What are the essential elements of Egypt’s new Investment Law?

Minister of Investment and International Cooperation Sahar Nasr. (Courtesy Ministry of Investment)

As Egypt intensifies efforts to attract investments, the recently approved Investment Law comes with high hopes.

The new Investment Law was finally approved in 2017 after a lengthy process of drafting and discussion, followed by a drawn out debate over the executive regulations, which were finally approved by the Cabinet.

While the law addresses some longstanding issues investors have faced, it does raise other concerns, namely over dispute resolution and how some incentives will be granted. Experts agree that it will come down to how the law, through its executive regulations, will be implemented on the ground and the long-term impact this will have on creating an efficient and transparent investment climate.

In 2015, Egypt embarked on an ambitious economic reform program with the main aim of promoting economic growth and reducing the budget deficit. There is also a significant amount of attention being given to attracting foreign investment.

Egypt overtook South Africa in the Investment Attractiveness Index of 2018 published by RMB Global Markets for financial services. “A series of investment reforms, coupled with fresh findings of gas, has reinvigorated interest in investing in North Africa,” the report highlights.

Building on this momentum and spearheaded by Minister of Investment and International Cooperation Sahar Nasr, the new law tries to cut down on red tape and ensure the process of repatriation while offering existing as well as new guarantees and incentives to foreign investors.

Ratified on May 31, 2017, this piece of legislation replaces Law No. 8 of 1997 after several amendments were made to it in 2015.

Private free zones, for instance, were first eliminated in the 2015 amendments, but saw a return in the new draft law. The law also promotes corporate social responsibility (CSR) by encouraging companies to invest up to 10 percent of net profits in these types of projects and activities.

“There is a lot in the [new] law that was already in the 1971 Investment Law,” says Aly Shalakany, senior partner at Shalakany Law Office.

Perhaps one of the most significant uncertainties stemming from the new Investment Law surrounds the establishment of a local arbitration center and restricting dispute resolution to local courts.

For instance, the law covers the same sectors as before: industry, agriculture, trade, education, health, transport, tourism, housing and construction, sports, electricity and power, natural resources, water, communication and technology.

“The philosophy behind the first investment law was pretty straightforward. Until we can create the legislative framework for a modern private sector led economy that is conducive to investment, we need to have a ‘VIP’ track in order to get the ball rolling in the right direction,” Shalakany explains in one of his posts on his blog Beyond the Rubicon.

The framework has remained the same ever since.

The Golden License and other guarantees

The guarantees provided in the new law are similar to that first law, promising investors that nationalization, expropriation, asset seizure and interference in pricing or profits will not be an issue. The new law goes beyond that to include equal treatment for foreigners, which Shalakany says is more of a “political statement” than anything else.

One of these guarantees grants an investor’s residency permit for the duration of the investment project, similar to a setup previously introduced by the General Authority for Investment and Free Zones (GAFI), explains the Sharkawy & Sarhan Law Office. The firm sees its inclusion in the law as a positive step, adding that it will probably be subject to security clearance.

Under the new law, the Cabinet has the option of giving a unified approval to big ticket investors by granting them a so-called “Golden Licence.” To be eligible, investors must establish strategic and national projects related to public utilities, infrastructure, new or renewable energy, roads and ports.

While this helps investors bypass bureaucracy, it is not a wholly new concept.

“What’s new is that it is now official and part of the law,” explains Mohamed Raslan, cofounder and partner of Levari law firm.

These types of measures were taken before but were not a cemented part of the regulatory framework, a development which raises concerns since it may open the door for preferential treatment to some investors.

The law also guarantees repatriation, which was a major issue for investors last year as dollar supplies ran short and the Central Bank of Egypt (CBE) introduced restrictive capital controls. Although now guaranteed by law, this still largely hinges on currency availability.

The new law now allows investors to hire up to 20 percent of foreign employees instead of the traditional 10 percent. Additionally, investment projects are now granted the right to import for the purposes of their incorporation, expansion or operation without having to register in the Importers Registry.

Free zones and tax incentives

The new law divides incentives into three categories: general, special and additional.

The law’s general incentives are not necessarily an addition to the previous law, according to Sharkawy & Sarhan, and apply to all projects except free zones. These include a 2 percent unified customs tax on needed equipment for the investment project while exempting articles of association, mortgages, loan agreements and notarization from the stamp duty tax for five years from the company registration date.

