TAXATION & TAX LEGISLATIONAlMoatassem MostafaLecture Ten: Sunday, 25 December 2016

The Egyptian Income Tax

Law

Taxpayers and Tax Period

Income of Natural Persons

Income of Legal Persons

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 المعاشات or severance allowances الخدمة نهاية .مكافأة

• 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• Life and health insurance premiums التأمين ,for the taxpayer أقساط

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.

Deductions and ExemptionsCommercial & Industrial Activities

• Taxable net profit of commercial and industrial activity is calculated based on deducting all costs and expenses related to such activity from the gross profit.

• In order to be deducted, costs and expenses must be:• related to the commercial or industrial activity of the firm and essential

for carrying out the activity; and• real and supported by documents except for costs and expenses that

have no supporting documents according to the custom.

Deductions and ExemptionsCommercial & Industrial Activities

• The costs and expenses deductible from gross profit include the following according to Article 23:1. Interests on loans used in the activity 2. Depreciation of the firm's assets 3. Fees and taxes paid by the firm 4. Social insurance contributions by employers in favor of their employees.5. Amounts deducted annually by firms from their finances or profits for the account of

the special saving or pension funds or others (limited to 20% of the total wages and salaries of their employees)

6. Insurance premiums taken out by the taxpayer against his disability or death (limited to EGP 3000 annually)

7. Donations to the government, local authority units and other public legal entities, whatever their value

8. Donations and subsidies to Egyptian non-governmental organizations and foundations as well as to educational institutions and hospitals subject to governmental supervision, and Egyptian scientific research institutions, providing they do not exceed 10% of the taxpayer's annual net profit; and

9. Financial penalties and indemnities borne by the taxpayer resulting from his contractual liabilities.

Deductions and ExemptionsCommercial & Industrial Activities

• The law indicated that 30% of the cost of the machinery and equipment used in production shall be deducted, whether they are new or used, at the beginning of each tax period during which such assets are used

• The law also permitted the deduction of bad debts excluded by the taxpayer from the firm’s books and accounts, given he presents a report by an accountant enrolled in the Accountants and Auditors Registry. If the debt is collected fully or partially, the amount collected must be included in the firm's revenues in the year in which the collection took place.

• Finally, if the final account of a year is closed in a loss, the loss shall be deducted from the succeeding year's profits. If, however, part of the loss remains, it shall be carried forward to the succeeding years up to the five years, after which no loss can be carried forward.

Deductions and ExemptionsCommercial & Industrial Activities• Regarding exemptions, according to Article 31 of the Law No. 91 of

2005, the following are exempted from tax: 1. Profits of land reclamation or cultivation enterprises, for ten years from the

date of activity inception;2. Poultry farming, apiculture النحالة, livestock husbandry and fattening تربية

وتسمينها fisheries, fish farming enterprises and fishing boats ,المواشيenterprises profits, for a period of ten years from the date of activity inception;

3. Physical persons’ income received from their investment in securities registered with the Egyptian Stock Exchange Market.

4. Physical persons proceeds from:• Securities and financial deeds of different types, registered with the Egyptian Stock

Exchange Market, whether issued by the State or shareholding companies; • Dividends from shares in joint stock companies and partnerships limited by shares; • Dividends from equity quotas in limited liability companies, partnerships, and

partnerships limited by shares; and• Dividends from investment securities issued by investment funds.

Deductions and ExemptionsCommercial & Industrial Activities

5. Interest which physical persons receive from their deposits and saving accounts in banks registered in the Arab Republic of Egypt; investment, saving and deposit certificates issued by said banks; deposits and saving accounts in post office funds and securities and deposit certificates issued by the Central Bank; and

6. Profits from new projects set up by funding from the Social Fund for Development (SFD) to the extent of such funding for a period of five years from the date of starting the activity or starting production

Deductions and ExemptionsProfessional and Non-commercial Activity• Income tax on professional or non-commercial activities is

applied on net revenues after deducting all costs and expenses necessary for carrying out the profession.

• The following costs and expenses are eligible for deduction from tax:1. Registration fees, annual subscriptions and profession's practice

fees;2. Taxes paid by the taxpayer for the practice of the profession,

other than the tax paid in accordance with this law;3. Amounts paid by the taxpayer to his syndicate in accordance with

its pension system (Limited to EGP 3000 annually); and 4. Life and health insurance premiums paid by the taxpayer in his

own favor or in favor of his wife and minor children (Limited to EGP 3000 annually).

