Navigating IPO Taxation for Companies in Egypt

An Initial Public Offering (IPO) represents a pivotal milestone in the trajectory of companies, as it marks their transformation from a private entity into a publicly listed one by offering their shares for public trading for the first time. In this context, tax considerations emerge as one of the key factors that directly impact the financial outcomes of the company on one hand, and the positions of shareholders on the other. Accordingly, understanding the tax implications of the IPO is a fundamental condition to ensure the success of the process and to avoid future risks.

Tax Implications for the Company

Tax Treatment of Equity Issuance:

The proceeds realized by the company from an IPO are considered an increase in capital or share premium and are therefore not treated as taxable income, as they do not represent revenues generated from operating activities but rather an enhancement of shareholders’ equity. On the other hand, the expenses and costs incurred by the company to complete the IPO—such as fees of offering and underwriting managers, legal and accounting expenses, listing and registration fees with the stock exchange, and the costs of promotional campaigns and investor roadshows—may be subject to debate regarding their tax treatment. In some jurisdictions, such expenses may be regarded as deductible costs due to their direct connection to corporate financing and enhancing the company’s ability to operate, while in other cases they may be treated as capital expenditures deducted from the share premium account and not included in the corporate income tax base.

Therefore, proper treatment of these expenses requires careful distinction between what constitutes deductible current expenses and what is classified as capital expenditure, in addition to the necessity of maintaining supporting documentation and relying on official tax interpretations or rulings to avoid disputes with the tax authority.

In this way, achieving balance in the treatment of IPO proceeds and expenses represents a fundamental element in the company’s tax planning as it transitions into a publicly listed entity.

Corporate Structure:

The issue of a company’s corporate structure is one of the key aspects that must be carefully considered when embarking on an Initial Public Offering (IPO). The listing process and the accompanying changes in ownership structure or control positions may give rise to new tax obligations or modifications to the existing tax status—particularly with regard to accumulated tax balances such as carried-forward losses or tax credits that the company has acquired during its previous years of operation.

The entry of new investors or the transfer of a majority stake to different owners may result in the loss of the right to utilize such losses or a reduction in the scope of their use, pursuant to tax rules that sometimes require business continuity or unchanged control in order to preserve the ability to carry forward losses.

Furthermore, restructuring the company before the IPO—whether through conversion into a holding company, the divestiture of non-core activities, or the merger of subsidiaries—may have tax implications related to the transfer or revaluation of assets, or their subjection to stamp duties and fees.

Accordingly, reviewing the company’s corporate structure prior to the IPO is both a practical and precautionary necessity to avoid losing acquired tax benefits and to ensure financial stability after listing. It is also crucial to seek the assistance of tax and legal advisors to ensure that any structural adjustments comply with local laws and international tax standards.

Tax Considerations for Shareholders

Capital Gains Tax:

Capital gains represent one of the most significant direct tax implications that shareholders may face when participating in an Initial Public Offering (IPO). If a shareholder sells their shares during or shortly after the offering, the difference between the sale price and either the acquisition cost or the subscription price is considered a taxable capital gain under the provisions of the Income Tax Law.

This becomes especially important if the share value has increased substantially as a result of the listing or due to high investor demand for the stock, as such circumstances may lead to considerable capital gains subject to varying tax rates depending on the shareholder’s status (individual vs. company, resident vs. non-resident).

The tax treatment of foreign investors may also differ, as they are sometimes subject to withholding tax at source, or may instead benefit from exemptions provided under double taxation treaties concluded between Egypt and their countries of residence.

Therefore, advance planning and awareness of the tax consequences of selling shares during an IPO are essential steps for any shareholder aiming to maximize investment returns while avoiding unexpected tax burdens.

Tax on Dividends:

Once the company is listed on the stock exchange and begins generating distributable profits, the cash or in-kind dividends received by shareholders become subject to tax under the applicable law. These dividends are treated as realized income for shareholders—whether individuals or corporate entities—and are therefore added to their taxable base and subject to the prescribed rates.

The tax burden varies depending on the status and tax residence of the shareholder. Resident shareholders are taxed at rates specified under Egyptian law, while non-resident investors may be subject to withholding tax at source, collected directly by the issuing company at the time dividends are paid. In some cases, double taxation treaties may reduce this rate or exempt foreign shareholders partially or entirely.

Accordingly, the receipt of dividends after the company’s listing creates a tax liability that must be carefully considered—particularly for foreign investors with holdings across multiple jurisdictions. In such situations, advance tax planning becomes essential to maximize net investment returns and to avoid legal risks.

