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Doing Business in Egypt

March 2009
Sitting at the crossroads linking Europe, the Middle East and Africa, Egypt is one of the region's most important political power brokers and plays a leading role in commercial, financial, cultural and diplomatic spheres
Egypt, situated in the north-east corner of the African continent, is bordered by the Mediterranean Sea to the north and the Red Sea to the east. The country is bisected by the highly fertile Nile valley, where most of the economic activity takes place. Cairo, the capital of Egypt, is the largest city in Africa, the Arab world and the Middle East. It is also the commercial and political center of Egypt. Industrial development is centered in Cairo, Alexandria (Egypt's chief port) Ismailia, Port Said, Luxor, Aswan and Assiut. The official language is Arabic, although English and French are also widely used in business, academic and political circles.

Economic Overview
Egypt sits at the pivotal crossroads linking Europe, the Middle East and Africa in an increasingly significant global business network. The Arab world's largest country in terms of population, Egypt is also one of the region's most important political power brokers. The country plays a leading role in commercial, financial, cultural and diplomatic spheres.

Over the past few years, Egypt has carried out far-reaching economic reforms and a liberalisation programme, designed to both open up its economy and strengthen its unique position as an international business hub. As it moves from a state-dominated to a free market economy, Egypt has been attracting direct foreign investors at a dynamic rate, as well as experiencing impressive growth in virtually all sectors and offering rich business opportunities. The International Monetary Fund (IMF) has rated Egypt as one of the world's top countries in terms of economic reform, a statement that is supported by a 25 per cent annual capital growth, 7-8 per cent annual GDP growth and a total annual FDI input of over $11bn.

Recent economic success is attributable to the privatisation of certain sector industries and reforms introduced by the government to customs, income and taxation related laws. Egypt is the world's largest exporter of cotton and its textile industry is large. Other industries include the production of cement, iron and steel, chemicals, fertilisers, rubber products, refined sugar, tobacco, canned foods, cottonseed oil, small metal products, shoes, and furniture.

Investment law and incentives
The Investment Guarantees and Incentives law, governs all investment, including foreign investment. The law offers preferential treatment to foster private domestic and foreign investment in Egypt.

Foreign investments in the petroleum exploration and production sector are governed by individual concession agreements between foreign companies and the Egyptian General Petroleum Corporation (" EGPC "). Foreign investments are welcomed in many areas including industry and mining, tourism related services, aviation transportation, maritime transport, infrastructure projects relating to water, power, telecommunication and satellite plants and data transmission networks.

A one-stop shop for investors has been established at the General Authority for Investment and Free Zones (GAFI) to facilitate and simplify approval, registration, licensing and certification of new projects.

The Investment Law offers a variety of incentives to foreign investors, including the following:
Machinery, assets, materials and spare parts required for investment projects can be imported without a license.

Products from manufacturing projects are not subject to price controls. Investment projects may own land and real estate for their operations.

Nationalisation and confiscation are not permitted. In addition, investment project assets may not be seized, except by the courts.

A custom duty at a unified reduced rate of five per cent is applicable to machines and equipment necessary to establish investment projects.

Structure of business entities
Business organisations in Egypt are generally in the form of incorporated companies, partnerships and sole proprietorships. Partnerships and sole proprietorships are normally used by Egyptian traders.

I. Joint Stock Company
The minimum number of shareholders is three natural or legal persons. Shares may be transferred between the shareholders in the case of a closed company and may be sold to other parties. Joint stock companies are subject to Egyptian tax on their worldwide income. Double tax relief is given by deduction unless the applicable double tax treaty provides for tax credit relief. The companies are required to distribute 10 per cent of their distributable profit to the employees up to a maximum of the total annual employees' salaries.

II. Limited Liability Company
The maximum number of shareholders is restricted to 50 who can either be individuals or legal entities. The shares can be transferred but the existing shareholders may exercise pre-emptive right. An LLC is subject to Egyptian tax on its worldwide income. Double tax relief is given by deduction unless the applicable double tax treaty provides for tax credit relief.

III. Foreign Branch:
There is no minimum capital requirement to establish a foreign branch. However, a bank certificate showing an overseas transfer of $5,000 in the name of the proposed branch is required to be submitted. Normally, it should take around three months from the date of submission of application to establish a branch. The branch may not employ foreigners in excess of 10 per cent of its work force or pay them more than 20 per cent of the total payroll. Foreign branches are allowed to deduct head office overhead expenses up to seven per cent of the taxable net profit.

Requirements for foreign nationals
To work in Egypt, a foreigner must obtain a work permit from the Office of Manpower and Training in the relevant governorate, or from the free-zone authority for projects located in free zones.

Corporate Income Tax
Egyptian corporations are subject to corporate profits tax on profits earned in Egypt and abroad. Foreign companies are taxed only on profits earned in Egypt. The standard rate of corporate profits tax is 20 per cent. However, oil prospecting and production companies are taxed at 40.55 per cent. Dividends received by residents from foreign sources are taxed at 20 per cent.

Withholding taxes
There is no withholding tax on dividends. Taxes on income from moveable capital and salaries are withheld at source. Amounts withheld are paid quarterly to the Tax Department.

The withholding tax rates on some important income items are as follows:
Professional services: 10-15 per cent
Commercial services: 3 per cent
Commission to commercial agents: 10 per cent
Erection/installation contracts: 1 per cent of each invoice issued

Double Tax Agreement
Oman and Egypt have signed a Double Tax Agreement but it has yet to come into force.

Social Security:
Social insurance contributions are levied only on Egyptian nationals with full-time employment. Both employers and employees are required to make social security contributions.

Exchange control and currency restrictions in Egypt
As a result of economic reforms and agreements reached with the International Monetary Fund (IMF), exchange controls have been cancelled in Egypt. The Foreign Exchange Law allows individuals and legal entities to retain and transfer foreign exchange in Egypt and abroad.

The Government acknowledges that the free market guides the rates of exchange set by the Central Bank of Egypt and other approved banks and dealers. However, the Central Bank actively monitors the exchange rate in order to assure the Egyptian pound's stability. Egypt eliminated foreign exchange transfer restrictions in 1991.

The Foreign Currency Law further relaxed the restrictions on capital transfers and emphasised the right of individuals and companies to transfer foreign exchange out of Egypt. Egyptian law allows individuals and businesses to conduct all normal foreign exchange transactions, including establishing foreign exchange accounts and transferring foreign exchange in and out of Egypt. Authorised banks may provide the full range of foreign exchange transactions, including accepting deposits, executing transfers and opening letters of credit.

Totalisation Agreements
To provide relief from payment of social security taxes in the home country as well as in Egypt, Egypt has concluded agreements with Cyprus, Greece and Sudan. These agreements are valid for an unlimited
duration.

Import restrictions
The government imposes import controls to improve Egypt's balance-of-payments. Importers must obtain an approval to open a letter of credit. A cash deposit ranging from 15 per cent to 100 per cent is also required, depending on the type of goods imported. The origin of goods must be certified to enter Egypt.

Summary
As an emerging economy, Egypt provides many opportunities to investors and exporters. It has carried out far-reaching economic reforms designed to sustain investment and growth. It has been experiencing impressive growth in virtually all sectors and offers rich business opportunities to both locals and foreigners.

The author is a Tax Partner at Ernst & Young.

By Sridhar Sridharan

© Oman Economic Review 2009