Gov’t moves to scale back its planned 14% VAT on leased office space

The government is moving to narrow the scope of its planned 14% VAT on leased administrative space, potentially keeping factories and buildings that provide direct services to citizens outside the tax net, three government officials tell EnterpriseAM. The change — which officials say follows IMF-backed recommendations to cut tax exemptions and raise revenues — could be written into the executive regulations to apply only to non-operational or non-service administrative premises.

A smaller pool, a softer pass-through. Limiting the tax to purely administrative premises would reduce how much of the burden falls on consumers while still bringing a broad class of office and administrative rents into the standard VAT regime. Officials are still studying the application mechanism, one official says.

The capital: Administrative buildings leased in the New Capital — including the government district — will be taxed, the officials say. The new budget puts government rents for New Capital buildings at around EGP 7 bn. Elsewhere in Greater Cairo, administrative towers, the Iconic Tower, and administrative zones in New Cairo, Sheikh Zayed, and other business districts are expected to fall under the tax, another official tells us.

A double-taxation question is still open. Some administrative units — particularly those inside malls and other customer-facing buildings — currently carry a 1% levy, one official says. Whether that survives alongside the new 14% VAT, or is scrapped to avoid double taxation, is still under discussion. New Cairo and New Administrative Capital Developers Association head Mohamed Albostany tells us the 1% charge had been enough as a tax cost on those premises.

REMEMBER- We reported earlier this month that the second tax facilitation package would bring leased administrative units under the standard VAT rate while allowing rent payments to remain deductible as business costs for income-tax purposes. The wider reform track is part of the Finance Ministry’s push to raise annual tax revenues by broadening the base rather than hiking headline rates.

A hit on paper, a hit on demand

Government sources tell us they do not expect the change to push companies to scale back their Egypt operations or investment plans, arguing that rent payments can be deducted from the corporate income-tax base as operating costs. That should cushion part of the hit, even if the VAT still changes the economics of leasing.

Developers are less hopeful. The new tax could curb investment demand for administrative units, which had been drawing buyers as company formation increased and demand shifted toward office premises, Albostany argues. Administrative units can generate rental yields of 8-10% — compared with 1-3% for residential units — but higher tax costs and softer demand could cool that activity, he adds. It could also weigh on companies that manage administrative buildings and towers — those that helped attract buyers to administrative units in recent years by managing or leasing the space on their behalf — but a higher tax burden on rents could make the model less appealing if passed through to tenants, he says.

Grade-A barely blinks

Landlords will try to preserve base rents and pass the VAT on to tenants, Ayman Sami, country head of JLL Egypt, tells us. Large Grade-A occupiers are unlikely to be materially hit by the standard VAT rate, but they will negotiate a middle ground that absorbs part of the increase into the existing lease economics, he explains. With many contracts already carrying automatic annual rent hikes of around 10%, the first year of application could see rents held flat before increases resume in later years, he adds.

Demand remains strong for administrative units, especially Grade-A space, Sami says. Spaces of 500-10k sqm are mostly suited to major corporates, developers, and large investors, while smaller investors tend to go for compact offices or clinics. A growing number of smaller investors are also pooling liquidity to buy larger administrative units in areas such as New Cairo to capture higher yields, he adds.

Companies stay, just with less space

The bigger competitiveness picture is still intact, Sami notes. Foreign companies weigh the total cost of setting up and operating, not rent alone, and Egypt still has a regional edge on operating costs and salaries, particularly when compared with other regional business hubs. The fact that USD-denominated office rents in Egypt have held up — or at least not fallen meaningfully — despite the float and broader economic pressure is a healthy sign for the market, he says.

The more likely adjustment is operational efficiency. Smaller footprints, more desk-sharing, and hybrid models that combine office and home work will likely be prioritized, rather than a shift away from offices altogether, Sami notes. Egypt has moved past the full remote-work phase that followed Covid-19, especially among foreign companies that follow policies set by global HQs, he notes.

WATCH THIS SPACE: The shape of the tax now sits in the executive regulations — whether the exemption holds for service and non-operational premises, and whether the 1% levy survives. Sami expects a period of uncertainty, delayed decisions, and price pressures before the market absorbs the cost. His broader ask is a cleaner tax architecture: a more unified system that improves competitiveness instead of layering property tax, VAT, and income tax on the same market.