The Egyptian Government recently announced plans to limit the application of a reduced rate of dividend withholding tax under the Egyptian Income Tax Law. The proposed changes would likely impact not only the Egyptian subsidiaries of EU companies, but also Egyptian branches of EU companies – although there is a separate question whether the withholding tax applied to deemed withdrawals of profits from an Egyptian branch by its foreign head office (the so-called branch remittance tax or BRT) is compatible with Egypt’s double tax treaties.

Background

In 2014, Egypt introduced a 5%/10% final withholding tax on dividends paid by an Egyptian company to its shareholders. The rate of withholding tax on dividends depends on the size of the shareholding.

The BRT is an extension of this withholding tax to the deemed withdrawals of profits from an Egyptian branch by its foreign head office. The tax base is essentially the branch’s earnings for the year. A debate started regarding the applicable rate of the BRT, until the Egyptian Tax Authority issued a circular letter (No. 12/2015) clarifying that the BRT’s rate is 5%.

Proposed change

On 18 March 2020, the Egyptian Government announced plans to change the conditions for applying the reduced rate of dividends withholding tax. Under the proposed changes, the 5% rate would apply only to dividends paid by entities listed on the Egyptian Stock Exchange. All other dividends would suffer a 10% withholding tax.

It is unclear if the BRT rate will also be raised to 10%. Such a rate increase would clearly increase the significance of the question whether the BRT is compatible with Egypt’s double tax treaties; it would double the benefit of securing effective treaty protection for affected companies.

BRT and double tax treaties

It is doubtful if the BRT is compatible with all the double tax treaties signed by Egypt. Most of them don’t specifically allow it. The discussion narrows down to whether the profits remitted from branches to head offices qualify as dividends under the relevant treaty. The double tax treaties of Egypt signed with France, the United Kingdom, Italy, the Netherlands, Germany, and Spain (EU DTTs) are comparable in terms of: 

• their definition of the term dividends
• not providing the right to Egypt to impose any additional taxes (other than corporate income tax) on profits generated by branches operating in Egypt.

Indeed, pursuant to Article 10(3) of the Italy-Egypt DTT the term dividends is defined as: income from shares, “jouissance” shares or “jouissance” rights, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. The wording of the other EU DTTs is identical.

It appears that a payment made by an Egyptian company qualifies as dividends under Article 10 of the Italy-Egypt DTT only when derived from either shareholdings or other forms of corporate rights.

The Egyptian Tax Authority considers, however, that the relationship between a head office and its branch creates a corporate right for the former over the latter. Several arguments may be put forward against this conclusion, including the fact that under Egypt’s Companies Law a branch has no separate legal entity from the head office, and it represents only an extended part of the foreign company through which it carries on its business in Egypt.

Considering that the EU DTTs allow Egypt to tax only the profits realized by a local permanent establishment, we believe that the Egyptian authorities’ application of the BRT on branch’s remitted profits to head offices is in violation of the treaties.

This is more so considering that other DTTs concluded by Egypt explicitly allow imposing additional income taxes on profits remitted from a permanent establishment to its head office (see, for instance, Article 10(6) of the Indonesia-Egypt DTT).

Comments and proposals

Imposing the BRT should constitute a violation of the EU DTT. Taxpayers interested in claiming treaty protections can file a ruling with the Egyptian Tax Authority to request the non-application of the BRT and, in case of an unfavourable answer, resort to the administrative courts.

From the perspective of the state of residence, the BRT may be deemed not creditable against the corporate income tax at home. Indeed, the residence country is generally obliged to provide relief only if foreign tax is levied in compliance with the treaty.