International Tax Issues

Cross-Border Taxation:

Cross-border taxation is one of the most complex aspects in the context of an Initial Public Offering (IPO), particularly for multinational companies or those with international investors in their ownership structure. In such cases, the applicable tax regime on IPO proceeds may vary depending on the jurisdiction where the shares are listed on the one hand, and the tax residence of the investors on the other.

For example, some countries may subject profits or proceeds from subscriptions to local tax even if they were realized in another jurisdiction, while other countries may impose withholding tax at source on dividends or proceeds transferred abroad.

Additionally, the transfer of funds across borders after the IPO may trigger further tax obligations, as some authorities levy taxes on the repatriation of profits or dividend distributions to foreign investors. Transfer pricing also becomes a critical issue when there are transactions between the parent company and its subsidiaries or between related entities within an international group. In such cases, companies are required to demonstrate that these transactions are conducted in accordance with the arm’s length principle in order to avoid profit reallocation or the imposition of additional taxes.

In Egypt, a 10% withholding tax is applied on dividends distributed to non-resident investors, whether in cash or in the form of bonus shares, unless reduced or exempted by double taxation treaties concluded between Egypt and the investors’ countries of residence. Moreover, companies listed on the Egyptian Stock Exchange are obliged to disclose their ownership structures and related-party transactions to ensure compliance with international tax rules and to mitigate the risk of reassessment by the tax authorities.

Based on the foregoing, companies intending to pursue an Initial Public Offering (IPO) on an international scale are required to establish a comprehensive plan for managing their cross-border tax obligations. Such a plan must strike a balance between compliance with local laws in each jurisdiction and leveraging international treaties to minimize the tax burden while maximizing returns for investors.

Double Taxation:

Double taxation is one of the most significant risks that companies or shareholders may face in the context of an Initial Public Offering (IPO), particularly when the transaction involves multiple jurisdictions. The same income—whether capital gains from the sale of shares, dividend distributions, or other proceeds—may be subject to tax in two or more countries at the same time: first, in the source country where the income is generated, and second, in the investor’s country of tax residence. This overlap can impose a double tax burden on companies and investors, reducing net investment returns and undermining the attractiveness of the IPO.

To avoid this issue, double taxation treaties (DTTs) play a pivotal role in alleviating the tax burden. These treaties establish clear mechanisms for allocating taxing rights between contracting states, either by exempting one country from imposing tax or by granting a tax credit in the country of residence equal to the amount already paid in the source country.

In Egypt, the state has concluded a wide network of such treaties with numerous countries, enabling foreign investors to benefit from reduced or even full exemption from withholding tax on dividends or share proceeds.

Advance tax planning by companies preparing for an IPO, as well as by investors considering participation, is therefore crucial to maximizing the protection afforded by international tax treaties and avoiding the risks of being taxed twice on the same income.

Illustrative Example:

Suppose an Egyptian listed company distributes dividends to a foreign shareholder resident in France. Under Egyptian law, a 10% withholding tax is imposed on dividends paid to non-residents. Therefore, if the French shareholder receives dividends amounting to EGP 100,000, the Egyptian company would withhold EGP 10,000 for the Egyptian Tax Authority, leaving the shareholder with a net amount of EGP 90,000.

However, under French law, dividends received by French residents from foreign sources are also subject to taxation in France. This means the same income could, in principle, be taxed both in Egypt (source country) and in France (residence country).

Here, the double taxation treaty between Egypt and France comes into effect. It provides that if tax has already been paid in Egypt, France will grant the French shareholder a tax credit equal to the Egyptian tax paid (EGP 10,000 in this case). As a result, the French shareholder is not taxed twice on the same income; rather, the Egyptian tax withheld is credited against their French tax liability.

This ensures that the total tax burden remains within the limits set by the residence country (France), while recognizing the tax already paid in Egypt, thus protecting the shareholder from double taxation on the same dividends.

Withholding Tax on the Offering

Non-Resident Investors:

Withholding tax is one of the most important tax considerations that companies must take into account when planning an Initial Public Offering (IPO), especially where foreign investors are part of the shareholder base. In many jurisdictions, a withholding tax is imposed at source on dividends distributed by a company to non-resident investors, whereby the tax is deducted directly from the dividend amount before it is transferred to the shareholder. The rate of this tax varies across countries—5% in some markets, rising to 15% or even 20% in others—directly impacting the net investment return for foreign shareholders.