Deductions and ExemptionsProfessional and Non-commercial Activity• All donations to the government, local authority units, and public legal

persons may be deducted from net revenues as long as donations do not exceed the net annual revenue. In addition, donations and assistance granted to recognized Egyptian NGOs, Egyptian scientific research institutions, and educational institutions and hospitals that are subject to the supervision of the government, shall be deducted from tax within the limits of 10% of the annual net revenue.

• As the case with industrial and commercial activities, the law allowed the deduction of all costs and expenses necessary to earn the revenue as long they are based on the proper accounts and supported by credible documents. In addition, costs and expenses that have no supporting documents based on the custom could be deducted. However, in case of the absence of proper accounts, the deduction will be limited to 10% of the annual net revenue.

Deductions and ExemptionsProfessional and Non-commercial Activity• Regarding exemptions, Article 36 exempted a number of

revenues from the scope of income tax as follows:1. Educational institutions, subject to the supervision of the

government, public legal persons, Public Sector or State-Owned Enterprises (SOE);

2. Revenues of editing and translating books, religious, scientific, cultural, and literary articles

3. Revenues received by teaching staff at universities and institutes for their books and teaching notes authored for distribution among students according to the regulations and prices set by the universities and institutes;

4. Revenues of members of the Formative Artists Syndicate نقابةالتشكيليين ,pursuing the production of photography الفنانين

sculpture نحت and engraving artworks النقش;

Deductions and ExemptionsProfessional and Non-commercial Activity

5. Revenues of self-employed professionals registered as members of their professional syndicates in their fields of specialization, but only for three years from the date of practice added to which is the training period required by the profession's practice law, public service period, military service or reserve service period if it is subsequent to the date the practice commenced. The period of exemption will be limited to one year for whoever practices the profession for the first time if fifteen years have elapsed since graduation. For the exemption to be valid, the taxpayer must practice the profession individually, without partnership with others, unless they are also tax-exempt.

Deductions and ExemptionsReal Estate• Article 43 of the law exempted the following from tax on

income from real estate:• Revenues of agricultural activity except those stipulated herein;

and• Revenues of areas planted in desert lands for a period of ten years

starting from the date the land is considered productive.

Income of Legal PersonsTax Base• The Law No. 91 of 2005 imposes an annual tax on the net

aggregate profits of legal persons whatever their objectives.

• Article 47 specified that legal persons in this sense include legal persons residing in Egypt, with respect to all profits whether realized in Egypt or abroad, with exception of the Agency of National Service Projects مشروعات جهاز

الوطنية of the Ministry of Defense in addition to الخدمةnon-resident legal persons, with respect to the profits through a permanent establishment in Egypt

Income of Legal PersonsTax Base• In addition to the two main categories of legal persons

mentioned above, the following are also regarded as legal persons under the provisions of the Law:1. Capital associations and partnerships whatever the law they are

subject to, as well as corporations de facto;2. Cooperatives and their unions, taking into consideration

exemptions stipulated by law;3. Public authorities and other public legal persons in relation to

activity exercised by them that is subject to tax.4. Banks, companies and foreign firms even if their head offices are

based abroad and their branches are in Egypt; and5. Units established by the local Authority with respect to their

activity that is subject to tax.

Income of Legal PersonsTax Rate• The Law No. 96 of 2015 amended the tax rate regarding

legal persons in which they are subject to a tax rate of 22.5% of the net annual profits.

• The tax base is rounded to nearest lower ten pounds.• The same article further specified two exceptional tax

rates for legal persons: a tax rate of 40% on the profits of Suez Canal Authority, the Egyptian General Petroleum Corporation and the Central Bank, and a tax rate of 40.55% on the profits of oil and gas exploration and production companies.

Income of Legal PersonsTax Rate• According to Article 56 of the Law No. 96 of 2015, capital

gains derived from the sales of securities realized by non-resident juridical persons are subject to tax at a rate of 10%.

