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Eritrea

Country Name: State of Eritrea
Currency: Eritrean Nakfa (ERN)
Primary Tax Authority: Ministry of Finance and National Development
Key Legislation:

  • Income Tax Proclamation
  • Value Added Tax (VAT) Proclamation
  • Customs Proclamation
  • Investment Proclamation
  • Tax Administration Proclamation

Fiscal Authority Allocation

Centralized Fiscal System:
Eritrea operates a centralized tax system. The Ministry of Finance and National Development is responsible for administering and collecting taxes, including corporate income tax (CIT), personal income tax (PIT), value-added tax (VAT), and customs duties. Local taxes are minimal and largely involve property and small business taxes.

Corporate Income Tax (CIT)

Standard Rate: 30%
Eritrea imposes a flat corporate income tax rate of 30% on the net taxable income of resident companies and non-resident companies with a permanent establishment in Eritrea.

Corporate Forms and Taxation:

  1. Resident Companies: Taxed on worldwide income.
  2. Non-Resident Companies: Taxed only on Eritrean-sourced income.

Exemptions and Incentives:

  • Investment Incentives: Eritrea offers tax incentives to companies investing in priority sectors, such as agriculture, manufacturing, mining, and energy. Incentives may include CIT holidays, customs duty reductions, and VAT exemptions on imported machinery and raw materials.
  • Free Trade Zones: Companies operating in Eritrea’s free trade zones may benefit from CIT exemptions, VAT exemptions, and customs duty relief.

Goods and Services Tax (GST) / Value-Added Tax (VAT)

Standard Rate: 10%
Eritrea imposes VAT at a standard rate of 10% on most goods and services. VAT is applied to domestic production and imports.

Exemptions:
Certain goods and services, including basic foodstuffs, healthcare, education, and essential agricultural inputs, are VAT-exempt. Exports are zero-rated, meaning businesses can claim refunds on VAT paid on inputs used in producing export goods.

Personal Income Tax (PIT)

Progressive Rates:
Eritrea applies a progressive personal income tax system to residents’ worldwide income and non-residents’ Eritrean-sourced income.

Resident Tax Rates for 2023 (Annual Income):

  • Up to ERN 18,000: 2%
  • ERN 18,001 to ERN 40,000: 10%
  • ERN 40,001 to ERN 60,000: 20%
  • Above ERN 60,000: 30%

Non-Resident Tax Rate:
Non-residents are taxed at a flat rate of 10% on Eritrean-sourced income.

Deductions and Allowances:
Personal deductions are allowed for expenses such as contributions to pension schemes, medical expenses, and charitable donations.

Additional Mandatory Contributions

Social Security Contributions:
Employers and employees must contribute to the national social security system, which covers pensions, healthcare, and other benefits.

  • Employer Contribution: 5% of gross salary.
  • Employee Contribution: 2% of gross salary.

Withholding Taxes

  • Dividends: 10%
  • Interest: 5%
  • Royalties: 10%
    Eritrea imposes withholding taxes on payments to non-residents, including dividends, interest, and royalties. These rates may be reduced under Eritrea’s double taxation agreements (DTAs).

Transfer Pricing Rules

Eritrea applies the arm’s-length principle for transactions between related parties. Companies must ensure that cross-border transactions between related entities reflect market value. Transfer pricing documentation may be required for companies involved in significant cross-border activities.

Special Tax Regimes

  • Free Trade Zones: Companies operating in Eritrean free trade zones enjoy tax holidays for up to 10 years, customs duty exemptions, and VAT exemptions. These zones are designed to attract foreign direct investment in manufacturing, logistics, and export-oriented industries.
  • Investment Incentives: Under Eritrea’s Investment Proclamation, companies investing in sectors like agriculture, mining, and renewable energy benefit from CIT holidays, customs duty reductions, and VAT exemptions on imported capital equipment.

Other Taxes

  • Customs Duties: Eritrea imposes customs duties on imported goods, with rates varying from 5% to 20%, depending on the type of goods. Essential goods such as food and agricultural inputs may benefit from reduced or zero customs duties.
  • Excise Taxes: Excise taxes are levied on luxury goods, alcohol, tobacco, and petroleum products.
  • Property Tax: Local authorities in Eritrea impose property taxes on land and buildings, with rates based on the location and use of the property.

Double Taxation Agreements (DTAs)

Eritrea has signed several double taxation agreements (DTAs) with neighboring countries and a few other jurisdictions. These agreements help reduce withholding taxes on cross-border income and prevent the double taxation of income earned in Eritrea and abroad.

Local Taxes

Local governments may impose minor taxes and fees, including property taxes, business registration fees, and local service levies. However, most significant taxes, including CIT, PIT, and VAT, are centrally administered by the Ministry of Finance and National Development.

Compliance and Reporting

Annual Filing:
Corporate tax returns must be filed by the end of the fourth month following the end of the financial year. Personal income tax returns are generally due by March 31st. VAT returns are filed quarterly or monthly, depending on the business’s turnover.

Penalties for Late Filing:
Penalties for non-compliance or late filing include fines and interest on unpaid taxes. Interest is charged at a rate of 1% per month on overdue taxes, with additional penalties for evasion or underreporting of income.

Recent Developments

Mining Sector Growth:
Eritrea’s economy is heavily dependent on mining, particularly gold and copper. The government is promoting further investment in the mining sector, offering tax incentives such as CIT reductions, VAT exemptions, and customs duty relief on mining equipment.

Renewable Energy Projects:
The government is encouraging investment in renewable energy projects, particularly solar and wind energy. Companies investing in these sectors may benefit from CIT holidays, VAT exemptions, and customs duty reductions on imported energy equipment.

Digital Taxation Efforts:
Eritrea is gradually modernizing its tax system and exploring digital taxation options to capture revenue from e-commerce and online transactions. The government is introducing digital tax platforms to improve tax compliance and facilitate electronic filing.

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