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Securitization, also known as financial rights securitization, is an innovative financing tool that allows public and private institutions to obtain the necessary liquidity without the need for direct borrowing. This process is carried out by securitization companies licensed by the Financial Regulatory Authority (FRA) issuing bonds, the value and returns of which are paid from future cash flows allocated for this purpose, known as the "securitization portfolio."
How Securitization Works
The concept of securitization is based on converting long-term loans or financial rights into tradable securities on the stock market. This enables issuing companies to obtain the value of these assets immediately, enhancing their financial flexibility and enabling them to expand their operations or extend more loans without having to wait for installments to mature or incur additional costs resulting from bank borrowing.
The Historical Development of Securitization Worldwide
The roots of securitization go back to the Great Depression of 1929 / 1930, when some countries, such as France and Britain, resorted to settling their debts by converting them into tradable assets such as stocks and bonds. After World War II, similar settlements were imposed on defeated countries, most notably East and West Germany, by exchanging debts for assets and bonds.
Despite these early beginnings, securitization did not become a widespread financial phenomenon until the 1980s, particularly in the United States and Europe. Initially, it was associated with mortgages, auto loans, and credit cards, before later expanding to include most types of future cash flows.
The Legal Framework for Securitization in Egypt
The Board of Directors of the Financial Regulatory Authority issued Decision No. 115 of 2022, regulating the issuance of securitization bonds against future cash flows. This decision is based on amendments to Capital Market Law No. 95 of 1992.
The decision stipulates that securitization companies shall issue these bonds after obtaining the approval of the competent authority, provided that the cash flows subject to the securitization are unrestricted or unconditional, are created for the benefit of public or private legal entities, and are not encumbered by any current or future rights of third parties. It also requires the preparation of a financial study approved by an auditor, detailing operating rates, past revenues (if any), and expected cash flows throughout the issuance period.
Bondholders enjoy a lien on the securitization portfolio throughout the issuance period, with the possibility of providing additional guarantees to enhance confidence and commitment to repayment.
Tax Dimensions of Securitization
Securitization operations play a vital role in enhancing market liquidity and mitigating financial risks, as previously outlined. These operations, however, have direct tax implications under Egyptian law.
Capital gains arising from the sale of securitization bonds (asset-backed securities) are subject to a flat tax rate of 10%, in accordance with the provisions of Income Tax Law No. 91 of 2005. An exemption applies where the holder of such securities is a non-resident of Egypt and the securities are listed on the Egyptian Stock Exchange; In this case, capital gains are not subject to taxation.
In addition, investment returns derived from securitization bonds are taxed at a flat rate of 20%, also pursuant to the provisions of Income Tax Law No. 91 of 2005.
Conclusion
Securitization in Egypt has evolved into an advanced financial instrument that contributes to enhancing liquidity, broadening the investment base, and strengthening the capital market. In Egypt, the legal framework established under the supervision of the Financial Regulatory Authority provides essential safeguards for transparency, risk management, and investor protection.
Beyond its role as an innovative financing mechanism, securitization also carries significant tax dimensions that directly affect both issuers and investors. The taxation of capital gains, bond yields, and sale proceeds reflects the State's policy of striking a balance between stimulating securitization activities and safeguarding public revenues.
For financial institutions and corporations, understanding the tax implications of securitization is a key factor in structuring transactions, as tax efficiency can have a substantial impact on net returns and overall market attractiveness. Accordingly, securitization in Egypt is not merely a source of innovative financing, but also a field where strategic tax planning plays a pivotal role in maximizing value and ensuring financial sustainability.
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