New laws in Egypt to impact personal and corporate taxation

Following a series of new laws that were issued in recent year, Law No. 96 was 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.

CIT

Egyptian CIT is levied upon corporations, partnerships and branches, and on all profits earned abroad or in Egypt. Non-resident companies operating in Egypt via 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 exempt from Egyptian CIT. In addition, not-for-profit organisations that solely exercise social, scientific, cultural and sporting activities are also exempt from CIT. The CIT rate in Egypt is currently 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. All firms are required to have financial statements for all firms 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 the tax return. For costs to qualify as tax deductible, they must be:

• Related to the business of the taxpayer and necessarily incurred in carrying out any related activities; and
• Valid costs that should be fully supported by the necessary documentation. The following profits are exempted from CIT and withholding tax (WHT):
• Yields on commercial paper and securities issued by Central Bank of Egypt (CBE), as well as gains realised on 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, with special rules applying to banks and insurance companies;
• Dividends and employee profit share payments;
• Remuneration of the company’s chairman and board of directors, which payments are 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 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.

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 Egyptian taxable profits (i.e. 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 (i.e., in the case of non-holding entities), dividends received by the latter, along with their relevant costs, shall be excluded from the taxable base of the profits of the juridical persons (i.e., no taxable profits/no deductible costs).

Distributions made by investment funds that only deal in securities (if their portfolio consists of at least 80% securities or other debt instruments) as well as distributions made by investment funds which are holding entities for other investment funds, that meet the requirements set out above, are all not taxable.

Investment funds’ received dividends shall be exempted 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 exempted. Interest on listed bonds is tax exempt, with the exception of Treasury bonds.

Capital Gains Taxation

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

Tax Depreciation

The Egyptian tax code differentiates between depreciation for tax purposes and accounting purposes. Rates of depreciation and methods of recording asset values vary accordingly. The 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 also may 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 may be deducted 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), and to this purpose a specific application request should be submitted to Egyptian Tax Authorities (ETA); and
• 25% of all other asset categories in each tax period. No depreciation will be calculated for land, antiquities and artistic works, jewellery and other assets that are non-depreciable by nature.

Thin Capital Provision

The Egyptian tax code contains a thin capitalisation provision that specifies that the interest paid by Egyptian tax-resident firms will only be tax deductible to the extent that those borrowers are capitalised within a debt-to-equity ratio of 4:1. It also includes the following definitions:

• Debt is defined as loans, bonds, Treasury bills and all forms of finance by debt through securities with fixed or variable interest.
• The definition of 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, with 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 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 a partnership into a corporation or transforming of a corporation into another corporation;
• 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.
• 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
• 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:

• More than 70% of its revenue is derived from the following: 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 at a low rate, i.e. less than 75% of the Egyptian CIT rate. If a company is designated as a CFC, its profits are taxed in Egypt under the equity method of revenue recognition, meaning that a percentage of revenue equivalent to the ownership of the Egyptian company is recognised as income for the investing entity and therefore taxed.

Transfer Pricing

Transfer pricing in Egypt is governed by Income Tax Law No. 91 of 2005, Article 30 and its Executive Regulations represented by Articles 39 and 40. The law defines the arm’s length principle (or neutral price), related parties and the transfer pricing methods along with 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 out 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 ETA is entitled to determine the relevant taxable profits on the basis of the arm’s length price.

On November 29, 2010 the ETA published in final form the “Egyptian Transfer Pricing Guidelines”. The preface of the guidelines indicate that they demonstrate the views of the ETA on the application of transfer pricing rules according to the articles of the law, and that the OECD Guidelines should be consulted for a more detailed description of principles, if so required.

The ETA also published the “Egyptian Transfer Pricing Guidelines” in order to “provide taxpayers with guidance on the application of the arm’s length principle in pricing their intra-group transactions and discuss the documentation that taxpayers are advised to develop in order to demonstrate to the ETA their compliance with such a principle.” Furthermore, in doing so, the ‘Egyptian Transfer Pricing Guidelines’ put forth a four-step approach to applying the arm’s length principle. Taxpayers are also advised to follow the four-step approach 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.” See the below summary for a brief overview of the ETA’s four-step approach:

• The first step requires 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 the 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.
• The second step is selecting the most appropriate pricing method(s). This step requires the selection of one or more transfer pricing methods to determine arm’s length prices for the controlled transaction.
• The third step requires applying the selected pricing method(s). This step requires extending the functional analysis and conducting a comparability analysis.
• The fourth step is 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 the third step on a permanent basis, and therefore, are required to monitor the validity of the method and data used. The documentation that taxpayers are expected to have prepared and maintained in Egypt is in line with that required under OECD guidelines. In broad terms, the ETA also set out documentation regulations in relation to transfer pricing. The documentation requirements are as follows:
• 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 a period of five years following the year during which the loss was incurred. Carrying losses backward is not allowed except for long-term construction contracts.

