Legal Reserve and Employee Profit-Sharing Under Egyptian Company Law
How much must an Egyptian joint-stock company set aside as a legal reserve, and when may it stop? What share goes to employees? The rules, and their accounting and tax treatment.
Executive summary
- A joint-stock company sets aside at least 5% of net profit a year as a legal reserve; the general assembly may stop the set-aside once it reaches half of issued capital.
- Employees are entitled to at least 10% of the profit decided to be distributed, capped at their total annual wages; whatever the by-laws grant above 10% goes to a special account for their benefit.
- A limited liability company and a one-person company owe the employees' share only once capital reaches the minimum capital of a joint-stock company in the same activity; neither the Law nor its executive regulations extends the legal reserve to them.
- In accounting, the statutory employees' share is a distribution of net profit, not an expense, unlike contractual profit-sharing (Egyptian Accounting Standard No. 38).
- For tax, this share is fully exempt from salary tax, and reserves are not deductible costs.
- Law No. 154 of 2026 diverts a percentage of the profit of companies wholly or more than 50% owned by the state to the treasury; it is calculated before any reserve and does not replace the legal reserve.
| Obligation | Rate and cap | Basis |
|---|---|---|
| Legal reserve | 5% of net profit a year (one-twentieth); the general assembly may stop it once it reaches 50% of issued capital | Article 40 of Law No. 159 of 1981, and article 192 of its executive regulations |
| Employees' profit share | At least 10% of the profit decided to be distributed, capped at employees' total annual wages | Article 41 of Law No. 159 of 1981, and article 196 of its executive regulations |
| State treasury's share of state-owned companies' profits | 5% of net distributable profit (wholly owned), or 4% within the state's share (state ownership over 50%), before any reserve | Article 1 of Law No. 154 of 2026 |
The legal reserve and other reserves
Article 40 of the Companies Law, No. 159 of 1981, requires the board to set aside from net profit "at least one-twentieth to build a legal reserve", and lets the general assembly stop the set-aside "once it reaches an amount equal to half the capital". Article 192 of the executive regulations (issued by Ministerial Decision No. 96 of 1982) makes the stoppage subject to an auditor's report and sets the threshold at half of issued capital. The legal reserve may be used to cover the company's losses and to increase capital (article 40); it may not be applied outside the purposes assigned to it without the general assembly's approval (article 42).
A company's by-laws may also create a statutory reserve, at a percentage and for a purpose they set themselves (article 40, and article 193 of the regulations).
The employees' share of profits
Article 41 entitles employees to a share of the profits it is decided to distribute, "of not less than (10%) of those profits and not more than the total annual wages of the company's employees." The floor is calculated on profit decided to be distributed in cash (article 196(1) of the regulations), not on total net profit, and the ceiling tracks total wages, not a fixed share of profit.
Where the by-laws set a share above 10%, within the wage ceiling, the excess goes to a special account invested for the employees' benefit, from which amounts may be paid to them in years in which no profit is made for reasons beyond the company's control, or which may be used for housing projects or services for them (article 196(2) of the regulations). Shareholders and employees become entitled as soon as the general assembly resolves to distribute, and the board must carry out the resolution within one month at most (article 44, and article 197 of the regulations).
Limited liability companies and one-person companies
Articles 40 and 41 sit in the Law's chapter on joint-stock companies. Article 128, which extends certain joint-stock company rules to limited liability companies and one-person companies, names only "the provisions on the auditor, stocktaking and financial statements"; it does not mention the reserve or profit distribution. The employees' share, by contrast, is extended to a limited liability company by article 285 of the regulations if its capital reaches the minimum capital of joint-stock companies in the same activity, and the limited liability company rules govern a one-person company wherever there is no special provision (article 129 bis of the Law and article 287 bis 4 of the regulations), so the same test applies to it. Nothing in the provisions on these two forms, in the Law or the regulations, extends the legal reserve to them in the same way, so the company's contract should be checked on this point.
The accounting treatment of the employees' share
Egyptian Accounting Standard No. 38, "Employee Benefits" (amended 2019, by Decision of the Minister of Investment and International Cooperation No. 69 of 2019), treats profit-sharing and bonuses as short-term employee benefits, recognised as a liability and an expense only when the entity has a present legal or constructive obligation that can be estimated reliably (paragraph 19). Paragraph 5A, however, takes the statutory share out of the standard's scope: "employee benefits do not include the employees' share of profits prescribed by legal provisions"; and paragraph 23 confirms it: "except for the employees' share of profits prescribed by law ... the entity recognises the cost of a profit-sharing and bonus plan not as a distribution of net profit but as an expense."
The statutory share therefore remains a distribution of net profit within equity, not an expense, unlike contractual bonuses. Here the Egyptian standard departs from IAS 19, which treats the cost of profit-sharing as an expense (its paragraph 23) with no similar exception for a share set by law.
The tax position
Item 6 of article 13 of the Income Tax Law, No. 91 of 2005, exempts from salary tax "the employees' share of profits whose distribution is decided in accordance with the law", with no ceiling. Because taxable profit is determined on the basis of the income statement prepared under the Egyptian Accounting Standards (articles 17 and 51), and the statutory share does not pass through the income statement, it is not deducted as a cost against profits tax. Reserves, the legal reserve included, are not deductible costs (article 24(1)).
Separately, Law No. 154 of 2026 (in force from 29 July 2026) requires companies wholly owned by the state or public juristic persons to set aside 5% of net distributable profit, and companies in which their holding exceeds 50% to collect 4% within, and deducted from, their share, after covering carried-forward losses and before any reserve is set aside; the percentage is tax revenue passing to the treasury within four months of the financial year-end, and does not replace the legal reserve or the employees' share. Further detail is in state-owned companies' profits under Law No. 154 of 2026.
What this requires
- Confirm every year that at least 5% is set aside for the legal reserve before any distribution, and compare its balance with half of issued capital.
- Calculate the employees' share on profit actually decided to be distributed, and confirm it does not exceed total annual wages.
- Set whatever the by-laws grant employees above 10% aside in a special account invested for their benefit.
- In a limited liability or one-person company, check capital before calculating the employees' share, and check the company's contract on reserves.
- Record the employees' share within equity as a profit distribution, not as an expense, and deduct neither it nor any reserve in the profits tax return.
- In companies wholly or more than 50% owned by the state or public juristic persons, calculate the Law No. 154 of 2026 percentage before setting aside reserves, and remit it within four months of the financial year-end.
The firm's Accounting & Bookkeeping Department reviews the legal reserve and the employees' profit share at each year-end, and confirms both are recorded in the books and the tax return consistently with the Companies Law and the Egyptian accounting standard.
Mahmoud Nassef — Chartered Accountant (Egyptian Register), Founder Partner
Member, Egyptian Society of Accountants & Auditors
Member, Egyptian Tax Society
Member, Egyptian Society for Public Finance and Taxation
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Disclaimer: This bulletin is prepared for general information on the legislation in force at the date of its publication. It does not constitute a professional opinion or tax or legal advice on any particular matter, and it should not be relied upon in place of advice based on an examination of the circumstances of each case. Nassef & Partners International accepts no responsibility for any action taken, or refrained from, in reliance on its contents. The positions stated remain subject to subsequent legislation and decisions.