Value Added Tax on Machinery

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 Equipment in Egypt: Scope, Exemptions, and Practical Implications

Value-Added Tax (VAT) is one of the indirect taxes imposed by the state on goods and services at various stages of their circulation, from production to final consumption. One of the topics that raises many questions in practice is the tax treatment of machinery and equipment: Are they subject to VAT? Are they deductible? Are there specific exemptions? These are the issues we aim to clarify in this article.

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1. What Is Value-Added Tax?

VAT is an indirect tax applied to all goods and services traded locally or imported—except those explicitly exempted by law. It is levied on the added value at each stage of the production and distribution process until the final consumer.

In Egypt, VAT is governed by Law No. 67 of 2016, which replaced the former Sales Tax Law No. 11 of 1991. The VAT system is considered fairer and more efficient because it covers all stages in the supply chain and prevents double taxation.

Any individual or legal entity engaged in an economic activity (industrial, commercial, professional, or service-related) and whose annual turnover exceeds EGP 500,000 is required to register with the Tax Authority and apply VAT to its transactions.

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2. Definition of "Machinery" in the Tax Context

In the context of VAT, “machinery” refers to:

All mechanical, electrical, electronic, or digital equipment used directly or indirectly in the economic activity of an enterprise, whether industrial or service-based.

Examples include:

  • Production Machinery: Manufacturing, packaging, cutting, printing machines, etc., used directly in industrial production.
  • Supporting Service Equipment: Compressors, industrial cooling systems, power generators.
  • Material Handling Equipment: Cranes, conveyor belts, industrial elevators, integrated production lines.

Note: Passenger vehicles and transportation means are not considered tax-exempt “machinery,” even if used for business purposes.

3. Are Machinery and Equipment Subject to VAT?

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Under Egypt’s VAT Law No. 67 of 2016, the general rule is that all goods and services are subject to VAT at 14%, unless specifically exempted by the law or its schedules.

1. Are machinery and equipment taxable?

Yes. Machinery and equipment fall under the scope of VAT and are subject to the standard 14% rate unless exempted explicitly by law.

2. When are machinery and equipment exempt?

Item No. 26 of the exemption schedule attached to the VAT law provides:

“Machinery, equipment, and devices necessary for industrial production purposes are exempt, excluding passenger vehicles.”

Thus, machinery used directly in industrial production (e.g., manufacturing machines, production lines) is VAT-exempt.

However, machinery used for non-industrial purposes (e.g., office, hotel, or administrative use) remains subject to 14% VAT.

3. Exemption vs. Deductibility

  • Exemption: No VAT is charged on the invoice.
  • Deduction: VAT is charged but can be claimed back by the registered buyer if the purchase supports VAT-taxable activity.

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4. Conditions for Exemption of Industrial Machinery

To qualify for the VAT exemption:

  • The machinery must be essential and used directly for industrial production.
  • The business must be engaged in industrial activity (e.g., factories, production workshops).
  • Supporting documents must be submitted (e.g., industrial license, production facility registration).
  • Passenger vehicles and non-production tools are not eligible for exemption.

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5. Non-Exempt Cases

The following machinery is not VAT-exempt:

  • Equipment used in commercial or non-industrial service activities (e.g., hotels, real estate firms).
  • Office and administrative machines (e.g., printers, copiers).
  • Internal transport tools unless used directly in production lines.
  • All types of passenger vehicles, regardless of their business purpose.

Can VAT be deducted if no exemption applies?

Yes, if:

  • The buyer is VAT-registered.
  • The machinery is used in a VAT-taxable activity.
  • The invoice meets legal criteria (supplier’s VAT registration number, itemized VAT, etc.).

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6. Accounting and Tax Treatment

1. For Taxable Machinery

  • The asset is recorded at purchase price plus VAT.
  • The VAT is deductible in tax returns if related to VAT-liable activity.
  • VAT is not part of the asset’s capitalized cost.

2. For Exempt Machinery

  • The asset is recorded at net price only (without VAT).
  • No VAT is charged, deducted, or refundable.

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7. Practical Example

A VAT-registered industrial company purchases a manufacturing machine for EGP 1,000,000 from a VAT-registered supplier.

Scenario A: Machine for industrial production

  • Price: EGP 1,000,000
  • VAT: EGP 0 (Exempt)
  • Total Invoice: EGP 1,000,000
  • No VAT is applied.

Scenario B: Machine for administrative use

  • Price: EGP 1,000,000
  • VAT: EGP 140,000
  • Total Invoice: EGP 1,140,000
  • VAT may be deductible if used in a VAT-liable activity.

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8. VAT Exemption ≠ Customs Exemption

Many confuse customs exemption with VAT exemption on imported machinery. However, each is governed by different laws:

Customs Exemption

Granted under Customs Law No. 207 of 2020 and applies to:

  • Investment-licensed industrial projects.
  • National or strategic projects.
  • Governmental or charitable aid programs.

Governed by VAT Law No. 67 of 2016. A product may be customs-exempt but still subject to 14% VAT unless exempted explicitly under the VAT law.

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9. Recommendations for Accountants and Businesses

For Accountants and Tax Consultants

  • Carefully review contracts and invoices for clarity and legal compliance (including VAT registration, tax amount, etc.).
  • Confirm if machinery is used directly in industrial production.
  • Keep supporting documents (invoices, industrial licenses) to validate tax treatment during audits.
  • Engage with the Tax Authority to clarify unclear or special-case scenarios.

For Companies and Business Owners

  • Consult a tax advisor before purchasing or importing machinery—especially for non-industrial or mixed-use activities.
  • Do not rely solely on customs exemption to justify non-payment of VAT.
  • Register for VAT upon reaching the turnover threshold to benefit from input tax deductions.
  • Ensure that suppliers are VAT-registered and issue compliant invoices.

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VAT on machinery is a critical topic for industrial companies. The law grants exemptions to support local manufacturing but requires strict compliance with specific conditions. Understanding the legal and practical aspects of these provisions is essential for full compliance and tax efficiency.

Interested in a beginner-friendly explanation of VAT in Egypt?

Read our article:

What is Value-Added Tax (VAT) in Egypt?

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