Finance Leasing in Egypt After Law 176 of 2018 and EAS 49
Finance leasing is one of the core pillars of Egypt’s non-banking financial sector, offering companies an efficient and well-regulated mechanism to finance productive assets without the need to incur significant upfront capital costs. Its importance has grown as businesses increasingly seek flexible financing solutions that support expansion, strengthen liquidity management, and enable long-term investment planning.
In this context, the legislative reforms introduced in 2018 under Law No. 176 of 2018 prompted updates to the Egyptian Accounting Standards. As a result, Egyptian Accounting Standard No. 49, “Leasing Contracts,” was issued to replace Egyptian Accounting Standard No. 21 on “Finance Lease,” aligning local requirements with global accounting developments relating to lease accounting.
The Concept of Finance Lease and Its Legal Nature
A finance lease is a financial arrangement in which a licensed leasing company purchases an asset specified by the lessee and grants the lessee the right to use the asset for a period agreed upon by both parties in the contract. This period typically exceeds 70% of the productive or economic life of the leased asset. Although the leasing company retains legal ownership of the asset throughout the lease term, the lessee assumes the economic risks and enjoys the benefits of using the asset. This distinction between legal ownership and economic control is the fundamental characteristic of a finance lease and influences both accounting and tax treatment.
At the end of the lease term, the lessee typically has the option to purchase the asset at a pre-agreed price, which is generally lower than the asset’s fair value at that time, or to return the asset to the lessor, in accordance with the terms outlined in the lease contract.
The Regulatory Environment Before 2020
Before 2020, financial leasing activities in Egypt were primarily governed by Law No. 95 of 1995, which provided a general framework for the practice. However, this law did not fully capture the economic substance of financial leasing transactions. Regulatory oversight was limited, and the processes for contract registration and enforcement were inefficient. Additionally, the accounting treatment under Egyptian Accounting Standard No. 20 of 2006 did not align with the unique characteristics of financial leases compared to operating leases. Instead of reflecting the regulatory nature of financial leases, the accounting approach treated them as operating leases, allowing the lessee to utilize the asset while avoiding the associated operational risks.
In light of this, the lessee recognizes periodic lease (rental) payments as an expense in his accounting records in accordance with the finance lease agreement. This expense is presented in the income statement and reflects both the depreciation component and the interest (finance charge) stipulated under the contract. Any unpaid portion of the lease payments is recognized as a long-term liability in the balance sheet. the lessor recognizes with the asset in his accounting records as the legal owner of the asset and he also depreciates the asset along its production life and recognizes with revenues that collects from the lessee as the rent value.
One of the most prominent issues during that period was depreciation, as depreciation was in many cases calculated by leasing companies as the legal owners of the assets, despite the fact that clients were the actual users of the assets and bore the operational risks. This discrepancy led to inconsistency between accounting treatment, tax treatment, and economic reality, and resulted in frequent disputes with the Tax Authority.
Egyptian Accounting Standard No. 49 (EAS) governs the accounting treatment of lease contracts in Egypt. Issued in 2019, it replaced EAS No. 20 and is consistent with International Financial Reporting Standard No. 16 (IFRS 16). The standard differentiates between operating and finance leases for the lessee, requiring them to record the right-of-use asset and the corresponding lease liability in their statement of financial position, reflecting the economic substance of the transaction. For the lessor, however, there is no distinction between finance and operating leases, and the principle of risk-benefit transfer continues, with the lessor recognizing revenues received from the lessee. This standard applies to financial periods beginning on or after January 1, 2020, with the early effect of the new standard applied to the comparative year 2019 for contracts with overlapping periods.
Depreciation Treatment Under the New Framework – Standard No. 49
Under Egyptian Accounting Standard No. 49, depreciation is treated on the basis of the right-of-use asset rather than the asset itself, as follows:
The lessee entity recognizes a right-of-use asset at the commencement of the lease contract, and this asset is depreciated on a systematic basis that reflects the pattern of consumption of the associated economic benefits. Depreciation is usually calculated using the straight-line method unless another pattern is more appropriate. Depreciation is recognized over the lease term if there is no reasonable assurance that ownership of the asset will transfer to the lessee at the end of the contract. If there is reasonable assurance of ownership transfer, the right-of-use asset is depreciated over the productive life of the asset. Depreciation expense is charged to the income statement separately from the interest expense arising from the lease liability, resulting in a clear separation between the depreciation component and the financing component, and reflecting the substance of the accounting treatment under the new framework of Standard No. 49.
The Taxable Impacts on the New Treatment
According to the finance Lease Law No. 176 of 2018, the lessor has the right to deduct the depreciation and amortization and interests related to Asset right to use as a taxable costs in his tax return in the limit of actual paid rent value, and The application of Egyptian Accounting Standard No. (49) Leases contract causes tax impacts specially in respect of the contracts which have Overlapping Period between applying the two standards differences between accounting treatment and tax treatment, while the settlement account in the lessor accounts is subject to corporate tax according to Egyptian income tax law No. 91 of 2005 and it’s amendments.
