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New Amendments to Income Tax Law Re

New Amendments to Income Tax Law Released
After months of anticipation and speculation by the business community and investors, the new amendments to the Income Tax Law that were promised by the Government during the March 2015 Economic Summit at Sharm El-Sheikh were released. A Presidential Decree-Law No. 96 for the Year 2015[1] (the “Law”) was enacted on 20 August 2015 and included a number of significant amendments to the Income Tax Law No. 91 for the Year 2005 and Law No. 44 for the Year 2014 that had imposed a temporary additional income tax. Due to the importance of the recent amendments (the “Amendments”), we shall offer a background, provide a general description of the new Law, and finally present a detailed review of its impact on the individual income tax, corporate tax, capital gains tax on trading listed securities, and income tax on dividends. This will be concluded with a commentary and an overall assessment of the Law.
Background
The Egyptian tax system, particularly corporate income tax, has undergone several changes over the past year. This caused significant confusion and raised serious concerns among investors - Egyptians and foreigners alike – due to the discrepancy in tax policy and regulations, as well as the reluctance of the government to clarify its position. To accurately understand the nature of these changes, it is necessary to review its historical development throughout the last few years. In 2005, Law No. 91 unified both corporate tax and individual income tax and fixed them at a rate of 20%. Despite the criticism that it received due to the unification of income tax without distinguishing between different levels of income, as well as due to the general reduction of the tax rate to an unprecedented level, the 2005 Law achieved many positive results. In particular, the 2005 Law was easier in terms of enforcement, encouraged disclosure and filing of tax returns, and resulted in developing the accounting and collection mechanisms. These positive results outweighed the negative aspects and contributed to the increase in tax revenue despite the decrease in its rate. In the aftermath of the January 2011 revolution, Egypt witnessed two key changes: 1) the rising demand for social justice and redistribution of income and wealth, and 2) the significant increase in public spending, especially on public sector wages. These considerations prompted Hesham Qandil’s government in 2012 to introduce a major amendment to the tax system under Law No. 101 for the year 2012[2] in which it modified the individual income tax and introduced several brackets, the highest having to pay a tax rate of 25%, the same rate which was applied to corporations, which previously used to be subjected to a 20% tax rate. After that amendment, the situation settled for a while, allowing both companies and individuals to cope with these changes.
“In March 2015, the Minister of Finance announced that individual income tax will drop to 22.5%, an announcement that was put into effect through the recently promulgated Law”
However on June 2014, Ibrahim Mahlab’s government introduced several new amendments that were promulgated by Law No. 44 of 2014,[3] and Law No. 53 of 2014.[4] These amendments represented a significant set-back from the clear and balanced state that characterized the Egyptian tax policy. They included: (1) imposing an additional temporary tax for three years. This would be a 5% tax on the annual taxable income by natural persons and on profits by legal persons (corporations) that exceeded one million EGP ("Additional Temporary Tax"), (2) increasing the scope of income tax on the income of natural and legal persons earned outside Egypt under certain conditions, (3) imposing an income tax on dividends, and (4) imposing a capital gains tax of 10% on trading listed securities in the stock exchange. In view of the negative impact of these amendments on the Egyptian economy and the investment climate as well as the severe criticism it faced, the government was reluctant to apply these changes and was forced to reconsider them. However, instead of resolving the issue and rectifying this unbalanced situation, the business community was astonished by the Minister of Finance’s statement on 17 March 2015 – one day prior to the Economic Summit at Sharm El-Sheikh - announcing the government's intention to revoke the capital gains tax on stock market transactions, and reduce the corporate tax to 22.5% instead of 30%. Once again, the hesitation was clear in the postponement of the application of these statements until the enactment of the most recent amendments reviewed below on 20 August 2015, i.e. after more than five months of the Minister’s announcement. This led to huge losses in investors’ confidence in the transparency of the Egyptian tax policy.
Overview of the Law
Overall, the recent Law addresses four main topics, namely:
  • Individual Income Tax.
  • Corporate Tax.
  • Capital Gains Tax on trading listed securities.
  • Income Tax on Dividends.
The following is a detailed review of each category.
