The Egyptian legal system is a civil law system inspired by the French Napoleonic Code.
The Egyptian legal system is based on codified laws adopted by the Parliament that observe the principles of Islamic law (sharia).
Under the Egyptian Constitution, the judiciary order is independent authority. The judicial authority is vested in courts of different types with distinct competences, as follows:
The Egyptian judicial system observes the principles of due process and judicial review, as court proceedings are two-tier proceedings that involve a first-degree court and a second-degree appeal court that reviews the awards of the first-degree court.
Investments are governed by the New Investment Law No 72 of the year 2017 and its Executive Regulations No 2310 of the year 2017 (the Investment Law).
The General Authority For Investment and Free Zones (GAFI) is the principal government body that regulates and facilitates foreign investment in Egypt. It is also the central authority responsible for the licences, approvals and permits required for investment activities.
The different types of investment in Egypt are categorised as follows:
The licensing of each type of investment is subject to a distinct set of requirements, as set out in the Investment Law.
Limitations to Foreign Investments
Real estate restrictions
Direct foreign ownership of real estate (ie, properties such as buildings and land) is limited and is subject to certain rules and regulations governing such ownership, including restrictions on direct ownership by foreigners of agricultural land, desert land and land and real estate in the Sinai Peninsula.
In general, there are no restrictions on foreign investors acquiring and participating in Egyptian companies, which may be owned entirely by foreigners. However, foreign participation is restricted in certain activities, including:
Foreign investors obtain approval on the contemplated activity by submitting a request to obtain a licence to operate where there is a statutory requirement to obtain a licence. When there is no licence requirement, the company could operate upon its registration at the Commercial Register.
The rules governing the application for the operation licence and the relevant requirements to meet in order to obtain the licence are provided for in the rules and regulations governing the sector/activity.
The timing for completing the registration procedures and obtaining a licence to operate where applicable differs depending on the type of activity and the extent of completeness of the investor’s file.
Depending on the type of activity, sanctions may vary from fine penalties to closure of the establishment by the competent authorities.
The Investment Law does not impose any commitments on foreign investors in terms of minimum investment amount or posting investment security.
Investors can challenge any decision issued by GAFI before the Administrative Courts.
The most common types of corporate vehicles used for investments are the limited liability company (which is similar to the English limited liability company) and the joint stock company (which is similar to the French société anonyme).
Unlike the limited liability company, the joint stock company has certain advantages that make it more suitable for investments by foreign investors in Egypt, including:
There must be a minimum of three shareholders in a joint stock company.
Generally, there are no limitations on foreign participation, except as may be expressly provided under the applicable laws of a given activity.
A joint stock company must operate under a commercial name derived from its business object, which may include the name(s) of its shareholders.
A joint stock company is incorporated for term of 25 years, which may be renewed for one or more additional term(s).
The head office of a joint stock company must be in Egypt.
A joint stock company may carry out any business purpose permitted under the applicable law.
The minimum share capital for a joint stock company is EGP250,000.
The incorporation process is typically carried out by a resident representative acting on behalf of the investor by way of a power of attorney.
The process of incorporation involves the following steps:
The incorporation process of an investment company in Egypt involves a security check, going up to the level of the ultimate beneficial owner of the investment company.
Any change in the memorandum and articles of association must be approved by GAFI.
Any change in the shareholders of the investment company must be recorded by way of an amendment to the memorandum of incorporation and notified to GAFI for ratification.
All corporate resolutions by the investment company (including any resolutions changing the board of directors) must be submitted to GAFI for ratification to ensure the resolutions do not breach the applicable laws.
The balance sheets of the investment company must be approved by the general shareholders meeting of the investment company and then submitted to GAFI by way of reporting.
Supervision of Management Through General Assembly Meetings
The shareholders oversee the management of the company through the general shareholders meeting of the company. There are two types of general shareholders’ meetings: the ordinary general assembly meeting (OGM) and the extraordinary general assembly (EGM).
The OGM is held at least once every financial year within the three months following the end of the company’s financial year, and has the following aims:
The EGM is held to decide on any amendment of the memorandum and articles of incorporation of the company, share issue, merger, spin-off or dissolution of the company.
Board of Directors
The management of a joint stock company vests in the board of directors (the Board), which must have a minimum of three members.
The Board shall appoint a chairman from amongst its members and may appoint one or more managing director(s) (ie, executive director) with such powers as the Board may determine. The chairman may also act as the managing director.
