Egypt: Trade and Investment
On May 11, 1997, Egypt's new Investment Incentives and Guarantees Law (Law No. 8 of 1997), which repeals and replaces Investment Law No. 230 of 1989, was legislated. The new law aims to boost production and foreign and domestic investment and offers potentially good incentives for investors, including:
* The prohibition of nationalization, confiscation, and freezing of assets;
* The right to own buildings and land for project purposes regardless of investors' nationality and place of residence;
* The right to maintain foreign currency bank accounts;
* The exemption of manufacturing projects from price controls or profit limitations;
* The right to repatriate capital and profits;
* The right of 100 percent foreign ownership of ventures.
In addition, the new law provides extended tax holidays for projects in target areas. It allows companies, once established, to gain their tax incentives automatically without receiving the prior approval of any administrative authority. It also provides incentives for exporters. Whereas the previous law extended tax incentives for any capital increase or any project expansions, however, the new law provides no such tax concessions.
The law specifies a list of priority sectors that automatically benefit from its guarantees and incentives. These sectors include land reclamation, manufacturing and mining, transport, software and computer systems development and production, medical services, certain financial services, oil field services, agriculture and tourism. For these and for most other projects, investments are automatically approved.
The new law expressly preserves the benefits and incentives, as well as investment guarantees granted under law No. 230 for companies established under that law or existing prior to the promulgation of the new law under Law No. 230, all foreign investment projects are exempted from taxes and duties applied in Egypt for a period of five years which may be extended by another five years, regardless of the location of the project.
The new law has also abolished the highly bureaucratic General Authority for Investment (GAFI). The entity that will replace GAFI and its functions are to be determined by a presidential decree. Pending issuance of the decree, GAFI will remain the authorized administrative agency.
Law No. 8 of 1997 grants the projects working under its rubric a tax holiday that includes provisions of interest to investors.
Profits on projects and shareholder shares are exempted from the tax on industrial and commercial profits and from the corporate tax for a period of five years starting from the first fiscal year following the beginning of production or activity. The exemption may be extended to ten years for projects established in new industrial zones, new urban communities, remote areas and those projects financed by the Social Fund for Development.
Profits on projects operating outside the Old Valley and profits of shareholder shares shall be exempted from tax on industrial and commercial profits and from the corporate tax for a period of twenty years starting from the first fiscal year following the beginning of production or activity.
An amount equivalent to a percentage of the capital paid in, to be determined by the Egyptian Central Bank for Lending, and discount rates, for the year of fiscal treatment, shall be exempted from the corporate tax, provided that the company is a JSC and its stocks are registered at one of the stock exchanges.
Yields of bonds, finance share warrants and incomes of the other similar securities portfolios as issued by the JSCs shall be exempted from the tax on revenues of movable capitals, providing they are placed for public subscription and registered at one of the stock exchanges.
A customs tax at a unified rate of 5 percent of the value is levied on the value of all imports (machines, equipment and instruments) imported by such projects.
The profits resulting from the merger, division or the change of the legal entity of a project are exempted from the taxes and duties payable on the merger, division or change of legal entity. Such projects shall enjoy the exemptions prescribed before the merger, division or change of legal entity, until the relevant exemption periods expire. The merger, division or change of the project's legal entity shall not result in any new fiscal exemptions.
The result of assessing the in-kind portions forming the foundation of JSCs, Partnership Limited by Shares and LLCs shall be exempted from the tax on revenues of commercial and industrial activities or the tax on corporate companies' profits according to each case.
Free Trade Zones
Projects set up in one of the active free zones enjoy certain benefits that may be of interest to foreign investors. Such projects are not subject to exchange-control regulations nor are they subject to any customs duties on imported goods or equipment. In addition, they are exempt from taxes for an unlimited period. These projects, however, are subject to annual duty of 1 percent of the value of products entering or leaving the free zone or on the annual value added to the project, as the case may be. Licenses to operate in free zones may be granted for the following activities: storage of goods in transit from one port to another; storage of Egyptian goods intended for export (provided taxes have been paid); storing, mixing, blending and repackaging operations; manufacturing, assembly and processing; and ancillary activities or services required by companies operating in the free zones.
