In the following, we aim to shed some light on the more relevant laws applicable in Egypt. In this respect, we shall focus on the corporate, labour, investment and property laws of the country.
1. Corporate Law
All newly established corporate vehicles in Egypt are subject to the provisions of the Companies Law No. 159 of 1981 (the “Companies Law”), which is the general law of application. The Companies Law prescribes all corporate governance rules and regulations, and regulates management, control issues, fiduciary duty and fiscal policies, together with operation of the company’s corporate requirements such as board of directors’ meetings, ordinary general meetings and extraordinary general meetings. However, depending on the types of activities, companies may be formed under either the Investment Incentives and Guarantees Law No. 8 of 1997 or the Capital Market Law No. 95 of 1992. Representative offices may also be required to be formed under the Commercial Agency Law No. 120 of 1982.
The main types of entities that can be established or acquired by foreign investors in Egypt are:
• Joint-stock companies;
• Limited liability companies (LLC);
• Branch offices; and
• Representative offices.
Joint Stock Companies
Joint stock companies are among the most commonly used legal vehicles in Egypt and are usually used in those cases where there is a manufacturing project to be established within the country that requires major investments. Furthermore, in cases of substantial investments, there are no requirements to pay the full capital upon establishment, which can be paid over a period of five years based on the development of the project.
Capital: A joint stock company may have authorised capital and must have issued capital (actual and paid in). The issued capital may not be less than LE250,000 (equivalent to $13,250 as of December 2016) for closed companies and LE500,000 ($26,500) if the company intends to offer its shares to the public. At least 10% of the share capital must be paid in at incorporation and subsequently increased to 25% within three months following the incorporation. Full payment of the issued share capital must be effected within five years after the incorporation.
Public Subscription: A joint stock company is permitted to offer its shares to the public. For those companies formed by public subscription, at least 49% of the shares must be offered to the public for a period of at least one month, unless the Egyptian founding shareholders pay up such percentage of shares prior to the public offering.
Number of shareholders: A joint stock company must have a minimum of three shareholders at all times, whether natural persons or legal entities. There is no maximum limit for the number of shareholders. However, if the number of shareholders reaches 100, the company would be considered as having been offered to the public and the rules applicable to public companies would then apply.
Objectives: Subject to obtaining permits and licences for certain types of activities – like industrial projects, which require approval from the Industrial Development Authority; banking projects, which require the approval of the Central Bank of Egypt; hotel management projects, which require approval from the Ministry of Tourism; aviation projects, which require the approval of the Ministry of Civil Aviation; and capital market activities, which require approval from Egyptian Financial Supervisory Authority – there are no restrictions on a joint stock company’s commercial objectives, provided they are not in conflict with public policy or morality. However, to benefit from the incentives and guarantees discussed in the Investment Law section of this legal review, joint stock companies established there under must list in their objectives at least one of those stipulated in the Investment Law.
Management: Joint stock companies are managed by a board of directors, which is entrusted with the day-to-day operations of the company, and in this respect, it has full authority to represent the company vis-à-vis third parties. Its authority, however, excludes those matters explicitly reserved by law or the company’s constitutive documents for the general assembly. The board of directors shall be headed by a chairman who shall be appointed by and from among its directors.
The board of directors must have a minimum of three members at all times. There are no nationality requirements for board members. There must be a means of employee participation in management, either through board membership, share ownership or the establishment of an administrative committee from among the employees. In practice, this stipulation can raise some issues in labour-intensive companies.
Profits: A joint stock company’s after-tax earnings for each fiscal year, as increased or reduced by any profit or loss that is carried forward from previous years, shall be available for distribution in accordance with the requirements of Egyptian law and the joint stock company’s statutes.
In order for shareholders to receive their dividends, they should deposit their shares with the Central Depository (if the shares are in 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). Dividends that are approved for distribution, but which are not claimed within five years from the date they are payable, shall be subject to the statute of limitations, and must be paid to the State Treasury.
Shareholders may decide at an ordinary general assembly whether to distribute all or part of the dividends, as per the audited financial statements of the company, so long as such distribution will not affect the company’s financial obligations vis-à-vis third parties or affect its ability to conduct business.
Stock Exchange Registration: Registration on the stock exchange is obligatory within one year of the formation of a company offering its shares to the public, otherwise the company may register its shares after the third year’s published profitable accounts.
