Overview of Egypt's legal framework for foreign investors

 

The legal environment is a major factor in an investor’s decision to set up shop in a foreign country, as is the ease of doing business once the enterprise begins operations. Egyptian laws that are most relevant for foreign investors are those that regulate corporate operations, labour, investment and property.

Corporate Law

All newly established corporate vehicles in Egypt are subject to the provisions of the Companies Law No. 159 of 1981 (Companies Law), as well as its amendments and executive regulations, which is the general law of application. The Companies Law prescribes all corporate governance rules and regulations, specifically addressing matters pertaining to the company’s management, control, fiduciary duty and fiscal policies.

The Companies Law further prescribes the operation of the firm’s corporate requirements, such as meetings of the board of directors, ordinary general assembly meetings and extraordinary general assembly meetings. That said, depending on the company’s type of activity, certain companies may be formed under different laws that are specified based on their activities, such as the Capital Markets Law No. 95 of 1992.

Foreign enterprises wishing to conduct business in Egypt may enter the local market by establishing either a permanent or temporary legal structure, and are permitted to do so through the establishment of various types of entities under Egyptian law. Entities that have a permanent presence in Egypt include limited liability companies (LLCs), joint stock companies (JSCs) and sole person companies (SPCs). Entities that have a temporary presence in the country include foreign branch offices and foreign representative offices.

LLCs, JSCs and SPCs are the three forms typically preferred by foreign investors intending to incorporate a business in Egypt; however, JSCs have long remained the preferred choice of foreign entrants, as they may be fully controlled by a foreign entity. Nonetheless, LLCs and SPCs may be fully owned by foreigners as well.

Joint-Stock Companies

JSCs are among the most commonly used legal vehicles in Egypt and are the favoured vehicle for establishing manufacturing projects that require major financial investments. The reason JSCs are preferred when an undertaking requires substantial investment is because there is no requirement for the company to pay the capital in full upon its establishment; the capital can be paid over a period of five years. Capital: A JSC may have authorised capital and must have issued actual and paid-in capital. The issued capital must be no less than LE250,000 ($15,400) for closed companies and at least LE50m ($3.1m) if the company intends to offer its shares to the public. At least 10% of the share capital must be paid-in at the incorporation stage, a portion that increases to 25% within three months following the incorporation. Full payment of the issued share capital must be effected no later than five years after incorporation.

In the case of holding companies established for purposes of stock dealings and investment, the issued capital shall be no less than LE5m ($308,000), of which a minimum of 25% must be paid upon incorporation and the remaining amount within five years after the date of incorporation. Shareholders: A JSC must have a minimum of three founding shareholders at all times, whether natural persons or legal entities. Generally speaking, there are no regulatory restrictions on foreign ownership of companies in Egypt; however, there are a few exceptions: restrictions on ownership apply to companies practising certain activities, including but not limited to operating importation, commercial agencies and real estate brokerage. Furthermore, ownership restrictions are applicable to companies with operations in certain geographical zones, such as those in the Sinai Peninsula. Objectives: Subject to obtaining permits and licences for certain types of activities, there are no restrictions on the commercial objectives of a JSC, provided that they are not contrary to public policy or morality. Management: JSCs are managed by a board of directors that consists of at least three members who have been appointed by its general assembly. The board of directors is entrusted with the day-to-day operations of the company and, in this respect, has the full authority to represent the company vis-à- vis third parties. The board’s authority, however, excludes matters that are explicitly reserved by law or by the company’s constitutive documents that stipulate such matters would need to be decided by the general assembly.

The board of directors shall be headed by a chairman who should not only be appointed by the directors, but must also be among them. The board must have a minimum of three members at all times. There are no nationality requirements for board members; however, security checks must be conducted on foreign directors and foreign shareholders. Corporate entities can hold the position of directors and will be represented by individuals. Profits: A JSC’s after-tax earnings for each fiscal year, as increased or reduced by any profit or loss that has been carried forward from previous years, shall be available for distribution in accordance with the conditions of the Companies Law and the statutes of the JSC.

Shareholders may decide at an ordinary general assembly whether to distribute all or part of the dividends as per the company’s audited financial statements, so long as such distribution will not affect the company’s financial obligations to third parties or its ability to conduct business. The distribution of dividends should be made within 30 days from the date of the approval of the ordinary general assembly.

The profit shall be available for distribution in accordance with the requirements of Egyptian law and the JSC’s statutes, as follows:

• A JSC is required to establish, and must always maintain, a legal reserve equal to no less than 5% of its issued capital funding until it reaches 50% of capital.