The existing free zones are located in Nasr City, Alexandria, Port Said, Suez, and Ismailia. In addition, new free zones are being established in Damietta, Cairo Airport, Safaga, Al Arissh and in Sinai east of Port Said.
Egypt is not a signatory to any free trade agreement. Egypt, however, has been negotiating with the European Union (EU) to realize a free trade agreement which will replace the earlier agreement concluded in 1977 that gave Egyptian industrial products free access to the European market. Negotiations have focused on the abolition of quotas on oil, textiles and other manufactured products and a relaxation of restrictions on agricultural produce.
While Egypt is a member of the Arab Common Market, along with Syria, Jordan, Iraq and Libya, this endeavor has not produced notable trade relations.
Egypt has entered into extra-regional trade relations with the EU and the US, among other countries, relating to the preferential treatment of certain specified goods. Egypt has pursued similar kinds of preferential treatment trade agreements with the Czech Republic, Greece, Jordan, Kuwait, Malta, Poland, Saudi Arabia and Syria. In March of 1995, Egypt and China entered into a trade accord. Egypt has also signed an Economic Treaty with Russia.
Egypt and Israel signed the Agreement on Trade and Commerce in May of 1980. The peace between the two countries, until recently, may best be described as "cold". In the wake of the peace process with the Palestinian Authority, the Joint Committee on Trade of Egypt and Israel met in November 1994 and issued the Taba Declaration in February 1995; it is hoped this step will lead to a new chapter in the trade relations between the two countries.
Egypt has complex tariff and non-tariff barriers. The latter include: a banned import list, quality control inspection standards, a prior approval list, quotas, Egyptian selling prices imposed on imported goods for customs valuation purposes and government procurement practices. Tariffs range from 5 to 55 percent, with certain rare exceptions such as automobiles (up to 135 percent).
The current tariffs are a result of a presidential decree issued in 1996 which lowers Egypt's highest customs tariffs by 10 to 15 percent across the board. In early 1996, the government also announced the reduction of tariffs on a wide variety of capital goods needed for industrial investment to 10 percent from previous rates that ran as high as 70 percent.
The government, however, has levied a 3 percent to 4 percent surcharge on the value of imported shipments as a fee paid for the inspection, listing, classification and re-examination of the shipment.
Overall, high tariffs have not crimped trade by foreign countries because the tariffs apply to all imports equally, and clever importers have been successful in discovering where exceptions and loopholes exist in the system. Exemptions to the banned import list are available for many sectors including the petroleum, tourism and military industries.
The list of banned import items was created to protect domestic industry and to reduce foreign exchange expenditures on luxury goods (called provocative items under customs terminology). Goods on the list include passenger cars, textiles, apparel, leather, steel pipes, PVC and batteries. Exemptions to the ban may be granted by the Ministry of Economy and Foreign Trade if no equivalent product exists in the local market or if the banned item is required for the survival of an industry. As the Egyptian Government has been rapidly reducing the items contained on the banned list, it has become less of a barrier to trade. A number of years ago the list covered 37 percent of all imports. Today, this percentage is lower and eventually is expected to be reduced to 5 percent of imports.
Egypt's quality control inspection standards adversely affect certain products, particularly food items. The Government has expanded the list of products subject to inspection to include many manufactured products, in addition to the previously monitored foodstuffs. Policy makers who point to the need to protect consumers from fraud and counterfeits see quality control as a moral issue. The major hurdle for foreign suppliers is that these quality standards often are ill-defined or not written at all. The restrictive features of this system are in the process of revision.
