it is very important for every company partners to know the basic of tax which will deal with when the company will start work in Egypt, this is the most important question which has to say to every Egyptian lawyer directly from the owners of the company when they are starting to contact with law firm in Egypt about establish a company in Egypt.
The answer for this question passed on a lot of sides, we will show it in follows.
Scope of the Tax
According to the act No 91 of 2005 (income Tax) an annual tax shall be levied on the net aggregate profits of legal persons whatever their objectives.
From this article we can get these legal terms:
- An annual tax.
- Legal persons.
it is very important to know the meaning for these legal terms according to that law to understand exactly the rules. for that the act itself gives meaning for every term as:
1- An annual tax:
A tax period is the fiscal year beginning the first of January and ending on 31st of December each year, or any period of twelve months which is used as a base for computation of the tax.
Tax may be calculated for a period shorter or longer than twelve months. The executive regulation of this law shall determine the accounting procedures for such period.
Tax becomes due on the day following the end of a tax period, and shall also become due on the death of a taxpayer, or cessation of a taxpayer’s residency, or the permanent discontinuance of a taxpayer from practicing the activity.
2- legal persons. two kinds:
- Legal persons residing in Egypt, with respect to all profits whether realized in Egypt or abroad, with exception of the Agency of National Service Projects of the Ministry of Defense.
Non-resident legal persons, with respect to the profits through a permanent establishment in Egypt.
Also due to that act the legal person who is the subject for that law :
- Capital associations and partnerships whatever the law they are subject to, as well as corporations de facto.
- Cooperatives and their unions, taking into consideration exemptions stipulated by law.
- Public authorities and other public legal persons in relation to activity exercised by them that is subject to tax, without prejudice to exemptions provided in the laws establishing them.
- Banks, companies and foreign firms even if their head offices are based abroad and their branches are in Egypt.
- Units established by the local Authority with respect to their activity that is subject to tax.
The base of tax: The tax base is rounded to nearest lower ten pounds and it shall be subject to tax at the rate of 20% of the net annual profits. With exception to the rate mentioned in the preceding paragraph, the profits of Suez Canal Authority, the Egyptian General Petroleum Corporation and the Central Bank are subject to tax at the rate of 40%, and the profits of oil and gas exploration and production companies are subject to tax at the rate of 40.55.
The legal meaning for tax base is the net profit which is determined on the basis of the gross profit after deducting all costs and expenses needed to realize such profits. The deductible costs and expenses must be:
- Related to the commercial or industrial activity of the firm and carrying out the activity.
- Real and supported by documents, except for costs and which customarily have no supporting documents.
The following are exempt from tax:
1- Ministries and government bodies.
2- Educational establishments subject to the supervision of the State, and which are basically not-for-profit entities.
3- Non-governmental organizations and institutions established under the provisions of the Non-governmental Organizations and Institutions law promulgated by law no. 84 of 2002, within the limits of the purpose for which they were established.
4- Non-profit making bodies that carry out activities of a social, scientific, sports or cultural nature as long as those activities are not of a commercial, industrial or professional nature.
5- Profits of private insurance funds subject to the provisions of law no. 54 of 1975.
6- International organizations, technical cooperation bodies and their representatives, for which international agreements provide their exemption from tax.
7- Profits and dividends of investment funds established according to the Capital Market Law promulgated by law no. 95 of 1992 and the revenue of bonds registered in the official schedules at the stock exchange.
8- Returns received by resident legal persons for their investments in securities registered on the Egyptian stock exchange market with the loss resulting from such transactions not to be deducted or carried over to subsequent years.
9- Returns received by legal persons on securities issued by the Central Bank of Egypt or revenues from transactions involving them; with an exception from provision of Article 56 of this law.
10- Dividends, profits and shares, which resident legal persons receive for their participation in other resident legal persons.
11- Profits of land reclamation and cultivation companies for a period of ten years from the date of starting the business or of starting production as applicable according to the rules to be determined by the Executive Regulation of this law.
12- Profits of companies engaged in poultry production, bee breeding, cattle breeding and fattening pens and the companies of fisheries and fish farms for a period of ten years from the date of exercising the activity.
The following are not deductible costs:
1- Debit interest paid by legal persons stipulated in Article 47 hereof on loans and advances they have obtained and that are more than four times the average of equity rights according to the financial statements prepared according to the Egyptian accounting standards. This does not apply to banks and insurance companies as well as those companies engaged in financing activity that are to be determined according to a ministerial decree.
2- Amounts that are set aside for the purpose of forming or funding different types of allocations, with the exception of the following:
(a) 80% of the provisions for loans that banks are committed to form according to the rules of the preparation and presentation of financial statements and the assessment principles issued by the Central Bank.
(b) Technical provisions which insurance companies are obliged to form in applying the provisions of the Supervising and Monitoring Insurance Law in Egypt promulgated by law no. 10 of 1981.
3- Distributed shares of profits and dividends and attendance fees paid to shareholders for attending the general assembly.
4- Membership remuneration and allowances received by Chairmen and members of the boards of directors.
5- Employees’ profit shares, which are distributed according to law.
6- Different types of reserves and allowances.
7- Fines, financial penalties and indemnities ruled against a taxpayer due to his or one of his affiliates’ commission of an intentional felony or misdemeanor.
8- The income tax due according to this Law.
9- Interest paid on loans which exceed double the credit and discount rate declared by the Central Bank at the beginning of the calendar year in which the tax period ends.
10- Interest on loans and debts of different types paid to non-taxable or tax exempt natural persons.
In the case of a change in the legal form of one or more legal persons, the capital profits and losses resulting from the revaluation shall not be included in the profit and loss account, provided that the assets and liabilities are registered with their book value at the time of the change in the legal form for the purpose of tax computation. The calculation of the depreciation of assets and the carry over of the provisions and reserves must be according to the set rules before making such change.
The following are deemed in particular to be a change in legal form:
1- The merger of two or more resident companies.
2- The splitting of a resident company into two or more resident companies.
3- The transforming of a partnership into a Shareholding Corporation or the transformation of a Shareholding Corporation into another one.
4- The purchase or acquisition of 50% or more of the shares or the voting rights, whether in terms of number or value, of a resident company against shares in the purchasing or acquiring company.
5- The purchase or acquisition of 50% or more of the assets and liabilities of a resident company by another resident company in exchange for shares in the purchasing or acquiring company.
6- The transformation of a legal person into a Shareholding Corporation.
The foreign tax paid by a resident company on its profits abroad shall be deducted from the tax due according to the provisions of this law, provided that the relevant supporting documents are presented. A loss incurred abroad cannot be deducted from the tax base in Egypt for the
same tax period or any subsequent period.
The deduction mentioned before may not exceed the tax payable in Egypt that may have been due with respect to the profits from works performed abroad.
If the final account of a year is closed in a loss, the loss shall be deducted from the succeeding year’s profits. If, however, part of the loss remains, it shall be carried forward to the succeeding years up to the fifth, after which no loss can be carried forward.
But this does not apply to a loss suffered by a company in the tax period and the previous periods if a change occurs to its capital ownership by a percentage of more than 50% of stocks, shares or voting rights provided that it is accompanied with a change in activity.
The preceding paragraph may only be applied by joint stock companies and companies limited by shares provided that their shares are not be offered for circulation on the Egyptian stock exchange market.