Rights and responsibilities: An outline of the legal environment for foreign companies

In the following, we aim to shed some light on the more relevant laws applicable in Egypt. In this respect, we shall focus on the corporate, labour, investment, and property laws of the country.

1.CORPORATE LAW: All newly established corporate vehicles in Egypt are subject to the provisions of the Companies Law No. 159 of 1981 (the “Companies Law”), which is the general law of application. The Companies Law prescribes all corporate governance rules and regulations, and regulates management, control issues, fiduciary duty and fiscal policies, together with operation of the company’s 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; and

• Representative offices. 1.1. Joint Stock Companies: Joint stock companies are among the most commonly used legal vehicles in Egypt and 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 based on the development of the project. Capital: A joint stock company may have authorised capital and must have issued capital (actual and paid in). The issued capital may not be less than LE250,000 ($35,575) for closed companies and LE500,000 ($71,150) 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 following the incorporation. Full payment of the issued share capital must be effected within a period of five years after the incorporation date. 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. Number of Shareholders: A 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 as having been offered to the public and the rules applicable to public companies would then apply. Objectives: Subject to obtaining the permits and licences for certain types of activities – like industrial projects, which require the approval of the Industrial Development Authority; banking projects, which require the approval of the Central Bank of Egypt; hotel management projects, which require the approval of the Ministry of Tourism; aviation projects, which require the approval of the Ministry of Civil Aviation; and capital market activities that require the approval of Egyptian Financial Supervisory Authority (EFSA) – there are no restrictions on a joint stock company’s commercial objectives, provided they are not in conflict with public policy or morality. However, to benefit from the incentives and guarantees discussed in the “Investment Law” section of this legal review, joint stock companies established there under must list in their objectives at least one those stipulated in the Investment Law. Management: Joint stock companies are managed by a board of directors, which is entrusted with the day-to-day operations of the company, and in this respect, it has full authority to represent the company vis-à-vis third parties. Its authority, however, excludes those matters explicitly reserved by law or 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 amongst its 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 management, either through board membership, share ownership or the establishment of an administrative committee from among the employees. In practice, this can raise some issues in labour-intensive companies. 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 that shareholders 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 that are approved for distribution but 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 whether 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 ability to conduct business. Stock Exchange Registration: Registration on the Stock Exchange is obligatory within one year of the formation of a company offering its shares to the public, otherwise the company may register its shares after the third year’s published profitable accounts. 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 from both employers and employees. Books & Records: Joint stock companies must maintain financial books and records and submit audited tax returns every year. 1.2. 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 services activities. Constitutive Documents: A limited liability company’s constitutive documents are its statutes. Model statutes have been issued by a Ministerial decree and any variations therefrom must be approved by the competent authority otherwise the registration may be rejected. Capital: No minimum or authorised capital is required for establishing a limited liability company. However, the capital must be fully paid at the time of incorporation. 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 natural persons or legal entities. Public Subscription: Shares in limited liability companies may not be offered to the public. 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. 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 from amongst its shareholders. Employee participation in management is not required. 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 employers and employees. Books & Records: The limited liability company must keep financial books and records and submit annual audited tax returns. Branch Offices: A foreign company may register a branch office in Egypt if the company has 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. Management: The branch office may be managed by a branch manager(s) who need not be an Egyptian national(s). 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 from both the employers and employees. Profits: The branch office must distribute at least 10% of its net profits to employees, up to a maximum of its total annual payroll. Books & Records: The branch office must maintain financial books and submit annual audited tax returns. Representative Offices: Foreign companies are permitted to establish representative or liaison offices, 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. Management: The representative office shall be managed by a manager(s) who need not be an Egyptian national(s).

2. 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 (much like its predecessor) an employee-biased law, designed to protect the employee.

In the following, we will primarily discuss:

• Employment contracts;

• Dismissal, termination and settlement;

• Closure of business or downsizing;

• Health care and pension payments;

• Work and disciplinary rules and regulations. 2.1 Employment Contracts: 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. Nevertheless, if the parties neglect to expressly renew the definite term contract but continue to perform same, it shall then be construed as an indefinite term contract. If an employee is hired on a probationary basis, the employment contract should expressly indicate the length of the probationary period and it shall not exceed three months. Working Hours & Overtime: Normal working hours may not exceed eight hours a day or forty-eight 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. 2.2 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 fault 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 two month prior termination notice to the employee in question and three months if the employee has served more than 10 years.

Unjustified termination would entitle the terminated employee to claim damages against the employer, and 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 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 12-month salary, pending a judgment on the merits of a case for unjustified termination. Amicable termination settlements 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 consider that the resignation is effective upon the lapse of such a one week period. 2.3 Health Care & Pension Payments: All private sector companies in Egypt are required to provide free health care 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. 3. INVESTMENT LAW General: 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 to the large number of disputes that were raised. 3.1 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. Firms 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 when 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, which are deemed necessary for the company’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 the place of residence of partners and shareholders, or the percentage of their participation in the property. This includes the exception of lands in Sinai Peninsula and other borderlands, as will be discussed later; and

• Companies can nominate their capital and run their accounts in foreign currency, if most of the company activities relate to export. 3.2 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 General Authority For Investment and Free Zones (GAFI) including, Alexandria, Suez, Port Said, Damietta, Ismailia and Cairo. Private free zones are established exclusively for a specific project or company, subject to the approval of GAFI. 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. 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 whose activities 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 refinery companies 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. 3.3 Special Economic Zones (SEZs): Under Law 83 of 2002 on SEZs, economic zones were established to provide entities with considerable economic independence, reduced bureaucratic procedures, lower taxation rates – with an average of 10% – and flexible administration and labour regulations. SEZ are self-governed through independent authorities for each zone, giving greater 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.

4. PROPERTY LAW: This includes special requirements and restrictions related to foreign ownership. 4.1 Law 230/1996 Concerning the Regulation of Ownership of Built Real Estate & Vacant: 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 commencing construction works, 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 such building before the lapse of five years from the date of acquiring same. 4.2 Law 94/2005 Amending Some Provisions of the Companies Law and the Investment Law: Law 94 of 2005 Amending Some Provisions of the Companies Law 159 of 1981 and the Investment Law 8 of 1997 (“Law 94/2005”) stipulates some regulations for the foreign ownership of real estate 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, 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. 4.4 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 decree prohibits foreign companies and entities from owning any land or property in the Sinai Peninsula, including land falling 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; and

• 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. 4.5 Law 14/2012 Concerning the Integrated Development 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 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 to the foregoing, the competent 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 law further stipulates that the duration of the usufruct right may not exceed 50 years in total.