Interest Expense in Egypt: A Business Guide to Tax Deductions

Businesses regularly borrow money and take out loans for a wide variety of reasons, for example, to purchase business assets, to meet costs, or to increase working capital. As a result, Interest is a common and fundamental expense to expand business. Interest expenditure can be deducted when calculating Taxable Income for the Tax Period in which it is incurred. However, Interest expense deductions are only allowed if the following conditions are fully met:

Domestically (Egypt Source Loans)

• The loan is business-related.
• Interest expenses are deductible for tax purposes after offsetting any tax-exempt interest income.
• The interest rate does not exceed twice the discount rate as determined by the Central Bank of Egypt at the beginning of the calendar year.
• The interest expense is in return for loans complying with the local thin capitalization rule: 4:1 debt-to-equity ratio. However, according to the new amendments, the thin capitalization ratio will be reduced gradually over a five-year phasing-out period, from 4:1 to 2:1, as follows:

• 4:1 for FY 2023
• 3:1 for FY 2024 to 2027.
• 2:1 for FY 2028 onwards

The General Interest Deduction Limitation Rule does not apply to: Banks, insurance Providers, or Natural persons undertaking a Business and companies exercising the financing activities to be determined by a ministerial decree.

• For banks and companies relying on financial investments, the returns from loans used in their activities are deducted after deducting the returns on non-taxable or exempt liabilities.
• In the case of Group taxation, the interest rate must be complied with at arm’s length.
• Branches of foreign corporations operating in Egypt when receiving interest expense, the full interest is treated as an ordinary income.

Other Loans (Foreign Source Loans)

• Debit interests incurred on loans obtained by public sector companies, public business sector companies, and private sector companies from sources outside Egypt are subjected to a tax rate of (20%), regardless of the term of the facility or loan.
• The debit interests of loans and credit facilities obtained by the government, local administration departments, and other public corporate bodies from sources outside Egypt are exempted from this tax.
• The debit interest of those loans obtained by public business sector companies and private sector companies will continue to be exempted before the enforcement of this law provided that this debit interest on those loans is paid before the date of enforcement of this law (before 16 June 2023).
• As aforementioned interests are subject to the 20% WHT. However, an applicable DTT signed between Egypt and the foreign country may result in the reduction of these interests if the interests are performed abroad and not through PE in Egypt (based on each DTT).
• For interests withheld on behalf of non-resident entities, tax shall be remitted to the tax authority the day following the withholding of the amount.

Conclusion

Understanding the intricacies of interest expense deductions and taxation regulations, both domestically and offshore, is essential for businesses operating in Egypt to optimize their financial strategies and compliance efforts.

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