Tax Obligations and Incentives for Subcontractors in Egypt

In addition to the legal and contractual risks, subcontractors in Egypt face complex tax challenges that may become obstacles to executing work at high quality. However, tax awareness (connected tax guidelines) can eliminate financial pressures at their roots, primarily by registering with the Egyptian Tax Authority to ensure tax compliance and to gain rights, incentives, and tax exemptions.

Tax Rate

A schedule tax is imposed at a rate of 5% of the value of the work completion certificate on all works related to contracting, construction, and building, provided that the contract includes both supply and installation together.

However, if the contract is solely for supply or installation, it does not fall under the definition of contracting and is subject to the general tax rate of 14%.

Therefore, companies must precisely define the concept of contracting, as it directly impacts the tax rate. If contracting works are not calibrated correctly, companies could be subject to an additional 9% tax, along with late penalties, especially for large construction companies with diverse projects, such as:

• Building works and foundations, and metal constructions
• Roads and bridges
• Airports and railways
• Water and sewage plants and networks
• Gas and fuel networks
• Marine and river works
• Public works and hydropower and thermal power stations
• Electromechanical and electronic works
• Telecommunications networks
• New and renewable energy projects, including solar energy

Given the numerous work certificates, including the final completion certificate, it becomes essential to define contracting works at the level of each certificate to ensure compliance with the Tax Authority’s instructions and to maintain a sound tax status for the company. This contributes to improving the company’s liquidity by avoiding late penalties, which could threaten the company’s continuity.

Tax Base

The tax base is the total contracting work from which the tax value is determined. Given the complexity of the contracting components, each type of input for contracting must be specified.

Recently, we have received many inquiries from companies specialized in contracting works regarding the tax base for the schedule tax and the basis for determining its value. Many companies wonder why they pay differences due to the inflated tax base after the tax audit. What is the correct application to avoid additional tax and late fees?

The tax base includes:

• Construction and building works, as well as all local and imported goods and services involved in the contracting works, whether provided by the assigning entity or supplied by the general contractor or subcontractors
• All manufactured goods and services provided by the contractor are subject to tax at the general tax rate, not the schedule tax rate

Responsibility for Tax Payment to the Tax Authority

The primary obligation lies with the general contractor, but the subcontractor must coordinate and monitor the tax payment.

If the general contractor pays the tax, the subcontractor is not required to pay the tax. However, the subcontractor must provide the following documents:

• A certificate from the general contractor detailing all project information
• The value of the subcontractor’s work must not exceed the value of the operations assigned by the general contractor
• The subcontractor’s tax returns must include all work completed by them and the tax paid by the general contractor

If the subcontractor pays the schedule tax, they have the right to offset it against the schedule tax paid by the general contractor, provided that it is for the same works (preferably with the general contractor’s tax registration number) to avoid any additional issues or requirements from the Egyptian Tax Authority.

Conclusion

Large contracting works face challenges related to the settlement of taxes between the general contractor and the subcontractor, particularly concerning the schedule tax and VAT. The lack of clarity in the mechanisms used and the multiple work completion certificates in large projects can lead to fines and delays in tax settlement. Therefore, it is crucial to precisely define the works at the level of each certificate to ensure the payment of dues, maintain a sound tax position, and open new doors to discover tax incentives, as these incentives are not limited to those specified by law.

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

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