Fictitious Invoices and Sham Transactions Between Companies: Criminal and Tax Risks

Fictitious invoices and sham transactions between companies are among the most sensitive tax-compliance issues in Egypt because the risk is not limited to disallowance of an expense or adjustment of the tax base. The conduct may be characterised as tax evasion where fictitious documents or transactions are used to obtain an unjustified deduction, refund or tax advantage. The issue is particularly important in corporate groups, related-party transactions and intangible services, where the company must be able to demonstrate the reality of the transaction, its economic benefit and pricing on a basis that can be defended before the Egyptian Tax Authority.

I. What Is a Fictitious Invoice or Sham Transaction?

A fictitious invoice is a document purporting to evidence the sale of goods, performance of services or another transaction that did not in fact occur, or that fabricates material information concerning a party, value or nature of a transaction in order to create an unjustified financial or tax effect.

A sham transaction may be broader than the invoice itself. Contracts, bank transfers and accounting entries may appear to reflect a genuine transaction while no real economic activity exists behind them, or while the arrangement is merely an artificial financial cycle designed to create fictitious revenue, expenses or balances.

II. Not Every Transaction Between Sister Companies Is a Sham

The existence of a transaction between related companies or entities within the same group does not make it fictitious. Management services, trademark licensing, financing, supply arrangements and cost-sharing may all be legitimate.

The practical test is whether the service, goods or right were actually provided, whether the consideration has an economic and legal basis, and whether the transaction is properly documented and recorded in accordance with the relevant tax and commercial laws.

III. Value Added Tax Law and Fabricated Invoices

Value Added Tax Law No. 67 of 2016 treats the fabrication of invoices for third parties concerning unreal sales transactions as a form of tax evasion and also addresses improper deduction or refund of tax where the statutory conditions are met.

The risk is not limited to the issuer of the invoice. Liability may also extend, under the applicable rules, to a beneficiary who uses the invoice to obtain an unjustified deduction or refund.

IV. Forged or Fabricated Documents as a Means of Tax Evasion

Forms of tax evasion may also include submitting forged or fabricated documents or records to avoid all or part of the tax due. Accordingly, the tax issue may overlap with forgery offences or use of forged documents where their elements are satisfied.

A distinction must nevertheless be maintained between an error in an invoice or a dispute over how a service is characterised and a fabricated document deliberately designed to prove a transaction that did not occur.

V. Unified Tax Procedures Law and Liability Within a Legal Person

Unified Tax Procedures Law No. 206 of 2020 governs tax audit, investigation, settlement and other procedural matters and has subsequently been amended, including amendments issued in 2025 and 2026.

Where tax evasion is committed within a legal person, criminal liability is not automatically attributed to every shareholder or board member. The law looks to the person responsible for actual management in the circumstances, subject to the applicable provisions and the possibility of proving lack of knowledge where provided by law.

VI. An Electronic Invoice Does Not by Itself Prove That the Supply Was Real

The existence of an invoice on the electronic invoicing system does not prove that the underlying economic transaction actually occurred. The system evidences part of the tax and documentary workflow but does not replace proof of delivery or actual performance of the service.

The invoice should therefore be reconciled with the contract, purchase order, receipt report, inventory records, bank transfer, correspondence and any technical or operational outputs connected with the transaction.

VII. How Are Fictitious Transactions Identified in Practice?

The review typically examines consistency of information between buyer and seller, timing of issuance, the nature of the business, operating capacity, inventory, bank accounts, employee records, contracts and service deliverables.

Suspicion may arise where substantial transactions are recorded with an entity lacking the activity, employees or assets necessary to perform them, where funds are repeatedly transferred and returned, or where consulting services have no verifiable deliverables.

VIII. Bank Flows Alone Do Not Prove the Reality of a Transaction

A bank transfer from a customer to a supplier is important evidence, but it does not by itself prove that the service or supply was genuine. Arrangements may exist to return or circulate funds among several parties.

Conversely, the absence of a bank transfer does not automatically establish sham dealing. The reason and method of payment should be examined, including compliance with rules governing non-cash payments.

IX. Invoices for Intangible Services

Management, consulting, marketing and technical-support services within corporate groups require a higher level of documentation because actual benefit can be harder to demonstrate than delivery of tangible goods.

It is advisable to retain the scope of work, correspondence, reports, timesheets, deliverables, names of persons performing the work and the method used to calculate the fees.

X. Related-Party Transactions and Transfer Pricing

A transaction between related parties is not disallowed merely because of the relationship. It is, however, subject to transfer-pricing rules and the arm’s-length principle, together with documentation obligations that vary depending on the nature and size of the group and transaction.

