DOING BUSINESS IN EGYPT
I. ENTERING THE
EGYPTIAN MARKET
Foreign enterprises wishing to
conduct business in Egypt may do so by establishing a formal, permanent
presence in Egypt. Egyptian law permits foreign investors in Egypt to
establish any of the following types of companies:
1. Limited Liability
Company;
2. Commandite Company
Limited by Shares; or
3. Joint Stock
Company.
A foreign investor may decide not
have a permanent presence in Egypt, instead setting up a branch or
representative office, or appointing a commercial agent to sell and
distribute products in the Egyptian market. Each of these business forms
is discussed in detail below.
II. CONDUCTING
BUSINESS UNDER THE INVESTMENT LAW
The
targeted sectors include: infrastructure; manufacturing and mining;
transport; software and computer systems development and production; medical
services; certain financial services; oil field services; agriculture;
reclamation of desert land; hotels and tourism (Article 1 of the Investment
Law). Investment guarantees and incentives outlined in the Law are limited
to commercial activities falling within these sectors.
The
investment guarantees afforded to qualifying companies include: the
prohibition of nationalization, confiscation and freezing of assets; the
prohibition of governmental interference in the pricing of companies’
products; the right to own buildings and land for project purposes,
regardless of the nationality and place of residence of a qualifying
company’s shareholders/partners; the ability to import all materials
required for construction or expansion of a project without the need for a
special import license or registration in the import register; and the
ability to export products without special licenses or registration in the
export register.
There are many tax incentives
afforded to qualifying companies under the Investment Law, including, inter
alia, 5, 10, or 20 year tax holidays, depending on where the company is set
up; waiver of certain fees and duties; fixed customs duties; and exemption
from tax of certain profits and dividends.
Article
28 of the Investment Law provides that the Council of Ministers (the Cabinet)
may grant and transfer state owned land to companies incorporated under the
Investment Law whose activities are within one of the targeted sectors.
Beyond
investment guarantees and financial incentives, the Investment Law provides
for the establishment of Free Trade Zone Areas including privately run Free
Trade Zones. (Article 29 of the Investment Law).
III. ESTABLISHING A COMPANY UNDER
THE COMMERCIAL COMPANIES LAW
A.
Limited Liability Company (“LLC”)
1.
Formation
A
LCC may be formed with a minimum of two shareholders and a maximum of 50
shareholders. If the number of shareholders should fall below two at any
time, the LCC will be deemed wound up by operation of law. (Articles 59 and
60 of the Ministerial Decision Implementing the Commercial Companies Law.)
There is no minimum Egyptian shareholding required to form a LCC.
The
founding shareholders of the LCC must submit an application requesting
permission to incorporate a LCC. The Ministerial Decision Implementing the
Commercial Companies Law outlines the mandatory provisions that must
be included in the Memorandum of Association.
The
LLC is incorporated once it is registered in the Commercial Register (Article
1 of Law 34 of 1976 governing the Register of Commerce and Article 77 of the
Commercial Companies Law). The LLC must also maintain a Register of
Partners in its head office, which must contain the names, nationalities,
domiciles and occupations of the partners; the number of shares owned by
each partner; the sum paid by each; and the assignment or transfer of shares
and related relevant information (Article 275 of the Commercial Companies
Law).
The
name of the LLC must be derived from the object of the company and may
include the name of one or more of its partners/shareholders. Additionally,
the words “Limited Liability Company” must be included in the name (Article
61of Ministerial Decision Implementing the Commercial Companies Law.)
2.
Capital
The
minimum share capital required to form an LLC is £E 50,000. The capital
must be divided into equal shares, either in cash or in kind, and the value
of each share must be at least £E 100. Each partner/shareholder is liable
to the extent of the value of his shares and no share certificates are
issued (Articles 67; 68 and 69 of Ministerial Decision Implementing the
Commercial Companies Law.)
3.