Taxation & Social Insurance: For investment promotion purposes, a newly issued law amended the corporate income tax pursuant to which the latter was reduced to 22.5 % of the company’s net profit.
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 from both employers and employees.
Books & Records: Joint stock companies must also maintain financial books and records and submit audited tax returns every year.
1.2. LLC: This type of company is usually formed for small-scale projects that do not require major financing, such as companies that are involved in internal trade and services activities.
Constitutive Documents: An LLC’s constitutive documents are its statutes. Model statutes have been issued by a ministerial decree and any variations there from must be approved by the competent authority, otherwise the registration may be rejected.
Capital: No minimum or authorised capital is required for establishing an LLC in Egypt. However, the capital must be fully paid at the time of incorporation of the entity.
Number of Shareholders & Public Subscription: LLCs must have a minimum of two shareholders at all times and can maintain a maximum of 50 shareholders. Shareholders may be natural persons or legal entities. Shares in LLCs may not be offered to the general public.
Objectives: LLCs may not engage in insurance, banking, savings, deposit taking, investment funds, securities brokerage or portfolio management activities, but may undertake any other activity provided it does not conflict with public policy or morality.
Management: LLCs may be managed by one or more managers, one of whom must be an Egyptian national. An LLC that has more than 10 shareholders must establish a supervisory committee from among its shareholders. Employee participation in management, however, is not required.
Taxation & Social Insurance: LLCs were previously subject to corporate income tax at a rate of 25% of net profits. A presidential decree was issued in 2015 pursuant to which the corporate income tax was reduced to 22.5% of the company’s net profits. All employees of an LLC 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 from both employers and employees, but not for foreign employees.
Books & Records: All LLCs are required by law to maintain up-to-date financial books and records, and submit audited tax returns for each financial year.
1.3. Branch Offices
A foreign company may register a branch office in Egypt if the company has a contract with an Egyptian private or public sector party to perform work in Egypt.
Unlike a representative office, a branch may engage in commercial, financial, industrial and contractual activities within the scope of the contract entered into.
Management: The branch office may be managed by a branch manager(s). The branch manager(s) does not need to be an Egyptian national(s).
Taxes & Social Insurance: In line with the strategy to promote investment, the 2015 law referenced above amended the corporate income tax from 25% to 22.5% of the company’s net profit.
Additionally, all employees of a branch office shall be subject to Egyptian salary tax and the branch office must implement the required monthly tax withholdings. The government requires social insurance contributions for Egyptian employees from both the employers and employees Profits: The branch office must also distribute at least 10% of its net profits to its employees, up to a maximum of its total annual payroll. The branch office is responsible for ensuring fair payouts.
Books & Records: The branch office must maintain financial books and submit annual audited tax returns.
1.4. Representative Offices & Management
Undefined Foreign companies are permitted to establish representative or liaison offices, scientific or technical offices and other offices for the purpose of carrying out market surveys or studying the feasibility of production without having to enter into any commercial operations or commercial agency activities. The representative office shall be managed by a manager(s), who does not need to be an Egyptian national(s).
2. Labour Law
In line with its obligations under the World Labour Organisation and the Arab Labour Organisation, of which Egypt is a member, the Egyptian Parliament enacted Labour Law No. 12 of 2003 (the “Labour Law”), superseding the former Labour Law No. 137 of 1981.
Despite its progressive approach, the Labour Law remains to a large extent (much like its predecessor) an employee-biased law, designed to protect the employee.
In the following, we will primarily discuss:
• employment contracts;
• dismissal, termination and settlement;
• closure of business or downsizing;
• health care and pension payments; and
• work and disciplinary rules and regulations. 2.1. EMPLOYMENT CONTRACTS PROBATION & TERM: 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(s) without being construed as an indefinite term contract.
Nevertheless, if the parties neglect to expressly renew the definite term contract but still perform the same services, it shall then be construed as an indefinite term contract.
If an employee is hired on a probationary basis, the employment contract should expressly indicate the length of the probationary period and it shall not exceed three months.
Working Hours & Overtime: Normal working hours may not exceed eight hours a day or 48 hours per week (excluding a one-hour break per day). Most private sector employees work five days a week, usually Sunday to Thursday.
The number of working hours may be increased under certain circumstances. In any event, and in accordance with Article 82 of the Labour Law, working hours and breaks must be organised so that the total working hours do not exceed 10 hours per day, including the break if it is taken at the workplace.