In the Egyptian context, dividends distributed to non-resident investors are subject to a 10% withholding tax, unless provisions of double taxation treaties apply, which may reduce or completely exempt such tax. Accordingly, companies planning an IPO are required to assess the effect of this tax on their international shareholder base and to ensure that prospective foreign investors are informed of the applicable tax framework.

It is also in the company’s best interest to provide advance tax guidance to investors, thereby ensuring transparency, enhancing the attractiveness of the offering, and minimizing risks that could negatively affect demand levels or subscription coverage rates.

Compliance and Ongoing Reporting

Periodic Reporting for Listed Companies:

Following the completion of an Initial Public Offering (IPO) and the company’s listing on the stock exchange, the company becomes subject to a wide range of disclosure and transparency obligations imposed on all listed entities. These obligations include preparing and publishing quarterly reports highlighting financial results and operational performance for each period, as well as detailed annual reports containing audited financial statements, management’s discussion of performance, risk analysis, and future growth plans.

Compliance goes beyond mere publication; it requires accurate accounting and tax systems, and specialized teams for financial compliance and corporate governance. This inevitably leads to additional costs such as external audit fees, tax and legal advisory services, the preparation of reports in accordance with local and international accounting standards, as well as the technological infrastructure required for data collection and analysis.

In the Egyptian context, the Financial Regulatory Authority (FRA) and the Egyptian Exchange (EGX) oblige listed companies to publish quarterly and annual financial statements within specified deadlines, and to immediately notify the exchange of any material events that could affect the share price or shareholder positions. Financial statements must be approved by an auditor registered with the FRA and prepared in accordance with Egyptian or approved international accounting standards. Any failure to comply with these requirements may result in penalties and fines, which can extend to suspending the trading of the company’s shares until its position is rectified.

Accordingly, the transition to becoming a listed company does not only represent an expansion of the capital base, but also imposes a higher level of regulatory and tax obligations that must be managed efficiently. This ensures continuous compliance with stock exchange and regulatory authority requirements and strengthens investor confidence in the integrity of the company’s financial and disclosure practices.

Heightened Scrutiny from Tax Authorities

Publicly listed companies are often under closer scrutiny by tax authorities compared to non-listed companies, due to the scale of their transactions, their direct impact on the national economy, and their heightened disclosure and transparency obligations. Simply transitioning into a public entity increases the likelihood of being subject to rigorous audits and periodic reviews, including examinations of tax returns, assessments of transfer pricing policies with related entities, verification of the deductibility of significant expenses such as IPO costs, and confirmation of compliance with both local and international tax standards.

This strict regulatory environment obliges listed companies to establish a robust and well-structured tax management function equipped with sufficient technical and legal expertise to handle such audits.

This includes the ability to prepare comprehensive tax files, maintain supporting documentation for all transactions, and coordinate continuously with external advisors and accounting firms to safeguard the company’s tax position. It also requires developing clear internal policies for managing tax risks and updating them regularly in line with the Egyptian Tax Authority’s circulars and the OECD’s standards on tax transparency and transfer pricing.

In Egypt specifically, this need has become more pressing with the implementation of the mandatory e-invoicing system and electronic tax return filings, which allow the authorities to track transactions in real time—thereby intensifying scrutiny on large and listed companies. As a result, a company’s success after an IPO depends not only on its ability to attract investors and maintain market confidence but also on its strict adherence to tax compliance requirements and the development of an internal framework capable of managing this heightened level of oversight.

Conclusion

The role of taxation in an Initial Public Offering (IPO) goes beyond being a mere legal obligation to comply with; it represents a strategic factor that largely determines the success of a company’s transition from private to public status. A clear understanding of the tax implications of the offering—whether for the company itself or for its shareholders—enables management to make more balanced decisions that achieve optimal financial outcomes.

Advance tax planning, particularly in relation to the treatment of capital gains, the utilization of carried-forward tax losses, and the structuring of pre-IPO reorganizations, can make the difference between a successful offering that delivers real value to investors and the market, and one burdened by unexpected tax costs that undermine its returns.

Moreover, continuous and strict compliance with local tax laws and relevant international regulations after listing is a cornerstone for maintaining investor confidence and enhancing the company’s reputation in financial markets. Accordingly, the success of any company post-IPO is not measured solely by its ability to attract investments or increase share value, but also by its capacity to manage its tax position efficiently, thereby ensuring sustainable growth and long-term financial stability.

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