Egyptian Tax Law 91/2005: Deductible Expenses

• The document summarizes the main points of Egyptian tax law number 91 of 2005, focusing on deductible expenses, costs, and bad debt write-offs.

Deductible Expenses and Costs

• To be deductible, expenses needs to pertain to the business activity.
• Expenses should be real and supported by documentation.
• Since July 2023, expenses must be supported by electronic invoices, the mandate starts in January 2025.
• The minister can extend the deadline or exclude some expenses from this e-invoicing requirement.

Expenses Not Requiring Formal Documentation

• Some expenses are commonly accepted without standard documentation, due to their nature.
• This includes internal transportation, buffet and internal hospitality, cleaning, routine maintenance, standard and professional stamps, and newspapers and magazines.
• Such undocumented expenses, including tips, cannot exceed 7% of the total documented general and administrative expenses.

Specifically Deductible Items

• Interest on loans used for business is deductible after deducting credit interest that are not subject to tax.
• Credit interest includes any amount the taxpayer earns from investing.
• Depreciation is deductible.
• Taxes and fees are deductible, excluding the income tax.
• Social insurance contributions are deductible.
• Entities can deduct amounts they deduct for private savings, reserve, or pension funds, up to 20% of employees' wages.
• Several conditions exist for private funds to be considered independent.
• The fund needs its own bank account separate from the company’s.
• Its funds must be invested for its own account.
• Its books and accounts should be independent from the company's accounts.
• Life and disability insurance premiums are deductible up to 3,000 EGP per year.
• Donations to the government and public entities are fully deductible.
• Donations to registered Egyptian charities are deductible up to 10% of the annual net profit.
• Financial penalties and compensations due to contractual liability are deductible.

Non-Deductible Items

• Reserves and provisions of all kinds are not deductible.
• Fines resulting from a felony or intentional misdemeanor are not deductible.
• Income tax itself is not deductible.
• Interest paid on loans exceeding twice the discount rate announced by the Central Bank at the start of the year is not deductible.
• Interest paid to individuals not subject to tax is not deductible, except for publicly traded bonds.

Calculating Financing and Investment Costs

• The executive regulations specify the calculation method, when the exemption for financing and investment related to tax-exempt income can't be deducted
• "Financing and investment costs" refers to amounts due or paid that affect financial statements, including interest on deposits, loans, advances, debts, plus general and administrative expenses incurred.
• Depreciation and provisions are not included.

Two Methods to Determine Financing and Investment Costs

• Allocation: Used when funds are for tax-exempt revenue, the financing and investment cost equals the interest paid for these funds.
• Proportional allocation: Used when funds are for both taxable and tax-exempt revenue, then the cost is calculated proportionally.
  • Calculate the ratio of tax-exempt revenue to total revenue, then apply this ratio to the total financing costs.

Example Calculation

• A facility had 2 million EGP in revenue, 1 million EGP in general expenses (excluding provisions/depreciation), existing loans of 2,375,000 EGP, and incurring 455,000 EGP in interest.
• Some loans included 300,000 EGP unused in operations at 20% interest, and loans to a tax-exempt person at 15% interest, and 675,000 EGP loan from Al Ahli Bank earning 150,000 EGP in interest.
• 6% is the discount interest rate declared by the Central Bank of Egypt.

Loan Analysis in the given Example

• 300,000 EGP loan unused has interest of 60,000 EGP.
• 400,000 EGP loan for a tax-exempt person has interest of 60,000 EGP.
• A million EGP loan from Bank Misr has an interest of 200,000 EGP.
• A 675,000 EGP loan from Al Ahli Bank has 135,000 interest.
• The overall total interest is 455,000 EGP, the total loans amount to 2,375,000 EGP.

Non-Credited Interest Calculation Example

• The uncredited interest includes for a loan that wasn’t used, and a loan for a tax exempt person.
• 60k is the interest in both of these cases
• These figures amount to 404,000 EGP of allowable deductions
• To calculate the financing and investment costs that can be credited = tax exempt revenue / total revenue x unaccredited interest
  • (150,000/2,000,00)(51,000) = 3,825 EGP

Expenses Not Considered as Deductible Costs

• Corporate entities' interest payments exceeding twice the average equity.
• This rule doesn't apply to banks, insurance, or financing companies.
• The excess is calculated based on financial statements prepared according to Egyptian accounting standards.

Temporary Provisions

• The rule will be phased in: 4x equity in 2023, 3x equity from 2024-2027, and 2x equity from 2028.

Example of Interest for a Corporate Entity

• A company's financials reported 450 million EGP in revenue, 100 million EGP in approved general expenses (excluding provisions/depreciation), and 30 million EGP in interest expenses.
• Loans totaled 190 million EGP at the start and 220 million EGP at the end of the year.
• Equity was 20 million EGP initially and 30 million EGP at year-end.
• Loans generated 2 million EGP in tax-exempt interest.
• The Central Bank's discount/credit rate: 6.5%.
• The report includes how to compute deductibilty for tax purposes.

Solution

• Find the interest rate on loans. (2million/190+20,00,000) = %15
• Find twice the value of interest
• = %6.5 x 2 = 13%
• Use 4 X the amounts of equity to find interest on loans.
  • (190million – 10 million) +(220million – 20 million)/ 2 = 190 million
• Interest rates can be found by calculating the average
  • (20 million +30 million)/ 2 =
    • ratio with: 190 / 25 = 7.6

Depreciation

• Buildings and facilities: 5%.
• Purchased intangible assets, created by the company: 10%.
• Computers, information systems, software, and storage units: 50% of the depreciable base.
• Other assets: 25% of the depreciable base.
• Land, artwork, jewelry, or assets not subject to wear and tear cannot be depreciated.

Basis of Depreciation

• It equals the asset group's balance at start with, asset purchases, additions
• Any salvage is applied in the following ways
  • a negative balance means the assets get added to the taxable income.
  • A balance means that the income goes completely to the ledger.

Depreciation Rates

• Rates are calculated as outlined by law, in line with article no ¾ of regulatory financing.
• Properties are tax deductable, with the rates listed in the article.
• No changes made allowed in the depreciation, unless for tax account purposes.

Accelerated Depreciation

• A taxpayer can deduct 30% of the cost of machinery and equipment used in manufacturing during the first tax period of use and include the remaining value in the standard depreciation base.

Capital Gains Example

• Building bought for 195k, registration fees of 5k.
• On 1.1.2020 the building was renewed.
• The building was then sold for 217k, with 2k expenses, on 30.09.2020.
• The report shows you how to calculate the profit tax
  • (195,000 + 5000) *(5/100) * (5/12 month)= 4167

Bad Debt Expense

• According to Article 28 permits writing off bad debts. The following conditions are required
  • The debt must arise from the company’s activity, so a report from an accountant must be provided.
  • The value must appear, with any regular accounts for the entity.
• Strict measures must have been taken to claim debts.