Over the past few years, there have been several changes made to the laws in Egypt that have aimed to reshape the tax system. This is important in light of the vital changes that have been witnessed in the field of taxation on a global level due to the dramatic, yet persistent fluctuations, in the world economy.
Corporate Income Tax (Cit)
CIT is imposed on the companies that are considered to be tax residents in Egypt, on all profits and income realised in Egypt and abroad. In addition, companies that are non-resident in Egypt, but realise profits through a permanent establishment (PE) in Egypt are also subject to CIT.
The CIT rate is 22.5% (flat rate) for corporate bodies, partnerships and PEs. However, there are different rates for the Suez Canal Authority, the Egyptian Petroleum Authority and the Central Bank of Egypt, which are taxed at a CIT rate of 40%. Also, oil exploration and production companies are taxed at a CIT rate of 406%.
The annual net taxable income is primarily based on the financial statements of the concerned entity, which should be prepared in accordance with the Egyptian Accounting Standards, which are similar to the International Financial Reporting Standards, with a few exceptions. All companies are required to have audited financial statements and must submit a tax return within four months of the end of their financial year. 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. While calculating the CIT, there are some deductions that could reduce the amount due.
Some expenses have certain conditions specified in the law that should be met in order for such expenses to be considered as deductible: 1. Interest on business loans, or the portion of a loan used for business purposes. The amount is calculated by:
• Deducting the interest paid from the interest received;
• Applying the thin capitalisation rules (4:1 debt to equity);
• Considering the rate of interest – whether it is in excess of double the credit and discount rates announced by the Central Bank of Egypt in January of the relevant year: 2. For related party loans, the interest rate must be calculated in line with the arm’s length principle; 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, to a maximum of LE10,000 ($659) per year or 15%, whichever is lower; 7. Donations to the Egyptian government, local administrative units and other public juridical persons; 8. In addition to this, the company should be considering the arm’s length principle 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, which exceeds twice the credit and discount rates; and
• Loan interest and other debts paid to non-taxable or tax-exempted natural persons (i.e. individuals).
Taxation On Capital Gains
Capital gains realised from the sale of listed Egyptian shares by both resident and non-resident shareholders are subject to 10% withholding tax. The application of this tax had been suspended for two years as of May 17, 2015. However, such suspension was extended for a period of three additional years, ending 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 Egyptian Stock Exchange (EGX).
However, capital gains realised from the sale of unlisted Egyptian shares by both resident and non-resident shareholders are subject to capital gains tax at the rate of 22.5% and in case of individual shareholders, the capital gains would be included in their income and thus subject to the progressive tax brackets 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 the asset values are different. The income tax law dictates that the following assets should be depreciated using the straight line method, through applying the relevant rates as follows:
• 5% of the cost should be claimed annually in respect of buildings, establishments, installations, ships and air crafts;
• 10% of the cost should be claimed annually with respect to intangible assets, including goodwill. Below are the 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;
• 25% of all other assets categories;
• There is a 30% accelerated depreciation rate that has recently become an option (i.e. will not be applied on the newly purchased or used machinery and equipment used in the production unless a request is submitted to the related authorities for the purpose of application of the accelerated depreciation tax rate). Thus, the company can effectively choose whether or not to apply accelerated depreciation. No depreciation is calculated on land, artistic and antiques works, jewellery and similar assets, given the fact that such items are 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. This entails that any interest expense on debt that exceeds this ratio would be disallowed as a deduction for CIT purposes. For clarification purposes, below are the definitions of both debt and equity as per the provisions of the Egyptian income tax law:
• Debt includes all amounts related to loans and advances, and the debit interest includes all amounts chargeable by the creditor in return for the loans and advances of any kind obtained thereby, bonds and bills. The loans and advances include, for purposes of this item, bonds and any form of financing by debts through securities with a fixed or a variable interest rate.
• Equity includes paid-up capital (PUC), in addition to all reserves and retained earnings reduced by accumulated losses and accordingly, this should serve as the basis for computing equity.
