Modifications to the tax law affecting MLTN Groups

His Excellency the President of Egypt Abdel Fattah El-Sisi has recently approved a new tax reform package. This package, effective from 16 June 2023, includes relevant modifications that affect Multinational Groups (MLTNs).

The reform package amends certain provisions of Law No. 91 of 2005 (i.e. the ‘Egyptian Tax Law’) and Law No. 182 of 2020, and introduces a fresh set of tax reforms, which are summarized below. Further discussions and clarifications regarding these reforms will be covered in separate alerts in due course.

Permanent establishment 

Under the new reforms, non-resident entities are deemed to crystallize: 

• a “Fixed Place of Business PE” in case of ‘Construction’, ‘Installation’ and ‘Assembly’ projects lasting for more than 90 days in any 12 months-period aggregate timing. 
• an “Agency PE” (i.e. “Dependent Agent”) in case of ‘Supervisory Activities” performed in connection to the ‘construction’ or ‘installation’ or ‘assembly’ project above if these meet the above threshold.

Example: If construction company "A" (ACo) resident in State "A" is undertaking a construction project in Egypt, while engineering company "B" (BCo) resident in State "B" is engaged in supervisory activities for the same project, ACo should register a presence in Egypt for tax purposes if their cumulative presence exceeds 90 days within a 12-month period. Similarly, BCo should also register its own presence for tax purposes in Egypt once the mentioned threshold is met.

• Additionally, the Egyptian Government has introduced a "Service PE" principle in line with the United Nations (UN) Model Tax Convention. According to this principle, if a non-resident enterprise provides services, including consultancy services, in Egypt through its employees or other personnel engaged by the enterprise or any related entity, it will be deemed to have a PE in Egypt if such activities persist for an aggregated period of more than 90 days within any 12-month period.
• Furthermore, the new reform has also introduced an additional concept of "Insurance PE” based on which if a foreign insurance company enters into an insurance contract directly with an Egyptian resident (without involving an independent intermediary), and the premiums are collected in Egypt or the risks are insured there, then the foreign insurance company will be deemed to have a PE in the country.
• Finally, the Egyptian tax law has been now amended to align with the modifications introduced by the Organization for Economic Cooperation and Development (OECD) and the “Group of 20” (G20) under the project called “Base Erosion and Profit Shifting” (BEPS) and, in particular, under “Action 7”. These changes, reflected also in the new OECD Model 2017 under Article 5 ("Permanent Establishment"), specify that the ‘exclusions’ from the definition of "Fixed Place of Business PE" (e.g., in case of use of facilities solely for the purpose of storage) should still apply only in case of genuine non-business related ‘preparatory’ or ‘auxiliary’ activities. 

Interest on cross-border loans 

• The Egyptian Government has removed the exemption from the 20% withholding tax (WHT) on interest sourced in Egypt for loans granted from abroad with a duration of at least 3 years. Please note that interest related to loans, with a duration of at least 3 years, granted prior to the implementation of the new law, may lose the exemption going forward.
• As before, tax treaty’s benefits on interest arising in Egypt could only be claimed by foreign taxpayers indirectly, after the preliminary application of the domestic 20% WHT (“cash flow” issue). 

Thin-cap 

The Egyptian thin-cap ratio will be reduced gradually from 4:1 to 2:1 over a 5-year phasing-out period, starting from 2024, as follows: 

• For FY2023, no changes (4:1 remains applicable)
• For FYs 2024 to 2027, the ratio will be reduced to 3:1
• Starting from FY2028, the ratio will be further reduced to the targeted 2:1 

Deloitte’s view

We believe that the introduction of the "Insurance PE" principle represents an anti-base erosion measure implemented by the Ministry of Finance (MOF) to prevent foreign insurance companies from shifting profits to low-tax jurisdictions.

It is essential to highlight that all the aforementioned PE updates will not apply to tax treaties that are not aligned with these modifications (rectius tax treaties have supremacy over domestic tax law). Foreign companies resident in non-treaty countries instead will be fully impacted by the new rules.

In light of the above amendments to the law it is expected that the Government will issue executive regulations in the near future to provide further clarity on the scope, purpose and practical application of these changes.