Tax treatment of service fees and royalties paid to non-residents: between legal provisions and practical reality

In the business world, many companies operating in Egypt are forced to pay sums to non-resident companies or individuals for services or rights to use intangible assets. This raises the following question: How are these payments taxed in Egypt? And is the situation different if there is a double taxation avoidance agreement between Egypt and a foreign country?

The issue is not that simple. Rather, it is regulated by Egyptian Law No. 91 of 2005 and its executive regulations, in addition to the network of double taxation avoidance agreements concluded by Egypt with more than 50 countries around the world.

1- Article (56) of Income Tax Law No. 91 of 2005:

The article clearly states that any sums paid by a party or entity in Egypt to non-residents for services, royalties, or interest are subject to a flat tax of 20% at source.

Text: This means that an Egyptian company is obligated to deduct the tax before transferring the amount and remitting it to the Tax Authority in the deduction and addition declaration.

2- Exceptions - Executive Regulations (Article 52):

The legislator has exempted some payments due to their non-related nature to generating income within Egypt.

Therefore, Article (52) of the Executive Regulations stipulates exceptions to the 20% tax, most notably:

• Shipping and unloading fees.

• Insurance.

• International transportation.

• Fees for purchasing or leasing international transportation equipment.

• Interest on loans and credit facilities obtained by the government, its units, or banks registered in Egypt.

Therefore, not all service fees provided to non-residents are automatically subject to the 20% tax. Rather, the provisions of the law and the regulations must be referred to together.

Second: The International Framework - Double Taxation Prevention Agreements

Egypt has an extensive network of agreements with numerous countries, the primary objective of which is to prevent double taxation on the same income (in Egypt and in another country) and to encourage investment and trade between countries.

The basic philosophy of these agreements is to distribute the "right to tax" between the two countries:

• Sometimes, the country in which the service provider resides grants the right to tax alone.

• Sometimes, they allow Egypt, as the source country, to collect a limited percentage (usually lower than the local law).

The agreements also provide precise definitions of terms such as "permanent establishment," "royalties," and "technical services," which helps eliminate ambiguity in application.

The double taxation avoidance agreement between Egypt and China is a clear model for distributing tax jurisdictions.

1- Regarding service fees:

• They are considered part of business profits. • Therefore, they are not subject to tax in Egypt unless the foreign service provider has a permanent establishment in Egypt.

• The agreement considers the provision of services continuing for more than 12 months in Egypt to be a permanent establishment.

• If the service is provided entirely outside Egypt, the tax due in Egypt is zero.

2- Regarding royalties:

• They are always treated as royalties, and Egypt has the right to tax them.

• However, the agreement sets the tax ceiling at only 8% (compared to 20% under local law).

Despite the clarity of the legal texts and agreements, the practical reality reveals a significant gap.

The Egyptian Tax Authority often requires companies to deduct the 20% rate by default, even if the service was provided entirely outside Egypt.

For a company to actually benefit from the provisions of the agreement, it must provide:

• A tax residency certificate issued by the tax authority in China (or another country).

• An official document proving that the service was performed entirely outside Egypt.

Without these documents, the auditor often insists on applying the full rate (20%) in accordance with Article (56) of the law.

_____________________________________

Conclusion

• Services and royalties paid to non-residents are essentially subject to a flat tax rate of 20%, according to Article (56) of Law No. 91 of 2005.

• However, there are clear exceptions stipulated in Article (52) of the Executive Regulations (such as shipping, transportation, and insurance).

• International agreements to avoid double taxation may reduce the rate (e.g., 8% instead of 20%) or exempt certain payments (if the service is performed entirely outside Egypt).

• Practical application requires strong documentation for the company to benefit from the exemption or reduced rate.

Therefore, before making any external transfer to a foreign service provider or rights holder, the company must carefully determine:

• Does the amount represent a service or a royalty?

• Does it fall under the exemption provided by the executive regulations?

• Is there a double taxation avoidance agreement in force with the other country?

Complying with this study not only protects the company from the risk of tax audits, but also ensures full benefit from the advantages of international agreements.