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Amendments to the Income Tax Law

Amendments to the Income Tax Law
Finally, and after 9 months of anticipation, in the first week of April the Ministry of Finance issued Ministerial Decision No. 172 of 2015 amending the Executive Regulations (issued by the Ministerial Decision No. 991 of 2005) of the Income Tax Law No. 91 of 2005.[1] After the enforcement of dividends distribution and capital gains tax by Law No. 53 of 2014, it became a necessity to amend the Executive Regulations to set out the procedures of executing the new taxes, as well as the deduction, withholding and remitting of tax to the Egyptian tax Authority. The new Executive Regulations were extended to address the amendments to the Income Tax Law by Law No. 11 of 2013. Said modifications had a clear impact on trading activities at the Egyptian Stock Exchange whether before or after issuance of the amendments of the Executive Regulations. Following is a review of the main aspects of the amended Executive Regulations.
Background: The Presidential Decree adopting Law No. 53 of 2014
The Egyptian government’s intention to widen its tax base aiming to constrain its budget deficit, was supported by Presidential Decree adopting Law No. 53 of 2014. The Law amended the Income Tax Law, the main amendments were as follows:
  1. Imposition of tax on dividends upon Natural and Juristic Persons

The Law clarified the tax base and rate. In all cases, the tax rate on dividends shall be 10%. However, this rate may be reduced to 5% provided certain conditions are met.

  1. Imposition of Tax on Capital Gains resulting from sale of shares and securities for Natural and Juristic Persons

The amendments provide that capital gains realized from sale of securities and shares are subject to tax. The Law determined the tax base as the capital gains calculated based on the net profits at the end of the tax year; the difference between the price of sale, exchange, or any form of disposal and the acquisition cost, after deducting the brokerage commission. In case of the sale by resident natural and juristic persons of shares listed on the Egyptian Stock Exchange, the capital gains shall be subject to 10%.For non-resident juristic persons, a 10% tax rate shall apply on capital gains without any deductions.

  1. Abolishing the Stamp Duty imposed upon acquisitions and disposals of securities
The Implications of the Amendments
The Ministry of Finance issued Decree No. 172 of 2015 amending certain provisions of the Executive Regulations of the Income Tax Law. The amendment addressed
  1. Substituting (18) articles
  2. Introducing (17) new articles
  3. Abolishing (7) articles
The amendments effective from April 7, 2015 are summarized below:
  1. Exempt bracket for natural persons’ income

The tax shall apply to the total net income of the natural person exceeding EGP 5,000. The taxpayer is subject to this treatment regardless of being resident or non-resident without duplication, deduction or proration as well as regardless of the taxpayer’s duration of employment or activity extended to a complete tax period or not.

In case of multiple income sources, this amount shall be first deducted from salaries income, then any remaining amount shall be deducted from any other income sources.

  1. Salary Tax
  • A personal exemption of EGP 7,000 applies to each taxpayer in addition to the natural persons’ exempt bracket mentioned above.
  • The total exempt amounts of contributions in private insurance funds and life insurance premiums shall not exceed (15%) of the net income or EGP 10,000, whichever is less.
  • The tax shall apply at 10% on amounts received by residents from sources other than their original employment sources. The rate applies without any reduction to meet costs as well as without any deduction as per the exempt bracket. The entity paying such amounts shall deduct and remit the tax within the first 15 days of each month.

For these purposes, the source from which the employee receives more than 50% of his income during a tax period shall be deemed the original employment entity.

  1. Corporate Income Tax
  • The net profit shall be specified based on actual revenues and costs. Hence, unrealized revenues and costs shall not be included in the taxable base.
  • Finance and investment cost related to exempt income in application of Article 24 of the Income Tax Law refers to amounts due or paid and charged to the financial statements. This covers interest proceeds or interest payable on deposits, loans, advances and debt in addition to general and administrative expenses incurred by the taxpayer out of the carrying out of his/her activity. Depreciation and provisions shall not be included in the general and administrative expenses.

