On the 11th March 2020, Covid-19 was officially declared a global pandemic by the World Health Organization, bringing significant disruption to economies worldwide, and affecting the way in which almost every sector operates. At the forefront of this crises, there are a number of legal and tax implications which are now ambiguous in light of the daily changes we are undergoing.
In an effort to shed some light onto the confusion arising during this time, our partners will be releasing a series of documents analyzing the implications of Covid-19 on the performance of contractual obligations, and highlighting the tax relief programs proposed by the government.
This note will provide an overview of:
– General Preventative Measures Against Covid-19
– Tax relief proposed by the Egyptian government
– The hardship doctrine as defined by the Egyptian Law
– Force majeure as defined by Egyptian Law
– The difference between force majeure and the hardship doctrine
i. General Preventative Measures Against Covid-19
Since announcing a state of emergency in Egypt, a number of measures were put in place to help combat the spread of Covid-19, namely:
- Applying a curfew from 7 p.m. to 6 a.m. for one month from March 25th 2020 to prevent the spread of coronavirus
- Partial closure of government activities except for essential work;
- Most of the other private sector companies are operating on a “work-from-home” basis or with a reduced workforce;
- All educational activities have been frozen with the majority operating online
- All court activities had been frozen;
- Official interest rate reduced by 3% to minimize negative impact on economy
- Six month delay for the repayment of all consumer and small-business loans including mortgages and car loans, excluding credit card payments.
- Reduction on money withdrawal limits for both individuals or corporations
- Freezing all hotel and resort activities, in addition to closure of entertainment places
- Freezing the civil aviation activities;
- Permitting all females within the governmental and private sector with children/s lessthan 12 years, to take leave or work from home .
ii. Tax Relief
To further assist the local economy, the government has also put in place a number of tax relief measures which we have summarized below.
- Corporate income tax measures:Deadline for the payment of individual tax has been extended from the end of March to the 16th of April, however no law has been passed yet to formalize this. Individuals are also encouraged to complete their tax returns online.As for corporations whose financial year-end falls on the 31 December. 2019, their corporate income tax return should be presented to the tax authority by end of April 2020. This deadline may also be extended by an amendment in the law as well, but has not yet been done so.
- Individual taxes and labor:
Private sector is mandated to pay salaries in full to all employees.
- Other taxes (local taxes, procedures):
The Prime Minister has issued a series of resolutions (which are yet to be formalized by alaw) to support the economy such as:
– Reducing gas and electricity prices for the industrial sector;
– Fixing electricity prices for the remainder of the population for 3 to 5 years;
– Additional financial support for exporters;
– Deferral of real estate taxes for the tourism and industrial sector for 3 months;
– Cancellation of admin seizure made to some taxpayers as a result of real estate tax, subject to certain conditions
– Reducing stamp duty on the sale of securities to non resident foreigners to 0.125% and for Egyptians to .0.5%;
– 50% reduction for tax on dividends related to stocks listed in the Egyptian Stock Exchange to 5%;
– Permanent exemption of non-residents from capital gains tax and deferral of the same tax on residents until 1/1/2022.
- Tax payments: Deferral of real estate taxes for the tourism and industrial sector for 3 months;
- Tax reporting: No formal changes yet except for individual taxpayers as mentioned above.
- VAT: No changes yet.
iii. Categorizing Covid-19
One of the most commonly asked questions during the outbreak of covid-19 has been whether or not the spread of the virus triggers a force majeure clause, and if not, what other legal avenues can be taken to justify the non-performance of contractual obligations during this time.
To understand the Egyptian Law’s jurisprudence on this matter, it is first important to differentiate between the hardship doctrine and the force majeure doctrine, both of which are clearly defined within the Egyptian Civil Code.
The Hardship Doctrine
The Civil Code, Law 131 of 1948 distinguishes between ‘hardship’ and ‘impossibility’.
– Hardship: ‘Article 147 (2) If exceptional events of a general nature have occurred, the extent of which could not be foreseen, and these events have the effect that the contractual obligation, without becoming impossible, is onerous for the debtor in a way that potentially inflicts on him a material loss, the judge may, according to the circumstances and considering the equilibrium of the interests of the contracting parties, reduce the onerous obligation to an acceptable limit; and any agreement to the contrary is void.
