Source discount on service purchases from outside Egypt

Withholding Tax on Service Purchases from Outside Egypt

Introduction

When purchasing services from suppliers or companies outside Egypt, Egyptian tax law requires local entities to withhold tax from the value of these services before making payments to the foreign supplier. This system ensures that taxes due on income generated from activities related to the Egyptian market are collected, even if the service provider is not resident in Egypt.

What Is Withholding Tax on Foreign Services?

. This is a tax directly deducted from the invoice amount payable to a non-resident service provider (outside Egypt) when purchasing services such as consultancy, technical support, software, marketing, and others.

. The Egyptian entity (company, institution, or individual) is responsible for withholding the tax and remitting it to the Egyptian Tax Authority.

Applicable Withholding Rate

. Standard Rate:

A 20% withholding tax is applied to most payments for services provided by non-resident suppliers outside Egypt

. Double Taxation Agreements (DTAs): .

The rate may be reduced if there is an active double taxation agreement between Egypt and the supplier’s country. In such cases, 20% is initially withheld, and the foreign supplier may claim a refund for the difference from the Egyptian Tax Authority upon submitting the required documentation.

1- Identify the Service Type:Ensure the service provided falls within the scope of services subject to withholding (consulting, IT, marketing, etc.).

2-Withhold the Tax:When making any payment to the foreign supplier, withhold 20% of the due amount and remit it to the Egyptian Tax Authority.

3- File the Tax Return:Submit a quarterly return (Form 41) detailing the withholdings and payments made to foreign suppliers

4-Issue a Withholding Certificate:Provide an official withholding certificate to the foreign service provider, which they can use in their home country or to claim a refund in case of a double taxation agreement.

5- Maintain Records:Keep all documents, invoices, and withholding certificates for submission during any tax audit.

. Digital Services and Consultancy:

The tax applies to all types of remotely provided services, including software, consulting, technical support, and online training.

. Exemptions:

Some transactions may be exempt or subject to reduced rates depending on the service type or international agreements.

. Penalties for Delay:

Failure to withhold or late remittance of the tax exposes the local entity to financial penalties.

• Check for a double taxation agreement between Egypt and the supplier’s country before making payment.
• Consult an international tax advisor to ensure correct procedures and avoid penalties

.Ensure all transactions and invoices related to imported services are properly documented

Withholding tax on service purchases from outside Egypt is a mandatory process designed to protect the state’s tax revenues and ensure fair competition in the local market. Strict compliance with legal procedures protects your business from penalties and enhances credibility in international transactions.