In order for expenses to be acceptable for tax deduction, such expenses must be:
- actual and supported by documents (Taxpayers should support their expenses and costs with electronic invoices and electronic receipts to be considered deductible costs from a corporate tax perspective).
- business related, and
- necessary for performing the company’s activity.
Depreciation and amortisation
The tax law set the depreciation and amortisation rates for tax purposes to the following:
- 5% of the cost of purchasing, establishing, developing, and renovating buildings and establishments is deductible based on the straight-line method.
- 10% of the cost of purchasing, developing, and improving intangible assets is deductible based on the straight-line method.
- Computers, information systems, software, and data storage sets are depreciated at a 50% rate on a declining-balance method.
- All others assets are depreciated at a rate of 25% of the depreciation basis for each fiscal year, on a declining-balance method.
A company may have the option to deduct 30% accelerated depreciation from the value of the machines and equipment used in industries during the first fiscal year of their employment. This should be done by submitting a request to the tax authority prior to deducting the 30% accelerated depreciation.
According to Article 25 of the Egyptian Income Tax Law, goodwill is amortised at the rate of 10% using the straight-line method.
Start-up expenses are tax deductible, and the whole amount can be amortised for the first year.
Interest expenses are deductible for tax purposes after offsetting any tax-exempt interest income.
Interest expense deductions are only allowed if the following conditions are fully met:
- The interest rate does not exceed twice the discount rate as determined by the Central Bank of Egypt at the beginning of the calendar year in which the tax year ends.
- The interest expense is in return for loans complying with the local thin capitalisation rule: 4:1 debt-to-equity ratio, However, According to the new amendments, the thin-cap ratio will be reduced gradually over a five-year phasing-out period, from 4:1 to 2:1, as follows:
- 4:1 for FY 2023,
- 3:1 for FY 2024 to 2027, and,
- 2:1 for FY 2028 onwards.
- This provision shall not apply to banks and insurance companies, as well as companies exercising the financing activities to be determined by a ministerial decree.
- The Egyptian transfer pricing rules (i.e. arm’s-length principle) are being followed (see Transfer pricing in the Group taxation section for more information). In case of a tax audit, if the interest rate isn’t proven to be at arm’s length, the tax authority has the right to adjust this price to arrive at the 'arm's-length price' and re-calculate the taxes due accordingly.
- The loan is business related.
According to Article 28 of the Egyptian Income Tax Law, deduction of bad debts shall be allowed, subject to submitting a report from the external auditor indicating the fulfilment of the following conditions:
- The company is maintaining regular books and records.
- The debt is related to the company activities.
- That debt value was previously included within the company accounts and records.
- The company has taken serious procedures for settlement of such debt and has been unable to collect it after 18 months from its due date.
Donations to the government are tax deductible. Donations to Egyptian charities are also deductible, but only up to 10% of taxable income.
Fines and penalties
Financial fines and penalties paid by the taxpayer because they or one of their subordinates has committed a deliberate felony or misdemeanour are not deductible.
Income tax payable according to the Income Tax Law is not deductible.
Other significant items
The following other items are not deductible:
- Reserves and appropriations of all different types.
- Profit shares, distributed dividends, and the attendance fees paid to shareholders for attending the general assembly’s meetings.
- Compensation and allowances obtained by the chairmen and board members.
- Workers profit share to be distributed according to the law.
Net operating losses
A company may carry losses forward for a period not to exceed five years. Nevertheless, if a change occurs in the ownership of its capital exceeding 50% of the shares, stocks, or the voting rights, if the company is either a joint-stock company or a company limited by shares whose shares are not listed on the Egyptian Stock of Exchange, and if the company changes its activity, the company cannot carry the losses forward.
In general, companies cannot carry losses back, except for contracting companies (i.e. in case of long-term projects), which are allowed a loss carryback for an unlimited period of time (to the extent of the duration of the contract).
Payments to head office
A branch may deduct head-office charges of up to 10% of its taxable income. Moreover, the branch or subsidiary should withhold taxes before the payment of interest, royalties, and service fees to non-resident foreign corporations or affiliates.