• The following rates apply to capital gains derived from the sale of securities by resident juridical persons:• A 10% rate applies to capital gains on securities registered at the

Egyptian Stock Exchange that are sourced in Egypt; and • The standard corporate tax rate of 22.5% applies to capital gains

on securities not registered with the Egyptian Stock Exchange that are sourced in Egypt, capital gains on securities realized abroad and capital gains on shares

Income of Legal PersonsTax Rate• Dividends paid by corporations or partnerships, including

companies established under the special economic zone system, to resident juridical persons, nonresident persons, or nonresident juridical persons that have a permanent establishment in Egypt are subject to tax on dividends.

• Tax on dividends is imposed at a standard rate of 10% without any deductions or exemptions. However, this rate can be reduced to 5% if both of the following conditions are fulfilled: • The recipient holds more than 25% of the distributing company’s

capital or voting rights; and• The recipient holds the shares or commits to hold the shares for a

period of not less than two years.

Income of Legal PersonsDeductions and Exemptions• all the expenses and costs are deductible from tax as long they are

necessary for the operation of the legal person and they are supported by documents, excluding those that can not be supported by documents.

• In addition, the following are exempted from the scope of income tax of legal persons:1. Ministries and government bodies;2. Educational establishments subject to the supervision of the state, and which are

basically not-for-profit entities;3. Non-governmental organizations and institutions within the limits of the purpose for

which they were established;4. Non-profit making bodies that carry out activities of a social, scientific, sports or

cultural nature as long as those activities are not of a commercial, industrial or professional nature;

5. Profits of private insurance funds6. International organizations, technical cooperation bodies and their representatives,

for which international agreements provide their exemption from tax

Income of Legal PersonsDeductions and Exemptions• all the expenses and costs are deductible from tax as long they are

necessary for the operation of the legal person and they are supported by documents, excluding those that can not be supported by documents.

• In addition, the following are exempted from the scope of income tax of legal persons:1. Ministries and government bodies;2. Educational establishments subject to the supervision of the state, and which are

basically not-for-profit entities;3. Non-governmental organizations and institutions within the limits of the purpose for

which they were established;4. Non-profit making bodies that carry out activities of a social, scientific, sports or

cultural nature as long as those activities are not of a commercial, industrial or professional nature;

5. Profits of private insurance funds6. International organizations, technical cooperation bodies and their representatives,

for which international agreements provide their exemption from tax

The Egyptian VAT LawTax Base

• Starting from September 2016, Egypt introduced a new Value-added Tax (VAT) Law (67 of 2016) to replace the General Sales Tax (GST) Law No. 11 of 1991.

• Article 2 of the Law No. 67 of 2016 indicated that a tax shall be imposed on goods and services, including goods and services listed in the schedule attached to this law, whether produced domestically or imported, at all stages of circulation, excluding those exempted by special provisions.

• Based on this article, VAT is applied on a broader range of goods and services as compared to the GST. This is justified by the fact that VAT is a tax on consumption; it is a transaction-based tax that is imposed on each stage of production and distribution

The Egyptian VAT LawTax Base

• The new VAT law included a schedule of goods and services that are subject to the Schedule Tax as follows: 1. Tobacco, cigarettes, snuff and Molasses;2. Gasoline, kerosene, diesel fuel, diesel oil, and fuel oil;3. Cooking oils and grease (from any source);4. Crackers and any food products made from flour and sugar, except bread.5. Manufactured potatoes;6. Manure and pesticides; 7. Gypsum powder;8. Construction contracts;9. Soap and cleaners;10. Air-conditioned transportation between provinces (including buses and

railway); 11. Professional services and consulting; and12. Media and art production

The Egyptian VAT LawTax Base

• The law further listed goods and services that are subject to both the standard VAT and the Schedule Tax as follows:1. Soda soft drinks;2. Televisions (more than 32 inches);3. Refrigerators (more than 16 feet) and Deep Freezers;4. Air conditioners and their independent units; 5. Cars (based on their engines’ capacities); and6. Communication services and mobile networks

The Egyptian VAT LawExemptions

• Despite the wide scope of the VAT in Egypt, the law exempted goods and services that are considered basic for the low-income class, in addition to other exemptions listed in the law.

