Business Incorporation in Egypt-Youssry Saleh Law Firm

Business Incorporation in Egypt

Youssry Saleh & Partners   9 Jul 2016   2470 Views

Foreign enterprises wishing to conduct business in Egypt may enter the Egyptian market by establishing a permanent legal structure. Foreign investors are permitted to establish various types of entities by the Egyptian law. These entities may have either permanent presence as Limited Liability Companies ( LLC) and Joint Stock Companies or temporary presence as Foreign Branch Offices and Foreign Representative Offices. Generally, investment in Egypt is subject to the Egyptian Corporate Commercial Law, however, if the entity invests in certain fields, it might obtain benefits from the Egyptian Investment Law.

Limited Liability Companies as well as Joint Stock Companies are the two forms preferred most by foreign investors intending to incorporate a business in Egypt.   Joint stock companies may be fully controlled by a foreigner and also limited liability companies may be 100% owned by foreigners provided that at least one of the general managers is an Egyptian.

Thus, herein the main differences will be highlighted between the four entities: Limited Liability Companies, Joint Stock Companies, Foreign Branch Offices and Foreign Representative Offices.

  • Limited Liability Company (“LLC”)

An Egyptian LLC is a company that is closed due to the limited liability of its shareholders equivalent to their shares’ values in the capital of the company. Therefore, it may be defined as a private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested.

To register an LLC, you must be aware of the following:

– An LLC must be registered in the Commercial Register at the General Authority for Investment and Free Zones (GAFI) as it is subject to its supervision. Any amendments to the articles of incorporation and by-laws must be reported to GAFI and approved by it. The LLC is incorporated once it is registered in the Commercial Register.

– The founding shareholders of the LLC must submit an application requesting permission to incorporate an LLC. The Ministerial Decision Implementing the Commercial Companies Law outlines the mandatory provisions that must be included in the Memorandum of Association.

– The name of the LLC must be derived from the object of the company and may include the name of one or more of its partners/shareholders. Additionally, the words “Limited Liability Company” must be included in the name.

To determine the scope of activities of an LLC, you must be aware of the following:

– According to the Law No.159/1981, Limited liability companies are not allowed to undertake insurance businesses, or banking functions or savings, or receive deposits, or invest funds to the account of other parties.

– However, LLC’s may carry out legal commercial activities like other business entities with the general limitations provided for in the applicable laws and regulations.

To manage an LLC, you must be aware of the following:

– There is no minimum Egyptian shareholding required to form an LLC so it may be 100% owned by foreigners due to the absence of a provision regarding this matter.

– The Egyptian Law states that an LLC may be formed with a minimum of two shareholders and a maximum of 50 shareholders.

– Shareholders appoint managers who may be one or more with at least one manager who is of Egyptian Nationality.

– The managers must be named in the Memorandum of Association but need not be a shareholders.

– The managers may be appointed for a definite term (which must be specified in the Memorandum of Association) or for an indefinite term. The managers shall have full authority to represent the LLC vis a vis third parties, unless such authority is limited or qualified by the Memorandum of Association.

– A supervisory board is required if the LLC has more than ten shareholders of which at least three must be shareholders.

To determine the capital required for forming an LLC, you must be aware of the following:

– Each partner/shareholder is liable to the extent of the value of his shares and no share certificates are issued.

– The minimum share capital required to form an LLC is LE 1,000. The capital must be divided into equal shares, either in cash or in kind, and the value of each share must be at least LE 10.

To pay taxes imposed on an LLC, you must be aware of the following:

– LLC’s are subject to tax on companies’ profits.

  • Joint Stock Company (“JSC”)

The Egyptian Commercial Companies Law defines a JSC as a company whose capital is divided into shares of equal value, which shares are negotiable in the manner prescribed by law. The liability of a shareholder is limited to the value of the shares subscribed for by him. An Egyptian joint stock company may be a closed company or a listed company.

