Pushing ahead: Changes to tax legislation are moving forward as planned

CORPORATE INCOME TAX: Egyptian corporate income tax (CIT) is levied upon corporations, partnerships and branches, and on all profits earned abroad or in Egypt. Non-resident companies operating in Egypt by way of an Egyptian permanent establishment are 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 exempted from Egyptian CIT. In addition, non-profit organisations that exercise social, scientific, cultural and sporting activities are exempted from CIT provided that their main activities remain in line with the fields mentioned.

The CIT rate in Egypt is 25% for annual taxable profits. Corporate taxable profits are calculated according to guidelines set out by Egyptian Accounting Standards (EAS). The EAS are in line with both International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). The main exceptions to this similarity to IAS and IFRS relate to leasing arrangements (which are subject to a standalone area of legislation in Egypt) in addition to the domestic rules in relation to the revaluation of fixed assets and presentation of a bank’s financial statements and provisions, all of which differ from both IAS and IFRS rules.

Financial statements for all firms should be audited and companies must file a tax return before May 1 (or within four months following the financial year-end). The submission of tax returns must accompany the payment of the tax due. CIT is assessed on the basis of the information provided in the tax return. In order for costs to qualify as tax deductible, they must be:

• Related to the business of the taxpayer and neces sarily incurred in carrying out that activity; and

• Valid costs which should be fully supported with the necessary documentation. The following profits are exempted from CIT:

• Dividends and distributions of investment funds established under the Capital Market Law No. 95 of 1992, which limits activities to investing in securities only;

• Capital gains on the sale of securities listed on the Egyptian stock exchange; and

• Yields on commercial paper and securities issued by the Central Bank of Egypt (CBE), as well as 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;

• Dividends and employee profit share payments;

• Remuneration of the company’s chairman and board of directors;

• Financial fines and penalties;

• Income tax payable;

• Interest on loans which carry a rate over two times that of the credit and discount rates announced by the CBE 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.

TAX DEPRECIATION: The Egyptian tax code differentiates between depreciation for tax purposes and depreciation for accounting purposes. Rates of depreciation and methods for writing down asset values vary. Differences between book and tax figures will result in deferred tax assets and liabilities.

Asset depreciation which makes use of the straightline 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.

• 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 also may include goodwill. Asset depreciation which makes use of 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;

• 25% of all other asset categories in each tax period; and

• 30% of the cost of machines and equipment used in production shall be deducted as an additional firstyear 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 depre ciation charge.) No depreciation will be calculated for land, antiquities and artistic work, jewellery and other assets that are non-depreciable in nature.

THIN CAPITALISATION: The Egyptian tax code contains a thin capitalisation provision which sets out that interest paid by Egyptian tax-resident firms will only be tax deductible to the extent that those borrowers are capitalised with 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. In accordance with the current regulation, average debts and equity are calculated as follows: (opening balance + closing balance) / 2.

GROUP RESTRUCTURING: According to a new group restructuring provision in Law No. 11 of 2013, any capital gains resulting from mergers, demergers or conversions of legal form are subject to tax.

The tax may be deferred indefinitely if the shares of the related entity are not disposed of for three years following the event and all parties to the transaction are resident in Egypt. The following events 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 of a partnership into a corporation or transforming of a corporation into another corporation;

• Purchasing or acquiring 33% or more of the shares or voting rights of a resident company, whether in terms of number or value, of a resident company against shares in the acquiring company;

• Purchasing or acquiring 33% or more of the assets and liabilities of another resident company; and

• Transformation of a legal person into a corporation.

CONTROLLED FOREIGN CORPORATION: For Egyptian tax purposes, a controlled foreign corporation (CFC) is a non-resident company in which:

• An Egyptian entity owns more than 10%;

• More than 70% of the non-resident corporation’s revenue is derived from the following: dividends, royalties, interest, management or rental fees; and

• Profits of the investee company are either not subject to tax in its tax resident jurisdiction or if tax is paid at a low rate (less than 18.75%). If a company is designated a CFC, its profits are taxed in Egypt under the equity method of revenue recognition – that is, a percentage of revenue equivalent to the ownership of the Egyptian company is recognised.