Egypt's 1996 agreement with the IMF provides for the reduction of the maximum tariff rate to 40 percent, a reduction of certain rates to 30 percent, and the limitation of the number of tariff bans to seven by 1998. This is also, according to the agreement, the deadline for the reduction of the current 4 percent and 3 percent import surcharge rates to a uniform 1 percent and for the government to eliminate all remaining non-tariff barriers.
Public Sector Procurement
Tendering in Egypt is regulated by Law No. 9 of 1983. According to this law, tendering should be subjected to the principles of publicity, equality and freedom of competition. Law No. 9 grants the government with three methods to select the party to an administrative contract: tendering, selective tendering and direct agreement.
Contracting for the purposes of purchase of movables, rendering services and concluding works and transport contracts are through a general tender.
Contracting through selective tendering may be employed in the following cases: (1) products or services subject to monopoly; (2) products or services that are available only through one particular person; (3) projects or services that cannot be defined with precise specifications; (4) consultative or technical works, which according to their nature, are required to be carried out by means of technicians, specialists or specific experts; (5) animals, poultry and fowls of all kinds required for purposes other than nourishment; (6) supplies, works, transportation and services that are urgent or that must be carried out in secrecy.
In case of urgency, the administrative authority may conclude its contracts through direct agreement (negotiation) within the limits of £E 2,000 regarding regular purchases, services and transport contracts. The limits are £E 4,000 regarding works-projects and £E 8,000 regarding the purchase of products monopolized by foreign companies that have no agent in Egypt. A tenderer must reside in Egypt or conduct the tender through a local agent.
Environmental issues in Egypt are governed by Law No. 4 of 1994. This law provides for the creation of an agency for the protection and promotion of the environment, the Environment Affairs Agency (EEAA). The EEAA is destined to formulate the general policy and to prepare the necessary plans for the protection and promotion of the environment. It should also follow up the implementation of such plans.
The law provides for a mandatory environmental review, to be undertaken by the competent administrative authority according to EEAA's instructions, as part of the approval process for all proposed projects.
The law forbids the handling of hazardous substances and wastes or the construction of any establishment for treating such substances without a license from the competent administrative authority. It is also forbidden to import hazardous waste or to allow its entrance into or passage through Egyptian territories. It is mandatory for all those who produce or handle dangerous materials to take precautions to ensure that no environmental damage shall occur.
All establishments (industrial and others) are required to ensure that while practicing their activities no leaked or emitted air pollutants (caused by the burning of fuel, etc.) shall exceed the maximum permissible levels. It is also prohibited to incinerate, to dispose of or to treat garbage and solid wastes as well as to spray pesticides or any other chemical compound unless it is done according to the conditions and safety measures specified in the Executive Regulations of the law.
Ships of any nationality, offshore platforms and any other companies or agencies authorized to explore or exploit natural marine resources are forbidden to discharge into the territorial sea of Egypt any polluting substances resulting in harm to the water environment.
The law further provides for a system of incentives to be offered to those who implement environmental protection activities or projects and sets penalties for those who are in violation of its provisions.
The Egyptian government has developed a five-year environmental action plan (1997/98-2001/02) for attacking the country's solid waste, air and water pollution problems.
The plan's priorities include: preparing feasibility studies for planned development projects, urging companies to work toward ISO 14000 environmental standards certification and urging the use of scientific management techniques and waste recycling to preserve natural resources.
Egypt is a signatory to various conventions concerning environment protection, among which are: the Environmental Modification Convention; the African Convention on the Conservation of Nature and Natural Resources; the Vienna Convention for the Protection of the Ozone Layer; the Convention for the Prevention of Pollution from Ships; the Barcelona Convention for the Protection of the Mediterranean Sea against Pollution; the Brussels Convention on Civil Liability for Oil Pollution Damage and the Moscow Treaty for Nuclear Weapon Tests in the Atmosphere.
© 2000 Mena Report (www.menareport.com)