Summary of Egypt's tax laws and regulations

 

In the past few years several changes have been made to Egyptian law to reshape the tax system. These reforms are important in light of changes that have recently been implemented in the field of taxation on a global level, due to significant and persistent fluctuations in the world economy.

Corporate Income Tax (CIT)

CIT is imposed on companies that are considered to be tax residents in Egypt and applies to all profits and income realised in Egypt and abroad. In addition, companies that are non-resident, but realise profits through a permanent establishment (PE) in Egypt, are also subject to CIT.

The CIT is assessed at a flat rate of 22.5% for corporate bodies, partnerships and PEs. The profits of the Suez Canal Authority, the Egyptian Petroleum Authority, and the Central Bank of Egypt (CBE) are taxable at a rate of 40%, while those of oil exploration and production companies are subject to a CIT of 40.6%.

Annual net taxable income is primarily based on the financial statements of the concerned entity. These statements should be prepared in accordance with the Egyptian Accounting Standards, which are broadly similar to the International Financial Reporting Standards, with a few key exceptions. All companies are required to maintain audited financial statements and must submit an online tax return within four months of the end of the financial year, which runs from July 1 to June 30.

The tax returns are prepared on the basis of self-assessment. Moreover, the balance of the tax is due and payable on the date on which the return is submitted. Corporate taxpayers are likely to have a credit balance arising from local withholding taxes (WHT). While calculating the CIT, there are some deductions available to corporations that can reduce the amount that they owe.

Some expenses have certain conditions specified in the law that should be met in order for such expenses to be considered deductible: 1. Interest on business loans – or the portion of a loan used for business purposes – which is calculated by:

• Deducting interest paid from interest received;

• Applying thin capitalisation rules (4:1 debt to equity); and

• Determining whether or not the interest rate is more than double the credit and discount rates announced by the CBE in January of a given year. 2. For related party loans, the interest rate must be calculated in line with the arm’s length principle (ALP). 3. Tax paid and borne, except that paid or payable under the income tax law. 4. Social insurance premiums paid on behalf of workers and the company. 5. Private saving or pension plans, but not exceeding 20% of workers’ annual total salaries. 6. Life insurance and medical insurance premiums of the business owner, of up to LE10,000 ($562) per year or 15% of the premiums paid, whichever of the two is lower. 7. Donations to the Egyptian government, local administrative units and other public juridical persons. In addition, the company should consider the provisions of the ALP for related party transactions.

The below costs are non-deductible and are typically added back to the tax pool:

• Reserves and appropriations;

• Financial fines and penalties;

• Income tax payable;

• Loan interest that exceeds twice the credit and discount rates set by the CBE; and

• Loan interest and other debts paid to non-taxable or tax-exempted natural persons (i.e., individuals).

Capital Gains Tax

Capital gains realised from the sale of shares listed on the Egyptian Exchange (EGX) by both resident and non-resident shareholders are subject to 10% WHT. The application of this tax was suspended for two years, beginning May 17, 2015. Such suspension was extended for a period of three additional years and is now scheduled to end on May 16, 2020. Accordingly, no capital gains tax shall be collected or withheld before May 17, 2020 with respect to shares listed on the EGX.

However, capital gains realised from the sale of directly owned, unlisted shares by both resident and non-resident shareholders are subject to taxation at a rate of 22.5%. In the case of individual shareholders, capital gains are included in their income, and are thus subject to progressive taxation up to 22.5%.

Tax Depreciation

The calculation of depreciation for accounting purposes is different from calculating depreciation for tax purposes. Thus, rates of depreciation and methods of recording asset values differ. The income tax law dictates that the following assets should be depreciated using the straight line method, applying the relevant rates as follows:

• 5% of the cost should be claimed annually in respect of buildings, establishments, installations, ships and aircrafts; and

• 10% of the cost should be claimed annually with respect to intangible assets, including goodwill. Below are the types of assets that should be depreciated using the declining balance method, as well as their respective rates as per the provisions of the Egyptian income tax law:

• 50% of the value of computers, information systems, software and data storage sets;

• 25% of the value of all machines and equipment; and

• 25% of all other assets categories. In addition, a 30% accelerated depreciation rate has recently become available for newly purchased or used machinery and equipment used in production. It is not applied unless a request is submitted for the purpose of application of the accelerated depreciation rate. Thus, companies can effectively choose whether or not to apply the accelerated depreciation rate.