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 can be extended to six years in the event of proven fraud or intention to evade taxes.

Treaties

The Egypt 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 foreign nationals, are subject to a personal income tax (PIT) in Egypt. Personal income is taxable under the following circumstances:

• Work performed outside of Egypt and an income that is paid or charged to an Egyptian entity; or
• Work performed in Egypt regardless of whether the income is paid by 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 (residents and non-residents) at their primary place of employment are as follows:
• 0% for income up to LE6500 ($886);
• 10% for incomes more than LE6500 ($886) and up to LE30,000 ($4080);
• 15% for incomes more than LE30,000 ($4080) and up to LE45,000 ($6130);
• 20% for incomes more than LE45,000 ($6130) and up to LE200,000 ($27,200); and
• 22.5% for incomes more than LE200,000 ($27,200). 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 that then recharges the cost to an Egyptian entity), the Egyptian entity is required to withhold PIT and pay this 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 WHT is widespread in Egypt and affects various payments within and outside of Egyptian borders. 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. Amounts affected include:

• Yields and interest 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 share of any administrative expenses or control and supervision costs for overseas head office(s) for any permanent establishment operating in Egypt, which shall not be considered service charges. Upon determining the profits of the permanent establishment, the approved administrative expenses and the control and supervision costs borne by the office overseas 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 Charges for the activity of an athlete or artist, whether paid direct or through any entity, are also not included under the WHT regulation.

Dividens

The regime for dividends is separate from that detailed above. Egyptian dividends paid to resident individuals are subject to an income tax rate of 10% if their ownership is not higher than 25% of the paid-up capital or the voting rights. Otherwise, dividends shall be taxable at a 5% rate, 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 between 10% and 22.5%.

Dividends paid to resident or non-resident entities are subject to a WHT rate of 10% if their ownership is below 25% of the paid-up capital or the voting rights. Otherwise, dividends shall be subject to a 5% WHT rate, provided the shares in question were held for two years.

Exemptions

Egyptian tax law also provides exemptions from WHT for certain items, including:

• Service charges that do not include transportation, logistics, training, insurance, and shipping and handling;
• Subscription to conferences, listing fees, direct advertising and marketing expenses;
• Services related to the performance of religious rites and/or practices;
• Accommodation in a hotel or 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 authorities must include:

• A residence certificate from the tax authorities in the recipient’s country stating that 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 within 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 all contract documentation relating to the loan or royalty agreement. Upon receipt of such an application, the Egyptian authorities have 90 days to respond. If the ETA fails to respond to the application within this prescribed timeframe, the recipient is entitled to approach the tax authorities in their own country with a view to them pursuing a competent authority claim as outlined in the procedures set out in the relevant double-taxation treaty.

Egyptian companies are also obliged to withhold the taxes listed below 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 ETA within one month from the end of each quarter. The rates of deduction are as follows:

• Purchases of goods at 0.5%;
• Supply of services at 2%;
• Construction at 0.5%;
• Commission, discount and/or gifts at between 2% and 5%; and
• Professional services at 5%.

Advance Payement 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 exempted 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 ETA, 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 ETA within 60 days of the submission date means that it has been refused.

Egyptian tax regulations also require the taxpayer to pay 60% of the estimated tax due value to the ETA in three equal instalments. The stated payments are due on the following dates:

• June 30;
• September 30; and
• December 31. Taxpayers are also allowed to reduce the value of the third instalment in the event that it becomes apparent that the annual estimated profits could be below their original expectations. The basis of the tax due estimation is 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 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

The country has two types of stamp tax. Ad valorem is the primary type and is 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, in addition to 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 also 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% on the value of any advertising expenditure.

In-kind stamp tax is the secondary category and is charged on certain types of company documents, such as commercial contracts. The rate is fixed at between LE0.30 ($0.04) and LE0.90 ($0.12) 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 ($7360). If a business is engaged in importing, they must register regardless of turnover.

Sales tax rates range between 5% and 100% for a variety goods and services. The majority of goods and services are taxed at a rate of 10%. Registered entities must also file monthly sales tax returns with the relevant authorities. Recent amendments to the law also allow taxpayers to offset sales tax credits against any other type of tax due, such as CIT and salary tax, among others. A new value-added tax (VAT) law is set to be enforced in 2016, replacing the current sales tax law.

Real Estate Tax

The Real Estate Tax Law No. 196 of 2008 was 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 ($3270) 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 (the due date was previously 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, range between LE200 ($27.26) and LE2000 ($273); and
• The penalty for intentional non-submission or submission of a fraudulent tax return may range between LE1000 ($136) and LE5000 ($681).

General Anti-Avoidance Rules

The General Anti-Avoidance Rules (GAAR) have been recently introduced to the Egyptian tax code. The GAAR state that any transaction must have a purpose other than either tax savings or tax postponement. Otherwise, the ETA has the right to determine the true nature of the transaction for the purpose of identifying the proper tax treatment. Further ETA guidelines are expected to be issued.