TRANSFER PRICING: Egypt’s domestic tax legislation has contained basic transfer pricing provisions since 2005, with a requirement for transactions between related parties to be carried out at arm’s length specified in the primary CIT tax legislation (Law No. 91 of 2005). The accompanying executive regulations set out the traditional methods for determining transfer pricing policies as the following: comparable uncontrolled price, cost plus or the resale price method.

The concept of pricing at arm’s length is set out in Law No. 91 of 2005. The accompanying executive regulations to this primary legislation clarify the scope of Egypt’s transfer pricing provisions. Arm’s-length price is defined in the law as “the price upon which two or more independent enterprises deal, determined according to market forces and transaction conditions”.

DOCUMENTATION REQUIREMENTS: The documentation that taxpayers are expected to have prepared and maintained in Egypt is in line with that required elsewhere (i.e. no real additional elements outside what the OECD guidelines would necessitate elsewhere.) In broad terms, the Egyptian Tax Authority (ETA) set out the following requirements in relation to transfer pricing:

• Documentation on the group 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 comparable used to support pricing.

TAX LOSSES: Losses can be carried forward for tax purposes for five years following the year in which the loss was incurred. Carrying losses backward is not allowed.

ADVANCE RULINGS: Advance rulings may be obtained from the ETA via a formal request, to which the ETA is 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 ETA is five years. This is extended to six years in the event of proven fraud or intention to evade taxes.

TREATIES: The Egypt government has concluded over 52 different double taxation treaties, and this has helped create an attractive framework for the introduction of overseas investment capital. The treaties create 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 foreign nationals, are subject to a personal income tax (PIT) in Egypt in the following circumstances:

• Work is performed in Egypt regardless whether income is paid from an Egyptian or foreign source; or

• Work is performed outside Egypt and the income is paid or charged to an Egyptian entity. 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 ( residents and non-residents) at their primary place of employment are as follows:

• 0% for up to LE5000 ($711.50);

• 10% for LE5000 ($711.50) and up to LE30,000 ($4269);

• 15% for LE30,000 ($4269) and up to LE45,000 ($6403);

• 20% for LE45,000 ($6403) and up to LE250,000 ($35,575); and

• 25% for more than LE250,000 ($35,575). The upper tax rates are applied after deducting all exemptions allowed under Tax Law No. 91 of 2005. The provisions of the relevant double taxation treaty may be applied, therefore under certain cases some individuals may not subject to PIT in Egypt.

REPORTING OBLIGATIONS: 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 over to the ETA within 15 days after the end of each month. A quarterly tax return must be prepared and filed with the ETA 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 January following the tax year in question.

EGYPTIAN WITHHOLDING TAX: Application of withholding tax (WT) is widespread in Egypt and effects various payments within and outside of Egyptian borders.

CROSS-BORDER PAYMENTS: These are generally subject to a 20% WT rate on all amounts paid by Egyptian tax residents to overseas parties, subject to tax treaty rate deductions. Amounts affected include:

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

• Royalties; and

• Amounts paid abroad in exchange for services. This does not include the amounts charged to a permanent establishment for its share in the administrative expenses of its head office, nor amounts paid abroad in exchange for the activities of an athlete or artist. No WT rates are applicable to dividends paid from Egypt to entities abroad.

EXEMPTIONS: Items that are exempt from WT include: service charges that do not include transportation, training, insurance, shipping and handling; subscription in conferences, listing fees, direct advertising and marketing expenses; and interest on loans and credit facilities if the loan term is longer than three years.

MINISTERIAL DECREE 771: Ministerial Decree No. 771 of 2009 requires that Egyptian entities initially apply a full 20% WT rate on payments made for royalties and interest, regardless of potential treaty relief. The overseas recipient may apply for a refund of the “overpaid” WT within six months of receiving the income. The application to the Egyptian 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 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 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 authorities have 90 days in which to respond. In the case of the ETA failing to respond to the application within the prescribed timeframe, the recipient is entitled to approach its own tax authorities with a view to them pursuing a competent authority claim under procedures set out in the relevant double taxation treaty.

