Rundown of general and new taxation regulations in Egypt

In recent years the Egyptian government has made extensive changes to the country’s tax framework, including Law No. 96, issued in 2015 to modify some articles in the corporate income tax (CIT) law. The practical application of some of the new concepts in the tax law has been clarified with the issuance of a set of executive regulations.

Corporate Tax Law

Egyptian CIT is levied upon all corporations, partnerships and branches, as well as on all profits earned abroad or in Egypt. Non-resident companies operating in Egypt via an Egyptian permanent establishment are also subject to CIT to the extent that revenue is recognised through their permanent establishment. Charities that are established in accordance with the provision of Law No. 84 of 2002 are fully exempt from Egyptian CIT. In addition, non-profit organisations that solely exercise social, scientific, cultural and sporting activities are exempt from CIT. The rate of CIT in Egypt stands at 22.5% for annual taxable profits.

Corporate taxable profits are calculated according to guidelines set out by Egyptian Accounting Standards, which are mostly in line with International Financial Reporting Standards. The main exceptions relate to financial leasing arrangements, which are subject to a standalone area of legislation in Egypt. Financial statements for all firms should be audited and companies must file a tax return before May 1, or within four months following the end of the financial year. The submission of tax returns must accompany the payment of the tax due.

CIT is assessed on the basis of the information provided in a company’s tax return. In order for costs to qualify as tax deductible, they must meet the following requirements:

• Be valid costs that are fully supported by the necessary documentation; and

• Be related to the business of the taxpayer and necessarily incurred in carrying out that activity. Certain profits are exempt from CIT and withholding tax (WHT) and they include the following:

• Yields on commercial paper and securities issued by the Central Bank of Egypt; and

• Gains realised on the trading in such securities. In addition, the following expenses are deemed to represent non-deductible expenditures:

• Excess interest in relation to loans where the taxpayer’s aggregate debt financing exceeds the thin capitalisation safe harbour debt-to-equity ratio of 4:1;

• Amounts charged to provisions and reserves, although special rules apply to banks and insurance companies;

• Dividends and employee profit share payments;

• Remuneration of the company’s chairman and board of directors, which is also not subject to income tax;

• Financial fines and penalties;

• Income tax payable;

• Interest on loans that carry a rate over two times that of the credit and discount rates announced by the Central Bank of Egypt at the beginning of the accounting period in question;

• Interest on loans paid to non-taxable or tax-exempt Egyptian tax residents; and

• Financing and investment costs related to revenues that are tax-exempt by law.

Taxation Of Dividends

Dividends received from non-resident or resident entities by an Egyptian holding resident entity shall be exempt from CIT after adding 10% of the distributed dividends’ value to the taxable profits earned in Egypt, which is in effect a positive adjustment in the annual tax return. This will apply provided that at least 25% of the shares in question are owned by the Egyptian resident entity. In addition, the shares in question should either have been held for two years prior to the distribution or be held for two subsequent years. Otherwise, such as in case of non-holding entities, dividends received by the latter, along with their relevant costs, shall be excluded from the taxable base on the profits of the juridical persons, meaning no taxable profits and/or no deductible costs.

Dividends paid by investment funds that deal only in securities – if their portfolio consists of at least 80% securities or other debt instruments – or by investment funds which are holding entities for other investment funds that meet the requirements set out above, are all not taxable.

Investment funds that received dividends shall be exempt from tax after adding 10% of the distributed dividends’ value to the investment fund’s taxable profits. Monetary funds’ investment and dividends paid are tax exempt. Interest on listed bonds is tax exempt, with the exception of Treasury bonds.

Capital Gains & Tax

Capital gains realised from shares’ disposal are subject to the ordinary CIT rate of 22.5%. Capital gains deriving from the disposal of listed shares are tax exempt under a two-year grace period, starting on May 17, 2015 and ending on May 17, 2017. Upon the expiration of the grace period, the ordinary 10% capital gain tax should apply.