The financing and investment cost shall be calculated based on either of the following two methods:

    1. Allocation method

If the sole purpose of borrowing is to invest in revenues exempt from income tax, then the funding cost shall be the interest paid on borrowing such funds.

    1. Apportionment method

If the purpose of borrowing is not solely to invest in revenues exempt from income tax, then the financing and investment cost related to these revenues is determined as follows:

Total revenues exempted as per Law Financing and investment cost
______________________________________ X
Taxpayer’s total revenues for the full year
 
  • Securities as well as investment fund profits and distributions are exempt provided such funds are incorporated as per the Capital Market Law No. 95 of 1992 and its Executive Regulation.
  • Capital gains realized from re–evaluation including acquisition profits are subject to tax in case of changing the entity’s legal form. The entity is entitled to postpone the tax based on the following:
    1. The assets and liabilities shall be entered at book value at the time of changing the legal form.
    2. Calculating the assets depreciation and carrying forward the provisions and reserves according to the rules prescribed for the assets and liabilities book value before carrying out that change of legal form.
    3. Stocks or shares resulting from the change of legal form may not be disposed of in any way for three years as of the change of legal form.
    4. None of the parties to the transaction of the change of legal form is a non-resident.

The deal shall be deemed an acquisition for purposes of the provisions of items (4 & 5) of Article (53) of the Law, in case the value of purchased shares represents 33% or more during the tax period.

  1. Withholding Tax
  • Service charges subject to withholding tax according to Article (56) of the Law do not include administrative, control and supervision expenses charged by the head office to the permanent establishment operating in Egypt.

The amount approved within the administrative expenses charged by the head office abroad shall not exceed 10% of the permanent establishment’s net tax profit.

  • Entities and branches incorporated as per the Special Economic Zones Law and those established under the Free Zone System are obliged to withhold the tax stipulated in Article (56) of the law at a rate of 20%. The aforementioned entities shall remit these withheld amounts to the Withholding Tax Department affiliated to the Central Department of International Agreements.
  • Two services were added to service fees exempt from tax according to Article (56) of the law as follows:
    1. Services related to the religious rites.
    2. Residence at hotels or any other places.
  1. Tax on Dividends and Capital Gains from Securities
  • In relation to dividends, the taxable event is putting dividends at the disposal of the shareholder. This applies by transferring the dividends from the distributing entity’s possession to the shareholder’s possession. This is also applicable to quotas.
  • Temporary distribution is subject to the same rule.
  • The distributing entity shall submit to the Tax Authority the dividend distribution decisions within (30) days of their issuance.
  • A natural person trading a portfolio that does not exceed EGP 5M shall be subject to a withholding tax of 5% or 10% as per the case. These dividends shall not be considered again when determining the natural persons’ taxable base.
  • The central depository and registry company as well as banks authorized to carry out custody activities or the distributing entity, as applicable, shall remit the amounts withheld to the Central Department for Withholding and Collection Forms. The remittance shall be performed before the fifth working day of the month following the month during which the collection took place by means of a check, cash or any other means of electronic payment. The aforementioned entities shall provide the taxpayer with a receipt for each amount withheld under tax account, or notify him/her.
  • Resident legal entities are entitled to deduct the tax on dividends withheld at source from the tax calculated on such dividends.

The calculated tax is the tax due on dividends and it shall be determined as follows:

Total revenues subject to withholding tax Tax due on the Company
______________________________________ X
Taxpayer’s total revenues for the full year
  • The acquisition cost of bonus shares is determined based on the share’s nominal value.
  • In regard to the capital gains resulting from securities listed with the Egyptian Stock Exchange realized by a resident natural person from a source in Egypt, the central depository and registry company and banks authorized to carry out custody activities or the party performing the transaction, as applicable, shall notify the Central Department for Withholding and Collection Forms with the transaction by the end of January of every year.
  • Since profits resulting from the disposal of securities listed with the Egyptian Stock Exchange should be excluded from the base of legal entities corporate tax, therefore, all costs related to such securities must be excluded through either allocation or apportionment, as follows:
    1. Allocation

If the sole purpose of borrowing is to invest in securities, the funding cost shall be the interest paid for borrowing such funds.