No depreciation is calculated on land, artistic and antiques works, jewellery or similar assets, given that such items are deemed non-depreciable by nature.

Thin Capitalisation Provisions

Under the thin capitalisation rule, interest deduction should be subject to a debt-to-equity ratio of 4:1. Thus, any interest expense on debt that exceeds this ratio is disallowed as a deduction for CIT purposes. The income tax law defines debt and equity as follows:

• Debt includes all amounts related to loans and advances. The debit interest includes all amounts chargeable by the creditor in return for loans and advances of any kind obtained thereby, as well as bonds and bills. Loans and advances include bonds and any form of financing by debts through securities with a fixed or a variable interest rate.

• Equity includes paid-up capital, in addition to all reserves and retained earnings reduced by accumulated losses.

Controlled Foreign Corporation (CFC)

Egypt does not have specific CFC provisions. However, the income tax law depicts the place of effective management (PoEM) concept, which can be viewed as similar. A company would be deemed to have a PoEM in Egypt if it meets at least two of the following conditions:

• Daily management decisions are made in Egypt;

• Meetings of the board of directors or managers are held in Egypt;

• At least 50% of the managers or board of directors are resident in Egypt; and/or

• Shareholders owning more than 50% of the capital and/or voting rights are resident in Egypt. If any two of the above conditions apply, such company will be deemed to have a PoEM in Egypt and will be treated as a resident company subject to Egyptian tax laws and regulations.

Transfer Pricing (TP)

TP rules were initially introduced through Law No. 91 of 2005. On November 29, 2010 the Egyptian Tax Authority (ETA) finalised the Egyptian Transfer Pricing Guidelines (ETPG), citing their goal of “providing taxpayers with guidance on the application of the ALP in pricing their intra-group transactions”.

The ETPG are generally consistent with OECD rules. The ETPG demonstrate the views of the ETA regarding the application of TP rules according to the law, and that OECD guidelines should be consulted for more detailed descriptions of principles when so required.

The ETPG include a clear and simple approach to applying the ALP. Taxpayers are advised to follow a four-step approach in pricing their controlled transactions according to the ALP, as well as to assess the consistency of their pricing with the ALP.

A related party is defined as any person related to a taxpayer by a relation affecting the determination of the taxable base, including:

• A husband, wife and descendants;

• Associations of capital and a person possessing, directly or indirectly, at least 50% of the number or value of shares or voting rights therein;

• Partnerships, joint partners and silent partners therein; and

• Any two or more companies in which a third person possesses at least 50% of the number or value of the shares or voting rights therein. Accordingly, the ETPG offer a four-step approach to applying the ALP. Taxpayers are also advised to follow the below approach in order to price their controlled transactions in respect to the principle:

• The first step is identifying intra-group transactions and understanding the nature of such transactions.

This step requires conducting a functional analysis in addition to analysing the scope of the controlled transaction, type of the controlled transaction, timing, expected costs and benefits, contractual terms, parties to the transaction, organisation structure, business objective, the nature of the industry and the market size.

• The second step is selecting appropriate pricing method(s). This step requires the selection of one or more transfer pricing methods to determine the arm’s length prices for the controlled transactions.

• The third step is applying the selected pricing method. This step requires extending the functional analysis and conducting a comparability analysis.

• The fourth step is determining the arm’s length amount and introducing a review process to reflect any future changes. Taxpayers are not expected to utilise the analysis conducted in step three on a permanent basis, and therefore, are required to monitor the validity of the method and the data used. Taxpayers are required to prepare contemporaneous documentation studies to support the arm’s length nature of their controlled transactions.

In October 2018 the ETA published an update to the ETPG in light of the work done by the OECD on base erosion and profit shifting. Headline changes to domestic law include the introduction and mandatory filing of the three-tiered approach to documentation – namely, master file, local file and country-by-country report – effective FY 2018, as well as the introduction of an advance pricing agreement programme.

Losses

Tax losses can be carried forward for tax purposes for a period of five years from which the loss was incurred. Losses may also be carried back, although this procedure is subject to specific conditions.