2.2. Dismissal, Termination & Settlement
Undefined The Labour Law has introduced a number of new provisions, including those governing termination of employment (without including dismissed due to redundancy).
Pursuant to Article 69, an employee may only be terminated on the grounds that he/she committed a grave fault or due to non-performance of his/her obligations. Salary in this respect would extend to include all related acquired rights (such as allowances, bonuses and the like).
Furthermore, Article 111 of the Labour Law requires the employer to serve a two-month-prior termination notice to the employee in question and three months if the employee has served more than 10 years.
Unjustified termination would entitle the terminated employee to claim damages against the employer, and if the court rules in favour of the employee, the awarded damages would not be less than two months of full salary for each year of service in addition to any other legal entitlements that the party in question may be entitled to as compensation.
Furthermore, pursuant to Law No. 180 of 2008, which amends certain provisions of the Labour Law, the employee is entitled to request that the court issue an urgent order to the employer for payment of a 12-month salary, pending a judgment on the merits of the employee’s case for unjustified termination.
Amicable termination settlements seek to put a termination package in place with the employee, which would ordinarily include a final resignation and release form. However, it should be noted that pursuant to Article 119 of the Labour Law, the employee has the right to withdraw his resignation within one week of its acceptance by the employer, and in such case the resignation would be considered null and void.
This rule aims to give the employee the chance to reconsider the impact of such resignation in an attempt to protect his or her best interests. Accordingly, the employer should consider that the resignation is effective upon the lapse of such a one-week period.
Health Care & Pension Payments: All private sector companies in Egypt are required to provide free health care coverage for their Egyptian employees either through the Medical Insurance Plan of the Ministry of Social Insurance or privately. They must also contribute to the Pension Insurance Fund of the Ministry of Social Insurance.
Investment Law
Egyptian, Arab and foreign investors are entitled to benefit from guarantees and incentives with respect to activities falling under any fields of investment outlined under the Investment Law. There are no minimum Egyptian capital requirements.
It is worth noting that a number of measures were put in place to protect investors and their rights following the revolution of January 25, 2011, due to the large number of disputes that were raised in the aftermath of the revolution. These new measures have been implemented to reassure investors that they will be adequately protected.
3.1. Guarantees & Incentives Available Under The Investment Law
The most significant incentives and guarantees currently provided under the amended Investment law are as follows:
• One stop shop: The amended Investment Law has advocated a prompt licensing issuance mechanism. For that purpose a designated regulatory authority for promotion of investment, created to that effect, shall deal with the competent administrative bodies to complete the licences and permits necessary for projects engaged in certain fields of investment.
The said regulatory authority shall undertake all necessary procedures to finalise all licences and permits and submit them to the investor through a one-stop-shop investment window.
The regulatory authority shall only promote and provide investment services through the one stop shop and enable it with the necessary mechanism to carry out its obligations.
• Criminal liability: The amended Investment Law sought to remedy the flaws regarding the criminal liability of managers and/or board members. Prior to its issuance, the person in charge of the management of the legal entity is deemed liable for criminal violations. The said liability was changed by the amended law. Thus, in cases where the offence is committed in the name and for the account of the company as a juristic person, the person in charge of the actual management of the company is free of liability, save, proof of his/her knowledge of the crime and/or his/ her intention to commit such crime for his/her own personal benefit and/or that of others.
In case the responsibility of the juristic person is not as stipulated in the previous paragraph, the legal entity shall be subject to a penalty fine of no less than fourfold the fine stipulated for the crime by law and not exceeding tenfold thereof. Further, a verdict may decree the suspension of the activity the legal person is licensed to conduct for a period not exceeding one year. In case of recidivism, a verdict shall ordain the cancellation of the licence altogether or the dissolution of the legal person, as the case may be. The verdict shall be published in two widespread daily newspapers at the expense of the legal person.
