Capital Increase and Its Tax Implications in Egypt

Capital increase refers to a company’s decision to raise its registered capital either by issuing new shares or by increasing the nominal value of existing shares. This increase can be achieved through cash issues, converting reserves or retained earnings into capital, or by issuing shares in exchange for non-cash assets.

Common Reasons for Capital Increase

The common reasons for increasing capital include:

• Financing new expansions or large projects
• Strengthening financial solvency and improving the company’s financial balance
• Providing additional working capital to meet operational needs

Tax Implications of Capital Increase under Law No. 91 of 2005

Law No. 91 of 2005, the Income Tax Law, regulates several tax aspects related to capital increases, including:

• Capital Gains Tax:
  • Capital Gains from Unlisted Shares: In cases where the capital increase occurs through the issuance of new shares, the capital gains resulting from the sale of these shares are subject to capital gains tax if the shares are not listed on the stock exchange.
  • Capital Gains from Listed Shares: The tax on capital gains earned by natural or legal persons from selling all or part of their shares in public offerings on the Egyptian Stock Exchange for a capital increase has been deferred. These gains are taxed when the shareholder disposes of the newly subscribed shares during the capital increase, and the actual acquisition cost of the shares before the offering is used as the basis for calculating capital gains, subject to certain conditions.

Tax on Dividend Distributions: When profits resulting from a capital increase are distributed, such an increase is not subject to dividend distribution tax.

Issuance Tax: If the capital increase occurs through the issuance of new shares at a nominal value higher than the nominal value of the old shares, no issuance tax is imposed.

Profit Distribution Project for Joint-Stock Companies

Profits to be distributed come from the following sources:

• Net distributable profits for the year
• Retained profits from the previous year
• Transferred reserves

Conclusion

Increasing capital is one of the most important financial tools companies use to strengthen their financial position and fund their projects. However, this process must be carried out carefully and with full knowledge of the various tax implications according to Law No. 91 of 2005, to ensure legal compliance and achieve maximum benefit.

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