Advance Ruling

The income tax law includes an advance ruling provision. The law states that the ruling should be submitted in writing and be supported by all the relevant documents, including copies of the contracts and accounts connected with the carried out transactions for which the ruling is required. The ETA should provide a response to the advance ruling within 60 days of receiving the required documents.

Double Tax Treaties (DTT)

The Egyptian government has concluded more than 60 tax treaties with different countries. Such treaties have created a system of sharing taxing rights with other countries in an aim to facilitate cross-border investment and trade.

Personal Income Tax

In general, this tax is withheld at source from payments to Egyptians and foreign nationals working in Egypt. A tax is imposed on the total net income of resident individuals for income earned in Egypt, as well as the income earned outside Egypt for resident individuals whose centre of commercial, industrial or professional activities is in Egypt. Furthermore, this type of tax is imposed on the income of non-resident individuals for their income earned in Egypt (i.e., paid from the Egyptian Treasury).

Taxable income is defined as payment from employment, including salaries, wages, overtime, bonuses, paid leave, commissions, profit shares, and all cash and in-kind benefits. After exempting a personal allowance of LE7000 ($390), personal income tax is calculated based on progressive rates, which are as follows:

• 0% for income up to LE8000 ($450) with no tax credit;

• 10% for income of more than LE8000 ($450) but less than LE30,000 ($1690) with 85% tax credit;

• 15% for income of more than LE30,000 ($1690) but less than LE45,000 ($2530) with 45% credit;

• 20% for income of more than LE45,000 ($2530) but less than LE200,000 ($11,200) with 7.5% credit; and

• 22.5% for income of more than LE200,000 ($11,200) with no tax credit. The tax due is to be calculated at the rate noted for each bracket. The tax credit shall apply only once, based on the highest income bracket for the taxpayer. Nevertheless, for those taxpayers whose income falls within the fifth bracket, no tax credit is to be provided.

According to the income tax law, an individual is considered a resident of Egypt in any of the following cases:

• If he or she has a permanent domicile in Egypt;

• The person is residing in Egypt for a period equal to more than 183 continuous or intermittent days within a given 12-month period; or

• An Egyptian who performs the duties of his or her position abroad but obtains his or her income from an Egyptian Treasury. Moreover, Egyptian resident employers are required to withhold the tax payable from employees’ salaries according to the aforementioned rates, and remit it to the tax authority within 15 days of the end of the month in which the payment has been made. The resident company is also required to complete quarterly salary returns and submit them to the tax authority, in addition to an annual reconciling return that should be submitted by the end of January of each year.

Withholding Tax

Domestic application of WHT is widespread and affects various payments on local and international levels. For the local WHT, an Egyptian entity has a liability to withhold tax against any payments in excess of LE300 ($16.86) that are made to any local contractor or supplier of goods or services, at the time of payment. The rates of WHT applicable to local payments for local services and supplies are as follows:

• 0.5% on contracting and supplies;

• 2% on all types of services;

• 5% on commissions fees; and

• 5% on professional fees. These payments of WHT are prepayments of providers’/ suppliers’ liability to CIT.

In addition, cross-border transactions are generally subject to 20% WHT on the following payments made by an Egyptian tax-resident entity to an offshore party:

• Interest on loans and credit facilities;

• Royalties; and

• Amounts paid abroad in exchange for services. It is worth noting that the 20% WHT rate can be reduced in case there is a DTT concluded between Egypt and the concerned country.

Dividends

A tax on dividend payments was introduced in Egypt for the first time in 2014 and amended in August 2015.

Dividends distributed by resident companies to resident or non-resident companies or individuals are subject to a 10% WHT. However, that rate may be reduced to 5% if the following conditions were met together:

• The shareholder holds more than 25% of the share capital or the voting rights of the subsidiary company; and

• The shares are held for at least two years. At the recipient’s level (in the case of a resident company), the dividend income would not be subject to CIT, provided that the associated costs are non-deductible.

