Alternative Funds 2023 Comparisons

The alternative funds industry constitutes one of the Egyptian economy’s cornerstones. It has been growing continuously since 2018, especially following the significant amendments made to the Egyptian Capital Market Law (ECML) and its Executive Regulations in that year.

Many alternative investment funds are operating in the Egyptian market, adopting a wide array of investment policies, patterns, models and sizes to enlarge both corporate and individual investors’ growth, which positively impacts the Egyptian economy. The Egyptian pound’s devaluation has been counted as a competitive incentive for foreign investors to invest and expand their business in Egypt.

Further, the Egyptian state has recently become involved in alternative investment funds activity, establishing its first sovereign fund, namely The Sovereign Fund of Egypt (TSFE), which is by far the largest alternative investment fund in Egypt. The primary aim of the TSFE is to sustainably develop the enormous state-owned assets and natural resources  to maximise the growth of the value of such assets. The TSFE’s primary strategy is to use the Egyptian state’s utilised and unutilised assets to co-develop them with private investors, to achieve high growth of returns.

To this end, TSFE adopts various investment models and patterns, mainly aiming at operating through sub-funds and affiliate companies to invest in specific/specialised sectors or projects, with private investors. TSFE primarily targets domestic investment by establishing sub-funds with specialised purposes/activities. The sectors prioritised for investment by the TSFE are food and pharmaceutical manufacturing, healthcare services, financial services, financial inclusion, infrastructure, tourism, real estate and antiquities development.

The Role of the Financial Regulatory Authority

Accordingly, a sub-fund of the TSFE has recently been established with the purpose of investing in various industries including but not limited to urban development, tourism support and antiquities development, non-banking financial services, digital transformation, financial inclusion, financial technology, including insurance and reinsurance services, real estate financing, financial leasing, commercial factoring, microfinancing and securitisation.

The primary legal and regulatory framework governing the alternative funds industry (including all the relevant parties) is the Egyptian Capital Market Law, its Executive Regulations, the Egyptian Financial Regulatory Authority (FRA) and its decrees/circulars issued in this regard.

The recent amendments to the ECML and its Executive Regulations have facilitated and provided for multiple funding mechanisms. The legislator has entitled the FRA to manage the entire regulatory process governing private equity funds activity in the Egyptian market. It is worth highlighting that private equity funds can also undertake venture-capital activity, subject to compliance with the FRA requirements in this regard. Further, the FRA has taken the unprecedented step of qualifying the financial institutions, including alternative investments funds, to utilise their assets in several projects, granting them the ability to list the shares of these projects on the Egyptian Stock Exchange (EGX) as an additional funding platform for their future projects.

It is anticipated that the recent amendments will lead to a flourishing of private equity practice in the Egyptian market and will generally benefit alternative investment funds activities at all levels.

The Executive Regulations of the ECML list various types/categories of alternative funds that can be established in Egypt – such as open-end funds, closed-end funds, index funds, real estate investment funds, income funds, money market funds, charitable funds and Sharia-compliant funds. All these alternative funds are common and operative in Egypt. Such alternative funds are atypical in various aspects – for example, prospectus/disclosure memorandum, target investor, investment policies and exit strategies.

According to the recent amendment made to Article 142 of the Executive Regulations of the ECML, an investment fund shall be in the form of a joint stock company (JSC), with an issued and paid-in capital of not less than 2% of the size of the investment fund with a maximum of EGP5 million or its equivalent in hard currency. It is to be noted that it may increase its issued capital to exceed the said maximum through increases subsequent to incorporation. Aside from this rule, banks, subject to the prior approval of the Central Bank of Egypt (CBE), as well as insurance companies, subject to the FRA’s prior licensing, may undertake investment funds activities, solely or with a third party.

That said, it is worth noting that, during the years 2021 and 2022, the FRA issued several decrees regulating the procedures that banks must undertake prior to engaging in investment funds activities. Banks have shown a significant interest in this field, which is also an indicator of its profitability.

The Articles of Association of the funds shall contain certain data/information to be provided in the templates pre-set by the FRA. This data/information includes the fund’s name, type, duration, address, founders and their respective shareholding percentage, board members and their respective authorities, capital and its increase events, together with its maximum ratio relative to the money for which the securities will be issued, auditors, disclosure requirements of the related parties, liquidation events and manner, custodians’ obligations and secondary offering procedures as to the closed-end funds.