    1. Apportionment:

If the purpose of borrowing is not solely to invest in securities, the financing and investment cost related to these revenues is determined as follows:

Total revenues from taxable securities Financing and investment cost
______________________________________ X
 Taxpayer’s total revenues for the full year
  • The central depository and registry company and banks authorized to carry out custody activities or any other entity carrying out the disposal of securities shall remit the withheld tax to the Central Department for Withholding and Collection Forms before the fifth working day of the month following that month during which the collection took place by means of a check, cash or any other electronic payment means.

The withholding entities are liable for providing the taxpayer with the receipt for each withheld amount.

The above mentioned entities shall refund to the taxpayer any amount remitted in excess of the tax due at the end of each quarter. The refund shall be processed during the month following that quarter provided that such amounts are settled from those amounts due to the Tax Authority on the form prepared for such purpose.

  1. Deduction under the account of Tax
  • The local withholding taxes prescribed in Article (59) of the Law, except the dividends of capital companies, shall be reported and remitted by means of a check, cash, or any other electronic payment means to the Central Department for Withholding and Collection Forms prior to the end of April, July, October, and January of every year.
  • Amounts withheld, added or collected shall be remitted to the Central Department for Withholding and Collection Forms as per Article (72) of the law by means of a check, cash, or any other electronic payment means prior to the end of April, July, October, and January of every year.
  • The entities carrying out the sale or distribution of any goods, industrial commodities or local or imported agricultural crops to private sector entities for the purpose of trading or manufacturing, in addition to entities that rent their properties prepared for trading or manufacturing activities or rendering services as well as food and beverages preparation – these entities are obliged to notify the Tax Authority with a statement of the value of the goods, industrial commodities and products, agricultural crops, transactions, amounts and rents collected from each prior to the end of April, July, October, and January of every year for the preceding three-months period.
  1. Tax Assessment
  • The Executive Regulation allows using the deemed profit basis for tax assessment to reach the taxable net profit. This applies in case no supporting data and documents are available upon inspection of the tax return filings.
  • In case the Tax Authority realizes some revenues were not included in the tax return filing and that the taxpayer was not previously notified, the authority shall notify the taxpayer with the tax adjustment.
  1. Tax Audit and Investigations

Entities that have to present their accounting books and documents include entities and companies incorporated under the Free Zone System. The same applies to entities incorporated under the Special Economic Zones system.

Conclusion
The late issuance of these Executive Regulations resulted in confusion and upheaval in the securities market including companies and investors, which directly impacted the performance of the Egyptian Stock Exchange. Furthermore, its issuance did not positively affect saidperformance that maintained its negative indicators. The Executive Regulations clarified the mechanism of deducting, withholding and remitting the due taxes to the Egyptian Tax Authority, which guarantees the enforcement of the dividends and capital gains taxes. It even extended to address the Egyptian Tax Authorities collection dates and forms for these taxes. In addition, the Executive Regulations set the calculation for excluding costs related to securities profits, which shall be excluded from the Corporate Income Tax base. On the other hand, threats of unconstitutionality prevail regarding Article 26 (Bis 1), which fixed different dividends tax rates based on the natural person’s portfolio value. These rates were not mentioned in Article 46 (Bis 2) of Law No. 53 of 2014. An additional concern regarding the new Executive Regulation is the amendment of Article 76, abolishing the withholding tax refund system as per the Double Tax Treaties (DTTs) that was set by the Ministerial Decree no. 579 of 2012. This is likely to have a negative impact on the Egyptian government’s image especially in relation to compliance with the DTTs it has entered into. It is worth noting that it has been announced that the enforcement of the capital gain tax resulting from securities listed on the Egyptian Stock Exchange will be suspended for two years. A law to that effect remains to be adopted.   [1] Minister of Finance’s Decision No. 172/2015 amending the Executive Regulations of the Income Tax Law, Egyptian Gazette, Issue No. 79 (cont.) (b), 6 April 2015.
Finally, and after 9 months of anticipation, in the first week of April the Ministry of Finance issued Ministerial Decision No. 172 of 2015 amending the Executive Regulations (issued by the Ministerial Decision No. 991 of 2005) of the Income Tax Law No. 91 of 2005.[1] After the enforcement of dividends distribution and capital gains tax by Law No. 53 of 2014, it became a necessity to amend the Executive Regulations to set out the procedures of executing the new taxes, as well as the deduction, withholding and remitting of tax to the Egyptian tax Authority. The new Executive Regulations were extended to address the amendments to the Income Tax Law by Law No. 11 of 2013. Said modifications had a clear impact on trading activities at the Egyptian Stock Exchange whether before or after issuance of the amendments of the Executive Regulations. Following is a review of the main aspects of the amended Executive Regulations.
Background: The Presidential Decree adopting Law No. 53 of 2014
The Egyptian government’s intention to widen its tax base aiming to constrain its budget deficit, was supported by Presidential Decree adopting Law No. 53 of 2014. The Law amended the Income Tax Law, the main amendments were as follows:
  1. Imposition of tax on dividends upon Natural and Juristic Persons

