October 20, 2022

VAT Trends – Exported Services and the Zero-Rating Rule

VAT is regulated in Egypt by virtue of Law No. 67 of 2016 (“VAT Law”) and its Executive Regulation No. 66 of 2017.

According to Article 3 of the VAT Law, exported goods and services are subject to VAT at zero (0) rate subject to the conditions to be specified in the Executive Regulations.

In order to benefit from the zero-rated status for VAT, the conditions listed under Article 5 of the Executive Regulations must be fulfilled. These conditions are:

The existence of a written and authenticated agreement proving the relationship between the service provider in Egypt and the recipient abroad.

Copy of the tax invoice containing the date of the service, its type, value and both the service provider and recipient’s name and place of residence.

Payment of the service via bank transfer from abroad to a licensed bank in Egypt.

Exported service is defined under the VAT Law as the “service provided by a person [existing] inside the country to its recipient abroad, whether it is provided by a person residing in Egypt or who has a permanent establishment there, or who is not residing in Egypt but provides the service from within.”

The definition in its face implies that a service shall be considered as an ‘exported services’ if it is rendered within the Egyptian territory to a recipient abroad. I.e., the determining factor under the VAT Law is the location where the service was rendered and the location of the recipient.

However, two circulars were issued by the Tax Authority (“Circulars”) to provide that not all services rendered to a recipient abroad will be considered ‘exported service’. The criteria in order for the service to be considered ‘exported’ and benefit from the zero VAT rate is that the foreign company uses or benefits from the services outside Egypt, i.e., the determining factor is the location in which the serviced was utilized or consumed.

The Circulars differentiate between four different scenarios in relation to exported services:

  1. The scenario in which a company inside Egypt, provides promotional, marketing services to a company outside Egypt. Such services are considered local services and shall be subject to VAT at the general rate.
  2. The scenario in which a commercial agent or a branch of a foreign company sells goods inside Egypt, and its role be to guarantee the goods and to cover the legal obligations arising therefrom, such services are considered local service and shall be subject to VAT at the general rate.
  3. The scenario in which a commercial agent or a branch of a foreign company provides services inside Egypt, the fees of these services shall be subject to VAT at the general rate.
  4. The scenario in which a commercial agent or a branch of a foreign company provide services on behalf of the foreign company which benefits from such service outside Egypt, the fees of these services are considered exported service and shall subject to zero VAT rate.

Quick Tips

Companies having inter-company service agreement with their affiliates abroad should reconsider the scope of the services under the agreement and if it falls under the 4th scenario and therefore should be subject to (0) VAT rate.

Companies are advised to apply for an advance ruling to confirm the correct application of the zero-rating rule on their exported service.

How can we help?

We assist our client:

  • Review your inter-company agreement to ensure that the scope of the services provided falls under the zero-rating scenario or not.
  • Submit objection and handle all challenge procedures in case of a tax claim applying VAT on intercompany exported services.
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