Will regulatory changes in Egypt attract more foreign direct investment?

Egypt’s legal framework outlines restrictions on foreign investment only in specific sectors. These include commercial agencies (which require 100% local ownership), import firms (51% local ownership) and certain activities that require regulatory approvals – irrespective of the nationality of the investor – such as banking and insurance. Companies operating in the Sinai Peninsula must also be fully owned by Egyptians. There is no local minimum shareholding requirement for projects related to renewable energy.

Foreign investors looking to establish a business in Egypt – whether directly or through a joint venture – can enter the market by establishing a legal entity, the structure of which would depend on the needs and the scope of business involved. In this respect, there are various types of entities laid out in the Companies Law No. 159 of 1981 (Companies Law). These include permanent entities such as limited liability companies and joint-stock companies, which are the two most common forms of corporate vehicles in Egypt. Other entities have a more temporary presence, such as branch offices. The law does not stipulate nationality requirements for the aforementioned corporate vehicles; all may be fully owned and managed by foreigners who have passed a security check.

Investment

The government continues to work to attract investment, especially in several mega-projects in fields such as electricity, energy, industry, agriculture, health care and construction. If business activity falls within the scope of the targeted fields covered by Investment Law No. 72 of 2017 (Investment Law), it would be beneficial for companies looking to enter the market to establish a corporate vehicle under its purview. This will enable the firm to qualify for the benefits and incentives offered by the law, which creates a smoother and more efficient investment climate.

The Investment Law grants general incentives and guarantees for companies incorporated under its remit, as well as special incentives for projects that are prioritised by the government. These guarantees include equal opportunities for all investors – irrespective of their nationality – and the size and/or location of their project(s), without any discrimination; free profit repatriation; the prohibition of confiscation of private investment; and residence permits for foreign investors for the term of the investment project.

The legal framework allows foreign investors to establish, expand and fund their project from abroad with no restrictions, either in Egyptian pounds or a foreign currency of their choosing. The legislation also provides for facilitated repatriation of dividends in the event of liquidation or upon the completion of the project. The repatriation is subject to the availability of the specified foreign currency and largely depends on the local bank, especially in terms of facilitating the allocation of adequate amounts of foreign currency to serve the investor, assuming that the business yields its revenue in Egyptian pounds.

Renewable Energy Projects

As part of the government’s initiative to reach its renewable energy targets – including a pledge for renewables to account for 60% of the energy mix by 2035 – the Renewable Energy Law No. 203 of 2014 introduced several schemes and mechanisms for renewable energy projects by private investors. The four main schemes are as follows:

• Build-own-operate (BOO) model: Initiated by the government represented by the Egyptian Electricity Transmission Company (EETC), the BOO model allows private investors to build, own and operate renewable energy projects, and sell electricity to the EETC (off-taker) at a price agreed by the two parties.

• Competitive bidding: Administered by the New and Renewable Energy Authority (NREA), competitive bidding allows private investors to construct and install state-owned generation facilities via engineering, procurement and construction contracts.

The NREA operates the facilities and sells electricity generated to the EETC at a price set by the Egyptian Electric Utility and Consumer Protection Regulatory Agency (EgyptERA) and approved by the Cabinet. In 2015 the Ministry of Electricity and Renewable Energy (MERE) issued special public procurement regulations to apply to all NREA-related procurement activities.

• Feed-in tariffs (FITs): Under this model, investors can build, own and operate renewable energy facilities, and sell the generated electricity to the EETC in accordance with the terms of a power purchase agreement and based on specific tariffs for electricity announced by the government. These vary according to the capacity of the project and are fixed for a term of 20 and 25 years for wind and solar projects, respectively. The first round of the FIT programme was initiated by MERE in 2014, and the tariffs were valid for a period of two years starting in October of that year. The second round was announced in 2016, and the electricity tariffs were valid for two years starting from October 2016. While several existing solar and wind projects are currently operating under the FIT scheme, no further rounds have been launched by the government.

• Independent production: Independent power production is a third-party scheme, allowing independent power producers to enter into bilateral contracts and sell power generated by the facility directly to consumers, using the national grid against wheeling and grid-access charges, payable to the grid operator. The wheeling charges are determined by EgyptERA and regularly published on their website.

Cashless Economy

The Central Bank and Banking Sector Law No. 194 of 2020 resulted in several developments in the financial services sector. It introduced a series of technological and digital initiatives to facilitate digital transformation in order to phase out cash payments in daily transactions slowly. These include digital finance tools, the digital settlement of cheques, e-money, cryptocurrency, financial technology (fintech) and regulatory technology (regtech).

The Central Bank of Egypt (CBE) has prioritised the adoption of technology in the financial services sector, including by encouraging fintech and regtech solutions. To that end, the CBE exempted, on a temporary basis, start-ups and other entities that are in the testing phase of fintech and regtech development from some of the licensing requirements set forth by the law. In doing so, it hopes to facilitate the creation of innovative financial services tools.

To facilitate further technological development, in February 2022 a law establishing guidelines for the use of fintech in non-banking financial activities was issued. Law No. 5 of 2022 is aimed at expanding the use of non-banking financial instruments, in line with a wider drive to boost financial inclusion.

