Egypt’s government has announced plans to introduce a capital gains tax on shares and stakes listed in the Egyptian Stock Exchange (EGX), commencing from the March/April 2025 tax season.
This decision comes amid a complex economic scenario, with the government actively addressing challenges through an International Monetary Fund (IMF)-backed $8 billion loan deal to rectify imbalances in the country’s economy. As part of this program, taxes are being emphasized as a crucial revenue source to mitigate the budget deficit until the conclusion of the loan program in 2026.
The Egyptian Tax Authority (ETA) and the Egyptian Clearing Company have been assigned the responsibility of establishing the necessary procedures for calculating and collecting taxes for the upcoming fiscal year.
To mitigate budget deficit
Egypt’s projected budget deficit for FY2024/2025 is set to expand to EGP 1.2 trillion, constituting 7.2% of the country’s GDP, a significant increase from the estimated EGP 555 billion, equivalent to 4% of GDP, in the current FY2023/2024. This forecast, outlined in the FY2024/2025 budget plan, underscores the economic challenges facing the nation.
Ahmed Elbokl, an associate professor of Economics at Suez Canal University, explained that capital gains tax applies to profits earned from the sale of assets like stocks and real estate and exploring its impact on the Egyptian stock exchange involves a Strengths, Weaknesses, Opportunities, Threats (SWOT) analysis. He noted that the implementation of this tax has faced multiple delays due to global and local economic crises affecting Egypt.
Strength
Elbokl highlighted several potential benefits of implementing the capital gains tax. Firstly, it could bolster government revenues, providing funding for infrastructure projects and public services, thereby fostering economic development.
Secondly, such taxes could contribute to fair income redistribution by expanding social safety nets and programs to assist workers transitioning between jobs. This, in turn, could enhance Egypt’s global standing in poverty reduction and income distribution. Furthermore, the tax may incentivize long-term investment, as investors may opt to hold onto their stocks for extended periods to avoid short-term capital gains tax. Elbokl suggests that this behavior could reduce short-term market volatility and increase stability.
The tax could promote sustainable investments by encouraging investors to retain their assets longer to circumvent the tax, reducing the influx of short-term “hot money” and fostering sustainable investment practices. Elbokl views this as a significant benefit of the tax, the professor said.
Weaknesses
Elbokl also outlined the potential drawbacks of implementing the capital gains tax. Firstly, he highlighted that the tax could lead to reduced liquidity in the market. Investors might be hesitant to buy and sell assets to avoid the tax, resulting in decreased trading volumes and potentially diminishing market dynamism, he stressed.
Secondly, investors would face increased costs due to the tax, potentially making the Egyptian market less attractive compared to markets without such taxes. Lastly, Elbokl emphasized the administrative complexities associated with implementing and managing the tax. This complexity could lead to confusion among investors and raise operational expenses for regulatory bodies.
Opportunities
Applying capital gains tax also presents opportunities for addressing fiscal challenges, as highlighted by Elbokl. Firstly, the revenues generated from this tax can be directed towards funding development and infrastructure projects. This investment in turn can enhance the investment climate and improve market indicators regionally and globally, thereby increasing the appeal of the Egyptian market to potential investors.
Moreover, implementing a stable and adaptable tax policy can boost investor confidence in the Egyptian market, attracting capital seeking long-term stability.
“A well-thought-out capital gains tax can incentivize sustainable investments over short-term gains, ultimately contributing to market stability,” according to Elbokl.
Furthermore, initially targeting the tax on popular stocks among investors, which are crucial for profit generation, can ensure consistent government revenues while mitigating the risk of investor flight. Elbokl suggests that this phased approach can reassure investors about their investments in different stocks.
Challenges
Elbokl highlights several potential risks associated with the implementation of such taxes. Firstly, there’s a concern that the tax could trigger capital flight, especially among foreign investors, who might opt to withdraw their investments from the Egyptian market in search of jurisdictions with more favorable tax regimes. To address this, it’s imperative to ensure that the tax rates remain competitive compared to other markets. Additionally, there’s a risk that high tax rates could erode the competitiveness of the Egyptian market, potentially deterring foreign investment. Moreover, poorly planned or sudden tax decisions may elicit negative reactions from investors, leading to market volatility and diminished confidence. Careful consideration of the timing and implementation of the tax is essential to mitigate these risks and ensure its effectiveness, Elbokl said.
The professor explained that capital gains tax is applied differently across various countries, influencing their economies and stock market performances uniquely. For instance, in the United States, the tax rates vary based on the holding period of assets, with higher rates imposed on short-term gains (less than a year) compared to long-term gains. Similarly, in Australia, the tax is contingent on the holding period, with reductions for long-term gains.
Elbokl recommends a cautious approach in implementing tax policies, emphasizing the importance of clarity and stability.
“Engaging in dialogue with investors and relevant entities is crucial to reaching agreements on tax rates and timing of application, thereby avoiding delays or cancellations. Additionally, effectively utilizing tax revenues to enhance infrastructure and public services can bolster the attractiveness of the Egyptian market to investors in the long run. By adopting this strategy, challenges can be turned into opportunities, fostering the growth and stability of the Egyptian stock exchange,” Elbokl explained.
Elbokl emphasized that international experiences show capital gains tax can effectively generate government revenue and promote long-term investments. However, challenges like reduced market liquidity and impacts on investment decisions must be addressed, Elbokl cautioned. Ultimately, the effects of the tax hinge on its design, implementation, and accompanying policies.
EGX performance
In a conversation with Business Monthly, Omar El-Shenety, Managing Partner at Zilla Capital, noted significant gains in the local market before the March devaluation and major deals with the IMF and Ras El-Hekma. However, after the devaluation and signing of mega deals, the need for hedging vanished, leading to market corrections.
Since April, the EGX has witnessed substantial losses, with its market cap dropping to about EGP 1.7 trillion in April from EGP 1.8 trillion in March, and its exchange value shrinking to EGP 1.5 trillion from EGP 2.1 trillion in March. El-Shenety identified key drivers behind this decline, including the repricing of stocks based on the new exchange rate post-devaluation, the correction due to reduced hedging needs, margin calls forcing investor sell-offs, institutional money exiting the market, and the fear-driven selling by small investors amidst rapid market declines.
