Ministry of Finance Clarifies the M

A Ministry of Finance decision dated 14 October 2019 (the “Decision”)[1] was issued containing the rules and procedures for the application of Article (58) of Income Tax Law No. 91 of 2005 (“ITL”) regarding the collection and refund of income taxes withheld on Treasury bill and bond (“T-bill and bond”) returns for non-residents. The Decision provides clarity on the manner by which non-residents who are owed payment of said returns can claim a refund or exemption of the applicable withholding tax based on the double taxation treaty to which their country is party to with Egypt. The streamlined rules will apply starting 1 December 2019.

Background

Under the ITL, certain payments of returns, royalties and services require the payer to deduct an applicable withholding income tax (“WHT”) rate from the payment and remit this deducted amount to the Egyptian Tax Authority (“ETA”). The ITL also sets out the cases and rates for when the payer withholds and remits tax, including payments made to entities and individuals who are non-resident in Egypt. The WHT rate could be reduced or eliminated if the non-resident’s state of residence has a Double Taxation Treaty (“DTT”) with Egypt providing a lower rate, or if they fall under a category for exemption. Egypt has over 50 signed DTTs with countries including the US, the UK, China, Saudi Arabia, Russia and a number of other European, Asian, African and Arab countries.

Decision No. 651 of 2019

The Decision sets out the conditions and manner in which a non-resident can apply a reduced rate or exemption from WHT on T-bill and bond returns according to a DTT. It states that the recipient of payment (the non-resident company or individual), or their legal proxy, may directly approach the custodian or the settlement and clearing company to submit the documents that allow them to benefit from the reduced rate or exemption from WHT. This means that the non-resident or their legal proxy would not have to approach ETA to settle this matter and can deal directly with the withholding agent (i.e., entity that is legally required to withhold tax) in relation to T-bill and bond returns. The documents to be submitted include an official certificate of residency from the recipient’s state of residence given that the determination of the recipient’s residency will be according to the definition contained in the relevant DTT.  The recipient of payment will also need to submit an attestation that they have the right to receive this payment (i.e., that they are the beneficial owner) and that the payment is not in relation to a permanent establishment in Egypt. An exemption from WHT for T-bill and bond returns will require in addition the submission of a certificate from the relevant authority at the DTT country that attests to the recipient’s fulfilment of the criteria for exemption. Following the above submissions, ETA reviews the documents to ensure that the payment recipient satisfies the DTT criteria and must then respond in writing to the custodian (the withholding entity) within 10 days from the date of receipt of the documents. This expedited timeframe would be an improvement if applied in practice as previous regulation provided timeframes which were never really applied. Submitted documents are valid until the end of the calendar year in which they were submitted, and ETA must provide reasoning for a decision to reject said documents. The Decision states that the Head of ETA will issue a matrix containing a comprehensive list of WHT tax rates for T-bill and bond returns according to all DTTs to which Egypt is a party. The matrix will then bind ETA – after confirming the fulfilment of the relevant criteria - and the settlement and clearing company that conducts the withholding, in their dealing with the payment recipient or their legal proxy. This move is hoped to make it clearer for non-resident companies in discerning the tax rate that they will be subjected to. The Decision further obligates the settlement and clearance company to compute the amount of due tax to be deducted within one day from receiving notice from ETA confirming the validity of the submitted documents and affirming that the payment recipient satisfies the DTT conditions. In addition, ETA is obliged to return any amounts in excess of the determined tax rate within 30 days from the date of its affirmation of the documents and recipient’s entitlement to the discounted rate under the DTT (or their exemption). In exceptional cases, this 30-day period could be extended by the Minister of Finance for an additional 15 days following a request from the Head of ETA. Finally, the Decision subjects ETA officials to administrative disciplinary action if they fail to apply its provisions ‘accurately’.   [1] Ministry of Finance Decision No. 651/2019 on the rules and procedures of the collection and rebate of the tax due from non-residents for the returns on treasury bills and bonds in application of Article (58) of the Income Tax Law, Egyptian Gazette, Issue No. 229 (cont.), 14 October 2019.