Withholding Tax on Cross-Border Services in Egypt

In recent years, there has been a notable surge in the Egyptian Tax Authority’s (ETA) focus on the tax treatment of cross-border payments, particularly regarding withholding tax (WHT) on service payments to non-residents. The increasing number of audits and the evolving regulatory landscape underscore a broader trend toward tightening compliance and ensuring proper revenue collection in line with global standards. This article explores the complex framework governing WHT in Egypt, analyzes recent audit trends, and offers insight into the strategic implications for multinational enterprises (MNEs).

Egypt’s Domestic Legislative Landscape

The cornerstone of Egypt’s WHT regime is embedded in Income Tax Law No. 91 of 2005, supplemented by Ministerial Decrees and subsequent executive regulations. Under this framework, payments made by Egyptian residents to non-residents against royalties, interest, and services rendered outside Egypt are generally subject to a 20% withholding tax, considering the provisions of Double Tax Treaty (DTT).

Recent amendments and administrative instructions by the ETA have emphasized strict documentation requirements to validate the nature of services rendered, the residence status of the recipient, and the arm’s length basis of the transaction. Failure to adhere to these standards may result in disallowance of deductions and reclassification of payments.

The DTT Gap: Law vs. Practice

Egypt has entered into more than 50 Double Tax Treaties, offering reduced WHT rates on dividends, interest, royalties, and service fees. In theory, these treaties align with international best practices; however, in practice, the implementation remains inconsistent. Egyptian tax auditors often question the beneficial ownership status of foreign recipients and require excessive documentation, even in treaty-eligible cases.

Moreover, the interpretation of “Permanent Establishment (PE),” “beneficial ownership,” and “technical services” under DTTs can significantly differ from local perspectives, creating compliance uncertainty for taxpayers and room for subjective judgment during audits.

A core concern raised by many investors is the administrative burden and long list of requirements that must be satisfied to apply DTT provisions in Egypt. This includes not only stringent documentation but also procedural hurdles that often delay or invalidate treaty relief claims. These challenges, coupled with the general perception of the process as lengthy, costly, and unpredictable, have eroded trust in the practical application and interpretation of Egypt’s tax treaty network. This contrasts with the broader intention of Egyptian tax management, which seeks to rebuild investor confidence and position Egypt as a preferred destination for regional investment.

Pillar Two and the Future of Tax Planning

The global rollout of the OECD’s Pillar Two framework, which enforces a 15% global minimum tax, is expected to have a ripple effect on tax planning in Egypt. As countries adjust their tax regimes to align with GloBE (Global Anti-Base Erosion) rules, the scope for aggressive tax planning through low-tax jurisdictions is narrowing.

In this context, withholding taxes on cross-border payments become an even more critical element of effective tax planning. Companies must reassess their structures and ensure their intercompany service agreements and payment flows are defensible under both domestic and international rules.

Treaty Shopping and Effective Tax Rate Minimization

One common method employed by MNEs to reduce their global effective tax rate is treaty shopping—the practice of routing transactions through intermediary entities in treaty-favorable jurisdictions. However, tax authorities worldwide, including Egypt, are taking a firm stance against such strategies.

The ETA increasingly applies a substance-over-form approach, looking beyond the legal structure to assess the economic reality. In the absence of real substance (people, premises, and genuine business activity), even entities located in treaty jurisdictions may be denied treaty benefits.

Preferential DTT Provisions on Royalties and Interest

Several of Egypt’s DTTs contain preferential WHT provisions on royalties and interest payments, which, when applicable, can reduce the domestic 20% rate substantially. However, these benefits are subject to rigorous scrutiny.

Taxpayers must demonstrate that the recipient is the beneficial owner and that the transaction is genuine and not primarily driven by tax motives. In practice, many audits challenge these payments, especially when they are made to entities in low-tax or intermediary jurisdictions.

Service Payments: Domestic vs. Treaty Treatment

Under Egyptian domestic law, services provided outside Egypt are typically subject to WHT, unless exempted under a relevant DTT. However, many treaties do not specifically address service fees, leading to interpretational gaps.

Some treaties limit WHT only to services that create a PE in Egypt, whereas others remain silent, allowing the ETA to apply domestic rules. As a result, MNEs must carefully analyze each treaty on a case-by-case basis to determine the correct WHT treatment.

Anti-Avoidance Rules: Striking the Balance

Egypt’s tax regime includes several anti-avoidance provisions, including transfer pricing, general anti-avoidance rules (GAAR), and substance requirements. While these rules are essential to counter aggressive tax avoidance, they can sometimes inadvertently restrict legitimate tax planning.

The challenge lies in ensuring that genuine commercial arrangements are not penalized. Hence, documentation, transparency, and aligning tax strategies with actual business operations are more important than ever.

ETA’s Efforts to Build Trust and Streamline Disputes

In a commendable move, the ETA is revisiting domestic tax laws and modernizing their administration of DTTs. Initiatives include:

• Establishing clearer guidelines for the application of treaty benefits
• Enhancing digital platforms for tax filing and compliance
• Promoting dispute resolution mechanisms outside traditional litigation

These steps signal a positive shift towards restoring trust between taxpayers and the tax administration, and aligning Egypt’s tax system with global standards. Addressing the practical hurdles in DTT implementation—especially the administrative complexity and cost—will be essential to sustain this progress and reinforce Egypt’s position as a competitive and investment-friendly jurisdiction.

Regional Benchmarking: Lessons from Middle Eastern Peers

Other Middle Eastern countries offer insightful practices:

• United Arab Emirates: Despite a low-tax regime, the UAE enforces robust Economic Substance Regulations and introduced corporate tax in 2023, including WHT on cross-border payments.
• Saudi Arabia: Applies a comprehensive WHT regime and emphasizes advance rulings and APAs (Advance Pricing Agreements) to reduce audit uncertainty.
• Jordan and Morocco: Have implemented detailed transfer pricing regulations and enforce treaty provisions through structured audit guidelines.

Egypt can benefit from adopting similar strategies, particularly around advance rulings, clarified guidance on treaty interpretation, and mutual agreement procedures (MAPs) to reduce prolonged disputes.

Our Role in Securing Your Cross-Border Tax Journey

Navigating cross-border taxation in Egypt requires more than just understanding the law—it demands foresight, documentation, and alignment with international tax trends. Our team of international tax professionals offers:

• Strategic structuring of cross-border service agreements.
• Treaty benefit analysis and documentation.
• Defense strategies during withholding tax audits.
• Proactive compliance with both domestic and OECD-led global frameworks.
• Guidance on risk mitigation and tax governance.

We are here to secure your cross-border tax journey, ensuring both compliance and tax efficiency in a rapidly evolving landscape.

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

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