Saad noted that contracting, construction, and building activities will now be treated as a component of continuous services upon the issuance of approved invoices or payment certificates (progress reports). This simplifies tax treatment by recognizing these activities as combining supplies and installations, and clearly defines the contractor's obligations on invoices.
For existing contracts, the new rules establish a tax base
of 36 percent of the total value of the invoice issued based on the approved
payment certificate for those ongoing contracts post-amendment.
He contrasted this with the old system, where some
construction contracts were treated under a fixed schedule tax of 5 percent or
a special rate, without an effective link to internal costs, noting that the 36
percent ratio was absent from the previous regulations.
Saad viewed the amendment as a "transitional
bridge" for dealing with contracts signed before the change, but warned it
could lead to disputes over fairness in the tax transition.
A key objective of the amendment, he said, is to clearly
define responsibility between parties and prevent double taxation, particularly
with subcontractors.
The amendments also introduce Article (45 bis), which
mandates a 15 percent annual increase in the schedule tax for certain items,
effective from January 1, 2026, for three years. This increase will then be
reduced to 12 percent annually starting January 1, 2029. Saad considered this a
preliminary step for a gradual hike in the schedule tax on certain goods and
services, likely intended as a means for gradually increasing state revenues.
Saad detailed fundamental differences between the old (2017)
and amended systems, primarily the transition from a "schedule tax/fixed
tax" to a "deductible VAT."
Under the old system, some contracting activities faced a
final 5 percent schedule tax that offered no, or limited, deduction rights. The
new system subjects these activities to the full VAT framework, granting the
right to deduct input tax if conditions are met, thereby reducing the actual
tax burden.
The new text introduces a special treatment for existing
projects—the 36 percent ratio—as the basis for calculating tax on those
continuous contracts, a clarity that was absent in the old regulations, where
the schedule tax generally applied as per the contract.
Saad highlighted the benefits of regulating the tax
relationship between the general contractor and subcontractors. The amendment
introduces a payment certificate mechanism to prove that double taxation has
been avoided and to allow the subcontractor to benefit from tax deductions. The
old executive regulations did not explicitly detail this arrangement.
The decision also broadens the definition of indirect
expenses, now allowing the inclusion of financing, administrative, and other
costs that may not have been recognized previously. Saad said this change makes
it easier to support accounting claims for deducting expenses related to
contracting activity.
Saad also noted that the amendments:
Integrate contracting into the "continuous
services" category under new provisions, classifying it as such when
electronic invoices (progress reports) are issued—filling a legislative gap.
Allow for special controls concerning the import of
disassembled production lines or fragmented shipments, addressing specialized
cases of importing equipment parts. Saad said this is important for industries
relying on assembly or importing components.
Propose a gradual increase in the schedule tax on some
goods/services—a strategic tax change to raise revenues over the medium term—a
mechanism that was not present in the old executive regulations.
Despite the positive changes, Saad raised several questions regarding the actual timing of implementation and transition to the new system, and the methodology for calculating the 36 percent ratio—whether it is a general estimate or subject to specific calculations (e.g., deducting certain costs first), and if it applies to the entire contract or only parts of it. He also inquired about the Tax Authority's mechanisms for implementing electronic invoicing and tax payment certificates.