A DUE DILIGENCE REPORT 

 

January -2016

Tax in Egypt

 LAW NO 91 / 2005;

The applicable Tax Law in Egypt is Law No. 91 for 2005 and it’s amendments which was put in force as from June 2005 The different types of taxes that are applicable to corporate companies will be presented in this section.

The Egyptian tax law does not foresee any tax group relief regime which could allow to offset tax losses against taxable profits among the different companies of any group.

Tax Return

Companies should deliver the tax return before May 1st for each year or during the past four months after the fiscal year end.

The tax return shall be signed by a chartered accountant to approve the company net profit / loss subject to tax. And that return was prepared according to the tax Law regulations.

The company can request to delay the filing of tax return by a request filed at the Tax Authority before 15 days before the dead time required.

The company can deliver an amended tax return within 30 day from the legal date of submitting the tax return.  The amended tax return shall be considered as good as the original tax return.

Standard CIT Rate

The income derived by companies as a result of carrying out its activities in Egypt (including management fees) will be subject to income tax in Egypt at a 22.5% tax rate on the net annual taxable income

Tax losses carried forward:

Tax losses are carried forward for five subsequent years and only carry back provision is for the long-term contract (Contractors Company).

The Taxable Amount

Payments without supporting documents as: transportation, buffet, maintenance, newspaper and donation, are limited to a maximum of 7% from General and administration expenses supported by documents.

Depreciation costs:

Depreciation is deductible for tax purposes and may be calculated using either the straight-line or declining-balance method. Depreciation rates according to the law are as follows:

 

Method of Depreciation	Rate	Description
Straight-line	5%	Buildings
Straight-line	10%	Intangible assets
Declining-balance	50%	Computers
	25%	Heavy machinery and equipment
	25%	Small machinery and equipment
	25%	Vehicles
	25%	Furniture
	25%	Other tangible assets

 

Accelerated depreciation is allowable only once at a rate of 30% for new machines & equipment at the year which they are placed into service for manufacturing companies.

Normal depreciation is calculated after considering the accelerated 30% depreciation on the net value of new assets, provided that proper books of account are maintained.

According to the tax law the company is obliged to add its accounting depreciation to its net profit (or deduct from the net losses) and then calculate the depreciation according to depreciation rates as per law.

Debit interest

Debit interest of loans used in company’s activity is a deductible cost after offsetting the interest income. Interest expense paid to individuals who are not subject to tax or exempt from tax is not deductible. Interest expense is limited to the interest rate which will not exceed twice the discount rate determined by the central bank of Egypt.

Thin capitalization:

The tax law determine the maximum debt to equity ratio to be 4:1. In the event the debt exceeds such ratio, the excess interest is not considered to be deductible expenses by the Tax Authority.

Withholding tax:

A- Domestic transactions

Any corporation would be required to apply the following withholding tax rates on payments made to local suppliers and services providers:

_ Suppliers of goods: 0.5%

_ Services: 2%

_ Consultancy, Commissions & Brokerage fees: 5%

The withholding tax would apply to payments in excess of EGP 300. Additionally, the withholding tax does not apply to bank interest or insurance premiums.

 

B – Payments of services to non-resident entities

The payments of service/management fee to a non-resident entity is subject to the domestic withholding tax rate of 20% according to article 56 of law 91/2005

However as in the case of a country Egypt has signed a DTT, the DTT provisions should allow for a withholding tax exemption in Egypt.

Tax treaty

Egypt has concluded DTTs with about 50 countries, which could change the tax treatment of transactions carried out between Egyptian entities and residents of a treaty country.

Recipient		Dividends (%)	Interest (%)	Royalties (%)
Non-treaty		10	20	20
Treaty:
Albania		10	10	10
Algeria		10	5	10
Austria		15	15	-
Bahrain		0	-	-
Belarus		15	10	15
Belgium		15/20 (1)	15	15
Bulgaria		10	15	15
Canada		15/20 (1)	15	15
China		8	10	8
Cyprus		15	15	10
Czech Republic		5/15 (2)	15	15
Denmark		15/20 (2)	15	20
Finland		20	15	20
France		0	15	15% franchise
				15% for other royalties
Georgia		10	10	10
Germany		15/20 (1)	15	15
Greece		10	10	10
Hungary		15/20 (1)	15	15
India		(3)	20	20
Indonesia		15	15	15
Iraq		(3)	20	16
Ireland		5/10 (2)	10	10
Italy		20	20	15
Japan		20	20	15
Jordan		15	15	20
Korea		10/15 (2)	15	15
Kuwait		10	10	10
Lebanon		10	10	5
Libya		(3)	-	-
Macedonia		10	10	10
Malaysia		0	15	15
Malta		10 (1)	10	12
Recipient	Dividends (%)		Interest (%)		Royalties (%)
Mauritius	5/10 (2)		10		12
Morocco	10/12.5 (2)		20		10
Netherlands	0/15 (4)		12		12
Norway	15		20		15
Oman	12.5		12.5		15
Pakistan	15/30 (5)		15		15
Palestinian Territories	15		15		15
Poland	12		12		12
Romania	10		15		15
Russia	10		10		15
Serbia & Montenegro	5/15 (5)		15		15
Singapore	15		15		15
Recipient	Dividends (%)		Interest (%)		Royalties (%)
South Africa	15		12		15
Spain	9/12 (2)		10		12
Sudan	0/15		20		10
Sweden	5/20 (2)		15		14
Switzerland	5/15 (2)		15		12.5
Syria	15		15		20
Tunisia	10		10		15
Turkey	5/15 (2)		10		10
Ukraine	12		12		12
United Arab Emirates	0 (6)		10		10
United Kingdom	20		15		15
United States	5/15 (4, 7)		15		15
Yemen	N/A (6)		10		10

Notes

1.            Dividends paid out by a company resident of Egypt to an individual of the other contracting state shall not be taxed more than the maximum amount mentioned. 15% in all other cases.

