The expanding Egyptian renewable energy market, supported by beneficial legislative changes and new feed-in tariffs, is stimulating increased foreign investment in Egyptian renewable projects. As well as navigating the Egyptian legal and regulatory framework for investment, foreign investors should also be considering the structure through which such investments will be made.
With any cross-border investment, it is very important to establish an investment and holding structure that effectively manages tax costs arising from the investment, both over the life of the investment and on a future exit. This involves a consideration of the following key factors:
- local tax costs and withholding tax charges on profit distributions
- mitigating tax leakage at holding entity level
- facilitating a tax-efficient exit at the end of the investment period
In the context of investing in Egypt, recent changes to the Egyptian tax system have increased in the importance of implementing an appropriate holding structure. Specifically, two key changes have been made to the Egyptian Income Tax Law that will impact on investment structuring:
- dividends paid by Egyptian companies to foreign shareholders will now be subject to a 10% Egyptian withholding tax
- capital gains realised by foreign shareholders on the sale of shares in Egyptian companies will now be subject to a 10% Egyptian withholding tax
These tax costs can be managed through the tax treaty system Egypt has with other jurisdictions. An efficient holding structure for investing in Egypt will involve a jurisdiction with which Egypt has an appropriate tax treaty and that also allows for profits to flow through to investors with minimal tax leakage.
There a number of suitable jurisdictions though which to structure Egyptian investments, of which the United Kingdom is a leading contender. Changes to the UK tax system in recent years have resulted in the UK becoming an attractive jurisdiction through which to hold foreign investments. Furthermore, there is an increasing requirement in international taxation for holding structures to have real “substance” in the jurisdictions through which they operate. Many investors often finding this criteria easier to satisfy through the UK than other potential holding jurisdictions as they will already have some form of UK presence.
The location and type of investors will be an important factor to determining an appropriate investment structure, but a variety of different factors will be relevant and tax will not be the only consideration. For example, accessing beneficial bilateral investment treaties may also influence the investment structure. To find out more about investment treaty protections click here.