Doing business in Egypt (dated)

Summary

Egypt is one of the most powerful forces in the Arab world, having a highly developed economical and social structure, and abundant sources of labour. It is facing some very difficult economical problems, largely resulting from the rapid increase in the population.

Egypt has a budget deficit and significant overseas debt. To improve this position, the Government has undertaken an aggressive economic reform program that required, among other initiatives, progress and implementing a free-market policy. Key aspects of this policy are lifting import restrictions, lowering customs duties and floating the Egyptian pound.

Egypt’s economy is continuing its gradual recovery from the declining growth rates it experienced in 2001 and 2002, but with a growth rate still far below what was achieved in the 1990s. The country’s real Gross Domestic Product (GDP) grew 3.6 percent in 2004, after achieving real growth of 2.9 percent in 2003. Real GDP growth is forecast at 3.6 percent for 2004, with an upward trend projected toward 5.3 percent by the end of the current decade.

Remittances from Egyptian workers in the Persian Gulf region have risen with higher oil prices, and tourism has recovered to near the levels before the slump which began after September 2001.  In a normal year, tourism revenues account for about 5 percent of Egypt’s GDP, and are among the country’s five main sources of hard currency inflows (the others being remittances from Egyptian workers abroad, hydrocarbons exports, Suez Canal tolls, and foreign aid). Over the long term, Egypt’s macroeconomic prospects may be more favorable, provided progress is made on such structural issues as privatization, trade liberalization, and deregulation.  Egypt’s main challenge is matching employment growth to the nearly 800,000 new job seekers coming into the labor market each year. Unofficial estimates put Egypt’s unemployment rate in the 15 percent-25 percent range, roughly twice the official figure.

Egypt’s government plans to accelerate its program for the privatization of state-owned enterprises (SOEs), though to date, the privatization program has moved slowly because of large SOE debt and severe overstaffing (layoffs are still difficult due to labor regulations).  In recent years, the private sector percentage of overall Egyptian GDP has been growing by around 1.5 percent per year, with about 40 percent of Egypt’s SOE’s having been privatized since 1994. In the future, the government plans to target “strategic” areas for privatization, including telecommunications and other utilities, including the Egyptian Electricity Authority, although the Egyptian General Petroleum Corporation  (EGPC) and the new natural gas entity, Egypt Gas (EGAS), remain off limits.

Energy will continue to play an important role in Egypt’s economy in coming years. Though net exports of crude oil and petroleum products have declined in recent years, higher prices on world markets have pushed Egypt’s oil revenues upward. The country also began exports of liquefied natural gas (LNG) from its first terminal in January 2005, adding another hard currency revenue stream, which is set to expand in late 2005 with the completion of the second LNG export terminal.

Business environment

A key policy of the Egyptian government is to encourage the private sector to invest in projects that will contribute to the economic development of the country. The government is particularly interested in encouraging inflows of foreign currency through tourism and export, and in reducing Egypt’s reliance on imports. It also recognizes the need for foreign companies to provide Egypt with advanced technical expertise.

Egypt is pursuing two principal economic goals:

• Economic diversification to decrease dependence on oil trhough the development of industry, agriculture and tourism; and
• Assumption of responsibility by the private sector for Egypt’s economic development.

The government promotes Joint Ventures with foreign participation and management. Although the Authorities’ preference is for participation of Egyptian partners with foreign investors, 100% foreign equity is welcomed for projects set up in the free zones, and for those in which technology transfer is a significant component.

A variety of incentives are offered to facilitate the operations of foreign investors  [3].

Foreign investments

All investments, including foreign investments, is governed by the Law no. 230 of 1989, the Investment Law. The goal of this law is to offer preferential treatment to foster private domestic and foreign investment in Egypt.

Foreign investment in the petroleum sector are governed by individual concession agreements between foreign companies and EGPC. The fields in which Arab and other foreign investments are welcomed are: land reclamation and cultivation,  industry, tourism, housing and urban development.

The government gives priority to projects that aim to generate exports, develop tourism or replace the import of basic commodities, and to those that require advanced technical expertise. It also actively seeks foreign investors to build luxury hotel and leisure facilities.

Investors submit applications for new projects to the General Authority for Invesments on forms specially developed to enable a Committee to evaluate such projects. The objectives of this evaluation is to determine whether the proposed project offers enough benefits to the Egyptian economy to justify entitlement to the special privileges available under the Law. The Authority is required to issue its decision on an investment application within twenty days of full documentation being submitted [3].

Structure of business entities

The Companies Law 159 of 1981 is administered by the Companies Department of the Ministry of Economy and Foreign Trade. It contains the rules, procedures, accounting and reporting requirements for companies. Investment under Law 159 may require a local partner.