 

2.            Reduced rate of the gross amount of dividends is applied if the beneficial owner is a company that holds at least 25% of the company’s capital. Higher rate applies in all other cases.

 

3.            In the absence of specific provisions, dividends may be taxed under the local law at 10%, which may be reduced to 5% under certain conditions.

 

4.            Lower rate applies if the foreign company holds more than 25% of the capital in the company.

 

5.            Lower rate applies if the beneficial owner is a company.

 

6.            Taxed in both the resident and source state.

 

7.            The reduction in the rate does not apply if the recipient is engaged in a trade or business in the United States through a PE that is in the United States. However, if the income is not effectively connected with a trade or business in the United States by the recipient, the recipient will be considered as not having a PE in the United States to apply the reduced treaty rate to that item of income.

Procedures for applying the WHT on payments to non-residents

A ministerial decree no. 771 for the year 2009 dictates that the reduced rate of WHT on interest or royalties provided by an applicable DTT should not be automatically applied. The rate of 20% (Egyptian tax rate) should be imposed upon deduction. However, under certain conditions, the foreign recipient of payments will be able to get a refund for the amount resulting from the variance between the normal rate of 20% and the reduced treaty rate.

Certain documents should be submitted to the tax authority along with the refund claim such as:

A special unit responsible for interest and royalty WHT refunds is tasked with reviewing each refund case and with issuing refund letters (subject to compliance with the requirements of the 2009 ministerial decree). A refund letter is required to be able to get a refund of excess WHT from the tax office to which the taxes were actually paid

C - Supply of equipment and materials

The supply of materials and equipment or assets by a non-resident company from abroad to Egypt is not subject to withholding tax. Therefore, payments made to the foreign contractor to buy and import equipment in Egypt should not suffer withholding tax.

Dividends

A dividend tax at the rate of 10% is imposed on dividends paid to non-resident companies, including the profits of non-resident companies that are realized through a permanent establishment in Egypt.

This dividend tax rate is reduced to 5% if the ownership in the distributing entity exceed 25% of the share capital or voting rights, and is held for a minimum 2-year period.

Capital gains:

According to recent changes to the Egyptian tax law, capital gains realized by non-resident companies on the disposal of securities or quotas in Egyptian companies are Subject to tax at the rate of 10% (no deductions allowed).

The taxable income is determined based on the net capital gains at the end of the tax year.

Capital gains are determined as the difference between the selling price and the acquisition cost after deducting the brokerage commission.

Additionally, the entity carrying out the transaction is required to withhold 6 percent of the net capital gains derived from each transaction and remit it to the tax authority.

Salary Tax:

Individuals' income tax is imposed on the total net income of the resident individuals for income earned in Egypt, as well as the income earned outside Egypt for resident individuals whose Centre of commercial, industrial, or professional activities is in Egypt. Also, tax is imposed on the income of non-resident individuals for their income earned in Egypt.

Earned income (EGP)	Tax rate on bracket (%)
First 6,500	0%
6,501 to 30,000	10%
30,001 to 45,000	15%
45,001 to 200,000	20%
More than 200,000*	22.5%

The above mentioned brackets also apply to non-residents on the income they receive from an Egyptian treasury or against work performed in Egypt. Please note that both residents and non-resident are entitled to an annual salary tax exemption of EGP 7,000.

Social security

Any cooperation in Egypt is required to open a social insurance file in the respective social insurance office (regardless of the fact of having employees or not).

Social security contributions
Type of remuneration	Employer (%)	Employee (%)
Fixed salary up to EGP 1,012.5/month	26	14
Variable payments up to EGP 1,1590/month	24	11

The social security contributions on employee income as per 2016 are as follows :

For employees who are receiving salaries more than the maximum ceilings mentioned above, only the maximum ceiling will be subject to social security and any amount received by the employee, which exceed such ceilings, will not be subject to social security.

The employees' as well as the employer's contributions are paid to the competent authority on a monthly basis within fifteen days follow the month of payment.

Sales Tax

The standard sales tax rate is 10% of the value of commodities (except for those referred to in special schedules of the law) and 5% to 10% for specific services. Some examples of the commodities subject to sales tax rates other than the standard 10% rate are as follows:.

 

• Specific types of televisions and fridges: 25%.
• Air conditioners: 25%.

Currently, there's a draft new Value Added Tax (VAT) law in place, which is expected to be enacted during the year 2015. The main objectives of the law are:

 

• Broadening the tax base through imposing VAT on a wider range of services (than those currently being taxed under the GST system).
• Streamlining the excise tax system and separating it from the VAT law.
• Eliminating all excises on goods, except for tobacco, alcohol, and petroleum products.

Registration – manufacturers and service provides with turnover exceeding 54,000 L.E must register for sales tax purposes Wholesalers and retailers are required to register where turnover exceeds 150,000 L.E

Stamp Tax

There are two distinct types of stamp tax, which are imposed on legal documents, deeds, banking transactions, company formation, insurance premiums, and other transactions, as follows:

The nominal stamp tax is imposed on documents, regardless of their value. The tax rate for items such as contracts is EGP 0.9 for each paper.

Percentage or proportionate stamp tax is levied based on the value of transactions.

An annual proportional stamp tax at the rate of 0.4%, shared by the bank and the client, is imposed on the bank's loans. This stamp tax is due on a quarterly basis on the beginning balance of each quarter of credit facilities and loans and advances provided by Egyptian banks or branches of foreign banks during the financial year in addition to the amounts utilised within this quarter.

Stamp tax is imposed on advertisements at the rate of 20%.