Changes to the Investment Law
Changes to the Investment Law
After a long debate which lasted for three months, an amendment to the Investment Law was issued in the middle of March.[1] This amendment was issued one day prior to the economic conference in Sharm El-Sheikh, and it was one of its pillars in light of the government's promise that it shall bring about a radical change in the investment environment. It is worth noting that, in spite of the fact that it is merely an amendment to Investment Law No. 8 of 1997, it is nevertheless a wide-ranging and sweeping amendment to the extent of making it practically a new investment law for Egypt. Following is a review of the main aspects of this amendment.
In its initial submission of the law, the Ministry of investment proposed two ideas; the first is to grant the Investment Authority the powers to issue all commercial licenses for companies through the one stop shop system, so that the investor does not deal except with the Authority. The second idea is to go back to the principle of granting tax exemptions to projects and companies in specific fields, provided they are determined by presidential decree and not in the law itself. However both ideas were resisted by legal experts in Egypt, the first because of the impossibility of its application, and the second because it contradicts principles of transparency and brings us back to the temporary tax exemption system which has proved to be problematic. Accordingly, in those circumstances, the new amendments were issued to try to introduce some ease of doing business and grant investors certain benefits, but in fact lacked an overall vision of what the amendment aimed to do and resulted in confusion in the investment policy.
Background: Investment Law No. 8 of 1997
Egypt's first investment law was introduced in 1971 (Law No. 65 of 1971). This was followed by Investment Law No. 43 of 1974, then by several amendments, then Investment Law No. 230 of 1989, and finally the current Investment Law No. 8 of 1997, which is still applicable till today. Throughout that time, the common philosophy was to identify a number of priority sectors in the economy, and then to accord investments in these sectors specific benefits and exemptions including tax and customs breaks for a specific time, or permanently in the case of Free Zones. In 2005, this policy that was followed for thirty five years was abandoned with the issuing of a new Income Tax Law (Law No. 91 of 2005) which unified income taxation at 20%, while eliminating all tax exemptions and breaks except in Free Zones. From 2004, a wide institutional reform was undertaken in the Investment Authority, whereby it became a promotion and facilitation authority and not a regulatory one, and where a one stop shop was established in order to facilitate the establishment of companies as well as unify the procedures for doing so. This remained the case following the January revolution, until the government introduced the idea of issuing a new Investment Law in October 2014. Since that time a number of drafts were circulated. However, in light of the objections by the investment community and legal experts, the proposal to introduce a new law was abandoned in favour of amendments to the existing one.The Purpose of the Amendment
| The selection of which company obtains a scarce license will be determined in accordance with the Executive Regulations, i.e. without reference to the Government Procurement Law. |
Project Licensing
As mentioned above, the new amendment did not grant the Investment Authority the powers to issue licenses across the board. Instead, it gave the Authority in Article (51 bis) the right to issue those licenses only with respect to specific fields which would be later determined by the President. Moreover the amendment specifies that in case there is competition over a certain license that is by definition scarce, then the selection of which company gets this license will be determined in accordance to specific rules in the executive regulations to the law, i.e. without reference to the provisions of the Government Procurement Law. The result is that the Investment Authority will not issue licenses in general, but only in priority cases as determined by the President, while projects outside of these sectors will continue to deal with various government agencies in the normal way.A New System for Land Allocation
Land allocation for investment purposes has been one of the main problems facing investors for many years in Egypt. And whereas the overall rule is that the allocation of state-owned land is to be done by reference to the Government Procurement Law No. 89 of 1998, in practice, parallel systems have been established over the years for the allocation of land for tourism, industry, agriculture and other purposes, without being bound by the said Procurement Law. This, however, was subject to severe criticism prior to the January Revolution due to the lack of transparency and the concern that corruption may have been involved in some of the transactions. In this context the new amendment sets out a new system for the allocation of state owned land to investors independently of the Government Procurement Law, whereby the Investment Authority would offer land owned by it or by other Government entities to investors by way of sale, rent, usufruct, or partnership, all in accordance with prices declared by the Authority. The Law states that in the case of competition between companies over the same land, a “toss” or a “draw” is to be made between those competing companies in order to determine which will be allocated that land. Article (74) of the Law further states that it's possible to dispose of public owned land to investors for free during five years starting 1 April 2015, provided that this is in the areas determined by the President, following the approval of the Cabinet of Ministers. Finally the Law introduces a new provision which allows state participation in the investment projects by presenting land as in-kind contribution into the project, bearing in mind that the valuation of such contribution will be done here in accordance with the executive regulations of the Investment Law and not by reference to the general rules of the Company and Capital Market Laws.Benefits Granted to Investors
In spite of the fact that the new law does not include tax and customs benefits that were proposed in its first draft, it has introduced new benefits including the following:- The investor may agree with various state agencies on selecting arbitration as a means for settling investment disputes Article (7).