Tax Depreciation

The Egyptian tax code currently differentiates between depreciation for tax purposes and for accounting purposes. Rates of depreciation and methods for writing down asset values vary accordingly. Differences between book and tax figures will result in deferred tax assets and liabilities. Asset depreciation using the straight-line method is set out as follows:

• 5% of the original cost may be claimed annually in respect to purchases, establishment, development, renovation or reconstruction of any buildings, establishments, installations, ships or aircraft; and

• 10% of the original cost may be claimed annually with respect to purchases, development, improvements to and/or renovation of any purchased intangible assets, which may also include goodwill. Asset depreciation using the declining balance method is set out as follows:

• 50% of the depreciable base value of computers, information systems, software and data storage set for each tax period;

• 30% of the cost of machines and equipment used in production could be deducted based on the request of the taxpayer as an additional first-year allowance, whether they are new or used, in the first fiscal period during which those assets are employed (this is in addition to the normal tax depreciation charge); to this purpose, a specific application request should be submitted to the Egyptian tax authorities; and

• 25% of all other asset categories in each tax period. No depreciation will be calculated for land, antiquities and artistic work, jewellery and other assets that are non-depreciable by nature.

Thin Capitalisation Provision

The Egyptian tax code contains a thin capitalisation provision that sets out that the interest paid by Egyptian tax-resident firms will only be tax deductible to the extent that those borrowings are capitalised within a debt-to-equity ratio of 4:1. Debt is defined as loans, bonds, Treasury bills and all forms of finance by debt through securities with fixed or variable interest.

Equity covers paid-up capital, plus all reserves and retained earnings, less retained losses, provided that any revaluation differences carried forward to reserves must be eliminated if they were non-taxable. Retained losses must be deducted only from the retained earnings and reserves. The thin capitalisation ratio is calculated as follows: average balance of debts/average balance of equity, the average being the average of the opening and closing balance.

Group Restructuring

Any capital gains resulting from changes of legal form are subject to tax. This tax may be deferred indefinitely if the shares of the resulting entity or transaction are not disposed of for three years following the event and all parties to the transaction are resident in Egypt.

The following situations are considered to fall within the scope of this provision:

• Merger of two or more resident companies;

• Demerger, both horizontally and vertically, of a resident company into two or more resident companies;

• Transforming a partnership or transforming a corporation into another corporation;

• Transformation of a legal person into a corporation;

• Acquisition of 33% or more of the assets and liabilities of a resident company by another resident company, in exchange for shares in the acquiring company; and

• Acquisition of 33% or more of the shares or voting rights, whether in terms of number or value, of a resident company, in exchange for shares in the acquiring company.

Controlled Foreign Corporation

For Egyptian tax purposes, a controlled foreign corporation is a non-resident company in which:

• More than 70% of its revenue is derived from dividends, royalties, interest, management or rental fees;

• An Egyptian entity owns more than 10% of its capital; and

• Profits of the investee company are either not subject to tax in its tax-resident jurisdiction or, if tax is paid, it is at a low rate, meaning less than 75% of the Egyptian CIT rate. If a company is designated as a controlled foreign corporation, its profits are taxed in Egypt under the equity method of revenue recognition – i.e., a percentage of revenue equivalent to the ownership of the Egyptian company is recognised as income to the investing entity and taxed.

Transfer Pricing

Transfer pricing in Egypt is governed by Income Tax Law No. 91 of 2005, and Article 30 and its executive regulations, which are represented by Articles 39 and 40. The law defines the arm’s length principle (defined as neutral price), related parties and the transfer pricing methods, as well as the priority with which such methods should be applied. Transfer pricing law in Egypt is applicable to related-party transactions including, among others, interest and other financial transactions that are carried out between related parties, whether internationally or domestically.

Under the law, if related parties have set conditions for their commercial or financial transactions other than those applied among independent parties, and such conditions led either to reducing the tax base or to shifting the tax burden from a taxable enterprise to an exempt or non-taxable enterprise, the Egyptian tax authorities are entitled to determine the relevant taxable profits on the basis of the arm’s length price principle.

Official Pricing Guidelines

In 2010 the tax authorities published in final form the Egyptian Transfer Pricing Guidelines with the intent of “providing taxpayers with guidance on the application of the arm’s length principle in pricing their intra-group transactions”. The guidelines are generally consistent with OECD rules. The preface of the Egyptian Transfer Pricing Guidelines indicates that the guidelines demonstrate the views of the country’s tax authorities regarding the application of transfer pricing rules according to the articles of the law, and that OECD guidelines should be consulted for a more detailed description of principles, if so required.

The Egyptian Transfer Pricing Guidelines includes a clear and simple approach to applying the arm’s length principle. Taxpayers are advised to follow this approach, which includes four steps, in order to price their controlled transactions according to the arm’s length principle and/or to assess the consistency of their pricing with the arm’s length principle in general. The below summary outlines a brief overview of the four-step approach:

• 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 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.

