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LIBYA |
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How to invest in Libya? |
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Libya remained closed to foreign investment for several decades. Its socialist and centralized economic system prevented virtually any external financing, except for oil partnerships and the long period of international embargo, further contributing to financial isolation. |
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How to invest in Libya? |
Libya remained closed to foreign investment for several decades. Its socialist and centralized economic system prevented virtually any external financing, except for oil partnerships and the long period of international embargo, further contributing to financial isolation. But a major change of direction to reform the economy was introduced with the appointment in June 2003 of a new Ministry of Economy, Mr. Choukri Ghanem (appointed CEO of the National Oil Company NOC in April 2006), a champion of economic openness holding a mandate to “abolish the public sector” and make Libya attractive to foreign capital. In line with this declaration of intent, the General Board of Ownership Transfer director, Muhammad Ahmed al-Ftise, declared that Libya would open in July the capital of 54 large state-owned companies to foreign investors. He said that the companies are large factories, each valued at a minimum of 150 million dollars. Foreign investors will be allowed to acquire majority holdings in these companies. The largest among the companies to be privatised will be sold to foreign investors, while small and medium firms will be offered to Libyan investors.
The lifting of international sanctions against Libya in 2003 led to its return to the international fold. Hydrocarbon resources and incentives to attract foreign investments are likely to boost the attractiveness of the country even if administrative reforms and a better businesses climate are likely to take longer. Imports are no longer a State monopoly and foreign investment is now possible in industry, health, tourism, services, agriculture, and any other sector approved by the National General People’s Committee (GPC).
Foreign investment is authorized under law n°5 (amended by law n°7 in 2003) and supporting decrees relating to transfer of technology, vocational training, regional development, industry, health, tourism, agriculture, oil related services (except drilling and exploration, covered by the Petroleum Law) and any other sector specified by the GPC. Tourism is covered by law n°7 of March 6, 2004 and decree n°139 of August 26, 2004. Some sectors are still closed to foreign investment. Telecommunications and the financial sector, for example, remain government monopolies. Retail and wholesale operations are restricted to Libyan nationals.
In addition to numerous incentives, law n°5 established the Libyan Foreign Investment Board (LFIB) to facilitate implementation of foreign investment procedures. LFIB oversees the application process and can be extended for a further three years. Moreover, the law allows co-investment by Libyan and foreign partners with no limit on foreign holdings, except in the banking sector and state-owned companies. Foreign investment is also exempt from the main legal requirements regulating the activities of Libyan companies, in particular registration in the trade or industrial registers. Decree n°178 allows for commercial representation on behalf of a foreign company under certain conditions.
The Foreign Investment Law provides many incentives for licensed projects, such as a five-year exemption from corporate tax, with a possible extension of a further three years if net profits are reinvested in the project. It also provides exemption from customs duties on import of machinery, tools, and equipment needed for the project for a period of five years as well as exemption from excise taxes on exported goods.
Foreign investors are allowed to repatriate invested capital in case of total or partial sale or conclusion or liquidation of the project, after five years from the date of release of the license, or within six months of the release of the license if independent difficulties or impediments emerge. They can transfer profits, employ foreign workers if local supply is not available, and purchase land for the project.
The Free Trade Act of 1999 created a legal framework for establishment of offshore Free Trade Zones (FTZ) in Libya. Fields of investment and economic activities in FTZs include :
- Storage of transit and domestic goods as well as goods produced within the FTZs intended for export as well as goods imported for re-export.
- Unpacking, cleaning, re-packing and similar operations within the FTZs guaranteeing that manufacture meets market requirements.
- Implementation of industrial processes.
- Provision of financial, banking, insurance, and the other related services required by investors in the FTZ.
Initiatives in the FTZ enjoy the usual incentives, including tax and customs exemptions, free repatriation of invested capital and earned profits; movement of capital and products between the FTZ and foreign countries without any monetary restrictions or monitoring regulations. Earnings also enjoy the same exemption if reinvested and there are legal guarantees against nationalization of these initiatives, etc. Misurata is currently Libya’s sole operating Free Trade Zone (FTZ), occupying 430 hectares including a portion of the Port of Misurata.
