The government said this week that it was going ahead with a 10 per cent capital gains tax (CGT) on Egyptian Stock Exchange (EGX) transactions starting on 1 January 2022.

The CGT has been repeatedly postponed since the idea was first floated in 2015. Fears of repelling EGX investors put the brakes on the project until 2017, and the application of the tax was then put off for three more years and instead replaced by a 0.125 per thousand stamp duty.

In 2019, the Ministry of Finance and the EGX negotiated draft amendments to the CGT to be enforced in 2020. The government has now decided to implement the CGT on the first day of 2022 as part of a batch of measures to back investment in Egyptian equities.

The tax will be applied in tandem with the launch of an initial public offering (IPO) programme that encompasses five companies, including e-finance and others operating in the public business sector.

Minister of the Public Business Sector Hisham Tawfik told the media that the idea of the CGT was proposed by the Egyptian Capital Market Association (ECMA). “I was a mediator in the negotiations. The tax was proposed by market experts because it is way fairer for traders than the stamp duty,” Tawfik said.

Regarding claims that this is not the right time for the CGT to see the light, Tawfik said “there is never a right time to apply a tax.”

Nonetheless, more than 20 MPs announced last week that they would draft a legislative amendment to postpone the implementation of the tax to 2023 instead of January 2022. They said that investors were already suffering as a result of the fallout from the Covid-19 pandemic, and a new tax would make things worse.

However, Tawfik denied that the CGT would drive investors away, stressing that “it is an alternative to the stamp duty.” He said that the new tax “will help investors because they will pay the tax from net profits after deducting losses. It is a very fair tax when compared with the stamp duty.”

ECMA head Mohamed Maher said the market had already absorbed the shock of enforcing the tax. He added that some businesses had requested postponing the CGT, pointing out that emerging markets, such as Egypt, do not impose similar taxes.

The market is also still recovering from the repercussions of the 25 January 2011 Revolution and the coronavirus pandemic, raising fears of the results of the application of the CGT, he said.

He added that it was unclear how the tax would be applied and collected.

Concerning debates about the unfairness of applying the CGT to local investors but excluding foreigners, Maher said that foreigners pay stamp duty and it was difficult to tax them on capital gains.

Foreign investors in the EGX are exempt from paying the CGT, which will be collected from individuals and entities domiciled in Egypt.

In 2017, the government approved a gradual stamp duty on EGX transactions, starting with a rate of 1.25 per thousand on buying and selling operations in the first year of implementation, 1.5 per thousand in the second year, and 1.75 per thousand in the third year.

In July 2019, the government cancelled the increased scheduled for the third year, maintaining it at 1.5 per thousand.

Negotiations on the CGT three years ago resulted in lowering the stamp duty to 0.5 per thousand for resident buyers and sellers and reducing it to 1.25 per thousand, down from 1.5 per thousand, for foreign non-resident buyers and sellers.

A number of financial analysts and EGX investors objected to the decision, demanding the cancellation of the duty altogether.

The CGT will be calculated based on net portfolio earnings at the end of the tax year. Earlier on, there were fears that the tax would be determined based on equities, not portfolios, as is the case in the international market.

The Egyptian Tax Authority said that investors with portfolios over LE5 million may have to open a tax file to pay the CGT.

Small retail investors, who make up 80 per cent of traders in the EGX, do not need to open a tax file since the CGT will be collected by the Misr for Central Clearing and Deposits Agency.

The International Monetary Fund (IMF) earlier criticised the government’s decision to postpone the application of the CGT, saying that poorer segments of the population would be disproportionately shouldering tax burdens.

The new year will tell if policymakers’ fears that the CGT will negatively reflect on local investment in the EGX are justified.

*A version of this article appears in print in the 7 October, 2021 edition of Al-Ahram Weekly