The Comprehensive Investor's Guide to Dividend Distributions to Employees in Egypt

Employee profit sharing in Egypt is a legal obligation for many companies, not just an optional benefit. This system is based on a philosophy aimed at achieving social justice and motivating employees. Understanding this mechanism is essential for investors because it directly impacts net profits available to shareholders, earnings per share (EPS), cash flows, and the ability to reinvest.1 This mandatory system differs from discretionary practices in many other markets, requiring investors to consider it as a structural element in profit allocation when evaluating investments in Egyptian companies.5

The employee dividend system in Egypt is based on a constitutional foundation that supports employee participation in enterprise management and profits.7 The key legislation is Law No. 159 of 1981 (Companies Law) and its amendments.

• Article 41 of the Companies Law: stipulates that the company's employees have a share of the profits to be distributed, determined by the general assembly based on a proposal from the board of directors, amounting to no less than 10% of these profits and no more than the total annual wages of the company's employees.5

• The Executive Regulations (Article 196 and others): clarify that the 10% percentage is the minimum, and that the total distributed share does not exceed the total annual wages. It also addresses how to deal with amounts in excess of 10% (if they do not exceed the wage ceiling) or in excess of the wage ceiling, which may be allocated to the Employees' Services Fund. 5

• Determining "annual wages": This is done by reference to the Egyptian Labor Law (such as Law No. 12 of 2003), and includes the basic wage, allowances, and other benefits. 10

• Continuity under Investment Law No. 72 of 2017: This law affirms the continuity of employees' rights to profits for companies subject to the provisions of Law 159 of 1981, and any existing systems protect better for employees. 13

• Scope of application: Primarily includes joint-stock companies, certain limited liability companies with a certain capital limit, and branches of foreign companies. 9

1. Determining "distributable profits": This is the company's net profits after deducting the legal reserve (usually 5% of annual net profits until it reaches a certain share of the issued capital) and any other statutory reserves. 7

2. Potential initial distribution (percentage of capital): A percentage (for example, 5%) of the capital may be distributed. The company's capital paid as a down payment to "shareholders and employees" before calculating the basic employee share, which reduces the remaining profit base for the 10% calculation.

3. Calculating the basic employee share (10%): The remaining 10% of the distributable net profits is calculated after the previous steps.

4. Applying the "Total Annual Wages" ceiling: Rs. 10

5. Dealing with the surplus: If the calculated 10% exceeds the wage ceiling, the surplus is usually deposited in a special account for the benefit of the employees.

6. Remaining profits: Available for distribution to shareholders or for retention.

Simplified example: A company's distributable net profits (after reserves and initial distribution, if applicable) are EGP 1,000,000. The calculated employee share (10%) = EGP 100,000. If the total annual wages of the employees are EGP 80,000, the actual employee share will be EGP 80,000, and the surplus (EGP 20,000) will be allocated to the Employee Services Fund.

• Decrease in net profit available to shareholders: Employees' dividends are deducted before determining the final dividend.

• Impact on Earnings Per Share (EPS) and Valuation Ratios: Decrease in EPS may affect the stock's valuation, price-to-earnings ratio (P/E ratio), and return on equity (ROE).

• Cash Flow Implications: Employees' dividends represent an outflow of cash that impacts a company's liquidity.

• Retained Earnings and Growth: They reduce the amounts available for reinvestment, potentially slowing the company's organic growth.

• Investor Sentiment: This factor must be incorporated into the analysis to avoid inaccurate valuations.

• For the company: Egyptian Accounting Standard No. (38) stipulates that dividends to employees are not included as an expense in the income statement, but are recognized as a distribution of profit. 7 This means that they are not deductible from the corporate income tax base and are paid from after-tax profits.

• For employees: The share of profits received by employees is exempt from income tax for natural persons, according to Article 13 of Income Tax Law No. 91 of 2005 and its amendments.3

• Compared to shareholder dividends: Shareholder dividends are subject to a withholding tax (usually 5% or 10%).17

• Incorporation into financial models: Models should be adjusted to reflect employee dividends as a mandatory outflow, which impacts discounted cash flow and EPS valuations.21

• Due Diligence: Investors should analyze the company's wage bill, historical profitability, how dividend rules are applied, and the impact of the wage cap.

• Shareholder dividend yield expectations: These should be adjusted downward due to the mandatory employee dividend.

• "Hedging" strategies: These involve in-depth analysis, accurate forecasting, and valuation adjustments, rather than derivative financial instruments.

• It is recommended to understand the range of potential impacts on investment returns.

Despite the cost, the system can have positive aspects if approached strategically:

• Enhancing motivation, productivity, and loyalty: Linking a portion of employees' income to company performance may motivate them and improve their loyalty.23

• Aligning interests: Employees may feel their interests align with those of the company.

• Integration with broader incentive programs: Companies can use the mandatory system as the basis for building a more comprehensive incentive strategy.

Understanding the mandatory employee dividend system in Egypt is essential for making informed investment decisions.

• Legal: A minimum of 10% of distributable profits, up to a maximum of total annual wages.

• Financial: Impacts shareholders' net profit, earnings per share, and cash flows.

• Tax: Non-deductible for the company, exempt for employees.

Investors should conduct careful due diligence and incorporate this factor into their long-term forecasts and valuation models. Ignoring or misinterpreting this system can lead to erroneous valuations and flawed investment results.