- The provisions of Article (41) of the Company Law shall not apply to investment companies, thus exempting those companies from having to grant their workers a share of the annual profit not less than 10% of those profits and not exceeding their total annual wages Article ( 14).
- The executive director of an investment company may be exonerated from the penalties committed by a company unless he/she is proved to have been aware of a crime and has benefited from it Article (7).
- The possibility of granting non-tax benefits to projects that are:
- labor intensive, or
- “aim at deepening the local content in their products”, or
- invest in: logistical services, the development of internal trade, electricity, agriculture, land, and maritime transport, railways, or in remote and deprived areas.
| New benefits to investors include special custom gateways, subsidized energy, and recovery of part of infrastructure and employee training cost, but only if the project is labour-intensive, deepens local content, or is in specific sectors. |
Such benefits may include: establishing special custom gateways, subsidized power, recovering part of the cost of infrastructure, recovering part of the cost of employee technical training, or recovering part of the social security payments.
These benefits may be granted by the decision of the council of ministers upon the suggestion of the minister of investment and in accordance with the criteria of the Executive Regulations Article (29).
- Establishing a new mechanism for the liquidation of companies whereby the company’s obligations towards various state agencies is determined no later than 120 days from the date of application Article (60).
Free Zones
The legal regime of the free zones is one of the biggest and most complex subjects in the investment law since the first legislation of 1971. Legal regime in this context means the determination of specific space with clear boundaries and a wall around it, whether it is an entire city, or a zone that includes various projects, or a stand-alone project, where the following benefits are applicable:- Exemption from all customs duties but with an obligation to export a certain percentage of production outside of Egypt,
- Exemption from all taxes applicable in Egypt in exchange for payment of a levy equal to 1% of annual turn over to the Investment Authority,
- Obtaining all building and operating licenses from one administrative body which is the free zone itself,
- Applying less stringent rules with respect to employing non-Egyptians.
- Initially, Article (29) of the Law stated that the establishment of a city-wide free zone can only be done through the issuance of a law, that the establishment of a public free zone may be done through a decree from the council of ministers based on the proposal of the Investment Authority, and that the establishment of a private free zone may be done through a decree of the Investment Authority alone.
The new amendment states that a city-wide zone will continue to be established through a law. A public free zone can now be established by a decision of the council of ministers based on a proposal of the ministers of investment and finance instead of the Investment Authority. However, no mention is made of a process to establish a private free zone, which means that such a free zone is no longer to be allowed. It is worth noting that nothing is mentioned with respect to the already existing free zones, which means that they will continue to enjoy the current status until expiry of the licenses or of the term of the company.
- In 2008, Law No. 114 was issued, prohibiting the licensing of new free zone projects in the areas of cement, steel, petroleum production, and natural gas production, liquidation and transport.[2] The new amendment has maintained this provision but has added to it “and other energy-intensive industries as determined by the Council of Ministers”. This means that other projects may in the future be prohibited in the free zones provided they are energy intensive.
Dispute settlement
In the area of investment dispute, a new system was introduced for the appeal from decisions by the Investment Authority. The system is similar to that which has been applied for many years by the Egyptian Financial Supervisory Authority (Previously, the Capital Market Authority). According to that system, any investor who wishes to appeal from a decision by the Investment Authority may submit a request within 15 days to a semi-judicial committee chaired by a vice president of the State Council (a deputy of the chief justice) and with membership of two other members of the State Council and two experts appointed by the Minister of Investment. In addition, the new amendment has reorganized the procedures for the Ministerial Committee for the Settlement of Investment Disputes, as well as the Ministerial Committee for the Settlement of Investment Contracts. Now both Committees will have better established procedures and both will include in their memberships a deputy chairman of the State Council.The Nature of the Investment Authority
The new amendment has introduced a whole new chapter on the Investment Authority and a newly established National Center for The Development and Promotion of Investment. This includes the following key ideas:- The most important change in the administrative structure in the Authority is that the Minister of Investment will now be the chairman of the Authority’s board. Furthermore, a new position has been created, that of an executive director of the Authority. Thus, the authority will seize to be independent from the Minister of Investment and will return to the position it occupied in the 1970s and 1980s.
