2026 Construction VAT Amendments In Egypt

The 2026 Construction VAT Amendments in Egypt abolished the 5% specific tax on construction activities and replaced it, following approval by the Egyptian House of Representatives in June 2025, with the application of the standard 14% VAT rate. The exception to this amendment is limited to the construction and maintenance of places of worship, which remain subject to special tax treatment according to the provisions of the law. This amendment is considered one of the most important structural reforms in Egypt's indirect tax system in recent years, representing a radical shift in the tax treatment of the construction sector, which had long remained outside the full framework of theVAT systemunder Law No. 67 of 2016.

The reform aims to fully integrate the construction sector into the VAT system based on input tax deduction and the tax credit mechanism, achieving greater tax fairness and neutrality while enhancing transparency and compliance efficiency. The amendment also reflects the Egyptian legislator's desire to align the local tax system with international standards applied in countries that use a comprehensive VAT system, where construction activities are considered an integral part of the general VAT system with the possibility of deducting associated input taxes.

The Previous Tax System

Before this amendment, construction activities were subject to what was known as the 5% specific tax on the total value of executed works, without consideration of the cost structure or the amount of VAT-subject inputs. Under this system, construction contractors were not allowed to deduct VAT paid on:

• Construction materials (cement, iron, bricks, etc.),
• Equipment and machinery,
• Subcontractor services,
• Professional and consulting services related to projects.

This resulted in a high effective tax burden on the construction sector, as input VAT was treated as a final cost of the project without the possibility of deduction or refund, which in many cases led to actual double taxation and increased project costs for both the contractor and the end client.

Additionally, this system placed the construction sector outside the traditional VAT framework, resulting in a dual tax system within the same law: a full VAT system based on input tax deduction, and a separate specific tax system that did not allow input tax deduction. This duality led to repeated complexities and disputes with the Tax Authority, particularly regarding the determination of the scope of taxable works, treatment of mixed contracts, differentiation between supply and installation, as well as pricing and contracting challenges, especially in long-term projects.

The New Tax System

The Ministry of Finance issued two ministerial decisions in October 2025, effective from October 24. The first decision expanded the definition of deductible input tax to include costs related to construction, financing, indirect operating expenses, as well as administrative and distribution costs. This enables contractors to deduct VAT on a broader range of costs, provided they maintain accurate accounting records and use electronic invoicing. The second decision defined transitional rules for contracts signed before July 18, 2025, allowing contractors to apply the 14% rate to the full value of the electronic invoice and benefit from input tax deduction, or apply it partially to reflect the old specific tax system, without deducting input tax for that portion. Any renewal or expansion of a previous contract is treated as a new contract, fully subject to the 14% rate with the possibility of input tax deduction.

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Integration into the VAT System

Following the 2025 amendments, the construction sector became fully integrated into the standard VAT system, subjecting it to the same general rules applied to other taxable sectors. As a result, entities registered in this sector became eligible to deduct VAT paid on goods and services related to construction work, including building materials, equipment, and subcontractor services, provided that they comply with tax registration requirements, issue correct tax invoices, and adhere to legally prescribed deduction rules.

This integration strengthens VAT neutrality by ensuring that construction activities are subject to the same deduction and tax credit mechanisms applied in other economic sectors, achieving greater consistency and tax fairness. It also addresses shortcomings of the previous system, particularly the non-deductibility of input tax and the resulting actual double taxation and increased project costs. Consequently, this amendment is expected to positively impact transaction transparency, simplify tax compliance, and reduce tax disputes related to construction activities.

Financial and Operational Benefits

This reform enables contractors to reduce the actual tax burden significantly, especially on projects heavily reliant on materials and services, by allowing input tax deduction instead of treating it as a final cost. It also eliminates tax duplication across the supply chain, enhancing cost efficiency and ensuring that the tax burden is passed on to the final consumer according to the principle of tax neutrality. Similarly, the new system requires companies to comply with electronic invoicing and maintain accurate digital tax records, which supports financial governance, increases transparency during tax audits, and reduces the risk of estimated assessments.

Operationally, input tax deduction improves contractors' cash flows, providing additional liquidity that can be used to finance ongoing projects and accelerate execution. This reform also aligns Egypt's construction sector with international standards and practices in indirect taxation, enhancing the ability of companies to participate in cross-border projects, enter international partnerships, and access external financing instruments, which often require a tax system compliant with international frameworks.

Practical Challenges

Despite the structural advantages of the amendment, practical implementation requires addressing several challenges, including:

• Contracts signed before the amendment:Determining whether they are subject to the specific tax or VAT, especially if they are long-term contracts awarded before the amendment and not fully executed.
• State receivables under the new system:Differences may arise between tax previously collected under the old system and that due under the new system, requiring clear transitional instructions from the Tax Authority.
• Impact of the new system on non-taxable clients: Such as individual buyers in residential projects, who cannot deduct tax, shifting the entire burden to the developer or contractor and potentially raising the sale price.

Conclusion

The transition from the 5% specific tax to the full 14% VAT represents a historic reform in Egypt's indirect tax system. It unifies tax standards, enhances transparency and compliance, and strengthens economic fairness. Success under the new system requires robust accounting systems, careful contract reviews, and clear tax strategies. Companies that adopt these changes early will be better positioned for local and international competition in 2026 and beyond.

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.