The managing director shall deal with the day-to-day business of the company and supervise the implementation of the resolutions of the Board.
Liability of Shareholders
The liability of the shareholders of a joint stock company is limited to their respective shareholdings in the company.
Egyptian law does not allow for piercing of the corporate veil by having a recourse against the shareholders for any liabilities assumed by the company.
Liability of the Board
Each member of the board (a Director) acting individually or acting collectively with the other Directors as a Board is entrusted with an agency mandate to manage the affairs of the company as an agent on behalf of the company (Agency Mandate).
The Director shall incur no personal liability as a result of the performance of the Agency Mandate as long as the acts performed by the Director fall within the limits of the Agency Mandate and comply with the applicable laws.
The applicable laws impose certain individual duties on each Director as well as collective fiduciary duties on the Board in performing their Agency Mandate (Fiduciary Duties).
The breach of any of the Fiduciary Duties is an implicit “fault” that may trigger the civil liability of the originator of such breach.
Any person who suffers damage from the breach may claim the civil liability of the originator by way of filing court proceedings before the competent courts in Egypt. This includes the company, any of the shareholders and any third party dealing with the company.
The company may claim the civil liability of the Board or a Director (as the case may be) if a fault that is attributable to the Board or the Director (as the case may be) caused damage to the company, while a shareholder may claim the civil liability of the Board or a Director (as the case may be) if a fault that is attributable to the Board or the Director caused damage to the company and/or the shareholder.
If the breach was committed by more than one Director acting individually or acting collectively as a Board, then the originators of the breach may be jointly and severally liable to compensate the damage suffered by the company or the shareholders.
Other than the liability for breach of Fiduciary Duties, a Director may be subject to penal sanctions if he or she Director commits any of the violations prescribed under the Applicable Laws.
Penal liability is a “personal” liability and may only be imposed on the originator of the violation; however, if the act results in damage to any person, then the company’s civil liability may be engaged in relation to compensation where the act was committed by the Director in the course of, or as a result of, his instructions from the company.
Directors’ liability – whether civil or penal – cannot be excluded or limited by contract or corporate resolution.
With regard to civil liability, the following measures may mitigate the Director’s civil liability:
The Egyptian Constitution establishes the right to work as a fundamental right, duty and honour, which is guaranteed by the state. The state shall protect workers’ rights, and see that work relationships between both parties are balanced during the production process. The state must also protect workers against work hazards, guarantee their safety and occupational health, and protect them from the unjustified termination of their contracts in accordance with the law. The Constitution also guarantees workers’ rights to peacefully strike, and to engage in collective bargaining.
Employment relationships (ie, the relationship between employees and their employers as defined under the Law) are primarily governed by the provisions of Labour Law No 12/2003 and relevant Minister of Manpower decrees.
Among other things, the Labour Law organises individual and collective employment contracts between employees and their employers.
Employment contracts must be in written form, can be in a bilingual form so long as the prevailing language is Arabic, and should be drawn up in in at least three original counterparts. The employer, the employee and the Office for Social Security Affairs should each receive one of the counterparts. The employment contract must include the following:
Employment contracts can be concluded for a definite or an indefinite term. When an employment contract is concluded for a fixed term and the parties thereto continue to act thereunder beyond the expiration of such definite term, without expressly renewing the agreement for similar definite terms, the employment relationship shall be governed by the provisions governing indefinite employment contracts, provided that the employee is Egyptian. Foreign employees may not enter into indefinite term employment contracts. Furthermore, the duration of an employment contract term for a foreign employee may not exceed three years. Parties are allowed to conclude multiple definite term employment contracts, provided their terms do not exceed in aggregate five years. Employment contracts must be expressly renewed in writing.
Employers may not expect their employees to work for more than eight hours a day or a total of 48 hours a week. Those hours are exclusive of break and meal times, and should include one or more periods of time for employees to rest and eat; the aggregate of such periods should not exceed one hour per working day. In setting out break and meal times, the employer should ensure that employees do not work more than five consecutive hours. The competent Minister shall determine which cases and professions require uninterrupted work without breaks or meals times due to the nature of the work or for operation purposes. Similarly, the competent Minister’s decision shall include a list of the professions that are deemed difficult or exhausting, in which resting time should be included within the actual working hours.
The above shall not apply in cases of exceptional work requirements or situations. In such cases, the employer must inform the relevant Labour Office and seek prior written approval for the exceptional working hours arrangements. In such exceptional cases, the employee is entitled to the daily wage in addition to overtime pay as agreed in the individual or collective employment contracts. In any case, such overtime pay may not be less than 35% of the daily wage for day hours and 70% of the daily wage for night hours.
