A Look at the Executive Regulations

On 28 October 2017, the Prime Minister issued the Executive Regulations of the Investment Law. The regulations contain elaborating details and procedural rules for the implementation of many of the provisions of the Law. Of these, the most important is the classification of geographical areas that can benefit from special incentives offered under the Law, and the definition of the term “investment costs” that is used for the calculation of the deductible tax incentive, as well as in several occasions throughout the Law. The Executive Regulations also provide the timelines, rules and procedures for all investment facilitation services such as company establishment, land allocation, post-establishment services, and liquidation, in addition to the rules relating to private sector accreditation offices, and the Investment Services Centre.

Background

Following much deliberation and anticipation, the new Investment Law No. 72 of 2017 was passed by Parliament, and issued on 31 May 2017 (the “Law”). It repealed the preceding investment law that was in place since 1997. The new Law identified a new list of eligible activities described as “Investment Fields”, that were granted certain legal guarantees, benefits and incentives with a view of facilitating investment in those fields and thus attracting investors. It set new rules for the allocation of investment land, re-identified the role, functions, and powers of the General Authority for Investment and Free Zones (“GAFI”), and attempted to facilitate incorporation and post incorporation services for companies operating in Egypt. Furthermore, the new Law also offered investors a number of ways to resolve investment related disputes out of court. The Law had stated that the Prime Minister – based on a proposal from the Minister of Investment and the Cabinet – is to issue the Law’s Executive Regulations within three months from the date of its coming into force. Interestingly however, Parliament has been involved in reviewing the long-awaited Executive Regulations. It is unusual for the House of Representatives to be part of the drafting of an executive decision, but in this particular case, Parliament approved the Law on the condition that it reviews and approves its Executive Regulations.

The Executive Regulations

Issued on 28 October 2017 under No. 2310 of 2017, the Executive Regulations (“ER”)[1] are the procedural rules for implementing Investment Law No. 72 of 2017. As such, the ER do not constitute new provisions, neither may they go beyond what has already been prescribed in the Law, they merely offer the rules for the procedural implementation of the provisions of the Law.

• Investment Fields

The Law sets out a number of “Investment Fields” that are eligible for the incentives and guarantees provided within it. These fields are: (1) industry, (2) agriculture, (3) trade, (4) education, (5) health, (6) transport, (7) tourism, (8) housing and construction, (9) sports, (10) electricity and power, (11) natural resources, (12) water, (13) communication, and (14) technology. However, in order to figure out which sectors under the prescribed fields are eligible for these benefits, we have to look at the Executive Regulations, Article (1) of which defines the activities under each sector that are subject to the Investment Law. By way of example, while the Law defines the broad sector of “Industry” as one of the fields of investment, the ER elaborates that to be “industrial activities that transform material and substance changing their form by mixing, treating, reshaping, and assembling the same… for the purpose of producing final or middle products; and excluding the manufacturing of tobacco, and alcoholic beverages.” Where the Law simply provides “Trade” as a field of investment, the ER define that to be “projects that invest in the fields of internal trade development, that are aimed at incentivising and promoting investment in trade activities, and these are: trade malls, wholesale trade, retail trade, and supply chains. Given that these activities are undertaken through an Egyptian Joint Stock company, except for activities undertaken in remote areas and new urban communities.” Moreover, under the ER the “Health Sector” includes a) specialized, general, or complete hospitals, on the condition that they offer 10% of their beds for free medical care, and b) medical treatment and diagnostic centres, on the condition that they provide free medical care to 10% of their patients. These are some examples of the definitions provided in the ER for activities within the investment fields that will be eligible for the benefits provided under the Law.

• Legal Guarantees

The Law had provided as a legal guarantee for investors that the State allows free foreign currency transfers “without delay”. The ER gives examples to what will be considered foreign currency transfer in relation to investment, and that includes: (a) foreign currency that is used for the establishment, construction, or expansion of a project within one of the investment fields, (b) foreign currency used for subscription in Egyptian securities, (c) Egyptian currency used to settle obligations in foreign currency, if such is used for the establishment or expansion of projects in Egypt, (d) purchase of machinery and equipment, raw material, or transportation from abroad for the purpose of establishing or expanding projects, (e) payments for intellectual property rights used in projects in Egypt, and (f) the repatriation of profits, if they are used to complete the issued capital, increase it, or are invested in other projects.

