Promotion of Energy Investment in Libya
Renad Haj Yahya -
Jubilee Easo -
Geoffrey Picton-Turbervill
The recent high oil and gas prices and Libya's rehabilitation into the international community after the lifting of US and international sanctions have led to an influx of foreign investors looking to invest in the country's oil and gas sector.
Geoffrey Picton-Turbervill
Against this backdrop, the Libyan government has embarked on a series of legal reforms, commencing in the late 1990s. Chief among these is Law No. 5 for the Promotion of Investment of Foreign Capital of 1997 (Law No. 5), which creates the most liberal legal framework for attracting direct foreign investment ever adopted by the Libyan government.
Law No. 5 provides the opportunity for full foreign equity ownership of companies licensed under the law. To qualify as an investment project under Law No. 5, the project has to be undertaken in one of the following investment sectors:
• agriculture;
• electricity generation;
• oil and gas;
• telecommunications;
• real estate and infrastructure projects; or
• tourism.
INCENTIVES AND BENEFITS
The investment incentives and benefits that Law No. 5 provides can be divided into two main groups. The first is the removal of many obstacles that an investor would otherwise have had to face under general Libyan law, and the second is the introduction of various financial incentives, including exemptions from certain taxes and duties.
The first category of benefits includes the following:
• removal of some restrictions in respect of the employment of foreign nationals in Libya;
• removal of prohibition on long-term ownership of land on a leasing basis;
• disapplication of the restrictions on shareholding and local partner participation required under general Libyan law; and
• introduction of investment protection for projects so that they cannot be nationalised, expropriated, compulsorily acquired or confiscated, unless by law or by judicial verdict and with the prompt payment of adequate and fair compensation.
Prior to enacting Law No. 5, such incentives and exemptions were often sought from the government by foreign investors in the oil and gas industry with respect to their specific projects. These comforts and protections, if provided by the government, were typically included in the main "concession" contract or in separate comfort letters. This practice, however, limited the types of investment in Libya to projects and investments under the patronage of the government. The inclusion of such incentives in Law No. 5 is therefore intended to give investors the comfort they require and to encourage investment in partnership with private entities in Libya.
The financial incentives include an exemption from corporate income tax for five years with a possible extension of three years, provided net profits are reinvested in the project. If investing in Libya under general Libyan law, companies and branches of foreign companies are subject to tax pursuant to Law No. 11 of 2004. Corporation tax rates under Law No. 11 range from 15 per cent to 40 per cent of the assessed profit plus a Jihad tax of 4 per cent on corporate profits. The five-year exemption from corporate income tax under Law No. 5 starts from the date of commencement of production or operations.
In brownfield projects, investors may apply for the tax holiday to start after the construction or upgrade of the project is finalised. For a project that does not have a construction or upgrade stage, the tax holiday begins from the date of the operations licence which, in this case, is immediately after the grant of the investment licence (see below for more on licences).
Law No. 5 also provides an exemption from customs duties and taxes on machinery and tools required to execute the project, and an exemption from customs and duties imposed on imports, as well as stamp duty tax imposed on commercial documents.
Stamp duty arises in two categories under general Libyan law: one on documents and bills, where it is imposed as a one-off fee on each page of the relevant contracts; and one on transactions, where it is calculated as a percentage ranging from 0.01 per cent to 2 per cent of the total value of the relevant contract or transaction. The first category of stamp duty is negligible and does not cause concerns to investors, while the second category can be significant. The stamp duty is payable once the contract is signed or documents are executed, and the Libyan authorities acknowledge the legality of the relevant contract only once such stamp duty has been paid.
Law No. 5 was originally interpreted by the tax authorities in Libya to exempt projects only from the first category of stamp duty (ie, stamp duty on documents and bills). This caused concern among investors that prompted the General People's Committee to issue a decree that is intended to clarify that the stamp duty exemption is also applicable to the second category of stamp duty (ie, stamp duty on transactions). However, since this is a relatively untested decree involving potentially large sums of money, foreign investors would be advised to seek specific clarification from the tax authorities with respect to the project in question.
THE LIBYAN FOREIGN INVESTMENT BOARD
The Libyan Foreign Investment Board (LFIB) has overall responsibility for the implementation of Law No. 5. The main objectives of the LFIB include providing advice, information and support for investors, identifying and promoting investment opportunities, receiving and considering applications for foreign investments, developing programmes to attract investors, recommending exemptions for investment projects and looking into investors' complaints.
The LFIB seeks to provide comprehensive services to investors who are operating in Libya under Law No. 5. This is being done by means of administrative offices within the LFIB's premises for customs, immigration, tax, labour, etc. This comprehensive service is referred to by the LFIB as a one-stop shop. It intends to ensure that foreign investors deal only with the LFIB in their day-to-day activities, alleviating the need to deal directly with such authorities as the immigration authority, the manpower authority or other authorities. This is intended to make administrative and procedural matters such as visa applications and tax filings much easier to deal with. In practice, the LFIB is still working towards full implementation of the one-stop shop policy and towards rolling out this policy to all the relevant government authorities in Libya.
APPROVAL PROCEDURE UNDER LAW NO. 5
To benefit from the incentives and benefits under Law No. 5, the investor will have to go through a three-step document-heavy approval process with the LFIB.
• Step 1: the process starts with the application by the project company for an investment licence. Through this application, the investor seeks to demonstrate to the LFIB that the proposed project will benefit the economy in Libya and that it fits within one of the areas of investment under Law No. 5.
If the investment is to be carried out through a special purpose vehicle or company, this vehicle or company will have to be incorporated prior to submitting the application to the LFIB. Among the documents that the applicant will be required to submit is a board resolution stating the desire of the company to invest in Libya and a feasibility study of the proposed project. All non-Libyan companies are required to operate in Libya through a Libyan branch. Approval for opening a branch will be granted by the LFIB as part of the Law No. 5 approval process.
All applications are considered by the LFIB management committee and upon the committee's approval, the secretary of the General People's Committee for Economy and Trade will issue the decision for establishing the project.
• Step 2: if successful in the first stage, the investor applies for an execution licence from the LFIB, which will allow construction and execution of the project to commence. At this stage, the investor has to open an account under the project's name with one of the Libyan commercial banks and start transferring a certain percentage of the project's capital. If part of the project's capital consists of fixed assets, the investor is required to present all ownership documents and purchase invoices to the customs office, in order to facilitate the customs procedures.
• Step 3: once the project is constructed and operational, the foreign investor will apply for an operations licence and commence commercial operations. Usually, if the relevant project does not involve a construction or upgrade phase, the investor can apply for the operations licence immediately after being granted the investment licence.
Though not specifically provided for in Law No. 5, it is possible for all the above three licences to be obtained at the same time from the LFIB. Foreign investors would be advised to seek specific clarification from the LFIB in order to understand whether their project is entitled to this fast-track treatment from the LFIB.
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Libya is currently in something of a transition phase from the enforced isolation during the period of sanctions to a more free-market environment in which foreign and private-sector investment is permitted and encouraged. The passing of laws such as Law No. 5 represents a major step forward in terms of addressing investors' concerns and enabling them more easily to enter the market, and as a consequence of enacting this law, the Libyan government has successfully attracted many investors. The Libyan authorities are continuing to work towards the full implementation of Law No. 5, with a view to ensuring that the large public administration machinery does not result in an unduly lengthy approval or implementation process.