New laws to impact personal and corporate taxation

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General

A series of new laws have been issued, which are reflected herein; however, it should be noted that the practical application of some of the new concepts in the tax law will be clarified with the issuance of a set of executive regulations, which is expected sometime in the near future.

Corporate Income Tax

Egyptian corporate income tax (CIT) is levied upon corporations, partnerships and branches, and on all profits earned abroad or in Egypt. Non-resident companies operating in Egypt via an Egyptian permanent establishment are subject to CIT to the extent that revenue is recognised through their permanent establishment. Charities that are established in accordance with the provision of Law No. 84 of 2002 are fully exempted from Egyptian CIT. In addition, not-for-profit organisations that solely exercise social, scientific, cultural and sporting activities are exempted from CIT.

The CIT rate in Egypt is 25% for annual taxable profits. A temporary annual tax will also apply from 2014-16 (applicable from the current tax period). An additional 5% on all annual net income greater than LE1m ($142,000) for individuals and corporate entities and will apply on top of the current 25% CIT rate and the existing progressive income tax rates for individuals, effectively creating a 30% top tax bracket.

Corporate taxable profits are calculated according to guidelines set out by Egyptian Accounting Standards, which are mostly in line with International Financial Reporting Standards (IFRS). The main exceptions relate to financial leasing arrangements (which are subject to a standalone area of legislation in Egypt).

Financial statements for all firms should be audited and companies must file a tax return before May 1 (or within four months following the financial year-end). The submission of tax returns must accompany the payment of the tax due.

CIT is assessed on the basis of the information provided in the tax return. For costs to qualify as tax deductible, they must be:

• Related to the business of the taxpayer and necessarily incurred in carrying out that activity; and

• Valid costs which should be fully supported by the necessary documentation. The following profits are exempted from CIT and withholding tax (WHT):

• Yields on commercial paper and securities issued by the Central Bank of Egypt, as well as gains realised on the trading in such securities. In addition, the following expenses are deemed to represent non-deductible expenditures:

• Excess interest in relation to loans where the taxpayer’s aggregate debt financing exceeds the thin capitalisation “safe harbour” debt-to-equity ratio of 4:1;

• Amounts charged to provisions and reserves ( special rules apply to banks and insurance companies);

• Dividends and employee profit share payments;

• Remuneration of the company’s chairman and board of directors (also not subject to income tax);

• Financial fines and penalties;

• Income tax payable;

• Interest on loans which carry a rate over two times that of the credit and discount rates announced by the CBE at the beginning of the accounting period in question;

• Interest on loans paid to non-taxable or tax-exempt Egyptian tax residents; and

• Financing and investment costs related to revenues that are tax-exempt by law.

Taxation Of Dividends

Dividends received from non-resident or resident entities by an Egyptian resident entity shall be exempted from CIT after adding 10% of the distributed dividends’ value to the Egyptian taxable profits.

This will apply provided at least 25% of the shares in question are owned by the Egyptian resident entity. In addition, the shares in question should either have been held for two years prior to the distribution or be held for two subsequent years.

Dividends paid by investment funds that only deal in securities only if their portfolio consists of at least 80% securities or other debt instruments or by investment funds which are holding entities for other investment funds that meet the requirements set out above are all not taxable.

Investment funds’ received dividends shall be exempted from tax after adding 10% of the distributed dividends’ value to the investment fund’s taxable profits. Monetary funds’ investment and dividends paid are tax exempted. Interest on listed bonds is tax exempt, with the exception of Treasury bonds.

Capital Gains Taxation

Capital gains realised by non-resident corporate entities and non-resident individuals shall be subject to WHT at 10%. Capital gains realised by resident corporate entities on the sale of listed shares shall be subject to CIT of 10%, while their gains on the sale of non-listed shares will be subject to the standard CIT rates of 25% and the additional 5% rate on income over LE1m ($142,000). 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 rates, at the progressive rates mentioned below.

Tax Depreciation

The Egyptian tax code differentiates between depreciation for tax purposes and accounting purposes. Rates of depreciation and methods for writing down asset values vary. Differences between book and tax figures will result in deferred tax assets and liabilities. Asset depreciation using the straightline method is set out as follows:

• 5% of the original cost may be claimed annually in respect to purchases, establishment, development, renovation or reconstruction of any buildings, establishments, installations, ships or aircraft.

