The new property tax law has finally been ratified

The contention that nothing is certain except for death and taxes has been given further credence as property taxes have finally become an established part of Egyptian life. A law to impose these levies was first introduced six years ago, but was never enforced in the face of strong opposition from property owners, and demands that the threshold and criteria be changed.

Making Amends

The new reality of Egypt in 2014 swept aside much of that opposition, not least by changing the levels at which the tax comes into force, and through amendments that protected those least able to afford it from having to pay the tax.

The amount payable is based on an inventory of buildings made by the Real Estate Tax Authority (RTA), including both residential and non-residential units. Amendments to the law that underpins the tax (196/2008) have changed not only the criteria for levying the tax but also placed limits on future valuations. A range of safeguards and appeals procedures have also been built into the system. The law was ratified by President Abdel Fattah El Sisi in August 2014, although its provisions have been backdated to July 2013. Under the revaluation of units – which will take place every five years – an upper limit of 30% for raising the figure used for tax purposes has been placed on residences, and one of 45% for non-residential units.

The tax has been introduced as part of a review of government finances that includes a phasing-out of subsidies and a drive to reduce the budget deficit. The shortfall in the 2013/14 fiscal year was some 14%. El Sisi has mandated that this be cut to 10% for 2014/15.

Given the existence of an appeals procedure against the property valuations on which the new tax is based, it is difficult to assess the amount that will be raised in its first year. Even if no valuation level is changed on appeal, the procedure alone could cause a three-month delay. Samia Hussein, head of the RTA, said she hoped revenues would exceed LE3.5bn ($497m). In 2008, the then finance minister, Youssef Boutros Ghali, estimated that the tax would bring in about $185m in the first year and around $930m-1.1bn in subsequent years. The government will reportedly direct half the revenues from the tax to health, education and social insurance, with the other 50% split between the municipalities and developing informal areas.

Threshold

The LE500,000 ($71,000) property valuation level that the 2008 law stipulated for the tax to start at was raised in the recent amendments to LE2m ($284,000). Hussein said that exemption from the tax would apply to homes that have an annual rentable value of up to LE24,000 ($3400). The tax is due in all cases from the property owner and not a tenant. It will be levied on the valuation amount that exceeds LE2m ($284,000) after 30% has been deducted from this sum as a maintenance allowance.

According to the Ministry of Finance, the tax burden on an additional residence would be less than LE11 ($1.60) per month for properties with a value of LE100,000 ($14,200), rising to around LE105 ($15) for units with a value of LE1m ($142,000). “If a person owns two properties, the first will be exempted from taxes if its value is below LE2m ($284,000) but the second will be taxed according to its value,” said ministry adviser Tarek Farag. “If, for example, the second property is valued at LE1m ($142,000), the taxes will be LE1260 ($179) per year.” A valuation of LE5m ($710,000) would attract a tax bill of LE6300 ($895). Property tax is payable in two instalments – in January and July – with owners receiving notification of their liabilities by mail.

Appeals

The finance minister, Hany Kadry Dimian, was quoted in the local press as saying that appeals against tax bills could be made within 60 days of receipt, and that the committee would be mandated to consider them within 30 days. He said that backdating the law to July 2013 made the tax payable as of that date.

The RTA’s public treasury will bear the burden for those Egyptians who are unable to pay the new tax, according to Dimian. A committee headed by one of the state council’s advisers will adjudicate on those requests, and will also be responsible for assessing rental values using criteria that include geographical location and nearby facilities, as well as property type.

Farag said that property built on farmland in accordance with regulations would be exempt from taxes on agricultural land to avoid double taxation. However, he said that poultry houses, warehouses, cattle pens and any other food security project that was built on agricultural land would be subject to agricultural land taxes, though not to those on real estate. Hussein said a three-strong committee representing the RTA, the governorate and taxpayers would be required to reach unanimous agreement to ensure “the integrity of the process”. Any owners who were not satisfied could submit an appeal that would be examined by a separate committee headed by an independent expert.

As there is a strong home-ownership tradition in Egypt, there has also been a tendency to register homes that are additional to the main family residence in the names of wives and underage children, even if the family all live under one roof. Hussein said these extra homes in children’s names would not be exempt from tax consideration, nor would those registered in the names of wives unless they were inhabited by the wife concerned. The LE2m ($284,000) tax exemption limit does not refer to the total value of property a person owns, but to the value of the primary residence. If one person owns two units, with each valued at less than LE2m ($284,000), only one would be exempt. The other would be subject to property tax.

Non-Residential

The law covers every kind of building, not just residences, although some – such as poultry houses – may not be subject to property tax. The other exemptions include government and military property, and buildings owned by foreign governments on the condition that Egyptian government buildings are exempt from tax in the foreign country. Hospitals, educational institutions and non-profit charities, as well as religious buildings such as mosques and churches, are not subject to property tax. However, it will apply to tourist facilities, airports, ports, petrol stations and other private buildings. The individual criteria for assessing tax levels are the subject of discussions between the Ministry of Finance and other ministries.

Hotels

One area where there is already a sharp difference of opinion between the tax authorities and the Chamber of Hotels is the valuation level on hotels. A Ministry of Tourism official, quoted in the local press on condition of anonymity, said, “The RTA insists on calculating the real estate property tax according to the market value of the property, and as a result they will raise the burden on tourist establishments by more than 500% on historic hotels overlooking the Nile.”

The Chamber of Hotels wants replacement value to be used instead, pointing out the financial pressures on hotels since the revolution in January 2011, which had a damaging impact on tourism revenues. The dispute has been referred to talks between the Ministries of Tourism and Finance, although no resolution had been announced at time of press. The official added, “The ministry had hoped to see the real estate tax on the tourism industry delayed for at least two years until there were signs of recovery, but Egypt’s difficult economic conditions are preventing this from happening.”

Impact

While in theory the tax should have a negative impact on real estate sales, this is expected to be minimal. Demand for the level of properties subject to the tax is strong, and in some areas is outpacing supply. In any case, the financial incentives behind a rush for real estate fuelled by thoughts of hedging against inflation and possible currency devaluation are stronger than the deterrent effect of a relatively mild tax.