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  • Service: Tax
  • Type: Business and industry issue
  • Date: 7/23/2014

Egypt – sweeping tax changes for capital gains, dividends and more 

The government of Egypt has released a series of significant tax changes in recent months that could significantly affect the taxation of foreign investors in the country. KPMG in Egypt summarizes recent Egyptian tax changes affecting:

  • capital gains on dispositions of securities
  • dividends
  • income tax rates for corporate income and salaries
  • head office re-charges
  • penalties for underreporting tax liabilities.

Capital gains on dispositions of securities

Resident natural persons carrying on taxable activities – unlisted securities


For resident natural persons, recently announced tax changes would impose capital gains tax on the disposal of unlisted securities or quotas at the normal tax rates, whether profits were generated in Egypt or outside of Egypt, provided they carry out taxable activities. The taxable income is determined based on the net profits of the portfolio at the end of the tax year on the difference between the selling price or replacement or any act of disposal in securities or quotas in any manner of disposition and the acquisition cost after deducting the brokerage commission.


Capital gains can be offset against capital losses within the same tax year, up to the amount of the capital gain derived from the disposal of securities. Where the capital loss exceeds the capital profit within the same tax year, the loss can be carried forward for the next 3 years. Offset between tax paid on the capital gains and the calculated tax is also possible up to the amount of the calculated tax.


Capital losses generated outside of Egypt cannot be offset against Egyptian taxable income for the same tax period or any following period. Additionally, capital profits generated in outside Egypt cannot be offset with capital losses generated in another country.


Resident natural persons not carrying on taxable activities – unlisted securities or gains on disposals of securities received from a foreign source


In these cases, capital gains tax would not apply.


Resident natural persons – listed securities


Capital gains received by a resident natural person from an Egyptian source income as a result of the disposal of securities that are listed in the Egyptian Stock Market are subject to tax at the rate of 10 percent with no deductions.


Non-resident natural persons – listed and unlisted securities


Capital gains realized by a non-resident natural person from the disposal of securities or quotas are subject to tax at the rate of 10 percent with no deductions.


The taxable income is determined based on the net profits of the portfolio at the end of the tax year on the difference between the selling price or replacement or any act of disposal in securities or quotas in any manner of disposition and the acquisition cost after deducting the brokerage commission.


The entity carrying out the transaction is required to withhold 6 percent of the capital gains derived from each transaction and remit it to the tax authority. The entity carrying out the transaction is required to prepare a settlement every three months and a final settlement at the year-end between the tax due and the tax paid.


Resident corporate bodies – listed securities


Capital gains received by a resident corporate body from an Egyptian source income as a result of the disposal of securities that are listed in the Egyptian Stock Market are subject to tax at the rate of 10 percent with no deductions.


Non-resident corporate bodies – listed and unlisted securities


Capital gains realized by a non-resident corporate body from the disposal of securities or quotas are subject to tax at the rate of 10 percent with no deductions.


The taxable income is determined based on the net profits of the portfolio at the end of the tax year on the difference between the selling price or replacement or any act of disposal in securities or quotas in any manner of disposition and the acquisition cost after deducting the brokerage commission.


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. The entity carrying out the transaction is required to prepare a settlement every three months and a final settlement at the year-end between the tax due and the tax paid.

Dividends

The Egyptian government also introduced a new tax on dividends. Highlights of the new dividend tax are as follows.


Resident natural persons


For natural persons who do not perform any taxable activities in Egypt, taxable income that is subject to 10 percent tax rate includes the amount of dividends received in excess of 10,000 Egyptian pounds (EGP) per year. A lower tax rate of 5 percent applies where ownership in the distributing entity exceeds 25 percent of the share capital or voting rights, provided the participation is held for a minimum 2-year period.


For natural persons who do perform taxable activities in Egypt, taxable income is the total dividends received. In other words, the 10 percent tax rate would apply to the total dividends received from either an Egyptian source. A lower tax rate of 5 percent applies where ownership in the distributing entity exceeds 25 percent of the share capital or voting rights, provided the participation is held for a minimum 2-year period.


For natural persons who do perform taxable activities in Egypt, taxable income is the total amount of dividends received. In other words, the normal tax rate would apply to the total dividends received from a foreign source as part of the corporate taxable income.


The entity carrying out the transaction is required to withhold 1 percent of the dividends and remit it to the tax authority.


Tax on non-resident natural persons


Tax is imposed on dividends received by a non-resident natural person at the rate of 10 percent, with no deductions. A lower tax rate of 5 percent applies where ownership in the distributing entity exceeds 25 percent of the share capital or voting rights, provided the participation is held for minimum 2-year period.


Tax on corporate bodies


Tax is imposed on dividends received by resident and non-resident corporate bodies, including the profits of non-resident corporate bodies that are realized through a permanent establishment in Egypt. Profits of non-resident corporate bodies that are realized through a permanent establishment in Egypt are deemed to be distributed within 60 days from the closing of the permanent establishment’s financial year.


Exemptions


  • distributions of dividends by investments funds established pursuant to capital markets Law 95 for 1992, provided 80 percent of the fund's resources are allocated to investments in securities and other debt instruments
  • distributions of dividends by the holding investments funds that are limited to investment therein through such investment funds
  • 90 percent of dividends received by such funds are tax exempt (i.e., 10 percent is subject to income tax to cover non-deductible costs)
  • income from investing in monetary investment funds
  • income from bonds which are listed in the Egyptian Stock Market except the treasury bonds
  • profits of investment funds whose activity is limited to investment exclusively in money market
  • distributions made in a form of free shares
  • 90 percent of dividends received by resident parent and holding companies from resident and/or non-resident subsidiaries are exempt from tax (i.e., 10 percent is subject to income tax to cover non-deductible costs), provided:
    • the company holds a minimum 25 percent of the share capital participation or voting rights of the distributing entity, and
    • such participations are held for minimum 2 years or committed to be retained for 2 years from the date of acquisition of the shares or the voting rights.

3-year income tax rate increase

The corporate income tax rate has been temporarily increased from 25 percent to 30 percent on taxable income exceeding EGP1 million. This increase applies to corporate bodies for 3 years, starting as of the current tax period.


The same increase applies to natural persons. Thus new salary tax rates apply as of the current tax period are as follows:


Egypt – salary tax rates and brackets
Amount of salary Tax Rate
Taxable income up to EGP5,000 exempt
EGP5,001 – EGP30,000 10%
EGP30,001 – EGP45,000 15%
EGP45,001 – EGP250,000 20%
EGP250,001 – EGP1,000,000 25%
Over EGP1,000,000 30%

Source: KPMG in Egypt, 2014

Head office re-charges

For Egyptian branches of foreign companies, head office re-charges of up to 10 percent of net taxable profit are deductible for income tax purposes, provided the re-charge does not include royalties, interests, commissions or direct wages. This measure applies to the tax year 2013 and to any tax year that started after the Tax Law 11 of 2013 was enacted. To qualify for deduction, the cost must be verified on a certificate issued by the external auditor of the head office and authenticated by the Egyptian Consulate abroad.


The deduction is allowed at the level of foreign branches only, so subsidiaries cannot benefit from the deduction.

Penalties for understated tax liabilities

Understatement of tax liabilities in the tax return may attract penalties as follows:


Egypt – penalties for understated tax liabilities
Omitted amount Penalty
10% – 20% of tax legally due 5% of tax legally due
20% – 50% of tax legally due 15% of tax legally due
Over 50% of tax legally due 40% of tax legally due

Source: KPMG in Egypt, 2014

 

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