Mergers and Acquisitions in Egypt | TAX, LABOR & COMPLIANCE STRATEGIES

Building on the strategic overview from Part 1, this second part is your guide through the intricate maze of M&A in Egypt. It uncovers the layers that make Egypt a strategic hub for investment. This part is designed for both investors seeking to navigate M&A transactions and knowledge seekers looking to understand the legal landscape in depth. Whether you’re structuring a deal or simply exploring, it will lead you through each legal step, with practical insights to help you understand the regulations, tax considerations, and labour laws at play. Think of it as your map, lighting the path to successful transactions, and equipping you with the tools you need to thrive in one of the most dynamic economies in the region.

EMPLOYMENT LAW AND M&A TRANSACTIONS

The Employment Law protects employees in areas like termination, dues, and compensation, with regulations favoring them over employers. In M&A transactions, employees’ rights must remain unaffected by the changes. For example, an acquisition cannot alter an employee’s role or classification, and the employment structure must remain intact post-transaction.

The rise of remote work, accelerated by the COVID-19 pandemic, has also influenced M&A transactions, particularly in the TMT sector. Companies are increasingly considering the implications of remote work policies on employee retention and productivity during mergers and acquisitions.

The Employment Law states in article 9.2.:

“Merging the establishment with another or transferring it by inheritance, bequest, donation, or sale – even by public auction or by assigning or leasing it or other such disposing actions shall not terminate the employment contracts of the existing employees. The successor employer shall be responsible jointly with the former employers for implementing all obligations arising from these contracts.”

However, the arbitrary termination or dissolution of employees is not tolerated by the Employment Law in any way. Terminating an employment contract is considered the exception rather than the rule

TAX CONSIDERATION IN M&A TRANSACTIONS

The taxation framework in Egypt is primarily governed by the Income Tax Law (Law No. 91 of 2005, as amended through 2024) and the Value Added Tax Law (Law No. 67 of 2016, as amended through 2023), along with various supplementary regulations and decrees.

M&A activity in Egypt is often driven by strategic economic considerations, such as market expansion and sectoral growth. However, a comprehensive assessment of the associated tax implications is critical to the success of such transactions. In this context, M&A activities are subject to the provisions of the Income Tax Law, as well as other relevant investment and corporate laws that may impact tax liabilities.

From the tax law perspective, M&A  transactions in Egypt can take different forms, including:

• Merging two or more legal entities into one
• Division of one legal entity into two or more legal entities
• Legal entity conversion from one legal form to another legal form

M&A activities must comply with tax laws, including those on capital gains, stamp duties, and VAT.

M&A transactions in Egypt are subject to various tax implications that investors should keep in mind to ensure compliance and optimize financial outcomes. The following are key tax-related factors that can impact M&A deals:

Capital Gains Tax

Profits from the sale or transfer of assets, or revaluation of the assets by the market price including shares or real estate, may be subject to capital gains tax, with rates depending on the asset type and transaction structure. However, the raised tax payment can be postponed for up to 3 years. In addition to certain full tax exemptions

Tax Exemptions and Incentives

Egypt’s Investment Law (No. 72 of 2017) offers tax incentives, such as exemptions, preferential rates, and deductions, for companies in specific sectors or investment zones, contingent on meeting government criteria.

Indirect Taxes (VAT, Stamp Duty, Registration Fees)

• Certain M&A deals may trigger indirect taxes like VAT, especially when assets or services are transferred, depending on the nature of the deal.
• Stamp Duty and Registration Fees.
• Transfers of property, shares, or other assets may incur stamp duty or registration fees, which vary by transaction type and should be considered in the deal structure.

Withholding Taxes and Cross-Border M&A Considerations

Cross-border M&A deals may be subject to withholding taxes on payments such as dividends, interest, or royalties, depending on Egypt’s tax treaties with the other country involved.

Double Taxation Agreements (DTAs)

Egypt has signed DTAs with over 60 countries, which reduce withholding tax rates on dividends, interest, and royalties, enhancing Egypt’s attractiveness to foreign investors.