Management
The management of an LLC
may be vested in one or more managers. At least one manager must be of
Egyptian nationality (Article 281 of the Ministerial Decision implementing
the Commercial Companies Law). The manager(s) must be named in the
Memorandum of Association but need not be a shareholder(s). The manager(s)
may be appointed for a definite term (which must be specified in the
Memorandum of Association) or for an indefinite term. The manager(s) shall
have full authority to represent the LLC vis a vis third parties, unless
such authority is limited or qualified by the Memorandum of Association. A
shareholders’ resolution limiting the authority of the manager(s) will not
be valid unless it is entered in the Commercial Register.
A supervisory board is required
if the LLC has more than ten shareholders of which at least three must be
shareholders. (Articles 120; 121; 122 and 123 of the Commercial Companies
Law.)
4.
Objects
An
LLC may conduct a variety of business activities, with the exception of
insurance, banking, savings, receiving deposits or investing funds on behalf
of others. (Article 5 of the Commercial Companies Law.)
5.
Personnel Requirements
The
LLC is subject to the provisions of the Commercial Companies Law relating to
the employment of Egyptian personnel. Where the LLC’s share capital is £E
250,000 or more, it must distribute 10% of the company’s net profit to its
employees up to a maximum amount equal to the total annual payroll. LLC’s
incorporated under the Investment Law whose objects are among the activities
listed in Article 1 of the Investment Law are exempt form this requirement.
B. Commandite Company Limited by Shares
1.
Formation
Article 3 of the
Commercial Companies Law defines a Commandite Company Limited by Shares (“CCLS”)
as “a company whose capital is composed of one or more shares owned by one
or more joint partners, as well as from shares of equal value subscribed for
by one or more shareholders whose shares are negotiable in the manner
prescribed by law.”
At incorporation, a CCLS
must have at least two founding parties, one of which must be a joint
partner (with unlimited liability). The founding members of the CCLS must
submit an application to the appropriate authority requesting permission to
incorporate the company.
Where the CCLS is incorporated
under the Investment Law, the Investment Law provides certain guidelines
concerning the provisions that must be included in its Memorandum of
Association.
2.
Capital
The minimum share capital
required of a CCLS is £E 250,000 (Article 6(2) of the Ministerial Decision
implementing the Commercial Companies Law). The capital is divided into two
categories: (1) shares owned by joint partners, and (2) shares of equal
value subscribed to by shareholders. The joint partners have unlimited
liability while the shareholders’ liability is limited to the value of their
respective shares (Article 3 of the Commercial Companies Law).
The
Commercial Companies Law does not impose minimum Egyptian shareholding
requirements on the CCLS.
3.
Management
The management of the
CCLS is run by one or more joint partners, called partner manager(s). The
name and scope of such partner manager’s authority must be included in the
Memorandum of Association (Article 110 of the Commercial Companies Law).
A
CCLS must have a Supervisory Board made up of at least three persons, whose
purpose is to supervise the acts of the manager(s). As such, this
Supervisory Board may not be chosen from the partner manager(s) (Article 112
of the Commercial Companies Law).
4.
Objectives
The CCLS is prohibited from
conducting the business of insurance, banking, or savings or investing funds
on other people’s behalf (Article 5 of the Commercial Companies Law).
5.
Personnel Requirements
The CCLS is subject to
the same provisions as the LLC concerning the employment of Egyptian
personnel.
C.
Joint Stock Companies
1.
Formation
Article
2 of the Commercial Companies Law defines a Joint Stock Company (“JSC”) as:
“ . . . a company whose capital is divided into shares
of equal value, which shares are negotiable in the manner prescribed by law.
The liability of a shareholder is limited to the value of the shares
subscribed for by him. The Company name shall be derived from the objects
for which it is to be incorporated and may not include the name of one or
more of the shareholders.”
JSC’s must have at least three founding shareholders (Article 1 of the
Ministerial Decision Implementing the Commercial Companies Law). The name
of the company must refer to the activities it intends to undertake. At
least 25% of the cash equity of the company must be paid up prior to
incorporation. Once the incorporation application is approved by the
authority, and the company is listed in the Commercial Register
incorporation is complete.
2. Capital
The minimum share
capital of a JSC is £E 500,000 if the JSC offers its shares to the public
and £E 250,000 if it is private (Article 6(1) of the Ministerial Decision
implementing the Commercial Companies Law). The capital must be divided
into shares of equal value, with a nominal value of between £E 5 and £E
1,000. All shares must be registered. A shareholder’s liability is limited
to the value of the shares subscribed to by him. Share certificates are
issued in the name of each shareholder.