Individual Income Tax
As mentioned above, the annual taxable income by natural persons was 20%, taking into consideration a number of deductions and exemptions that the low-and middle-income benefited from. In 2012, the government reapplied the progressive tax system in which a maximum of 25% tax was imposed on the highest bracket that exceeded one million EGP annually. However, on June 2014, Ibrahim Mahlab’s Government imposed a special tax for three years of 5% on the annual taxable income that exceeded one million EGP. As a result, taxes on the highest bracket of individual income tax were increased to 30%. On March 2015, the Minister of Finance announced that this tax will drop to 22.5%, which was regulated under the recently promulgated Law, in which the highest bracket of individual income tax is subjected to a rate of 22.5% on the annual taxable income that exceeds two hundred thousand EGP. Unfortunately, this new situation is not clear enough as rather than annulling Law No. 44 of 2014, which imposed the additional temporary tax of 5% for three years, the latest Amendments replaced the three-year duration with one-year, which ends - according to the amendment - by the end of the "tax period" (i.e. financial year) that began on 5 June 2014. This should mean that this one year has already passed.
Corporate Tax
The situation governing individual income tax was repeated for corporate taxes, i.e. taxes on profits by legal persons. This tax was originally set at 20% in 2005 and was later increased to 25% in 2012. In 2014, an additional 5% was imposed on annual profits that exceeded one million EGP. However, under the new Law, this tax is reduced to 22.5%. As for the additional temporary tax of 5%, the above review of the individual income tax applies, which means that this tax should also not be applicable to corporate tax.
Capital Gains Tax on Trading Listed Securities
The capital gains tax has been subject to a long debate until June 30, 2014 when Law No. 53 of 2014 was enacted. This law imposed a capital gains tax of 10% on the trading of listed securities on the Egyptian stock exchange. However, due to the severe objections it faced from the investment community and the small revenue it was expected to achieve, the government announced the revocation of this tax last March. Unfortunately, the enactment of the new Amendments were delayed until 20 August 2015, and instead of explicitly revoking the tax, it stipulated the “suspension” of the capital gains tax on trading listed securities for two years starting from 17 May 2015, a phrasing that signifies that the tax will be re-imposed as of 16 May 2017.
Income Tax on Dividends
The situation of income tax on dividends has been uncertain and ambiguous ever since Law No. 53 for the Year 2014 was enacted. The law was subject to intense controversy since its publication on 30 June 2014 and until it was dealt with in the latest Amendments. Accordingly, income tax on distributed dividends has become 10%, and is reduced to 5% if the recipient’s share of the distributing company is higher than 25% for over two years. The new Law stipulates that the distributed dividends received by resident companies from other resident companies (that are subject to tax) are relieved from dividend tax. On the other hand, the new Law also specifies that dividends realized by non-resident companies through a permanent establishment in Egypt are subject to tax within sixty days after the end of the fiscal year even if the non-resident companies do not distribute any dividends.
Conclusion
There is no doubt that the recent Amendments to the Income Tax Law represent a positive development as they put an end to the hesitation and uncertainty in the tax policy, which have caused a lot of damages to the investment climate in Egypt. However, an outright abolition of the capital gains tax on trading listed securities would have definitely been better than its deferment for two years. An explicit annulment of the additional temporary tax on annual taxable income that exceeds one million EGP, instead of only reducing its period, would have also been more desirable. Furthermore, reducing the income tax on corporate profits and the maximum tax imposed on individual income to 22.5% – albeit encouraging investment – raises questions as to how the Government intends to maintain a budget deficit of 9% in light of the significant increase required in its resources. However, the Law remains a positive step because clarity and decisiveness in tax issues are more welcome than indecision and ambiguity.   [1] Presidential Decree-Law No. 96/2015 amending the Income Tax Law No. 91/2005, Official Gazette, Issue No. 34 continued, 20 August 2015. [2] Presidential Decree-Law No. 101/2012, Official Gazette, Issue No. 49 (cont.) (a), 6 December 2012. [3] Presidential Decree-Law No. 44/2014 imposing a temporary additional tax on income, Official Gazette, Issue No. 22 (bis) (c), 4 June 2014. [4] Presidential Decree-Law No.53/2014 amending the Income Tax Law No. 91/2005 and the Stamp Duty Law No. 111/1980, Official Gazette, Issue No. 26 (bis) (a), 30 June 2014.