Foreign investors may choose to organize under the Invesment Law (Law 230 of 1989). Rules, procedures, accounting and reporting requirements under Law 230 are administered by the Central Authority for Investment.

A company, the most common vehicle for conducting business in Egypt, is a legal entity altogether distinct from the personalities of its individual owners.

Investors pool their capital in a company to share in the profits, generally without risk of loss beyond their investment, or the amount of their guarantee. Companies may purchase, hold and sell property, sue and be sued, and enter into contracts.

They have perpetual existence and cannot normally be involuntarily terminated, except by their creditors in case of default.

Companies may rise money by issuing additional capital stock, debentures or other securities [3].

Business organizations in Egypt are generally in the form of incorporated companies, partnerships and sole proprietorships. The unincorporated forms are generally used by Egyptian traders and are of limited interest to foreigners.

An interest in a project under the Investment Law is frequently in the form of shares in joint stocks or LLC. Full ownership by the foreign investor is allowed when the project concerned is in the free zones. For investments outside the free zones, certain activities may have to include Egyptian equity participation.

Public companies, but not LLCs may invite public subscription of their shares or debentures and other securities. They may also be listed on the stock exchange.

A LLC must consist of two or more members, but it is usually not allowed to have more than 50 members.

Typical business entities include:

• Sole proprietorships
• Partnerships
• Joint Venture and Consortiums
• Branches of foreign companies
• Agencies
• Representative offices
• Liaison offices and technical and scientific service offices

Trusts do not exist in Egypt.

The structures used by foreign investors usually include:

• Limited Liability Company (WLL)
• Joint Stock Company.

Labour issues

The Egyptian labour is considered to be among the most skilled in the world.

Egyptians employed in a company formed under the Companies Law should not comprise less than 90% of the total employees and their remuneration should not constitute less than 80% of the total salaries and wages paid.

For technical and administrative staff, Egyptians should not constitute less than 75% in number, and their total earnings should not be less than 70% of the total wages and salaries paid to all such staff.

In the free zones, Egyptians must constitute up to 75% of the project’s workforce.

Exceptions to the above provisions are allowed only if specifically approved by the Ministry of Labour.

Taxation

Egypt levies direct taxes, such as corporate profit tax and income tax on types of personal income, and indirect taxes, such as customs duties, sales taxes and entertainment tax.

As of January 1994 all companies are subject to corporate profits tax at a standard rate of 40% except for petroleum companies, which are subject to tax at 40.55% and companies involved in industrial and export activities which are subject to tax at 32%.

Law 187 of 1993 replaced the schedular income taxes and general income tax with an unified income tax system. No major changes to the corporate profit tax were introduced by the new Unified Tax Law, however, individuals and partnerships are now subject to direct income tax on different types of personal income at the following rates:

• Industrial, commercial and non commercial profits and income from immovable property are subject to tax on annual net income at rates ranging from 20 to 48%;
• Income from movable capital, including items such as interest, foreign dividend and directors’ fees are subject to 32% on gross income; and
• Salaries are subject to tax at two rates: 20% on up to LE 50,000 per year and 32% on the excess.

In addition, a 2% development duty is imposed on the annual taxable income of individuals and companies that exceeds LE 18,000.

Income derived from immovable property is subject to land tax and buildings tax in addition to unified income tax on annual net income.

Capital gains realized by companies are treated as normal business income and taxed accordingly.

Individuals are not normally subject to tax on capital gains. However, if capital gains are part of commercial and industrial profits, individuals are taxed on capital gains as part of commercial and industrial profits at normal rates of 20%-48%.

Individuals are also taxed on gains from sales of real estate or building sites withing the boundary of Egyptian cities, at a flat rate of 5% of the disposal value of the property.

Stamp taxes are levied in Egypt on most types of documents and bills an on some types of shares, debentures and bonds.

A succession tax is levied on gifts and inheritages. Zakat, religious wealth tax is not statutorily levied in Egypt.

Social security taxes are levied on employers and employees on a monthly basis.

Corporate taxes may be summarized as follows:

• Corporate income tax rate 40%
• Capital gains tax rate 40%
• Branch tax rate 40%
• Withholding tax
  • dividends 0
  • interests (*) 32%
  • royalties from patents & know how (*) 32%
  • Branch remittance tax 0%
• Net operating losses (years)
  • Carry back 0
  • Carry forward 5%

(*): final tax imposed on gross payments to corporations. The rate may be reduced under a tax treaty. The treaty with Italy reduces such withholding to 15% on royalties and 25% on interests.

Financial reporting

Accounting and auditing principles in Egypt are moving towards international accounting standards and international auditing guidelines.

