The recent amendments introduced by the Egyptian Government to the Value Added Tax (VAT) Law No. 67 of 2016 represent a strategic turning point in the Egyptian financial landscape. These reforms are not just changes in figures; they are a fundamental shift in the philosophy of tax treatment for vital sectors, most notably the Contracting and Construction Sector.
At M1 Group, as chartered accountants and tax consultants, we provide this comprehensive and detailed guide for company managers, owners, and CFOs to understand the legal, accounting, and economic dimensions of these changes and ensure full tax compliance.
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Axis I: The Historic Shift in Tax Treatment for Contracting (From Schedule Tax to General Rate)
The tax treatment of the contracting sector has been controversial for years, as it was subject to a non-deductible tax that did not align with the principle of Value Added Tax.
1. Historical Context: The Old Tax Distortion (Schedule Tax)
Before the amendment, contracting services were subject to a Schedule Tax at a reduced, fixed rate (usually 5%), which did not grant the taxpayer the right to deduct Input VAT.
Negative Consequences for the Economy:
- Tax Cascading (Tax on Tax): Companies were paying VAT on inputs (often at 14%), and then paying the fixed 5% tax on outputs without recovering the input tax. This resulted in an unwarranted inflation of the final project cost.
- Burden on the Consumer: The non-deductible tax cost was passed on entirely to the final consumer, affecting the sector's competitiveness.
2. The Core 2025 Amendment: Subject to 14% with the Right to Deduction
The new amendments explicitly stipulated the removal of contracting services from the Schedule Tax list and subjecting them to the General VAT Rate (14%), while granting contracting companies the legal right to deduct the VAT paid on their inputs.
Core Legal Text: The provision concerning contracting services in the Law's accompanying Schedules (under a complementary ministerial decision to Law 67 of 2016) has been amended to be excluded from the Schedule Tax and apply the provisions of Article Two, which defines the general tax rate for non-exempt goods and services.
3. Necessary Accounting Procedures for Contracting Companies (M1 Group Recommendations)
To maximize the benefit from this amendment and avoid penalties from the Egyptian Tax Authority, companies must take crucial procedural steps:
- Input Verification: It must be ensured that all purchase invoices for materials and services related to projects (now subject to 14%) are documented and issued electronically and correctly by registered suppliers. Any non-compliant invoice will lead to the rejection of the deduction claim.
- Temporal and Accounting Segregation: The accounting team must prepare a procedural guide to separate projects that began before the amendment's implementation, which may still be subject to 5% (for previous periods), from new projects subject to the general 14% rate.
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Axis II: Clarification of VAT Controls on Real Estate and Administrative Units
The amendments aimed to unify the tax treatment for commercially-oriented real estate activities, while preserving essential exemptions.
1. Administrative Units and the 1% (Schedule Tax)
It was clarified that units designated for administrative activities and located in commercial and administrative complexes are subject to a Schedule Tax rate of 1% on their value.
SEO and Search: This item is vital for developers searching for "VAT on administrative units" and "Real estate taxes on malls." Legal Purpose: To eliminate the previous ambiguity and distinction between commercial shops (which were subject to 1%) and administrative offices within the same commercial context.
2. Confirmation of Exemptions for Residential Units and Essential Services
The amendments confirmed no prejudice to the tax exemptions imposed on vital sectors that directly serve the citizen.
Residential Exemption: Transactions related to residential units and their associated services (such as education and health) remain exempt from VAT. Zero-Rated VAT: No change occurred to transactions subject to the zero rate, such as exported goods and services, which enhances the capacity of exporters.
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Axis III: Other Schedule Tax Amendments and Procedural Reforms
The amendments included other provisions aimed at controlling and regulating tax dealings in specific areas.
1. Amendments to Luxury and Consumer Goods
The fixed tax and rate tiers on specific goods (such as tobacco and alcoholic beverages) were raised based on specified schedules. This serves two goals: increasing tax revenue and regulating consumption.
2. Legal Facilitation Mechanisms (Complementary Laws of 2025)
The legislation accompanying the Law included mechanisms to facilitate procedures and improve the relationship between the taxpayer and the Egyptian Tax Authority:
- Settlement of Tax Disputes: The government opened a time window for companies to definitively settle old and disputed tax files, against facilitated payment terms and the cancellation of a significant portion of late fees and penalties. This is a golden opportunity to cleanse financial and tax records.
- Accelerating Tax Refunds: Efforts continued to automate the process of refunding due VAT (especially for exporters), which improves corporate cash flow and encourages exports.
The amendments to the VAT Law in 2025 represent an acknowledgment of the importance of simplifying tax procedures and removing distortions that hindered economic growth, especially in the construction sector. It's no longer just about registration; it's about the deduction and refund strategy.
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M1 Group's Final Recommendations for Strengthening Your Financial Position:
- Immediate Legal Consultation: For contracting companies, the transition period is the most challenging. You must work immediately with a specialized chartered accountant to ensure the correct application of deduction mechanisms and avoid the error of submitting an incorrect declaration.
- Comprehensive Review of Disputes: If your company has old tax files, the timing of settling these disputes now reduces the potential total cost.
- Digital Transformation of Documents: It must be ensured that all accounting systems are ready to handle the requirements of e-invoicing and automated deduction.
Do you want a team of legal experts to ensure your company's full compliance and secure its right to input deduction following the new amendments? Contact M1 Group now to book your analytical consultation.