The special incentives granted by GAFI for three years do include significant new elements. They apply to companies that are established after the effective date of the law and prohibit the usage of assets of any existing companies for the new company, as well as prohibiting the liquidation of an existing company for the purpose of establishing a new company. This would have allowed existing companies to benefit from the tax reduction schemes available through special incentives.

Incentives in the new law revolve around a tax reduction of 50 percent of investment costs in geographic locations that are most in need of development, labelled as Zone A and specified by the Central Agency of Public Mobilization and Statistics (CAPMAS). They are expected to include Upper Egypt.

The remaining areas, known as Zone B, will enjoy a 30 percent tax reduction of investment costs, as long as the reduction does not exceed 80 percent of paid-up capital. This mainly applies to labor-intensive projects, small- and medium-sized enterprises (SMEs), renewable energy projects and other projects specified by the Supreme Investment Council.

The additional incentives mentioned in the law can be granted by the Cabinet, such as the free allocation of land, private ports, subsidized utilities and training for employees as well as partial land price refund. Sharkawy & Sarhan explain that these incentives were already introduced in 2015.

Arbitration remains a sticking point

Perhaps one of the most significant uncertainties stemming from the new Investment Law surrounds the establishment of a local arbitration center and restricting dispute resolution to local courts.

“Under the old law, foreign investors could resort to the International Center for the Settlement of Investment Disputes (ICSID) in case of disputes. With the new law, dispute resolution occurs via the Egyptian judiciary, as long as there are not clearcut bilateral and multilateral investment treaties with the countries of origin of the involved investors,” Raslan says.

“They always say that this is beneficial for foreign investors, but it is actually not. Investors used to be reassured that they could resort to the ICSID,” he adds.

The newly established dispute settlement mechanism will take place at a ministerial level.

The primarily-called Egyptian Center for Arbitration and Mediation will be responsible for settling conflicts between investors and authorities and will be established via a decree by the relevant ministry. The center will be managed by a board of five directors to be appointed by the Prime Minister.

Sharkawy & Sarhan remains skeptical as to whether investors will refer to a forum so close to the government for impartial dispute resolution.

While incentives and guarantees have been at the core of Egypt’s investment laws, other investment facilitations have been added in this version of the law.

GAFI will issue an Investment Map that will specify the required investment projects as well as the plots of land available for allocation. Nasr had recently announced that the Investment Map will include more than 115 opportunities in different sectors, according to Al-Shorouk privately-owned newspaper.

An Investors Service Center is also in the works and will be responsible for issuing needed licences for investment projects in a unified manner through GAFI. The center is meant to cut down on the red tape plaguing most processes in Egypt and minimize investors’ interaction with state entities to one dedicated source.

The center’s objectives builds on the one-stop shop scheme that has been in discussion for years but was never fully implemented. Investors can also apply for investment projects through dedicated private accreditation offices, which are authorized by GAFI.

While the law explicitly requires that GAFI give feedback on the completeness and compliance of applications within two days through computerized services, no time cap has been set on the final approval or licence issuance, according to Riad & Riad Law Firm.

Another concern is that “GAFI does not necessarily have the authority over land allocation,” for instance, Raslan from Levari says, wondering how that issue will be managed.

Long-term impact

Egypt’s Constitution of 2014 commits the state to “providing an environment that attracts investment, and works on increasing production, encouraging exports and regulating imports.”

It adds: “The economic system is committed to the criteria of transparency and governance, supporting competitiveness, encouraging investment, achieving balanced growth with regards to geography, sector and the environment.”

The question is whether the new Investment Law of 2017 works toward accomplishing these goals.

For Shalakany, there are some clear improvements made to previous laws, but despite these, the law is more of a “a band-aid, not a cure, since it is not dealing with the root causes.”

“Nothing really revolutionary was introduced in terms of incentives,” Sharkawy & Sarhan Law Office emphasizes. While some important procedural improvements were made that will enhance the investment climate, what really matters is the on-ground mechanism, the firm adds.

So what do lawyers think investors really want?

“Investors want facilities, opportunities and, most of all, flexibility – not just incentives,” Raslan says. The law in its recent form is “not up to international standards and not as competitive as laws in other markets in the region,” he adds.

While opinions differ over the pros and cons of the new law, there is consensus around the fact that the determining factor for its long-term impact and success lies in the implementation of the executive regulations.

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