The Law clarified the tax base and rate. In all cases, the tax rate on dividends shall be 10%. However, this rate may be reduced to 5% provided certain conditions are met.

  1. Imposition of Tax on Capital Gains resulting from sale of shares and securities for Natural and Juristic Persons

The amendments provide that capital gains realized from sale of securities and shares are subject to tax. The Law determined the tax base as the capital gains calculated based on the net profits at the end of the tax year; the difference between the price of sale, exchange, or any form of disposal and the acquisition cost, after deducting the brokerage commission. In case of the sale by resident natural and juristic persons of shares listed on the Egyptian Stock Exchange, the capital gains shall be subject to 10%.For non-resident juristic persons, a 10% tax rate shall apply on capital gains without any deductions.

  1. Abolishing the Stamp Duty imposed upon acquisitions and disposals of securities
The Implications of the Amendments
The Ministry of Finance issued Decree No. 172 of 2015 amending certain provisions of the Executive Regulations of the Income Tax Law. The amendment addressed
  1. Substituting (18) articles
  2. Introducing (17) new articles
  3. Abolishing (7) articles
The amendments effective from April 7, 2015 are summarized below:
  1. Exempt bracket for natural persons’ income

The tax shall apply to the total net income of the natural person exceeding EGP 5,000. The taxpayer is subject to this treatment regardless of being resident or non-resident without duplication, deduction or proration as well as regardless of the taxpayer’s duration of employment or activity extended to a complete tax period or not.

In case of multiple income sources, this amount shall be first deducted from salaries income, then any remaining amount shall be deducted from any other income sources.

  1. Salary Tax
  • A personal exemption of EGP 7,000 applies to each taxpayer in addition to the natural persons’ exempt bracket mentioned above.
  • The total exempt amounts of contributions in private insurance funds and life insurance premiums shall not exceed (15%) of the net income or EGP 10,000, whichever is less.
  • The tax shall apply at 10% on amounts received by residents from sources other than their original employment sources. The rate applies without any reduction to meet costs as well as without any deduction as per the exempt bracket. The entity paying such amounts shall deduct and remit the tax within the first 15 days of each month.

For these purposes, the source from which the employee receives more than 50% of his income during a tax period shall be deemed the original employment entity.

  1. Corporate Income Tax
  • The net profit shall be specified based on actual revenues and costs. Hence, unrealized revenues and costs shall not be included in the taxable base.
  • Finance and investment cost related to exempt income in application of Article 24 of the Income Tax Law refers to amounts due or paid and charged to the financial statements. This covers interest proceeds or interest payable on deposits, loans, advances and debt in addition to general and administrative expenses incurred by the taxpayer out of the carrying out of his/her activity. Depreciation and provisions shall not be included in the general and administrative expenses.

