2019 was a huge year for Egypt ’s startup ecosystem. The North African country has the market — the third most populated country in Africa after Nigeria and Ethiopia, with over one hundred million people, and 24 years being the average age any investor would find in the country. Latest report released by community and data platform for startups, MAGNiTT, on startup financing in the Middle East and North Africa (MENA) showed Egypt topping the whole of MENA in the number of startup financing deals concluded in 2019. In fact, Magnitt’s geographical breakdown of the 2019 data further shows Egypt ’s growing influence in the MENA region with the North African country’s startups contributing at least 25% (141 deals) of all 564 deals that the region recorded. Of the amount disclosed form these deals, 14% ($98.6 million) was raised by Egypt ‘s startups. Apart from playing an influential role in the Middle East startup ecosystem, Egypt has also remained prominent on the African startup ecosystem. Quite obvious from Egypt’s early startup success is partly as a result of some radical changes in the country’s legal system. A few of these changes are noted below.
Tax Incentives Through Legislation
In 2017, Egypt enacted a new Investment Law which came into effect on 1 June 2017.The new Law repealed the old Investment Guarantees and Incentives Law №8 of 1997, and marked a new beginning in the journey towards attracting investments to the country’s startup ecosystem. The law makes, among other things, certain investment guarantees which include that:
- Invested funds in Egypt are not subject to arbitrary proceedings.
- Nationalization of investment projects shall not be allowed.
- The funds of investment projects shall not be seized except for the public interest and in return for fair compensation.
- The investor has the right to finance the project from abroad in foreign currency and is entitled to derive profits, transfer profits abroad, or liquidate the project and transfer the output of liquidation abroad.
- The investment project has the right to employ foreign workers up to 10% of the total number of employees. This shall be increased to 20% in the absence of national labor with the necessary qualifications. In addition, foreign workers have the right to transfer their remuneration abroad.
- The right of investment projects to import the necessary raw materials, production necessities, equipment and spare parts, without the need to register in the importers’ register. They also have the right to export their products without registering them in the exporters’ register and without a license.
- Non-Egyptian investors shall be granted residence in the Arab Republic of Egypt throughout the operation of the project.
- The Government shall treat foreign investors in a similar way as national investors.
In summary, the new Investment Law №72 of 2017 has addressed a number of issues, including empowering a single investment authority (GAFI) to deal with companies, thus reducing the number of authorities that operate in this field. The process of establishing a firm now takes one working day.
Incentives Given To Investors Under The Law Include That:
- Registration of the articles of association of companies and the establishment of credit facilities and mortgage-related contracts are be exempted from stamp duty and authentication fees. Also exempted from taxes and fees is the registration of land for qualifying projects covered by the investment.
- Under the law only 2% of customs duties shall be imposed on all imported machinery, equipment and devices necessary for the projects.
- Industrial projects and investments shall qualify for custom duty-free importation of moldings, models, etc., for temporary use in the manufacture and re-exportation of products.
Furthermore, qualifying investment projects established after the implementation of Investment Law №72 shall qualify for deduction of investment costs from the taxable net profit as follows:
- 50% of the investment costs of projects in Sector A, which includes the geographical areas most in need of development in accordance with the executive regulations.
- 30% of the investment costs of projects in Sector B, which includes the rest of the Republic of Egypt, and the project is in one of the following activities: manufacturing, mining, logistics, tourism, health care, oil services, infrastructure, and venture capital.
By virtue of a decision of Egypt’s Council of Ministers, additional incentives may be granted for projects as follows:
1. The establishment of special customs points for the project’s exports and imports.
2. The Government shall bear the value of the cost incurred by the investor for the delivery of the facilities to the property allocated to the project.
3. The Government shall bear part of the cost of the technical training of the employees.
4. The Government shall refund half of the value of land allocated to industrial projects in the event of commencement of production within two years from the handover of land.
5. The Government shall assign free land for certain strategic activities.
Again, by virtue of a decision of the Council of Ministers, new incentives may be introduced whenever the need arises.