When the employee is required to work during his/her day off, the employer must pay him/her twice the daily wage and give him/her another day off during the following week. In any case, the actual working hours for an employee may not exceed ten hours per day.
The dismissal of an ill-performing employee and/or the termination of an employment relationship is strictly regulated. In practice, an employer can minimise the risk associated with the highly regulated employment rules by starting employment relationships under definite term employment contracts.
Under Egyptian Labour Law, an employment contract may be terminated for the following reasons.
Employers may dismiss their employees on the grounds of the provisions of Article 69 of the Law or when the unsatisfactory performance of the employee can be established under internal regulations that were previously approved by the competent authorities. Dismissal must be carried out in compliance with legally required procedures.
An employer can initiate the dismissal process for an employee on the grounds of a gross fault under the provisions of Article 69 of the Law. Acts that constitute a gross fault include the following:
Even when an employee’s act falls within the scope of application of Article 69 of the Law, said employee may not be dismissed unless the following dismissal procedures are followed.
Collective Dismissal for Economic Reasons
An employer may opt, for economic reasons, to partially or fully shut down an establishment, or to downscale its size and activity in a way that would affect the number of employees therein, in accordance with the rules and regulations provided for under the Law.
In such case, the employer submits a request to a committee specifically formed to this effect. Such request shall include the reasons for downscaling, and the number and categories of employees subject to dismissal.
Under a procedure of collective dismissal for economic reasons, an employer may opt to amend an employee’s agreement and amend his/her job description and cut his/her salary to the statutory minimum wage. If the employee refuses such amendment to the employment contract, he/she shall be entitled to compensation equal to one month's salary for the first five years spent in the service of the employer, and one and a half month's salary for any additional years spent at the service of employer.
In the context of collective employment contracts, collective bargaining is defined as the discussions and dialogue that occur between workers' syndicates and employers, in order to:
Collective bargaining happens at the level of the establishment, or the activity branch/type, or the profession or industry, as well as at the provincial/regional and national levels.
Bargaining takes place in establishments that hire 50 workers or more, between the employer and representatives of the syndicates’ council within the establishment and the general syndicate. In the absence of a syndicates’ council within the establishment, bargaining occurs between the employee and five workers selected by the relevant general syndicate, on the condition that at least three of those five are employed at the relevant establishment.
For establishments that employ fewer than 50 workers, bargaining occurs between representatives of the relevant general syndicate, and representatives of the relevant organisation for employers or the employer himself. The representatives of all parties are considered legally authorised to carry out negotiations and execute the resulting agreement.
If one of the two parties refuses to carry out collective bargaining, the other party may request the relevant administrative authority to initiate negotiation procedures by notifying the relevant employers' organisation or the workers’ syndicate as the case may be, in order for them to initiate bargaining on behalf of the refusing party. The relevant organisation here is considered to be legally authorised to carry out negotiations and sign the collective agreement.
Salaries paid to employees are subject to income tax in Egypt, regardless of whether the employee is a resident or non-resident.
The Salary Tax rate is determined based on income brackets in an escalating manner, ranging from 0% (for annual income from EGP0 to EGP15,000) up to 25% (for annual income of more than EGP400,000).
The employer is duty bound to withhold the Salary Tax and pay it to the relevant tax authorities on a monthly basis, within 15 days following the month of the salary payment.
The Tax Law imposes corporate income tax on legal entities residing in Egypt on the income realised in Egypt as well as the income realised outside of Egypt (ie, worldwide income).
The default corporate income tax rate in Egypt is 22.5% on the net taxable profits of a company. A higher rate of 40.55% applies to oil exploration companies.
All investments made under the umbrella of the Investment Law benefit from the following incentives:
Projects established in Free Zones benefit from corporate income tax exemption but are required to pay the following fees:
Projects in public free zones and private free zones shall pay an annual service fee to GAFI equivalent to 0.001% of its share capital, subject to a cap of EGP100,000.
Exemption under the Tax Law
The Egyptian Tax Law provides certain tax exemptions to incentivise investment in specific industries, as follows:
The Egyptian Tax Law does not recognise the concept of tax consolidation amongst entities of the same group: parent companies and their subsidiaries/affiliates/sister companies are taxed on a standalone basis.