Foreign investors who want to do business in Libya have four main options: 1) set up a branch office; 2) establish a joint venture/joint stock company with a local firm; 3) establish a representational office; and 4) enter Libya under the provisions of investment law n° 5.
Trade activities and joint ventures fall under law n°65 of May 20, 1970 governing trade and commercial companies stipulates that any person or entity that wants to carry out a trade activity must have Libyan nationality. Partnerships are however possible. Joint ventures must be at least 51 percent Libyan-owned.
Joint venture holding companies are permitted under Libyan law. The establishment of joint ventures (joint stock companies) is governed by law n° 65 of 1970, amended by law n° 21 of 2000. The establishment of branch offices is also covered by law n°65 as well as the 1953 commercial code. In the construction/contracting field as well as other longer-term activities, formation of a joint venture or branch office is virtually a requirement for operating in Libya. The minimum capital investment for qualification has been raised to $50 million, which must be completely paid-up by the time the company is created.
Representational offices through a local agent are governed by law n° 6 of 2004. It stipulates that foreigners wishing to sell direct to the Libyan market must employ the services of a local agent. This law has been liberalized, with decree n°8 of January 9, 2005specifying that seven product groupings currently require a local agent: passenger vehicles, motorcycles, copying machines, ovens, refrigerators, washers & dryers, other major household appliances, televisions, faxes, and computers, road making and paving equipment, heavy agricultural equipment (including pumps). Libyan nationals no longer need import licenses to act as agents for foreign firms. The general director of the office as well as all employees must be Libyan. Agencies work under distributorship agreements, signed with a local firm or registered agent. The Tripoli International Fair held each year in April is an excellent marketing opportunity.
Opening of a branch office/local subsidiary of a foreign company is covered by decree n°3 of January 3, 2005, which governs creation of a foreign subsidiary company in Libya. The request must be addressed to the Department of Business Registration at the Ministry of Economy and Trade, including the name of the designated agent. Minimum capital investment to qualify is 150,000 LYD and duration of the activity is five years renewable. The scope of activities authorized for foreign subsidiary companies in Libya is determined by decree n°13 of January 9, 2005. Opening a representation office does not grant a foreign company the right to sell or to market goods in the country.
Entering Libya under the terms of law n° 5 dealing with promotion of foreign investment stipulates that investment decisions are taken by the Libyan Foreign Investment Board, which approves proposals and grants licenses. Many of the restrictions on foreign companies in the above categories do not apply to foreign investments and majority Libyan ownership is not required. Minimum capital investment for qualification under law n°5 is $50 million.
Contracting with state-owned companies is governed by legislation that requires a foreign supplier to pay a contract registration tax equal to 2 percent of the amount of the main contract or 1 percent of a sub-contract.
It should be noted that contractual payments can be settled solely by irrevocable letter of credit, which can take up to six months. Major construction contracts are often awarded under turnkey or EPC (Engineering-Procurement-Construction/commissioning) arrangements. Build-Operate-Transfer (BOT) contracts are extremely rare in the oil & gas energy sector.
Taxation and customs formalities have evolved, with licenses abolished in 2003. However, Libya requires standard import documentation including certificate of origin, tariff code, and a customs declaration. The Libyan customs tariff adopted the simplified harmonized nomenclature in January 1998 as a prior condition to its application for WTO membership, Libya is working to accredit its central Standards Bureau and to implement a network of certified national testing laboratories. The government significantly streamlined its customs tariffs and eased restrictions on external trade by downsizing the negative import list from 31 to 17 items designated “luxury”, or locally manufactured. The Libyan Customs Administration cancelled duty on more than 3500 product categories, effective August 1, 2005. Approximately 80 products remain subject to duty of between 5 and 50 percent. The new tariff schedule has only two rates (10 percent for tobacco products and 0 percent for all other products) and import duty was replaced by a 4 percent service fee, which must be paid by importers on all products except 85 items. Additionally, they have to pay a 2 percent tax for domestically produced goods and an excise duty of 25 or 50 percent. As mentioned above, duty rebates are available to foreign investors importing merchandise under the terms of law n°5 of 1997. In addition, the government has created an investment fund to handle a portion of the government’s oil revenues.