Upon incorporation or upon
an increase in capital, a minimum of 49% of the share capital must be
offered for one month to the public and Egyptian natural and juridical
persons, unless Egyptian shareholders already hold 49%. The JSC is
permitted to incorporate if, after one month, the JSC is unable to obtain
49% Egyptian shareholding (Article 37 of the Commercial Companies Law).
3.
Management
The JSC is managed by a
Board of Directors. The Board must have an odd number of directors, with
three being the minimum allowed. Juristic persons are allowed to act as
directors, provided that a natural person is appointed as representative to
act on its behalf on the Board. The directors shall hold a term of three
years, except for the initial directors, who are appointed for a term of 5
years (Article 77 of the Commercial Companies Law).
The majority of the Board of
Directors must be Egyptian nationals (Article 92 of the Commercial Companies
Law). This requirement does not apply to JSC’s incorporated under the
Investment Law, whose corporate objects are among the activities specified
in Article 1 of the Investment Law.
If
the JSC is undertaking the management or business of a public utility, the
Minister in charge must approve the appointment of directors to the Board.
Directors
are required to own a specified number of shares, which must be deposited in
an account, where they will remain throughout his tenure, as a guarantee of
his management. The value of the shares must be at least £E 5,000 (Article
91 of the Commercial Companies Law).
4.
Personnel
The
JSC must abide by the provisions of the Commercial Companies Law requiring
the employment of a certain percentage of Egyptian personnel. Foreigners
may be hired if it is impossible to find the requisite number of qualified
Egyptian employees and Ministerial approval is obtained.
IV.
ENGAGING A COMMERCIAL AGENT
A commercial agent must be
either an Egyptian national or an Egyptian juristic entity whose name has
been registered at the Commercial Agents and Intermediaries Register at the
Ministry of Economy and Foreign Trade (“MEFT”). Furthermore, the person/entity
must meet specific characteristics, which are set forth in Article 2 of the
Commercial Agencies Law.
Once
the parties enter into an agency agreement, the agent/intermediary must
register the agreement. The agency agreement must include the territory
covered by the agent, the product or service that is the subject matter of
the agency, the agent’s fee or rate of commission, the currency and mode of
payment of such fees and commissions, and the term of the agreement.
Furthermore, the Commercial Agencies Law requires that each agency agreement
contain a specific undertaking by the foreign principal to inform the
appropriate Egyptian embassy or consulate (in the foreign principal’s home
country) of any amendments to the agreement.
The
agency agreement does not have to be exclusive. The Commercial Agencies Law
does not limit the principal’s right to terminate (or not to renew) a
commercial agency. However, Egyptian law does include the “abuse of rights”
doctrine, under which a court may grant a commercial agent damages for the
principal’s abusive exercise of the right to terminate (or not renew) the
agreement. The provisions of the commercial agency agreement generally will
govern and define the rights of the parties upon termination or renewal.
Principals
must report to the tax department details of payments of commissions made to
commercial agents and intermediaries within one month of each payment and
must adhere to the specific withholding requirements provided for in Law No.
157 of 1981 (“The Income Tax Law”). A foreign company with no presence in
Egypt, however, would not be under any obligation to withhold taxes on
payments made to its Egyptian commercial agent, because the tax regulations
do not have such extraterritorial effect.
V. ESTABLISHING A
BRANCH OR REPRESENTATIVE OFFICE
A.
Representative Office
A
foreign company may establish a, “representation, liaison, scientific, or
other office as long as the sole purpose of such office is to carry out
market surveys or to study the feasibility of production without carrying on
any commercial activity including the activities of a commercial agent”. (Article
173 of Law No. 159 of 1981 hereinafter referred to as the Commercial
Companies Law).
The
representative office must be registered in the Register of the Foreign
Representative Offices kept by the Companies Department at MEFT (Article 316
of the Ministerial Decision No.96 of 1982, implementing the provisions of
the Commercial Companies Law, hereinafter referred to as “Ministerial
Decision Implementing the Commercial Companies Law”), as well as with the
Imports and Exports Authority (Article 21 of Ministerial Decision
Implementing the Commercial Companies Law).
