- General Background
- Scope of Application
- Amended Rules of Customs and Taxes
- Program Incentives
- Special Fund for the Program
1.1 A draft law on the Development of Vehicles Industry and its Feeders Industries (“Draft Law”) has been recently issued by the Ministry of Trade and Industry and submitted to the Egyptian House of Representatives for approval. The purpose of the prospective law is to enhance and develop vehicles industry and feeders industries in Egypt (the “Industry”).
1.2 The Draft Law inaugurates an eight-years national program for developing vehicles and feeds industries introducing new incentives for companies who are able to reach a threshold local component percentage, production quantity or exportation value (the "Program").
1.3 The Draft Law sets new rules for customs tax, state resources development fees and the sales tax imposed on certain types of vehicles. It also provides for a new tax called the "Industry Development Tax" to apply on imported as well as locally produced vehicles. The Draft Law is consisting of 20 articles. Below is a summary of its main provisions.
2.Scope of Application
a. Passenger vehicles with internal combustion engine of three or more pistons, excluding ambulances and hearses vehicles, (Under HS Code 87.03).
b. Vehicles for the transport of 10 to 16 passengers (including the driver) (HS Code 87.02).
c. Vehicles for the transport of goods, especially HS Code no. 87042190 (Others) and HS Code 87042210: (g.v.w. [gross vehicle weight] exceeding 5 tones and less than 9 tones).
3.Amended Rules of Customs and Taxes
3.1 The current customs tariff applicable on the above vehicles by virtue of the Presidential Decree no. 184 of 2013 (the “Tariff Code”), as amended, is replaced with a unified customs tariff of 10% of the value on which the customs tax should be calculated. For example, the above referenced vehicles under 2.1 (a) and (b) are currently subject to a customs tariff of 40%. According to the Draft Law, it will be reduced to 10%.
b. Special Exemption from State Financial Resources Development Fee
3.2 Cars with a cylinder capacity less than 1300 CC, which are imported from abroad or manufactured locally, are exempted from the State Financial Resources Development Fee (“Development Fee”). The Development Fee on such cars is currently amounting to 3% of the value of the care.1
c. Special Application of Sales Tax
3.3 The Draft Law provides that imported passenger vehicles with capacity more than 2000 CC, shall be subject to the same sales tax treatment of passenger vehicles that are locally manufactured. According to the Sales Tax Law 2, passenger vehicles with capacity more than 2000 CC are subject to 30% sales tax,3 which was increased in 1997 by an additional 5%. 4 This means that the imported passenger vehicles, with capacity more than 2000 CC, are subject to an aggregate sales tax amounted to 35%.
d. Industry Development Tax
3.4 According to the Draft Law, a new Industry Development Tax (“ID Tax”) shall be imposed on the above listed vehicles according to the below list(1) of tax brackets:
- Passenger Vehicles
- > 1300cc: 30%
- <1300cc >1600cc: 30%
- <1600cc >2000cc: 100%
- >2000cc: 135%
- Vehicles used to transport 10-16 persons including the driver.
- Vehicles for the transport of goods, with g.v.w. not exceeding 5 tones.
- Vehicles for the transport of goods, with g.v.w. exceeding 5 tones and less than 9 tones.
3.5 Such ID Tax shall be due on the imported vehicles, only one time, when they are customs cleared and on vehicles manufactured locally when they are sold in the local market.5
3.6 The ID Tax base of the vehicles manufactured locally shall be calculated according to the price determined by the factory plus the sales taxes and the Development Fees. The ID Tax base for the imported vehicles shall be calculated based on the value on which the customs tariff should be calculated, plus custom taxes, sales taxes and the Development Fees.
4.1 New incentives are introduced for companies which are able to reach the required local component percentage, production quantity or exportation threshold. These incentives shall be calculated on the basis of the price of the vehicle as in the sales invoice in addition to all imposed taxes. The amount of this incentive shall be deducted from the ID Tax imposed on each kind of vehicles (see List (1) above).6 Below are the incentive percentages(list 2):
- Passenger Vehicles
- > 1300cc: 23.05%
- <1300cc >1600cc: 23.05%
- <1600cc >2000cc: 50%
- >2000cc: 57.45%
- Vehicles used to transport 10-16
persons including the driver.
