Egypt's tax exemption scheme reduces the nominal corporate tax rate to 16% and the value-added tax rate to zero%.

1. Introduction

Egypt is striving to offer a comprehensive package of incentives for investors, extending beyond tax cuts to include regulatory reforms and infrastructure development. Regarding taxes, the circulating claims about reducing the nominal corporate income tax to as low as 16% or the value-added tax to 0% require careful clarification. While the standard corporate income tax rate is 22.5%1 and the standard VAT rate is 14%, there are several mechanisms that could significantly reduce the effective tax burden. These include:

· Special incentives under the Investment Law

· Simplified tax systems for small and medium enterprises

· Substantial tax advantages in specialised economic zones, most notably:

* The Suez Canal Economic Zone offers a competitive corporate tax rate and VAT exemptions on operations within it.

* The value-added tax system also applies a zero-rate to exports, enhancing the competitiveness of Egyptian products in global markets.

Egypt's attractiveness goes beyond tax incentives to include other competitive advantages, such as relatively low labor costs and a readily available workforce, as well as a reasonable cost of living. The Egyptian government is actively working to improve the business environment by simplifying procedures and reducing non-tax burdens on investors.

2- The evolving investment landscape in Egypt: a government priority

This trend is reflected in recent presidential directives aimed at:

* Replacing the multiple fees previously imposed by various government entities and agencies with a unified additional tax calculated as a percentage of net profit. This shift represents an important step toward simplifying the financial structure of projects and increasing cost predictability, a key demand for investors.

* At the Tax Authority, there are clear initiatives to build a new relationship with the tax community, based on trust and cooperation. A comprehensive guide to tax incentives and facilitations has been announced, aiming to explain all the provisions of the available tax packages and how to benefit from them in a simple and clear manner.

* A comprehensive inventory of non-tax financial burdens imposed on investors is also being prepared, with the aim of alleviating these burdens and enhancing transparency.

* Work is also underway to launch a temporary digital licensing platform offering hundreds of services, in preparation for the establishment of an integrated electronic system covering the entire investment lifecycle.

* Ambitious plans to significantly reduce customs clearance times by the end of 2025, by improving efficiency and removing non-tariff barriers. These practical measures, once fully implemented, will directly contribute to reducing the time and cost required to start and operate a business in Egypt.

3. Egyptian corporate tax system

Egypt's corporate tax system is multi-tiered, combining a standard tax rate with a range of targeted incentives and reductions, as well as special regulations for economic zones. This diversity requires investors to have a thorough understanding of the tax framework to determine the actual tax burden on their projects.

3.1. Standard framework for corporate income tax (CIT)

Corporate income in Egypt is generally subject to a corporate income tax. The standard rate is currently 22.5%. This rate serves as the baseline against which all other available tax incentives and reductions are measured. Historical data and future projections indicate relative stability around this rate, providing investors with a degree of certainty regarding general tax policy.

3.2. Corporate tax reaches 16% when special tax incentives are applied.

investment projects can benefit from significant tax reductions that may result in an effective tax rate significantly lower than the standard rate, in some cases approaching or even falling below 16%. A prominent example of this is the Suez Canal Economic Zone, which offers a special tax regime following the application of legally mandated exemptions and incentives.

In addition, there are other incentives within the investment law or sector-specific laws (which will be discussed later) that can significantly reduce the tax base and thus lower the final tax due.

3.3. Main tax reductions and incentives under the Investment Law (No. 72 of 2017 and its amendments such as Law 160 of 2023)

Egyptian Investment Law No. 72 of 2017 and its subsequent amendments, most notably Law No. 160 of 2023, offer a package of significant tax incentives aimed at encouraging new investments and expanding existing ones. The most prominent of these incentives are:

o Deductions from taxable net profits: The law grants a deduction from the taxable net profits of new investment projects established to operate in specific sectors or geographic areas. The percentage of this deduction ranges as follows:

o A 50% discount on investment costs (Sector A): This discount is granted to projects located in the geographic areas most in need of development, as defined by the investment map. These areas typically include Upper Egypt governorates, border governorates, the Suez Canal Economic Zone, and the Golden Triangle.

Illustrative example

• A company established in the Suez Canal Economic Zone falls under Sector A.

• Its total investment cost is EGP 300 million, meaning that the deductible portion of the company's profits is 50% of the investment cost, which equates to EGP 150 million, provided other conditions are met.

