What are the taxes involved in mining in Egypt? Tax research on mining enterprises

1. Tax System Analysis of Egypt

In Egypt, resident enterprises and individuals are taxed on global income, while non-residents are taxed on income generated within Egypt. The corporate income tax rate is 22.5%, and the personal income tax is a progressive tax with a threshold of 21,000 EGP. Capital gains tax has different rules for residents and non-residents. Egypt has taken a cautious approach to cryptocurrencies and has not yet specified tax details, but mining enterprises may generally face income tax and capital gains tax.

1.1. Identification of resident and non-resident taxpayers

1.1.1 Criteria for the recognition of resident and non-resident enterprises in Egypt

Foreign companies and partnerships are classified as Egyptian resident businesses if they meet one of the following criteria: the entity is incorporated under Egyptian law; The government or public agency owns more than 50% of the capital of the entity; The effective management location is in Egypt.

Of these, Egypt is considered a valid place of administration if an entity meets any two of the following conditions: day-to-day management decisions are made in Egypt; Board members meet in Egypt; At least 50% of the board members or management reside in Egypt; The major shareholder (who owns more than 50% of the shares or voting rights) resides in Egypt.

In addition, the Egyptian Income Tax Law defines a permanent establishment (PE) as follows: head office, branch, building used as a point of sale, office, factory, workshop, natural resource extraction, farm, construction site, building or assembly point, facility, regulatory activities, agent authorized to approve contracts on behalf of the foreign company, independent broker or agent who is certified to spend most of the year for the benefit of the foreign company.

Except for resident enterprises and permanent establishment (PE), all other enterprises are non-resident enterprises. Resident businesses are taxed on worldwide income. Non-resident businesses and partnerships are taxed on the income of their permanent establishment (PE) in Egypt.

1.1.2 Standards for identifying Egyptian residents and non-resident individuals

A natural person who meets any of the following conditions should be considered an Egyptian resident: having a permanent residence in Egypt; considering the impact of Egypt's double taxation treaties (DTTs) with other countries on the determination of this period, if the person has been continuously or intermittently residing in Egypt for more than 183 days within a 12-month period; if the person is an Egyptian performing duties abroad, but whose income comes from the Egyptian Ministry of Finance's allocation.

Any natural person who does not meet any of the above conditions should be considered a non-resident individual.

1.2 Income Tax

1.2.1 Corporation Income Tax The corporate income tax (CIT) rate in Egypt is 22.5% of the net profit of the company.

This rate applies to all types of business activities, but oil exploration companies are exempt, with a profit tax rate of 40.55%. In addition, the profit tax rate for the Suez Canal Authority, the Egyptian Oil Authority, and the Central Bank of Egypt is 40%.

1.2.2 Personal Income Tax

Egypt applies a system of taxation based on residency and source, where personal income tax is levied on the net income of resident individuals earned in Egypt, as well as the net income of resident individuals who conduct business, industry, or professional activities (meaning the location where the individual makes decisions and where their main interests are located is in Egypt) earned outside of Egypt. In addition, personal income tax is levied on the income earned by non-resident individuals in Egypt. That is, resident individuals are required to pay tax on their global income, including income earned in Egypt and abroad, while non-resident individuals are required to pay tax only on income earned in Egypt.

Egypt uses a progressive tax system, where the tax rate increases as income levels rise. The personal income tax threshold is 21,000 EGP, and the tax rate ranges from 2.5% to 27.5%, depending on the taxpayer's income bracket. The progressive tax system is designed to achieve a fair distribution of tax burdens and ensure that high-income individuals contribute a larger proportion of their income to the government.