The Egyptian Tax Law restricts thin capitalisation by providing a maximum debt-to-equity ratio of 4:1, which applies to the deduction of interest on loans from the taxable income of the company. The ratio applies to all debts extended to the company, with the exception of debt extended by Egyptian registered banks, insurance and/or leasing companies.
The Egyptian Tax Law includes transfer pricing regulation aligned with the OECD Transfer Pricing Guidelines. It applies to the commercial and financial transactions between related parties, including the exchange of goods and services and the allocation of expenses, royalties and interest.
As of 1 July 2014, the Egyptian Tax Law applies the General Anti-Avoidance Rule (GAAR), which aims to exclude any tax effect of transactions that are designed mainly to avoid tax.
The Egyptian competition law only requires post-merger notification to the Egyptian Competition Authority for transactions that involve a combined turnover in Egypt of more than EGP100 million.
Failure to comply with the post-merger notification is sanctioned by a penalty ranging between EGP20,000 and EGP500,000.
However, Egypt is getting closer to adopting a new merger control regime that would transform the system from a post-closing to a pre-closing filing regime; please see 9. Looking Forward.
The post-merger notification to the Egyptian Competition Authority shall be made within 30 days of closing the transaction.
The acquiring or merging party in a share or assets transaction is required to make the post-closing notification. In a joint venture transaction, the party that meets the control test (ie, turnover threshold) is required to submit the post-closing notification.
The notification process does not attract fees payable to the Egyptian Competition Authority.
The merger filing form requires the submission of supporting documents including financials, transaction documents, and other regulatory consents as applicable, and the commercial registration certificates of the entities involved in the merger.
The Egyptian competition law restricts cartel agreements and practices that are deemed restrictive to free market competition between competitors (horizontal competition), such as:
The Egyptian competition law also restricts agreements and practices that are deemed restrictive to free market competition between a party and its suppliers and/or customers (vertical competition). The Egyptian competition law sets the following subjective criteria to serve as a test for the agreements and practices:
The Egyptian competition law defines a dominant position as one in which an entity's market share exceeds 25% of the total market share, giving it effective influence on the price determination or volume supply while other competitors do not have the capability to restrict the practices of the “Market Dominant Person” in the relevant market.
The Egyptian competition law sets out the following exhaustive list of restricted practices that a Market Dominant Person should not carry out:
In Egypt, a patent must be novel, creative and industrially applicable in order to be registered and for intellectual property rights granted thereto. An invention is not deemed novel when and if:
Inventions affecting national security, public order or morals, the environment and public health cannot be subject to patent registration. Furthermore, certain discoveries cannot be patented, in order to guarantee the dissemination of knowledge into society. Such knowledge includes scientific theories, mathematical methods, medical treatments and surgeries, and biological materials.
Period of Protection
A patent confers protection on its owner for a period of 20 years from the date of filing the patent request.
A patent will give its owner the right to exploit the patented invention and the right to prohibit anyone from using and exploiting the patented invention.
Employees who develop an invention as part as their job shall be compensated for their inventions; the same applies to inventions that were subject to an obligatory licence.
Procedures, Enforcements and Remedies
Applications for patent registration must be filed in three counterparts in the Arabic language to the Patent Office at the Scientific Research Academy. The file must include a very detailed description of the invention.
The Patent Office will review the application file to verify that the invention is novel, represents an inventive step and is industrially applicable. It will further examine whether the application prerequisites were duly met. Objections and appeals can be filed within a period of 60 days from the date of publication of the patent application; this period is extended to 90 days where the patent applications are deemed to be related to defence, military production or public security. The patent office is competent to decide on any objections raised. Legal recourse may be taken against the decision of the Patent Office.
Trade marks are governed under the Intellectual Property Rights Law No 82 of the year 2002 (IPR Law).
Article 63 of the IPR Law defines a trade mark as “all that characterises a product, be it a commodity or a service.” It also sets out the condition that trade marks must be discernible by sight, in all cases.
The legal owner of a trade mark may prevent third parties from importing, using, selling or distributing the products characterised by this mark, unless he or she markets these products in any country or authorises a third party to do so.
The owner of a “well-known” trade mark, both in Egypt and worldwide, shall have the right to enjoy the protection conferred by the IPR Law even when said mark is not registered in Egypt (Article 68 of the IPR Law).
Certain marks are ineligible for trade mark registration, such as those that violate public order and morals, those that are attributable to public or international institutions, those that pertain to third parties, those without original characteristics and those that profess misleading geographical indications.
Period of Protection
According to Article 90 of the IPR Law, a trade mark is protected for a period of ten years, which can be renewed any number of times.
