Egypt’s 2025 VAT Amendments on the Construction Sector

In June 2025, the Egyptian legislator approved a pivotal amendment to the Value Added Tax (VAT) Law, stipulating the abolition of the 5% schedule tax imposed on contracting and construction activities, subjecting them instead to the standard VAT rate of 14%, with an explicit exception for the construction and maintenance of places of worship.

This amendment represents one of the most significant legislative shifts in the structure of indirect taxation in recent years. Its impact goes beyond merely changing the tax rate—it extends to a complete restructuring of the financial and legal relationship between the contractor, the developer, the client, and the state treasury, within a framework more aligned with the principles of the global VAT system based on input deduction and credit.

From a Fixed Tax to a Deductible Tax

The schedule tax previously constituted an exceptional tax treatment for contracting activities. It was imposed as a fixed, non-deductible tax on the total value of executed works, regardless of actual cost or profitability, and was payable irrespective of the client’s status or the project’s eligibility for deduction.

This model resulted in a number of practical issues:

• Actual tax duplication: As tax was paid on inputs (materials, equipment, services), then a final fixed tax was imposed on the total value without deducting what was previously paid.
• Disconnection from the VAT system: Creating a dual regime within the same law and placing contracting activities outside the scope of the deduction and credit mechanism that underpins VAT.

With the new amendment, contracting activities became subject to the standard VAT rate (14%), thus becoming part of the full VAT regime, enabling contractors to deduct input tax—provided that formal and substantive conditions for deduction are met, primarily dealing with registered parties and issuing proper VAT invoices.

Accounting and Financial Advantages of the Amendment

1. Reducing Actual Tax Burden Through Input Deduction:

One of the core advantages of this transformation is the ability to deduct VAT paid on all project inputs—a feature that was previously unavailable.

This deduction reduces the tax payable by the contractor and lowers the net tax cost of the project, particularly in projects that heavily rely on materials and services.

2. Eliminating Tax Duplication in the Production Chain:

Under the former system, each party in the supply chain bore a separate, non-transferable tax, leading to inflation of the final cost. Now, the input credit mechanism allows for the tax burden to be passed through to the final beneficiary—an ideal model aligned with the fundamental logic of VAT.

3. Higher Accounting Discipline and Transparency in Tax Treatment:

The new regime requires upgrading accounting systems to accurately record outputs and inputs, issue compliant tax invoices, and submit precise tax returns based on actual—not estimated—data.

This enhances the quality of financial records, reduces risks of tax evasion or arbitrary estimation, and reinforces principles of financial governance within companies operating in this sector.

4. More Effective Cash Flow Management

The input deduction mechanism enables companies to reduce their tax obligations at the end of each tax period, freeing up additional liquidity that can be allocated to project execution.

This is critically important in the contracting sector, which is characterized by long and complex financial cycles that require strong cash and liability management capabilities.

5. Greater Alignment with International Standards

Integrating the contracting sector into the general VAT system renders the Egyptian tax regime more aligned with those applied in advanced markets, facilitating Egyptian companies’ participation in international projects or joint ventures with foreign entities.

It also simplifies audit procedures and verification processes in cases of international financing or contracts funded by multinational bodies.

Key Challenges in Practical Implementation

Despite the structural advantages of the amendment, its practical implementation requires careful handling of several key challenges, including:

• Pre-amendment contracts: Determining whether they fall under the schedule tax or the VAT system—especially for long-term contracts or those awarded before the amendment but not yet fully executed.
• State dues under the new system: Differences may arise between the tax previously collected under the old system and that due under the new system, necessitating clear transitional guidelines from the Tax Authority.
• Impact on non-taxable clients: Such as individual homebuyers in residential projects, who cannot deduct VAT—thus shifting the full burden to the developer or contractor, potentially increasing the final selling price.

Conclusion

The legislative amendment abolishing the schedule tax and subjecting contracting activities to VAT constitutes a strategic step in reforming Egypt’s indirect tax regime. It unifies tax treatment standards, enhances operational efficiency, and promotes economic fairness.

At the same time, it demands a new level of tax and accounting readiness from companies operating in the contracting sector, along with a detailed understanding of deduction and credit mechanisms, and a comprehensive review of contracts and financial systems to ensure full compliance and avoid future tax risks.

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