Free zones

With the Law n.8/1997 and successive the Decree of the First Minister n.2108/1997 (implementing) Egypt it has introduced the new norms for investments.

The norm (Art.1) indicates fields of interest of the legislator, whose directory constitutes therefore a precise declaration of priority for investors wishing to operate in Egypt. In the order, they are: the recovery and use of desert lands to agroindustrial scope; the breeding and fish farming; the industry and the mines; the tourist building and services; refrigerated transports; the aerial transports and related services; international marine transports; oil researches and the transport of gas; the buildings; the infrastructures, with particular regard to the water and electrical grids, motorways and communications; medical and hospital sectoro; the financial leasing; software.

Indications sufficiently detailed on the within of everyone of the aforesaid fields are therefore contained in the Decree n.2108/1997 (Part I, Artt.1-16); the norm adds moreover that the legislator may indicate further areas of interest of the country.

The Law n.8/1997 (Cap.3, Artt.29-46) therefore has reaffirmed the concept and the regimen of the Free trade zones (“Free Zones”), geo-administrative areas characterized, instituted in order to promote the development of the foreign investments through the introduction of favorable conditions with respect to the ordinary status.

The Free trade zones are of two types: public and private (Art.29); those public ones are instituted with decree ministerial on proposal of the General Authority for Investments & Free Zones (GAFI); the others, always through the GAFI, but on directed demanded of the enterprise investor, and are finalized to the realization of specific plans (Art.29, third c.).

The public Free trade zones are currently six: Nasr City (the Cairo), Alexandria, Port Said, Suez, Ismailia and Damietta. The utilities and services costs do not introduce, amongst the Zones, any variations that may constitute a relative advantage.

• The Free Zone of Nasr City is found very close to the international airport of Cairo, hardly thirty minutes from the center of the city, with all the logistic advantages.
• The Free Zone of Alexandria is developed to the West of town, on the coast of the Mediterranean, and have us of therefore of all the services and the structures available in that area.
• Port Said is found to the entrance of the Suez Canal, three kilometers from the city area.
• The Free Zone of Suez is placed at the south end of the Channel, in a strategic position for the companies that look to the Red Sea as a direction of trade.
• The Free Zone of Ismailia, along the Channel between Port Said and Suez.
• Damietta is the most recent Free Zone and is situated on the Mediterranean Sea, East of Port Said.

Each Free trade zone is a public entity ruled by a committee (“Board of Directors”) whose President is appointed by Decree (Art.29). The Committee is in charge of  the application of the norms in matter of investments, which authorizes with appropriate decree (Art.31).

Every Free trade zone refers to to the GAFI. The GAFI carries out tasks of promotion and authorization in matter of investments; it provides foreign  corporations with information and assistance about the procedures to be untertaken.

The integral text of the Law n.8/1997 in matter of investments may be found in the web site of the GAFI.

The General Authority for Investment and Free Zones was undergoing major changes as it has been transformed from an obstructive regulatory authority to a more effective investment promotion role, with a mandate to encourage foreign direct investment (FDI).

Thanks to the amendments of investment law no.8 of 1997, introduced by law no. 14/04, GAFI is now the sole body to which investors will have to turn in order to have their proposed projects approved. GAFI represents the most tangible step undertaken by the Egyptian Government to streamline investment procedures.
Services provided by GAFI range from company registration to site location to partner identification to contracts and licenses acquisition. GAFI’s services are provided at no cost to the investor.

In this regard, a “One Stop Shop” has been established in GAFI’s headquarter to carry out the aforementioned services. The “One Stop Shop” encompasses delegates from different governmental agencies, under one roof, specialized and well trained in dealing with the investors making sure that someone is looking after their interest. Investors will no longer need to seek approvals from different government departments and agencies to establish a project.
In light of the new law no. 14/04, GAFI will also be entrusted with issuing licenses on certain tax and custom exemptions granted to investors as well as preparing essential investment maps and statistics.

Moreover, GAFI took the initiative to work closely with the Egyptian commercial representation offices in different countries to facilitate trade operations and provide more information on trade opportunities wherever they do exist.

Art. 35 of the Law n.8/1997 states that: “Projects which are established in the Free Zones and the profits as distributed by them shall not be subject to the provisions of taxes and duties Laws applicable in Egypt. However, these projects shall be subject to an annual duty of 1% of the value of commodities on their entry for storage projects, and of the value of commodities at their exit, for manufacturing and assembly projects. Transit goods (trade) of which the destination is determined, shall be exempted from these duties. Projects of which the main activity requires no entry or exit of goods shall be subject to an annual duty of 1% of the total revenues realized thereby, based on the accounts as approved by a certified accountant. In all cases, the projects shall pay services charges as determined in the executive regulations of this Law.”.