To register a JSC, you must be aware of the following:

– A JSC must be registered in the Commercial Register at the General Authority for Investment and Free Zones (GAFI) as it is subject to its supervision like limited liability companies. Any amendments to the articles of incorporation and by-laws must be reported to GAFI and approved by it. The JSC is incorporated once it is registered in the Commercial Register.

– The Egyptian Financial Supervisory Authority (EFSA) should be informed of the issuance of any stocks or bonds which it must approve. Moreover, this authority is competent with issuing licenses to companies working in certain areas.

– The Company must keep accounts and publish its audited accounts and financial statements which are duly audited by a qualified Egyptian auditor.

–  The Company name shall be derived from the objects for which it is to be incorporated and may not include the name of one or more of the shareholders.

– At least 25% of the cash equity of the company must be paid up prior to incorporation.

 To determine the scope of activities of a JSC, you must be aware of the following:

– A joint stock company may carry out legal commercial activities like other business entities with the general limitations provided for in the applicable laws and regulations.

To manage a JSC, you must be aware of the following:

– A JSC must have at least three founding shareholders.

– The directors shall hold a term of three years, except for the initial directors, who are appointed for a term of 5 years.

– Juristic persons are allowed to act as directors, provided that a natural person is appointed as representative to act on its behalf on the Board.

– The majority of the Board of Directors must be Egyptian nationals. This requirement does not apply to JSC’s incorporated under the Investment Law, whose corporate objects are among the activities specified in Article 1 of the Investment Law.

– Directors are required to own a specified number of shares, which must be deposited in an account, where they will remain throughout his tenure, as a guarantee of his management. The value of the shares must be at least LE 5,000.

To determine the capital required for forming a JSC, you must be aware of the following:

– Shares may be closely held or offered to the public. The minimum share capital of a JSC is LE 500,000, fully paid up if the JSC offers its shares to the public and LE 250,000 if it is private of which 10% is to be paid at the time of incorporation, to be increased to 25% within three months, and the remaining amount of the nominal value of the shares is to be paid up within five years.

– In case of holding companies established for the purposes of stock dealings and investment, the minimum capital is LE 5 million, of which at least 25% must be paid upon incorporation. The remaining amount of the issued capital is to be paid up within five years of the date of incorporation according to the procedure and at the rate set by the board of directors. The authorized capital is not to exceed 10 times the issued capital. If the shares are to be offered to the public, this must be done through a bank licensed to receive subscriptions, a company established for this purpose, or a company licensed by EFSA to deal in securities.

– The capital must be divided into shares of equal value, with a nominal value  between LE 5 and LE 1,000. All shares must be registered. A shareholder’s liability is limited to the value of the shares subscribed to  him. Share certificates are issued in the name of each shareholder.

– In general, there are no limitations to the percentage of the capital that can be owned by foreigners. However, there are some exceptions to the previous rule. For example, certain regulatory approvals are required for foreign and local investments in Egyptian banks and insurance companies exceeding 10% of the issued shares.

To pay taxes imposed on a JSC, you must be aware of the following:

– JSC’s are subject to tax on companies’ profits.

  • Foreign Branch Office

According to the Egyptian Companies Law, a foreign company may establish a branch office in Egypt to undertake certain commercial activities. Practically, the branch is treated as an Egyptian company in all matters except corporate governance. In other words, a branch office is an outlet of a company or, more generally, an organization that does not constitute a separate legal entity, while being physically separated from the organization’s main office.

To register a Foreign Branch Office, you must be aware of the following:

– Following approval of the registration application, any foreign company, whatever its legal form is, which carries out any commercial, financial, industrial or contracting activity in Egypt has to be registered as a branch in the Commercial Register at the General Authority for Investment and Free Zones (GAFI).

– Once registered at the Commercial Register, the foreign branch must also be registered in a centralized register of foreign companies kept at the Commercial Companies Department.

– The branch must have the same name as the parent company.

To determine the scope of activities of a Foreign Branch Office, you must be aware of the following:

– A branch can undertake any form of legal activity in Egypt for which it is registered in the Commercial Registry provided that it has a signed contract with an Egyptian entity to provide the services encompassed by such activity.