An application for renewal must be submitted during the final year of the period of protection, or at the latest three months following the expiration of the protection, provided appropriate notification was submitted to the trade mark office.
Registration of Trade Marks
The Trademarks and Industrial Designs Office at the Internal Trade Development Authority of the Ministry of Trade and Industry (ITDA) is the competent authority for the registration of trade marks in Egypt. Ownership of a trade mark and conferring protection thereupon is subject not only to the proper registration thereof with the ITDA, but also to its use within five years of said registration (Article 65 of the IPR Law).
Trade marks are registered under certain classes for goods and services, and protection thereof will be limited to the class under which the products or services are registered.
In order for a trade mark to be considered protected, the decision approving the application of registration issued by the ITDA must be published in the ITDA Trademarks and Industrial Drawings and Designs Gazette. Third parties may oppose the ITDA’s decision to approve the application for trade mark registration, in which case the opposing party has 60 days to file an opposition before the competent committee. When the committee rejects the opposition, the third party may appeal such decision; if such appeal is equally rejected, the third party may file a claim before the State Council to seek the cancellation of the ITDA decision. However, upon the lapse of a period of 60 days from the date of publication of the approval of the trade mark registration application without any opposition, the trade mark is deemed finally registered. The trade mark registration date will be the date of the filing of the application for trade mark registration before the ITDA.
Industrial designs and models are governed under the IPR Law.
Article 119 of the IPR Law defines industrial designs and models as “all script layout and all forms embossed, whether in colour or not when it adopts a discerned appearance characterised by novelty and is industrially applicable.”
Industrial designs and models are not deemed novel when they are publicly displayed or described or used prior to the date of the submission of the request for registration.
Period of Protection
Industrial designs or models are protected for a period of ten years, starting from the date of the submission of the request for registration in the Arab Republic of Egypt.
The protection may be renewed for another five years if a request for renewal is submitted during the last year of the period, or within three months following the expiry of the protection period.
Extent of the Protection
Registration of the industrial design or model allows its owner to prohibit third parties from manufacturing, selling or importing products that infringe upon said design or model.
Protected industrial designs or models can be used for non-commercial, educational or scientific purposes, and whenever used without prejudice to the owner’s interests.
The Trademarks and Industrial Designs Office at the ITDA is the competent authority for the registration of industrial designs and models.
The procedures for filing the registration application for industrial designs and models are similar to those for the registration of trade marks, varying only in the requirements of the file submission.
As is the case with trade marks, approval of the application requires the publication thereof. As for the rejection of the application, the same rules and regulations for filing oppositions and appeals shall apply (see 7.2 Trade Marks).
Copyrights are governed under the IPR Law.
Article 140 of the IPR Law confers the authors of literary and technical compilations protection in Egypt. A "compilation" is defined under Article 138 of the IPR Law as “any literary, technical or scientific compilation, whatever its kind, the method of expressing it, its importance, or the purpose of its composition.” Accordingly, copyright protection shall be conferred to the following:
The title of a compilation can be protected if it is original and innovative.
Extent of the Protection
Copyright grants the author of a compilation the exclusive right to:
In addition, an author has non-prescriptive and inalienable rights on his protected compilations, such as:
Copyright protection under the IPR Law also addresses the author’s financial rights. An author may dispose of all or part of his or her financial rights to third parties, provided that such transfer may be established in writing and detailed with regards to its extent, purpose, duration and place.
However, the IPR Law prohibits an author from disposing of the entirety of his/her future compilations.
Duration of the Protection
The author’s financial right is protected during the life of the author and for a period of 50 years following his/her death.
Registration of Copyright
Under the Egyptian IPR Law, the ownership of copyright is not established through the formal registration of compilations with the competent authorities, but a recent amendment to the IPR Law No 178 of the year 2020 requires that each Ministry competent under the IPR Law creates a unit for the registration of authors’ compilations and any licence rights and assignments thereof. Transfer of the relevant rights will not have effect vis-à-vis third parties until the compilation is registered before the competent authority.
Software is protected under the rules and regulations governing copyright. The Minister of Telecommunication Decree No 107 of the year 2005 created the Intellectual Property Office for the protection of Software (IPR Office) under the Information Technology Industry Development Agency (ITIDA).
The IPR Office is competent to offer the following services:
Databases and Trade Secrets
The Egyptian IPR Law protects trade secrets and databases.