• Selecting the most 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.

• Applying the selected pricing method(s): This step requires extending the functional analysis and conducting a comparability analysis.

• 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 3 on a permanent basis, and therefore are required to monitor the validity of the method and the data used. The documentation that taxpayers are expected to have prepared and maintained in Egypt is in line with that required under the OECD’s guidelines. In broad terms, the Egyptian tax authorities have set out the following requirements in relation to documentation for transfer pricing:

• Documentation on the group’s structure and relationships between related parties;

• Details and analysis of the industry and market in which the taxpayer operates;

• Documents relating to the taxpayer’s business, pricing policies and business strategy;

• Analysis of the transactions under review with accompanying documentation;

• Functional analysis of risks, assets and functions performed by related parties; and

• Evidence of the comparables used to support the transfer pricing.

Tax Losses & Advance Rulings

Losses can be carried forward for tax purposes for a period of five years, following the year in which the loss was incurred. Carrying losses backward is not allowed, except for long-term construction contracts.

Advance rulings may be obtained from the tax authorities via a formal request, to which they are bound to respond within 60 days, according to the relevant clause of Law No. 91 of 2005. The statute of limitations on assessments and amendments of tax returns by the tax authorities is five years. This is extended to six years in the event of proven fraud or intention to evade taxes.

Taxation Treaties

The Egyptian government has concluded over 56 different double-taxation treaties, and this has helped create an attractive framework for the introduction of overseas investment capital. These treaties have created a system of reduced tax rates on withholding, dividend and royalty payments, although the amount and types of reductions may vary between countries.

Personal Income Tax

Individuals, whether Egyptian or nationals of foreign countries, are subject to a personal income tax (PIT) in Egypt under the following circumstances:

• Work is performed outside of Egypt and the income is paid or charged to an Egyptian entity; or

• Work is performed in Egypt, regardless of whether income is paid from an Egyptian or foreign source. The PIT rate for an individual working in a secondary place of employment is 10% without any deduction from their gross salary. The rates for individuals (resident and non-resident) at their primary place of employment are as follows:

• 0% for up to LE6500 (equivalent to $345 as of December 2016);

• 10% for more than LE6500 ($345) and up to LE30,000 ($1590);

• 15% for more than LE30,000 ($1590) and up to LE45,000 ($2390);

• 20% for more than LE45,000 ($2390) and up to LE200,000 ($10,600); and

• 22.5% for more than LE200,000 ($10,600). The provisions of the relevant double-taxation treaty may be applied; therefore, under certain cases some individuals may not be subject to PIT in Egypt. In addition, resident individuals have become taxable on their worldwide income if Egypt is the “centre of their commercial interests”.

Where individuals are being paid wholly by an Egyptian entity (or by an offshore entity which then recharges the cost to an Egyptian entity), the Egyptian entity is required to withhold PIT and pay this to the Egyptian tax authorities within 15 days after the end of each month. A quarterly tax return must be prepared and filed with the tax authority before the end of the month following the end of the quarter. At the end of the year, an annual PIT reconciliation is made for the whole year. However, in the event that the employees are receiving income from offshore sources, with no recharges to any Egyptian entity, individuals are personally responsible for filing an annual PIT return before the end of the January following the tax year in question.

Egyptian Withholding Tax

The application of WHT is widespread in Egypt and affects various payments within and outside of the country’s territory. Cross-border payments are generally subject to a 20% WHT rate on all amounts paid by Egyptian tax residents to overseas parties, subject to tax treaty rate deductions. This includes:

• Yields and interest on loans and credit facilities, if the loan term is less than three years;

• Royalties;

• Charges for the activity of a sportsman or artist, whether paid direct or through any entity; and

• Amounts paid abroad in exchange for services; this does not include administrative or control and supervision expenses borne by a head office overseas for a permanent establishment operating in Egypt. Upon determining the profits of the permanent establishment, the approved administrative expenses and the control and supervision expenses borne by the overseas office shall not exceed 10% of the taxable net profit of the establishment. The expenses borne within this percentage shall not include any royalties, returns, commissions or direct wages, provided that an approved and authenticated statement shall be submitted by the auditor of the head office.