1.3 Capital Gains Tax

The Egyptian Income Tax Law defines capital gains as the difference between the cost of acquiring shares and their fair market value/selling price. For listed shares purchased before July 1, 2014, and sold after that date, capital gains will be calculated based on the difference between the purchase price or the closing price on June 30, 2014 (whichever is higher) and the selling price.

l Capital Gains Tax (CGT) treatment applicable to resident enterprises/individuals:

Capital gains realized by resident shareholders from the sale of listed shares traded on the EGX (Egyptian Stock Exchange) should be taxed at a rate of 10%. On the other hand, capital gains realized from the sale of non-listed shares/securities should be taxed at the individual income tax rate. For investments in foreign shares/securities (investing abroad): If Egypt is the center of the individual's business, industry, or professional activities, capital gains realized from investments in foreign shares should be subject to personal income tax. The latest amendment to the Tax Law (2023 Law No. 30) provides additional capital gains tax relief for individuals who meet certain criteria: Allowing an additional cost (up to 0.5% of the selling and buying transactions) to be treated as a deductible expense, thereby reducing the taxable capital gains.

l Capital Gains Tax treatment applicable to non-resident enterprises/individuals: Non-resident shareholders' capital gains from the sale of listed shares on EGX should not be subject to corporate income tax (including T-bonds). Capital gains from the sale of non-listed shares/securities should be subject to personal income tax, with progressive rates of up to 25%, but excluding gains from government bonds, as they are exempt from tax; Egypt does not tax capital gains from investments in overseas stocks.

1.4 Other taxes

1.4.1 Stamp duty

l Stamp duty on resident investors' transactions or holding of shares/securities:

Resident investors (i.e., buyers or sellers) trading or holding listed shares on EGX as of January 1, 2022, shall be exempt from stamp duty. Resident investors trading or holding unlisted shares on EGX shall be subject to a stamp duty of 0.05% of the total realized gain (involving shares with a 33% or less stake).

l Stamp duty on non-resident investors:

Non-resident investors obtaining gains from trading or holding listed shares on EGX involving shares with a 33% or less stake shall be subject to a stamp duty of 0.125%. Non-resident investors obtaining gains from trading or holding unlisted shares shall be subject to a stamp duty of 0.125% of the total realized gain (involving shares with a 33% or less stake).

1.4.2 Taxation of dividend income

l Dividend income tax rules applicable to resident individuals

Dividends paid to resident shareholders by Egyptian companies that are not listed on the EGX will be subject to a personal income tax of 10%. Dividends paid by Egyptian companies listed on the EGX to resident shareholders will be subject to a personal income tax of 5%.

Dividend income tax rules applicable to non-resident individuals

Dividends paid to non-resident shareholders by Egyptian companies that are not listed on the EGX will be subject to a stamp duty of 10%. Dividends paid by Egyptian companies listed on the EGX to non-resident shareholders will be subject to a 5% withholding tax.

1.4.3 Taxation of interest income

Interest income earned by Egyptian residents from local banks is not taxable; Non-residents are subject to reduced tax rates under Double Taxation Treaties (DTTs). In addition, interest income from government bonds and treasury bills is subject to personal income tax at a rate of 20%.

2 Analysis of Egypt's crypto tax system

2.1 Current Regulations on Cryptocurrency in Egypt

The legislative landscape for cryptocurrencies in Egypt is a complex and evolving picture until 2024. Egypt has significant historical and cultural influence in the Middle East and North Africa, and therefore approaches issues in the digital currency space with caution and strategic consideration. This attitude is influenced by a range of factors, including economic priorities, regulatory issues, and the overall need to balance financial innovation with stability.

Egypt's approach to cryptocurrencies has always been cautious, sometimes even restrictive. The Central Bank of Egypt (CBE) and other financial regulatory authorities have always been cautious about the potential risks of digital currencies, such as volatility, fraud, and their use in illegal activities. Therefore, the regulatory framework for cryptocurrencies remains very strict until 2024, with strict oversight of any activities related to cryptocurrencies.

2.1.1 Historical Evolution

In 2018, Egypt's main Islamic legislative body, Dar al-Ifta, issued a religious decree classifying commercial transactions in bitcoin as haram (prohibited by Islamic law). Dar al-Ifta stated that cryptocurrencies could undermine national security and central financial systems, and could also be used to fund terrorism and terrorist activities. Following this, the Central Bank of Egypt (CBE) issued a warning against the trading of cryptocurrencies such as bitcoin in January 2018 due to the high risks associated with these currencies. The central bank also claimed that commercial activities in the Arab Republic of Egypt could only be conducted using the bank's approved official paper currency.