• 10% of the original cost may be claimed annually with respect to purchases, development, improvements to and/or renovation of any purchased intangible assets, which also may include goodwill. Asset depreciation using the declining balance method is set out as follows:

• 50% of the depreciable base value of computers, information systems, software and data storage set for each tax period;

• 30% of the cost of machines and equipment used in production shall be deducted as an additional first year allowance, whether they are new or used, in the first fiscal period during which those assets are employed (this is in addition to the normal tax depreciation charge); and

• 25% of all other asset categories in each tax periNo depreciation will be calculated for land, antiquities and artistic work, jewellery and other assets that are non-depreciable by nature.

Thin Capitalisation Provision

The Egyptian tax code contains a thin capitalisation provision which sets out that the interest paid by Egyptian tax-resident firms will only be tax deductible to the extent that those borrowers are capitalised within a debtto-equity ratio of 4:1.

• Debt is defined as loans, bonds, Treasury bills and all forms of finance by debt through securities with fixed or variable interest.

• Equity covers paid-up capital plus all reserves and retained earnings less retained losses, provided that any revaluation differences carried forward to reserves must be eliminated if they were non-taxable. Retained losses must be deducted only from the retained earnings and reserves. The thin capitalisation ratio is calculated as follows: average balance of debts / average balance of equity, average being the average of the opening and closing balance.

Group Restructuring

Any capital gains resulting from changes of legal form are subject to tax. This tax may be deferred indefinitely if the shares of the resulting entity or transaction are not disposed of for three years following the event and all parties to the transaction are resident in Egypt. The following events are considered to fall within the scope of this proviresident company into two or more resident companies;

• Transforming a partnership into a corporation or transforming of a corporation into another corporation;

• Transformation of a legal person into a corporation.

Controlled Foreign Corporation

For Egyptian tax purposes, a controlled foreign corporation (CFC) is a non-resident company in which:

• More than 70% of its revenue is derived from the following: dividends, royalties, interest, management or rental fees;

• An Egyptian entity owns more than 10% of its capital; and

• Profits of the investee company are either not subject to tax in its tax-resident jurisdiction or if tax is paid at a low rate (less than 75% of the Egyptian CIT rate). If a company is designated as a CFC, its profits are taxed in Egypt under the equity method of revenue recognition – i.e., a percentage of revenue equivalent to the ownership of the Egyptian company is recognised as income to the investing entity and taxed.

Transfer Pricing

Egypt’s domestic tax legislation has contained basic transfer pricing provisions since 2005, with a requirement for transactions between related parties to be carried out on arm’s length basis specified in the primary CIT tax legislation (Law No. 91 of 2005).

The accompanying executive regulations set out the traditional methods for determining transfer pricing policies as the following: cost plus, comparable uncontrolled price or resale price method.

Arm’s-length price is defined in the law as “the price upon which two or more independent enterprises deal, determined according to market forces and transaction conditions”.

The documentation that taxpayers are expected to have prepared and maintained in Egypt is in line with that required under OECD guidelines. In broad terms, the Egyptian Tax Authority (ETA) set out the following requirements in relation to transfer pricing:

• Documentation on the group structure and relationships between related parties;

• Details and analysis of the industry and market in which the taxpayer operates;

• Documents relating to the taxpayer’s business, pricing policies and business strategy;

• Analysis of the transactions under review with accompanying documentation;

• Functional analysis of risks, assets and functions performed by related parties; and

• Evidence of the comparable used to support pricing.

Tax Losses

Losses can be carried forward for tax purposes for a period of five years following the year in which the loss was incurred. Carrying losses backward is not allowed except for long-term construction contracts.

Advance Rulings

Advance rulings may be obtained from ETA via a formal request, to which ETA is bound to respond within 60 days, according to the relevant clause of Law No. 91 of 2005.

The statute of limitations on assessments and amendments of tax returns by ETA is five years. This is extended to six years in the event of proven fraud or intention to evade taxes.

Treaties

The Egypt government has concluded over 52 different double taxation treaties, and this has helped create an attractive framework for the introduction of overseas investment capital. These treaties have created a system of reduced tax rates on withholding, dividend and royalty payments, although the amount and types of reductions may vary between countries.