Dividends

The regime for dividends is separate from the above. Egyptian dividends paid to resident individuals are subject to income tax at 10%, if their ownership is not higher than 25% of the paid-up capital or of the voting rights. Otherwise, dividends shall be taxable at 5%, provided the shares in question were held for two years. Dividends paid by non-resident entities to Egyptian resident individuals shall be taxable within the progressive rates used for income tax, which range from 10-22.5%. Dividends paid to resident or non-resident entities are subject to a 10% WHT, if their ownership is below 25% of the paid-up capital or of the voting rights. Otherwise, dividends shall be subject to a 5% WHT, provided the shares in question were held for two years.

Exemptions

Items exempt from WHT include: • Service charges that do not include transportation, training, insurance, shipping and handling expenses;

• Subscription to conferences, listing fees, direct advertising and marketing expenses;

• Services related to the performance of religious rites;

• Accommodation in a hotel or any other place; and

• Interest on loans and credit facilities, if the loan term is longer than three years.

Ministerial Decree No. 771

Ministerial Decree No. 771 of 2009 requires that Egyptian entities initially apply a full 20% WHT rate on payments made for royalties and interest, regardless of potential treaty relief. The overseas recipient may apply for a refund of the overpaid WHT within six months of receiving the income. The application to the Egyptian tax authorities must include:

• A residence certificate from the tax authorities in the recipient’s country, stating the recipient of the income in question is indeed a tax resident in that jurisdiction per the definitions set out in the relevant tax treaty;

• An explicit declaration by the recipient that they are the beneficial owner of the income and that it is not related to any permanent establishment in Egypt;

• In the case of royalty income, proof that the recipient is actually entitled to the income, which may be in the form of patent registration, proof of trademark ownership or any other suitable evidence; and

• A copy of the contract documentation relating to the loan or royalty agreement. Upon receipt of such an application, the Egyptian tax authorities have 90 days to respond. If the authorities fail to respond to the application within the prescribed time frame, the recipient is entitled to approach the tax authorities in their own country with a view to them pursuing a competent authority claim under procedures set out in the relevant double-taxation treaty.

Wht Filing

Egyptian companies are obliged to withhold the following taxes from their local suppliers and service providers. The same rules will apply to payments made by their customers. Egyptian entities must prepare WHT Form No. 41 for each quarter and file it with the Egyptian tax authorities within one month from the end of each quarter. The rates of deduction are as listed below:

• 0.5% for purchases of goods;

• 2% for supply of services;

• 0.5% for construction;

• 2-5% for commission, discount and gifts; and

• 5% for professional services.

Advance Payment Regime

The advance payment regime was introduced into the Egyptian tax code through Law No. 91 of 2005. This system works in tandem with the WHT system. Private entities are exempt from applying the provisions of local WHT in the event of applying the advance payment system. Taxpayers can apply for the advance payment regime through the submission of a request to the Egyptian tax authorities, along with a statement disclosing the most recent corporate tax due, or a figure estimating the expected corporate tax due in the case of applying during the first year of operations. This request should be submitted no later than 60 days before the start of the new tax period. Failure to receive a reply from the Egyptian tax authorities within 60 days of the submission date means it has been refused. The taxpayer must pay 60% of the value of the estimated tax due to tax authorities in three equal instalments. The stated payments shall be due on the following dates:

• June 30;

• September 30; and

• December 31. Taxpayers are allowed to reduce the value of the third instalment in the event that it becomes apparent that the annual estimated profits could be below expectations. The basis of the tax-due estimation is the value of the most recent corporate tax due. In the event of incurring losses in the previous year or applying the system in the first year of operations, an estimation of the tax due is acceptable. It is important to highlight the fact that taxpayers may be considered exempt from their annual payments while applying the advance payment system in either of the following cases:

• Incurring tax losses for two successive years; or

• Changing the legal form of the entity.

Stamp Tax

Egypt currently has two types of stamp tax: ad valorem and in-kind. Ad valorem is the primary type, charged on dealings with banks at a quarterly rate of 0.1% on loan balances. The tax will be applied to the sum of the starting balance of each loan receivable at the start of the quarter, plus the highest debit balance reached during the course of the quarter without deduction of any payment. Half of this amount will be levied on the bank and half on the recipient of the loan.

Banks are responsible for withholding and remitting the stamp tax due. The tax must be remitted within seven days before the end of each quarter. The stamp tax also applies at 20% of the value of any advertising expenditure.

The second type is in-kind stamp tax, which is charged on certain company documents, such as commercial contracts. The rate is fixed at LE0. 30-0.90 ($0.02-0.05) per page. This is in addition to a state development levy of LE0.10 ($0.005) per page.

