on reinvested profits, and expedited business establishment processes.
In 2010, Libya introduced a series of new measures to encourage foreign direct investment and trade in its agricultural, tourism, services, industrial and other sectors. Among these incentives, eligible projects can enjoy a 5 year income tax holiday, which can be extended for an additional 3 years in certain conditions, and any losses arising during the tax-exempt period can be carried forward to later years.
While many features of Libya’s tax law are beneficial, dealing with the tax administration itself can present difficulties. For example, Libya has no well-defined concept of tax residency, and even a minor level of business activity in the country could be enough to attract Libyan tax. Tax filings are based on tax declarations, with deemed profits based on commercial activity, and so the ultimate tax cost can subject to a certain amount of subjectivity and uncertainty.
Additionally, decades of high taxes and autocratic rule have created a deeply entrenched culture of tax evasion, and Libya will need to reverse this trend to keep its tax rates low. Rather than focusing strictly on enforcement, however, there is optimism that Libya’s new government will decide to maintain its competitive tax rates and encourage broader tax compliance by giving Libyans confidence that their tax dollars are being well spent in their best interest. Improving the transparency, clarity and certainty of its tax administration will be an important step in this direction.
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