• Assuming that revenues are 20% of the investment cost, which equals EGP 60 million in the first year.

• Assuming that costs and expenses are 50% of revenues, this results in a net profit before taxes of 50%.

• Assuming that revenues increase by 30% each year, as shown in the following table, the profit margin during the first 7 years from the date of commencement of production decreases to 16%, which provides a tax saving for projects entitled to benefit from tax advantages.

o 30% discount on investment costs (Sector B): This discount is granted to projects located in the rest of the country and operating in specific sectors, such as labor-intensive projects, small and medium-sized enterprises, projects that rely on or produce new and renewable energy, national and strategic projects, tourism projects, electricity production and distribution projects, projects that export their production, and certain specific industries (such as the automotive industry and its feeder industries, wood, chemical, pharmaceutical, food, engineering, and textile industries). These percentages are deducted from the taxable net profit, effectively reducing the tax base and, consequently, the tax amount due.

o Cash Investment Incentives Program (Law 160 of 2023): This program represents a qualitative addition to investment incentives. It grants investment projects operating in industrial activities that meet certain conditions a cash investment incentive ranging from 35% to 55% of the actual tax paid on income generated from operating the investment project or its expansion. Key conditions for this incentive include that the project be financed by foreign currency transferred from abroad at a rate of no less than 50% of its cost, and that the project commence operations within six years from the date the law comes into effect (with the possibility of extension). This incentive is distinguished by the fact that it is disbursed to the investor in cash within 45 days of the date of filing the tax return and is not considered taxable income.

This direct cash incentive is a powerful tool for improving project cash flows and return on investment, especially for capital-intensive or early-stage projects.

It should be noted that these incentives are not automatic, but rather require the fulfillment of specific conditions and controls related to the type of activity, geographical location, date of establishment of the company, and a commitment to maintaining regular books and accounts.

3.4. Tax Benefits for Small and Medium Enterprises (Law 152 of 2020)

Recognizing the vital role micro, small, and medium-sized enterprises (MSMEs) play in the economy, the Egyptian government issued Law No. 152 of 2020 to provide a package of incentives and facilitations for this segment of enterprises. The law aims to encourage the integration of these enterprises into the formal economy and alleviate their burdens. The most prominent tax benefits include:

• Simplified tax system: The law allows small and medium-sized enterprises to be subject to a simplified tax system based on business volume (annual sales figure) rather than net profits. The reduced flat or proportional tax rate is graded according to the business volume bracket. For example, enterprises with an annual business volume of less than EGP 500,000 are subject to a tax rate of 0.4% of business volume, while the rate reaches 1.5% for enterprises with a business volume ranging from EGP 10 to 20 million.10 This system provides significant simplicity in tax accounting and reduces compliance costs.

• Unified customs tax: These projects benefit from a unified customs tax of 2% of the value of all imported machinery, equipment and devices necessary for their establishment.

• Exemption from stamp tax and documentation fees: Contracts for establishing companies and establishments, and land registration contracts necessary for their establishment, are exempt from stamp tax and documentation and registration fees for a period of five years from the date of their registration in the commercial register.

• Other exemptions: These projects may be fully or partially exempted from the real estate tax on units used to carry out the activity.

This law reflects a strategic direction toward supporting the small and medium-sized enterprise sector, which is a key driver of economic growth and job creation. It can contribute to building a stronger and more diversified local economic base, which also benefits major foreign investors who may rely on local suppliers.

The following table summarizes the most important tax transactions for corporate income tax in Egypt:

Table 1: Key tax transactions for corporate income tax in Egypt

This multi-tiered approach to corporate taxation, which combines a standard rate, conditional incentives, and region-specific regulations, requires in-depth research from investors, but in return, it offers significant tax savings opportunities for qualifying businesses.

4. Value Added Tax (VAT) in Egypt: Taking Advantage of the Zero Rate and Exemptions

Value-added tax (VAT) is an integral part of the Egyptian tax system and directly impacts the cost of goods and services. Egypt's VAT system features a standard rate, zero-rated goods for certain categories (most notably exports), and a broad list of goods and services that are completely exempt from the tax.

4.1. Standard VAT rate and its application

The standard VAT rate in Egypt is 14%.

This rate is imposed on most goods and services sold or provided in the local market, unless there is a specific provision subjecting them to the zero rate or exempting them.