Undisclosed data and information will be protected under the Egyptian IPR Law when the information is secret by nature – ie, the information in its entirety or the elements of its constitution are not known nor in circulation in the public domain of those working in the field to which it is relevant. Furthermore, the commercial value of the information should derive from the secrecy thereof. Finally, the secrecy of the information should depend on the extent of the measures taken by its holder to effectively preserve it.
Owners of undisclosed information and trade secrets must exert reasonable efforts to preserve the secrecy of such information.
The protection conferred to the owner of undisclosed data and information is limited to the right to prohibit third parties from infringing such information by way of unfair commercial practices. The law sets out an exhaustive list of what is deemed unfair commercial practices that give the owners of undisclosed data and information grounds for legal recourse before Egyptian Courts.
The New Data Protection Law No 151 of the Year 2020
The long-anticipated law governing the protection of personal data and privacy was promulgated and issued on 16 October 2020. The Data Protection Law 151/2020 (DPL) is the main legislation pertaining to the protection of personal data, and specifically focuses on safeguarding the personal data of individuals that is stored, processed or controlled electronically through online platforms.
The DPL is greatly modelled on the European Union’s General Data Protection Regulation (GDPR).
The law introduces rights for data subjects (ie, individuals whose data is being electronically stored, processed or controlled) and obligations for the controllers and processors of such personal data.
It is applicable to personal data that belongs to Egyptians residing in Egypt and abroad, as well as foreigners residing in Egypt.
The DPL regulates and governs the usage of personal data of individuals and sets the rules for the disclosure of such data. It expressly prohibits the storing, processing, disclosure, use and transfer of personal data without the express prior consent of the concerned data subject.
The Anti-Cyber and Information Technology Crimes Law No 175 of the Year 2018
In 2018, the Anti-Cyber and Information Technology Crimes Law No 175 of the year 2018 (the Cyber-Crime Law) was promulgated in an attempt to protect data available through information technology and its transfer against piracy and cyber-crimes, and to enhance the regulation of data processing and e-commerce activities. It also provides certain technical standards regarding data protection.
The DPL is applicable to personal data that belongs to Egyptians residing in Egypt and abroad, as well as foreigners residing in Egypt. Accordingly, the duties of a foreign company targeting data subjects in Egypt will vary depending on whether they act as holders, processors or controllers.
Rights of Data Subjects
Under the DPL, data subjects have the following basic rights:
A data holder/processor/controller must respond to the data subject’s request in relation to these rights within six days of receiving the request.
Additionally, the proper collection, processing and storage of the data must conform to the following:
A violation by a data holder, processor or controller of these data subject rights is subject to a penalty of between EGP200,000 and EGP1 million.
Cross-border Transfer of Personal Data
The transferring or sharing to a foreign country of personal data that is collected or prepared for processing is prohibited unless such country guarantees the personal data a level of protection that does not fall below that stipulated under the DPL.
The Personal Data Protection Centre (PDPC) is yet to be established.
According to the DPL, the PDPC should be established upon the promulgation of the DPL Executive Regulations, within six months of the date of the issuance of the DPL. The PDPC should aim to protect personal data and regulate the activities of processing and granting access to such personal data.
Particularly, the PDPC shall have the right to do the following:
More insight about the PDPC’s role should come with the issuance of the DPL Executive Regulations.
New Merger Control Regime: Pre-closing Filing Regime
On 25 November 2020, the Cabinet of Ministers announced its approval of certain amendments to the Egyptian Antitrust Law and referred it to the Parliament to consider its enactment.
The proposed amendments aim to introduce the concept of “Economic Concentration” to the Egyptian Antitrust Law. The term “Economic Concentration” is expected to capture entities resulting from mergers as well as direct and/or indirect share and/or asset acquisitions and hence transactions leading to the creation of an “Economic Concentration” will have to be approved by the Egyptian Competition Authority by way of the pre-closing filing regime.
The amendments are expected to be voted on by the Parliament during 2021.
It is likely that the amendments will have immediate effect, with no transition period.
The proposed amendment suggests that the turnover thresholds for determining an “Economic Concentration” will be determined by the Executive Regulations, which are to be issued by the competent minister after enactment of the amendments. However, the proposed draft amendment also suggests interim thresholds (ie, until the Executive Regulations are issued by the competent minister), as follows:
The above thresholds remain indicative and subject to the final approval of the Parliament.
The draft amendments remain under discussion by the Parliament and the outcome in terms of the final provisions and timing of enactment remains uncertain.