The financing and investment cost shall be calculated based on either of the following two methods:

    1. Allocation method

If the sole purpose of borrowing is to invest in revenues exempt from income tax, then the funding cost shall be the interest paid on borrowing such funds.

    1. Apportionment method

If the purpose of borrowing is not solely to invest in revenues exempt from income tax, then the financing and investment cost related to these revenues is determined as follows:

Total revenues exempted as per Law Financing and investment cost
______________________________________ X
Taxpayer’s total revenues for the full year
 
  • Securities as well as investment fund profits and distributions are exempt provided such funds are incorporated as per the Capital Market Law No. 95 of 1992 and its Executive Regulation.
  • Capital gains realized from re–evaluation including acquisition profits are subject to tax in case of changing the entity’s legal form. The entity is entitled to postpone the tax based on the following:
    1. The assets and liabilities shall be entered at book value at the time of changing the legal form.
    2. Calculating the assets depreciation and carrying forward the provisions and reserves according to the rules prescribed for the assets and liabilities book value before carrying out that change of legal form.
    3. Stocks or shares resulting from the change of legal form may not be disposed of in any way for three years as of the change of legal form.
    4. None of the parties to the transaction of the change of legal form is a non-resident.

The deal shall be deemed an acquisition for purposes of the provisions of items (4 & 5) of Article (53) of the Law, in case the value of purchased shares represents 33% or more during the tax period.

  1. Withholding Tax
  • Service charges subject to withholding tax according to Article (56) of the Law do not include administrative, control and supervision expenses charged by the head office to the permanent establishment operating in Egypt.

The amount approved within the administrative expenses charged by the head office abroad shall not exceed 10% of the permanent establishment’s net tax profit.

  • Entities and branches incorporated as per the Special Economic Zones Law and those established under the Free Zone System are obliged to withhold the tax stipulated in Article (56) of the law at a rate of 20%. The aforementioned entities shall remit these withheld amounts to the Withholding Tax Department affiliated to the Central Department of International Agreements.
  • Two services were added to service fees exempt from tax according to Article (56) of the law as follows:
    1. Services related to the religious rites.
    2. Residence at hotels or any other places.
  1. Tax on Dividends and Capital Gains from Securities
  • In relation to dividends, the taxable event is putting dividends at the disposal of the shareholder. This applies by transferring the dividends from the distributing entity’s possession to the shareholder’s possession. This is also applicable to quotas.
  • Temporary distribution is subject to the same rule.
  • The distributing entity shall submit to the Tax Authority the dividend distribution decisions within (30) days of their issuance.
  • A natural person trading a portfolio that does not exceed EGP 5M shall be subject to a withholding tax of 5% or 10% as per the case. These dividends shall not be considered again when determining the natural persons’ taxable base.
  • The central depository and registry company as well as banks authorized to carry out custody activities or the distributing entity, as applicable, shall remit the amounts withheld to the Central Department for Withholding and Collection Forms. The remittance shall be performed before the fifth working day of the month following the month during which the collection took place by means of a check, cash or any other means of electronic payment. The aforementioned entities shall provide the taxpayer with a receipt for each amount withheld under tax account, or notify him/her.
  • Resident legal entities are entitled to deduct the tax on dividends withheld at source from the tax calculated on such dividends.

The calculated tax is the tax due on dividends and it shall be determined as follows:

Total revenues subject to withholding tax Tax due on the Company
______________________________________ X
Taxpayer’s total revenues for the full year
  • The acquisition cost of bonus shares is determined based on the share’s nominal value.
  • In regard to the capital gains resulting from securities listed with the Egyptian Stock Exchange realized by a resident natural person from a source in Egypt, the central depository and registry company and banks authorized to carry out custody activities or the party performing the transaction, as applicable, shall notify the Central Department for Withholding and Collection Forms with the transaction by the end of January of every year.
  • Since profits resulting from the disposal of securities listed with the Egyptian Stock Exchange should be excluded from the base of legal entities corporate tax, therefore, all costs related to such securities must be excluded through either allocation or apportionment, as follows:
    1. Allocation

If the sole purpose of borrowing is to invest in securities, the funding cost shall be the interest paid for borrowing such funds.