4.2. Strategic use of zero-rate VAT for exports and key sectors

Zero-rating VAT is an important tool for enhancing the competitiveness of certain sectors, particularly exports. When a good or service is zero-rated, it means that the tax due is zero percent. More importantly, the producer or service provider is entitled to recover the VAT incurred on the inputs used in producing the good or providing the service. This differs fundamentally from a tax exemption, which typically does not allow for the recovery of input tax.

In Egypt, the following categories are primarily subject to zero-rate VAT:

• Exported goods and services: All goods and services exported from Egypt abroad are subject to a zero-rate value-added tax. This measure is crucial to ensuring that Egyptian exported products are not burdened by the domestic value-added tax, making them more competitive in international markets.

• Exported goods or services from free zones, cities, and markets: Goods or services exported by free zones, cities, and markets abroad are also subject to a zero-rate tax.

• Imported goods or services to free zones, cities, and markets: Imported goods or services required for the licensed activity within these zones are subject to a zero-rate tax, with the exception of passenger vehicles.5 This contributes to reducing investment and operating costs within these zones.

The zero rate on exports is in line with international practice and aims to encourage foreign currency inflows and support the trade balance.

4.3. Comprehensive list of goods and services exempt from VAT

In addition to zero-rated goods and services, the Egyptian VAT law includes a long and detailed list of goods and services that are completely exempt from the tax. Exemption means that these goods and services are not subject to tax when sold to the final consumer. However, as a general rule, businesses that sell exempt goods or services are not permitted to deduct or reclaim the VAT they incurred on their inputs related to these exempt goods or services.

The most prominent categories of exempt goods and services include the following:

• Basic food products: such as baby formula, dairy products, all types of bread, pasta (except for certain types), eggs (except pasteurized), tea, sugar, coffee, agricultural products sold in their natural state, legumes, grains, and table salt.

• Healthcare services: These include most healthcare services, excluding cosmetic and weight-loss surgeries for non-medical purposes, as well as medicines and the active ingredients used in their production.

• Educational services and scientific research.

• Banking and financial services: These include banking operations legally restricted to banks, insurance and reinsurance services, and non-banking financial services subject to the supervision of the Financial Regulatory Authority.

• Sale and leasing of residential and non-residential lands and buildings.

• Basic transportation services: such as land transportation for passengers (except for tourist and air-conditioned transportation between governorates), non-tourist inland water transportation, and air transportation for passengers.

• Medical products and equipment for people with special needs.

• Books, newspapers, magazines, and educational materials.

The following table summarizes the various VAT transactions in Egypt:

Table 2: Overview of VAT treatment in Egypt

A thorough understanding of these differences is essential for companies operating in Egypt, as they directly impact product pricing, tax compliance, and overall profitability.

This gradual approach to providing incentives across different zones allows Egypt to meet the needs of a wide range of investors and reflects the flexibility of economic policies aimed at maximizing the benefits of available investment opportunities. Recent amendments, such as permitting certain energy-intensive industries in free zones under certain conditions23, demonstrate that the government is adopting a pragmatic and adaptable approach to balancing incentive provision with national strategic interests.

5. Comparison of the most prominent tax incentives in Egypt, classified according to the regulating law and the construction area.

5.1. An illustration comparing the most prominent incentives in different investment zones in Egypt.

6. Egypt's competitive advantages outside the tax framework

Egypt's attractiveness as an investment destination extends beyond tax incentives. It also includes a range of other competitive advantages that contribute to enhancing the business environment and reducing operating costs. These factors play a significant role in investors' decisions when evaluating available opportunities.

6.1. Labor Cost Advantage: A Comparative Analysis

Egypt's relatively low labor costs are a key advantage that has long attracted investment, especially in labor-intensive sectors. Numerous official reports and statements indicate that Egypt enjoys a competitive wage structure and a large, skilled labor force,[6] with a workforce of more than 31 million people.

• Average monthly wages in Egypt, even after recent increases in the minimum wage to 6,000 Egyptian pounds (approximately $125 per month in April 2024),

• Average public sector salaries, estimated at approximately $428.59 per month in the 2024-2025 budget, remain low compared to many other Arab countries and competing countries in some sectors. For example, some analyses indicate that Egyptian products, such as ready-made garments, can maintain a comparative advantage compared to products from countries such as China, Vietnam, Bangladesh, and India, even with the addition of certain customs duties, suggesting a difference in basic production costs that favors Egypt.