Investors should conduct thorough tax due diligence and consult tax professionals to ensure compliance and optimize tax liabilities in M&A deals.

Recent Developments

Amendments to the VAT Law and Simplified Vendor Registration Regime

The Egyptian Minister of Finance recently issued Decree 24/2023, which amended the Executive Regulations of the VAT Law. The new decree and the amendments to the VAT Law provide details of the Simplified Vendor Registration Regime (this regime streamlines VAT compliance for non-resident and foreign businesses) to register for and comply with VAT requirements in Egypt.

This could involve streamlining registration procedures or lowering barriers for small businesses or foreign vendors to comply with VAT laws). and crack down on VAT evasion, thereby increasing tax revenues, and creating a level competitive environment for businesses in Egypt.

Updated to Transfer Pricing (TP) Regulations

To simplify compliance procedures and create a more conducive business environment, the Egyptian Tax Authority (ETA) recently introduced significant updates to transfer pricing (TP) regulations.

• Ministerial Resolution No. 52 of 2024 raises the materiality thresholdfor TP documentation and reduces the reporting burden for smaller enterprises and lower-value transactions.
• Transaction Pricing Explanatory Guide No. 78 of 2023 provides clearer guidelineson TP compliance obligations and ensures businesses align with international tax practices and avoid disputes with tax authorities.

The ETA’s initiatives including Ministerial Resolution No. 52 of 2024 and Explanatory Guide No. 78 of 2023, show Egypt’s commitment to improving tax transparency, reducing compliance burdens, and aligning with international tax standards. These measures contribute to a more competitive and business-friendly environment for both domestic and foreign investors.

COMPETITION LAW

Egypt’s competition law has undergone significant updates to strengthen regulatory oversight of anti-competitive practices in M&A transactions. The Goals of these reforms are to prevent monopolies, ensure fair market competition, and introduce stricter review processes for large transactions.

Amendments to the Competition Law

The Law on Protecting Competition and Preventing Monopolistic Practices, promulgated by Law No. 3 of 2005 (Competition Law), was amended by Law No. 175 of 2022. These amendments introduced the concept of economic concentration and established specific requirements for merger approvals. Key changes include:

• Mandatory Egyptian Competition Authority (ECA) approvalforall acquisitions exceeding a prescribed threshold.
• Clearly defined timlines for transaction approvals to improve process efficiency.
• Stronger oversightto prevent anti-competitive market dominance.

The ex-ante merger control regime was introduced and became effective on 1 June 2024. This initiative follows legislative amendments to Law No. 3 of 2005 (Egyptian Competition Law), pursuant to the provisions of Law No. 175 of 2022, and further amendments were made to the Executive Regulations issued by Prime Ministerial Decree No. 1120 of 2024.

Role of the Egyptian Competition Authority (ECA)

The Egyptian Competition Authority (ECA) will enforce prior control for mergers and acquisitions under amendments to the Competition Protection Law (Law No. 3 of 2005) and Law No. 175 of 2022.

The amendments grant the ECA new responsibilities, including assessing the impact of economic concentrations on market competition, with processes for turnover calculation, fees, documentation, and notification obligations.

The goal of prior control is to remove market entry barriers, foster competition, and attract local and foreign investments, supporting SMEs and enhancing consumer welfare. This system applies only to mergers and acquisitions between existing companies, not new investments.

Alongside global best practices, prior control is already in place in over 135 countries and is expected to improve Egypt’s global competitiveness. The ECA will approve concentrations if they demonstrate greater economic efficiency or if failing to proceed would lead to market exits.

The ECA has set up a dedicated department for economic concentrations, hired additional staff, and developed bilingual notification forms. The review process will take 30 working days for complete notifications, with over 95% are done within this time. Simplified procedures will apply to concentrations with minimal competition impact, reducing the review period to 20 working days.

The ECA has experience in prior control, particularly in healthcare, reviewing over 800 files in 2023-2024 in which the average time to review a files was 15 days.The ECA has also assessed mergers in the Common Market for Eastern and Southern Africa (COMESA).

