The Egyptian government is studying the introduction of amendments to real estate laws to resolve the accumulating challenges in the sector. Among these amendments is a draft law to amend certain provisions of the Income Tax Law 91/2005 on the real estate transaction tax.
The amendments are meant to define the legal dealings between the seller and the buyer, legalize real estate ownership, achieve security for owners, facilitate the real estate registration procedures –which are required to gain access to the Central Bank of Egypt’s (CBE) real estate financing initiative– and preserve the state’s rights to collect taxes, while reducing the burden of taxes on citizens.
The Proposed Amendment to the Real Estate Transaction Tax
The real estate transaction tax is one form of income tax and it’s payable on the gross value of properties or vacant land whether the transfer (disposal) is of the whole property or part thereof, whether the land is owned by the taxpayer or others, and whether the contracts of disposal are notarized or not. The transaction tax is estimated at 2.5 percent of the value written on the disposal contract (down from the five percent value established by Law 143/1981). The tax is payable within 30 days of concluding the sale to avoid imposition of fines of the taxpayer.
The draft law, which the cabinet approved and referred to the House of Representatives for debate and enactment, provides for replacing the 2.5 percent tax with a lump-sum tax ranging between EGP 1,500-4000 for real estate sale contracts entered into before 19 May 2013, i.e. the date of the entry into force of the Law 11/2013, which included the last amendment to the real estate transaction tax. In other words, the real estate disposition tax that is currently in effect is estimated at 2.5 percent of the disposition value on all taxable sale contracts, regardless of the date of concluding them. However, upon approval of the draft law, only contracts signed before 19 May 2013 will be excluded to be subject to a lump-sum tax rather than a percentage tax of the sale contract.
Examples of properties eligible for real estate transaction tax exemptions include cases of 1) provision of real estate as an in-kind share in the capital of joint stock companies, provided that the ownership cannot be transferred for five years, 2) donation of real estate to direct ancestors (parents) or direct descendants (children) or spouses (husband and wife), 3) forced sale, 4) expropriation of real estate for public benefit, and 5) donation of real estate to state agencies. Notably, this tax shall be imposed only on individual property dispositions. Multiple dispositions, i.e. the sale of more than one property, are regarded as being a real estate investment activity that is subject to the commercial and industrial profits tax, rather than the real estate transaction tax.
Real Estate Transaction Tax and Real Estate Tax
There is a difference between the real estate transaction tax and real estate tax. The real estate tax that was imposed since the 1950s on properties except those that serve as a main residence (first residential unit) whose value is less than EGP 2 million, otherwise the unit becomes taxable. It was estimated at 10 percent of the net annual rental value of the real estate unit after deducting 30 percent for housing units and 32 percent for non-housing units, for maintenance expenses the taxpayer bears. This tax is collected annually, possibly in two equal installments, the first of which can be paid until the end of June and the second until the end of December. The taxpayer may pay it in full on the date of paying the first installment pursuant to Law 196/2008.
The real estate tax is calculated by estimating the capital value of the property, amounting to 60 percent of its market value, then calculating the annual rental, estimated at three percent of the capital value of the property, then 30 percent of the rental value is deducted for residential units and 32 percent for non-residential units in exchange for all maintenance expenses incurred by the owner. The unit whose net annual rental value is less than EGP 24,000 and taken by the taxpayer as a main residence is tax-exempt as well as non-residential units (commercial and administrative) whose net annual rent is less than EGP 1,200.
A real estate tax is distinct from a real estate transaction tax. The real estate transaction tax is payable once when the property is sold, whereas the real estate tax is paid annually based on the estimated rental value of the housing unit. The rental value is assessed once every five years to ensure the change in the rental value is taken into consideration. The real estate tax is levied on built units and collected by the Real Estate Taxation Authority whereas the real estate transaction tax is imposed in the case of selling of real estate or vacant land and is collected by the Egyptian Tax Authority. In addition, the real estate tax is imposed on the owner of the property or whoever has right in rem with respect to the property whereas the real estate transaction tax is imposed on the seller, not the buyer.
Goals of the Real Estate Transaction Tax
The real estate transaction tax and the proposed amendment to it aim at achieving several goals, primarily reducing the burden of taxes imposed on the taxpayer. The following table compares the value of the tax in lump sum for contracts signed before 19 May 2013 according to the proposed draft law as opposed to the current 2.5 percent tax.
Table 1: Comparison between the proposed lump-sum tax and the current 2.5 percent tax
It should be noted that swapping the 2.5 percent tax for a lump sum tax for contracts made before 19 May 2013 entails reducing the tax burden on citizens, which would push taxpayers to pay the tax. Additionally, this tax shall be levied on the last seller of the property unit without regard to the chain of ownership to facilitate the registration of properties sold before 2013.
Realizing the importance of reducing the burden of taxation to avoid tax evasion, several parliamentarians stressed the need to reduce the tax rate of 2.5 percent for contracts concluded after 19 May 2013.
Additionally, the real estate transaction tax will help enumerate all of the properties in Egypt through the individuals’ registration of their real estate. In this vein, it should be noted that the Real Estate Publicity Law 5/2021 issued on 6 March 2021 disassociated payment of real estate transaction tax from real estate registration to ensure facilitating the real estate registration procedures. The buyer registers the property at the real estate publicity department and gets access to all utilities without being charged any taxes. Based on the registered sale contract, the competent tax authority collects the tax from the seller being the party that generated revenue from the sale.
As for the impact of that tax on government income in the event that the draft law is approved, the tax is projected to bring about greater government revenues estimated at EGP 500 billion if the tax imposed on sale contracts made before 2013 is paid. Additionally, state revenues will also increase as a result of collecting the 2.5 percent of the taxable sale contracts, ranging between 500,000 to 650,000 sale contracts annually
Overall, the draft law will reduce the taxation burden on the buyer, bring about an increase in the state’s tax revenue, and encourage buyers to register their property which would result in preservation of rights and property, enhancement of the properties’ enumeration process, and promoting access to the real estate financing initiative that require registration of properties.
The swift adoption of laws and decisions is very important to achieve the desired goals and allow for examining mechanisms to confront other challenges facing the real estate sector, particularly those relating to old lease contracts.