It is worth noting that the law includes a participation exemption for holding companies, where 90% of the amount of dividends would not be subject to CIT and only 10% would be. This means that the dividends would be taxed at a rate of 2.25% (10% of 22.5%). However, availing the participation exemption is subject to fulfilling the below two conditions:

• The shareholder holds more than 25% of the share capital or the voting rights of the subsidiary company; and

• The shares are held for at least two years. Dividends received by resident individuals whose annual investment portfolio exceeds LE10,000 ($560) would be subject to WHT at a rate of 10%, which could be reduced to 5% if the following conditions are met together:

• The shareholder holds more than 25% of the share capital or the voting rights of the subsidiary; and

• The shares are held for at least two years. In this case, the dividends would not be subject to personal income tax, provided that the associated costs are non-deductible.

Furthermore, dividends received by resident individuals whose annual investment portfolio does not exceed LE10,000 ($562) are not subject to tax.

It is worth noting that dividends received by resident individuals from shares invested abroad, in case Egypt is the centre of their professional, commercial or industrial activity, are subject to the normal personal income tax rates, with a foreign tax credit allowed for any foreign taxes paid to the extent of the local tax payable. However, shareholders receiving dividends in the form of shares (stock dividends) should not be subject to dividend WHT.

Profits of foreign companies operating in Egypt through a PE should be deemed to have been distributed as dividends if the profits were not repatriated within 60 days following the end of the PE’s fiscal year. In such case, the dividends deemed to be distributed would be subject to 5% WHT.

Exemptions

Egyptian tax law provides an exemption of cross-border payments from WHT for certain items, such as:

• Transport or freight;

• Shipping;

• Insurance;

• Training;

• Participation in exhibitions and conferences;

• World stock exchange introduction; and

• Direct advertising and merchandising.

Ministerial Decree

Ministerial Decree No. 771 of 2009 requires that Egyptian entities initially apply 20% WHT on payments against royalties and interest regardless of potential treaty relief. The offshore recipient may apply for a refund of the difference within six months of receiving the income.

The non-resident entity receiving the income should be eligible to receive a refund within 60 days of receiving all of the required information and documentation of the difference between the 20% rate and the reduced rate provided by the relevant DTT.

In April 2015, however, certain amendments were made to the executive regulations of the income tax law, and the interpretation to such amendments is that the procedure for withholding and reclaiming a refund should no longer be applicable. In practice; the ETA may still expect taxpayers to follow such procedure.

Advance Payment Regime

The advance payment regime was introduced in Egypt through Law No. 91 of 2005. This approach allows a taxpayer to pay an estimated amount with respect to the WHT, which acts as an advance payment; then, at the end of the financial year, the ETA offsets the amount due from the advance payment and any difference is credited against future CIT liability. With such practice, taxpayers may request their clients to cease applying the WHT upon payments of invoices.

Stamp Tax

The stamp tax is generally levied on certain types of payments under the stamp tax law. Below is a summary of the most common types of stamp tax: 1. Stamp tax imposed on contracts:

• All types of contracts should be subject to a nominal stamp tax at an approximate amount of LE1 ($0.056) on each page of the contract (i.e., each of the counterparts of the contract should bear LE1 [$0.056] per page of the contract), on each copy of the contract.

This is generally considered minimal and thus should not represent a material cost. 2. Stamp tax on loans and credit facilities:

• Loans and credit facilities acquired from local banks or local branches of foreign banks are subject to 0.4% stamp duty tax, which is imposed on the highest debit balance, in addition to the amounts utilised.

This should be paid by the bank on a quarterly basis, and borne equally by the bank and the customer. 3. Stamp tax on advertisements:

• Advertisements are usually subject to 20% stamp tax. 4. Payments made by a government body:

• These are subject to stamp tax at a maximum rate of 2.4% of the value of the payment. It is worth noting that a recently introduced stamp tax was imposed on the disposal of securities. This duty is imposed on the proceeds (i.e., the value of the transaction) from buying or selling any kind of stocks, regardless of whether they are Egyptian or foreign, listed or non-listed, and without deducting any costs. The buyer and seller should apply the duty on the total proceeds based on the following rates:

• 0.125% shall be paid by both the seller and the buyer until May 31, 2018;

• 0.15% shall be paid by both the seller and the buyer from June 1, 2018 until May 31, 2019; and

• 0.175% shall be paid by both the seller and the buyer from June 1, 2019 onwards. However, in case that any of the below-mentioned conditions is met, the rate of the stamp duty to be imposed should be 0.3%:

• If the sale and purchase transaction involves 33% or more of the value or the number of shares or voting rights in a resident company; or

• If the sale and purchase transaction involves 33% or more of the assets or the liabilities of a resident company by another resident company in return of shares in the acquiring company. In case that the total amount of sale and purchase transaction(s) performed by one person in one entity has reached the limit mentioned above (i.e., 33% or more) within two years from the first transaction undertaken by such person and from the date of issuing and enacting this law, the whole transaction should be considered as one transaction and consequently subject to the 0.3% stamp duty.