Principally, all types of funds are governed by the ECML, together with its Executive Regulations, and regulated by the FRA and its decrees issued in this regard.

Generally, the ECML requires the fund’s disclosure/prospectus memorandum to allocate the investment ratios, subject to the minimum and maximum investment ratios provided under those regulations, and subject to approval by the FRA, depending on the type of the invested asset(s). For instance, the fund’s invested ratio in purchasing securities of one company shall not exceed 15% of the fund’s net assets, as well as 20% of the total securities of that company.

Regulatory Approvals for Funds

If a bank will establish the fund, the following documentation must be satisfied:

• approval of the CBE;
• a draft prospectus memorandum;
• the management agreement entered into between the bank establishing the fund and the investment manager;
• a certificate from the auditor, evidencing the amount allocated from the bank to undertake the investment fund activity;
• a declaration from the auditors, accepting the auditing on the fund’s accounts, along with the names and number of other funds being audited by those auditors;
• a statement issued by the investment manager, containing the number, names and size of any other fund being managed by that investment manager;
• a statement issued by the bank, appointing the auditors of the fund, from those who are listed at the FRA; and
• a payment receipt for the FRA fees.

If the fund is to take the form of a JSC, the latter having first been established, the following documentation shall be satisfied:

• a draft prospectus memorandum;
• the management agreement entered into between the bank establishing the fund and the investment manager;
• a bank deposit certificate in the amount allocated from the company to undertake investment fund activity;
• a declaration from the auditors, accepting the auditing on the fund’s accounts, along with the names and number of other funds being audited by those auditors;
• a statement issued by the investment manager, containing the number, names and size of any other fund being managed by that investment manager;
• a statement issued by the bank, appointing the auditors of the fund, from those who are listed at the FRA;
• a payment receipt for the FRA fees; and
• a statement issued by the fund company, specifying the person in charge of finalising the procedures before the FRA.

Once all documentation is satisfied, the FRA further scrutinises the documents and approves the prospectus memorandum, within five business days as of the documents’ collection date, unless the FRA requires further clarification.

Recent Amendments to Regulatory Regime

Facilitation of licensing procedures

The FRA has recently been inducing investors to incorporate alternative investment funds, as it attempts to further facilitate the licensing procedures of alternative investment funds. To this effect, the FRA has introduced several amendments to the regulations governing alternative investment funds. For instance, the amendments now permit Egyptian private legal entities, aside from those subject to the FRA’s supervision, to undertake investment funds activity. Accordingly, banks can engage in investment funds activity, whether directly or indirectly and whether solely or with a third party, subject to (i) the approval of the CBE together with the FRA, and (ii) the purpose of the bank under its statutes, where the investment funds activity shall be explicitly provided, amongst other activities. Also, the amendments provide a set of rules that shall be considered and satisfied by a legal entity in order to obtain the FRA’s investment fund licensing, inter alia, as follows:

• to be solvent and non-bankrupt;
• to be operative with respect to its principal activity, other than the investment fund activity, for at least three years preceding the application for the investment funds licence;
• to have prior approval of the entity’s extraordinary general assembly on undertaking the investment funds activity, whether solely or with a third party; and
• the shareholders’ equity shall not be less than EGP50 million, or the equivalent in foreign currency, according to the last audited financial statements.

Funds’ supervisory committees

Further, a legal entity licensed to undertake investment funds activity is committed to appointing a supervising committee, monitoring the investment fund. The members of that committee shall not exceed five members, including one representative of each entity. In contrast, the remaining members shall be independent and experienced per the rules of expertise and competence, as issued by the FRA. Moreover, alternative investment funds are now permitted to invest in various financial instruments (eg, assignment of futures), subject to specific legal and financial requirements, inter alia, as follows:

• the assignment shall be effective and convey the assigned portfolio (ie ownership, liabilities, rights, characteristics, warranties); and
• the contracts, subject to the assignment, shall include the assignor’s right to sell/factor the debts.

