Fair play: The new tax law aims to close loopholes and improve collection

In December 2012, the Egyptian cabinet agreed to postpone the implementation of the country’s new property tax law – which had been due to take effect in January – until July 2013. The new law, which was intended to expand the tax base, was introduced to the statute book in 2008 under former president Hosni Mubarak but had not yet been implemented due to opposition from large property holders. PREVIOUS SYSTEM The previous property tax system, which dated to 1954, levied taxes at a rate of between 10% and 40% on the rental value of properties deemed to be within city limits, with revaluations supposed to occur every 10 years. The 1954 law also exempted projects that were under construction from paying the tax. This lead many developers to leave the top floor of their buildings unfinished, as this allowed the building to qualify as still under construction and thus to avoid the tax. Given the large expansion of Egypt’s urban area since the 1950s and difficulties in terms of updating property valuations, reform was in order.

NEW LAW: Under the new system, owners are allowed to exempt one residence, but any further properties which are valued at over LE2m ($284.6m) are taxed at a unified rate of 10% of the rental value, with deductions allowed for maintenance costs. A dedicated body within the Ministry of Finance, the Real Estate Tax Authority (RETA), administers the tax. Declaration forms are available online in an effort to increase compliance and smooth out assessment, while an electronic tracking database will also make it harder to evade payment.

Tax liability is assessed on an annual basis, but can be paid as a lump sum or in two instalments, one payable in June and the other in December. Schools, hospitals, and non-profits are also exempt. The loophole exempting unfinished projects has been closed, but the tax will not be applied to apartment buildings whose rents were frozen by the government in the 1950s, and whose tenants therefore now pay only a nominal rent. Although the law was passed in 2008, the tax will not be applied retroactively, and the 2013 valuations will stand as the baseline. As part of the transition to the new system, property owners were due to receive the final valuation of their property, together with their tax liability for the year, by the end of July. They would then have a window of 60 days to appeal if they felt the amount was too high, with the tax authorities bound to respond to any appeal within a 30-day timeframe.

CHALLENGES: The new tax has not been without controversy. Since it is levied per unit, rather than per person, someone with a second property worth just over the threshold would have to pay whereas a company or an individual owning several units worth less than LE2m ($284.6m) each would pay nothing. However, in response to criticism that the system was inequitable, the government has added provisions to the system to try and ensure greater acceptability: while 50% of revenues will go to central government, 25% will go to provincial governments and the remaining 25% will be used to fund efforts to tackle slum housing.

Given the exemptions, the tax has a rather low base: up to 90% of residential properties are exempted in some form, according to RETA. In May, the state-owned Ahram newspaper reported that the Egyptian government expected to raise LE2.7bn ($384.2m) in the first year of the new property tax system, from 15m units which have been assessed for tax purposes. Inspectors were in the process of assessing the value of a further 17,000 factories across the country.

Enforcing payment may well prove difficult, at least initially. While a number of gated communities developed by the country’s big real estate firms operate a system of service charges, a number of developers have reported difficulties in persuading residents to pay up, especially after a few years. If residents at the very top of the housing market are reluctant to pay, it seems unlikely that the government will be able to oblige those living in worse conditions to do so. Nevertheless, Egypt’s fiscal constraints, with a budget deficit in excess of 10% of GDP, mean that the government is keen to implement the tax as a means to improve revenues.