In the area of protection of foreign investments and dispute settlement: Libya has ratified a number of international conventions and signed bilateral agreements dealing with investment protection, in particular with Tunisia, Morocco, Egypt, Austria, Germany, Malta, Switzerland, Belgium, Bulgaria, France and Croatia. Article 23 of law n°5 on foreign investments stipulates that an investment initiative cannot be nationalized, dispossessed, submitted to custody or sequestration or any similar provisions without a legal decision and equitable reimbursement. The Libyan legal system is quite effective in dispute settlements and it is relatively easy to obtain an equitable judgment, but execution of court decisions is not always quick. As for international arbitration, Libya is not a signatory of the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). In the case of commercial disputes, foreign entities currently opt for trials at the ICC, the International Chamber of Commerce, since Libya has a history of respecting its decisions. Libya is a member of the Multilateral Investment Guarantee Agency (MIGA).
Libya is a member of the 1989 Arab Maghreb Union (AMU) linking Tunisia, Algeria, Morocco, Mauritania, and Libya. The AMU’s stated objectives include promotion of free movement of goods and people, revision and simplification of customs regulations, and movement towards a common currency. Nominally, AMU mandates duty-free trade among its members.
Libya is part of the Greater Arab Free Trade Area (GAFTA), also called PAFTA (Pan Arab Free Trade Agreement) and the Euro-Med Partnership (EMP), also known as the “Barcelona Process”, a dialogue between the European Union, and 12 Mediterranean countries. The Barcelona Declaration of November 27, 1995 set goals reducing political instability and increasing commercial integration. In 1999, 27 European partners agreed to admit Libya, contingent on Libya’s accepting the decisions already made in that context. Libya has also applied for membership in the World Trade Organization (WTO). A working group has been set up to review and assist Libya in this process.
As for the income tax regime, authorities passed a new tax law (n°11 of March 5, 2004) reforming the general income tax, reducing the top tax rate on wages and salaries and increasing personal tax exemptions. Corporate tax remains progressive, on a sliding scale of from 15 to 40 percent, compared to 20 to 60 percent under the previous law.
There is an additional solidarity tax called jihad, amounting to 4 percent of taxable income. Foreign oil companies are subject to a special tax regime, defined in the Petroleum Law of 1955, currently being amended, with three tax brackets at 8, 10, or a flat 15 percent of income instead of 25 percent previously. The general tax on income has been abolished. Contracts must be registered at the tax office within 60 days of signature, with two percent of total amount or 1 percent of the sub-contract payable at the time of registration. The income tax authorities consider that any payment governed by a contract in Libya is taxable and the total amount of the contract is taken into account for calculation of taxable income. For service or engineering contracts, tax authorities charge 25 percent or more of taxable profits.
Currency and foreign exchange controls are more flexible than before, managed by the foreign exchange control department of the Libyan Central Bank. Libya unified its multi-tiered exchange rate system (official, commercial, black-market) on June 16, 2003, effectively devaluing the country's currency. Among other goals, devaluation was meant to increase the competitiveness of Libyan firms and to help attract foreign investment. The current exchange rate is approximately 1.6 LYD to the euro. The Libyan dinar is not a convertible currency and thus is used only for in-country current transactions. However, foreign investors can open accounts in foreign currencies at one of the commercial banks or the Libyan Arab Foreign Bank (LAFB). Non-residents working in Libya can open domestic accounts, but Central Bank approval is required for any other transfers to non-resident accounts.
Foreign investors are allowed to repatriate invested capital in case of total or partial sale, conclusion or liquidation of the project, five years after the date of the licensing agreement, or within six months of the date of the investment act if difficulties arise. |
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