State Entity Tax Exemptions Under Egypt Law No. 159 of 2023

Law No. 159 of 2023 represents one of the important legislative developments aimed at reforming the tax framework applicable to economic and investment activities carried out by state entities. The law is based on the removal of tax and fee exemptions granted to such entities in cases falling within its scope, while maintaining the exemptions and exclusions expressly provided under the law and its Executive Regulations.

It is important to emphasize that Law No. 159 of 2023 does not introduce a new tax nor does it establish an independent tax rate. Rather, the removal of the exemption results in the application of the relevant tax legislation or the legal framework governing the concerned fee, provided that the legal conditions for taxation are satisfied.

This distinction is particularly important when assessing the financial impact of the law, as each tax or fee must be analyzed separately based on the nature of the activity and the transaction under review.

Impact on Corporate Income Tax

The impact of the law on corporate income tax represents one of the most significant practical aspects of its implementation.

Where a state entity conducts an economic or investment activity falling within the scope of the law, and such activity previously benefited from an exemption from tax on commercial and industrial profits due to the status of the entity or pursuant to a legal provision subject to cancellation, the removal of the exemption results in the application of the provisions of the Income Tax Law, provided that the conditions for taxation are met.

Accordingly, the revenues, costs, and expenses related to the taxable activity shall be identified, and the taxable base shall be determined in accordance with the general rules stipulated under the Income Tax Law.

However, this does not mean that all revenues generated by the entity automatically become subject to income tax, as the determination of the taxable base remains dependent on the nature of the activity, the source of the income, and the specific provisions applicable under the Income Tax Law.

Withholding Tax on Account of Tax

The practical application of the law is not limited to determining the liability for income tax; rather, it extends to tax collection mechanisms and withholding procedures.

In this regard, the Egyptian Tax Authority issued Circular No. 6 of 2024 concerning the application of the withholding tax system on state entities conducting economic or investment activities subject to tax on commercial and industrial profits.

Pursuant to such instructions, entities responsible for withholding tax under Article 59 of the Income Tax Law are required to apply the withholding tax mechanism on payments made to state entities conducting economic activities subject to taxation, in accordance with the legally prescribed rules and procedures.

This demonstrates that the impact of the law does not only relate to the final tax liability, but also extends to cash flows and procedures associated with tax collection.

Value Added Tax (VAT)

When analyzing the VAT implications, a distinction must be made between two separate concepts: the taxable status of the transaction itself and the exemption granted based on the status of the entity.

If a state entity conducts an economic activity involving the supply of goods or services subject to VAT, the applicable VAT treatment shall be determined in accordance with the Value Added Tax Law No. 67 of 2016 and its amendments, rather than merely based on the fact that the entity is state-owned.

Accordingly, the removal of exemptions pursuant to Law No. 159 of 2023 may, depending on the source of the exemption and the nature of the activity, result in the application of the ordinary VAT rules, including registration requirements, tax collection, issuance of tax invoices, and filing of VAT returns, whenever the legal conditions are satisfied.

The exemptions provided under specific provisions of the VAT Law or other relevant legislation remain subject to separate analysis based on their legal source and scope. Such exemptions cannot be considered cancelled merely due to the issuance of Law No. 159 of 2023.

The Egyptian Tax Authority has clarified that the VAT Law and its amendments contain various provisions regulating taxable and exempt supplies, which confirms the necessity of referring to the VAT Law itself when determining the applicable treatment for each activity.

Stamp Tax and Other Fees

The scope of Law No. 159 of 2023 extends to taxes and fees, and is not limited solely to income tax.

Accordingly, when reviewing the impact of the law, it is necessary to identify all exemptions previously enjoyed by the entity or the activity, including exemptions related to transactions, documents, contracts, services, or other taxable bases subject to taxes or fees under separate legislation.

This highlights the importance of not limiting the review to income tax matters only, but rather conducting a comprehensive tax planning and assessment exercise covering all taxes and fees that may be associated with the activity.

Customs Duties and Related Fees

Similarly, customs exemptions previously granted to certain state entities or activities must be reviewed, including identifying the legal source of each exemption and determining whether it falls within the scope of Law No. 159 of 2023 or any of the exemptions maintained under the law.

The cancellation of a specific exemption does not necessarily mean that all import transactions conducted by the entity automatically become subject to customs duties. Instead, reference must be made to customs legislation, regulations, and decisions governing the relevant transaction, while determining whether the relevant exemption falls among those affected by the law.

