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Ethiopia

General Information

Country Name: Federal Democratic Republic of Ethiopia
Currency: Ethiopian Birr (ETB)
Primary Tax Authority: Ministry of Revenues (MoR)

Key Legislation

  • Constitution of Ethiopia: Provides the legal foundation for taxation in Ethiopia, with principles focused on fair taxation and revenue generation for public expenditure.
  • Income Tax Proclamation No. 286/2002: Governs individual and corporate income tax.
  • Value-Added Tax Proclamation No. 285/2002: Regulates the value-added tax system.
  • Excise Tax Proclamation No. 307/2002: Establishes rules for excise duties on certain goods.
  • Tax Administration Proclamation No. 983/2016: Outlines the framework for tax administration in Ethiopia.

Fiscal Authority Allocation

Ethiopia is a federal republic, meaning tax collection responsibilities are divided between the central (federal) government and regional authorities.

Taxes Collected by Central Authorities:

  • Corporate income tax (CIT)
  • Personal income tax (PIT)
  • Value-added tax (VAT)
  • Excise tax
  • Customs duties
  • Withholding taxes

Taxes Collected by Local Authorities:

  • Agricultural income tax
  • Property tax
  • Regional service taxes

Revenue Sharing Mechanisms:

Revenue from federal taxes is shared with regional states, especially income derived from VAT and corporate tax, in line with Ethiopia’s federal structure.

Corporate Income Tax (CIT)

  • Standard CIT Rate: 30%
  • Deductions: Common business expenses such as salaries, depreciation, interest (subject to thin capitalization rules), and research and development (R&D) costs.
  • Loss Carryforwards/Carrybacks: Losses can be carried forward for up to 5 years. Carrybacks are not permitted.
  • Tax Incentives: Ethiopia offers tax holidays for certain industries, especially those involved in manufacturing, agriculture, and export. A common holiday ranges from 2 to 7 years, depending on the industry and investment size.

Value-Added Tax (VAT)

  • Standard VAT Rate: 15%
  • Scope of VAT: VAT is imposed on the sale of goods and services within Ethiopia and on imported goods.
  • Exemptions: Exemptions include basic foods, education, health services, financial services, and some agricultural products.
  • Refunds: VAT refunds are available for businesses exporting goods and for those in the investment stage that import machinery and capital goods.

Personal Income Tax (PIT)

  • PIT Rates: Progressive rates from 10% to 35%:
    • 10% on income up to ETB 7,200.
    • 15% on income between ETB 7,201 and ETB 19,200.
    • 20% on income between ETB 19,201 and ETB 38,400.
    • 25% on income between ETB 38,401 and ETB 63,000.
    • 30% on income between ETB 63,001 and ETB 93,600.
    • 35% on income exceeding ETB 93,600.
  • Tax-Free Allowance: Basic deductions include personal and dependent allowances, as well as specific deductions for medical expenses and pension contributions.
  • Non-Resident Tax: Non-residents are taxed at a flat rate of 10% on Ethiopian-sourced income.

Additional Mandatory Contributions

Social Security Contributions:

  • Pension Contributions: Employers contribute 11%, and employees contribute 7% of their monthly income towards the social security pension scheme.

Withholding Taxes

  • Dividends: 10% withholding tax.
  • Interest: 5% withholding tax on interest paid to residents.
  • Royalties: 5% withholding tax.
  • Service Fees: 2% withholding tax on service fees paid to residents; for non-residents, the withholding tax rate is 15%, subject to applicable tax treaties.

Transfer Pricing Rules

Transfer pricing regulations require that transactions between related parties be conducted at arm’s length. Detailed documentation must be maintained, and non-compliance can lead to penalties.

Special Tax Regimes

  • Export Tax Incentives: Companies involved in exporting are exempt from CIT for up to 5 years. In addition, no VAT is imposed on exported goods.
  • Free Trade Zones: Ethiopia has free trade zones that offer additional benefits such as tax exemptions on import duties, VAT, and excise taxes on inputs used for manufacturing export goods.

Other Taxes

  • Excise Tax: Applies to certain goods such as tobacco, alcohol, vehicles, and fuel at varying rates.
  • Property Tax: Regional governments impose taxes on immovable property based on the market value.
  • Customs Duties: Ethiopia imposes customs duties on imported goods, with rates varying by the type of goods.
  • Stamp Duty: Applies to legal documents, including contracts, with rates depending on the type and value of the transaction.

Double Taxation Agreements (DTAs)

Ethiopia has signed DTAs with several countries, including South Africa, Russia, the UK, and France, providing relief from double taxation and reduced withholding tax rates for cross-border transactions.

Compliance and Reporting

  • Corporate Tax Filing Deadline: CIT returns must be filed by the 30th day of the 4th month following the end of the fiscal year.
  • VAT Filing: VAT returns must be submitted monthly.
  • Penalties for Late Filing: Penalties include interest on unpaid taxes and fines, which vary depending on the tax and the extent of non-compliance.

Recent Developments

  • Tax Administration Modernization: The Ministry of Revenues has been implementing reforms to modernize the tax administration system, including the adoption of electronic tax filing and payments.
  • Changes in PIT Brackets: Ethiopia recently adjusted personal income tax brackets to reduce the tax burden on low-income earners and simplify compliance for businesses.
  • Tax Incentives for Industrial Parks: Ethiopia has continued expanding its industrial parks, offering favorable tax conditions, including long tax holidays and reduced duties on capital goods, to attract foreign investment.

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