Start-ups

The government implemented a series of measures in Law No. 152 of 2020 that pertain to micro-, small and medium-sized enterprises (MSMEs), such as tax incentives to facilitate development, subject to the fulfilment of the stipulated terms of agreement. Moreover, Decree No. 20 of 2022, issued by the Financial Regulatory Authority (FRA), established new standards and “sensible pricing” – which it defines as a commitment by financial firms to provide funding to MSMEs through fair and balanced pricing schemes. The decree aims to ensure complete transparency when it comes to financing requirements, including all financial burdens and expenses incurred. This enables clients to grow their businesses, while preserving the financial entities’ capacity to achieve the required operational and financial sustainability rates.

The decree further stipulates the minimum technical requirements that the concerned financing entities should follow when setting a pricing policy for the various products and financing services offered to MSMEs, such as the financing period, the disbursement method and the types of guarantees submitted.

Sustainability

In light of the impact a company has on its employees, customers and surrounding communities – as well as out of a growing awareness of and strong support for sustainable finance – the FRA issued Decree No. 108 of 2021 in July of that year mandating that all firms listed on the Egyptian Exchange (EGX) and operating in non-banking financial services – listed or not – file annual environmental, social and governance reports with their financial statements, starting in 2023. The evaluation will be based on more than 20 key performance indicators established by the FRA, including those related to a firm’s environmental footprint, diversity, and health and safety standards. Among other goals, these efforts aim to attract environmentally friendly investment and offset risks associate with climate change.

Taxes

In general, all locally registered companies – except for those incorporated in a free zone – are subject to a corporate tax with a flat rate of 22.5% on their net profit. This rate increases to 40.6% for companies undertaking oil and gas exploration. The tax rate is imposed on companies that are resident in Egypt on all profits realised from the country and/or abroad, and companies that are non-resident in Egypt but make a profit through a permanent establishment in the country. Income tax is also payable in Egypt, with brackets determined by earned income. The employer is required to compute the income tax and withhold it at the source on a monthly basis.

A value-added tax (VAT) of 14% is applicable to all goods and services. However, a reduced VAT of 5% is applicable to industrial projects such as those in electricity generation, and machinery and equipment used for producing goods or the provision of services, whether imported in whole or in part, or locally procured. All invoices related to the import of such equipment should be stamped by the relevant authorities and cleared by the Egyptian Tax Authority in order to benefit from the VAT reduction.

Other taxes that may be applicable are a capital gains tax and stamp duty issued when acquiring an Egypt-based company. Capital gains realised from the disposal of unlisted shares by resident or non-resident corporations are subject to the standard corporate tax rate of 22.5%. As for capital gains realised from the disposal of listed shares on the EGX, those acquired by non-residents are not subject to capital gains, while those purchased by residents are subject to a tax rate of 10%. Capital gains taxes went into effect on January 1, 2022 after their reintroduction was postponed in March 2020 as part of a package to support businesses activity during the Covid-19 pandemic.

In October 2020 the stamp duty was amended, lowering the rate on proceeds from a non-resident’s sale or purchase of securities from 0.15% to 0.125%. The tax on proceeds for residents was similarly reduced from 0.15% to 0.05%, with no deduction for cost.

Egypt has double-taxation treaties (DTTs) with over 50 countries. This can change the tax treatment of transactions carried out between entities in Egypt and residents of a treaty country, providing additional tax benefits. If a DTT exists between the country of residence of a non-resident taxpayer and Egypt, the taxpayer can benefit by approaching the International Tax Treaties Department, which will assess the applicant’s file and issue a decision on whether an exemption or reduced rate applies under the treaty.

Labour

Labour Law No. 12 of 2003 is designed to protect local employees’ rights and interests. It sets out an exhaustive list of events outside the scope of which the termination of an employment contract is considered an arbitrary dismissal (i.e., termination without cause) and would trigger compensation for the terminated employee. The value of compensation would differ depending on whether the employment contract was drawn up for a definite or indefinite term. The termination of an indefinite contract is more challenging, as the employer would be legally required to compensate the terminated employee with a minimum of two months’ salary per each year of service – a figure that increases to three months per year of service when the concerned employee has served more than 10 years in the company. This is in addition to any other financial entitlements provided by the company and recognised as an acquired right: for example, special benefits, allowances, bonuses, profit sharing and the like, habitually granted to an employee over a number of years. However, employers tend to terminate their employees amicably, offering packages that are determined on a case-by-case basis.

Nevertheless, the law grants the employer the right for partial or full closure, or downsizing its business for economic reasons, necessitating the termination of some of the employees. However, in such a case, the employer must first obtain prior approval from a special labour committee.

Dispute Resolution

Egypt is party to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention. As such, the country recognises and enforces foreign arbitral awards and the referral by a court to arbitration. Egypt also has an extensive bilateral investment treaty (BIT) network – with more than 100 such agreements – and as a result, the country works to protect investment by nationals of BIT contracting parties, ensuring fair and equal treatment, protection from expropriation and the guaranteed right to repatriate investment.

Lastly, in an attempt to facilitate and expedite dispute-resolution procedures, the Investment Law established the Supreme Committee for Arbitration and International Disputes, a body headed by the prime minister and consisting of a number of ministers, as well as representatives of competent authorities such as the CBE and the General Authority for Investment and Free Zones. The committee is responsible for reviewing and approving agreements signed by local administrative authorities that include an arbitration clause, as well as the resolution of any related disputes.