After months of anticipation and speculation by the business community and investors, the new amendments to the Income Tax Law that were promised by the Government during the March 2015 Economic Summit at Sharm El-Sheikh were released. A Presidential Decree-Law No. 96 for the Year 2015[1] (the “Law”) was enacted on 20 August 2015 and included a number of significant amendments to the Income Tax Law No. 91 for the Year 2005 and Law No. 44 for the Year 2014 that had imposed a temporary additional income tax. Due to the importance of the recent amendments (the “Amendments”), we shall offer a background, provide a general description of the new Law, and finally present a detailed review of its impact on the individual income tax, corporate tax, capital gains tax on trading listed securities, and income tax on dividends. This will be concluded with a commentary and an overall assessment of the Law.
Background
The Egyptian tax system, particularly corporate income tax, has undergone several changes over the past year. This caused significant confusion and raised serious concerns among investors - Egyptians and foreigners alike – due to the discrepancy in tax policy and regulations, as well as the reluctance of the government to clarify its position. To accurately understand the nature of these changes, it is necessary to review its historical development throughout the last few years. In 2005, Law No. 91 unified both corporate tax and individual income tax and fixed them at a rate of 20%. Despite the criticism that it received due to the unification of income tax without distinguishing between different levels of income, as well as due to the general reduction of the tax rate to an unprecedented level, the 2005 Law achieved many positive results. In particular, the 2005 Law was easier in terms of enforcement, encouraged disclosure and filing of tax returns, and resulted in developing the accounting and collection mechanisms. These positive results outweighed the negative aspects and contributed to the increase in tax revenue despite the decrease in its rate. In the aftermath of the January 2011 revolution, Egypt witnessed two key changes: 1) the rising demand for social justice and redistribution of income and wealth, and 2) the significant increase in public spending, especially on public sector wages. These considerations prompted Hesham Qandil’s government in 2012 to introduce a major amendment to the tax system under Law No. 101 for the year 2012[2] in which it modified the individual income tax and introduced several brackets, the highest having to pay a tax rate of 25%, the same rate which was applied to corporations, which previously used to be subjected to a 20% tax rate. After that amendment, the situation settled for a while, allowing both companies and individuals to cope with these changes.
“In March 2015, the Minister of Finance announced that individual income tax will drop to 22.5%, an announcement that was put into effect through the recently promulgated Law”
However on June 2014, Ibrahim Mahlab’s government introduced several new amendments that were promulgated by Law No. 44 of 2014,[3] and Law No. 53 of 2014.[4] These amendments represented a significant set-back from the clear and balanced state that characterized the Egyptian tax policy. They included: (1) imposing an additional temporary tax for three years. This would be a 5% tax on the annual taxable income by natural persons and on profits by legal persons (corporations) that exceeded one million EGP ("Additional Temporary Tax"), (2) increasing the scope of income tax on the income of natural and legal persons earned outside Egypt under certain conditions, (3) imposing an income tax on dividends, and (4) imposing a capital gains tax of 10% on trading listed securities in the stock exchange. In view of the negative impact of these amendments on the Egyptian economy and the investment climate as well as the severe criticism it faced, the government was reluctant to apply these changes and was forced to reconsider them. However, instead of resolving the issue and rectifying this unbalanced situation, the business community was astonished by the Minister of Finance’s statement on 17 March 2015 – one day prior to the Economic Summit at Sharm El-Sheikh - announcing the government's intention to revoke the capital gains tax on stock market transactions, and reduce the corporate tax to 22.5% instead of 30%. Once again, the hesitation was clear in the postponement of the application of these statements until the enactment of the most recent amendments reviewed below on 20 August 2015, i.e. after more than five months of the Minister’s announcement. This led to huge losses in investors’ confidence in the transparency of the Egyptian tax policy.
Overview of the Law
Overall, the recent Law addresses four main topics, namely:
  • Individual Income Tax.
  • Corporate Tax.
  • Capital Gains Tax on trading listed securities.
  • Income Tax on Dividends.
The following is a detailed review of each category.