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 WT Form No. 41 for each quarter and file it with the ETA before one month after the end of each quarter. The rates of deduction are as follows:

• Purchases of goods – 0.5%

• Supply of services – 2%

• Construction – 0.5%

• Commission, discount and gifts – 2-5%

• Professional services – 5% TAX ADDED REGIME:Under the provisions of Law No. 101 of 2012, certain entities are required to add a maximum of 5% to amounts charged to private entities. The tax shall be added to the following activities:

• Selling and distribution of goods for the purpose of trading and manufacturing;

• Selling and distribution of manufactured products and agricultural crops, whether local or imported, for the purpose of trading and manufacturing; and

• Leasing of a location for the purposes of residing, manufacturing or offering services in the location. The tax shall be collected along with the amount it is added to. This will be considered a pre-payment of the payer’s tax. The specific rates will be determined by Ministerial Decree No. 177 and will be based on the nature of the activity. The rate may not exceed 5%. This tax does not apply to entities that are exempted from tax by law.

The Customs Authority shall collect from importers a percentage of the value of their goods that are permitted to be imported into the country for trading or manufacturing purposes. The rate is currently set at 0.5%.

ADVANCE PAYMENT REGIME: The advance payment system was introduced into the Egyptian tax code via Tax Law No. 91 of 2005. This system works in tandem with the WT system. Private entities are exempted from applying the provisions of local WT in the event of applying the advance payment system.

Taxpayers can apply for the advance payment system by submitting a request to the ETA, along with a statement disclosing the most recent corporate tax due (or an estimated figure for 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 ETA within 60 days of the submission date means it has been refused.

The taxpayer must pay 60% of the estimated tax due value to the ETA in three equal instalments. The stated payments shall be due on the following dates:

• June 30

• September 30

• December 31 Taxpayers are allowed to reduce the value of the third instalment in the event that it becomes apparent that the annual estimated taxpayer’s profits could be below expectation. The basis of the tax due estimation shall be based on 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 exempted from their annual payments whilst 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 has two types of stamp tax. Ad valorem is the primary type charged on dealing 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 in 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.

A stamp tax of 0.1% will also be levied on both the buyer and seller in any transaction involving the purchase or sale of securities whether the securities are foreign or Egyptian or whether the securities are listed or unlisted. This tax must be remitted within 15 days of the end of the month in which the transactions take place. In addition to this, the stamp tax also applies at 20% on the value of any advertising expenditure.

In-kind stamp tax is the secondary type charged on certain types of company documents, such as commercial contracts. The rate is fixed at LE0.30-0.90 ($0. 04-0.13) per page. This is in addition to a state development levy of LE0.10 ($0.01) per page.

SALES TAX: Most transactions carried out in Egypt are subject to sales tax. Service and manufacturing businesses are required to register for this if their turnover exceeds LE54,000 ($7684). If a business is engaged in importing, they must register regardless of turnover.

Sales tax rates range from 5-100% for various goods and services. The majority of goods and services are taxed at a rate of 10%. Registered entities must file monthly sales tax returns with the relevant authority. Recent amendments to the law allow taxpayers to offset sales tax credits against any other type of tax due (such as CIT and salary tax).

REAL ESTATE TAX: The Real Estate Tax Law No. 196 of 2008 was recently amended by Law No. 103 of 2012. Some major elements of the law are as follows:

• Tax is based on the annual rental value of real estate, which is determined every five years by the Real Estate Tax 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 ($3415) exemption (for one unit per owner only) for residential properties and a 32% deduction on non-residential properties.

• Property at all stages of completion is subject to tax.

• The tax is due on July 1.

• According to the new Law No. 103 of 2012, these dates will be changed. The law is not yet clear on when the new payment dates will be aside from stating that they will be changed in line with the date from which the tax is considered due (previously January 1, now July 1). Executive regulations will likely be issued for this law in the future in order to clarify.

• 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, ranges from LE200-2000 ($28-284). The penalty for intentional non-submission or submission of a fraudulent tax return may range from LE1000-5000 ($142-711).