• Investment Incentives

The Law had provided as an incentive, residency to foreign investors for the term of the project. In this respect, the ER sets out the conditions for granting residency and these are (1) that the person is a founder, partner, or shareholder in the company, and (2) that residency is not less than one year and does not exceed the term of the project. The Executive Director of GAFI may add additional conditions upon consulting with the Ministry of Interior, and residency is revoked once the investor exits the company, or it is liquidated. Furthermore, the Law had provided that investment projects may hire foreign employees up to 10 % of their work force, which can be increased up to 20% in the event that the required qualifications cannot be fulfilled by national employees, and that is under conditions to be set out in the ER. The ER provides for the formation of a committee within GAFI to look into requests for increasing the number of foreign employees. In considering these requests, the committee is to look at things such as the applicant’s qualifications, security clearances, reciprocity, company needs, and whether the company creates opportunities for Egyptian workers. Preference is given to foreigners who have been born or reside in Egypt, and the company has an obligation to make sure that Egyptian assistants work closely with, and receive training from, the foreign workers. In addition, the Law distinguishes between “general’’, “special”, and “additional” incentives.

1. General Incentives

These are available to all projects that stand to benefit from the Investment Law, but excluding those established in a Free Zone. They include that all incorporation contracts, facility, mortgage, final real estate sale and purchase agreements are exempt from stamp duty, and authentication and notarization fees for a period of five years; and a unified custom duty tax of 2% from the value of all machinery and equipment necessary for the establishment of the investment project.

2. Special Incentives

The Special Incentive is a deduction from net taxable income that is either 30% or 50% of “investment cost” depending on the project’s geographical location. The ER defines the term Investment Cost as “the costs necessary for the establishment of the investment project constituting property rights in addition to long-term obligations that are investment in constructing fixed material assets (that are tangible), or intangible assets, on the condition that the value of such is paid in cash; in addition to working capital.” In this respect, the Law differentiates between Sector (A) and Sector (B) projects. For a project to be eligible to receive the Special Incentive in either Sector, it must satisfy the following conditions:

• That the investment project is undertaken through a newly incorporated company.
• That the new company is incorporated within three years from the date of the ER.
• That it holds regular books.
• None of the shareholders may have provided physical assets of an entity that existed at the time of the issuance of this law.
• That the tax credit constituting the Special Incentive does not exceed 80% of paid capital.
• That the Special Incentive must be applied within seven years from commencement of operations.

Sector (A) Investment projects shall be entitled to tax incentives in the form of a deduction from net taxable income amounting to 50% of Investment Cost for projects in priority areas of the country described as “Sector (A)”. The ER provides that Sector (A) includes the Suez Canal Economic Zone, and the Golden Triangle Zone. Sector (A) also includes areas in dire need that will be determined in a prime ministerial decree, given that the area must satisfy the following conditions provided in the ER:

• That it suffers from low levels of economic development.
• Has high presence of informal economy.
• High unemployment rate and low opportunities.
• Is highly populated.
• Suffers from low quality education and high illiteracy rates.
• Lacks medical services.
• Suffers from extreme poverty.

Sector (B) Sector (B) is any geographical location that is outside of Sector (A). They are areas that have potential for development and can contribute to attracting investment. Projects in Sector (B) enjoy a 30% deduction from Investment Cost provided they are one of the following:

• Labour intensive projects.
• SMEs.
• Projects that rely on new or renewable energy, or produces the same.
• Strategic national projects (as determined by the Supreme Council for Investment).
• Tourism projects (as determined by the Supreme Council for Investment).
• Electricity production or distribution projects (as determined by the Prime Minister in consultation with the Ministers of Electricity and Finance).
• Car manufacturing.
• Wood manufacturing, furniture, printing, packaging, chemical industries.
• Production of antibiotic, cancer treatment, or cosmetics.
• Food industries, agricultural crops, and agricultural waste management.
• Architectural, mineral, textile, and leather industries.
• Communications and Information Technology projects (this was not provided in the Law and was mentioned for the first time in the context of Sector B projects in the ER).
• Projects that export at least 50% of their production.

The ER defines that for a project to be considered labour intensive, the number of employees must not be less than 500 Egyptian socially insured workers, and direct wages must exceed 30% of total operational cost.

3. Additional Incentives

Finally, the Law provides in addition to General, and Special Incentives, what it calls Additional Incentives. These may be granted by way of a prime ministerial decree, and are available for investment projects established after the enactment of the Law whether in Sector (A), or (B). Additional Incentives include:

• Allowing the establishment of special custom outlets for the projects imports or exports (in coordination with the Ministry of Finance).
• The government incurring all or part of the cost of infrastructure (after commencement of operations).
• The government incurring part of the cost of vocational training.
• Returning half of the value of the allocated land to industrial projects if production commences within two years from receiving the land.
• Allocation of land free of charge for some strategic industries.
• Other non-tax incentives may be issued by a decision of the Cabinet.

