Introduction

Double Tax Treaties (DTTs) play a critical role in determining whether cross-border payments are subject to Withholding Tax (WHT). Among the most important treaty articles for multinational groups operating in Egypt and MENA are:

• Article 12 – Royalties

• Article 15 – Income from Employment

These two articles define who has the taxation right, how WHT should be applied, and under what circumstances a payment can be exempt from tax in the source country.
Misinterpreting Articles 12 and 15 is one of the top reasons for WHT disputes, rejected treaty-benefit claims, and double taxation scenarios.

This guide explains how the two articles work, their key concepts, and how they affect WHT obligations for businesses operating across borders.

1. Article 12 Royalties (and Sometimes Technical Services)

1.1 What Article 12 Covers

Article 12 primarily governs cross-border payments relating to intellectual property, including:

• Software licensing

• IP licenses

• Copyrights

• Trademarks

• Patents

• Technical know-how

• Scientific/technical information

• Payments for the use of intangible rights

Many DTTs also include technology-related services under Article 12.

1.2 Article 12 and Withholding Tax

Under many DTTs:

✔ The source country (e.g., Egypt) may apply WHT

BUT
✔ The rate is reduced (often 0–10%) instead of the Egyptian domestic 20%.

Key conditions:

• The foreign recipient must be the Beneficial Owner

• The payment must fall under Article 12 definitions

• A valid Tax Residency Certificate (TRC) must be provided

• No Permanent Establishment (PE) must exist in the source state

1.3 Why Article 12 Matters for Businesses

If a payment is classified as a royalty, it almost always triggers WHT — unless a treaty provides relief.

Misclassification risks include:

• Treating royalty as a service → under-withholding

• Treating a service as royalty → over-withholding

• Losing treaty relief due to BO or TRC issues

2. Article 15  Employment Income

Article 15 applies to income derived by employees, including:

• Salaries

• Wages

• Remuneration for work performed

• Employee secondee arrangements

This is separate from Article 12 because Article 15 relates to individuals, not companies.

2.1 When Article 15 Applies The 183-Day Rule

Under most treaties, income is taxable only in the employee’s residence country UNLESS:

1. The employee spends more than 183 days in the source country, OR

2. The employer is resident in the source country, OR

3. The remuneration is borne by a Permanent Establishment in the source country

If any of these conditions is met → Egypt gains taxation rights.

2.2 Article 15 and WHT

Payments under Article 15 generally do not fall under standard WHT rules.

BUT…

When foreign employees perform work in Egypt:

• Their salaries may become taxable in Egypt

• The Egyptian payer may be required to apply payroll WHT

• A PE may be triggered unintentionally if the foreign employer sends employees to Egypt

This is a frequent mistake in cross-border service contracts.

3. How Articles 12 and 15 Interact with WHT Obligations

Key Differences

Understanding the difference prevents:

• Overpaying WHT

• Claiming incorrect exemptions

• Triggering unexpected tax exposure

4. Real-World Scenarios

Scenario 1 Software Licensing Agreement

Payment includes:

• Software license

• Annual support

• Updates

→ Article 12 applies → WHT likely applicable.
→ Treaty may reduce from 20% → 10% or less.

Scenario 2 Technical Consultant Working from Abroad

Foreign engineer working remotely.

→ Not a royalty → Not an employment situation in Egypt.
→ No Article 12 or Article 15 taxation.
→ May qualify for 0% WHT if work performed outside Egypt.

Scenario 3 — Employees Sent to Egypt for On-Site Work

Foreign company sends staff for 3 months.

→ Article 15 applies
→ If < 183 days and cost not borne by Egypt → no tax
→ If > 183 days or borne by Egyptian PE → Egypt may impose payroll tax

5. Common Misinterpretations and Errors

❌ Treating employee secondees as “technical service providers”

→ Misclassification → Wrong WHT

❌ Applying Article 12 to pure offshore services

→ Overpayment of WHT

❌ Not checking 183-day threshold for employee presence

→ Non-compliance with payroll obligations

❌ Using Article 15 to justify 0% WHT on royalty payments

→ Incorrect — Article 15 cannot override Article 12

❌ Claiming treaty benefits without Beneficial Ownership evidence

→ Treaties rejected → full 20% WHT applies

6. Best Practices for Businesses

✔ Analyze the nature of payment before selecting article

✔ Review treaty article wording carefully

✔ Maintain documentation for BO and TRC

✔ Track physical presence of employees in Egypt

✔ Separate service and royalty elements in contracts

✔ Ensure invoices match classification

✔ Prepare detailed treaty analysis for each payment

Conclusion

Articles 12 and 15 of Double Tax Treaties have a major impact on WHT obligations, especially for software licensing, royalty payments, and service arrangements involving foreign employees.
Correct classification ensures:

• Accurate WHT application

• Eligibility for treaty benefits

• Compliance with the Egyptian Tax Authority

• Avoidance of disputes, penalties, and tax leakage

Understanding these articles empowers companies to structure their cross-border arrangements efficiently and confidently.