Business-friendly policies: Essential legal information for establishing a company

In the following, we aim to clarify the laws relevant to businesses operating in Egypt. To this end, we shall focus on the corporate, labour, investment, and property laws of the country.

1. CORPORATE LAW: All newly established corporate entities in Egypt are subject to the provisions of the Companies Law No. 159 of 1981 (the Companies Law). The Companies Law prescribes all corporate governance rules and regulations, regulates management and control issues, and sets fiduciary duty and fiscal policies. It also dictates policies for the operation of companies’ 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. 92 of 1995. 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

• Branch offices

• Representative offices A. Joint stock companies: Joint stock companies are among the most commonly utilised legal vehicles in Egypt. They are usually used in those cases where there is a manufacturing project to be established in Egypt 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 depending on the level of development of the project. i. Capital: A joint stock company may have an authorised capital and must have an issued capital (actual and paid-in). The issued capital may not be less than LE250,000 for closed companies and LE500,000 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 of incorporation. Full payment of the issued share capital must be carried out within a period of five years after the incorporation date. ii. 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 Egyptian public for a period of one month, unless the Egyptian founding shareholders already pay up such percentage of shares prior to the public offering. iii. Number of shareholders: The 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 to have launched a public offering and the rules applicable to public companies would then apply. iv. Objectives: Subject to obtaining the necessary permit and licence for certain types of activities, such as industrial projects that require the approval of the Industrial Development Authority, banking projects that require the approval of the Central Bank of Egypt, hotel management projects that require the approval of the Ministry of Tourism, aviation projects that require the approval of the Ministry of Civil Aviation and capital market activities that require the approval of the Egyptian Financial Supervisory Authority, there are no restrictions on a joint stock company’s intended commercial objectives.

However, to benefit from the incentives and guarantees granted under the Investment Law as referred to in the Investment Law section of this legal review, joint stock companies established thereunder must list in their objectives at least one of the objectives stipulated under the Investment Law. v. Management: Joint stock companies are managed by a board of directors, which is entrusted with the day-to-day operations of the company. In this respect, the board has full authority to represent the company vis-à-vis third parties. Its authority, however, excludes those matters explicitly reserved by law or by 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 the company’s 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 company management, either through board membership, share ownership or the establishment of an administrative committee selected from among the employees. In practice, this can raise some issues in labour-intensive companies. vi. 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 approved for distribution which are not claimed within five years from the date they are payable shall be subject to the statute of limitations and be paid to the State Treasury. Shareholders may decide at an ordinary general assembly 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 business. vii. Stock exchange registration: Registration on the stock exchange is obligatory within one year of formation in the case of a company offering its shares to the public. Otherwise, the company may register its shares after the third year’s published profitable accounts. viii. Taxation & social insurance: A joint stock company is subject to corporate income tax at the rate of 20-25% of its net profits. Employees shall be subject to Egyptian salary tax and the company must make the necessary monthly tax withholdings.

Social insurance contributions are required for Egyptian employees and must be paid by both the employers and employees. ix. Books & records: Joint stock companies must maintain financial books and records and submit annual audited tax returns.

B. Limited liability companies: This type of company is usually formed for small projects that do not require major financing, such as companies involved in internal trade and service activities. i. Constitutive documents: A limited liability company’s constitutive documents are its statutes. Model statutes have been issued by a ministerial decree and any variations from the approved forms must be approved by the competent authority, otherwise the registration may be rejected. ii. Capital: No minimum or authorised capital is required for the establishment of a limited liability company. However, the capital must be fully paid at the time of incorporation. iii. Number of shareholders: Limited liability companies must have a minimum of two shareholders at all times and up to a maximum of 50 shareholders. Shareholders may be individual persons or legal entities. iv. Public subscription: Shares in limited liability companies may not be offered to the public. v. Objectives: Limited liability companies 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. vi. Management: Limited liability companies may be managed by one or more managers, one of whom must be an Egyptian national. A limited liability company that has more than 10 shareholders must establish a supervisory committee selected from among its shareholders. Employee participation in management is not required. vii. Taxation & social insurance: A limited liability company shall be subject to corporate income tax at the rate of 20-25% of its net profits. Employees shall be subject to salary tax and the company must make the necessary monthly tax withholdings. Social insurance contributions are required for Egyptian employees from both the employers and employees. viii. Books & records: Limited liability companies must keep financial books and records and submit annual audited tax returns. C. Branch offices: A foreign company may register a branch office in Egypt if the company has established a contract with an Egyptian private or public sector party to perform work in Egypt. Unlike a representative office, a branch office may engage in commercial, financial, industrial and contractual activities within the scope of the contract entered into. i. Management: The branch office may be managed by an Egyptian or foreign branch manager. ii. Taxes & social Insurance: A branch office is subject to corporate income tax at the rate of 20% of its net profits. Employees of a branch office shall be subject to salary tax and the branch office must make the necessary monthly tax withholdings.

For Egyptian employees, social insurance contributions are required to be paid by both the employers and employees. iii. Profits: The branch office must distribute at least 10% of its net profits to employees, up to a maximum of its total annual payroll. iv. Books & records: The branch office must maintain financial books and submit annual audited tax returns. D. Representative offices: Foreign companies are permitted to establish representative or liaison offices, as well as scientific or technical offices and other offices for the purpose of carrying out market surveys or studying the feasibility of production without entering into any commercial operations or commercial agency activities. i. Management: The representative office may be managed by an Egyptian or foreign branch manager.

II. 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 12 of 2003 (the “Labour Law”), superseding the former Labour Law 137 of 1981. Despite its progressive approach, the Labour Law remains, to a large extent, an employee-biased law, designed to protect the employees’ interests (much like its predecessor).

