The current Egyptian effort to reform the fiscal system thus lies at the core of the country’s economic revamp. Over the past decades, the government has launched a series of initiatives to modernize the tax structure and broaden its portfolio, aiming to create revenue generation, investment locale, and other conducive conditions for investors. The journey has already been punctuated by waves of tax incentives.

Building on the positive impact of the first package of incentives, the second package, announced in late 2025, aims to restore confidence among taxpayers while deepening digitalization and extending coverage through a turnover-based tax regime, exemptions, and graduated rates designed for small businesses.

Egypt’s Tax Reform Journey

The Egyptian government aims to increase the tax revenue as a percentage of gross domestic product (GDP) to approximately 15.2% by fiscal year (FY) 2029/2030, compared to 12.3% in FY 2024/2025, as per the Ministry of Finance’s medium-term public finance strategy for 2026/2027-2029/2030, released in early January 2026.

The ministry noted that this is a pivotal step towards joining the average tax performance in the African continent, which was around 15.6% in FY 2021/2022. This target is planned to be achieved by expanding the tax base, improving tax compliance, automating tax systems, and boosting economic activity, without imposing additional burdens on citizens or the business community.

This comes as the government prepares a new package of proposed tax measures, which are expected to raise the tax revenue-to-GDP ratio by about 1%, thus bringing it to 14.4% in FY 2026/2027.

Egypt’s first tax incentive package, launched in 2024, aimed to simplify compliance and expand the taxpayer base. Introduced by the Ministry of Finance in October 2024, the first package of tax incentives targeted small and medium-sized enterprises (SMEs), freelancers, and professionals with annual turnovers of up to EGP 15 million. It offered broad exemptions across income, capital gains, value-added taxes (VAT), and stamp duties, while eliminating registration and documentation fees for participants in the simplified system.

Economist Ahmed Zayed tells Arab Finance: “The first package of tax incentives contributed to measurable progress in integrating new segments into the formal tax system, particularly small and micro-enterprises, through the simplified tax regime for businesses with annual turnover below EGP 20 million.” 

As of June 19^th, 2025, the inaugural tax incentive package generated EGP 54.76 billion in additional revenue through 110,000 voluntary dispute requests and more than 450,000 new or amended tax returns.

“The experience highlighted the importance of clarity, procedural simplicity, and incentive-based compliance in encouraging voluntary participation. These lessons have been directly incorporated into the design of the second package,” Zayed notes.

Unveiling the Second Package's Pillars

Building on the momentum of the first initiative, the second package—unveiled by Minister of Finance Ahmed Kouchouk in December 2025—focuses on four pillars: restoring trust with taxpayers, incentivizing compliance, expanding digitalization, and broadening tax coverage. It introduces streamlined registration processes, reduced documentation requirements, and enhanced digital platforms to ease taxpayer interaction with the Egyptian Tax Authority (ETA).

This comes as “the newly announced tax facilitation packages are introduced within the framework of an integrated strategy aimed at enhancing the efficiency of the tax system, broadening the taxpayer base, and strengthening voluntary compliance. The emphasis on procedural simplification, digitalization, and partnership with taxpayers reflects a gradual transition toward a more service-oriented tax administration that supports sustainable revenue generation,” according to Zayed.

Under the second package of incentives, small enterprises with an annual turnover of up to EGP 20 million benefit from simplified tax procedures, including reduced documentation and faster processing times. Businesses are now categorized by turnover brackets, each with tailored compliance requirements, making it easier for micro and small enterprises to formalize their operations.

Meanwhile, new entrants into the formal sector may qualify for temporary exemptions from income tax, VAT, and stamp duties, especially if they register voluntarily under the new system. Registration and licensing fees are waived for eligible small businesses, lowering the cost of formalization. Additionally, taxpayers with outstanding disputes can benefit from penalty waivers and expedited settlements under Law No. 5 of 2025.

In this regard, Nada Haytham, Economic Analyst, tells Arab Finance: “The success of the second package in formalizing the economy is anchored in its move from punitive enforcement to incentive-based registration. By introducing a simplified, turnover-based tax (ranging from 0.4% to 1.5%) for businesses with turnovers under EGP 20 million (Law No. 6 of 2025), Egypt is lowering the 'cost of entry' for the informal sector.”

“Global precedents, like Brazil’s Simples Nacional, show that such simplified regimes can boost registration by up to 18% in the early years. However, Egypt must avoid the 'cliff effect' seen in other markets, where firms intentionally stunt their growth to stay within lower tax tiers,” she adds.

