Several significant changes have been made to Egyptian tax law, via presidential decrees, that will increase tax revenues and add clarity. The addition of domestic dividend taxation may cause some to reconsider their structures to avoid repeated tax leakage. Egyptian corporates with overseas subsidiaries will benefit from the long-overdue participation exemption regime.
Temporary Wealth Tax
A new 5% temporary annual tax will apply from 2014-16 on all annual net income exceeding LE1m ($142,000) for individuals and corporates. This comes on top of the current top tax rate of 25% for corporates and individuals, making the new top tax rate 30% for all income above LE1m ($142,000).
Individuals who are deemed to be tax resident in Egypt are now taxable on global income if Egypt is the “centre of their commercial interests”.
Egyptian dividends paid to resident individuals are subject to a new tax at source at 10% if their percentage ownership is 25% or less of the paid-up capital or the voting rights. This rate is reduced to 5% if the percentage exceeds 25% and the shares in question were held for two years. Dividends paid by non-resident entities to Egyptian resident individuals shall be taxable at the progressive rates used for income tax, ranging from 10-30%. There is no further taxation on dividends for individuals.
Dividends paid to resident or non-resident entities are initially subject to withholding tax (WHT) at 10% if percentage ownership is below 25% of the paid-up capital or voting rights. This WHT rate is reduced to 5% if percentage ownership exceeds 25% and the shares in question were held for two years. Subsequently, such dividends are added to the resident corporate’s tax pool and the following rules apply.
For percentage ownership exceeding 25%, dividends received by an Egyptian resident entity are exempted from corporate income tax (CIT). However, 10% of the value is deemed to be the cost of earning such dividends and a corresponding amount is thus disallowed from other costs before reaching the taxable profits pool. The 5% withheld at source is not recoverable in such a case as the dividend income is exempt and the deemed costs added back effectively are taxed according to the applicable tax rates of 25% for amounts up to LE1m ($142,000) or 30% on income over LE1m ($142,000). In addition, the shares in question should either have been held for two years previous to the distribution or be held for two years following it. For percentage ownership below 25%, dividends are added to the corporate’s tax pool and are taxable at 25% or 30% as above, and all taxes withheld by the paying entity are deductible against the tax due.
Capital gains on the sale of listed shares are now subject to a reduced tax. Capital gains realised by resident corporate entities on the sale of shares listed on a local exchange shall be subject to CIT of 10%, while gains on the sale of non-listed shares will be subject to the standard CIT rates of 25% and 30%. Capital gains realised by resident individuals on the sale of listed shares shall be subject to income tax of 10%, while their gains on the sale of non-listed shares will be subject to the standard income tax. Capital gains are identified based on the difference between the sales or exchange price or any other manner of disposal of the shares and the cost of acquiring such shares after deducting the brokerage commission. For listed shares, if the acquisition of securities was made prior to June 30, 2014, the cost of shares will be determined based on the highest of the acquisition price or the closing price on June 30, 2014. In all cases the entity responsible for the settlement of the transaction will withhold the tax at source at 10% of the gain.
General Anti-Aviodance Rules
Under the new General Anti-Avoidance Rules any transaction must have a purpose other than tax savings or postponement. The tax treatment will be determined based on the true economic substance of the transaction.
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