- The other radical change in the nature of the Authority is expressed through Article (93) of the Law, which grants the Authority wide regulatory power to impose administrative penalties which it did not have before, thus transforming it from a promotion agency to a regulatory authority. The said article states that the Authority may warn companies which contravene the Investment Law and request them to remove the contravention within 15 days. If the company does not respond, the authority may take the following measures: suspension of the company for three months, suspension from benefits and privileges in the Law for a specific time, cancellation of those benefits and privileges and finally cancellation of the company license altogether. It is worth knowing that the Law allows the company in this case to appeal against the authorities’ decision as stated above.
- The third change in the authority is the establishment of the National Center for the Development and Promotion of Investment. The Center is not really independent, but is rather a sector within the organizational structure of the Authority. However, it differs from other sectors in that its head will be appointed by a decision of the prime minister, and that it will have its own internal statutes, a rather confused administrative situation.
- Finally, Article (85) of the Law makes an ambiguous statement about exempting the Authority from governmental rules and systems and about employing the best skills in accordance with rules issued by the prime minister.
Miscellaneous
The new Law included a number of other important provisions, including:- Requiring all joint stock companies – whether listed in the Stock Exchange or not – to register their shares in the central depository system from the date of establishment.
- Determining that the minister of investment shall be the designated minister in charge of the application of the Investment Law, which is a formalization of the current practice.
- Reducing the customs duty paid by investment companies on the importation of machinery and equipment necessary for their establishment from 5 % to 2%.
- The application of the new amendments from the day following its publication in the Official Gazette, i.e. from 13 of March 2015.
Conclusion
The interest generated by the Investment Law prior to the economic conference in Sharm El-Shaikh has raised expectations by the investment community for what this Law may achieve. Unfortunately, due to the conflict between various drafts prepared by more than one ministry, as well as the lack of clear vision for what the Law is out to achieve, the Law came out with a few benefits but also with significant confusion. On the positive side, the Law has reorganized the procedures for investment dispute settlement, provided for a new appeal process from decisions by the Investment Authority prior to resorting to administrative courts, established a new National Centre for Investment Promotion, and set out new and faster procedures for company liquidation. On the other hand the Law did not provide a new system for issuing operating licenses as promised by the government but rather limited this to companies operating in specific fields to be later determined by the President. Moreover the new land allocation regime for selling and renting state owned land to investors, in spite of its apparent ease and speed, may open the door to significant criticism for lack of transparency, especially with respect to land that will be distributed for free in spite of potential competition between investors. Finally, significant changes in the nature and the role of the Investment Authority are brought about by the Law, granting it new and regulatory powers up to the point of authorizing it to abolish a company’s license. This will put the Authority in a conflicting and difficult situation between its role as the regulator and that of a promoter of investment in Egypt At the end, and in spite of some positive elements, the amendment was not required and it would be better to review it carefully and calmly away from the political and media pressure that accompanied the economic conference. [1] Presidential Decree-Law No. 17/2015 amending the Investment Law No. 8/1997, Official Gazette, Issue No. 11 (bis), 12 March 2015. [2] Law No. 114/2008, Official Gazette, Issue No. 18 (bis), 5 May 2008.
After a long debate which lasted for three months, an amendment to the Investment Law was issued in the middle of March.[1] This amendment was issued one day prior to the economic conference in Sharm El-Sheikh, and it was one of its pillars in light of the government's promise that it shall bring about a radical change in the investment environment. It is worth noting that, in spite of the fact that it is merely an amendment to Investment Law No. 8 of 1997, it is nevertheless a wide-ranging and sweeping amendment to the extent of making it practically a new investment law for Egypt. Following is a review of the main aspects of this amendment.
In its initial submission of the law, the Ministry of investment proposed two ideas; the first is to grant the Investment Authority the powers to issue all commercial licenses for companies through the one stop shop system, so that the investor does not deal except with the Authority. The second idea is to go back to the principle of granting tax exemptions to projects and companies in specific fields, provided they are determined by presidential decree and not in the law itself. However both ideas were resisted by legal experts in Egypt, the first because of the impossibility of its application, and the second because it contradicts principles of transparency and brings us back to the temporary tax exemption system which has proved to be problematic. Accordingly, in those circumstances, the new amendments were issued to try to introduce some ease of doing business and grant investors certain benefits, but in fact lacked an overall vision of what the amendment aimed to do and resulted in confusion in the investment policy.