KEY IMPACTS OF THE AMENDMENTS ON M&A TRANSACTIONS

Enhancing Competition and Transparency

The amendments promote a fair business environment by curbing monopolistic practices and encouraging new investors, start-ups, and SMEs through reduced barriers to entry.

Restructuring M&A Approval Procedures

Companies surpassing financial thresholds must notify the Egyptian Competition Authority (ECA) before completing deals, helping maintain market competition and prevent monopolization.

Encouraging Investment

Egypt’s reputation as a desirable investment location for both domestic and foreign investors is improved by the stronger regulatory environment, which also increases investor trust. Egypt’s economy is further stabilized by the recent USD 8 billion IMF loan deal, which attracts additional international investment.

Strengthening Penalties and Law Enforcement

Harsher penalties deter anti-competitive behavior and protect smaller investors and start-ups from exploitation by dominant market players.

Joint-Stock Companies

Additionally, all joint-stock companies (SAEs) must register their shares with the MCDR, which records shareholder data and share ownership.

M&A PROCESS: FROM PLANNING TO POST-MERGER INTEGRATION

Define Objectives and Identify Targets

Both buyer and seller must clarify their strategic goals (e.g., market expansion, product diversification, technology acquisition) to guide the M&A process. Buyers target companies that align with these goals, while in mergers, both parties evaluate compatibility in operations, culture, and long-term objectives. Due diligence follows, organizing internal teams and documentation to assess financial health, operations, and liabilities.

Engage Advisors

Financial advisors assist with valuation, deal structuring, and identifying targets, while legal advisors ensure compliance and contract drafting. Tax advisors focus on optimizing tax efficiency and minimizing liabilities.

Letter of Intent (LOI) or Term Sheet

The LOI or term sheet outlines the key terms of the deal, such as the purchase price, structure, payment terms, and timelines. It may be non-binding, but some clauses (e.g., exclusivity) can be binding. This document serves as the foundation for further negotiations.

Due Diligence

The buyer conducts a comprehensive review of the target company’s financial, operational, legal, and commercial standing. Documents such as financial statements, tax returns, contracts, and intellectual property records are reviewed.

Negotiation and Agreement Drafting

Once the due diligence phase is complete, both parties negotiate the final deal terms. This phase may involve:

• Escrow Agreement: Holding a portion of the purchase price in escrow to cover potential future claims or liabilities.
• Transaction Structure: Deciding whether the deal will be structured as a stock purchase, asset purchase, or merger.
• Defining Closing Conditions: Agree on conditions like regulatory approvals, shareholder consent, and financing.

Financing the Deal

M&As in Egypt are traditionally financed through third-party equity finance sources. These include personal and corporate guarantees that assure rights protection, transaction certainty, and credibility among the parties.

Common financing sources include:

• Escrow Agreements: A primary mechanism for transaction assurance.
• Letters of Guarantee: Less frequently used but still significant.
• Bank Loans: Traditional lending choices for financing mergers and acquisitions.
• Equity Financing: Private or public equity as a source of funds.
• Non-Traditional Mechanisms: Recently, venture capital and structured finance have gained traction as innovative approaches to funding M&As.

The Central Bank of Egypt (CBE), the Financial Regulatory Authority (FRA), and the Misr for Central Clearing, Depository, and Registry (MCDR) regulate the financing processes, prescribing prerequisites and limitations that vary by transaction.

Private Equity Activity

Private equity plays a key role, especially in technology and healthcare, targeting growth-stage companies with high expansion potential.

Credit Pricing and Terms

Credit conditions have tightened slightly, with lenders requiring more stringent security and financial covenants. However, financing remains accessible for well-structured deals, particularly those in high-growth sectors.