    1. Apportionment:

If the purpose of borrowing is not solely to invest in securities, the financing and investment cost related to these revenues is determined as follows:

Total revenues from taxable securities Financing and investment cost
______________________________________ X
 Taxpayer’s total revenues for the full year
  • The central depository and registry company and banks authorized to carry out custody activities or any other entity carrying out the disposal of securities shall remit the withheld tax to the Central Department for Withholding and Collection Forms before the fifth working day of the month following that month during which the collection took place by means of a check, cash or any other electronic payment means.

The withholding entities are liable for providing the taxpayer with the receipt for each withheld amount.

The above mentioned entities shall refund to the taxpayer any amount remitted in excess of the tax due at the end of each quarter. The refund shall be processed during the month following that quarter provided that such amounts are settled from those amounts due to the Tax Authority on the form prepared for such purpose.

  1. Deduction under the account of Tax
  • The local withholding taxes prescribed in Article (59) of the Law, except the dividends of capital companies, shall be reported and remitted by means of a check, cash, or any other electronic payment means to the Central Department for Withholding and Collection Forms prior to the end of April, July, October, and January of every year.
  • Amounts withheld, added or collected shall be remitted to the Central Department for Withholding and Collection Forms as per Article (72) of the law by means of a check, cash, or any other electronic payment means prior to the end of April, July, October, and January of every year.
  • The entities carrying out the sale or distribution of any goods, industrial commodities or local or imported agricultural crops to private sector entities for the purpose of trading or manufacturing, in addition to entities that rent their properties prepared for trading or manufacturing activities or rendering services as well as food and beverages preparation – these entities are obliged to notify the Tax Authority with a statement of the value of the goods, industrial commodities and products, agricultural crops, transactions, amounts and rents collected from each prior to the end of April, July, October, and January of every year for the preceding three-months period.
  1. Tax Assessment
  • The Executive Regulation allows using the deemed profit basis for tax assessment to reach the taxable net profit. This applies in case no supporting data and documents are available upon inspection of the tax return filings.
  • In case the Tax Authority realizes some revenues were not included in the tax return filing and that the taxpayer was not previously notified, the authority shall notify the taxpayer with the tax adjustment.
  1. Tax Audit and Investigations

Entities that have to present their accounting books and documents include entities and companies incorporated under the Free Zone System. The same applies to entities incorporated under the Special Economic Zones system.

Conclusion
The late issuance of these Executive Regulations resulted in confusion and upheaval in the securities market including companies and investors, which directly impacted the performance of the Egyptian Stock Exchange. Furthermore, its issuance did not positively affect saidperformance that maintained its negative indicators. The Executive Regulations clarified the mechanism of deducting, withholding and remitting the due taxes to the Egyptian Tax Authority, which guarantees the enforcement of the dividends and capital gains taxes. It even extended to address the Egyptian Tax Authorities collection dates and forms for these taxes. In addition, the Executive Regulations set the calculation for excluding costs related to securities profits, which shall be excluded from the Corporate Income Tax base. On the other hand, threats of unconstitutionality prevail regarding Article 26 (Bis 1), which fixed different dividends tax rates based on the natural person’s portfolio value. These rates were not mentioned in Article 46 (Bis 2) of Law No. 53 of 2014. An additional concern regarding the new Executive Regulation is the amendment of Article 76, abolishing the withholding tax refund system as per the Double Tax Treaties (DTTs) that was set by the Ministerial Decree no. 579 of 2012. This is likely to have a negative impact on the Egyptian government’s image especially in relation to compliance with the DTTs it has entered into. It is worth noting that it has been announced that the enforcement of the capital gain tax resulting from securities listed on the Egyptian Stock Exchange will be suspended for two years. A law to that effect remains to be adopted.   [1] Minister of Finance’s Decision No. 172/2015 amending the Executive Regulations of the Income Tax Law, Egyptian Gazette, Issue No. 79 (cont.) (b), 6 April 2015.