“To measure true success, Egypt should track VAT C-Efficiency and growth in social insurance registrations, as these indicators reflect sustainable formalization rather than just one-time paper-based compliance,” Haytham explains.

Meanwhile, Economic Expert Abdelrahman Sherif, explains that “International experience from informal-heavy economies—such as Indonesia, Brazil, and Türkiye—suggests that tax incentives alone do not formalize the informal sector. They can act as an entry point when combined with simplified registration, predictable tax obligations, and credible enforcement over time.”

Going forward, Sherif adds, “Well-designed tax incentives can positively influence Egypt’s investment climate, particularly in strategic diversification areas such as renewable energy, green industries, and private sector–led development.”

Tax Incentives' Promise

Egypt’s new tax incentive framework demonstrates ambition, but its effectiveness will depend on several considerations. As Haytham points out, “The package acts as a catalyst for high-value sectors, particularly the green energy frontier. For instance, the 33–55% cash rebate for green hydrogen projects (Law No. 2 of 2024) is a world-class incentive that addresses project liquidity and risk.”

These measures, combined with the Golden License—a single approval point for strategic investments—and logistical discounts such as the 30% reduction in port usage fees, position Egypt as a potential hub for renewable energy and diversified capital inflows.

Yet, the challenge lies in ensuring that such incentives do not disproportionately benefit large investors while leaving SMEs and informal businesses behind.

Economist Ali Metwally stresses that the biggest challenge is not the incentives themselves but the execution gap. He explains, “Bringing informal activity into the system requires trust, simplicity, and credible no-surprises enforcement. Many micro and small businesses stay informal because compliance is costly in time and paperwork, and they fear retroactive liabilities, inspections, or penalties that could wipe out thin margins.”

To maximize impact, Metwally argues that formalization must be made economically rational—through a simple, low-rate presumptive regime for small businesses, a clear transition ladder to the standard system, and a time-bound clean slate mechanism that prevents retroactive claims for newly registered firms.

At the same time, Egypt faces a delicate fiscal balancing act. Haytham cautions that “to hedge against potential revenue shortfalls from SME incentives, the government is concurrently expanding the VAT base through Law No. 157 of 2025 (e.g., targeting crude oil and news agencies and restructuring construction VAT).” This expansion may help offset forgone revenues, but it also risks burdening sectors already under inflationary strain.

The real test, however, is administrative capacity. As Haytham emphasizes, “Foundational reforms like the integration of AI for predictive compliance, the guarantee of one-week VAT refunds for ‘White List’ companies, and the reactivation of dispute settlement committees are essential.”

Sherif adds a cautionary note on risks. He highlights that “the main risks associated with tax incentives include short-term revenue losses, unequal access favoring larger firms, and limited additional investment (deadweight loss).” To mitigate these risks, Sherif recommends a disciplined framework with clear eligibility criteria, sunset clauses, and regular cost-benefit evaluations to assess economic additionality.

Zayed complements these views by stressing the importance of liquidity and predictability for business continuity. He notes that “simplified tax procedures, faster VAT refund mechanisms, and the introduction of offset arrangements between tax credits and liabilities help improve corporate liquidity and reduce administrative burdens, thereby supporting business continuity and expansion.”

He also highlights the shift from capital gains tax to stamp duty in the stock market, which enhances predictability and encourages longer-term institutional investment.

Moreover, Zayed points out that similar approaches in India and Türkiye successfully deepened capital markets and boosted trading activity—suggesting Egypt could replicate these outcomes if reforms are consistently applied.

Finally, he underscores that “progressive tax rates strike a balance between revenue mobilization and investment incentives by aligning tax obligations with the scale of economic activity, while maintaining an enabling environment for SMEs to grow.” This reinforces the need for equity in taxation, ensuring that reforms do not disproportionately burden smaller players.

Egypt’s tax reform journey reflects both ambition and pragmatism. By setting a clear target of raising tax revenues to 15.2% of GDP by FY 2029/2030, the government has aligned its fiscal vision with continental benchmarks while signaling a commitment to modernization and inclusivity.

Ultimately, Egypt’s fiscal reform is more than a technical exercise—it is a cornerstone of economic transformation. If implemented with efficiency, fairness, and foresight, the current wave of tax incentives can expand the taxpayer base and deepen capital markets.

By Sarah Samir

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