In this respect, according to the ER a project must satisfy one of the following conditions in order to be eligible for an Additional Incentive:

• Has commenced its operations, or activities.
• Makes Egypt the a main headquarter for its products.
• Depends in financing its activities on foreign currency that is transferred into Egypt.
• Exports at least 50% of its products.
• Works in a field of modern technology or technology transfer into Egypt.
• Increasing local component in production so that it is not less than 50%.
• Operates according to research output resulting from research conducted in Egypt.

 

• Investment Services

In addition to the guarantees and incentives provided to projects established in one of the investment fields, the Law purported to facilitate some of the company establishment and post-establishment services offered to investors through GAFI. Unlike the guarantees and incentives provided under the Law however, facilitated company services apply to all joint stock and limited liability companies, regardless of whether or not they operate in one of the investment fields.

1. Investment Guide

GAFI is to issue a guide containing the conditions, procedures, and timeline, for land allocation, as well as the requirements for obtaining all approvals and licenses in relation to the investment activities. In this respect, the ER states that all relevant authorities must – upon obtaining the approval of the Ministry of Defence – submit to GAFI its procedures, timelines, and documentation that is required for the issuance of approvals and licenses in relation to land allocation, or investment fields in general. The ER provides a deadline of 60 days from its date for the collection of this data. It is worth noting that the original deadline for the issuance of the Investment Guide was 60 days from the date of the Law’s coming into effect in May 2017. The ER further states the details that are to be contained in the Guide, such as the name of the governmental body in charge of the approval, the documents required from the investor, the timeline and fee for the required service. The Guide it to be made available to investors online, and will be updated regularly by GAFI.

2. Investment Service Centres

Established at GAFI and its branches, these Centres comprise representatives from governmental bodies and public utilities companies that are authorized to issue all investment related approvals, licenses, and permits (including for land). The ER provide details as to the manner in which GAFI is to determine the number of representatives and employees in the Centres, their qualification, and conditions for their appointment. The ER also provides that the term of employment at the Centre will be one year that is renewable upon GAFI’s approval, and that GAFI may terminate any of these employments.

3. Accreditation Offices

The Law introduced the concept of accreditation offices for the inspection of investment project documents. These are licensed private sector offices authorized to review and accredit applications, and issue a certificate of inspection that is valid for one year. The ER creates a Permanent Committee for Accreditation Offices within GAFI, and sets out the conditions for licensing these Offices. These include that the Office is a joint stock company and that it exclusively operates as an Accreditation Office. The Office must have on its force qualified experts with experience that is not less than 10 years in the Office’s field of accreditation, and must have an EGP 1million insurance policy in place. The ER also sets out categories for pricing of the accreditation license varying between 10, 15, and 20 thousand Egyptian Pounds depending on whether the Office will issue certificates in one field or more. In addition to being tasked with issuing licenses for Accreditation Offices, the Permanent Committee for Accreditation Offices also evaluates their performance twice a year, and penalizes them in the event of violations. The ER provides more details on the obligations of Accreditation Offices in performing their duties and their professional liability as provided in the Law.

4. Company Establishment Services

The ER provides the steps for electronic incorporation. It also defines the establishment documents required for each type of company. Company capital at incorporation can be in any currency, provided that in the event that the company is not a joint stock, then capital must be paid in full. Companies established prior to the enactment of the Law can transfer their capital from EGP to a foreign currency subject to conditions set out under the ER including (i) that the company’s capital prior to transfer is not less than EGP 250 million that is paid in full, (ii) that a decision is issued by a majority of the company’s shareholders to make the transfer, and (iii) that the company provides proof that at establishment the shareholders have deposited 100% of the paid capital in that foreign currency.

5. Liquidation

The new Investment Law is considered one of the first in Egypt to recognize an investor’s right in exiting the market. Article (6) of the Law provides that an investor has the right to establish an investment project, expand it, finance it with no restrictions, manage it, use it, sell it, make profits and repatriate the same, as well as liquidate the project and transfer the outcome of said liquidation outside of Egypt. Moreover, the Investment Services Centre provides liquidation services as part of its operation. According to the Law, in the event of liquidation, relevant government bodies are required to inform both the company and GAFI of any dues that the company owes within 120 days from submitting the request for liquidation, or these dues lapse. The ER provides the steps and procedures to apply for voluntary liquidation. This can be considered a breakthrough since prior to these provisions, liquidation was subject to outdated rules under the old Trade Law.

6. Single Approval

The Law provides that a single approval comprising establishment, operation, and management can be issued by the prime minister for strategic and national projects aimed at development. The single approval may contain one or more of the incentives provided in the Law. The ER provides some clarity in that respect. It lists the conditions for a project to obtain said single approval, and these include that the company is joint stock, and that its capital is not less than 50% of Investment Cost. Requests for the single approval are submitted to GAFI, who then presents it to the Minister of Investment, who finally presents it to the Cabinet. The ER however does not provide standards as to which incentives can be granted to these projects.