Egypt adhered to the OECD’s BEPS Project regarding tax erosion, which requires the implementation of the four minimum standard action points of the BEPS Project. Egypt opted to apply, amongst other standards, the “principal purpose test” to its covered dual tax treatment agreements (DTTs), which will likely impose firmer substance requirements on the claimants of DTT benefits.
Opportunity for Practitioners and Investors Alike in Egypt’s Compelling Debt Capital Market
To borrow from Mr Dickens, COVID-19 has seen both the best of times and the worst of times for Egypt’s capital markets – “best of times” for issuers of (and investors in) debt instruments, but rather more challenging if equities are more your flavour.
Egypt’s benchmark EGX30 was down 23% in 2020 and is lagging 8% year-to-date in 2021 after the exit of international institutions in the early days of the pandemic. The country has since broken a nearly two-year IPO drought (Egypt’s first listed pure-play higher education provider) and seen its first ever technical listing (of London-listed consumer healthcare giant IDH), and at least four companies are on deck with potential offerings for the fall listing window.
By contrast, the nation’s debt capital markets have been very active, with Egyptian issuers setting new national records for the largest securitised offering and largest sukuk (a form of sharia-compliant bond) during the pandemic. The secondary market for debt is starting to take shape, and the pipeline of companies preparing to take issuances to market in the back half of the year is deep and varied. Indeed, securitisation, Islamic finance and corporate bonds have taken off in a way that the CEO of the region’s largest investment bank recently described as “extraordinary”.
Developments in the real economy support an optimistic outlook for corporate Egypt: it was one of only two economies in the Arab world to grow last year (+3.6%), and GDP is comfortably on track to return to pre-pandemic levels north of 5% by 2022, with the IMF’s World Economic Outlook pencilling in 5.7% growth for the state’s 2021–2022 fiscal year.
This is a position of which regulators including the Financial Regulatory Authority (FRA) are more than passingly aware. Legal and regulatory changes (including a drive to make debt more tradable) have been key drivers of the market’s development, and two new legal changes expected in the second half of this year should look to add depth and complexity to the debt market: the securitisation of future, off-balance-sheet cash flows and the launch of sovereign sukuk.
These new instruments will create new ways of driving corporate growth, and open new investment opportunities for fund and treasury managers the world over.
COVID-19 Did Nothing to Sap Energy from the Debt Market
Egypt’s debt market has boomed despite the pandemic: Egypt had listed corporate bonds, securitised bonds and sukuk worth a total of EGP9.75 billion at the end of June 2019 (the end of the state’s fiscal year), according to Central Bank of Egypt data. That figure rose to EGP21.8 billion by June 2020, to EGP30.86 billion by the end of 2020, and stood at EGP36.83 billion as of the end of April 2021, the most recent period for which full data is available.
Enterprise, the country’s respected business daily, tracked a total of 13 bond issuances in 2020 (12 securitised and one conventional) raising just north of EGP20 billion. That is down slightly from the EGP22 billion raised from 18 offerings (all securitised) the previous year, but is still a solid performance for a pandemic year that involved coping with lockdown and a transition to working from home. While real estate developers continued to be the most aggressive in taking securitised bonds to market, they were followed closely in 2020 by players in the country’s booming non-bank financial services (NBFS) industry, including providers of factoring, consumer finance and leasing services.
2020 also saw the quiet debut of corporate sukuk and green bonds. Two high-profile issuers issued sukuk worth a combined EGP4.5 billion last year, and Egypt’s FRA said at the end of 2020 that it expects another EGP10 billion worth of issuances in 2021. With Egypt's first sovereign green bond under its belt, the Commercial International Bank (CIB, the country’s largest private sector bank) became the first to announce a corporate green bond with backing from the International Finance Corporation.
Securitisation of Future Cash Flows
For more than 15 years, Egyptian corporations have been able to issue bonds backed by on-balance sheet accounts receivable – the key words here being “on-balance sheet”. The exciting new development is that the FRA is moving ahead with amendments to the Capital Markets Act that would allow the issuance of bonds backed by expected future cash flows that do not yet exist on the company’s balance sheet.
Writing in an explanatory note, the chairman of the FRA noted that the new financing tool could be of great benefit to state-owned (or “public”) entities, providing them with an alternative source of finance. It noted in particular that such a tool could benefit state-run companies and institutions that provide a number of public utilities to citizens on a daily basis. “Sustainability” and “growth” are key words in this respect, particularly as the note singles out industries such as electricity distribution, water, telecommunication, transport, roads, health, education and housing as among those that may benefit from the instruments. There is also discussion now in the business press on the securitisation of future taxes or electricity bills.