The basic tax impacts appear mainly in the accounting method of recognition of depreciation expense on the right-of-use asset and interest expense on the lease liability, compared to tax recognition that often only allows lease payments. This leads to differences in the tax burdens for both Lessor and Lessee.
The reforms associated with the application of Egyptian Accounting Standard No. (49) have led to significant impacts on the market, as they contributed to enhancing transparency and reliability by showing lease obligations and rights of use in the financial statements after they had been hidden in many cases. This enabled investors and lenders to assess the true financial position of entities with greater accuracy. These reforms also improved comparability between companies with different financing models, which positively reflected on the efficiency of investment and credit decisions.
On the other hand, recognizing rights of use and lease liabilities led to an apparent increase in leverage ratios and changes in certain financial performance indicators, prompting a number of companies to reconsider the structure, duration, and terms of their lease contracts. At the level of the leasing market, these reforms encouraged leasing and financing companies to develop more flexible and transparent products and contributed to strengthening financial discipline and market stability in the medium and long term, without harming its investment attractiveness.
Conclusion
It is evident from the foregoing that Finance Lease in Egypt has witnessed a fundamental development at both the legislative and accounting levels, reflecting a shift from focusing on the legal form of contracts to emphasizing their economic substance. The issuance of Law No. 176 of 2018, followed by the application of Egyptian Accounting Standard No. (49) in 2020, contributed to reorganizing this activity on bases more consistent with international standards, enhancing transparency and reducing shortcomings that prevailed under the previous framework, especially with regard to depreciation treatment and determining who bears the economic risks and rewards of the asset. The new framework also allowed for more accurate treatment of differences between accounting and tax treatment through the recognition of temporary tax differences and deferred tax mechanisms, reducing tax disputes and achieving greater fairness and clarity.
At the market level, these reforms contributed to improving the quality of financial information, increasing the efficiency of investment and financing decisions, and encouraging the development of leasing companies’ business models, thereby supporting the role of Finance Lease as an effective tool for financing investment and stimulating economic growth. Accordingly, it can be said that the recent reforms represent an important step toward building a more efficient and sustainable Finance Lease market, provided that coordination continues between the accounting and tax frameworks and that the practical application of these standards is accompanied by effective awareness and oversight.
Frequently Asked Questions
What is finance leasing in Egypt?
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Finance leasing in Egypt is a financial arrangement where a licensed leasing company purchases an asset chosen by the lessee and grants the lessee the right to use it for an agreed period, usually exceeding 70% of the asset’s economic life. The leasing company retains legal ownership, while the lessee bears the economic risks and enjoys the benefits of use. At the end of the lease, the lessee often has the option to purchase the asset at a pre-agreed price or return it to the lessor.
How did Law 176 of 2018 change finance leasing?
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Law No. 176 of 2018 modernized the framework for finance leasing in Egypt and replaced the earlier regime under Law No. 95 of 1995. It better reflected the economic substance of leasing transactions, strengthened regulatory oversight, and improved contract registration and enforcement. The law also triggered updates to the Egyptian Accounting Standards, leading to the issuance of Egyptian Accounting Standard No. 49 on leasing contracts, which aligned local rules with global developments in lease accounting.
What is Egyptian Accounting Standard 49 on leases?
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Egyptian Accounting Standard No. 49 “Leasing Contracts” governs how lease contracts are accounted for in Egypt. Issued in 2019, it replaced EAS No. 20 and is consistent with IFRS 16. For lessees, it requires recognition of a right-of-use asset and a corresponding lease liability on the statement of financial position, ensuring that the economic substance of the lease is reflected. For lessors, it continues to apply the risk-and-reward transfer principle, with income recognized from lease payments.
How does EAS 49 treat depreciation for leases?
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Under EAS 49, depreciation is calculated on the right-of-use asset rather than the underlying asset itself. The lessee recognizes a right-of-use asset at the commencement of the lease and depreciates it on a systematic basis that reflects the pattern of consumption of economic benefits, usually using the straight-line method. If ownership is not expected to transfer, depreciation is over the lease term; if ownership is expected to transfer, it is over the asset’s productive life. Depreciation expense is presented separately from interest expense on the lease liability.
What are the tax impacts of EAS 49 on finance leasing?
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The tax impacts of EAS 49 arise mainly from differences between the new accounting treatment and existing tax rules. Under Law No. 176 of 2018, the lessor may deduct depreciation, amortization and interest related to the right-of-use asset as taxable costs, within the limit of the rent actually paid. At the same time, tax recognition often focuses on lease payments rather than the accounting split between depreciation and interest. This creates timing and amount differences in taxable profits for both lessor and lessee, particularly for contracts that span the transition between standards.
How did EAS 49 affect Egypt’s finance leasing market?
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EAS 49 has had a significant impact on Egypt’s finance leasing market by increasing transparency and reliability of financial reporting. Lease obligations and rights of use are now presented on the balance sheet, allowing investors and lenders to better assess the true financial position of entities. The standard improved comparability between different financing models and led some companies to reconsider the structure and duration of their lease contracts due to changes in leverage ratios and performance indicators. It also encouraged leasing and financing companies to develop more flexible and transparent products, strengthening financial discipline and supporting long-term market stability and growth.
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