• Land allocation

The Law allows for land that is privately-owned by the State to be provided to investors outside of the provisions of the Bids and Tenders Law which would normally govern such transactions. An investor has a choice between applying for real estate through GAFI or directly through the governmental body that has original jurisdiction over the land in question. The Law places a time limit of 30 days during which the investor must receive a response regarding their request for land-price valuation.  The ER sets out the information that should be included in the valuation request. This includes value of neighbouring property, cost of utilities, type of investment, and “other technical elements as required by the relevant authority”. Furthermore, the Law provides that the President may provide land to investors for free for developmental purposes in certain geographical locations. The ER offers some guidance in this respect as it limits land that is provided for free to investors who satisfy the technical and financial conditions to be determined by a prime ministerial decree. The ER also states that an investor wishing to apply for free land must submit a letter of credit (LC) to the relevant authority. The value of the LC is determined according to the type of activity. For production activities, the LC must be equal to 1% of the project’s Investment Cost. For service activities, the LC must be equal to 3% of the Investment Cost, and for storage activities, the value of the LC is 5% of Investment Cost.

• Special Zones

In line with previous investment laws, the new Law allows for the establishment of Free Zones. These may either be a wholly designated city that is established by special law, a public free zone where a fenced area is designated to accommodate various investments, or a private free zone which is a stand-alone project. Both private and public free zones must be established by a Cabinet of Ministers’ decision. The ER sets out the conditions for approving the establishment of public and private free zones. A project established within a public free zone must pay a deposit (guarantee) equal to 2% of its Investment Cost according to the terms provided in the ER. On the other hand, an approval for the establishment of a private free zone is subject to the following conditions provided in the ER:

1. That there is no suitable location for the project within a public free zone, or that there is a material economic interest in establishing the private free zone in the designated location;
2. That the project takes the form of a joint stock or limited liability company with issued capital of not less than 10 million US dollars, and Investment Costs that are not less than 20 million US dollars or their equivalent; and,
3. That permanent employment in the project is not less than 500 workers; its surface area is not less than 20 thousand meters square; local component not less than 30%; and that exports are not less than 80%.

The Law also provides for the establishment of Investment Zones and Technological Zones. The ER contains some details specific to these two types.

• The General Authority for Free Zones and Investment (“GAFI”)

Under the new Law GAFI continues to play a dual role of promotion and supervision. This section of the ER contains procedural rules for convening a monthly GAFI Board of Directors meeting, and the formation of a Board Secretariat. It also sets out timelines and procedures for GAFI’s disciplinary measures undertaken in its capacity as supervisor. Furthermore, a provision in the ER allows GAFI to hire a private sector company to undertake the authority’s investment promotion plan.

• Dispute Resolution

Finally, the investment ER provides the procedural framework that governs Petition Committees established within GAFI to receive complaints against administrative decisions issued in relation to the Investment Law, either by GAFI, or any governmental body that is in charge of issuing approvals, permits or licenses. The Investment Law had contained dispute resolution mechanisms in addition to GAFI’s Petitions Committee(s). Namely, it provided for the formation of two Ministerial Committees: one for the Resolution of Investment Disputes, and another for the Settlement of Investment Contracts, in addition to a new Arbitration and Mediation Centre. However, these bodies cannot be provided for under the Law’s Executive Regulations, and separate pieces of legislation are required for their formation. Indeed, on 25 September 2017, the Prime Minister issued a decree forming the Ministerial Committee for Resolution of Investment Disputes[2] in accordance to the new Investment Law; and on 5 November 2017, another Prime Ministerial decree established the Ministerial Committee for the Settlement of Investment Contracts.[3]

Conclusion

The Executive Regulations of the Investment Law signal the beginning of its full implementation after more than five months of the Law’s coming into force. Although the Executive Regulations do not – and cannot – add new substantive provisions to the Law, their issuance is an important development as it paves the way for putting the incentives, guarantees, and benefits provided under the Law into application. However, this remains a complex Law, especially with respect to the intricate tax rebate system it has introduced. Only practical implementation will therefore allow for a better assessment of the actual impact of the Investment Law on attracting and encouraging investment in Egypt.   [1] Prime Minister’s Decree 2310/2017 enacting the Executive Regulations of the Investment Law No. 72/2017, Official Gazette, Issue No. 43 (bis) (a), 28 October 2017. [2] Prime Minister’s Decree 2094/2017 forming the Ministerial Committee for the Resolution of Investment Disputes, Official Gazette, Issue No. 38 (bis) (a), 25 September 2017. [3] Prime Minister’s Decree 2376/2017 forming the Ministerial Committee for the Settlement of Disputes in Relation to Investment Contracts, Official Gazette, Issue No. 44 (bis) (b), 5 November 2017.