Authorised sectors of investment

With respect to the characteristics of an investment, the FRA further allows alternative investment funds to engage in some activities related to the development of specialised investment sectors, inter alia, agricultural and industrial development sectors, and any related or supplementary activities, in accordance with the investment policy of the alternative investment fund. The engagement in such activities can be undertaken through either direct investment in the assets of the target projects or indirectly via purchasing the shares issued by the companies operating in those target projects. Accordingly, the investment policy of the alternative funds investing in specialised sectors shall disclose in its relevant disclosure memorandum certain matters, inter alia:

• the specialised target sectors and the relevant type of investment; and
• the ratio and level of diversification of those target sectors and investments pro rata the total assets of the alternative investment fund; and
• disclosure of the specialised sectors as targeted for investment, and its geographical distribution.

Specific regulations imposed on investment funds

The board of directors of the alternative fund, or its supervising committee, as the case may be, shall approve all related party contracts or resolutions to which the alternative fund is a party.

Further to the foregoing limitation, there are additional limitations set out by the FRA with respect to the alternative investment funds specialised in financing the microfinance activity in dealing with fungible assets, financial instruments, securities via purchasing microfinance portfolios from the entities first licensed by the FRA to undertake microfinance activities. The licensing of dealing with financial instruments is only granted to closed-end alternative investment funds, whose securities were offered in a private placement, provided that the principal fund shall have the purpose of dealing in the financial instruments through financing the entities licensed by the FRA to undertake microfinance activities. For that purpose, the alternative fund’s investment policy enclosed in the prospectus/disclosure memorandum, as the case may be, by virtue of which the investment manager may purchase microfinance portfolios from the entities licensed by the FRA, shall in particular entail:

• the minimum of collaterals given by the assignor to the alternative investment fund, under which the assignment agreement is to be decided, whether accepted or not;
• the permissible concentration ratio to accept assignment from the assignor;
• determination of the credit policy adopted by the investment manager, which shall be the basis of accepting the assignment of the portfolio(s) to the alternative investment fund, particularly the limits and ratios allowed for the investment manager to accept the non-recourse assignment agreement;
• the risks associated with the alternative fund’s investments (eg, credit risk, concentration risks in accordance with the ratios specified by the investment policy, cash-flow risks, fluctuation of the return-on-investment risk and profitability risks); and
• the assignor and assignee’s obligations, along with the mechanism of performing the obligations of both of these.

The alternative investment fund is also allowed to direct a portion of its funding to the other financial instruments for cash-flow purposes, provided that those other financial instruments shall be disclosed under the disclosure memorandum.

As for the investment limitation of real estate alternative investment funds (REIFs), investment in the earning assets – whether real estate assets or financial assets related to the real estate activity – in ratio to the REIF’s total assets shall be 70%, not exceeding 95%, as imposed by the FRA. The latter also defines the earning assets that generate recurrent revenue, as follows:

• real estate – earning assets can be the real estate assets that are owned, built or developed (whether directly or indirectly), which generate or are expected to generate returns (whether by lease, management or exploitation, and whether those real estate assets are, for example, for housing, touristic, commercial, retail or industrial purposes); and
• financial assets – the financial assets related to the real estate activity, which generate recurrent revenue, include:
1. securitisation bonds that are issued in lieu of the financial rights portfolio of the real estate loans;
2. bonds issued by the real estate financing companies secured by the real estate financing loans portfolio;
3. securities listed on the EGX, provided that any such securities must be issued by a company of which the majority of assets are real estate assets, or issued by a company operating in a field pertaining to the real estate development;
4. shares in Egyptian non-listed companies, 80% of whose assets are real estate assets, in which case the REIF’s ownership ratio in that company’s capital shall not fall below two thirds at any time; and
5. securities issued by the other REIFs.

In all cases, the REIF’s investments in deposits at call and treasury bills shall not exceed 30% of the REIF’s total assets.

Disclosure requirements under the EMCL, its Executive Regulations, or FRA decrees, are extensive and depend on the disclosing entity (eg, the alternative fund, its investment manager and the related party) and phase of the disclosure. There follows a brief summary of the critical disclosure requirements and reporting.

Firstly, in the case of an initial public offering or private placement, the prospectus memorandum shall contain, for example:

• the fund’s name, type, duration, address, licence number and the date of founding entity (if it exists);
• the fund’s purpose, investment policy and the addressed investor;
• the fund’s size, events of increase, founders’ data and their respective shareholding percentage;
• introducing the risks of being encountered by the fund and its management mechanism;
• periodical disclosures required from the related parties;
• the ratios of investment in each kind of the fund’s assets; and
• the fund’s events of liquidation.

