This article examines the state of play around foreign direct investment into Egypt, a country deserving attention, the author argues.

Egypt, a country that tends not to grab much coverage in these pages, might see its economic prospects and position being overlooked. The author of this article, Mohamed Mamdouh, a partner in accounting firm Kreston Egypt, sets out the case for the country. The editors are pleased to share these views; the standard disclaimers apply to views of guest contributors. Jump into the debate if you wish to respond. Email burroughes@wealthbriefing.com

After several regulatory changes to optimise its business climate, Egypt stands poised to claim its rightful place as a leading destination for foreign direct investment in 2024. Strategically positioned at the intersection of Asia, Africa, and Europe, the country boasts a unique host of factors that create an increasingly favourable environment for international investors.

Egypt’s FDI market
Foreign direct investment in Egypt skyrocketed in 2022, doubling the previous year's figure to exceed $11 billion. This impressive feat hinged on two key drivers: a crucial $3 billion loan from the International Monetary Fund and a wave of regulatory reforms by the government of Egypt.

The IMF loan, tied to the government of Egypt’s commitment to economic openness, served as a vote of confidence, encouraging investors with its backing for reforms such as a flexible exchange rate and increased privatisation. This, coupled with the easing of import restrictions, paved the way for a surge in foreign investment. 

Though challenges remain, Egypt's FDI market is undeniably taking off, fuelled by a renewed focus on economic liberalisation and international support.

Geo-demographic attractiveness
As a top destination for foreign direct investment, one of Egypt’s most compelling drawcards is its geography and demography.

Egypt's location places it at the heart of global trade, with 8.5 per cent of the world's commerce traversing its vital shipping lanes. This strategic advantage is complemented by a youthful and dynamic workforce, constituting 21 per cent of its over 100 million-strong population. This demographic represents one of the largest talent pools in the Middle East and Africa, offering investors access to a skilled and readily available labour force.

Evolving regulatory conditions
Recognising the need for a modernised and investor-friendly environment, Egypt enacted a comprehensive investment law in 2017. This legislation has streamlined bureaucratic processes, provided tax holidays, and guaranteed investors the repatriation of earnings and protection against expropriation. This unwavering commitment to transparency and investor security fosters a climate of trust and confidence, essential for attracting international capital.

Beyond legislative reforms, the Egyptian government is actively implementing initiatives to strengthen the overall investment ecosystem, for example a “New Company” law, amendments to the Bankruptcy law in 2018, and a new Customs law in 2020. 

Streamlining corporate and tax regulations promises greater efficiency and clarity for foreign businesses. The Ministry of Finance is spearheading a series of fiscal measures aimed at broadening the tax base, combatting evasion, and establishing competitive neutrality between state-owned and private sector entities. These efforts collectively lay the groundwork for a robust and equitable investment landscape where all players can compete equally.

By reformulating the legislation governing the formation of corporations and tax legislation, the Egyptian government intends to take advantage of each of these capabilities to foster an environment conducive to investment. 

Investment landscape
Opportunities for investing in Egypt are aligning with its new policy directions, offering potential in sectors such as financial services, renewable energy, and technology. 

Given the dynamic regulatory transformations, businesses contemplating entry into the Egyptian market in 2024 should consider the importance of securing knowledgeable local expertise for effective navigation and compliance.
 

Tax considerations for foreign investors
Income tax 
In June 2023, the Egyptian Government introduced amendments to the Investment Law No 72, offering incentives and process efficiencies to encourage more foreign direct investment. These changes included a cash investment incentive which entitles investors to a refund of corporate taxes paid on income generated from their business operations.

In alignment with Egypt’s development goals, there are additional special exemptions available to foreign businesses in strategic sectors including high tech industries, renewable energies, manufacturing, and energy. This includes an exemption from land use fees for 10 years, an exemption from contribution to infrastructure costs, and cost-sharing incentives for utilities. The Free Zones Expansion also makes it permissible for projects to be licensed under the free zones system. 

To safeguard the interests of investors and prevent potential disruptions to their business strategies caused by frequent fluctuations in tax treatments and rates, the government is dedicated to establishing a stable investment environment. To that end, a unified tax procedure law was enacted in response to investor concerns related to some of the articles of the income tax law previously enacted in 2005 and its subsequent amendments. However, further improvements are still necessary, specially at early stage of implementation which cause a contradicted interpretation of the law provisions.

Value Add Tax 
Egypt has the second lowest VAT rate in the MENA region, behind the UAE. The standard VAT rate sits at 14 per cent with a discounted rate of 5 per cent. Except for certain exempted goods and services, the scope of the value-added tax includes all goods and services. The tax is divided into the standard value-added tax and the company's right to deduct the input tax from the output tax. 

In May 2023, the Egyptian government updated its VAT law to ensure simplified registration of non-residents providing remote services to customers based in Egypt. Within this, the reverse charge VAT means that for foreign businesses providing goods or services to an Egyptian-registered business, or those importing goods into Egypt, the recipient is responsible for paying VAT – rather than the foreign business. Not only does this serve to reduce VAT fraud, it also encourages increased cashflow for foreign businesses.

Transfer price 
Egypt's transfer pricing regulations aim for fairness and transparency while remaining practical for businesses of all sizes. While challenges exist in implementation, the ETA's ongoing efforts aim to attract and support responsible investment through a predictable and evolving regulatory framework.

In 2018, the Egyptian Tax Authority (ETA) released a comprehensive guide outlining its approach to transfer pricing regulations. This document, revising a previous guide from 2010, aims to clarify how Article 30 of the Income Tax Law and supporting regulations are applied in practice.

Consistent with the OECD international guidelines, the Egyptian approach features various transfer pricing methods such as comparable uncontrolled price and transaction profit split. Importantly, the guide recognises the potential burden compliance imposes on businesses. Accordingly, companies with minor related-party transactions (under EGP 8 million) are exempt from extensive documentation requirements.

However, implementing this transfer pricing framework effectively will likely take time. The concept itself remains unfamiliar to some investors, both domestic and foreign, further compounded by the fact that not all countries follow similar regulations. The ETA is committed to regular updates of the guide to ensure alignment with future legal developments and practical experience.