Given the multiplicity of transactions and cross-border businesses, many businessmen and professionals of various kinds often have revenues earned abroad and pay income or corporate tax on those revenues according to foreign laws. Since these revenues are subject to taxation in Egypt if they take Egypt as the center of their industrial, commercial, and professional activities, Law No. 91 of 2005 was keen to avoid double taxation on these revenues.
Foreign Profits Subject to Egypt's Income Tax Credit System in Egypt
- Profits from operations and branches and distributions.
- Gains from dealing in securities obtained by resident companies in exchange for their investments in companies abroad.
- Royalties and rents.
- Interest collected on loans granted abroad.
The Conditions for Deducting Foreign Taxes Paid Abroad from Income Tax in Egypt
- The company must provide supporting documents for the payment of foreign tax on its behalf.
- The deduction of the tax paid abroad should not exceed the tax payable in Egypt, which is determined in accordance with the law.
- The amount included in the deduction system for tax on distributions and gains from dealing in securities should not exceed the direct tax withheld from these amounts.
Tax treatment for Tax credit cases under Law No. 91 of 2005
First: Tax Benefits for Individuals
Law No. 91 of 2005 offers tax deductions for individuals on various types of foreign income, including:
- Business Income: Revenue from commercial and industrial activities of all kinds.
- Freelance Income: Earnings from freelance professions and intellectual property rights.
- Real estate Income: Revenue from owning or renting property.
- Transportation Income: Earnings from transportation activities.
- Investment Income: Dividends and capital gains from securities disposal.
Deductible Foreign Taxes
Individuals can deduct foreign taxes paid on these income sources from their Egyptian tax bill, up to the limit of the calculated tax. This means you can't reduce your tax liability below zero.
Distributions from Resident Entities
Distributions received from Egyptian companies are exempt from taxation for resident individuals, after deducting any related costs.
Important Note
Unlike losses incurred in Egypt (which can be carried forward for five years), foreign tax losses cannot be used to reduce future tax bills.
As stipulated in Article 91 of Law No. 91 of 2005, tax losses incurred abroad are not treated in the same manner as tax losses incurred in Egypt (five-year carry forward) as follows:
"Losses incurred abroad during the same tax period or subsequent periods cannot be deducted from the Egyptian tax base. Also, no offsetting is allowed between profits earned in one country and losses incurred in another."
In accordance with the foregoing paragraph, the calculated tax is determined as follows:
Second: Tax Benefits for Entities
For resident companies in Egypt, foreign taxes paid on overseas profits are educiblefrom their Egyptian tax bill, but with some limitations. Here's a breakdown:
- Deductible Foreign Taxes: Companies can deduct foreign taxes paid on their foreign profits, provided they have the necessary documentation.
- Non-deductible Foreign Losses: Losses incurred abroad cannot be subtracted from the company's Egyptian tax base for the current or future tax periods.
- Foreign Tax Credit Limit: The deductible foreign tax amount cannot exceed the total Egyptian tax liability calculated according to Egyptian law.
In simpler terms, companies can offset some foreign taxes against their Egyptian tax bill, but foreign losses and exceeding the Egyptian tax liability don't qualify for deductions.
The Relationship Between the Income Tax Rate in Egypt and the Countries Where Revenues Are Earned Abroad, and Its Tax Impact
When doing business across borders, it's crucial to consider foreign income or corporate tax rates to maximize tax advantages. Here's why:
- Foreign Tax Limitations: If a foreign tax is higher than the tax you'd pay on the same income in your home country, you can't deduct the entire difference.
- Unused Foreign Tax Credits: Any excess foreign tax credit you can't use to reduce your current tax bill in your home country cannot be refunded or carried forward to future tax years under Law No. 91 of 2005.
In short, understanding foreign tax rates helps you avoid missing out on potential tax benefits.
Conclusion
In conclusion, while the foreign tax credit offers a valuable deduction under Law No. 91 of 2005, independent of tax treaties, a closer look at the local tax regulations of the income-generating country is crucial. Egypt, for example, provides attractive incentives for investment. However, to maximize these benefits within a single tax period, a thorough analysis of exemptions, deductions, and incentives offered by the local tax code is recommended before applying them.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.