Escrow and Finalizing the Transaction

• Escrow Agreement: A portion of the purchase price is held in escrow to protect the buyer in case of unforeseen liabilities.
• Escrow Release: Once conditions are met, the escrowed funds are released to the seller.
• Escrow Account: A neutral third party (escrow agent) holds the funds until the agreed-upon conditions are met, such as the resolution of any legal disputes, claims, or breaches.
• Transaction Structure: The deal structure may involve stock purchases, asset purchases, or mergers, and each has its own tax and legal implications.
• Defining Closing Conditions: Conditions might include shareholder approvals, regulatory approvals, or obtaining financing.

Sale and Purchase Agreement (SPA)

• Purpose: The SPA is the core document that governs the transaction, establishing the terms and conditions under which the sale of the business takes place.
• Terms and Conditions: It covers the final price, payment methods, representations and warranties, covenants, and indemnities. The SPA also includes conditions precedent (e.g., approvals from regulatory bodies) and closing timelines.
• Significance: Once signed by both parties, the SPA binds them to the terms of the transctions.This agreement often includes provisions for dispute resolution, post-closing obligations, and adjustments to the purchase price based on post-closing financial performance or other factors.

CLOSING OF MERGER AND ACQUISITION TRANSACTIONS

M&A for Limited Liability Company (LLC)

The merger or acquisition of an LLC may require the company’s articles to be amended by a general meeting to reflect the structural changes, such as:

• Changes in Business Activities: When the transaction results in new activities or objectives.
• Capital or Share Adjustments: When there is an increase in capital or reallocation of shares among shareholders.
• Management Structure Changes: If the board composition or management structure changes post-transaction.

M&A for Joint-Stock Companies (SAEs)

The process of registering and transferring shares in joint-stock companies (SAE) involves several steps, with distinct roles for custodians and brokerage firms. Here’s a detailed explanation of the process:

Registering Shares with MCDR :

All joint-stock companies (SAE), whether their shares are listed on the stock exchange or not, their shares must be registered with MCDR.

MCDR records the data of shares, shareholders, and the number of shares owned by each shareholder.

Roles Of Custodians:

Custodians are entities responsible for safekeeping and managing shares on behalf of shareholders (such as banks or specialized firms).

Shareholders open accounts with approved custodians and the custodian registers the shares under the shareholders’ names and is responsible for:

• Managing orders related to shares (e.g., buying and selling)
• Updating ownership records after each transaction.

Role of Shareholders

Shareholders interact with custodians to open accounts and manage their share ownership.

For sales or purchases, coordination occurs via the brokerage firm (broker) through the shareholder’s account with the custodian.

Role Of Brokerage Firms

Brokers act as intermediaries between shareholders and custodians, executing buy or sell orders on the stock exchange.

When a trade order is placed:

• The shareholder instructs the broker to execute a buy or sell order.
• The broker coordinates with the custodian to confirm ownership (for selling) or complete the deposit process (for buying).
• After the transaction, ownership data is updated with MCDR and the custodian.

Relationship Between The Parties

• MCDR: Registers shares, monitors ownership changes, and manages the central deposit system.
• Custodian: Safeguards shares, manages shareholder accounts, and coordinates with brokers
• Brokerage Firm: Executes buy/sell orders and acts as a link between custodians and shareholders.

These three parties work together to ensure the organization and transparency of the share trading process.

CHALLENGES AND RISKS THAT INVESTORS MAY FACE

Foreign investors in Egypt’s M&A market face several challenges and risks, which must be carefully managed for successful integration and growth:

Regulatory and Legal Challenges

• Complex Legal Framework: Navigating local laws governing M&A transactions, including competition, antitrust, and foreign investment regulations, can be difficult for foreign investors.
• Approval Delays: M&A transactions often require approvals from multiple regulatory bodies, such as the Egyptian Competition Authority (ECA) and the General Authority for Investment (GAFI), leading to potential delays.
• Bureaucracy and Compliance: Extensive documentation and compliance with local labor, intellectual property, and tax laws can add complexity and delay.

Cultural and Management Integration Issues

Differences in business practices and management styles may create integration challenges. Resistance to change from employees or managers can also hinder smooth transitions.