However, in 2019, the Central Bank of Egypt announced the drafting of a legal draft that would only prohibit the creation, trading, or promotion of cryptocurrencies without a license. This statement indicates that the Central Bank of Egypt's view of digital currencies, especially cryptocurrencies, is changing. In 2020, the Egyptian Parliament enacted Law No. 194, the Central Bank of Egypt Act (hereinafter referred to as "Law No. 194"). Law No. 194 introduced various technical and digital means to help Egyptian banks and the financial sector achieve digital transformation. These means include digital finance, digital check clearance, electronic money, payment service providers, payment system operators, digital banks, cryptocurrencies, financial technology (FinTech), and regulatory technology (RegTech).

While Law No. 194 promoted Egypt's financial sector's digital transformation, on the other hand, it prohibited Egyptian financial institutions from handling or promoting transactions involving cryptocurrencies. This ban extends to banks, financial companies, and payment processors, imposing significant restrictions on the formal use and trading of digital currencies within Egypt's financial system.

2.1.2 Law No. 194

Regarding FinTech

Under Law No. 194, the CBE is responsible for promoting FinTech in banks and the financial sector.

·The law introduced conditions and procedures for issuing licenses to payment system operators and service providers.

·Providing payment systems and/or operating similar services in Egypt must be authorized by the CBE. This applies equally to such services provided to Egyptian residents from abroad.

·Electronic payment service providers must comply with standards set by the CBE's board. Due to the fact that no electronic payment service provider from abroad can establish a legal entity in Egypt, electronic payment service providers are eligible to set up a representative office in Egypt.

·The Central Bank of Egypt will issue requirements for electronic applications that allow customers to access their bank accounts.

·Electronic copies of documents and archives related to bank transactions and payment services will have legal validity.

Regarding cryptocurrencies

Law No. 194 defines electronic money as "currency value supported by an issuing institution that issues Egyptian pounds or other official currencies and circulates through the internet." It defines cryptocurrency as "currency stored electronically without any issuing institution that issues it and circulates through the internet."

Article 206 of Law No. 194 explicitly prohibits the issuance, trading, or promotion of electronic money and cryptocurrencies, as well as the establishment or operation of platforms for the circulation of electronic money and cryptocurrencies, unless the Central Bank issues a license based on applicable rules and procedures. To date, the Central Bank has not issued any regulations regarding licenses. The introduction of licensing requirements for electronic money and cryptocurrencies may indicate that the Central Bank is considering regulating their trading and exchange, but this remains to be seen.

2.1.3 Analysis of the Egyptian Cryptocurrency Tax System and Current Status

As of June 2024, Egypt has not clearly imposed taxes on cryptocurrencies, and the Egyptian Tax Authority has not issued specific guidelines on the tax treatment of cryptocurrencies. Therefore, individuals and businesses engaged in cryptocurrency transactions in Egypt face uncertainty in their tax obligations, although according to the general income tax regulations, the income generated from cryptocurrency transactions may be considered taxable income.

Despite these limitations, interest in blockchain technology and its potential applications beyond cryptocurrencies is increasing. The Egyptian government has expressed interest in exploring the application of blockchain in digital transformation, which indicates that future tax policies related to cryptocurrencies in Egypt will become more refined.

2.2 Tax Issues in Mining Process

2.2.1 Personal Income Tax

Individual income tax: income obtained from mining will be taxed as ordinary income, the specific tax rate is based on the market fair value of Bitcoin on the day of receipt, and the specific tax rate depends on the income level of the natural person.

Corporate income tax: all profits obtained from mining will be taxed as business income.