To manage a Foreign Branch Office, you must be aware of the following:

– A branch can be managed by a foreign manager and it is under the full control of its parent company. Branch offices’ activities are subject to review by GAFI to ensure compliance with laws and regulations.

To determine the capital required for forming a Foreign Branch Office, you must be aware of the following:

– Branch offices are not subject to a requirement of a minimum capital investment. However, initial capital investments must be made in foreign currency transferred to Egypt through a registered Egyptian bank.

To pay taxes imposed on a Foreign Branch Office, you must be aware of the following:

– The net profit of a branch is subject to a corporate tax at the same rate as Egyptian companies. It is subject to corporate income tax at the rate of 40% on profits that are generated from its operations in Egypt.

– Branches are subject to exemption from taxation for a period of ten years if they exercise their activities in new urban communities and employ a certain percentage of Egyptian nationals as specified in the Companies Law.

  • Foreign Representative Office

According to the Egyptian Companies Law and its Executive Regulations, a foreign company may establish a representation, liaison, scientific, or other office as long as the sole purpose of such office is to carry out market surveys or to study the feasibility of production without carrying on any commercial activity including the activities of a commercial agent for the benefit of the foreign company.

To register a Foreign Representative Office, you must be aware of the following:

– The representative office must be registered in the Register of Foreign Representative Offices kept by the Companies Department at the Ministry of Economy and Foreign Trade (MEFT), the Imports and Exports Authority, GAFI, as well as the Central Bank of Egypt (CBE).

– If an office is designated as a “technical” representative office, it must be registered with the Ministry responsible for its field of activity. For example, a technical office relating to pharmaceuticals must be registered with the Ministry of Health.

To determine the scope of activities of a Foreign Representative Office, you must be aware of the following:

– According to the Regulations for Egyptian Companies Law, the scope of activity for a representative office is very limited as the sole authorized activity for a representative office is to conduct market research, market surveys, and production studies.

– In the case of a “technical” representative office, the scope also includes technical review of products in the market.

– Representative offices are prohibited from the exercise of any trading activity.

– Activities of a representative office are subject to review by GAFI to ensure compliance with laws and regulations.

To manage a Foreign Representative Office, you must be aware of the following:

– The management can be handled by a foreign manager for the representative office.

– A representative office is under the full control of the parent company.

To determine the capital required for forming a Foreign Representative Office, you must be aware of the following:

– There is no requirement for any capital investment. The parent company pays for the expenses of maintaining the representative office.

To pay taxes imposed on a Foreign Representative Office, you must be aware of the following:

– Since a representative office is legally not involved in any commercial activities, it does not realize any profits and as such is not subject to taxation.

– Employees are subject to applicable taxes on their employment income.

  • In order to facilitate choosing the adequate entity to incorporate, following is a simple brief for the best use of each entity mentioned above:

– A Limited Liability Company is an adequate entity for incorporation of small businesses. The LLC is a favored choice for businesses with few owners not looking to build the business into a much larger company. Moreover, due to the limited liability of its shareholders, it provides a comfortable feeling of security for investors in the Company.

– A Joint Stock Company might be the choice for medium and large-sized companies as it is not advisable for small companies due to its expensive corporate form. Partners who want their liability to be limited to the value of the shares subscribed for by each of them might prefer a JSC. To sum up, this is an appropriate legal form if partners wish to make high-risk medium to large investments.

– A branch office is an adequate entity for low cost projects, however, it is not the ideal choice for massive projects because the parent company and branch offices activities are not differentiated and the parent company is fully liable for the branches liabilities.

– A representative office may be useful to monitor commercial activities undertaken by some other form of business entity undertaking the actual commercial activity on behalf of the foreign entity in Egypt. For example, a foreign entity’s representative office may be used to monitor the activities of a foreign entity’s distributor or agent in Egypt. The office may, indirectly, assist the distributor through conducting market research, market surveys, and production studies.

Youssry Saleh Law Firm in Egypt assist investors during establishing, formation, incorporating of their entities as well as helps to make use of additional investment guarantees and incentives discussed in the Egyptian investment law