Egypt is not alone: the note further states that the FRA has found a number of other countries that allow the securitisation of future cash flows.
The private sector will also benefit. Although the FRA’s explanatory note emphasises the benefits to public entities, it is clear from the language of the amendment that private-sector companies can also use the proposed instrument, opening significant new opportunities for corporations with reliable future cash flows that may wish to pursue new avenues to obtain finance. Membership-driven sporting clubs and private-sector utilities are expected to be among the first in line.
Pointing to the clear success of traditional securitisation, the FRA bluntly predicts that the securitisation of future cash flows will prove equally successful in the Egyptian market. The take-home message is that this is not a trial balloon, but a serious proposal for a very real financial instrument that is now in its final stages.
The legal amendment that introduces the concept of bonds backed by future cash flow will be made by way of adding a chapter to existing legal provisions governing securitisation. This chapter will include two or three articles that will solely aim to introduce the principle of the securitisation of future cash flows. The existing legal provisions of traditional securitisation will serve as the basis and foundation for the securitisation of future cash flows and will be equally applicable to this new form of bonds. This approach by the FRA is likely to contribute to the success of this new financing instrument, as the nation’s community of advisers – from lawyers to investment and commercial bankers – is already familiar with the majority of the rules and provisions governing securitisation.
There are clearly questions still to be answered. The draft does not make clear how these bonds will be structured or how documentation will address the risks and challenges relating to future cash flows. These challenges are more pronounced when the issuer of the bond expects the bond to be off-balance sheet (as is the case with securitised offerings, meaning bond-holders have recourse over only the portfolio covered by the issuance and not the issuer). This will require a lot of work from all advisers and consultants on each bond, but it is certain that Egypt will witness its first securitisation bond of future cash flow before the end of 2021.
The Introduction of Sovereign Sukuk
Egypt is relatively new to the global, multitrillion-USD Islamic finance market and, as noted above, 2020 was the year in which it started catching up through the issuance of its first private-sector sukuk. These included a EGP2 billion issuance by a major private-sector real estate developer and a EGP2.5 billion issuance by consumer and structured finance player Sarwa Capital.
Sukuk (the Arabic plural form of the word “sakk” or “certificate”) is a sharia-compliant instrument of co-ownership and co-investment in cash-generating assets. Sukuk need the approval of an accredited religious committee composed of scholars who provide a written report that a given sukuk structure is compliant with sharia.
With the private-sector precedent now set, Egypt’s House of Representatives is now in the final stages of discussing a law that would permit sovereign sukuk – an instrument the Finance Ministry has made clear it is eager to take to market. The law will set out a framework that will regulate Egypt’s sovereign sukuk issuances, including governing how the sharia-compliant debt is securitised and traded. Once ratified, the executive regulations for the bill are expected to be issued within three months.
The draft law proposes that sukuk can be issued in Egyptian pounds or in foreign currencies, via both public and private placements in local or international markets. The law has outlined specifical forms of sukuk, including mudaraba, murabaha, ijara and istisnaa. The draft law also makes it clear that fixed and movable assets that are publicly owned by the state cannot be subject to sukuk – only the usufruct rights of fixed and movable assets privately owned by the state can be subject to sovereign sukuk. Article 7 of the law proposes that a prime ministerial decree shall be issued to define those assets that are publicly held by the state, and further confirms that the sale or lease of privately owned assets is prohibited. Only a usufruct right can be granted.
Usufruct is a real right (in rem) giving its holder the right to use a property owned by another person for a specific period of time. During this period, the holder of the usufruct right can use the property and commercially exploit it.
Key Points of the Draft Law
The key points of the draft law are as follows:
The government plans to take its first sukuk to market as soon as the law is ratified. In order for this to happen, the executive regulations of the law need to be issued and all the prime ministerial decrees referred to in the law would have to be issued. The issues that need to be settled include the following:
We are, then, extremely excited about the state of the nation’s debt market at the half-year mark. Two exciting new instruments are about to be made possible. More than a dozen companies are known to be exploring traditional securitised issuances and corporate sukuk. The country's first private-sector green bond is in the pipeline. And a strong economy is floating all boats – not just the real estate and NBFS players that benefit from traditional securitisation, but also the clubs and utilities and others who might be in a position to take advantage of an instrument allowing them to securitise future off-balance sheet cash flows.