Income tax is one of the most prominent taxes imposed by the state on individuals and companies, and it is an essential part of the Egyptian financial system. It represents an important source of government revenue and has a significant impact on economic activity at both the individual and institutional levels.
It is defined as a direct tax imposed by the state on individuals or companies engaged in specific activities. This tax is applied to the annual taxable net profit, which is determined based on the financial reports of individuals or institutions after making the necessary adjustments in accordance with the approved income tax rules.
Income tax is levied on the net income derived from various economic activities, whether it is the income of individuals or companies. In Egypt, the tax is collected according to Egyptian Law No. 91 of 2005, which is the fundamental law that regulates how this tax is imposed on individuals and companies.
Initially, the Income Tax Law underwent many amendments that helped improve tax collection and increase fairness in the distribution of tax burdens. These amendments also included tax reductions for certain social groups and individuals facing economic pressures.
The annual income tax return for companies is not considered valid unless signed by a certified external tax expert, making it mandatory for payment. According to the Tax Authority Law, the tax return is considered a declaration and self-assessment, and the company is responsible for preparing it. In case any tax obligations are not included in the return, fines are imposed according to the law. The corporate income tax rate in Egypt is 22.5% of the taxable net income. Losses can be carried forward for up to five subsequent years.
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Tax System in Egypt:
The Egyptian Tax Authority relies on Law No. 91 of 2005, as amended by several modifications, which governs how income tax is imposed on individuals and companies in Egypt. The system aims to achieve tax justice by imposing progressive taxes on income, where the tax rate increases as income rises.
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Income Tax on Individuals:
Tax is imposed on income earned by individuals from various sources such as salaries and wages, income from investments, or from professional and commercial activities such as law, engineering, or freelance work.
Income Tax Brackets for Individuals: The income tax is based on progressive brackets, meaning individuals who earn more pay higher taxes. The tax brackets for individuals are as follows:
- From 0 to 15,000 EGP annually: No tax is imposed.
- From 15,001 to 30,000 EGP annually: 2.5% tax.
- From 30,001 to 45,000 EGP annually: 10% tax.
- From 45,001 to 200,000 EGP annually: 15% tax.
- From 200,001 to 400,000 EGP annually: 20% tax.
- More than 400,000 EGP annually: 25% tax.
Example: If a person's income is 500,000 EGP annually, the tax is applied as follows:
- The first 15,000 EGP are exempt.
- From 15,001 to 30,000 EGP, a 2.5% tax is applied, and so on for each bracket.
Tax Exemptions:
- Individuals with low income (less than 15,000 EGP) are exempt.
- Expenses related to health and education are deductible from the taxable income.
- Pensions and social assistance are exempt.
Tax Deductions: Individuals may be allowed to deduct certain expenses, such as:
- Medical expenses.
- Educational course costs.
- Social assistance for individuals with disabilities.
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Corporate Income Tax:
Income tax is imposed on companies (both domestic and foreign) that make profits from their business or industrial activities. These companies include joint-stock companies, limited liability companies, and sole proprietorships.
Corporate Tax Rate: In Egypt, corporate tax is levied at a rate of 22.5%. This tax is applied to the net profit earned by companies after deducting allowable expenses and costs.
Tax Deductions for Companies: Companies investing in specific sectors, such as renewable energy or sustainable development projects, may benefit from tax exemptions or reductions. Additionally, companies providing social services, such as employee welfare or community support projects, may also receive tax deductions.
Small and Medium Enterprises (SMEs): To support small and medium enterprises, small businesses with lower revenues may benefit from reduced tax incentives, paying a lower tax rate on income.
How is Income Tax Collected? Income tax collection occurs either through withholding at the source or via annual tax returns. Tax is deducted directly from individuals working in the public or private sector by their employers. In the case of companies and self-employed individuals, they submit annual tax returns based on the net income earned during the year.
Tax Returns: Individuals and companies are required to submit annual tax returns to the Tax Authority, detailing all their income and expenses over the year. They must pay the due tax on time to avoid penalties.
Electronic Collection: To facilitate payment and enhance transparency, the Egyptian government has started using electronic systems for tax collection, such as electronic filing of tax returns and electronic payment methods.
Tax Procedures and Permits: Individuals and companies must submit annual tax returns to the Tax Authority. Large companies, in particular, are required to submit audited financial reports to ensure transparency. For individuals, returns can be submitted online to simplify the process.
Recent Amendments to the Tax Law: One of the primary goals of Egyptian law is to improve the tax system and make the collection process more effective and transparent. Key recent amendments include:
- Exemption for Low Income: A mechanism was introduced to exempt individuals with low income from paying tax.
- Enhanced Transparency: Electronic payment and filing technologies have made the process more organized and faster.
- Tax Reductions for Development Projects: Tax reductions were introduced for companies investing in projects aimed at community development and sustainable growth.
Income tax in Egypt has undergone significant amendments, including improving the electronic system, expanding tax exemptions, and providing more facilities for investors and small businesses. These changes aim to improve the efficiency of tax collection and enhance transparency.
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Tax Payment Mechanism:
The Egyptian Tax Authority collects taxes either by direct deduction from salaries or through the submission of annual tax returns by individuals and companies. Individuals and companies are expected to submit accurate tax returns on specified deadlines.
Tax Evasion Penalties: Tax evasion is considered a financial crime punishable by law. Penalties for tax evasion include:
- Financial Fines: Fines may be imposed on individuals or companies that fail to pay taxes or conceal their income.
- Imprisonment: In some cases, penalties may include imprisonment for repeated tax evasion or involvement in collective tax evasion cases.
- Company Closure: Companies that fail to comply with tax laws for extended periods may be shut down.
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Importance of Income Tax for the State and Citizens:
Income tax is a vital source of public revenue, which finances government projects such as education, health, and infrastructure. It also helps reduce the economic gap by imposing progressive taxes, where higher-income groups contribute to funding services that benefit everyone. Additionally, the tax contributes to social justice by providing exemptions and guarantees for certain groups of citizens.