الهيئة العامة للرقابة المالية

Egyptian Financial Supervisory Authority (EFSA)

July 3, 2014

Circular Letter No. (7) of 2014

Regarding Amendments to Certain Provisions of the Income Tax and Stamp Duty Laws and Their Impact on Investment Funds Subject to the Provisions of Law No. 95 of 1992

The Official Gazette (Supplement No. 26-A) published on June 29, 2014 the decision of the President of the Republic by Law No. 53 of 2014 amending certain provisions of the Income Tax Law issued under Law No. 91 of 2005, and the Stamp Duty Law issued under Law No. 111 of 1980,

and in the EFSA's keenness to inform all relevant parties regarding investment funds of how to apply the amendments to the aforementioned Income Tax Law for the purpose of calculating tax when determining the fund's net asset value and consequently the NAV per share,

we would like to point out that the amendments included the repeal of Article (83) of the Stamp Duty Law, and thus buy and sell transactions on the stock exchange will no longer bear the stamp duty (one per thousand),

Furthermore, in coordination with the Egyptian Tax Authority, the attached explanatory circular has been prepared. Please note that taxes are due only on realized profits.

Furthermore, to ensure the accurate calculation of the net asset value of open-end funds and the NAV per share, it is necessary to maintain a provision for the due tax based on realized profits and to hedge against the tax burden arising from the conversion of unrealized profits – on which the share price is based – into realized profits during the financial period. This aims to ensure accuracy in pricing fund documents upon sale and redemption. Each provision's value shall be adjusted according to business results at the end of each pricing period (daily, weekly, or otherwise).

The Authority also emphasizes the necessity for investment fund managers, management service companies, and appointed auditors to promptly consult with each other to agree on the proper accounting treatment applied to calculate the funds' net asset values.

Hesham Ibrahim
Head of the Central Administration
for the Authority's Presidency Affairs

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Egyptian Financial Supervisory Authority
Egyptian Tax Authority

Explanatory Circular

To clarify how investment funds apply the amendments to certain provisions of the Income Tax Law issued under Law No. 91 of 2005 and amended by Law No. (53) of 2014

In order to clarify how investment funds apply the aforementioned amendments to the Income Tax Law, officials from both the EFSA and the Egyptian Tax Authority held a meeting to discuss the matter, with the aim of issuing this circular to explain how to apply the amendments to the Income Tax Law for calculating tax when determining the net asset value of investment funds subject to the provisions of Law No. 95 of 1992.

First: General Principles

1. Tax on the investment fund's profits is calculated at a flat rate in accordance with the provisions of the aforementioned Law regarding realized capital gains and distributions related to the fund's investments in securities. Otherwise, the fund's remaining activities are subject to the Income Tax Law, and tax is calculated based on the tax return submitted by the fund.

2. Securities investment fund documents are not subject to any taxes when distributions are made or when shares are traded, for securities investment funds established under the Capital Market Law that invest at least 80% in securities and other debt instruments, and for holding investment funds whose investments are limited to the aforementioned investment funds.

3. Money market funds are not subject to tax.

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Second: How to Calculate Tax in Accordance with the Provisions of Law No. (....) of 2014

1- Realized Capital Gains on Listed Securities

Calculated at the end of the year (December 31) on the net realized capital gains on securities listed on the stock exchange during the year, at a rate of 10%, subject to the following:

1/1 Profit per Transaction:

Calculated as follows:

Net Value of the Sold Security – Acquisition Cost

The net sale value represents the selling price of the security minus a flat rate of 3 per thousand (deemed brokerage commission).

2/1 Acquisition Cost:

Calculated based on the weighted average method as follows:

(a) Listed securities purchased after the effective date of the Law's provisions as follows:

• The purchase price of the securities plus 3 per thousand deemed brokerage commission, as well as fees and other service charges (Authority, Stock Exchange, Egypt Clear, etc.).

(b) Securities purchased before the effective date of the Law's provisions as follows:

• The purchase price shall be the closing price of the security on the day preceding the effective date of the Law's provisions, plus 3 per thousand deemed brokerage commission, as well as fees and other service charges (Authority, Stock Exchange, Egypt Clear, etc.), or the acquisition cost, whichever is higher. The acquisition cost in this case shall be determined by Egypt Clear and the Central Depository Company.

3/1 Capital Losses:

If the result of trading listed securities yields realized capital losses, the losses shall be carried forward for a period not exceeding three years starting from the Gregorian year following the year in which the capital losses were realized.

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2- Cash Dividend Distributions

Tax is levied on cash dividend distributions on listed and unlisted shares received by the fund at the following rates:

• 10% on cash dividend distributions on shares owned by the fund in any company at a percentage of 25% or less.
• 5% on cash dividend distributions on shares owned by the fund in any company at a percentage of more than 25%, subject to holding them for two years (in the case of funds permitted to own more than 25% of a single company's capital).

Tax on cash dividend distributions is withheld and deducted at source, meaning the investment fund receives the net cash dividends after tax deduction.

The tax applies to cash dividend distributions received by the fund from foreign depositary receipts issued against Egyptian securities listed on the stock exchange.

The periodic yield on corporate bonds and securitization bonds is not subject to tax.

3- Free Shares

1/3 Free shares of all companies are exempt from tax.

2/3 Free shares received by the fund are recorded at the par value of the share. The par value is primarily determined to establish the acquisition cost upon disposal of the shares and to determine capital gains or losses.

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4- General Tax Base

Except for what is stipulated in paragraphs (1) to (3) above, the fund's remaining revenues (from issuance and redemption commissions, bank deposit yields, treasury bill and bond yields, etc.) shall be included, subject to the following:

1/4 When preparing the tax return, 10% of the net costs of cash distributions is added to revenues as non-deductible costs.

2/4 The income statement shall reflect the total yield of treasury bills and bonds, with the tax paid on this yield deducted from the tax payable.

3/4 Capital gains on unlisted shares are added, with their share of expenses and costs allocated at a rate proportional to those gains relative to the fund's total revenues.

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Dr. Mustafa Mahmoud Abdel Qader
Head of the Egyptian Tax Authority

Sherif Samy
Head of the Egyptian Financial Supervisory Authority