In the constantly changing global tax environment, it is imperative for businesses that operate internationally to remain well-informed about the most current updates in tax regulations. Egypt, a nation celebrated for its advantageous geographical position and flourishing economic zones, has recently introduced significant modifications to its transfer pricing regulations, emphasizing the importance of businesses staying informed about these changes. This article will delve into the crucial elements of these updates and how they affect companies engaged in transactions with affiliated entities in Egypt and the affiliated onshore entities engaging with free zone companies located in Egypt in the context of the recently enacted Transfer Pricing Regulations No. (78/2023).
Dividends Redefined: A Key Regulatory Updates
One of the significant clarifications introduced by the subject regulations is the exclusion of dividends from being categorized as related party transactions. This clarification is of paramount importance as it distinguishes dividends from other financial transactions, subjecting them only to distinct tax treatment at a fixed rate of 10% under specific conditions.
For multinational companies operating within free zones (FZ) in Egypt, a major change has been introduced regarding the submission of the master file. In cases where the parent company is located in a free zone, subsidiaries are now required to prepare and submit the master file in conjunction with the local file. This change simplifies the reporting process and ensures that all relevant information is readily available to tax authorities.
As the regulation did not impact the mandatory requirement introduced by Law No. 206, Article No. 14 of the executive regulation, the FZ company remains obligated to solely submit the country-by-country report (CBCR).
Joint Ventures disclosure
The issued regulation involving joint ventures (JV) where the company is associated with one of the two companies in the joint venture and has been assigned the work, the guidance provides for this arrangement to be disclosed in both the tax return and the local file. This requirement depends on the company's basic percentage of participation in the joint venture, which ensures transparency in the joint venture arrangements.
Transactions with related parties
Moreover, the regulations classified those payments made on behalf of related parties, as well as any compensation linked to these payments, will be categorized as related party transactions. Consequently, these payments will now come under the purview of transfer pricing regulations, emphasizing the imperative of meticulous documentation and adherence in such instances.
local file Submission
Specific clarifications along with examples confirmed the practices local filing submission. Companies should file locally within two months of the original tax return submit date. Additionally, if an extension is filed, the local file must still be made based on the filing date of the principal tax return (e.g., Withing two months).
Furthermore, if an amended declaration is filed within 30 days of the date of the principal declaration, companies must ensure that the local file matches the updated information. Timely local file is critical to maintaining compliance with transfer pricing regulations and avoiding potential penalties.
Despite the regulation is quite generous in providing examples, it overlooks a practical other scenario in which a taxpayer submits both an extension request (by 30 June) and an amended tax return within one month of the extended principal CIT deadline (31 July). In my opinion, and in line with the same reasoning, the deadline for the LF should also be extended to the end of September; however, this understanding has not been confirmed yet by the Tax Authority
The recent updates to Egypt's Transfer Pricing Regulations (Issue No. 78/2023) have introduced several key changes that affect businesses operating internationally, especially those engaged in transactions with affiliated entities in Egypt or affiliated onshore entities dealing with free zone companies in Egypt. These changes are important to be aware of. First and foremost, the redefinition of dividends as non-related party transactions is a significant development. This new clarity in categorization has far-reaching implications for businesses involved in dividend-related activities. The regulations have also expanded the scope of related party transactions to encompass payments made on behalf of related parties and associated compensations. This expansion emphasizes the need for meticulous documentation and compliance in such instances. It's essential for businesses to stay informed about these updated regulations because compliance is crucial in the ever-evolving global tax landscape. Adhering to these changes will not only help companies avoid potential penalties but also contribute to transparent and fair business practices in Egypt.
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.