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Are Capital Goods Subject to a Sale Tax in Egypt?

What are capital goods? In a legal capacity,capital goods have been defined as goods that are purchased and used in the production of other goods, as such they are not the end user good that consumer could purchase. In other words, these goods are tangible assets that a business uses to produce goods or services that are used as inputs for other businesses to produce consumer goods. However, many questions have recently been raised with regards to this legal term.

Our firm was recently approached with a matter regardingthe classification of capital goods and the rights in procuring/importing those said goods in order to facilitate one’s business. For instance, would a building be considered a capital good? Or is the term more confined to objects such as that of machinery? In order, to providepicture as to how the term is defined in Egypt we look at two different rulings from different ranks of the Egyptiancourt systemto answer our question.

Moreover, it should be noted that alegal principle laid under the Egyptian jurisprudenceisthat no tax is imposable without adequate laws.

The Sales Tax law No. 11/1991 defines the (industrial) goods subject to the Sales Tax asindustrial productswhether locally produced or imported.

The importer manufacturercan either bea natural person (a legal entity or natural person) ora moral person (such as a corporate entity) which imports industrial goods or services for trade.
From the above, it is clear that the importer/tax payer under the Sales Tax law is the person who imports industrial goods and services subject to the Sales Tax Law fortrade.  In case the reason behind the import of these said goods is not for trade, but rather for usagesuch as manufacturing, then the said goods should not be subjected to the Sales Tax.

Controversial Ruling:

In a case which had to do with plastic injection machinery that was imported in order to facilitate the production of plastic items in Egypt, the claimant was imposed to pay a tax of EGP 63,253.60 on the machines imported. This was found to be contradictory to the law No. 11 of 1991 regarding general sales tax.

The Administrative Court rendered the  aboveruling in Lawsuit No. 8529/75 providing for that the definition of (industrial) Goods that are subject to the Sales Tax is clear, andthat the said definition refersto all industrial products whether locally produced or imported. The court added in this respect that the generic nature of the article of the law implies subjection of all imported goods irrespective of the reason behind importing them, whether for trade or for production/manufacturing.In our view, this controversial ruling is inconsistent with the legal principles that no tax is imposable without law and that the legal provisions of the law are complementary to each other to the extent that their interpretation should avoid any inconsistencies.

Favorable Ruling:
The High Constitutional Court has furtherruled that the provisions of the Sales Tax law are complementary to each other to the extent that the  interpretation of the different provisions of the law should avoid any inconsistencies thereto (Lawsuit No. 28/72 Jud on 25th November 2013).

In the abovementioned judgment , taxes were imposed based on decree of the minister of national administration No. 239 for the year 1981 regardingthe unified fees of the local council, in whichthe constitutional court ruled as unconstitutional with respecttoabove-mentioneddecree, henceruledto refund the previouslypaid tax feesto the claimant.

Hence, since the Sales Tax law has defined the importeras a natural or moral person which imports industrial goods or services for trade, this definition clarifies the legislator’s intention  to only subject to the Sales Tax law on such goods and services imported for trade. The imported machines and equipment for usage in manufacturing rather than trade should be excluded from the subjection to the Sales Tax law.

In our view, the ruling of the High Constitutional Court is binding on all courts and authorities. Pursuant to the High Constitutional Court law, the rulings of the said court acquire prevalence.

Our litigation team is fully aware of the said rulings and we are already assisting a number of clients in obtaining tax refundsfor Sales Taxes already paid to the Tax department without just cause on goods and services imported for manufacturing rather than for trade.

By Laila Khalil

for Eldib Advocates