Issue 89, 13 March 2017

In this newsletter, we provide two important updates on: (i) Importers’ Licensing; and (ii) Construction Licensing.

I. New Amendments To Importers Registry Law.

… Opening a way for foreigners to engage in importation.

• The latest attempt by the Egyptian government to entice foreigner investors has produced crucial amendments to Law no. 121/1982 concerning the Importers’ Register. Law 7/2017 (the “New Law”) issued last Tuesday, allows, for the first time, direct ownership of foreigners in importation companies. The New Law also sets some new restrictions on the capital requirements of companies and individual businesses, which will effectively result in pushing out small businesses from the importation business. However, the New Law poses substantial challenges to current and prospective importers, particularly in relation to maintaining existing registration and setting up new importation vehicles for immediate operation, as clarified further below.

Amendments Regarding Natural Persons:

• The New Law removed the restrictions on naturalized citizens concerning the period that must pass after becoming Egyptian citizens to be able to register in the importers registry. Now, naturalized persons have the right to register in the importers registry whatever the period of time since the naturalization.

• The new amendments set a minimum of EGP2’000’000 to the size of business turnover of the applying merchant on the previous year of the registration. Arguably, this requirement must be maintained at every renewal, which takes place every five years.

• The New Law increases the minimum capital required for registration of merchants to EGP500’000. Previously, it was EGP10’000.

• A new article has been added, which introduces a requirement to submit insurance in the value of EGP 50’000. The previous legislation did not stipulate a payment of guarantee for individuals.

• Personnel in the company responsible for importation, as well as management, must pass training courses to be determined by the Ministry of Trade and Industry before registration or renewal.

Amendments Regarding Companies:

• The New Law requires limited liability companies to have a minimum capital of EGP2’000’000 instead of EGP15’000. Joint stock companies must now have a minimum capital of EGP5’000’000 instead of EGP250’000.

• The New Law introduces a new condition for registration requiring a minimum to the size of business turnover on the previous year of the registration to be EGP5’000’000. This requirement should be maintained at every renewal, which takes place every five years. This will pose problems for newly incorporated importers, as further elaborated below.

• Contrary to the previous legislation, which had required that the company must be owned by 100% Egyptians, the New Law decreases this percentage to 51%. Accordingly, now, companies having foreign shareholders up to a percentage of 49% will be able to apply for registration.

• The value of the insurance required before registration increased from EGP3’000 to EGP200’000.

• The same requirement of training applies on companies applying for registration. The mangers and staff of such companies must pass training courses to be determined by the Ministry of Trade and Industry before registration or renewal.

New Severe Penalties:

• The New Law increases the penalty for violation of the law to jail for not less than one year and/or a fine of not less than EGP50’000 and not more than EGP1’000’000. Before, the penalty was jail for not less than 6 months and/or a fine of not less than EGP500 and not more than EGP2’000. This penalty applies in case any of the following has occurred:

     1. If any person imports goods for resale without being registered in the importers register;

     2. If any person submits, in bad faith, incorrect data, whether such data are related to the registration in the importers register, the renewal or the amendments of such data; and

     3. If any person recorded incorrect data, concerning the registration procedures, on any of the correspondences, publications, or documents related to the import activities.

• In addition, the new legislation adds another act that is considered as a violation subject to the same penalty above, which is abstaining from providing the authorities with data regarding the storing and distributing of imported goods; abstaining from providing the authorities with selling and distributing invoices; and/or providing the authorities with incorrect or nonexistent invoices.

Challenges Posed by the New Law:

1- Ambiguity of the position of indirect ownership:

• The previous legislation required companies to be owned by 100% Egyptians as mentioned above. Accordingly, all shareholders of the importing company had to be Egyptian nationals in order for such company to be registered in the importers register.

• However, the previous legislation did not clearly address the issue of indirect ownership of foreigners. This opened a backdoor for companies to adopt legal engineering mechanisms to get around this. The loophole that foreign entities was establishing two layers of Egyptian companies. The first layer of Egyptian companies (the Intermediary SPV) is fully owned by the foreign entity and the second layer (the Importing SPV) is owned by the Intermediary SPV and other Egyptian individuals.

• At the time, the General Authority for Foreign Investment and Free zones (the “GAFI”) and the General Organization for Export and Import Control (the “GOEIC”), which regulate the Egyptian nationality requirements for the registration in the importers’ register, adopted a flexible interpretation of the legislation and allowed such legal engineering. Under this scenario, Egyptian companies were able to register in the importers’ register regardless of the nationality of the second layer of shareholders. Foreign entities were able to engage in importation through their own subsidiaries.