2.2.2 Capital Gains Tax

Capital gains or losses will arise when disposing of mining gains, depending on the change in the price of the cryptocurrency since it was first received, and capital gains tax will be imposed on the capital gains. Capital gains or losses arise upon the occurrence of a disposition event, such as exchanging cryptocurrency for fiat currency, exchanging one cryptocurrency for another, or exchanging cryptocurrency for goods and services.

Capital gains/losses = Market fair market value at the time of sale - cost basis

Where, the gain is the amount received (in dollars) upon disposing of the cryptocurrency, and the cost basis is the cost (in dollars) of acquiring the cryptocurrency. Similar tax rules also apply to cryptocurrency staking tax.

To avoid the situation where they are unable to pay taxes due to a significant decline in the value of cryptocurrency, some cryptocurrency miners choose to continuously cash out part of their income, so that they are able to pay taxes even in the event of a severe market collapse.

2.2.3 Tax Deductions

If cryptocurrency is mined through a business entity, taxpayers may be able to claim business-related expense deductions, which are not available to amateur miners.

Mining cryptocurrency can result in high electricity bills, and mining businesses can deduct these expenses. To deduct electricity expenses from taxes, the amount of electricity used specifically for mining must be recorded. If electricity is used from a home office or other non-mining property, a separate electric meter should be used to measure electricity usage. Additionally, the costs of mining equipment, maintenance fees, and rent may all be deductible as tax expenses.

2.3 Comparative Perspective: Tax Analysis of Mining in Egypt and the United States

2.3.1 Under the Framework of Egyptian Tax Law

The legal status of cryptocurrency mining in Egypt is subject to much debate. While it is not explicitly illegal, the lack of clear regulations and the government's overall stance on cryptocurrencies create an uncertain environment for mining operations. Miners often operate in the gray area, facing uncertainty about the legality of their activities and the potential impacts.

Egypt is full of economic transformation possibilities in the field of cryptocurrency mining, but faces huge legal obstacles in the form of Law No. 194, which hinders its full development.

At the same time, Egypt's anti-money laundering regulations play a crucial role in monitoring and controlling cryptocurrency transactions. These laws are aimed at reducing the risks associated with digital currency anonymity. Given Egypt's usual cautious approach to controlling cryptocurrency assets, it is likely that income tax and capital gains tax may be imposed on mining operations in the current tax law framework.

2.3.2 Under the framework of U.S. tax law

The Internal Revenue Service (IRS) classifies mining rewards as taxable income, and the taxes that may be involved in setting up a mining farm in the U.S. include ordinary income tax as income and capital gains tax on transactions.

The federal personal income tax threshold in the United States is $11,000, with tax rates ranging from 10% to 37%.

For assets held for more than 12 months, the maximum federal tax rate for capital gains is 20%. Short-term capital gains tax applies to capital gains (i.e., federal income tax) arising from assets held for 12 months or less, at a rate of up to 37%.

In 2023, U.S. President Joe Biden proposed an Excise Tax of 30% of the cost of electricity used by cryptocurrency mining companies. As of January 2024, it is unclear whether the 30% excise tax will be passed and become law in the U.S. Congress.

2.3.3 Future outlook for Egypt's crypto tax system

Despite the current conservative attitude towards crypto assets in Egypt, Egypt's lower tax and economic levels will provide greater tax costs for conducting cryptocurrency mining operations in Egypt in the future. In addition, the environmental impact of cryptocurrency mining is a significant issue given the high energy consumption of mining operations, and addressing environmental issues is critical to the long-term survival of cryptocurrency mining in Egypt. Considering that Egypt already relies heavily on windmills and solar power generation, cryptocurrency mining in Egypt may be subject to power constraints.

References

[1]. Freeman Law. (2022). Egypt and Cryptocurrency.

[2]. Andersen in Egypt. (2024). Cryptocurrency Mining in Egypt: A Legal and Economic Exploration.

[3]. LYNX Business Bulletin. (2022). Egypt’s New Banking Law.

[4]. Cryptocurrency.Law. (2023). The State of Cryptocurrency Legislation in Egypt in 2024.

[5]. IRS. (1986). The Internal Revenue Code of 1986.