Group Restructuring
Generally, capital gains realised from a change in the legal form of an entity should be subject to capital gains tax at a rate of 22.5%.
However, the tax on gains realised from the revaluation of entities due to a change in their legal form could be deferred until the actual disposal of the shares and /or the assets provided that:
• The assets and liabilities should be stated at their pre-evaluation value. Additionally, depreciation is to be calculated based on pre-evaluation values.
The calculation of the depreciation of assets and the carry-over of the provisions and reserves must be according to the same values recorded before making such change.
• The company should maintain the shares or quotas for three consecutive years following the change of the legal form;
• The law states that the tax shall be due in the event that another change in the legal form took place;
• The following are considered the forms of changing a company’s legal form:
• Merger of two or more resident companies.
• Demerger of a resident company into two or more companies; and
• Transforming a partnership into a corporation, or transforming a corporation into another one; and
• The transformation of a legal person into a corporation.
Controlled Foreign Corporation (Cfc)
Egypt does not have specific CFC provisions, however; the Egyptian income tax law depicts the “place of effective management” concept which could be viewed as relatively similar. A company would be deemed to have an effective place of management in Egypt, if at least two of the following conditions were met:
• Daily management decisions are taken 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
• Shareholders owning more than 50% of the capital/ voting rights are resident in Egypt. Accordingly, if two of the above mentioned conditions were applicable, thus such company will be deemed to have an effective place of management in Egypt and thus, be treated as a resident company, subject to Egyptian tax laws and regulations.
Transfer Pricing (Tp)
TP rules were introduced in Egypt for the first time through Law No. 91 for the year 2005. On November 29, 2010, the Egyptian Tax Authority (ETA) issued the Egyptian TP Guidelines (EGTP).
The EGTP generally follow the OECD TP Guidelines and depicts the arm’s length principle (ALP), which is the most widely used principle in determining the transfer prices among related party transactions.
The EGTP grants the right to the ETA to adjust the prices of transactions between related parties in case it views that such prices are not at arm’s length (i.e. the prices are not in line with what independent enterprises would have been willing to accept/pay), in other words, do not reflect fair market value.
The EGTP are being issued as a series of parts, the first part of which was issued in final version to the public and provides guidance on the ALP for tangible goods, how to establish comparability, choosing the most appropriate TP method(s) and documentation requirements. The coming parts should cover more TP topics, specifically transactions involving intellectual property, intra-group services, cost contribution arrangements, and advanced pricing agreements.
A related party is defined as any person related to a taxpayer by a relation affecting the determination of the taxable base, including:
• The husband, wife and descendants;
• Associations of capital, and the person possessing, directly or indirectly, at least 50% of the number or value of shares, or voting rights in them;
• 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 in each of them. Accordingly, the EGTP put forth a four step approach to applying the arm’s length principle. Taxpayers are also advised to follow the four-step approach in order to price their controlled transactions in respect to the arm’s length 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 since the introduction of TP in Egypt in 2005.
The ETA specified, however, that they didn’t require the submission of TP documentation studies with the tax return; rather, they are required to be available upon request in a tax audit. Studies are acceptable in English, but a translation may be requested from the taxpayer.
Losses
Tax losses could be carried forward for tax purposes for a period of five years from which the loss was incurred. Also, carry backward of losses is available, but subject to specific conditions.
Advance Ruling
The Egyptian income tax law includes an advance ruling provision. The law states that the ruling should be submitted in a written form, and should be supported by all the relevant documents (related to the certain transactions for which the ruling is required). As mentioned in the law, the required supporting documents are copies of the contracts and accounts connected with the carried out transactions.
The ETA should provide a response (to the advance ruling) within a period of 60 days from the date of receiving all the required documents.