However, one major problem hindering a more robust investment in the country’s startup ecosystem is the absence of adequate regulatory framework enabling the setting up of onshore private equity or venture capital funding Africa.
For instance, while Egypt’s Executive Regulations of the Capital Markets Law allows for the creation of Private Equity funds located in Egypt, the current regulatory framework does not facilitate and enable their incorporation.
What is currently obtained is that the Law treats all funds as mutual funds. This approach does not give enough consideration to the special nature of Private Equity and Venture Capital Funds and to the global standards for how they are structured.
Consequently, this explains why Private Equity and Venture Capital located in Egytp funds are hardly found in the country.
The majority of Private Equity funds are established offshore (outside Egypt) due to the enhanced flexibility this provides, the tax-efficient systems and the fact that international investors see offshore routes as well-tested and more familiar.
Other local investors opt to establish investment holding firms in Egypt, thus deviating from the typical Private equity fund structure.
Therefore, amending the Executive Regulations of the Capital Markets Law to permit the establishment of private equity funds in the form of limited liability companies (similar to the LLC structure in France) or limited partnerships (as in the United Kingdom), would encourage Private equity and venture capital activity, allowing the formation of private equity and venture capital funds in Egypt.
Government-backed Funds
Apart from tax incentives, Egypt ’s government has also set up a number of funds and programmes to support its startup ecosystem. Below are some of these:
Bedaya
Bedaya is a government-backed incubator, established by Egypt’s General Authority for Investment and Free Zones (GAFI) in 2009. The incubator offers up to LE 150,000 (US$9,047) in funds as well as business development services, networking opportunities and manufacturing spaces to startups in Egypt.
According to its website, 60 percent of Bedaya’s fund is allocated to supporting startups from governorates outside of the capital, Cairo.
The incubation period at Bedaya is a minimum of three months. Bedaya offers funding for 3–5 years in return for equity. But, it also reveals different exit strategies that vary from business to business.
TIEC — Technology Innovation and Entrepreneurship Center
Running throughout Upper Egypt and the Delta as well as in its headquarters in Cairo, TIEC is a government entity that specializes in incubating information and communication technology (ICT) startups as part of the governmental plan to develop Egypt’s ICT sector.
Since its establishment in 2010, TIEC offers fund of up to LE 120,000 (US$7,237) without a share or equity in the company. Its incubation period is 1 year.
Fekretak Sherketak
“Fekretak Sherketak” Initiative was launched in September 2017 by Egypt’s Ministry of Investment and International Cooperation to encourage startups and promote the entrepreneurial atmosphere in Egypt.
According to its website, this incubator is “designed to support and empower the next generation of Egyptian entrepreneurs and contribute to the development of the Egyptian startup ecosystem.”
Along with funding opportunities, the firm offers program mentorship, training and other necessary tools and resources for local entrepreneurs looking to grow and expand their businesses.
The program promotes the launch of the Egypt Entrepreneurship Program (EEP) in partnership with Hermes Financial Group and UNDP.
Emerging businesses have the opportunity to receive LE 500,000 ($30,157) as a fund from “Fekretak Sherketak” in return for 4–8 percent equity as well as a four-month training period.
Furthermore, the number of private venture capital (VC) firms, accelerators and incubators in Egypt has also been increasing, which indicates a growing interest in entrepreneurship in Egypt.
These firms include Gesr, Flat6labs, Injaz Egypt, and AUC Venture Labs; they succeeded in putting many brilliant ideas into motion. Egyptian entrepreneurs who like to start or even scale their business can head to any of these incubators or accelerators which offer mentorship, training, office space, and legal support to selected startups.
Due to Egypt ’s evident interest in its startup ecosystem, barely a week goes without an Egyptian startup announcing an investment round. Egypt opened doors for many young people to start thinking about ways to innovate, create and control their destinies , unleashing their entrepreneurial potential.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer.
He could be contacted at udohrapulu@gmail.com