The government on Monday intervened to tone down a new capital gains tax law on profits made in stock market transactions to calm fears by investors. The amendments included exempting bonus shares, those distributed to shareholders instead of cash dividends, from the tax in addition to raising the tax-free limit from LE10,000 to LE15,000 on annual cash dividend payments for local and foreign individuals resident in Egypt. The new final draft of the law includes imposing a new 10 per cent tax on cash dividends and net capital gains realised at the end of each tax year. In other words, when investors sell their holdings of shares at a price higher than what they paid for them, they will need to pay ten per cent of the difference, called capital gains, in taxes. Also, shareholders who opt to keep their shares to acquire distributed profits at the end of the year will also have to pay a 10 per cent tax on their revenues if these exceed LE15,000. The rate will be reduced to five per cent on cash dividends for shareholders who own 25 per cent or more of listed company capital. According to Hani Dimian, the Minister of Finance, non-resident foreigners will be taxed on each transaction. “For foreigners, I will [collect the tax] transaction-by-transaction because they can carry out a transaction and then leave,” Dimian said on the private television channel CBC. Initial responses to the new tax were negative, with the stock market's main index, the EGX30, losing 3.5 per cent on Thursday, the day the new tax was revealed and, after the two-day market break, falling a further 4.2 per cent on Sunday, its largest daily drop in a year. The law under which the new tax will be levied has been amended several times, but the cabinet has now revised its final draft and referred it to the president for ratification. It cancels the transactions stamp tax levied in 2013 under ousted former president Mohamed Morsi. The amendments to the law caused stocks to rebound during midday trading on Monday, with the EGX30 inching up 1.5 per cent to 8,020 points and the broader EGX70 increasing 0.3 per cent. On Tuesday the index lost a mere 0.65 per cent. “Investors were reassured by these amendments and convinced that the new tax is better than the currently imposed 0.001 transactions tax,” market analyst Eissa Fathi told Al-Ahram Weekly. He said that the market had started responding positively to the amendments at the end of Sunday's session when the EGX30 narrowed its losses by the end of the day. Market transactions was suspended for half an hour on Sunday at midday after the EGX lost five per cent, the permitted daily drop, and ended the session falling by four per cent after trading was resumed. Fathi pointed out that the stamp tax on transactions was imposed on investors regardless of whether they had achieved gains or registered losses, whereas the capital gains tax will only be imposed on profits. But he slammed the government's sudden move to impose the new tax without opening the issue up to public discussion. The fact that the news was leaked had also negatively affected the stock market. “Ambiguities in the new tax at the beginning have caused a downward trend in the market since last Monday,” he said. Overall losses in market capitalisation due to the decline in share prices starting Monday of last week and until Sunday had amounted to LE39 billion, he said. Advocates of the new tax point out that these losses are only on paper, as the owners of the shares will only lose if they sell their holdings. “Some investors are trying to pressure the government to withhold the decision by heavily selling in the market to give the impression that the new tax will have an adverse effect on the local stock market and the economy at large,” wrote Ahmed Al-Naggar, Chairman of Al-Ahram Establishment, in the Al-Ahram daily on Monday. However, he added, the listed shares were those of well-established companies and any change in their prices was a matter of supply and demand, not affecting the real value of the company or its growth and therefore not having a direct effect on the real economy as a whole. A plan to impose a capital gains tax was introduced soon after the 25 January Revolution by the then minister of finance Samir Radwan, but this was dropped after pressures from the business community. The introduction of the new tax has sparked fears that it might prompt investors to abandon the stock market and invest their money in banks or dollars, which in turn would lead to further depreciation in the value of Egyptian pound, igniting inflation and causing more economic problems. Fathi said that the amendments had erased these fears. Al-Naggar said that a capital gains tax was imposed on the stock markets of almost all developed countries and most of the emerging ones, with rates commonly being higher than those in Egypt. Fathi expected that the new tax would be imposed by the start of the new fiscal year on July 1. According to Abdullah Al-Adli, head of the tax division at the accountancy firm PricewaterhouseCoopers, investments in the stock market are “hot money,” a term used to describe capital that is frequently transferred between individuals and financial institutions in an attempt to maximise interest or capital gains. “If this money is making gains it's the state's right to levy taxes on it,” he said. Though a capital gains tax was needed, Al-Adli said that the timing of its introduction had been bad. He said that Egypt was scrambling to attract investors to revive an economy strained by three years of political turmoil, but the change in the country's taxation system and imposing new taxes might send bad signals to investors. He also criticised the fact that there were other untapped tax resources that the government could have used to expand the tax base other than the capital gains tax. Taxing the informal sector, for example, was critical to expanding the tax base as well as collecting tax arrears. The finance minister said that the expected amount to be collected from the new tax would range from between LE3.5 to LE4.5 billion a year. The introduction of the tax is part of a first phase of tax reforms the government intends to pursue, expecting to bring in some LE10 billion. Profits from the stock market are currently tax-free, and the minister said the new tax would not be retroactive. The International Monetary Fund defended Egypt's decision to tax investor profits, and the interim prime minister said he would not reverse the plan even after it caused stocks to plunge. “The new tax measures proposed by the ministry of finance are well targeted and fair,” Chris Jarvis, IMF Mission Chief for Egypt, said in a statement quoted by Bloomberg. “Solving Egypt's budget problems requires tax increases as well as subsidy cuts. Taxing high-income earners, including by taxing gains from capital, can make an important contribution and benefit all Egyptians.”