6.2. Cost of Living: Implications for Operating Expenses and Expat Talent

Egypt's generally low cost of living is an additional positive factor. Estimates indicate that the cost of living in Egypt is significantly lower than in countries such as India, the United Kingdom, and the United States. For example, the average monthly cost of living per person (excluding rent) is estimated at approximately EGP 15,229, with details available on housing, transportation, and utility costs.

This lower cost can positively impact companies' operating expenses, including compensation expectations for local employees. It may also make Egypt an attractive destination for expatriate talent, where they can enjoy a good standard of living at a lower cost.

6.3. Government Support and Simplified Procedures for Investors

As explained in Section II of this report, the Egyptian government is making tangible efforts to improve the investment environment by simplifying procedures and reducing bureaucratic burdens. These efforts include developing digital platforms for government services, reducing customs clearance times, and reviewing non-tax financial burdens. 7 The success of these reforms is a vital complement to cost advantages, as procedural hurdles can offset the benefits resulting from lower input costs.

6.4. Market Access and Strategic Location

Egypt enjoys the advantage of a large and growing domestic market, as well as a strategic geographic location linking the continents of Africa, Asia, and Europe. This advantage is reinforced by a network of trade agreements that provide Egyptian products with preferential access to numerous regional and international markets, including agreements with the European Union, Arab countries (the Greater Arab Free Trade Area (CAEU)), COMESA, and the African Continental Free Trade Area (AfCFTA), in addition to its membership in the World Trade Organization (WTO) and the BRICS group.

The following table shows labor cost indicators in Egypt compared to selected countries, taking into account the limited availability of direct and accurately comparable data from available sources:

Table 4: Labor Cost Indicators – Egypt vs. Selected Comparator Countries (Indicative Data)

The following table compares corporate tax rates in Egypt with some emerging and competing economies:

Table 5: Overview of corporate tax rates in selected emerging/rival economies

7. Conclusion and Outlook: Capitalizing on Investment Opportunities in Egypt

The Arab Republic of Egypt offers a growing array of attractive investment opportunities, supported by a combination of strategic tax incentives, significant operational advantages, and the government's ongoing commitment to improving the business environment. As this analysis has demonstrated, claims about the potential for ultra-low tax rates, such as a 16% corporate tax or zero VAT, have a basis within specific frameworks, although they require a careful understanding of the conditions and target sectors.

The standard corporate income tax rate is 22.5%, but this figure does not represent the full picture. Projects operating in the Suez Canal Economic Zone benefit from a competitive tax rate. The Investment Law also provides significant deductions on investment costs, deducted from taxable net profits, reducing the effective tax burden. 14 This is in addition to the direct cash incentive program, under which investors can reclaim a significant portion of the tax paid. 15 For small and medium-sized enterprises, Law 152 of 2020 provides a simplified tax system based on business volume with very low rates

Regarding value-added tax, the standard rate is 14%, but the zero-rate application to all exports is a significant advantage for export-oriented projects. In addition, a wide list of essential goods and services is completely exempt from this tax, easing the burden on consumers and reducing the cost of some inputs.

Egypt's attractiveness extends beyond the tax framework to include other competitive advantages, most notably the availability of relatively low-cost labor, 6 a large domestic market, and a strategic location that provides access to multiple markets through a network of trade agreements. 7 These advantages are reinforced by persistent government efforts to simplify procedures, reduce non-tax burdens, and develop infrastructure. 7

However, investing in Egypt, like any emerging market, requires careful consideration and a thorough assessment of potential risks, including macroeconomic and bureaucratic challenges. The dynamic nature of the reforms requires continuous monitoring and a deep understanding of the operating environment.

Looking ahead, Egypt is expected to achieve good economic growth rates in the coming years, driven by increased private consumption and private investment, provided the reform momentum continues and macroeconomic stability is maintained. The government's commitment to strengthening the role of the private sector and creating a favorable investment environment, with the support of international partners, bodes well for further improvements in the investment climate.

In conclusion, Egypt presents a unique combination of challenges and opportunities. Investors with strategic vision, the ability to navigate a sophisticated regulatory environment, and the willingness to conduct comprehensive due diligence can significantly benefit from the country's available incentives and competitive advantages. The key to success lies in a thorough understanding of regulations and laws, a realistic assessment of risks, building strong partnerships, and contributing to Egypt's sustainable development goals. As the government continues its reform process, Egypt's position as a key investment destination in the region is expected to solidify.