A wealth-friendly tax system capable of attracting expatriates and their money

Source: Nidaa al Watan

Since financial remittances from expatriates to Lebanon have long served as a vital lifeline for the economy, due to the sustained commitment of expatriates to their homeland and their deep emotional connection to it, Lebanon, which today suffers from a shortage of investments and an inability to attract them, needs to reform its tax system in a manner similar to what many countries have done to draw investments and appeal to wealthy individuals, especially expatriates.

Some of the proposals currently circulating suggest adopting a wealth-friendly tax system aimed at attracting wealth and foreign capital, particularly from affluent Lebanese expatriates spread across the world. This system would impose an optional fixed annual tax ranging between $25,000 and $50,000 on foreign-sourced income, while offering full exemptions on taxes on foreign profits, returns, inheritance, and wealth related to approved investments. The goal is to stop the outflow of capital and attract affluent members of the diaspora.

What is a wealth-friendly tax system?

A wealth-friendly tax system imposes a fixed tax rate or fixed amount on income, regardless of the income’s value. In certain special cases, it allows taxpayers to opt for a fixed annual tax on foreign-sourced income, with a full exemption on taxes applied to foreign profits and returns. Under such a system, residents or foreign investors can pay a predetermined amount annually or a small, fixed rate instead of being subject to a complex or progressive tax framework. In return, they receive full exemption from taxes on income generated abroad, such as profits from investments, bank interest, or stocks.

This system is characterized by a small, optional, fixed annual tax that applies only to those who choose it instead of the standard tax system. It is imposed on foreign-sourced income, meaning money originating outside the country, while granting full exemption from domestic taxes on foreign profits and returns.

The primary aim of this system is to attract investors and wealthy individuals to reside in the country. It encourages foreign investment and energizes the local economy while providing the state treasury with steady, predictable income through simple taxation. It also enhances the country’s image as a safe and stable financial hub. Most importantly, its simplicity helps reduce tax evasion. However, critics argue that a wealth-friendly tax system is unfair to lower-income citizens, as it benefits the wealthy more and widens social inequality.

Small or economically open countries tend to adopt this system because they seek to attract foreign capital and stimulate their economies through the spending of wealthy individuals and investors. They rely on fixed taxes as an easy and quick way to increase government revenue without burdening the general population. For this reason, it is sometimes called a “wealth-friendly tax system” as it creates a comfortable tax environment that attracts wealth rather than driving it away.

In Switzerland, for example, there is a special system known as lump-sum taxation, which allows wealthy foreigners to pay a fixed annual tax (150,000 Swiss francs), in exchange for full exemption of their foreign profits and assets from taxation. This system has made Switzerland a preferred destination for wealthy individuals and businesspeople from around the world.

Can a wealth-friendly tax system be adopted in Lebanon? And could it truly attract expatriate capital?

In this context, the head of the Taxation Association, Hicham el-Moukammal, explained that the goal today is to make Lebanon’s tax system fairer, to attract capital and encourage expatriates to return to their homeland. He noted that Lebanese expatriates, or residents in Lebanon who earn income abroad, should not be taxed twice. According to the principles of tax territoriality and territorial income, if profits are generated outside Lebanese territory and taxed in the country where they were earned, they should not be subject to tax in Lebanon, as some are attempting to promote today.

El-Moukammal explained that the profits earned by Lebanese citizens abroad are taxed in the country where the income is generated. The net profits, after subtracting the tax paid abroad, are considered net income, returns, and profits belonging to Lebanese individuals. It is these net returns that some are seeking to subject to taxation under Articles 69 and 78 of the Income Tax Law. However, he emphasized that the most appropriate proposal currently under discussion is to impose a tax according to a specific ceiling, rather than a fixed amount, not exceeding a set upper limit, similar to systems in some countries that impose taxes only on foreign income exceeding a specific threshold, and up to a capped maximum.

He stressed that encouraging investors and expatriates to return to Lebanon must be accompanied by the adoption of a fair tax system that does not impose additional taxes on income earned abroad, especially since the country fails to provide basic services such as retirement security. He also highlighted the obstacles to adopting a wealth-friendly tax system: the need to activate double-taxation treaties, the need for incentives to encourage the return of capital from abroad, and the need to attract capital owners who could, upon their return, help increase investment opportunities.

In conclusion, el-Moukammal stressed that such a tax system applies only to individuals residing in Lebanon whose income originates from abroad, after paying profit taxes in the country where the income was earned. Only then would they be required to pay an annual capital tax in Lebanon within a predetermined ceiling.