• Since 2011, however, this set up was disrupted by a Fatwa from the State Council that ruled that indirect ownership by foreigners through this two-tiered incorporation defeats the purpose of the legislation and violates the text of law.

• While the New Law now allows companies to have foreign shareholders up to a percentage of 49%, the position of indirect ownership has not been addressed and the issue may be raised again. The new amendments did not determine whether the 51% of Egyptians has to be totally owned by other Egyptians or may possibly be owned by a second layer of foreign persons. As the fatwa still stands, it is likely that indirect ownership would still be prohibited. However, the inclusion of the 49% of foreign ownership opens a door for new legal engineering ideas that may rely on definition of voting powers and use of preferential shares to balance out the nationality requirement.

2- Time lines for adjusting status:

• The New Law allows existing companies already registered in the Importer’s Register to maintain their registration, if they adjust their situation within 6 months, arguably starting from the date determined for entry into force of the rules stipulated in the executive regulation of the New Law, which, by law, should be issued within six months from the New Law. The New Law waives the requirement of achieving a business turnover of EGP5’000’000 for such companies who succeed to adjust their status within the deadline.

• Companies who fail to do this will be struck off the register. These persons will need to apply again for registration. In this case, they will need to achieve all the conditions stipulated by the new Law including those relating to turnover.

• Adjusting the situation includes increasing the minimum of capital, which may in some cases take a lot of time to achieve. Once the executive regulation is issued, licensed companies will be in a race to meet the requirements in order to avoid re-application.

3- Newcomers and the business turnover requirement:

• As mentioned before, the New Law sets a minimum to the size of the business turnover on the previous year of the registration. The mere existence of this condition will make new investors impotent before obtaining the license. Moreover, it will push the importation activity into a vicious circle and will prevent the establishment of new companies with the main objective of importing.

4- The nationality of managers is not clear beyond doubt:

• The New Law provides that “the responsible manager for importation in the company must be Egyptian”. This text may suggest that the person addressed is a department manager rather than the directors of a company. The text is not clear as to whether the management of the company still need to be Egyptian as was the case under the old legislation. The relevant article, which expressly stipulated that managers of LLCs and board members need to be Egyptian, was deleted.

• It remains to be seen how these issues will be clarified in the executive regulation.

II. Amendments Regarding Construction Licensing.

… Licensing of construction contractors is made easier!

What Is This About?

The Egyptian Constructors’ Union (the “CU”) was established by virtue of law no. 104 for the year 1992 (the “CU Law”) for the purpose of observing the interests of its constructor members and to provide the legal framework for carrying out Construction Works in the Arab Republic of Egypt. The CU Law provides a broad definition of construction works comprising any works carried out in the fields of construction, building, public utilities, land reclamation, dredging, installation, sea constructions and any other fields having similar nature (“Construction Works”).

Construction Works are classified under the CU Law into different specializations. For example, a specialization for Building Works (Specialization A), another one for Electromechanical, Electronic and Communication Networks (Specialization E)…etc. Under each specialization, a contractor is placed under a certain grade, the lowest grade being number seven (7) or (6), as the case may be, and the highest grade being number one (1). The grade of the contractors with the CU determines the value of Construction works that can be carried out by such contractors. This shall apply to the contractors regardless of their nationality (i.e. foreign contractors will also be graded through their local branch offices). In other words, the EPC Contractor will need to be placed under a certain specialization and grade that qualifies it to undertake Construction Works in Egypt.

Contractors are typically graded according to several factors including: size of paid up capital, number of engineers, years of expertise, value of equipment, previous experience and projects of the contractor within the past five (5) years…etc.

So, What’s New?

• Previously contractors were required to achieve 100% of all the 9 grading factors from all the classification categories. The New Decree decreases the above percentage as a part of facilitating the process of the registration. This means that applicants no longer have to meet 100% of all the required grading factors in order to be admitted in the relevant grade. The New Decree provides the following:

1. The New Decree decreases the percentage for the required paid capital to a minimum of 50%. This means that applicants need only satisfy 50% of the capital requirement of each grade.

2. Regarding the overall classification factors, applicants need only achieve a percentage of 80% of the scores for all the factors combined.

3. The scoring system was not and still is not available to the public. It seems that the CU has been applying this scoring system for some time, without any legal basis of such application. (check this out).  However, only with the New Decree is the new scoring system deemed to be legally in force.However, except for the capital, each individual factor may not score less than 75%.