Secondly, the fund’s board of directors or the founding entity (as the case may be) shall update the disclosure memorandum on an annual basis, in the case of listing the securities at the EGX, or in the event of changing any of the disclosure memorandum’s articles, which shall ultimately be approved by the FRA, and then disclosed to the securities holders and the EGX. As for the mandatory tender offering (MTO), the announcement of the MTO can be published/disclosed, subject to the FRA’s approval.

The alternative funds tax regime lies in the Egyptian Income Tax Law No 91 of 2005 and its Executive Regulations (collectively, EITL). The EITL exempts certain investment funds incorporated under the ECML from taxation. This exemption applies to specific returns on investment, as follows:

• dividends of investment funds whose investments in securities and other debt instruments are not less than 80%;
• profit distribution of holding funds whose investment is limited to the aforementioned funds;
• profit distribution received by those funds after adding 10% of the value of the distributed profits to tax deductibility in lieu of the non-deductible costs;
• a return on investment in the money market funds;
• a return on the bonds listed in the stock exchange (without the treasury bonds); and
• profits of the investment funds whose activity is limited to monetary investment only.

Other returns/profits will be subject to ordinary taxation, as applicable under the EITL. In all cases, it is highly advisable for the investor to consult with a tax adviser on the tax implications with respect to the establishment of an alternative investment fund.       

According to Article 160 of the Executive Regulations of the ECML, the open-end funds and the alternative investment funds that invest in money markets are prohibited from borrowing loans except for meeting the requests of return, subject to the following conditions:

• the loan term shall not exceed 12 months;
• the loan value shall not exceed 10% of the value of the existing securities at the date on which the loan request is submitted; and
• due care is exerted in obtaining the loan on the best market terms and conditions.

The aforementioned Article provides for an exception for private equity funds, real estate investment funds and venture capital funds; these funds can borrow up to 100% of the paid-in amount of the total securities or the book value of the fund, whichever is the lesser, and within the parameters stated under the prospectus memorandum or the disclosure memorandum. On a related front, it is worth noting that private equity funds can provide financing for non-banking financial services companies, constituting a new financial mechanism for investors through subscribing to investment securities issued by funds engaging in other financial instruments(s).

Under the new CBE Law No 194 of 2020, repealing the old CBE Law No 88 of 2003, a new chapter has been added addressing financial technology, including cryptocurrencies and digital finance. The law is consistent with the Egyptian state vision of cashless transactions in the country. As such, the investment rules for alternative funds to invest in such non-traditional assets have yet to be observed. Although litigation funding has been witnessed in a few cases, it is not yet common in Egypt. Cannabis-related investments (ie, investments through licensed companies that are engaged in the research, development, distribution and sale of cannabis for medical uses) are not observed in the Egyptian market.

The ECML’s Executive Regulations allow diversification of the fund’s assets, subject to its type and its investment policy as approved by the FRA. To this end, the use of subsidiaries for investment purposes is commonly used in the case of private equity funds models, as the PE fund can use a special-purpose vehicle for a specific industry.       

An investment manager must be an Egyptian capital corporation (ie, a company limited by shares or a JSC), with a minimum paid-in capital of EGP5 million. An investment manager shall be licensed by the FRA to operate as an investment manager.

The fund must have a legal presence in Egypt. The Executive Regulations of the ECML require the minimum number of board members of the board of directors of the fund to be three, with the maximum being 11. The majority of the board members shall be independent (eg, a natural person who is not an executive, a shareholder of the fund, the fund’s related parties, a service-provider – directly or indirectly). As to the private equity funds, the investment manager shall be the general partner. The Executive Regulations of the ECML also determine the role of the board of the investment funds.

According to the ECML, its Executive Regulations and FRA decrees, the service provider (eg, custodian) shall be Egyptian and licensed by the FRA. As for the money laundering reporting and compliance, the manager must maintain certain internal committees emanating from the manager’s board of directors, such as audit, risk and governance committees. Furthermore, generally, the fund shall enter into an agreement with a management services company, whereby the latter shall be obliged to undertake a set of tasks and responsibilities, including periodic evaluation of the alternative fund’s security, as well as retaining all documents/securities related to the alternative fund’s assets, in particular:

• ownership agreements of the alternative fund’s investments, other than securities;
• agreements related to the management of the alternative fund’s assets;
• licensing and administrative approval(s) necessary to establish and operate the alternative fund’s projects;
• loan and mortgage agreements related to the alternative fund’s assets;
• the investment committee’s resolutions of the investment manager; and
• an evaluation report prepared by the evaluation experts.