The Egyptian Tax Authority has issued transfer-pricing guidance covering documentation such as the local file, master file and other relevant materials. The rules in force at the time of preparing the file should be reviewed.

XI. Absence of Economic Benefit Does Not Automatically Mean Tax Evasion

If a company cannot demonstrate an economic benefit from a related-party service, the Tax Authority may disallow the expense or adjust the transfer price, but this does not automatically establish tax evasion.

Criminal characterisation requires additional elements involving intent and use of an unlawful mechanism or fictitious document under the applicable penal provision.

XII. Effect of Fictitious Invoices on Income Tax

Where the reality of an expense or compliance with the statutory conditions for deduction cannot be established, the expense may be disallowed and the taxable base adjusted.

However, the existence of a suspicious invoice does not automatically justify rejection of all of the company’s books. The outcome depends on the scale and nature of the irregularity, the tax audit and the evidence, and the integrity of the remaining accounts.

XIII. Effect of Fictitious Invoices on Value Added Tax

Where a fabricated invoice is used to deduct input tax or claim an unjustified refund, tax differences and tax-evasion liability may arise where the statutory elements are satisfied.

The Egyptian Tax Authority has stated that fictitious transactions designed to create tax rights contrary to reality constitute tax evasion and warrant legal action.

XIV. Criminal Liability of Board Members

A board member is not criminally liable merely because a fictitious invoice appears in the company’s books. The member’s role in actual management, participation, knowledge or the application of a specific statutory provision must be established.

A distinction should also be drawn between an executive or finance director who created or approved the transaction and a non-executive board member who neither participated nor knew of it.

XV. Separate Legal Personality Does Not Automatically Fall Away

Proof of tax evasion or sham dealing does not automatically convert all company debts or taxes into personal debts of shareholders or board members.

Personal liability may arise where prescribed by law or where an individual personal act is established, but this differs from stating that the company’s separate legal personality is entirely disregarded.

XVI. Sham Contracts Are Not All Automatically Void in the Same Manner

Some contracts may be simulated as a matter of civil law, others may simply be documents unsupported by actual performance, and valid contracts may exist alongside inaccurate invoices.

Each document and its relationship to the underlying contract should therefore be analysed separately rather than assuming the invalidity of every connected agreement.

XVII. Penalties Cannot Be Generalised Under One Formula

Penalties vary according to the relevant tax law, the type of offence, the date of the conduct and legislative amendments. Both the Unified Tax Procedures Law and the VAT Law have undergone recent amendments.

The provision in force at the time of the conduct should therefore be reviewed before stating any term of imprisonment, fine or criminal characterisation, rather than relying on one fixed figure for all cases.

XVIII. Settlement of Tax Offences

The Unified Tax Procedures Law permits settlement of certain tax offences subject to statutory conditions, procedures and amounts, and settlement may affect criminal proceedings or execution of the sentence depending on the stage of the matter.

Settlement should not be reduced to payment of the principal tax and delay charges alone. The applicable consideration, conditions and competent authority depend on the provision in force and the date of the conduct.

XIX. 2025 and 2026 Amendments Must Be Considered

The tax system has recently undergone amendments, including Law No. 7 of 2025 and amendments issued in 2026 to the Unified Tax Procedures Law, VAT Law and Income Tax Law, together with legislation dealing with settlement and closure of certain tax disputes.

The date of the conduct and relevant tax period should therefore be reviewed before giving a final opinion on penalties, settlement or procedural deadlines.

XX. Freezing and Bank Attachment Are Not Automatic Consequences

Attachment, enforcement measures or judicial orders may arise in particular cases, but the mere emergence of suspicion concerning fictitious invoices does not automatically result in freezing the company’s bank accounts.

A bank may review its credit relationship with the company under compliance rules and the financing agreement, but cancellation of facilities or acceleration requires an independent contractual or legal basis.

XXI. Suspension of a Tax Number or Electronic Invoicing Is Not Automatic

Discovery of a fictitious invoice should not be assumed to result in suspension of the tax number or a permanent bar on issuing invoices in every case. Technical and tax procedures differ depending on the file and decisions of the Tax Authority.

Any actual suspension or restriction should be addressed by reference to the specific decision or procedure issued in that case.

XXII. International Companies, the FCPA and UK Bribery Act

A fictitious invoice within an Egyptian subsidiary does not automatically trigger the FCPA or UK Bribery Act against the parent company. Those laws have specific jurisdictional and conduct requirements.

