M&A in Egypt: Navigating Financial Complexities
Egypt’s growing economy has earned it the reputation of being the “land of opportunities.” In this context, we aim to explore how investors, both domestic and foreign, can capitalize on these opportunities, with a particular focus on mergers and acquisitions (M&A) and their tax implications.
Mergers and acquisitions can be driven by various economic reasons, such as industry expansion and growth strategies. However, it is crucial to understand the tax implications that arise during the merging process, especially in the context of Egypt’s tax regulations governed by Law 91 of 2005 and its amendments until 2023, as well as the related investment laws that subjected the M&A transactions.
The Egyptian tax law mentioned the capital gains resulting from revaluation are subject to tax, in the event that the legal form of the entity is changed the legal person may postpone being subject to tax on the condition that assets and liabilities are recorded at their book value at the time of changing the legal form for the purposes of calculating the tax, and that depreciation on assets is calculated and allocations and reserves are transferred in accordance with the rules established before this change is made, and mentioned also in particular what’s considered as a change in the legal form as follows:
1. Merger of two or more resident companies.
2. Dividing a resident company into two or more resident companies.
3. Transforming a people company into a capital company or converting a capital company into another capital company.
4. Transformation of a legal person into a financial company.
However, the key condition to delay tax for a period of three years, as mentioned by the law, is that all assets and liabilities are recorded at their book value at the time of changing the legal form for the purposes of calculating the tax. While this condition serves to defer the tax burden, it may result in financial statements that do not accurately reflect the true financial position of the companies involved in the acquisition. Such discrepancies can potentially mislead financial statement users, including shareholders and other stakeholders, and contradict financial standards that require assets to be recorded at fair value.
However, the fixed assets disposal that included branding transaction will be subject to 1% Vat rate, and the fixed assets alone will be subject to VAT rate.
ex: For factory disposal, this transaction attracts the VAT liabilities at rate of 4.2%=(14%X30%) of the used fixed assets’ selling price except for the Building value, the building is usually VAT exempted; However, in case the budings will be a part of the factory selling transaction along with a commercial brand it will trigger the VAT rate of 1%= (10% of the value x 10% schedule VAT rate); if not, and the buyer is not buying the commercial brand, the VAT should not apply to the building
Egypt’s growing economy presents significant investment opportunities, as recognized by major global financial and economic organizations. However, it’s important to acknowledge that this type of investment in Egypt comes with certain drawbacks. The requirement to record acquired assets at their net recorded value in the merged company can hinder the ability to present an accurate financial statement that reflects the true financial position. This approach conflicts with the prevailing financial standards in Egypt.
We believe that addressing this discrepancy might necessitate adjustments to the law to align it with the financial standards operating in Egypt. This alignment is essential to foster a more transparent and investor-friendly environment, ultimately benefiting both domestic and foreign investors seeking to make the most of Egypt’s promising economic landscape.
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