ARTICLE 11

Dividends

Paragraph (1) provides that dividends derived from sources within one Contracting State by a resident of the other Contracting State may be taxed by both Contracting States.

Paragraph (2) limits the rate of tax imposed by the United States to a rate not in excess of fifteen percent of the gross amount of the dividends paid by a United States corporation to an Egyptian resident. However, if the dividend recipient is an Egyptian corporation, the rate of tax imposed by the United States may not exceed five percent of the gross amount of the dividend paid by a United States corporation. This additional rate limitation only applies if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least ten percent of the outstanding voting stock of the paying corporation was owned by the recipient corporation, and not more than twenty-five percent of the gross income of the paying corporation for such prior taxable year (if any) consists of interest or dividends (other than interest derived from the conduct of a banking, insurance, or financing business and dividends or interest received from subsidiary corporations, fifty percent or more of the outstanding voting stock of which is owned by the paying corporation at the time such dividends or interest is received). These rate limitations do not affect the taxation of profits of the company which pays the dividends.

Paragraph (3) provides that dividends paid by an Egyptian corporation to a resident of the United States will be subject to the following Egyptian taxes (and substantially similar taxes enacted after August 24, 1980) to be deducted at the source:

(a) the tax on income derived from movable capital; (b) the defense tax; (c) the national security tax; (d) the war tax; and (e) the supplementary taxes computed on the basis of the previously mentioned taxes (these taxes are hereinafter referred to collectively as "taxes on income from movable capital").

However, to the extent such dividends are distributed out of the current year's earnings, the amount of such dividend will be allowed as a deduction to the corporation in computing its taxable profits subject to the Egyptian taxes on industrial and commercial profits. Dividends paid to a U.S. corporation will not be subject to any other Egyptian taxes.

The rate of the taxes on income from movable capital is essentially the same as that of the taxes on industrial and commercial profits. Thus, double taxation by Egypt is avoided under internal Egyptian law to the extent earnings are distributed currently. Conversely, if current earnings are not distributed, such earnings will be subject to the taxes on industrial and commercial profits in the year earned and to the taxes on income from movable capital in the year distributed.

In the case of dividends paid to a natural person who is a resident of the United States, paragraph (3) provides that Egypt may also impose its graduated general income tax on such dividends in addition to the taxes on income from movable capital. However, in applying these graduated rates, the total general income tax on the dividend income of an individual may not exceed an average of 20 percent of the net dividends. Thus, where the Egyptian taxable income of the individual is so small that the marginal rate applicable to the dividends is less than 20 percent, the tax will fall below the maximum; and where the aggregate income is so large that the marginal rates exceed 20 percent, the higher marginal rates will apply, but only to the point

where the average rate of general income tax on the income does not exceed 20 percent.

Paragraph (4) provides that the limitations of paragraphs (2) and (3) will not apply if the dividends are treated, under paragraph (6) of Article 8 (Business Profits), as industrial or commercial profits attributable to a permanent establishment which the recipient has in the source Contracting State. In such case, the provisions of Article 8 (Business Profits) will apply. If the recipient of the dividend is a citizen of the source Contracting State, that Contracting State may tax the recipient without regard to this Article because of the saving clause of paragraph (3) of Article 6 (General Rules of Taxation).

Paragraph (5) provides that Egypt may tax dividends paid by a United States corporation whose activities lie solely or mainly in Egypt as though paid by an Egyptian corporation. Accordingly, dividends paid by such a corporation to United States residents will be taxed in the manner prescribed in paragraph (3) of this Article. Thus, a United States corporation whose activities lie solely or mainly in Egypt, even though its head or administrative office is outside Egypt, will be subject to the Egyptian taxes on industrial and commercial profits computed on its income after deducting the amount of current income distributed as dividends. Such dividends, in turn, will be subject to the taxes on income from movable capital which are deducted at the source; and, by virtue of paragraph (1)(a) of Article 4 (Source of Income), such dividends will be treated as income from sources within Egypt. The factors determining when a foreign company's activities lie solely or mainly in Egypt are not specified in the treaty or in Egyptian statutory law; however, the Egyptian tax authorities take into account such elements as the corporation's charter, balance sheet, and profit and loss statement, and the ratio of profits from sources in Egypt to total profits. In substance, this provision reflects those aspects of internal Egyptian tax law which, in order to avoid discrimination between Egyptian and foreign corporations, treat foreign corporations most of whose activities are conducted through an Egyptian branch as Egyptian corporations for Egyptian tax purposes.

Paragraph (6) applies to the yearly profits attributable to an Egyptian permanent establishment of a United States corporation (other than a United States corporation specified in paragraph (5)) which are deemed distributed currently as a dividend in accordance with the provisions of Egyptian taxation law. These dividends deemed paid will be deductible for purposes of computing the income subject to the taxes on industrial and commercial profits and hence they will be subject only to the Egyptian taxes specified in paragraph (3).

Paragraph (7) defines the term "dividends" to mean income from shares and similar rights, which are not debt claims and which participate in profits. The term includes income from other corporate rights which is treated as income from shares under the taxation laws of the State of residence of the corporation making the distribution. Each Contracting State may apply its domestic law rules for differentiating dividends from interest and other disbursements, subject to an agreement between the competent authorities as to a common meaning. See paragraph (2) of Article 2 (General Definitions).