A fictitious invoice may nevertheless become a significant indicator in an internal investigation, particularly where it is connected with unexplained payments, government counterparties, corruption concerns or financial records of an entity subject to foreign rules.

XXIII. M&A Risk

In M&A transactions, historical suppliers, unusual transactions, related parties, service invoices, tax refunds and tax-audit correspondence should be reviewed.

The buyer may require specific warranties and indemnities for historical tax risks and may consider holdbacks or escrow arrangements depending on the materiality of the risk.

Practical Checklist for Testing Whether a Transaction Is Genuine

The contract or purchase order and the defined scope of goods or services.
The electronic invoice or correct tax document.
Delivery and receipt reports or service deliverables.
Inventory, shipping and transport movements where goods are involved.
Bank statements, payment method and the true beneficiary.
Correspondence and the persons who performed the transaction.
The supplier’s actual capacity to provide the goods or services.
The relationship between the parties and whether transfer-pricing documentation is required.
Any tax refund or deduction generated by the invoice.
Any subsequent return of funds or circular movement of money.

XXIV. What Should a Company Do if It Internally Discovers a Fictitious Invoice?

Any pending payments or tax deductions should be suspended, relevant documents, systems and records preserved, and the persons who created or approved the transaction identified. The company should then conduct an independent legal, tax and accounting review.

The circumstances may require correction of a tax return, communication with the Tax Authority, internal disciplinary investigation, a repayment demand against the supplier, or criminal proceedings. The appropriate response depends on the nature and stage of the matter.

XXV. Common Errors

Common errors include treating every related-party transaction as tax evasion, assuming that the existence of an electronic invoice proves that the underlying transaction was real, or attributing criminal liability to every board member.

Other errors include assuming that settlement is available on identical terms at every stage or that payment of the tax automatically extinguishes every other legal consequence.

XXVI. Practical Best Practices

Supplier approval, invoice approval and payment approval should be separated, and the invoice should be linked to operational evidence demonstrating performance. Additional controls should be adopted for intangible services and related-party transactions.

It is also advisable to conduct periodic supplier reviews, analyse unusual transactions, review high-value tax refunds and deductions, and prepare transfer-pricing documentation on a timely basis.

When Is Specialist Legal Counsel or Local Counsel in Egypt Necessary?

Legal intervention becomes necessary upon receipt of a tax-audit notice concerning fictitious invoices, discovery of a suspicious internal transaction, before filing a correction or settlement request, or during tax due diligence for an acquisition.

Local Counsel can identify the provision applicable to the tax period, coordinate with tax and accounting advisers, preserve evidence, assess personal management liability, and manage correspondence and investigations.

How Can Specialist Legal Support Help?

El Rouby Law Firm reviews the legal risks associated with invoices and intercompany transactions, drafts supplier agreements and document-authenticity representations, and supports internal investigations and due diligence.

The firm also assists with regulatory compliance, risk management and the legal aspects of transfer pricing, as well as negotiation, settlement, tax disputes, litigation and representation before the Egyptian Tax Authority, the Public Prosecution and other competent authorities depending on the matter.

Conclusion

A fictitious invoice is not merely an incomplete document; it may be used to create an unjustified tax right, expense or revenue. Liability is not determined by the invoice alone, however, but by the reality of the transaction, the role of each person, the resulting tax advantage and the law applicable to the relevant period. El Rouby Law Firm can review an invoice file under audit or dispute or conduct a preventive assessment of a supplier chain and intercompany transactions.

Frequently Asked Questions

Is Every Inaccurate Invoice Tax Evasion?

No. A distinction must be drawn between an error or omission and a fabricated invoice or one deliberately used to obtain an unjustified tax advantage.

Does an Electronic Invoice Prove That the Transaction Is Genuine?

No. It should be reconciled with the supply or service, payment and supporting operational documentation.

Are All Board Members Liable for Fictitious Invoices?

No. Criminal liability is personal, and the persons responsible for actual management, participation or knowledge must be identified under the applicable provision.

Can Tax-Evasion Offences Be Settled?

The law permits settlement of certain tax offences subject to specific conditions and procedures. The provision in force at the time of the conduct and the stage of the proceedings must be reviewed.

Are Related-Party Transactions Considered Sham Transactions?

No. They must, however, be supported by evidence of the reality and benefit of the transaction and comply with transfer-pricing and documentation rules.

Does Discovery of a Fictitious Invoice Automatically Close the Company or Freeze Its Accounts?

No. Such measures require an independent legal basis or decision and do not arise automatically from mere suspicion.