B.
Branch Office
Following approval of the registration application, all foreign companies
conducting commercial, financial, industrial or contracting activities in
Egypt must register their office in the Commercial Register. Once
registered at the Commercial Register, the foreign branch must also be
registered in a centralized register of foreign companies kept at the
Commercial Companies Department.
Article
170 of the Commercial Companies Law provides that branch offices are subject
to certain provisions of the law pertaining to the percentage of Egyptian
personnel that must be employed.
Article
313 of the Ministerial Decision Implementing the Commercial Companies Law
provides that the branch office must distribute at least 10% of its net
profits to its employees, up to a maximum of the total annual payroll.
The
branch office is subject to corporate income tax at the rate of 40% on
profits that are generated from its operations in Egypt. (Branches of
foreign companies and consulting engineers working in new communities and
reconstruction projects enjoy a tax holiday from certain Egyptian taxes.)
VI. THE COMMERCIAL REGISTER
LAW
The process of
registration, be it for agents or companies, is governed by the Commercial
Register Law. The basic rule is that anyone carrying on a commercial
activity must register in the Commercial Register.
The Commercial Register
Law provides that all registrations must be renewed every 5 years. Once a
person, company, or partnership is registered, it must put its trade name,
place of registration and registration number on the front of its premises
and on all its correspondence (Article 5 of Commercial Register Law).
The
penalties for violating the provisions of the Commercial Register Law are
set forth in the Ministerial Decision Implementing that Law and range from a
fine of £E 10-100 to three months - two years imprisonment and/or a fine
between £E 100 - £E 500. (Articles 18 and 19 of the Ministerial Decision
Implementing the Commercial Registry Law).
VII.
PUBLIC SECTOR PROCUREMENT
Procurement
by the Egyptian Government and its agencies is governed by the Tenders and
Auctions Law No. 90 for the year 1983 (hereinafter referred to as the
Tenders Law). Article 1 of the Tenders Law provides that government
procurement of movables, services, and contracts for public works and
transportation is to be conducted by way of public tender advertised for in
accordance with the provisions of this law. Article 1, however, carves out
an exception to this general rule and provides the procuring ministry or
agency with the discretion, under specific criteria, to procure by way of:
(i)
limited tender;
(ii)
local tender;
(iii)
sole sourcing; or
(iv)
direct purchasing.
Article 59 of the Tenders Law
provides that the tenderer (whether a natural or corporate person) for a
public tender must be a resident of Egypt or must have an Egyptian agent.
It is worth noting however, that
the Cabinet approved a new tenders law. One of the aims of the law is to
make the awarding of public sector contracts more transparent. In addition,
it is believed that criteria for awarding the contracts will include both
cost of production and the attainment of the requisite technical
standard. However, the law maintains the preference for local bidders,
whereby a local bidder will be considered to have the lowest bid so long as
its bid is not more than 15% higher than that of a foreign bidder.
VIII.
MINISTRY OF DEFENSE PROCUREMENT
A breach of the MOD’s
policy would probably be characterized as a contractual breach of an
administrative contract, assuming the MOD includes a certificate or
provision in the contract to the effect that commissions and fees have not
been included in the contract price. The consequences of such a breach
could range from deducting the value of the commission or other compensation
paid in violation of its policy to annulling the contract or having it
completed at the contractor’s expense. Serious violators may also have
their names stricken from the list of approved suppliers.
IX.
TAXATION
Egypt levies a 40%
corporate income tax on the annual net income of LLCs, CLLCs, JSCs and
branches of foreign corporations “engaged in trade or business” in Egypt, or
otherwise with Egyptian source income. In addition, all entities subject to
the corporate income tax must pay a supplemental tax of 2% (on net annual
income exceeding £E 18,000).
Article eight of the
US-Egyptian income tax treaty states that industrial and commercial profits
of a resident of one of the contracting states shall be exempt from tax by
the other contracting state unless the resident has a permanent
establishment in the latter country. All income attributable to the
permanent establishment is considered Egyptian source income.
|