Tax Accounting

Chapter 3
Income Tax on Salaries and the Like

Learning Objectives
This chapter will discuss the tax treatments of salaries and the like under the
law no. 91 of 2005. After this chapter you should know:
- Determination of the taxable income of salaries and the like.
- Sources of taxable income of salaries and the like and identify the tax
exemptions.
- Calculation of the monthly tax due on salaries and the like and identify the
tax rate exceptions.
- Calculation of the tax due on bonuses and occasional incomes.
- Preparation the tax settlement list and calculation the tax differences at the
end of the year.

3.1. The Taxable Income of Salaries and the Like

According to article (9) of the law no. 91 of 2005 the tax is applied to salaries
and the like as follows:
1. All earnings (cash or in kind) received by a taxpayer resulting from a
source (third party) in Egypt (government, public sector, or private for
a work performed in Egypt or abroad. Whether these earnings are for
works performed with or without a contract, on a regular or irregular
basis, regardless of such dues’ names, forms, or reasons. Including:
wages, incentives, commissions, grants, additional payments,
allowances, dividends or shares in profits and cash and in-kind benefits
of all types.

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2. All earnings (cash or in kind) received by a taxpayer resulting from a

foreign source for work performed in Egypt.
3. Salaries and remunerations (rewards) of non-shareholding chairmen
and members of the board of director of public sector and public
business sector companies.
4. Salaries and remunerations (rewards) of chairmen, members of the
board of director and managers of corporations in return for their
administrative work.
The general rules to subject any income to the income tax on salaries
and the like are determined according to the principles of residence and
sources of income as follows: The income will be subject to tax on salaries
and the like, if the taxpayer (Egyptian or Foreigner) performs his duties
whether

In Egypt: and receives his income

Abroad: and receives his income
from Egyptian treasury, foreign
from Egyptian treasury or an
treasury, An employer resident, or
employer resident in Egypt
non-resident in Egypt (According to
(According to sources of income)
the principle of residency)

So, the incomes from sources outside Egypt do not subject to tax on
salaries and the like.
3.1.1 Sources of Taxable Income
The taxable income of salaries and the like can be divided into (2) groups:
Basic Salary Variable Salary
It is regular payments to It is regular or irregular payments
employees in return for mental, to employees in cash or non-cash

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 Tax Accounting

manual, or technical work which form over and above their basic
include: salary which include:
- Salaries - Bonuses (The amounts received
- Wages by the employee in return for
- Periodic raise performing additional work
supplementary to his original
work).
- Cash and in-kind Benefits (The
benefits received by the
employee to improve working
conditions, enhance
performance, or increase
production)

3.1.2. Calculation of The Monthly Tax Due on Salaries and The Like
Bonuses
Bonuses can be classified into (2) groups:
1. Taxable Bonuses: which are subjected to tax (They are paid
occasionally, i.e., they are received by the employee once or twice
during the year).
2. Non-taxable Bonuses: (Article 12) of tax law no. 91/2005 (e.g.,
Severance pay & Retirement benefits). Retirement benefit / End of
service bonus is received only once. Non-taxable income because it is
considered as a compensation rather than a payment for work. Pensions
also are non-taxable incomes because they are payments from amounts
previously deducted from the employee’s salary.
Cash and in-kind benefits
Cash benefits can be classified into (3) groups:
1. Taxable cash benefits, which are subjected to tax. They are subjected to
tax on salaries if they represent a personal benefit to the employee.

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 Tax Accounting

Therefore, they must not be a compensation for (against) actual expenses

which are incurred by the employee. Including: overtime payment,
incentives, commission, nature of work allowance, meeting attendance
allowance, representation allowance, and grants paid to workers on special
occasions (e.g., Marriage grant, Labor Day).
2. Non-taxable cash benefits, which are not subjected to tax include
allowances which are paid against in kind benefits. Non-taxable
allowances because they are paid to employees against actual expenses.
Such as, housing (or residence) allowance, meals, travel &
transportation permits, and infection allowance.
3. Exempted cash benefits: which are exempted according to social law
include: social raise, special raise (whether it is added to the basic or
variable salary), university allowance paid to the university staff, and
cost of living allowance.
4. Taxable in-kind benefits, which are subjected to tax. The benefits
which are received by the employee from the employer in a non-cash
form. They subject to tax on salaries under the following (2) conditions:
- They must be granted to the employee for free of charge. Therefore, if they
are granted to the employee against a charge, even if it was a symbolic
(trivial) amount, they will not subject to tax.
- They must represent a personal benefit to the employee (i.e., they must be
for personal use of the employee not for the performance of his job).
- According to the article no. (11) of the executive regulations of the law,
the value of the in-kind benefit is determined:
a. According to the market value: such as housing (lodging), meals,
clothes, and travel & transportation permits.
b. According to specific rules, such as follows:
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 Tax Accounting

- The company's cars placed at the personal disposal of the employee. The
taxable in-kind benefit value is determined by 20 % of car s operating
expenses after excluding depreciation expense.
Taxable benefit value = (Operating expenses – Annual dep. exp.) x 20%
The car operating expenses include (fuel, insurance, periodical maintenance).
Example:
A car owned by a company is given to one of its employees to be used for
both his personal and business purposes. The annual operating costs of the car
were L.E 16,000 including L.E. 10,000 annual depreciation.
Required:
Calculate the value of the monthly Taxable in-kind benefit.
Solution.
The monthly taxable in-kind benefit value of the car
= monthly cash operating expenses x 20%
= [(16,000 – 10,000) ÷ 12 months] x 20%
= [6,000 ÷ 12 months] x 20%
= 500 x 20 % = L.E. 100
- Mobile (Cellular) Phones: The taxable in-kind benefit value is determined
by 20% of mobile phone bill.

Taxable benefit value of the mobile phone = The phone bill × 20

Example:
A company gave one of its employees a mobile phone to be used for both his
personal and business purposes. Notice that, it was bought for L.E. 5,000. The
monthly phone bill was L.E 300.

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Required:
Calculate the value of the monthly Taxable in-kind benefit.
Solution.
The monthly taxable in-kind benefit value of the mobile phone
= The monthly phone bill x 20%
= 300 x 20%
= L.E. 60
a. Taxable in-kind benefits, which are subjected to tax
1. Loans and advances offered by employers:
In case the employer gives a loan to one of its employees exceeding the total
income obtained by the employee during the 6 months prior to obtaining the
loan. It is compared between the loan interest rate and 7%. There are two
cases:

1. The loan interest rate ≥ (7%) The loan is not subjected to tax as in-
determined by the law. kind benefit
2. The loan interest rate < (7%) The loan is taxable as in-kind
determined by the law benefit, and its value is determined
as follow:

Taxable in-kind = benefit value of

the loan × the in- kind benefit value
the interest rate difference

Where:

The benefit value of the loan = loan

amount – the total income during the
last (6) months prior to the loan

The interest rate difference = 7% –

the loan interest rate

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 Tax Accounting

Example (1):
An employee received L.E 20,000 as a loan from his employer on 1/7/2018.
The total amounts received by the employee from 1/1/2018 until 30/6/2018
was L.E 15,000. The loan interest rate was 5%.
Required:
Calculate the value of the annual taxable in-kind benefit.
Solution.
The annual taxable in-kind benefit value of the loan = the in-kind benefit value
x the interest rate difference
1. The in-kind benefit value = loan amount – the total income during the last (6)
months prior to the loan
= 20,000 – 15,000 = 5,000
2. The interest rate difference = 7 % – the loan interest rate
=7%–5%=2
3. The annual taxable in-kind benefit value = 5,000 x 2%
= L.E. 100

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