Sales Tax

As of September 8, 2016, the general sales tax has been cancelled and substituted by a value-added tax (VAT). The rate has been set at 13% since the date of implementation and until June 30, 2017, when it will be increased to 14%.

Vat Mechanism

Input VAT can be offset against output VAT, with certain exceptions listed below. Regarding the scope of the new tax, all goods and services are subject to VAT. Services are widely defined as anything that is not a good. This will also cover management fees, royalties, etc.

Exemptions & Special Rates

A list of exempt goods and services includes 57 items specified in the law, such as electricity, basic foods and crude oil. Certain goods and services are specified as tabled items or subject to an excise tax. These have a special rate applied and their providers are not allowed to offset input VAT against their output VAT. These include construction contracts, professional services, petroleum products, etc. Double-taxed items: Certain specified goods and services are subject to the general VAT rate, as well as the so-called table rate. These include cars, white goods, air conditioning equipment and mobile telecommunications services.

A reverse charge mechanism applies on imported services from non-registered end-users. If a non-resident provider has not elected to appoint a local agent, then end-users are required to add VAT on the value of imported services and pay it to the Egyptian tax authorities. Non-resident providers of taxable items can register in Egypt through a VAT representative and collect VAT from end-users.

Registration Limit

Egyptian taxpayers have to register for VAT purposes only if their revenues are equal to or higher than LE500,000 ($26,500). Voluntary registration is possible below this limit. Providers of all goods and services subject to rates other than the general rate (tabled items and double-taxed items) are required to register irrespective of their revenues. There is also a delay fine, which is set at 1.5% per month or a portion of it.

Other Regulations

There a number of other VAT regulations and they are listed below. Tax refund timing: The tax refund is limited to 45 days from the date of filing of the request, which is assuming that all the relevant supporting documents and data needed are complete. Transitional period: The authorities have provided a three-month period, from date of implementation of the law, to move from the general sales tax system to the VAT system. This excludes cases where no delay fines have been granted to taxpayers concerning mistakes, errors and delays. Change of existing contracts: Article 11 stipulates that existing contracts at the date of issuing the VAT law will be amended by force of law to apply the new VAT provisions. Executive regulations to be issued will determine how such contracts are amended. Related parties: The arm’s length pricing principle should be applied to all related-party transactions. Anti-abuse provisions: Any transaction that is deemed by the Egyptian tax authorities to be intended mainly to avoid or postpone paying tax will be subject to re-classification and re-pricing by the tax authority, with the burden of proof lying with the taxpayer to prove otherwise.

Real Estate Tax

The Real Estate Tax Law No. 196 of 2008 was amended by Law No. 117 of 2014. Significant elements of the law include the following:

• The tax is based on the annual rental value of real estate, which is determined every five years by the Real Estate Taxation Authority;

• The taxpayer owes 10% of the annual rental value of the property after a 30% deduction on overall value, as well as a LE24,000 ($1270) exemption (for one unit per owner only) for residential properties and a 32% deduction on non-residential properties;

• Properties at all stages of completion are subject to tax;

• The tax is due on July 1, instead of January 1;

• Reassessment of the property’s rental value should not result in an increase in tax greater than 30% of the tax due for the previous assessment for residential properties or 45% for non-residential properties;

• The penalty for failing to submit a real estate tax return, or submitting one incorrectly, is in the range of LE200-2000 ($10.60-106); and

• The penalty for intentional non-submission or submission of a fraudulent tax return is in the range of LE1000-5000 ($53-265).

Anti-Avoidance Rules

The General Anti-Avoidance Rules have been recently introduced in the Egyptian tax code. The rules state that any transaction must have a purpose other than either tax savings or tax postponement. Should this not be the case, the tax authorities have the right to determine the true nature of the transaction for the purpose of identifying the proper tax treatment.

Customs Duties

Goods that enter Egypt are subject to the duties on imports prescribed in the Customs tariff issued by Law No. 184 of 2013, which determines the most-favourable-nation rate linked by international harmonised system code. Goods exiting Egyptian territories are not subject to a Customs tariff, except those for which a special provision exists. The country is party to many international free trade agreements that may reduce Custom duties or provide a full exemption. The amount as declared for Customs purposes at importation shall represent the actual value of goods. All actual costs and expenses paid in connection with the goods until their arrival at the port of destination in Egypt is added to the stated value. If the value is defined in foreign currency, it shall be estimated using the exchange rate announced by the central bank on the date the Customs statement is registered.