Furthermore, in 2021 the FRA issued a decree whereby it authorises financial institutions (including investment funds) to appoint an anti-money laundering officer, provided they have been trained by the FRA to this effect.

Non-local service providers (eg, administrators, custodians) are not allowed to operate in Egypt unless they have a legal presence in Egypt. Accordingly, the legal presence will trigger the obligation of registration before the FRA.

During the past several months, the FRA has granted licences to numerous newly established funds in Egypt, making the total number of investment funds in Egypt approximately 122 growth investment funds, focusing on medium-sized enterprises and family businesses. Their main function is to act as agents for growing businesses, and simultaneously foster and monitor expansion to ensure a sustainable future for such businesses. Moreover, the CBE Law is introducing a set of rules governing financial technology, which will be fully enforceable upon the issuance of its Executive Regulations. As such, a reflective response by the FRA, imposing further regulation of funds investments in both industries, is anticipated to ensure more growth in investment funds.

While the majority of promotors and sponsors of alternative funds are considered to be local financial institutions or local entities, the Egyptian market has recently witnessed the increased appetite of promoters and sponsors from the Gulf area and Europe to participate in the establishment and promotion of alternative funds, backed by the FRA’s efforts to facilitate the licensing and establishment procedures thereof.        

An investment manager shall be a capital corporation (ie, a company limited by shares or a JSC), with a minimum paid-in capital of EGP5 million. An investment manager shall be licensed by the FRA to operate as an investment manager. Most investment managers in Egypt adopt the JSC structure.

The regulatory regime of investment managers does not vary from the legal regime governing alternative investment funds, as all are governed by the ECML and its Executive Regulations, as well as the FRA decrees/circulars issued in this regard.

Under the ECML and the FRA decrees issued with respect to obligations of investment manager(s), the latter has certain obligations to perform, such as concluding a technical service agreement with a specialised company in the target investment/project, where such a company undertakes management and execution of the technical aspects related to the alternative fund’s projects. Furthermore, the FRA obliges the investment manager(s) to retain all documents related to the assignment of the financial portfolio in a bank licensed to act as a custodian for the purpose of protecting the rights of securities holders. Further, the investment manager(s) is obliged to:

• set the credit policy, subject to the approval of the alternative fund’s board of directors or the supervisory committee, as the case may be;
• build up a system for managing risks and monitoring the collection of instalments of future financial rights portfolios; and
• prepare a feasibility study for each project in which the alternative investment fund intends to invest, including in particular financial, technical, marketing aspects and expected cash flows.

With respect to investment in microfinance portfolios, when purchasing the microfinance portfolios from the entities licensed by the FRA to undertake microfinance activities, the investment manager shall:

• verify the compliance of the assignor with financing parameters as stipulated by the relevant decrees issued by the FRA;
• review the periodical supervisory reports prepared by the assignor, as submitted to the FRA;
• ensure that the assigned microfinance portfolio is effective and assume responsibility for conveyance of ownership, liabilities, rights, characteristics and warranties;
• ensure that the assigned agreements (constituting the financing portfolio) are not subject to repayment acceleration at the time of assignment;
• ensure that all documents related to the assigned portfolios are properly assigned to be kept with a custodian licensed by the FRA;
• provide electronic integration with the assignor(s) of the microfinance portfolios so that the investment manager can engage with the electronic loan follow-up system created by the assignor(s) of the portfolios;
• follow up, during the assignment process, on the portfolios assigned to the alternative investment fund via the electronic loan follow-up system created by the assignor(s);
• set out a risk-management system related to the portfolios assigned to the fund to be certified by the alternative fund’s board of directors; and
• prepare a quarterly report to be submitted to the alternative fund’s board of directors, detailing the investment manager’s performed business attached to the fund’s periodic financial statements.