Background: Investment Law No. 8 of 1997
Egypt's first investment law was introduced in 1971 (Law No. 65 of 1971). This was followed by Investment Law No. 43 of 1974, then by several amendments, then Investment Law No. 230 of 1989, and finally the current Investment Law No. 8 of 1997, which is still applicable till today. Throughout that time, the common philosophy was to identify a number of priority sectors in the economy, and then to accord investments in these sectors specific benefits and exemptions including tax and customs breaks for a specific time, or permanently in the case of Free Zones. In 2005, this policy that was followed for thirty five years was abandoned with the issuing of a new Income Tax Law (Law No. 91 of 2005) which unified income taxation at 20%, while eliminating all tax exemptions and breaks except in Free Zones. From 2004, a wide institutional reform was undertaken in the Investment Authority, whereby it became a promotion and facilitation authority and not a regulatory one, and where a one stop shop was established in order to facilitate the establishment of companies as well as unify the procedures for doing so. This remained the case following the January revolution, until the government introduced the idea of issuing a new Investment Law in October 2014. Since that time a number of drafts were circulated. However, in light of the objections by the investment community and legal experts, the proposal to introduce a new law was abandoned in favour of amendments to the existing one.The Purpose of the Amendment
| The selection of which company obtains a scarce license will be determined in accordance with the Executive Regulations, i.e. without reference to the Government Procurement Law. |
Project Licensing
As mentioned above, the new amendment did not grant the Investment Authority the powers to issue licenses across the board. Instead, it gave the Authority in Article (51 bis) the right to issue those licenses only with respect to specific fields which would be later determined by the President. Moreover the amendment specifies that in case there is competition over a certain license that is by definition scarce, then the selection of which company gets this license will be determined in accordance to specific rules in the executive regulations to the law, i.e. without reference to the provisions of the Government Procurement Law. The result is that the Investment Authority will not issue licenses in general, but only in priority cases as determined by the President, while projects outside of these sectors will continue to deal with various government agencies in the normal way.A New System for Land Allocation
Land allocation for investment purposes has been one of the main problems facing investors for many years in Egypt. And whereas the overall rule is that the allocation of state-owned land is to be done by reference to the Government Procurement Law No. 89 of 1998, in practice, parallel systems have been established over the years for the allocation of land for tourism, industry, agriculture and other purposes, without being bound by the said Procurement Law. This, however, was subject to severe criticism prior to the January Revolution due to the lack of transparency and the concern that corruption may have been involved in some of the transactions. In this context the new amendment sets out a new system for the allocation of state owned land to investors independently of the Government Procurement Law, whereby the Investment Authority would offer land owned by it or by other Government entities to investors by way of sale, rent, usufruct, or partnership, all in accordance with prices declared by the Authority. The Law states that in the case of competition between companies over the same land, a “toss” or a “draw” is to be made between those competing companies in order to determine which will be allocated that land. Article (74) of the Law further states that it's possible to dispose of public owned land to investors for free during five years starting 1 April 2015, provided that this is in the areas determined by the President, following the approval of the Cabinet of Ministers. Finally the Law introduces a new provision which allows state participation in the investment projects by presenting land as in-kind contribution into the project, bearing in mind that the valuation of such contribution will be done here in accordance with the executive regulations of the Investment Law and not by reference to the general rules of the Company and Capital Market Laws.Benefits Granted to Investors
In spite of the fact that the new law does not include tax and customs benefits that were proposed in its first draft, it has introduced new benefits including the following:- The investor may agree with various state agencies on selecting arbitration as a means for settling investment disputes Article (7).
- The provisions of Article (41) of the Company Law shall not apply to investment companies, thus exempting those companies from having to grant their workers a share of the annual profit not less than 10% of those profits and not exceeding their total annual wages Article ( 14).
- The executive director of an investment company may be exonerated from the penalties committed by a company unless he/she is proved to have been aware of a crime and has benefited from it Article (7).
- The possibility of granting non-tax benefits to projects that are:
- labor intensive, or
- “aim at deepening the local content in their products”, or
- invest in: logistical services, the development of internal trade, electricity, agriculture, land, and maritime transport, railways, or in remote and deprived areas.
| New benefits to investors include special custom gateways, subsidized energy, and recovery of part of infrastructure and employee training cost, but only if the project is labour-intensive, deepens local content, or is in specific sectors. |
Such benefits may include: establishing special custom gateways, subsidized power, recovering part of the cost of infrastructure, recovering part of the cost of employee technical training, or recovering part of the social security payments.
These benefits may be granted by the decision of the council of ministers upon the suggestion of the minister of investment and in accordance with the criteria of the Executive Regulations Article (29).
- Establishing a new mechanism for the liquidation of companies whereby the company’s obligations towards various state agencies is determined no later than 120 days from the date of application Article (60).