• After funding its legal reserve, if required, the balance of a JSC’s after-tax earnings is considered as the company’s distributable profits and may be distributed pursuant to a resolution of the general assembly.

• A JSC is required to allocate employee bonuses equivalent to a minimum of 10% of its distributable profits, if any, with a maximum equivalent to the aggregate annual payroll. The allocation of such amounts shall be determined by a board of directors’ resolution.

• Distributable profits shall be distributed in order of priority: 1. An initial amount equivalent to a minimum of 5% of the distributable profits shall be distributed to shareholders as dividends and to the employees as bonuses.

2. An amount of up to 10% of distributable profits may be paid to members of the board of directors as remuneration, though shareholders can decide not to distribute such dividends.

3. The balance of distributable profits may be paid to the shareholders as additional dividends and to the employees as additional bonuses. Further, it may also be carried forwards to the following year as retained earnings or allocated to fund a special reserve whose use will be determined by the general assembly upon a recommendation of the board of directors. In order for shareholders to receive their dividends, they should deposit their shares with the Central Depository if the shares are in a dematerialised form or surrender the coupons attached to the share certificates if the shares are in documentary form and the company issued the final share certificates. Corporate tax: The current corporate tax rate is set at 22.5% of the company’s net profit. Salary tax & social insurance: All company employees shall be subject to Egyptian salary tax, and the company must implement the required monthly tax withholdings. Additionally, social insurance contributions are required for Egyptian employees by both employers and employees.

Limited Liability Companies

This type of company is usually formed for small-scale projects that do not require major financing, such as firms that are involved in internal trade and service activities. An Egyptian LLC is a company that is closed due to the limited liability of its quota holders equivalent to their quotas’ values in the capital of the company. Capital: Unlike a JSC, there is no initial minimum capital required for LLCs. Any increase in the capital necessitates an extraordinary general assembly resolution. The company’s capital is divided into equal quotas, which are commonly called shares, either in cash or in kind, and the value of each share cannot be less than LE1 ($0.06). No share certificates are issued, and the sale of shares is subject to the preemptive purchase rights of the remaining partners. Quota holders: All quotas must be of equal value. LLCs must have a minimum of two quota holders at all times and can maintain a maximum of 50 quota holders. Quota holders may be natural persons or legal entities. Although the law does not prescribe a minimum value for such quota, in practice they are commonly valued at LE100 ($6.16). Quotas in LLCs cannot be offered to the public. Changing designations: An LLC has the ability to change its status to become an SPC in the event that the number of founders or partners is less than the legally prescribed minimum, or in the event that they fail to meet the requirements specified by the law during the allotted period, in accordance with Amendment No. 4 of 2018 to the Companies’ Law, provided that the company does not engage in activities prohibited by the law for SPCs. Objectives: Unlike a JSC, an LLC is precluded from business activities in certain areas, such as insurance, banking, savings, deposit taking, investment funds, securities brokerage and portfolio management. However, an LLC may undertake any other business activity provided it can carry out commercial, industrial or service activities similar to other business entities, subject only to the general limitations of public policy or morality. Management: LLCs may be managed by one or more managers, to be appointed from among the quota holders or others. Previously, the only restriction had been that one of the managers must carry Egyptian citizenship; however, Decree No. 295 of 2018, issued by the General Authority for Investment and Free Zones (GAFI), removed this requirement, permitting managers to be of any nationality. The decree does not come without exceptions, though, namely that it is not applicable to companies who operate as importation or commercial agencies, and also extends to those acting as commercial intermediaries.

The managers may be appointed for a definite term that has been specified in its articles of association or for an indefinite term. Moreover, a supervisory board is required if the LLC has more than 10 quota holders. At least three members of this board must be quota holders. Employee participation in management is not required. Profits: The rules governing distribution of profits are the same as those that apply to JSCs, except that profits are required to be distributed at approximately 10% of the distributable dividends to employees only when the capital reaches LE250,000 ($15,400), with a cap of the total aggregate salaries of the workforce. Corporate tax: The corporate tax rate is currently set at 22.5% of the company’s net profit. Salary tax & social insurance: All company employees shall be subject to Egyptian salary tax and the company must implement the required monthly tax withholdings. Social insurance contributions are required for Egyptian employees by both employers and employees. It is important to note that social insurance contributions increase on an annual basis.