Aside from the disclosure requirements imposed by the ECML and its Executive Regulations with respect to ownership of the listed companies on the EGX, the alternative fund’s manager is required under the ECML and its Executive Regulations to disclose particular items to the investors, including the following:

• bi-annual and annual reports on the alternative fund’s performance, particularly as related to the fund’s investments, returns and accurate financial position;
• the alternative fund’s financial statements and its auditors’ report; and
• any other material information/events that affect the fund’s activity and financial position.

Similar to the alternative investment funds, the tax regimes applicable to the alternative investment fund manager are mainly provided under the EITL. As such, the investment manager shall be subject to the corporate income tax regime under that law.

The EITL provides for the cases where the “permanent establishment” of the manager will be taxable under that law, as follows:

• the manager is incorporated pursuant to the Egyptian law;
• the manager’s headquarters (or de facto headquarters) is in Egypt;
• the ownership of the Egyptian state or a public juristic person exceeds 50% of the manager’s capital;
• Egypt is the country where all the daily management resolutions of the manager are resolved;
• Egypt is the country where the board/manager meeting of the manager is convened;
• Egypt is the country where at least 50% of managers/board members of the manager are residing; and
• Egypt is the country where the partners/shareholders, owning 50% of the manager’s voting rights/capital, are residing.

The carried interest is subject to the corporate income tax imposed by the EITL. To this effect, the carried interest is taxable under the EITL at a fixed rate of 22.5%.

In principle, all alternative investment funds are required to appoint a management service company, licensed by the FRA. Further, and depending on the alternative fund’s purpose, and subject to the FRA’s approval, the investment functions/operation can be outsourced. For instance, in the case of real estate investment funds, a real estate developer is required, and hence can be outsourced. The FRA allows the investment manager(s) to seek the assistance of specialised expertise, including the periodic evaluation of investment security, to determine the indicative price of any such investment security.

The investment manager shall be an Egyptian juristic person (see 3.2 Legal Structures Used by Managers). Non-local manager(s) cannot operate in Egypt. In the event that a non-local manager opts to operate in Egypt, that manager will have to secure a legal presence satisfying the requirements mentioned in 3.2 Legal Structures Used by Managers.

Aside from the local regulatory approvals and disclosure requirements mentioned above, similar transactions can entail a prior approval of the fund’s investors before any change of ownership or legal structure. While having regulatory approvals and implementing the disclosure requirements beforehand is obligatory, the obligation of prior approvals of the fund’s investors in case of change of control can be considered on a case-by-case basis, and depending on the commercial agreement between the fund’s stakeholders.

While anticipated changes to the fund managers regime and requirements can be considered minimal, this remains subject to changes influenced by economic conditions, political developments and regulatory preferences to include, modify or enhance more trends.        

The investors of the funds depend on whether the fund is closed-end or open-end. In the case of a closed-end fund, the investors shall be “qualified investors” (ie, financial institutional and individual investors who shall meet specific financial solvency and technical criteria). In the case of an open-end fund, the investors can be ordinary individuals and institutional financial investors.

Although not widely used, side letters can be adopted by the funds and their managers, taking into consideration the standard disclosure and reporting requirements listed above.

As previously stated, the alternative fund’s marketing depends on the fund’s type and purpose; it can be marketed to “qualified investors” (whether institutional or individual investors) or to the public.

Generally, any marketing process of alternative funds shall be through a licensed company, at the FRA, for that purpose. While there are no specific guidelines for the rules of marketing alternative funds, the marketing company shall undertake marketing for the alternative fund consistent with the fund’s investment policy, subject to the FRA’s approval, which is monitoring and supervising the marketing materials/information. To this effect, it is worth highlighting that the FRA’s prior approval shall be procured in the case of a private placement, while subsequent approval may be obtained in the case of a public offering.

While the use of placement agents is not widely adopted, alternative funds’ managers usually resort to independent firms against fixed compensations, taking into consideration the qualifications listed in 4.4 Rules Concerning Marketing of Alternative Funds.

Both corporate and individual investors are subject to the EITL. Aside from the tax exemption mentioned in 2.5 Tax Regime for Funds, the applied tax varies depending on whether the investor is an individual or corporate entity. According to the EITL, the applicable tax on individual investors ranges from 2.5% up to 25%. For corporate entities, the applicable tax rate is 22.5%. Nonetheless, either the corporate or the individual investor may benefit from a preferential tax regime (ie, double tax treaty) if that treaty provides for any particular exemption.

