Market loses big with news of 2 new taxes

The main EGX30 index took a sharp drop on Thursday, losing 3.5 percent to close at 8,243 points, reflecting investors’ rejection of the 10 percent capital gains tax and dividend tax announced by the Finance Ministry.

Though the proposed taxes have not been presented to the Cabinet and so are not yet law, their announcement still caused the largest single-day drop for the market in two months, shaving LE12 billion off total capitalization.

Subsequently, the broader EGX100 lost 2.6 percent, rounding off a week of broad declines on the market during a prolonged presidential election.

The dividends tax would be 5 percent for people who have owned 25 percent of a company for more than two years, and 10 percent for the rest, said Mohamed Abu Basha, an economist at Cairo-based private equity firm EFG-Hermes.

In a statement released after an emergency meeting, the Egyptian Capital Market Association (ECMA) and the capital market division of the Federation of Egyptian Chambers of Commerce said that this is not the best time to impose taxes on the stock market, reported the state-owned news site Al-Ahram.

Egypt’s stock market has been a top performer in the region this year, with the benchmark index rising a total of 22 percent since the start of 2014.

In its statement, the ECMA said that it “understands the dire state of the country’s economy, and the need to restructure the financial system, and therefore does not object to taxing the capital market.” However, the representatives detailed measures that could have been taken to maintain investor confidence in Egypt’s market.

Studying similarly emerging markets, namely the BRICS nations — an association of the five major emerging national economies of Brazil, Russia, India, China and South Africa — ECMA said it is uncommon to apply both of these taxes on the same market, according to Al-Ahram.

It may have been better to reduce the tax rate if both are to be imposed at once, they added.

Abu Basha said that some analysts object to the timing, claiming that the economy is not strong enough to impose a measure that could drive away investment.

While both taxes would affect investor sentiment, the capital gains tax has a broader impact because not everyone is affected by the dividend tax, Abu Basha explained.

The EGX30 had opened the week at a six-year high in Sunday’s trading session, which ended at 8,762 points. A steady drop began when the polls opened on Monday, however, with the index closing at 8,736 points on the first day of voting in the presidential election.