The New Property Tax Law

The new Property Tax Law was issued on June 23rd, 2008 and published the same day as law number 196 of 2008. A great deal of confusion has accompanied this Law as a result of heated debates in Parliament, the media and elsewhere. The key provisions in the Law are the following:

1. The Law applies only to built-up properties. Formally speaking, it is not a property tax law, but a Built-Up Properties Tax Law (which is its name in Arabic).‘Built-up properties’ is a broad term that refers to:

• Properties built in any material, for any purpose (permanent or temporary), above or below ground or on water, occupied or unoccupied, for consideration or without, even unfinished properties if they are occupied.
• Vacant land being used, albeit fenced or attached to a building.
• Leased structures constructed on buildings.
• Properties built on agricultural lands.

The Law, however, does not apply to agricultural lands which continue to be subject to the current taxation, buildings publicly owned, nor to buildings dedicated to religious purposes.

2. The Tax Rate is 10% of the annual rental value of the property, after deducting 30% for meeting expenses with respect to properties used for housing purposes and 32% with re­spect to properties used for other purposes.
3. Undoubtedly, the most controversial aspect of the Law is how the rental value of the prop­erties will be determined. The key challenge in the application of the Law is how to strike a balance between fairness and simplicity of procedures while avoiding the potential occur­rence of corrupt practices. In this respect, the Law states that there shall be a «Valuation Committee» present in each Governorate, established by decision of the Minister of Finance in consultation with the Minister of Housing. Each Committee shall be composed of a repre­sentative of the Property Tax Authority (acting as chairperson), a representative from each of the Ministries of Finance and Housing and two taxpayers nominated by the Local Council. The Committees shall determine the rental values based on quality of building, location and amenities. In this regard, the Law states that the Executive Regulations (which have yet to be issued by the Minister of Finance) shall provide the operational details for the function­ing of these Committees. In all cases, taxpayers shall be notified with the rental valuation.
4. Appeal is possible from the rental valuations. This must be made within sixty days of being notified with the rental value. Appeal may also be submitted by the Tax Authority if it deems the rental value lower than market value. The appeal is to be considered by an Appeal Committee established by decision of the Minister of Finance. This Commit­tee will comprise an expert acting as chairperson, one representative of each of the Tax Authority and the Ministry of Housing and two consultant engineers or experts in this do­main selected by the Governor upon the recommendation of the Local Council. Although the Law does not say so explicitly, the appeal process does not prevent or deprive the parties – both the taxpayer and the Tax Authority – from taking their disputes to the com­petent Egyptian Courts. This is in adherence with the general principles of Egyptian Law.
5. There is a number of key exemptions and clarifications with respect to the determination of the rental value:

• Once the rental value, and therefore the tax, for each property have been determined, it is to remain fixed for five years. Moreover, once the five years have elapsed, the new valua­tion may not exceed 30% above the previous one for housing purposes and 45% for other purposes.
• Properties already rented out under the existing rental laws are to be taxed on the basis of the rental value already agreed upon. Once the current lease has expired, then the new rental value determined by the Valuation Committee is to apply. This is a provision which will have a major impact on the tax paid by owners (and at the same time landlords) of «old rents», whereby they will pay a nominal value. It is fair in the sense that it would be grossly unjust to have those owners pay market value taxation when their earnings from rental con­tinue to be nominal. However, it may also be a loophole in the application of the Law, as it may allow some tenants and owners to agree to keep an old rental value for purposes of avoiding the new taxation.
• Certain properties are exempt from payment of the tax. These are: buildings owned and used by non-profit organizations, buildings used for educational or medical purposes, head­quarters of political parties and professional unions, residential units whose annual rental value is less than six thousand Egyptian Pounds, cemeteries, properties owned by sporting clubs and centers, properties owned by foreign governments provided reciprocal treatment, properties used for the benefit of adjacent agricultural lands, and buildings used for social occasions with no intention to realize profits.

6. The obligation to pay the new tax rests on the owner of the built-up property or those who have a right of usage thereon. This is a confusing provision in the law, The intention must have been to make the tax payable by the owner of the building unless it is being let, rented or given in any other form of usage, in which case the tax becomes payable by the lessor, tenant or user. However, the exact provision does not clearly indicate this order and will cer­tainly require some further explanation in the Executive Regulations.
7. With respect to the payment mechanisms, the new tax is due on January 1st of every year and payment is to be made automatically by the taxpayers without need for notification.
8. An interesting feature in the Law is the fact that Article (7) therein states that all dis­putes pertaining to the application of the Law shall be within the jurisdiction of Administrative Courts. This is a departure from the existing norm in Egypt, whereby all tax disputes are determined by ordinary judiciary, not by administrative courts. It is, however, a positive side of the Law, since it may be expected that most of the disputes would be pertaining to the determination of the rental values for the properties.
9. Another interesting feature of the Law is that 25% of the proceeds of collecting the new tax will be remitted to the Governorates in which the taxes were collected. Although the intention may be to provide the Governorates with additional and much needed resources, this could lead to a situation where the gap in standards of living and public expenditure widens, as more resources are made available to areas that are already benefiting from better condi­tions and higher rents.

Executive Regulations for the Property Tax Law

The Executive Regulations for the new Law should be forthcoming within the next few weeks and it will allow the start of application of the Law.