Personal Income Tax

Individuals, whether Egyptian or foreign nationals, are subject to a personal income tax (PIT) in Egypt in the following circumstances:

• Work is performed outside Egypt and the income is paid or charged to an Egyptian entity; or

• Work is performed in Egypt regardless of whether income is paid from an Egyptian or foreign source; The PIT rate for an individual working in a secondary place of employment is 10% without any deduction from their gross salary. The rates for individuals ( residents and non-residents) at their primary place of employment are as follows:

• 0% for up to LE5000 ($710);

• 10% for LE5000 ($710) and up to LE30,000 ($4260);

• 15% for LE30,000 ($4260) and up to LE45,000 ($6390);

• 20% for LE45,000 ($6390) and up to LE250,000 ($35,500); and

• 25% for more than LE250,000 ($35,500). Individual’s income is also subject to the temporary wealth tax mentioned previously in this article. Accordingly, the top effective rate is 30% on income over LE1m ($142,000). The upper tax rates are applied after deducting all exemptions allowed under Law No. 91 of 2005.

The provisions of the relevant double taxation treaty may be applied; therefore, under certain cases some individuals may not be subject to PIT in Egypt. In addition, resident individuals have become taxable on their worldwide income if Egypt is the “centre of their commercial interests”.

Where individuals are being paid wholly by an Egyptian entity (or by an offshore entity which then recharges the cost to an Egyptian entity), the Egyptian entity is required to withhold PIT and pay this to ETA within 15 days after the end of each month. A quarterly tax return must be prepared and filed with ETA before the end of the month following the end of the quarter. At the end of the year, an annual PIT reconciliation is made for the whole year. However, in the event that the employees are receiving income from offshore sources (with no recharges to any Egyptian entity), individuals are personally responsible for filing an annual PIT return before the end of January following the tax year in question.

Egyptian Withholding Tax

Application of WHT is widespread in Egypt and affects various payments within and outside of Egyptian borders. Cross-border payments are generally subject to a 20% WHT rate on all amounts paid by Egyptian tax residents to overseas parties, subject to tax treaty rate deductions. Amounts affected include:

• Yields and interest on loans and credit facilities if the loan term is less than three years;

• Royalties; and

• Amounts paid abroad in exchange for services. This does not include the amounts charged to a permanent establishment for its share in the administrative expenses of its head office, nor amounts paid abroad in exchange for the activities of an athlete or artist. No WHT rates are applicable to dividends paid from Egypt to entities abroad.

Dividends

The regime for dividends is separate from the above. Egyptian dividends paid to resident individuals are subject to income tax at 10% if their ownership is not higher than 25% of the paid-up capital or the voting rights. Otherwise, dividends shall be taxable at 5% provided the shares in question were held for two years. Dividends paid by non-resident entities to Egyptian resident individuals shall be taxable within the progressive rates used for income tax, which range from 10-30%.

Dividends paid to resident or non-resident entities are subject to WHT at 10% if their ownership is below 25% of the paid-up capital or the voting rights. Otherwise, dividends shall be subject to WHT of 5% provided the shares in question were held for two years.

Exemptions

Items that are exempt from WHT include:

• Service charges that do not include transportation, training, insurance, shipping and handling;

• Subscription in conferences, listing fees, direct advertising and marketing expenses; and

• Interest on loans and credit facilities if the loan term is longer than three years.

Ministerial Decree No. 771

Ministerial Decree No. 771 of 2009 requires that Egyptian entities initially apply a full 20% WHT rate on payments made for royalties and interest, regardless of potential treaty relief. The overseas recipient may apply for a refund of the “overpaid” WHT within six months of receiving the income. The application to the Egyptian authorities must include:

• A residence certificate from the tax authorities in the recipient’s country stating the recipient of the income in question is indeed a tax resident in that jurisdiction per the definitions set out in the relevant tax treaty;

• An explicit declaration by the recipient that they are the beneficial owner of the income and that it is not related to any permanent establishment in Egypt;

• In the case of royalty income, proof that the recipient is actually entitled to the income (which may be in the form of patent registration, proof of trademark ownership or other suitable evidence); and

• A copy of the contract documentation relating to the loan or royalty agreement. Upon receipt of such an application, the Egyptian authorities have 90 days to respond. If ETA fails to respond to the application within the prescribed time-frame, the recipient is entitled to approach their own tax authorities with a view to them pursuing a competent authority claim under procedures set out in the relevant double taxation treaty.

Egyptian companies are obliged to withhold the following taxes from their local suppliers and service providers; the same rules will apply to payments made by their customers. Egyptian entities must prepare WHT Form No. 41 for each quarter and file it with ETA within one month from the end of each quarter. The rates of deduction are as follows:

• Purchases of goods – 0.5%

• Supply of services – 2%

• Construction – 0.5%

• Commission, discount and gifts – 2-5%

• Professional services – 5% TAX ADDED REGIME: This tax has been cancelled. Alternatively, taxpayers must submit a quarterly report summarising the relevant details of local payments made during each quarter.