– Impossibility: Article 373 – The obligation extinguishes if the debtor establishes that its execution has become impossible for him, due to an extraneous reason, which is beyond his control.’
To apply the hardship doctrine, four criteria must be met, namely:
– The contract must exist
– The exceptional public events must have occurred after the contract was concluded
– The event must be unforeseen
– The event must make the performance of the contractual obligation difficult, but not impossible to perform.
To further shed light on the definition of “unforeseen events”, the same article goes on to state that they are “events that cannot be foreseen by an ordinary individual”. This limits the applicability of the clause to events which could not have been premeditated, and so it is widely accepted that extreme weather conditions or changes in currency would not fall under this category. Additionally, the law
states that the difficulty in performance must be a direct occurrence of the unforeseen circumstance; otherwise the hardship doctrine will not apply.
Finally, in certain situations, the hardship doctrine can be applied to terminate an agreement entirely. According to Article 658 (4): ‘If the economic equilibrium between the obligations of the employer and the contractor collapses due to exceptional events of general character, which were not taken into consideration at the time of contracting, and consequently the basis on which the financial valuation of the contract for works was made falters, the Judge may rule in favor of increasing the contractor’s fee or terminating the contract’. The key element to prove here therefore, is whether the event in question caused “the economic equilibrium between the obligations of the employer and the contractor collapse”, and it will be left to the judge’s discretion whether or not this criteria is satisfied.
Civil unrest, restrictions under a state of emergency (eg, curfew, travel restrictions) and the suspension of banking and stock trading are typical cases of ‘exceptional events of general nature’ referred to in Article 147 (2) of the Civil Code. In practice, when determining the existence, or not, of an event of hardship, Egyptian courts apply additional requirements to ascertain the ‘exceptional’ nature of the event in question. The Court of Cassation, for instance, has ruled that the exceptional event is not considered as such unless ‘the event is exceptional, of general character, unforeseeable, unusual, and rare […]’. Additionally, it should be shown that the inability to perform contractual obligations occur as a direct result of the disruptive event, and that the impediments to executing the contract or the project are likely to result in a material loss.
If a contractual obligation becomes burdensome to the point where it is impossible to perform the duties within it, force majeure is likely to apply as opposed to the hardship doctrine. The force majeure doctrine is sometimes referred to as an “act of god” clause within binding agreements, since the events are so great in magnitude they make they halt contractual obligations entirely. Historically, pandemics, epidemics, wars and other political turmoil can fall under this category.
The key-defining factor for a force majeure event is its permanent impediment to the party’s ability to execute their obligations within the agreement.
Force Majeure versus the Hardship Doctrine
The first differentiating factor between these two theories therefore can be seen in the effect of the unforeseen circumstance, where the hardship doctrine requires that the circumstance make the fulfillment of the contractual obligation extremely difficult, and force majeure taking this a step further and requiring that the obligations be completely impossible to perform.
Secondly, the outcomes of the two differ in their consequences. In the hardship doctrine, the competent judge reduces the onerous obligation to a reasonable extent. In Force Majeure, the obligation for performance ceases to exist entirely without any liability on the non-performing party.
iv. Application to Covid-19
Whether Covid-19 falls under the hardship doctrine or constitutes a force majeure will be determined by a competent judge on a case-by-case basis, with the main determining factor being the degree to which the parties’ ability is hindered as a result of this virus. It should be noted however, that determining the applicability of either doctrine does not automatically excuse the non-performance of contractual obligations and proper legal advice should be sought to obtain an accurate assessment of your standing.
Other factors which may impact your case include whether or not your agreement directly refers to pandemics or epidemics, or more generally to plagues or natural disasters, and your businesses’ interactivity with other high-risk areas, for example if the majority of your materials are sourced from China, whether there was a high number of cases, it may be easier to claim force majeure to suspend partial performance of your contractual obligations.
Partner – Attorney at Law
Copyright © 2018 Andersen Tax & Legal Egypt, All rights reserved