- Vehicles for the transport of goods,
with g.v.w. not exceeding 5 tones.
- Vehicles for the transport of goods,
with g.v.w. exceeding 5 tones and less
than 9 tones.
4.2 In order for a company to benefit from this incentive, it must meet one of the following conditions:
i. Local Components
4.3 The local components used in locally manufactured vehicles reach the percentage to be defined in the Executive regulations. The Program aims at gradually increasing the percentages of the local components until it reaches (60%) for passenger vehicles or vehicles used to transport 10-16 person; and (70%) for light and medium trucks during the 8 years following the release of the law.
4.4 Vehicles which benefit from this incentive will not be able to benefit from the tariff reductions laid out in Article 6 of the Tariff Code.7
ii. Production Capacity
4.5 A minimum annual production capacity to be determined by the executive regulation of the law must be reached. The Program aims that a company should reach the following production capacity by the end of its duration:
- 60,000 vehicles for passenger vehicles with cylinder not exceeding 1.6 CC or for vehicles used to transport 10-16 persons.
- 8,000 vehicles for passenger vehicles with cylinder exceeding 1.6 CC.
- 50,000 vehicles: for light and medium trucks.
4.6 This is in addition to having a minimum of 45% local components for passenger vehicles and vehicles used to transport 10 -16 persons, 60% for vehicles used to transport goods with g.v.w up to 9 tons.
iii. Exportation Threshold
4.7 A minimum threshold of exportation is fulfilled as to be determined by the executive regulations of the law. Exports of vehicle parts manufactured locally should reach from 25% up to 40% of the aggregate production value for the assembling company, or of the value of the customs invoice of the imported vehicles.
4.8 Exports of locally manufactured complete vehicles should reach from 75% up to 125% of the aggregate production value for the assembling company, or of the value of the customs invoice of the imported vehicles.
4.9 Assembling companies shall enjoy the abovementioned incentives by deducting them from the ID Tax imposed on local components sold in the market. Whereas, the exportation incentives applying on importers shall be settled against the ID Tax due on the imported cars.
5. Special Fund for the Program
5.1 A special fund for the development of vehicles industry and its feeders industries (the “Fund”) shall be established to carry out the following:
- managing the Program and granting the incentives provided by the Draft Law;
- disbursing funds to develop and promoting the Industry; and
- supervising the performance of companies participating in the Program and ensuring their compliance with the prices notified to the Fund.
5.2 Such Fund shall be affiliated to the Industry Development Authority (IDA) and shall be managed by a board of directors to be chaired by the IDA chairman, with the membership of an array of relevant ministers and representatives of the Federations of Egyptian Industries.
5.3 The financial resources of the Fund are mainly depending on the collected ID Tax and the contribution of companies and entities, participating in the Program, by (0.5%) of their annual sales value.8
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Article (1) paragraph (17) of the Development Fees Law no. 147 of 1984. ↩
Law no. 11 of 1991 as amended. ↩
List (1) attached to the Sales Tax Law ↩
Law no. 2 of 1997 amending the Sales Tax Law. ↩
Also, it shall be deemed as a sale, using the vehicles by a taxable person for its private or personal purposes or disposing them by any legal disposal. ↩
Article (6) of the Draft Law. ↩
Egypt’s tariff reductions are laid out in Article 6 of the Tariff Code. The rule consists of two principal sections: Section A: the tariff on completely-knocked-down (CKD) parts imported for industry purpose under supervision of the Customs Authority is equal to 90% of the finished good tariff. If, for example, an assembler imports CKD parts of a motor vehicle and then assembles the vehicle in Egypt, the tariff on the components would be 90% of the finished motor tariff. Section B: the tariff on components depends on a sliding scale that is based on the share of local components in the final value of finished goods. If, for example, the assembly industry reaches 30% local content, the tariff on the imported parts would be the finished good tariff after reductions of 30% for local content and an additional 3% (10% of 30%). On net, therefore, the assembler pays only 67% of the finished good tariff. Assemblers to base their input tariffs either on the sliding scale above or on the individual component tariffs that are listed in the Egyptian tariff code, whichever are lower. The method is called “itemization” and is allowed only if the manufacture achieves a 60% percentage of local content. ↩
Article (9) of the Draft Law. ↩