Labour Law

To a large extent, the Labour Law remains much like its predecessor – an employee-favoured law designed to protect the rights of the worker. Employment contracts: An employment contract may be drawn up for a definite or indefinite term. The Labour Law provides that a definite-term contract may be renewed upon the express mutual agreement of the parties for a consecutive definite term or terms without being construed as an indefinite-term contract. However, if the parties neglect to expressly renew the definite-term contract but continue to perform the same employment relationship, it will then be construed as an indefinite-term contract. Dismissal, termination & settlement: An employee may only be terminated on the grounds that he or she committed a grave fault or due to the non-performance of his or her obligations. Termination can be undertaken only after satisfying a certain process and if certain events are present. Furthermore, Labour Law requires the employer to serve a twomonth termination notice to the employee if the employee has served less than 10 years and three months’ notice if the employee has served more than 10 years at the company.

Unjustified termination of an employee would entitle the terminated employee to claim damages against his or her employer. In the event that a court rules in favour of the employee, the damages awarded must not be less than two full months worth of his or her salary for each year of their employment, in addition to any other legal entitlements that the party may be entitled to as compensation. Salary, in this respect, would extend to include all related acquired rights, such as allowances and bonuses.

Amicable termination settlements seek to put a termination package in place for the employee, which would ordinarily include a final resignation and release form. The termination packages offered are commonly equal to the compensation that a court would order as detailed above. The employee has the right to withdraw his or her resignation within one week of its acceptance by the employer, and in such a case the resignation would be considered null and void. Accordingly, the employer should consider the resignation effective upon the lapse of a one week.

Investment Law

The Investment Law No. 72 of 2017 introduced new safeguards and rights that create a smoother and more efficient process in the running of investment projects, and the executive regulations of the investment law outline the necessary conditions for pursuing investment activities. The law governs a large number of investment activities in various economic sectors, including manufacturing, agriculture, trade, education, health, transport, tourism, housing, construction, sports, electricity, energy, natural resources, water, communications and technology. Legal guarantees: The law implements a series of safeguards for investors. It outlines that:

• All investors are explicitly guaranteed fair and just treatment.

• All foreign investors are given the same treatment as local investors.

• Exceptionally, foreign investors can be granted preferential treatment in application of the principle of reciprocity.

• Investment projects may not be nationalised, and companies and establishments may not be expropriated. The expropriation of an investment project’s property may exceptionally take place in the case of a public utility, but not without fair compensation paid in advance without delay. The amount paid shall equal the fair economic value of the expropriated property on the day preceding the expropriation decision date.

• Investment projects may not be administratively attached, sequestrated or frozen, except by a final court order or irrevocable judgment. An exception can occur in the case of debts owed to the Tax and Social Insurance Authority, which may be collected through all types of attachment, without prejudice to the contracts concluded by the state or the public legal persons with the investor.

• Investors receive more protection and security as compared to the previous law, as governmental and regulatory authorities may not revoke the investment project licence or suspend it, and may not cancel land allocation except after giving notice to the investor of a breach, hearing his or her views and giving the investor a period that does not exceed 60 days to remedy the breach. If the breach was not rectified after the given period, the opinion of GAFI must be sought before issuing any decision against the investor, and GAFI shall express its opinion within seven days from the date of receiving the request. The investor retains the right to appeal any decision handed down before the GAFI Appeals Committee and then the courts, if necessary.

Dispute Resolution

The amended investment law introduced further changes to facilitate and expedite dispute resolutions, allowing parties to resolve all disputes arising out of investment contracts via arbitration. First, the new law established the Ministerial Committee for Investment Contracts Disputes Resolution, which is responsible for dispute resolution specific to investment contractual obligations of which the state or an affiliate is a party. Second, the Ministerial Committee for Investment Disputes Resolution was established to focus solely on assessing disputes between the government and investors regarding the implementation of the new law. A ministerial decree also created a grievance committee that is responsible for receiving complaints regarding the implementation of the new investment law in Egypt.

Free Zones

Egyptian, Arab and foreign investors may undertake projects in Egyptian free zones regulated by the investment law. Free zone companies can engage in either industrial or service activities. Most goods and materials that are imported into a free zone are not subject to import duties or regulations. There are two types of free zones: public free zones and private free zones. Public free zones: Public free zones are established by the Council of Ministers following a proposal by the competent minister and after receiving approval by GAFI’s board of directors to perform licensed projects, regardless of their legal form. Public free zones are mainly aimed at exports. A decision by the Council of Ministers to establish a public free zone shall state the public free zone’s location and its boundaries.

Projects established in public free zones are subject to a fee equal to 2% of the commodity value upon access for warehousing projects, and a fee equal to 1% of the commodity value upon egress of manufacturing and assembling projects. That said, the trade of transit goods shall be exempt from this duty; however, projects established in public free zones are subject to a fee of 1% of the total revenue of the project in which the main activity does not require the ingress or egress of goods, based on the financial statements reviewed by a certified accountant. Incentives & tax breaks: Free zone companies are not subject to income tax and are incorporated for the purpose of exporting the products or services manufactured or provided in the free zone. Under the free zone system qualifying companies are granted Customs duties and tax exemptions. Both types of free zone companies are exempt from local taxes and Customs.