• Dispute resolution: The amended Investment Law introduced further amendments to facilitate and expedite dispute resolutions, allowing parties to resolve to arbitration for all disputes arising out of investment contracts. Three dispute settlement committees have been created to that effect: 1. The Petition Committee 2. Ministerial Committee for Settlements of Investment Disputes 3. Ministerial Committee for Settlements of Disputes Arising out of Investment Contracts
• Investors are granted guarantees against expropriation and nationalisation. Firms and their assets cannot be attached, seized or expropriated by way of an administrative order. The Investment Law further provides that no administrative body may interfere in setting prices or profit margins, or revoke or suspend a licence for the use of property, except when the terms of the licence are violated;
• Articles of association, mortgages and loan agreements are exempt from stamp duties and related notary fees for five years from the date of registering the company with the Commercial Registration Department;
• A flat rate of 5% of the value of all imported machinery and equipment, which are deemed necessary for the company’s project, shall be assessed as Customs duties;
• Companies shall have the right to own buildings and lands, and to develop real estate as required for implementing and expanding their activities, irrespective of the nationality or the place of residence of partners and shareholders, or the percentage of their participation in the property. This includes the exception of lands in the Sinai Peninsula and other borderlands, as will be discussed later; and
• Companies can nominate their capital and run their accounts in foreign currency if most of the company’s activities relate to exports.
3.3. Free Zones
Egyptian, Arab and foreign investors may undertake projects in the Egyptian free zones regulated by the Investment Law. Most goods and materials imported into a free zone are not subject to import duties or regulations.
There are two types of free zones: public and private. Public free zones are established in specific locations by the General Authority For Investment and Free Zones (GAFI) including, Alexandria, Suez, Port Said, Damietta, Ismailia and Cairo.
The types of activities permitted in the free zones are mixing, blending, repackaging, manufacturing, assembling, processing and repair operations. Public free zones are usually located adjacent to seaports and airports to facilitate import-export procedures.
Private free zones are established exclusively for specific projects that either need to be located near the sources of their raw materials services, or which, by their nature, are located outside the public free zones. Private free zone status is more difficult to obtain due to the requirements set out by GAFI.
Incentives & Tax Breaks
Free zone companies can undertake either industrial or service activities. Free zone companies are not subject to income tax and are incorporated for the purpose of exporting abroad 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.
However, free zone projects are subject to an annual duty of 1% of the value of goods entering the free zone for storage with respect to warehousing projects and 1% of the value of goods exiting the free zone with respect to manufacturing and assembly projects. Projects whose activities do not require the entry or exit of goods shall be subject to an annual duty equal to 1% of their total revenue, based on audited accounts.
In a recent amendment to the Investment Law, all projects undertaken in free zones that entail high electrical consumption, such as steel, cement and fertilisers shall be subject to income tax as per Tax Law 91 of 2005, and accordingly shall pay income tax at the rate of 22.5% per annum on their net profits. Law 133 of 2010 enables oil refinery companies to set up and operate in a free zone according to the provisions of the Investment Law. Such projects shall be subject to tax as set forth in the Income Tax Law.
3.4. SPECIAL ECONOMIC ZONES (Sezs)
Under Law 83 of 2002 SEZs were established to provide entities with considerable economic independence, reduced bureaucratic procedures, lower taxation rates – with an average of 10% – and flexible administration and labour regulations.
Aside from tax related incentives, new legislation issued in 2016 pursuant to which further incentives are granted for heavy employment projects in the free zones, projects prioritising domestic industrial components for production and for renewable energy-related projects.
SEZs are self-governed through independent authorities for each zone, giving greater power to each zone’s board of directors. Production in SEZs is mainly focused on areas such as fertilisers, iron and steel, pharmaceuticals, building materials and petrochemicals.
4. Property Law
This includes special requirements and restrictions related to foreign ownership.
4.1. Law 230 Of 1996 Concerning The Regulation Of Ownership Of Built Real Estate & Vacant Land
Pursuant to Law 230 of 1996 regulating the ownership of built real estate and vacant land by non-Egyptians (“Law 230/1996”), a foreigner who acquires ownership of vacant land is obliged to commence construction within a period of five years from the land purchase agreement being notarised.
In the event the five-year period lapses without commencing construction works, the prohibition to dispose of the said vacant land shall be extended to a similar period as that of the delay in construction.
In principle, foreigners who acquire ownership of a building in accordance with Law 230/1996 may not dispose of such building before the lapse of five years from the date of acquiring same.
4.2. Law 94 Of 2005 Amending Some Provisions Of The Companies Law And The Investment Law
Law No. 94 of 2005 amending some provisions of the Companies Law No. 159 of 1981 and the Investment Law No. 8 of 1997 (“Law 94/2005”) stipulates some regulations for the foreign ownership of real estate in Egypt. Law 94/2005 provides that both companies and entities shall have the right to own land and property which is required to conduct and expand their activities, irrespective of the nationality of the partners, shareholders, their residency or the percentage of their shareholdings and partnerships, with the exception of land and property in areas designated by the Council of Ministers in determining the rules according to which such real estate is transferred.