Free Zones
The legal regime of the free zones is one of the biggest and most complex subjects in the investment law since the first legislation of 1971. Legal regime in this context means the determination of specific space with clear boundaries and a wall around it, whether it is an entire city, or a zone that includes various projects, or a stand-alone project, where the following benefits are applicable:- Exemption from all customs duties but with an obligation to export a certain percentage of production outside of Egypt,
- Exemption from all taxes applicable in Egypt in exchange for payment of a levy equal to 1% of annual turn over to the Investment Authority,
- Obtaining all building and operating licenses from one administrative body which is the free zone itself,
- Applying less stringent rules with respect to employing non-Egyptians.
- Initially, Article (29) of the Law stated that the establishment of a city-wide free zone can only be done through the issuance of a law, that the establishment of a public free zone may be done through a decree from the council of ministers based on the proposal of the Investment Authority, and that the establishment of a private free zone may be done through a decree of the Investment Authority alone.
The new amendment states that a city-wide zone will continue to be established through a law. A public free zone can now be established by a decision of the council of ministers based on a proposal of the ministers of investment and finance instead of the Investment Authority. However, no mention is made of a process to establish a private free zone, which means that such a free zone is no longer to be allowed. It is worth noting that nothing is mentioned with respect to the already existing free zones, which means that they will continue to enjoy the current status until expiry of the licenses or of the term of the company.
- In 2008, Law No. 114 was issued, prohibiting the licensing of new free zone projects in the areas of cement, steel, petroleum production, and natural gas production, liquidation and transport.[2] The new amendment has maintained this provision but has added to it “and other energy-intensive industries as determined by the Council of Ministers”. This means that other projects may in the future be prohibited in the free zones provided they are energy intensive.
Dispute settlement
In the area of investment dispute, a new system was introduced for the appeal from decisions by the Investment Authority. The system is similar to that which has been applied for many years by the Egyptian Financial Supervisory Authority (Previously, the Capital Market Authority). According to that system, any investor who wishes to appeal from a decision by the Investment Authority may submit a request within 15 days to a semi-judicial committee chaired by a vice president of the State Council (a deputy of the chief justice) and with membership of two other members of the State Council and two experts appointed by the Minister of Investment. In addition, the new amendment has reorganized the procedures for the Ministerial Committee for the Settlement of Investment Disputes, as well as the Ministerial Committee for the Settlement of Investment Contracts. Now both Committees will have better established procedures and both will include in their memberships a deputy chairman of the State Council.The Nature of the Investment Authority
The new amendment has introduced a whole new chapter on the Investment Authority and a newly established National Center for The Development and Promotion of Investment. This includes the following key ideas:- The most important change in the administrative structure in the Authority is that the Minister of Investment will now be the chairman of the Authority’s board. Furthermore, a new position has been created, that of an executive director of the Authority. Thus, the authority will seize to be independent from the Minister of Investment and will return to the position it occupied in the 1970s and 1980s.
- The other radical change in the nature of the Authority is expressed through Article (93) of the Law, which grants the Authority wide regulatory power to impose administrative penalties which it did not have before, thus transforming it from a promotion agency to a regulatory authority. The said article states that the Authority may warn companies which contravene the Investment Law and request them to remove the contravention within 15 days. If the company does not respond, the authority may take the following measures: suspension of the company for three months, suspension from benefits and privileges in the Law for a specific time, cancellation of those benefits and privileges and finally cancellation of the company license altogether. It is worth knowing that the Law allows the company in this case to appeal against the authorities’ decision as stated above.
- The third change in the authority is the establishment of the National Center for the Development and Promotion of Investment. The Center is not really independent, but is rather a sector within the organizational structure of the Authority. However, it differs from other sectors in that its head will be appointed by a decision of the prime minister, and that it will have its own internal statutes, a rather confused administrative situation.
- Finally, Article (85) of the Law makes an ambiguous statement about exempting the Authority from governmental rules and systems and about employing the best skills in accordance with rules issued by the prime minister.
Miscellaneous
The new Law included a number of other important provisions, including:- Requiring all joint stock companies – whether listed in the Stock Exchange or not – to register their shares in the central depository system from the date of establishment.
- Determining that the minister of investment shall be the designated minister in charge of the application of the Investment Law, which is a formalization of the current practice.
- Reducing the customs duty paid by investment companies on the importation of machinery and equipment necessary for their establishment from 5 % to 2%.
- The application of the new amendments from the day following its publication in the Official Gazette, i.e. from 13 of March 2015.