Egyptian renewable investment – suspension of Egyptian capital gains tax on share disposals

Egyptian tax on shares sold by non-residents

In 2014, the Egyptian Income Tax law was changed to introduce a 10% Egyptian tax charge on the net gain realised on a disposal of shares in an Egyptian company.

This tax charge is intended to apply to non-resident as well as resident holders of Egyptian shares. Further, it is proposed that a withholding mechanism will apply that could require a purchaser or broker to withhold tax from sale consideration and remit such tax directly to the Egyptian Tax Authority.

Impact on renewables investment in Egypt

Although significant uncertainty exists regarding the precise scope and application of this new tax, it could represent a material additional cost for overseas investors in Egyptian renewable projects.

However, depending on the holding structure used by an overseas investor, there is potential for this capital gains tax charge to be removed under the terms of a double taxation treaty entered into between Egypt and the investment holding company jurisdiction.

This Egyptian capital gains tax charge on non-residents and the opportunities to mitigate this charge through applicable tax treaties is a key issue when determining the appropriate investment structure for investment into Egypt. Click here for further details.

Suspension of capital gains tax charge

This new tax on capital gains has proved very unpopular with investors. The Egyptian stock exchange fell sharply when the tax was announced and the introduction of the tax, as well as the continuing uncertainty regarding its scope, has damaged Egypt’s attractiveness to overseas investors.

As a consequence, the Egyptian Government announced on 18 May 2015 that the 10% capital gains tax charge on share disposals will be suspended for two years. Details of the exact terms and scope of this suspension are not yet available, but this announcement is considered to be a positive indication of the Egyptian Government’s intent to make Egypt an attractive location for foreign investment.

Structuring renewable investments in Egypt

While the suspension of the capital gains tax charge is generally good for foreign investment in Egypt, there is not likely to be any material impact to the recommended approach for overseas renewable investors into Egypt.

Given that the gains tax charge will only be relevant on a disposal of shares in an Egyptian project company, there remains a real risk that by the time an investor seeks to exit an investment, the Egyptian capital gains tax charge will be active again.

We will provide further details on this change as they become available, but it is likely to remain prudent for overseas investors in renewable projects in Egypt to continue to structure their investment taking into account this potential tax risk.