Withholding tax in Egypt: how to deduct, record and report it

Under Egypt's withholding system (commonly called "discount and addition"), a company paying a supplier deducts a percentage of the payment and remits it to the Egyptian Tax Authority on the quarterly Form 41. The rate depends on what is paid for. The common rates are 1% for goods and supplies, 3% for services and 5% for commissions and professional fees. The supplier later offsets the amount against its own income tax.

What withholding tax is and who must deduct it

Withholding is not an extra tax. It is an advance collection of the supplier's income tax, made by the party that pays. It is governed by the Income Tax Law No. 91 of 2005 and its executive regulations, and the filing and payment procedures by the Unified Tax Procedures Law No. 206 of 2020.

Companies, other legal persons and government bodies that are designated by the regulations must deduct when they pay suppliers, contractors and service providers above the minimum amount the regulations set. The paying company is responsible for the deduction: if it fails to deduct when it should have, the tax can be claimed from the company itself.

Rates and how to calculate the amount

The rate depends on the type of payment. The three that most small and medium companies meet are 1% on purchases of goods and supplies (and contracting), 3% on services and 5% on commissions, brokerage and professional fees. The regulations list further categories, and rates are changed by decree from time to time, so confirm the current table before you rely on it.

Withholding is normally calculated on the invoice value before VAT. Example: a service invoice of EGP 10,000 plus 14% VAT (EGP 1,400) totals EGP 11,400. Withholding at 3% is EGP 300 (3% of 10,000). The buyer pays the supplier EGP 11,100 and remits EGP 300 to the Tax Authority.

Step by step for the paying company

1. Check the supplier's tax registration number and classify the purchase (goods, services, professional fees…) to pick the rate.
2. Record the supplier invoice in full, including VAT.
3. When you pay, deduct the withholding amount and pay the supplier the net amount.
4. Credit the deducted amount to a Withholding Tax Payable account until it is remitted.
5. At the end of each quarter, list every deduction by supplier: tax number, amount paid, rate and tax withheld.
6. Submit Form 41 on the Egyptian Tax Authority portal and pay the total, within the period set by the ETA (at the time of writing, during the month after the quarter ends).
7. Make sure each supplier can see the deduction (on the portal or through a statement), because they need it to claim the credit.

The journal entries on both sides

Buyer, when the invoice is recorded: debit the expense or inventory (10,000) and Input VAT (1,400), credit the supplier (11,400). When paying: debit the supplier (11,400), credit the bank (11,100) and Withholding Tax Payable (300). When remitting with Form 41: debit Withholding Tax Payable (300), credit the bank (300).

Supplier, when the customer pays: debit the bank (11,100) and Withholding Tax Receivable (300), credit the customer (11,400). The receivable stays on the balance sheet until the annual income tax return, where the total withheld during the year is deducted from the tax due.

Common mistakes

• Calculating withholding on the VAT-inclusive total instead of the value before VAT.
• Using one rate for everything instead of classifying each purchase.
• Deducting from the supplier but not remitting the amount or not filing Form 41 on time.
• As a supplier, never recording the amounts customers withheld, and so losing the credit against income tax.
• Missing or wrong supplier tax registration numbers, which leave deductions unmatched on the supplier's side.