Advance Payment Regime

The advance payment regime was introduced into the Egyptian tax code via Law No. 91 of 2005. This system works in tandem with the WHT system. Private entities are exempted from applying the provisions of local WHT in the event of applying the advance payment system.

Taxpayers can apply for the advance payment regime through the submission of a request to ETA, along with a statement disclosing the most recent corporate tax due (or a figure estimating the expected corporate tax due in the case of applying during the first year of operations). This request should be submitted no later than 60 days before the start of the new tax period. Failure to receive a reply from ETA within 60 days of the submission date means it has been refused.

The taxpayer must pay 60% of the estimated tax due value to ETA in three equal instalments. The stated payments shall be due on the following dates:

• June 30

• September 30

• December 31 Taxpayers are allowed to reduce the value of the third instalment in the event that it becomes apparent that the annual estimated profits could be below the expectations. The basis of the tax due estimation is based on the value of the most recent corporate tax due.

In the event of incurring losses in the previous year or applying the system in the first year of operations, an estimation of the tax due is acceptable. It is important to highlight the fact that taxpayers may be considered exempted from their annual payments whilst applying the advance payment system in either of the following cases:

• Incurring tax losses for two successive years; or

• Changing the legal form of the entity.

Stamp Tax

Egypt has two types of stamp tax. Ad valorem is the primary type, charged on dealings with banks at a quarterly rate of 0.1% on loan balances. The tax will be applied to the sum of the starting balance of each loan receivable at the start of the quarter, plus the highest debit balance reached in the course of the quarter without deduction of any payment. Half of this amount will be levied on the bank and half on the recipient of the loan.

Banks are responsible for withholding and remitting the stamp tax due. The tax must be remitted within seven days before the end of each quarter. The stamp tax also applies at 20% on the value of any advertising expenditure.

In-kind stamp tax is the secondary type, charged on certain types of company documents, such as commercial contracts. The rate is fixed at LE0.30-0.90 ($0.04-0.13) per page. This is in addition to a state development levy of LE0.10 ($0.01) per page.

Sales Tax

Most transactions carried out in Egypt are subject to sales tax. Service and manufacturing businesses are required to register for this if their turnover exceeds LE54,000 ($7668). If a business is engaged in importing, they must register regardless of turnover.

Sales tax rates range from 5-100% for various goods and services. The majority of goods and services are taxed at a rate of 10%. Registered entities must file monthly sales tax returns with the relevant authority. Recent amendments to the law allow taxpayers to offset sales tax credits against any other type of tax due (such as CIT and salary tax).

A new value-added tax law is expected to be issued in the near future, replacing the current sales tax law.

Real Estate Tax

The Real Estate Tax Law No. 196 of 2008 was amended by Law No. 103 of 2012. Some major elements of the law are as follows:

• Tax is based on the annual rental value of real estate, which is determined every five years by the Real Estate Tax Authority.

• The taxpayer owes 10% of the annual rental value of the property after a 30% deduction on overall value, as well as a LE24,000 ($3408) exemption (for one unit per owner only) for residential properties, and a 32% deduction on non-residential properties.

• Properties at all stages of completion are subject to tax.

• The tax is due on July 1 (the due date was previously January 1).

• According to the new Law No. 103 of 2012, these dates will be changed. The law is not yet clear on when the new payment dates will be, aside from stating that they will be changed in line with the date from which the tax is considered due. Executive regulations will likely be issued for this law in the future in order to clarify.

• Reassessment of the property’s rental value should not result in an increase in tax greater than 30% of the tax due for the previous assessment for residential properties or 45% for non-residential properties.

• The penalty for failing to submit a real estate tax return, or submitting one incorrectly, ranges from LE200-2000 ($28.40-284).

• The penalty for intentional non-submission or submission of a fraudulent tax return may range from LE1000-5000 ($142-710).

General Anti-Avoidance Tax

The General Anti-Avoidance Rules (GAAR) have been recently introduced in the Egyptian tax code. The Egyptian GAAR state that any transaction must have a purpose other than either tax savings or tax postponement. Otherwise, ETA has the right to determine the true nature of the transaction for the purpose of identifying the proper tax treatment. Further interpretations are expected to be issued by ETA.

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The Report: Egypt 2014

Tax chapter from The Report: Egypt 2014

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