4.3. Prime Ministerial Decree No. 350 Of 2007
Undefined This decree states that all companies and entities shall have the right to own the land and property necessary for conducting their business or expansion of their activities, irrespective of the nationality of the partners or shareholders, their residency and the percentage of their partnerships and shareholdings.
This is applied with the exception of land in strategic areas, such as those adjacent to the western, eastern and southern borders of Egypt; islands located in the Red and Mediterranean Seas; and the Suez Canal area. The decree prohibits foreign companies and entities from owning any land or property in the Sinai Peninsula, including land falling within the geographical scope of Ismailia, Suez and Port Said Governorates.
However, Law No. 14 of 2012, concerning the integrated development of the Sinai Peninsula, stipulates that: Companies with foreign participation are permitted to invest in certain areas of the Sinai Peninsula, provided that 55% of the share capital of such companies is owned by Egyptian nationals and provided that the activity conducted is of a developmental nature.
However, such companies may be exempt from the minimum quote of Egyptian participation, and thus fully owned by foreigners, after security clearances of the later and the approval of the relative security authorities.
Under the Sinai Development Law and its related executive regulations and decrees, only Egyptian nationals born to Egyptian parents (and that do not hold any other nationalities) or Egyptian companies in which capital is fully owned by Egyptian nationals shall have the right to own land in certain areas of the Sinai Peninsula.
However, foreigners are permitted to acquire usufruct rights over real estate in other areas of the Sinai Peninsula provided that the usufruct right is for a period of up to 30 years, which may be renewed provided that, in aggregate, the usufruct right shall not exceed 50 years.
Foreign nationals may also own built-up areas without acquiring ownership rights of the underlying land. In all cases, any ownership rights carried out in the Sinai Peninsula are subject to obtaining the approval of the board of directors of the National Authority for the Development of the Sinai Peninsula and the relevant competent security authorities.
5. Government Procurement
Undefined
5.1. Government Contracts
The Tenders Law, No. 89 of 1998, outlines the governmental procurement of goods, services and construction, which must be concluded through a public tender or public negotiations. In very limited cases, the governmental entity may recourse to a limited tender or limited negotiations.
In emergency cases only, direct contracting, without recourse to public or limited tenders/negotiations, may be permitted (such as for the procurement of medicines, vaccines and infant milk).
Although a government contract must be awarded on the basis of the most qualified and lowest bid, Egyptian domestic contractors shall be accorded priority if their bids do not exceed the lowest foreign bid by more than 15%. Each tender must be accompanied by the payment of a bid bond of up to 2%, which shall be refunded to unsuccessful tenderers.
A final deposit of up to 5% must paid by the winning bidder and will be released after execution of the contract and the lapse of the guarantee period.
5.2. Procurement Of Goods
Law No. 5 of 2015 aims to promote domestic products and ensure that all treasury expenditures related to government contracts prioritise the purchase of Egyptian products over imports when securing items related to such contracts.
Technically, government procurement must first prioritise products satisfying the proportion of domestic industrial components – all products in which domestic components exceed 40% of the final price of the product.
However, there are several exceptions to the 40% threshold: If the products satisfying the proportion of domestic components do not meet the required/ approved standards for the intended product; are not available or available in limited quantities and/or if its price exceeds by 15% the price of similar imported items.
The 40% threshold may be waived by virtue of a decree issued by the prime minister. The decree would be based on a proposal from the competent minister, together with the minister of finance and the minister of planning, in accordance with the parameters set-out in the Executive Regulations. If these guidelines are approved, then alternatives can be explored.
6. Value-Added Tax (Vat)
Undefined
6.1. New Law
A new VAT law was recently approved on August 31, 2016 and was published in the Official Gazette, taking effect on September 8, 2016.
The new VAT Law No. 67 of 2016 replaced the General Sales Tax Law No. 11 of 1991, which has been annulled as well as any other legal provisions contradicting the new law.
VAT will be applied to a broader range of goods and services while a number of basic goods and services which affect low-income earners will be exempt, in addition to other exemptions provided in the law.
The new VAT Law sets the tax rate at 13% for commercial transactions and at 10% for professions.
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