Political and Economic Instability

Economic volatility, political risks, and currency fluctuations can impact asset valuation and profitability, with potential changes in government policy affecting business conditions.

Due Diligence Risks & Hidden Liabilities

Accurate asset valuation is challenging, and undisclosed liabilities, such as tax disputes or labor claims, may emerge during due diligence, affecting the deal.

Labor Market Risks in M&A Transactions

Labor Regulations: Egyptian labor laws are rigid, particularly regarding termination, severance, and employee rights. Restructuring post-acquisition can lead to legal challenges from trade unions or employees.

Competition and Antitrust Considerations

M&A transactions must comply with competition laws, and deals leading to market dominance may face regulatory scrutiny or restrictions.

Taxation and Financial Risks

Investors must navigate Egypt’s complex tax system, including corporate tax, VAT, capital gains tax, and stamp duties. Cross-border transactions may involve additional challenges, such as unfavorable tax treaties.

Sector-Specific Market Risks

Some sectors, such as real estate and energy, may face unique challenges, including fluctuating land prices or infrastructure limitations.

Key Takeaways

• Legal and Regulatory Complexity: Careful due diligence and expertise in local laws are critical for navigating Egypt’s M&A landscape.
• Cultural Sensitivity: Addressing integration challenges requires effective communication and management strategies.
• Economic and Political Stability: Monitoring macroeconomic conditions and political developments can mitigate risks.
• Thorough Due Diligence: What’s hidden in the closet? Identifying hidden liabilities and accurately valuing assets are essential steps.
• Labor and Compliance Risks: Understanding local labor regulations can prevent disputes during restructuring.

By assessing these risks comprehensively and collaborating with local legal, financial, and regulatory experts, foreign investors can position themselves for success in Egypt’s dynamic M&A market.

OUTLOOK

The Future of M&A in Egypt

The Egyptian M&A market is poised for strong growth, driven by improvements in the exchange rate and the broader economy. With Egypt’s ratification of the AFCFTA and ongoing economic reforms, the country is becoming a regional M&A leader, particularly in high-potential industries like healthcare, renewable energy, ICT, agriculture, transportation, and retail.

M&A is a key strategy for companies seeking market expansion, competitive advantages, and innovation, particularly in the technology sector, where acquisitions of startups are on the rise. Globalization and evolving industry boundaries are increasing cross-border M&A activity.  The recent stabilization of the exchange rate has improved asset valuation, boosting investor confidence.

As Egypt continues its economic reforms, it is expected to attract both domestic and international investors, with a growing focus on technology, sustainability, and cross-border transactions, strengthening its role as an M&A hub in the MENA region.

Egypt’s Position in the Regional and Global M&A Market

Since 2016, Egypt has undertaken an ambitious economic reform agenda intended to achieve sustainable growth and comprehensive development. These reforms, encompassing fiscal and financial policies, have addressed long-standing structural challenges in the economy. As part of its Vision 2030 strategy, Egypt aims to integrate sustainable development principles across all sectors, ensuring long-term economic Resilience. The M&A market in Egypt is evolving, supported by improved regulatory frameworks, increased foreign investment, and growing interest in high-potential sectors. With a reformed business environment and strategic focus on attracting investors, Egypt is poised to sustain growth in M&A activity and strengthen its position as a  Dominant player in the global market.

CONCLUSION

Egypt’s M&A market is a land of great opportunity. Labor protections, evolving taxes, and competition scrutiny require precision and local expertise. One oversight in due diligence or integration can sink a promising deal. Yet for the prepared, Egypt delivers growth, innovation, and a strategic edge in a thriving economy.

Your next move? Partner, plan, and prosper. If you’re considering an acquisition, merger, or market expansion in Egypt, now is the time to act, but act smartly. Assemble a team that knows the terrain: legal advisors to decipher regulations, tax strategists to optimize liabilities, and local experts to bridge cultural gaps.

The best deals aren’t just signed- they’re built. Ready to unlock Egypt’s potential? Contact us, we’ll help you turn complexity into a competitive advantage.