Individual Income Tax
As mentioned above, the annual taxable income by natural persons was 20%, taking into consideration a number of deductions and exemptions that the low-and middle-income benefited from. In 2012, the government reapplied the progressive tax system in which a maximum of 25% tax was imposed on the highest bracket that exceeded one million EGP annually. However, on June 2014, Ibrahim Mahlab’s Government imposed a special tax for three years of 5% on the annual taxable income that exceeded one million EGP. As a result, taxes on the highest bracket of individual income tax were increased to 30%. On March 2015, the Minister of Finance announced that this tax will drop to 22.5%, which was regulated under the recently promulgated Law, in which the highest bracket of individual income tax is subjected to a rate of 22.5% on the annual taxable income that exceeds two hundred thousand EGP. Unfortunately, this new situation is not clear enough as rather than annulling Law No. 44 of 2014, which imposed the additional temporary tax of 5% for three years, the latest Amendments replaced the three-year duration with one-year, which ends - according to the amendment - by the end of the "tax period" (i.e. financial year) that began on 5 June 2014. This should mean that this one year has already passed.
Corporate Tax
The situation governing individual income tax was repeated for corporate taxes, i.e. taxes on profits by legal persons. This tax was originally set at 20% in 2005 and was later increased to 25% in 2012. In 2014, an additional 5% was imposed on annual profits that exceeded one million EGP. However, under the new Law, this tax is reduced to 22.5%. As for the additional temporary tax of 5%, the above review of the individual income tax applies, which means that this tax should also not be applicable to corporate tax.
Capital Gains Tax on Trading Listed Securities
The capital gains tax has been subject to a long debate until June 30, 2014 when Law No. 53 of 2014 was enacted. This law imposed a capital gains tax of 10% on the trading of listed securities on the Egyptian stock exchange. However, due to the severe objections it faced from the investment community and the small revenue it was expected to achieve, the government announced the revocation of this tax last March. Unfortunately, the enactment of the new Amendments were delayed until 20 August 2015, and instead of explicitly revoking the tax, it stipulated the “suspension” of the capital gains tax on trading listed securities for two years starting from 17 May 2015, a phrasing that signifies that the tax will be re-imposed as of 16 May 2017.
Income Tax on Dividends
The situation of income tax on dividends has been uncertain and ambiguous ever since Law No. 53 for the Year 2014 was enacted. The law was subject to intense controversy since its publication on 30 June 2014 and until it was dealt with in the latest Amendments. Accordingly, income tax on distributed dividends has become 10%, and is reduced to 5% if the recipient’s share of the distributing company is higher than 25% for over two years. The new Law stipulates that the distributed dividends received by resident companies from other resident companies (that are subject to tax) are relieved from dividend tax. On the other hand, the new Law also specifies that dividends realized by non-resident companies through a permanent establishment in Egypt are subject to tax within sixty days after the end of the fiscal year even if the non-resident companies do not distribute any dividends.
Conclusion
There is no doubt that the recent Amendments to the Income Tax Law represent a positive development as they put an end to the hesitation and uncertainty in the tax policy, which have caused a lot of damages to the investment climate in Egypt. However, an outright abolition of the capital gains tax on trading listed securities would have definitely been better than its deferment for two years. An explicit annulment of the additional temporary tax on annual taxable income that exceeds one million EGP, instead of only reducing its period, would have also been more desirable. Furthermore, reducing the income tax on corporate profits and the maximum tax imposed on individual income to 22.5% – albeit encouraging investment – raises questions as to how the Government intends to maintain a budget deficit of 9% in light of the significant increase required in its resources. However, the Law remains a positive step because clarity and decisiveness in tax issues are more welcome than indecision and ambiguity.   [1] Presidential Decree-Law No. 96/2015 amending the Income Tax Law No. 91/2005, Official Gazette, Issue No. 34 continued, 20 August 2015. [2] Presidential Decree-Law No. 101/2012, Official Gazette, Issue No. 49 (cont.) (a), 6 December 2012. [3] Presidential Decree-Law No. 44/2014 imposing a temporary additional tax on income, Official Gazette, Issue No. 22 (bis) (c), 4 June 2014. [4] Presidential Decree-Law No.53/2014 amending the Income Tax Law No. 91/2005 and the Stamp Duty Law No. 111/1980, Official Gazette, Issue No. 26 (bis) (a), 30 June 2014.