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Thursday, 11 November 2021

Cabinet announces basket of measures to make EGX more attractive to investors, companies

Trading on the EGX is about to get more affordable: The Madbouly government has announced a package of EGX tax cuts and fee reductions to support trading on the bourse ahead of the introduction of the capital gains tax on resident investors next year.

Investors are going to be paying less in fees: Trading and clearance fees, as well fees paid to the Financial Regulatory Authority and the Investor Protection Fund, will all be reduced, cabinet said in the statement, without disclosing figures.

And all of the fees will be tax-deductible: All fees will be classified as expenses, meaning investors paying taxes here will be allowed to use them to offset their tax bill.

A sweetener for folks (that would be just about everyone in the market) hating on the capital gains tax? The government is looking to cushion the blow for shareholders who have owned stock for a long period of time — who through investment style and good fortune would literally be buying low and selling high — by tweaking how capital gains are calculated.

Huh? Whaddya mean? A 10% capital gains tax would typically be calculated on the delta between the price at which the investor sold and the price at which she bought. But the government is planning to propose a grandfather clause that could cushion the impact of the tax on people who held shares at the time the tax comes in.

How would that work? For shares you own on the date the grandfather clause comes into effect, the capital gains tax would be calculated based on the selling price minus the price of the share when you bought it or when the measure came into effect — whichever was higher.

How does that help? Without the grandfather clause: Let’s say you bought one share of EGX-listed ZFT Co twenty years ago at EGP 1.00 — and sell it this year at EGP 15.00. Your gain is EGP 14.00, and the government wants EGP 1.40 from you, please and thank you. With the grandfather clause: If ZFT’s share price was EGP 12.00 at the time the law was enacted, then your gain is EGP 2.00 — and the government wants just EGP 0.20 from you.

The path forward is still a bit opaque: We do note that the statement doesn’t use the words “capital gains tax,” which cabinet now seems to understand is financial kryptonite. It also does not make clear whether the grandfather clause would require legislation or if it will be enacted as a regulation.

BACKGROUND- The securities industry and investors have come out in opposition to the government’s plan to introduce a 10% capital gains tax on net portfolio earnings starting 1 January 2022, and have warned that the additional tax would stunt trading volumes and further weigh on foreign investment on the bourse. Lawmakers in both the House and the Senate have been suggesting the tax needs to be reconsidered.

More tax breaks: The plans will slash tax charged on share swap transactions from 22% to 10%, while tax paid by retail traders on earnings from mutual funds will drop to 5%. There will also be measures in place to mitigate the tax implications of capital increases.

Tax incentives to promote capex: Companies will pay no tax on share price gains used to fund capital expenditure in an effort to encourage firms to expand.

Support for newly-listed companies: Investors will receive a 50% tax deduction on income derived from trading the shares of companies that have recently IPOed on the bourse, a move designed to boost liquidity for new companies on the exchange and encourage more businesses to list.

This isn’t the first time in recent period officials have amended the rules in efforts to attract investors: Back in September, the Financial Regulatory Authority (FRA) announced new new listing amendments (pdf) to reduce the amount of capital that companies need to offer to the public in efforts to encourage share sales on the Egyptian bourse.

Also in the package:

  • Opportunity cost is now tax-deductible: Policymakers will come up with a calculation to determine the equivalent of the opportunity cost taken by investors when they choose to put their money into the EGX, which will then be deducted from their taxable income.
  • A solution for dual taxation? The authorities are also working on a solution to the issue of the double taxation of the parent company and its subsidiaries if both are listed on the EGX. Currently subsidies’ bourse earnings make onto both, the subsidiary and its parent company’s tax bases.
  • More breaks and services ahead? The government will establish a unit within the General Investment Authority to resolve any issues faced by listed companies and work to encourage more companies to list on the exchange.

For more: Check out EGX boss Mohamed Farid’s appearance on the air waves last night, during which he walked us through the amendments (watch, runtime: 8:18).

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