Therefore, customs treatment should be reviewed at the level of each category of imports or transactions, rather than at the level of the entity as a whole.

Impact on Invoicing, Collection and Cash Flows

The removal of exemptions may result in practical implications extending beyond the amount of tax ultimately payable.

For example, the application of taxation to an activity that was previously exempt may require the implementation of new procedures relating to the issuance of invoices, tax collection, withholding tax obligations, tax returns, and supporting accounting records and documentation.

Furthermore, changes in the tax treatment may affect the entity’s net cash flows, particularly in cases where tax becomes due at certain stages of the business cycle before the consideration is collected from customers.

Accordingly, the assessment of the impact of the law should not be limited to the amount of tax payable, but should also include an analysis of the timing of tax liability, collection, and payment obligations.

Accounting Segregation Between Activities

A single entity may conduct different types of activities, some of which fall within the scope of the cancellation of exemptions, while others may continue to benefit from legal exemptions or exclusions.

In such cases, accounting segregation between activities becomes an essential element for proper implementation.

This includes identifying the revenues, costs, expenses, assets, and liabilities related to each activity separately, allowing for the accurate determination of the taxable base and applicable taxes and fees attributable to the taxable activity.

Such segregation also helps strengthen the entity’s tax position during tax examinations, particularly where the entity conducts activities subject to different tax treatments.

Impact of the Law on Pricing and Costs

The cancellation of exemptions may have a direct or indirect impact on the cost of conducting business activities.

Where taxes or fees become applicable to an activity that was previously exempt, the overall cost structure, profit margins, and cash flow projections may be affected.

From a commercial perspective, this may require a reassessment of financial models, feasibility studies, and pricing structures, particularly in relation to new contracts entered into after the effective date of the law.

However, this does not necessarily mean that the tax burden can automatically be passed on to customers, as this depends on the nature of the contract, the applicable tax provisions, pricing arrangements, and the agreement between the parties.

Tax Compliance and Assessment Approach

To ensure proper practical implementation, a comprehensive tax review may be conducted through the following steps:

Competitive Neutrality and Its Impact on the Tax Treatment of State Entities Conducting Economic Activities

The principle of competitive neutrality represents one of the key economic dimensions of the law, as it aims to ensure equal treatment among different entities operating in the market, particularly where certain state entities or entities previously benefiting from exemptions conduct economic or investment activities that compete with private companies already subject to applicable taxes and fees.

Within this framework, the law seeks to reduce competitive disparities arising from tax or fee exemptions previously enjoyed by certain entities when conducting economic activities. This contributes to establishing a level playing field between public and private sector entities. According to the Egyptian Tax Authority’s approach, these measures form part of broader efforts aimed at supporting private sector competitiveness and encouraging investment.

The cancellation of a tax exemption does not result in the creation of a new independent tax. Rather, depending on the nature of the activity and the relevant tax concerned, it leads to the application of the existing tax rules once the legal conditions for taxation are satisfied.

Accordingly, the analysis requires identifying the nature of the activity conducted by the entity and determining the applicable taxes and fees in accordance with the legislation governing each type of tax or fee.

Conclusion

The impact of Law No. 159 of 2023 extends to a wide range of tax and financial aspects. However, determining the actual impact requires a separate analysis of each tax, fee, and activity concerned.

Income tax represents one of the most significant practical areas affected by the law, particularly following the implementation of withholding tax procedures applicable to state entities conducting economic activities subject to taxation. In addition, VAT, stamp tax, customs duties, and other financial obligations should be reviewed separately in accordance with the legislation governing each.

In all cases, the appropriate starting point is identifying the legal source of the exemption, rather than merely identifying the entity benefiting from such exemption. An exemption cancelled pursuant to the law should be distinguished from an exemption that continues to apply by virtue of an international treaty or another statutory exception.

Accordingly, the proper application of Law No. 159 of 2023 requires a comprehensive tax assessment covering the nature of activities, applicable exemptions, relevant taxes and fees, compliance obligations, financial impact, and contractual implications, while maintaining the principle of competitive neutrality and ensuring equal treatment among market participants.

Frequently Asked Questions

Add Andersen in Egypt to Google Preferred Sources

Make us your preferred source to ensure you always get accurate information. Access our peer-reviewed, highly reputable, and unique research directly through Google.

Add

To find out more, please fill out the form or email us at: info@eg.Andersen.com

Contact Us