• The goods and services exempted from VAT are as follows:1. Basic food items, including eggs, chicken, beef, seafood, pasta, tea, sugar, coffee,

dairy products for both infants and adults, and all kinds of bread;2. Agricultural products sold in their natural state, excluding tobacco;3. Manufactured fruits, vegetables other than potatoes, and juices and their

concentrates;4. Beans, grains, salt, and spices;5. Medicines and materials used in their production;6. Food manufactured and sold to the consumer directly through non-touristic

restaurants and shops;7. Water purification and distribution services, excluding bottled water;8. Natural gas and butane gas;9. Minerals, gold, and silver;10. Waste and leftovers;

The Egyptian VAT LawExemptions

• Article 27 and 28 of the law additionally indicated some exemptions from VAT. These exemptions include gifts and donations received by the administrative system of the state or units of local administration.

• Furthermore, imports that are used for scientific, educational or cultural purposes by scientific, educational, and research institutes.

• Finally, all goods, services, hardware, raw materials, and equipment used for arming, defense, and national security purposes are exempted from VAT Ibid.

The Egyptian VAT LawDeductions

• In addition to the aforementioned exemptions, Article 22 of the law entitles registered businesses to deduct VAT already imposed on returns from sales and goods and services that represent supplies and inputs of production.

• Registered businesses are also entitled to deduct the GST previously imposed on their purchases. In contrast, registered businesses are not entitled to deduct input VAT related to their exempted supplies or to their supplies of goods and services subject to Schedule Tax Ibid.

The Egyptian VAT LawRefund

• Article 30 addressed tax refund in which VAT shall be refunded within 45 days from the date of submitting a documented refund request as compared to three months in the GST law. A registered business can refund tax in any of the following cases: 1. VAT previously paid on exports of goods and services,

regardless of their state at the time of exporting;2. VAT obtained accidently;3. VAT credit balance that has been carried forward more than six

VAT periods; and4. VAT paid on machinery and equipment used in the production of

taxable products or rendering taxable services, during submission of the first tax return except cars and buses (unless used for the authorized activity of the business).

The Egyptian VAT LawTax Compliance

• The Law No. 67 of 2016 defined a number of sanctions to ensure an effective compliance to its provisions. These sanctions range between paying a fine in case of breach of the provisions of the VAT law and imprisonment in case of tax evasion.

• Article 66 of the law indicated that any violation of the provisions of the VAT law other than tax evasion is punishable by a fine ranging between EGP 500 and EGP 5000 in addition to the payment of the due VAT or Schedule Tax. Violations punishable by a fine include (but not limited to), delay in filing tax return and delay in paying VAT and the Schedule Tax that does not exceed sixty days, and providing false data on the sales taxable goods or services if they appeared to be more than what was indicated in the tax return.

The Egyptian VAT LawTax Compliance

• In case of tax evasion, Article 67 indicated that tax evasion is punishable by imprisonment for a period ranging between three years and five years, a fine that range between EGP 5000 and EGP 50,000, and payment of all the due VAT and Schedule Taxes. These sanctions could be doubled in case evasion is repeated within three years.

• According to the provisions of the VAT law (Article 68), tax evasion include (but not limited to) the following cases:1. Selling, rendering, or importing goods or services without mentioning them in

tax return and without paying the due VAT and/or Schedule Tax;2. Unlawful deduction or refund of VAT or Schedule Tax, partially or fully;3. Providing false documentation to evade the payment of VAT or Schedule Tax

partially or fully;4. The absence of tax bills related to the sale or render of taxable goods or

services; and5. The delay in payment of the due VAT and/or Schedule Tax for a period

exceeding sixty days

Application• Categorize each of the following goods and services as those

subject to the Schedule Tax only, those subject to both the standard VAT and the Schedule Tax, or those exempted from VAT. Finally, determine the tax rates applicable in each case during the fiscal year 2016/2017.1. Manufactured Potatoes2. Milk3. A 40-inch Television4. Soap5. Tea6. Air Conditioner7. A 2016 Mitsubishi Lancer8. Cooking Oil9. A Pepsi Can10. Bread

AnswerSchedule Tax Only Schedule Tax & VAT

(Tax Rate 13% + Schedule Tax)

Exempted

Manufactured PotatoesSoapCooking Oil

A 40-inch TelevisionAir ConditionerA 2016 Mitsubishi LancerA Pepsi Can

MilkTeaBread