The seller shall pay 0.3% once he or she reaches the exit limit. The buyer shall also pay 0.3% when he or she reaches the acquisition limit and after deducting any stamp duty paid before. The 0.3% stamp duty imposed on the transactions equalling 33% or more should not be considered a deductible expense for CIT purposes. Also, note that there are very limited exemptions from this tax, applicable to certain types of securities.

Value-Added Tax (VAT)

In 2016 VAT replaced the previous sales tax regime. Currently, the general VAT standard rate is 14%, and should be applicable to all goods and services.

VAT is applied to a broader range of goods and services when compared to the previous sales tax regime, though there are a number of basic goods and services that are exempt from VAT, mainly because they affect low-income earners. These exemptions are in addition to others specifically listed in the law.

VAT is a consumption tax imposed at each stage in the chain of production and distribution (transaction-based tax). The burden of collection lies with the business (i.e., businesses collect the VAT on behalf of the ETA).

Non-resident and/or non-registered persons should appoint a fiscal representative in case of selling taxable goods or rendering taxable services in Egypt to non-registrants who do not perform an activity through a PE in Egypt. In case of a non-resident, non-registered person rendering a service inside Egypt to a registrant that is not required to perform its activity, the service recipient would be required to calculate and pay the taxes due within 30 days from the date of sale (in case of not assigning a fiscal representative), based on the reverse charge mechanism.

Real Estate Tax

Real estate tax is an annual tax applied on all constructed real estate units and similar properties throughout the country. The application of the tax began in July 2013 and continued subsequently in January of each year.

The tax due should be collected over two equal instalments. The first should be collected until the end of June, while the second should be collected until the end of December of the same year. A taxpayer may pay the tax in full on the date of paying the first instalment. Assessment committees should be formed in every governorate, to be responsible for assessing the market value of constructed real estate units.

The assessment of a given unit shall be based on a qualitative classification according to the building standard, its geographical position and its annexed utilities. The capital value of the real estate is then calculated as 60% of the market value.

Lastly, 3% of the capital value is considered the annual rental value of the real estate. The assessment will be applicable for a five-year term. It should not result in raising the rental value of the constructed real estate units used for residential purposes by more than 30% of the value of the previous reassessment, or more than 45% of the value of the previous reassessment for those real estate used for non-residential purposes. The tax rate is 10% of the annual rental value of the taxable real estate units.

General Anti-Avoidance Rules (GAAR)

The GAAR is a tool introduced in Egypt in 2014 to manage tax avoidance and combat abusive tax arbitrage. The rules were introduced to help strengthen the ETA’s anti-avoidance strategy and help tackle abusive avoidance schemes. The objective of the GAAR is to further deter taxpayers from entering into abusive arrangements for the purpose of obtaining a tax advantage.

Customs Duties

Goods that enter Egypt are subject to the duties on imports prescribed in the Customs tariff issued by Law No. 184 of 2013, which determines the most-favourable-nation rate linked by an internationally harmonised system code.

Goods exiting Egyptian territories are not subject to a Customs tariff, except those for which a special provision exists. The country is party to many international free trade agreements that may reduce Customs duties or provide a full exemption.

The amount as declared for Customs purposes at importation shall represent the actual value of goods. All actual costs and expenses paid in connection with the goods until their arrival at the port of destination in Egypt is added to the stated value. If the value is defined in foreign currency, it shall be estimated using the exchange rate announced by the CBE on the date on which the Customs statement is registered.

OBG would like to thank RSM for its contribution to THE REPORT Egypt 2019

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The Report: Egypt 2019

Tax chapter from The Report: Egypt 2019

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