Major Amendments to Tax Legislations: A New Strategy Towards Restructuring The Income Tax System

October 8, 2023

Highlights

On 15 June 2023, Law No. 30 of 2023 (the “Law”) was issued, introducing significant amendments (the “Amendments”) to the following tax legislations:

  • Law No. 91 of 2005 regarding the income tax; and
  • Law No. 182 of 2020 regarding the abolishment of the exemptions on income tax granted on the yields of treasury bills and bonds or capital gains resulting from dealing in said bills and bonds.

The Amendments establish an integrated system to restructure the income tax, aiming to achieve social justice, support capital market investments, and follow the updates and changes pursued by the Tax Authority for digital transformation and tax operations automation.


New Definitions

A. The Law amends the definition of the factual company by stipulating that it exists or continues between 2 (two) natural persons without fulfilling incorporation and publicity procedures, except for the sole proprietorship resulting from inheritance.

B. The Law also amends the definition of the related person in accordance with the international standards and provides a list of persons triggered by such definition. This definition aims to ensure the following:

  1. preventing the transfer of profits between resident and non-resident entities through unlawful tax plans; and
  2. limiting the business relationships between suppliers and retailers and business relationships between entrepreneurs and their employees by focusing on management, ownership, and control standards so that such associated relations do not affect the tax base.

C. The definition of the permanent establishment has been amended accordingly to comply with Egypt’s international obligations in this regard, as well as the international standards of fixing the taxation treatment for non-resident companies operating in Egypt. The list of establishments falling under such definition includes, inter alia, the following:

  1. the activities carried out in Egypt related to exploration, extraction, and exploitation of natural resources for period(s) exceeding 90 (ninety) days for 1 (one) year;
  2. the consultancy services provided for a project for period(s) 90 (ninety) days for 1 (one) year;
  3. the insurance project affiliated with one of the countries, in case premiums are collected in Egypt or where it insures risks therein;
  4. a person who works for an affiliated project in accordance with the specific requirements mentioned under the Law; and
  5. all projects or activities exceeding 90 (ninety) days in accordance with the specific requirements mentioned under the Law.

Further, the Law stipulates a list of cases that are not considered as a permanent establishment.

D. The Law defines the civil company as a non-commercial company incorporated under the provisions of the Egyptian Civil Code No. 131 of 1948 or any other law.


Key Amendments

The Law integrates the philosophy of the equal distribution of the tax burden by stipulating the following:

A. amending the tax rate according to the income brackets to ensure a progressive taxation policy by amending the net income subject to zero taxation to be EGP 21,000 (twenty-one thousand Egyptian pounds);

B. increasing the cap of the annual personal exemption for the taxpayer to be EGP 15,000 (fifteen thousand Egyptian pounds);

C. amending the deductible costs’ requirements by stipulating that they shall be supported by electronic invoices or receipts, starting from July 2023 for the electronic invoices and January 2025 for the electronic receipts. In this regard, some costs can be exempted from such requirements by virtue of a ministerial decree;

D. increasing the annual exempted amount of the life insurance and health insurance premiums for the taxpayer to be EGP 10,000 (ten thousand Egyptian pounds) or 15% (fifteen per cent) of the net income, whichever is less;

E. introducing a new provision regarding the tax on dividends received by the natural person residing in Egypt from companies, in addition to dividend income received by holders of investment funds’ instruments. Further, the tax rate in the aforementioned cases is determined at 5% (five per cent) or 10% (ten per cent) in accordance with the requirements mentioned under the Law;

F. determining the taxable capital gains and the criteria for calculating the net portfolio profit as well as the costs related to the disposal of shares in the Egyptian Exchange (the “EGX”) based on specific criteria; and

G. determining the cases in which companies’ dividends are subject to tax rate at 10% (ten per cent) or 5% (five per cent) and 20% (twenty per cent) for treasury bonds revenue.


New Tax Exemptions

A. The Law amends the list of tax exemption cases by abolishing the exemption that was previously granted for:

  1. the educational establishments under public supervision; and
  2. the income the resident legal entities receive resulting from dealing with the securities listed in the EGX.

B. The Law also amends the requirements of tax exemptions for dividends received by holding companies from their subsidiaries.

C. The Law introduces new exemption cases to encourage the investment institutions supporting the state’s economy and the start-ups and aims to encourage investors to invest in Egypt. These exemptions - subject to the requirements mentioned under the Law - include, inter alia, the following:

  1. capital gains resulting from public companies' debt settlements;
  2. profits of funds investing in debt instruments;
  3. profits of holding investment funds;
  4. profits of securities investment funds;
  5. profits of venture capital companies and funds;
  6. profits of charity investment funds; and
  7. profits of real estate funds.

Finally, the Law provides for cases of (i) tax deferment on capital gains gained by natural or legal persons subject to the conditions mentioned under the Law; (ii) taxplayer incentives; (iii) initial taxes due on establishments and companies as of the Law entry into force date; tax waiver; and (v) tax exemption continuation.


The Supreme Council for Taxation

The Law introduces the establishment of the Supreme Council for Taxation and determines its competencies and prerogatives, which precisely include defending the rights of taxpayers and helping them to fulfil their legal obligations.


Entry into Force

The Law provisions entered into force on 16 June 2023, except for several provisions that shall come into force as follows:

  1. the provision regarding tax rate for salaries income shall enter into force as of July 2023;
  2. the tax rates regarding commercial activities, non-commercial professions’ income, and real estate properties income shall enter into force as of the taxation period that ends following the Law publication on 15 June 2023; and
  3. the annual personal tax exemption shall enter into force as of July 2023.

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