AlMoatassem MostafaLecture Eight: Sunday, 4 December 2016

Taxation & Tax Legislation

Essay Three: The Egyptian Tax System

An Overview of the

Egyptian Tax System

The Egyptian Income Tax

Law

The Egyptian Value-added

Tax Law

An Overview of the Egyptian Tax System

• The Evolution of the Egyptian Tax System• Structure of the Egyptian Tax System• Tax Reforms, Incentives, and Compliance

Tax Reforms, Incentives, and Compliance• Several tax reforms took place in Egypt in order to, boost

revenues, enhance investment, and reduce tax evasion. • The reforms have taken the form of continuous amendments of

existing tax legislations and enacting new ones. • Income Tax Law has been subject to continuous amendments

since its introduction in 1939. • For instance, the government adopted major tax reforms by

introducing a new income tax law (Law No. 91 of 2005). The main aim of the new law was to address inefficiencies related to tax rates and tax administration. The new law resulted in reductions in tax rates by 50% and switched to a self-assessment tax regime.

• In 2015, the Income Tax Law No. 91 of 2005 was partially amended by a Presidential Decree that promulgated Law No. 96 of 2015

Tax Reforms, Incentives, and Compliance• The same applies for the General Sales Tax Law that was subject to

successive amendments until it was eventually abolished by enactment of the new Egyptian Value-added Tax Law No. 67 of 2016.

• The Egyptian tax system offers two categories of tax incentives for investment.

• The first category is offered according to Income Tax Law and could be benefited by all businesses in Egypt.

• The second one is offered only to businesses operating under Investment Law. Under Income Tax Law, businesses could benefit from tax holidays and tax incentives in order to reduce their tax burden.

• In addition, Investment Law No. 8 of 1997 included various tax incentives, customs exemptions, and many investor guarantees. Such incentives might also take the form of free economic zones where businesses operating in these zones are exempted from corporate tax.

Tax Reforms, Incentives, and Compliance

• In 2014, The General Anti-Avoidance Rules (GAAR) were introduced in the Egyptian tax system.

• The primary objective of the GAAR is to deter taxpayers from entering into arrangements for the purpose of obtaining an “abusive” tax advantage.

• The GAAR gives the tax authority the right to challenge any cases where it suspects that the main objective of the transaction is to defer, reduce or avoid paying tax and would accordingly have the right to reassess the due taxes that were relevant to the transaction.

The Egyptian Income Tax

Law

Taxpayers and Tax Period

Income of Natural Persons

Income of Legal Persons

The Egyptian Income Tax Law• The current Egyptian Tax Law is Law No. 91 of 2005 in

addition to Law No. 96 of 2015. The Law No. 96 of 2015 amended a number of provisions of the Income Tax Law No. 91 of 2005 and Tax Law No. 44 of 2014, which imposed a 5% temporary additional income tax.

• In this section, we analyse the provisions of the Egyptian Income Tax Law in terms of taxpayers, tax bases, tax rates, and tax deductions and exemptions.

Taxpayers and Tax Period• Book One of the Law No. 91 of 2005 included general

provisions and definitions related to its application. The law distinguished between two types of taxpayers, natural persons and legal persons. In addition, it specified the tax period.

Natural Persons• Article 2 of the Income Tax Law No. 91 of 2005 indicated

a number of conditions to consider a natural person an Egyptian resident. These conditions include • having a permanent residence in Egypt, • residing in Egypt for a period exceeding 183 days, whether

continuously or intermittently within a year, • or working abroad but receiving income from the Egyptian

Treasury. • The existence of any of these conditions is sufficient for a natural

person to be deemed an Egyptian resident.

Natural Persons• The Executive Regulation of the Law No. 91 of 2005

further indicated in its 3rd Article that a natural person is regarded as a permanent resident if he is physically present in Egypt for a period exceeding half a year either in his private-owned home or as a tenant.

• In addition, if a natural person owns or works in any working place, including commercial shops and factories, inside Egypt, he shall be considered a permanent resident according to the provisions of the Income Tax Law.

Legal Persons• For a legal person to be considered an Egyptian resident, the 2nd

Article of the Law No. 91 of 2005 indicated that it must be • either established according to the Egyptian Law, its main or effective

managing headquarters is located in Egypt,• or if the state or any state-owned legal person own more than 50% of its

capital. • The 3rd Article of the Executive Regulation indicated that for Egypt

to be considered the actual management headquarters of a legal person, at least two conditions of the following must exist, • if daily administrative decisions are taken in Egypt, • if the administrative board meetings or managers’ meetings are held in Egypt, • if at least half of the administrative board members or managers are residents

in Egypt, • or if the partners or shareholders are residents in Egypt and their combined

shares exceed half of the capital or the voting right.

Legal Persons• The 4th Article of the law further outlined the conditions of

a permanent establishment, which is a fixed business place through which some or all operations of projects of a non-resident are carried out in Egypt.

• Permanent establishments include a place of management, a branch, a building used as a sales outlet, an office, a factory, a workshop, a mine, oil field, natural gas well, quarry, or any other place for extracting natural resources, including timber or any other product from forests, a farm or plantation, building site, construction project, assembly, preparations, or supervisory activities related to any of these.

Tax Period• Article 5 of the Income Tax Law indicated that a tax period

is the fiscal period starting from the 1st of January to 31st of December, or any period of twelve months used as a basis for computation of the tax.

• The 5th Article further indicated that tax period might be less or more than twelve months in a number of exceptional cases as specified by the Executive Regulation.

• A tax is accordingly due on the following day of the end of a tax period. It is also due in case of the death of a taxpayer, suspending or ending of his residency, or the permanent discontinuance of a taxpayer’s taxable activity.

