Tax Depreciation versus Accounting Depreciation in Egypt

Executive summary

• Article 25 of Income Tax Law No. 91 of 2005 sets four fixed depreciation rates: 5% for buildings, installations, fittings, ships and aircraft; 10% for purchased intangible assets, including goodwill; 50% for computers and information systems; and 25% for every other business asset. Land, artistic and archaeological works and jewellery are not depreciated at all.
• The 5% and 10% rates are charged on cost for each tax period; the 50% and 25% rates apply to a declining, pooled base per group (articles 25 and 26), which rises with additions and falls with depreciation and disposals; once it is EGP 10,000 or less, the whole base is deductible at once.
• Article 27 (as replaced by Law 17 of 2015) lets a taxpayer elect a 30% accelerated deduction on the cost of machinery and equipment used in production, new or used, in the first tax period in which it is used; without the election, only the article 25/26 rates apply. Under the article's original 2005 wording the allowance was automatic.
• This differs from the accounting charge under Egyptian Accounting Standard 10 — per asset, by estimated useful life, reviewed annually — producing a recurring gap between the two bases.
• The difference between an asset's carrying amount and its tax base is a temporary difference under Egyptian Accounting Standard 24: taxable, giving a deferred tax liability, where tax depreciation is faster; deductible, giving a deferred tax asset, where it is slower.

Asset categories and tax depreciation rates

Article 25 states that "the depreciation of the establishment's assets is computed as follows", then sets a rate for each category with no reference to an estimated useful life:

Item 1 reads: "(5%) of the cost of purchasing, constructing ... any of the buildings, installations, fittings, ships and aircraft, for each tax period", and item 2 applies 10% to intangible assets in the same way: a fixed percentage of cost every period, that is, straight line. Item 3 reads: "The following two categories of the establishment's assets are depreciated according to the depreciation-base system, at the rates set against each."

The depreciation base: a declining pool, not an asset-by-asset life

The first departure from accounting logic is that the two item 3 rates are not applied to each asset's own cost, but to the "depreciation base" that article 26 defines as "the carrying amount of the assets as it appears in the opening balance sheet for the tax period", increased by the cost of assets used and of development, improvement, renewal or reconstruction, and reduced by the annual depreciation and the sale value of disposals or compensation received for their loss. Each of the two groups is therefore a single collective pool that declines year after year at the same rate — there is no separate calculation for each asset within it. Where the base is negative, the value of the disposal or compensation is added to the taxpayer's commercial and industrial profits; a base of EGP 10,000 or less is treated as fully deductible.

Article 34 of the executive regulations (Minister of Finance Decree 991 of 2005) sets out how the system works: each group is depreciated at its item 3 rate "regardless of the period for which the group's assets were used", so an asset bought late in the year is depreciated with its group at the full year's rate, and the remaining balance is carried forward as the next period's base; and "the depreciation rates set out in article (25) of the law may not be departed from for the purposes of computing the tax."

The accelerated first-year deduction — elective, on request

Law 17 of 2015 (Official Gazette No. 11 (continued), 12 March 2015) replaced article 27 in full, turning the allowance from automatic into elective, on the taxpayer's request: "30% of the cost of the machinery and equipment used in investment in the field of production, whether new or used, may be deducted on the taxpayer's request, in the first tax period during which those assets are used, and the article (25) depreciation base for that period is then computed after deducting the said 30%." Where no request is made, only the article 25/26 rates apply — the allowance is an exception to be claimed, not the automatic rule the article's original 2005 wording provided. Both paragraphs require the taxpayer to keep regular books and accounts, and the allowance is confined to machinery and equipment used in production; it does not extend to buildings or intangible assets.

Article 35 of the executive regulations adds the remaining value to the depreciation base, but describes the machinery and equipment as those used "in the field of industrial production" — narrower than the law's "in the field of production" — so a taxpayer claiming the allowance should be able to show that the machine is used in production.

Why it differs from the accounting charge

The accounting charge under Egyptian Accounting Standard 10, "Fixed Assets and their Depreciation" (in the text issued by Prime Ministerial Decree 883 of 2023), is spread over the estimated useful life of each asset and of each significant component, with the useful life reviewed at least at each financial year-end (paragraphs 43, 50 and 51). Tax depreciation is instead a statutory rate, on cost or on a collective pool per group, unconnected to the asset's actual life or use. The result is a recurring gap between the two bases, widened whenever the article 27 allowance is claimed.

Deferred tax under Egyptian Accounting Standard 24

Egyptian Accounting Standard 24, "Income Taxes" (issued in 2015, amended by Minister of Investment and International Cooperation Decree 69 of 2019 and by the preface issued with Prime Ministerial Decree 883 of 2023; neither amendment touches the paragraphs cited here), defines "temporary differences" as "the differences between the carrying amount of assets or liabilities in the statement of financial position and the tax base of those assets or liabilities" (para. 5), and addresses this case directly: "the depreciation used in determining taxable profit (tax loss) may differ from that used in determining accounting profit ... and a taxable temporary difference giving rise to a deferred tax liability arises if tax depreciation is accelerated" (para. 17(a)); where tax depreciation is slower than accounting depreciation, a deductible temporary difference giving rise to a deferred tax asset arises. Accelerated tax depreciation here is the effect of combining the group rate with the article 27 allowance when it is claimed: "when the carrying amount of the asset exceeds its tax base, the amount of taxable economic benefits will exceed the amount that will be allowed as a deduction for tax purposes" (para. 16). The liability is measured at the tax rates expected to apply when it is settled, based on the rates enacted, or about to be enacted, by the end of the financial period (para. 47).

Illustrative example (hypothetical): a company that keeps regular books buys production machinery costing EGP 1,000,000, uses it from the first day of its financial year (which is also its tax year) and elects the article 27 allowance. The machine has a 10-year accounting useful life on a straight-line basis with no residual value, falls for tax within category 3(b) (25%), and is the only asset in its group:

The taxable temporary difference is 900,000 − 525,000 = EGP 375,000. At the 22.5% tax rate on the profits of juristic persons (article 49, first paragraph, as replaced by Law No. 96 of 2015), assumed to be the rate that will apply when the difference reverses, the business recognises a deferred tax liability of EGP 84,375.

This is the standard regime. A business registered under the simplified tax regime is taxed on a percentage of its turnover rather than its net profit, so these depreciation rates do not enter its tax computation — see the simplified tax regime.

What this requires

• Keep two parallel records: the accounting carrying amount under Standard 10, and the tax position under articles 25 and 26 — cost for buildings and intangible assets, and the depreciation base for each item 3 group.
• Make the article 27 request explicitly for qualifying machinery and equipment in the first tax period in which they are used — it does not apply without a request and cannot be taken in a later period — and keep the regular books and accounts it requires.
• Recompute each group's collective tax base every period, for its additions and disposals, independently of the accounting depreciation schedule.
• Flag any group whose base has fallen to EGP 10,000 or less: the whole balance is then deducted, the group's tax base falls to nil, and the deferred tax on it must be remeasured.
• Compute the deferred tax on the gap between the two bases at every close, not only disclose that a gap exists.

The firm's Tax Department reconciles the tax base of fixed assets under articles 25, 26 and 27 against the accounting depreciation schedule, and computes the deferred tax arising from the difference between them.

Mahmoud Nassef, Founder Partner
Chartered Accountant, Ministry of Finance, Egypt

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.