Double Tax Treaties (Dtt)
The Egyptian government has concluded 60 tax treaties with different countries. Such treaties have created a system of sharing the 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 ($461), personal income tax is calculated based on progressive rates that have been updated as follows:
• 0% for income up to LE7200 ($474) with no tax credit;
• 10% for income more than LE7200 ($474) up to LE30,000 ($1980) with 80% tax credit;
• 15% for income more than LE30,000 ( $1980) up to LE45,000 ($3000) with 40% tax credit;
• 20% for income more than LE45,000 ($3000) up to LE200,000 ($13,200) with 5% tax credit; and
• 22.5% for income more than LE200,000 ($13,200) 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 provisions of the Egyptian income tax law, an individual is considered to be 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 12 months; and
• An Egyptian who performs the duties of his or her position abroad and 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 (Wht)
Application of WHT is widespread in Egypt and affects various payments on local and international levels.
For the local WHT tax, an Egyptian entity has a liability to withhold tax against any payments in excess of LE300 ($20) 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 supplying services;
• 2% on all types of services;
• 5% on commissions fees; and
• 5% on professional fees. These payments of WHT are prepayments of the providers’/suppliers’ liability to CIT.
In addition, cross-boarder payments are generally subject to 20% WHT on the following types of payments made by an Egyptian tax resident entity to an offshore party. Payments includes:
• 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 relevant country.
Dividends
In 2014 a tax on dividend payments was introduced in Egypt for the first time and was subsequently amended in August 2015.
Dividends distributed by resident companies to resident or non-resident companies, or individuals are subject to a 10% WHT, however, such rates could 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 case it is 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%*22.5%). However, availing the participation exemption is subject to fulfilling the below two conditions collectively:
• 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 more than LE10,000 ($659) would be subject to WHT at a rate of 10% that could 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. In this case, the dividends would not be subject to personal income tax, provided that the associated costs are non-deductible.
However, dividends received by resident individuals whose annual investment portfolio does not exceed LE10,000 ($659) 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 PE’s fiscal year end. In such case, the dividends deemed to be distributed would be subject to 5% WHT.
Exemptions
Egyptian tax law provides 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 No. 771
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 a period of no more than 60 days, from the date of receiving all of the required information and documents 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 Egyptian income tax law, and the interpretation to such amendments is that the “withhold and reclaim refund” procedure (explained above) should no longer be applicable. However, in practice; the ETA may still expect such procedure to be followed by the taxpayer.
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 in respect to the WHT to act as an advance payment, and then at the end of the financial year, the ETA would offset the amount due from the advance payment, and any difference would be 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 and is regulated by 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 nominal stamp tax at an approximate amount of LE1 ($0.07) on each page of the contract (i.e. each of the counterparts of the contract should bear LE1 ($0.07) per page of the contract), on each copy of the contract.
This is generally considered minimal and thus should generally 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, 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 generally subject to 20% stamp tax as per the stamp tax law;
• Stamp tax on payments made by governmental bodies; 4. A specific rate has been set for payments made by a governmental 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 recently there has been a newly introduced stamp tax imposed on the disposal of securities as follows:
• Stamp duty is imposed on the proceeds (i.e. 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 stamp 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;
• 0.150% shall be paid by both the seller and the buyer from June 1, 2018 and until May 31, 2019; and
• 0.175% shall be paid by both the seller and the buyer from June 1, 2019. However, in case that any of the below mentioned conditions is met, then the rate of the stamp duty to be imposed in such case 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 be subject to the 0.3% stamp duty.
The seller shall pay 0.3% once he reaches the exit limit and the buyer shall also pay 0.3% when he 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 as 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)
Recently, the 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, however, there are a number of basic goods and services that are exempt from VAT, mainly because they affect low-income earners. This is in addition to other exemptions 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 relies with the business (i.e. businesses collects the VAT on behalf of the ETA).
The 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 that is applied on all constructed real estate units and the like all over the country. The tax should apply starting from July 2013 and then 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. Committees, called assessment committees, should be formed in every governorate, to be responsible for assessing the market value of the constructed real estate units. The assessment shall be based on a qualitative classification of these real estate units, according to the building standard, the geographical position and the annexed utilities. Then the capital value of the real estate is 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 to manage tax avoidance and combat abusive tax arbitrage, which Egypt introduced in 2014. 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.
Read More from OBG