Income of Natural Persons:Tax Base• Article 6 of the Law specified that the tax base of the

income tax is the total net income earned in Egypt by resident and non-resident natural persons.

• The article further specified that the sources of the taxable income include salaries and the like, commercial and industrial activity, professional or non-commercial activity, and real estate

Salaries and the Like• In this respect, salaries and the like include:

• All earnings by a taxpayer resulting from work for third parties, with or without a contract, on a regular or irregular basis, regardless of such dues names, forms or reasons, whether they are for works performed in Egypt or abroad, and the consideration thereof was paid from a source in Egypt, including wages, bonuses, incentives, commissions, and the like;

• All earnings by a taxpayer from a foreign source for work performed in Egypt;

• Salaries and remunerations of non-shareholding chairpersons and board members of public sector and public business sector companies; and

• Salaries and remunerations of chairpersons, board members and managers of corporations in return for their administrative work.

Salaries and the Like• Article 11 of the law further stipulated “tax is imposed on

all amounts paid to non-residents, regardless of the agency or body employing them, for undertaking services under its supervision.

• Tax is also imposed on amounts earned by residents from other than their original place of employment at a rate of 10% without any reduction to cover costs, and without further deductions”.

Commercial and Industrial Activity• Article 17 of the law indicated that taxable income include profits from

commercial and industrial activities shall be determined based on revenue resulting from all commercial and industrial operations. These profits include, according to Article 19, the following:

• Profits of commercial, industrial, mining, quarrying and petroleum establishments;

• Profits of artisans and small businesses;• Profits realized from any commercial or industrial activity even if limited to one

transaction; • Profits from a transaction or transactions carried out by brokers and agents on

commission, and in general, all profit realized by any person who is engaged in the brokerage business to purchase, sell or lease real property or any kind of goods, services or movable assets;

• Profits from the leasing of a commercial or industrial shop, as well as profits from leasing mechanical and electrical machinery, excluding farm tractors, irrigation machines and their accessories, and machinery and equipment used in agriculture;

Commercial and Industrial Activity• Profits from all kinds of transportation activity;• Profits by those engaged in the construction or purchase of real

property with the intention of selling them professionally;• Profits from land parcelling operations whether for sale or

construction; and• Profits from land reclamation or cultivation establishments, poultry

farms or mechanical hatcheries projects, cattle and livestock farms of more than 20 head, and fish farms and fisheries projects.

Professional or Non-commercial Activity

• Regarding professional or non-commercial activity, income tax shall be applied on the following revenues: • Net revenues on self-employed professions and other non-

commercial professions which the taxpayer practiced independently and of which the basic element is work, if they have resulted from the practice of the profession or activity in Egypt;

• Revenue received by intellectual property rights’ holders from selling or using their rights; and

• Any other revenues from any occupation or activity not stipulated in Article 6 of this law.

Real Estate• Taxable revenues from real estate include,

• revenues from agricultural land, • revenues from constructed real estate, and • revenues from furnished units.

Tax Rate of Income Tax

Tax Rate of Income Tax• The Law No. 96 of 2015 amended Article 8 of the Law No. 91

of 2005 with regards tax rates on the income of natural persons as previously illustrated.

• The first bracket exempt from income tax has been increased from EGP 5,000 to EGP 6,500.

• In addition, the maximum income tax rate for individuals has been reduced to 22.5% from 25%.

• The above noted tax rates are effective for wages and similar payments starting from 21 August 2015.

• With respect to commercial and industrial revenues, non-commercial revenues and real estate revenues, such rates will be applied to the 2015 tax year starting from 1 January 2015 to 31 December 2015.

Tax Rate of Income Tax• Article 8 of Law No. 96 of 2015 further indicated that on

computing the tax, the total annual net income shall be rounded to the nearest lower ten pounds.

• In addition, the Law No. 96 of 2015 amended the enforcement period of the 5% additional temporary income tax that was imposed by the Law No. 44 of 2014.

• This additional tax was imposed on natural and legal persons with income exceeding tax base by EGP 1 million for the tax year starting from 1 January 2014 to 31 December 2014.

• Accordingly, the Law No. 96 of 2015 ruled out that the additional temporary tax shall no longer apply to any tax year after 2014.

Deductions and Exemptions• The Law No. 91 of 2005 specified a number of deductions

for each of the taxable incomes of natural persons. • In addition, it indicated that certain components of a

natural person’s income shall be exempted from tax.

Deductions and ExemptionsSalaries and the Like• According to Article 12 of the Law, income tax is not

applicable on either pensions or severance allowances.• Article 13 also excluded an amount of EGP 4000 as an

annual personal exemption from the scope of income tax in addition to the following:• Social insurance contributions and other payments deducted according

to the provisions of the social insurance laws or any alternative systems;

• Employees’ subscriptions in private insurance funds established according to the provisions of the Private Insurance Funds Law No. 54 of 1975;

• Life and health insurance premiums for the taxpayer, or in favor of his wife or minor children; or any insurance premiums for pension entitlement (limited to 15% of the net income or EGP 3000, whichever is greater);

Deductions and ExemptionsSalaries and the Like

• The following collective in-kind benefits (limited to 15% of the net income or EGP 3000, whichever is greater):• Meals offered to employees;• Collective transportation of employees or the equivalent cost;• Health care;• Tools and clothing necessary for performing the work; and• Accommodation provided by an employer to employees for the

performance of work.• Employees' dividends distributed according to the law; and• Amounts received by members of the diplomatic and consular

corps, international organizations and other foreign diplomatic representatives, in the scope of their official work, on condition and to the extent of reciprocity.