The question as to whether alternative funds qualify for benefits under double taxation treaties would depend on the terms of the double tax treaty entered into between Egypt and any other country, subject to the eligibility criteria under that treaty if it provides for benefits for the alternative funds.

Double tax treaties are various in terms of the range of the applicable level of exemption. Hence, investors are always encouraged to consult their tax adviser to obtain detailed advice on the alternative investment fund’s structure and operation.

The FRA has issued a circular, whereby Egyptian non-banking financial institutions (including alternative funds managers) are required to be compliant with the FATCA provisions. In this respect, alternative funds managers are required to take a set of actions, including the following:

• registration and signing an agreement with the IRS, to be renewed every three years;
• undertaking the due procedures within the requirements of the FATCA to determine the identity of the current and new customers in light of the criteria provided by the FATCA; and
• undertaking the due procedures (ie, “know your customer” (KYC)) to detect and identify any of the American nationality indicators of the account-holder, as provided under the FATCA’s provisions (eg, American citizen, Green Card holder, place of birth in the USA) so that the financial institutions can report the account of that American person/citizen to the IRS, as required under the FATCA’s provisions. One of the procedures adopted in this respect is to obtain a written declaration from the account-holder that they are not subject to any of the foregoing indicators of American nationality.       

The AML and KYC regimes are mainly governed by the following laws and regulations.

• AML Law No 80 of 2002 as amended – It specifies the legal framework for combating money laundering and defines money laundering infringements while describing the penalties for violations thereof.
• Financial Intelligence Unit (FIU) – The Egyptian Money Laundering Combating Unit (EMLCU) operates as the country’s FIU. It is responsible for receiving, analysing and disseminating suspicious transaction reports to relevant authorities for investigation.
• Customer due diligence (CDD) – Financial institutions and designated non-financial businesses and professions in Egypt are required to conduct thorough customer due diligence procedures. This involves verifying the identity of customers, assessing the nature of their business relationships, and understanding the source of their funds.
• KYC requirements – The KYC process typically involves collecting and verifying customer information, including identification documents, proof of address, and beneficial ownership details. Financial institutions are required to establish risk-based procedures to assess the level of due diligence required for different types of customers.
• Reporting obligations – Financial institutions and designated non-financial businesses and professions in Egypt have an obligation to report suspicious transactions to the EMLCU. They are also required to report large cash transactions and certain other specified transactions as per the regulations.
• Record keeping – Financial institutions and designated non-financial businesses and professions in Egypt must maintain records of customer transactions, identification data, and supporting documentation for a specified period.
• AML compliance and reporting – Financial institutions and designated non-financial businesses and professions in Egypt are expected to implement robust AML compliance programmes, including the appointment of an AML officer, staff training and internal controls. They are also required to submit periodic reports on their AML measures to the EMLCU.

The AML and KYC requirements can be subject to amendments and updates from time to time, and heavily depend on the instructions, laws and guidelines issued by the CBE and the relevant regulatory bodies.        

Data security and privacy for investors regimes were highlighted and addressed in various laws and regulations including the following.

• The CBE Law and its executive regulations, where the CBE undertakes to safeguard clients’ and investors’ data in a private and secured banking system. The CBE also undertakes to guarantee the security and privacy of investors’ accounts and to treat all data related to investors that the CBE becomes aware of as confidential.

• The ECML and its executive regulations provide the legal framework for securities activities in Egypt. While the law primarily focuses on market operations, it also includes provisions related to investor protection and confidentiality. The ECML requires market intermediaries, such as brokerage firms, investment funds and listed companies, to maintain the confidentiality of investors’ personal and financial information. They are obligated to implement appropriate measures to protect investor data against unauthorised access, use or disclosure.
• The Egyptian Personal Data Protection Law No 151 of 2020 sets out provisions for the protection of personal data, including the collection, processing, storage and transfer of such data, and the competent regulatory body responsible for monitoring such actions. The application of this law remains subject to the issuance of its executive regulations, to further elaborate on its scope of application and re-equipments.

As the regulations related to the AML and data privacy are dynamic and directly affected by business, commercial and economic factors, it is anticipated that further regulations related thereto, with more detailed requirements and/or particulars, will be issued and updated by the FRA and CBE.