Anti-Cybercrime Law

On August 14, 2018 the Anti-Cybercrime Law No. 175 of 2018 came into effect. The law applies to natural and legal persons, company managers, service providers, web administrators and state officials. The Anti-Cybercrime Law has a wide scope covering a number of matters, including but not limited to online crimes and subject-matter censorship.

What the law considers to be prohibited content is not coherently defined. Part three of the Anti-Cybercrime Law is composed of eight chapters that indicate the types of offences considered under the law. Most notably these include offences against the integrity of information networks, systems and technology (chapter 1); crimes related to the invasion of privacy and illegal content (chapter 3); and the criminal liability of legal persons (chapter 8).

The Anti-Cybercrime Law incorporates privacy related provisions and penalises content that poses a threat to the country’s national security.

Government Procurement

The Law Regulating Contracts Concluded by Public Bodies No. 182 of 2018 (Public Bodies Contracts Law) was issued on October 3, 2018 to create a better business environment and to more effectively regulate public sector procurement and public contracts. The new Public Bodies Contracts Law aims to:

• Apply criteria for openness, transparency, integrity, freedom of competition, equality and equal opportunity, and avoid conflicts of interest;

• Reinforce the principal of governance;

• Develop methods of buying and selling that are able to keep pace with economic developments, and meet the needs of administrative authorities effectively;

• Create an appropriate environment in which small and medium-sized enterprises can compete;

• Provide fair treatment throughout the business community and prevent practices of collusion, fraud, corruption and monopoly;

• Transition towards modern management methods and the use of IT within procedures;

• Reach a level of efficient and effective public expenditure;

• Regulate procedures for the planning and enforcement of public contracts, and monitor such enforcement; and

• Encourage those subject to the provisions of this law to adopt innovative solutions, initiatives and technologies when contracting, as well as adopt sustainable contracting policies. The Public Bodies Contracts Law provides for two main procurement methods: public tenders and public practices’ negotiations. The law stipulates that public tenders follow the principles of open competitive bidding, where two proposals are to be submitted: a technical proposal and a financial proposal. Public practices’ negotiations, meanwhile, are equivalent to a bid or an auction. These two methods are used for the procurement of goods and works. When it comes to consulting services, in the absence of a distinct procurement method, the aforementioned procurement processes also apply. Rules & exceptions: Contracts governed by the provisions of the Public Bodies Contracts Law must abide by the following conditions and be conducted via the following methods: (a) Contracting for the purchase or the lease of movable goods or real estate, or contracting for contracting activities or for receiving technical services or works that are awarded by way of a public bid. An exception may be made by a decree from the competent administrative authority based on a recommendation by the Bureau for Contracts. This type of contracting is conducted through one of the following methods: general practice, limited practice, a limited bid, a twostage bid, a local bid or a direct agreement. (b) Contracting for the sale or lease of movable goods, real estate or projects that do not have a legal personality are awarded through an open public tender or a sealed-envelope tender. Licensing to use or exploit real estate and projects are awarded in the same manner. An exception may be made by a decree from the competent administrative authority based on a recommendation by the Bureau for Contracts. This type of contracting is conducted through one of the following methods: a limited tender, a local tender or a direct agreement. The administrative authority may fulfil its needs by following any of the contracting methods mentioned in section (a) in order to reach a framework agreement that is in accordance with the provisions of Article 65 of the Public Bodies Contracts Law, noted below. Moreover, the contracting methods outlined in sections (a) and (b) cannot be substituted for any other type of contracting method.

The administrative authority may, in accordance with Article 65 of the law, submit its needs or the needs of one or more administrative bodies through following the method of bid, limited practice, general practice or direct agreement in any of the following cases:

• Where there is a need for frequent contracting of items, for the implementation of works or services, or for the introduction of consultancy studies;

• Where the administrative authority shall, in accordance with the normal course of events, expect the nature of the items, works, services or consultancy studies required to be urgently established in the future, without knowing exactly the timing of their delivery, implementation or quantities; or

• Other cases in which the administrative authority considers it appropriate to follow this type of contracting, including targeting the development of certain industries or the characterisation of needs.

Repatriation

Dividends may be freely repatriated to any domain outside of Egypt, subject to the availability of foreign currency.

OBG would like to thank Helmy, Hamza & Partners for its contribution to THE REPORT Egypt 2020

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The Report: Egypt 2020

Legal Framework chapter from The Report: Egypt 2020

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