Withholding Tax in Free Zones in Egypt

Egypt’s ambitious economic vision has placed free zones at the heart of its strategy to attract foreign direct investment and boost exports. These zones are promoted as ideal platforms for global trade — offering tax incentives, modern infrastructure, and strategic access to ports and airports. Yet, beneath the surface of these benefits lies a complex web of tax obligations that businesses, especially those involved in cross-border transactions, must carefully navigate.

A Dual-Zone System Designed to Attract Investment

Egypt’s free zone system is divided into two main types, each serving distinct investment needs.

Public Free Zones are typically located near ports and airports to streamline international trade. They support industrial, commercial, and service projects with a strong focus on exports and are responsible for over a quarter of Egypt’s total export volume. More than 1,300 companies operate within these zones.

Private Free Zones, on the other hand, are tailor-made for specific strategic projects that benefit from proximity to raw materials or export markets. While fewer in number, they offer enhanced operational flexibility to investors.

Both public and private free zones enjoy generous incentives, including exemptions from customs duties, VAT, income tax, and property tax. They also allow for unrestricted repatriation of profits and capital — features that significantly reduce financial and administrative burdens for investors.

What’s Often Overlooked: The Tax Obligations Beneath the Incentives

Despite being widely labeled as “tax-free,” businesses in free zones must still contend with specific tax-related obligations. A 1% fee is imposed on the movement of goods, and when products are sold in the domestic Egyptian market, they are subject to the same taxes and customs regulations as any other local sale. Furthermore, customs supervision continues to apply inside the zones, ensuring compliance with national import-export regulations.

Employees Aren’t Exempt from the Tax Equation

While companies enjoy substantial tax relief, their employees do not. Workers in free zones remain fully subject to personal income tax under Law No. 91 of 2005 and social insurance contributions under Law No. 148 of 2019. Moreover, there are labor restrictions in place: foreign workers may not exceed 10% of the workforce unless special approval is granted.

Withholding Tax: The Hidden Cost of International Transactions

For companies operating in free zones, one of the most unexpected yet financially significant challenges is the withholding tax (WHT) applied to payments made to foreign entities. These taxes must be deducted and paid before the transaction is executed, making compliance immediate and non-negotiable.

Failure to apply WHT correctly can lead to severe penalties and cash flow complications.

Double Tax Treaties: Opportunities for Relief

Egypt’s extensive network of over 50 double taxation treaties (DTTs) offers relief from the harsh effects of withholding taxes. These treaties may reduce or eliminate taxes on dividends, interest, or royalties and provide greater legal clarity for cross-border operations. However, benefiting from a DTT requires meticulous documentation including residency certificates, contracts, and evidence of tax payment and a clear understanding of treaty terms.

Transfer Pricing Obligations in a “Tax-Free” Zone

Even in an environment with 0% corporate tax, companies in free zones must comply with Egypt’s transfer pricing (TP) regulations. All transactions between related parties must adhere to the arm’s length principle. If a company meets the local TP thresholds, it is required to prepare and submit:

• A Master File (if the parent entity is in Egypt or abroad),
• A Local File documenting intercompany transaction,
• And a Country-by-Country Report (CbCR) if the group’s global revenues exceed EGP 3 billion.

Supporting documentation such as intercompany agreements and accurate invoicing is not optional. Non-compliance could result in reclassification of transactions, denial of deductions, and exposure to penalties.

When Incentives Turn into Risks

Failing to meet tax compliance requirements can lead to substantial financial penalties and reputational harm. Reclaiming foreign WHT is also a bureaucratic process that can be both time-consuming and document-heavy. To successfully apply for relief or refunds, companies typically need:

• A tax residency certificate for the foreign party.
• A copy of the applicable tax treaty.
• Proof of tax paid in Egypt.
• And formal agreements supporting the nature of the payment (e.g., for services, royalties, or loans).

Conclusion

Egypt’s free zones undoubtedly provide a fertile ground for investment and export-led growth. However, they are not regulatory loopholes. The incentives come hand-in-hand with obligations especially in the realm of cross-border taxation and compliance.

For Egypt, it’s a vital tool in modernizing its tax regime, protecting public revenue, For foreign investors, understanding the rules before entering the Egyptian market is essential to avoid costly surprises.

For Egyptian businesses, tax compliance in free zones is not a formality it is a fundamental pillar for sustainable, long-term success in the global economy.

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