In the following, we will primarily discuss:

• Employment contracts

• Dismissal, termination & settlement

• Closure of business or downsizing

• Health care & pension payments

• Work & disciplinary rules & regulations A. Employment contracts: i. 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. If the parties fail to expressly renew the definite-term contract but continue to perform the same duties, it shall then be construed as an indefinite-term contract.

If an employee is hired on probation, the employment contract should expressly indicate the probationary period, provided it shall not exceed three months. ii. Working hours & overtime: Normal working hours may not exceed eight hours a day or 48 hours per week (excluding a one-hour break entitlement 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.

B. Dismissal, termination & settlement: The Labour Law has introduced a number of new provisions, including those governing termination of employment ( without including termination due to redundancy). Pursuant to Article 69, an employee may only be terminated if he/she commits a grave error 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 termination notice to the employee in question two months prior to termination. This notice must be given three months prior if the employee has served more than 10 years.

Unjustified termination would entitle the terminated employee to claim damages against the employer. If the court rules in favour of the employee, the awarded damages for unjustified termination would not be less than two months’ full salary for each year of service, in addition to any other legal entitlements.

Furthermore, pursuant to the recently issued Law 180 of 2008 amending certain provisions of the Labour Law, the employee is entitled to request the court to issue an urgent order to the employer for payment of a 12-month salary, pending a judgment on the merits in a case for unjustified termination.

Amicable termination settlements, meanwhile, 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 take into consideration that the resignation is effective upon the lapse of such a one-week period.

C. Health care & pension payments: All private sector companies in Egypt are required to provide free healthcare 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.

III. 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.

A. Guarantees & incentives available under the Investment Law: The most significant incentives and guarantees currently provided under the Investment Law are as follows:

• Investors are granted guarantees against expropriation and nationalisation. Companies 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 where the licence terms are violated.

• Articles of association, mortgages and loan agreements are exempt from stamp duties and notarisation 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 deemed necessary for the com pany’s project shall be assessed as Customs duties.

• Companies shall have the right to own buildings, lands, and to develop real estate as required for implementing and expanding their activities, irrespective of the nationality or place of residence of partners and shareholders or the percentage of their participation. This is with the exception of lands in Sinai Peninsula and other borderlands as will be illustrated later.

• Companies can nominate their capital and run their accounts in foreign currency, if most of the company activities are related to exporting.

B. 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 (GAFI), including Alexandria, Suez, Port Said, Damietta, Ismailia and Cairo. Private free zones are established exclusively for a specific project or company.

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, in order 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.

Free zone companies can either undertake industrial or service activities. Free zone companies are not subject to income tax and are incorporated for the purpose of exporting the products or services manufactured or provided in the free zone abroad.

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 duties.

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 that 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 very recent amendment to the Investment Law, all free zone projects with a 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 20% per annum on their net profits.

Law 133 of 2010 enables oil refining firms 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.

C. Special economic zones (SEZs): Under Law 83 of 2002 on Special Economic Zones (SEZs), economic zones were established to provide for entities of considerable economic independence, no bureaucratic procedures, lower taxation rates with an average of 10% on all activities, and flexible administration and labour regulations.

Such SEZs are self-governed through separate independent authorities in charge of each SEZ, which gives more 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.

IV. PROPERTY LAW: Special requirements and restrictions are in place related to foreign property ownership in Egypt.

A. Law 230/1996: Concerning the regulation of ownership of built real estate & vacant land by non- Egyptians: 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 five years from notarisation of the land purchase agreement. In the event the five-year period lapses without the commencement of construction, 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 the building before five years has passed from the date of acquisition.

B. Law 94/2005: Amending some provisions of the Companies Law and the Investment Law: Law 94 of 2005, which amends some provisions of the Companies Law 159 of 1981 and the Investment Law 8 of 1997 (“Law 94/2005”) stipulates some regulations and restrictions related to the ownership of real estate by foreigners in Egypt.

Law 94/2005 provides that companies and entities shall have the right to own land and property required to conduct and expand their activities. This is 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.

C. Prime Ministerial Decree No. 350/2007: 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 Prime Ministerial Decree 350/2007 prohibits foreign companies and entities from owning any land or property in the Sinai Peninsula. This includes land that falls within the geographical scope of Ismailia, Suez and Port Said governorates.

Moreover, the decree stipulates that all companies and entities may only have a usufruct right to use land and property located on the Sinai Peninsula if the following conditions are met:

• A usufruct contract must be concluded with the entity owning the land for a determined period starting from one year up to 99 years, which may be renewed upon the agreement of the parties.

• The necessary approvals must be obtained from the concerned authorities in addition to the concerned governorate.

• All buildings, facilities and premises constructed on the land granted by virtue of the usufruct right must be returned to the original owning entity at the end of the usufruct period.

D. Law 14/2012 Concerning the integrated devel- opment in Sinai Peninsula: Law 14/2002 was recently enacted to prohibit foreigners, be they natural or juristic persons, from owning any land or property in the Sinai Peninsula, including land falling within the administrative scope of Ismailia, Suez and Port Said Governorates.

The said law grants all natural and juristic persons, foreign and Egyptian, a usufruct right to use land and property located in the Sinai Peninsula, subject to certain conditions that must be fulfilled beforehand. As an exception, the relevant authority may grant its approval on the ownership of foreigners and Egyptians of built real estate in such areas to the exclusion of the land erected thereon.

The said law further stipulates that the duration of the usufruct right may not exceed 50 years in total.

OBG would like to thank Helmy, Hamza & Partners for their contribution to THE REPORT Egypt 2012