Information for Investors

Taxation and Custom Duty Exemption

Because Ethiopia is a preferred location for FDI (Foreign Direct Investment) numerous rules, regulations were in place to accommodate, attract and meet the needs of investors. By creating a conducive environment that would guarantee foreigners, ex patriots or domestic investors to invest in Ethiopia. According to Ethiopian Investment Commission literature attractive taxation system is one of the main reasons why this country is becoming the center of investors.

The Ethiopian tax law provides for the direct and indirect taxes. The direct taxes are divided into five categories: personal income tax, rental tax, withholding tax, corporation tax, etc. the main types of indirect taxes applicable are VAT, customs duty, excise and turn over taxes.

Direct Taxes

Incomes taxable under Income Tax Proclamation No. 286/2002 (Article 6) include: incomes from employment, business activities, personal activities, entrepreneurial activities by non-residents, movable property, immovable property, alienation property, dividends distributed by resident company, profit shares paid by registered partnerships, interest paid by the national, regional or local governments, and license fees. Personal income tax rates applicable at present are given in the table below:

Personal Income Tax Rates

 

Employment Income per month

Tax rate

 

Over Birr

To Birr

 

1

0

150

Exempt threshold

2

151

650

10

3

651

1400

15

4

1401

2350

20

5

2351

3550

25

6

3551

5000

30

7

Over 5000

 

35

Source: Income Tax Proclamation No. 286/2002

Taxable business income of companies is taxed at the rate of 30%. Other business tax payers with business income ranging from ETB 1,801 to ETB 60,000 pay between 10% and 30%. Business income above ETB 60,000 is charged 35%.

Taxable Business Income Tax rates

 

Taxable business income tax rates

Tax rate

 

Over Birr

To Birr

 

1

0

1,800

Exempt threshold

2

1,801

7,800

10

3

7,801

16,800

15

4

16,801

28,200

20

5

28,201

42,600

25

6

42,601

60,000

30

7

Over 60,000

 

35

Source: Income Tax Proclamation No. 286/2002

Capital gains tax under Income Tax Proclamation No. 286/2002 (Article 37) is payable on gains obtained from the transfer of buildings used for business, factory, or office purposes at 15 percent and shares of companies at 30 percent.

An individual foreigner, who lives in Ethiopia for more than 183 days in a period of twelve calendar months, whether continuously or intermittently, is regarded as being resident for the entire tax period and is taxed in accordance with the provisions of Income Tax Proclamation No. 286/2002 (Article 5.2).

However, the following are excluded from the computation of taxable income in accordance with Article 13 of the Income Tax Proclamation No. 286/2002 and Article 13 of the Regulations No. 78/2002:

  • Medical treatment;
  • Transportation allowance;
  • Hardship allowance;
  • Reimbursement of travelling expenses on joining and completion of employment, provided that such payments are made pursuant to specific provisions of the contract;
  • Board members’ and board secretaries’ allowances; the income of persons employed for domestic duties;
  • The contribution of the employer and the employee to the retirement or provident fund and all forms of benefits contributed by employers that do not exceed 15% of monthly salary; and
  • Payments made to a person as compensation in relation to injuries suffered by that person or the death of another person.

Other direct taxes applicable are royalties (5%), income paid for services rendered outside of Ethiopia (10%), income from games of chance (15%), dividends (10%), income from rental of property (15%), and interest income (5%) and are payable at flat rates in accordance with Article 31-36 of the Income Tax Proclamation.

Indirect Taxes

The value added tax (VAT) system, which came into effect on 4th July 2002, largely replaced the old business tax system of commodity and service taxes including the sales tax and the withholding tax. The VAT rate is 15% of the value of every taxable transaction by a registered person and all imports of goods and services other than those exempted. Taxable transactions which shall be charged with zero percent are: export goods or services to the extent provided in the regulations. The rendering of transportation or other services directly connected with international transport of goods or passengers as well as the supply of lubricants and other consumable technical supplies taken on board for consumption during international flights.

Excise tax is payable on a range of consumer goods, whether locally produced or imported, e.g., alcohol, tobacco, salt, fuel, television sets, cars, carpets and toys. Its rates vary from 10% on receivers, garments and textiles of any type and fabrics to 100% on perfumes, vehicles above 1,800cc and alcoholic drinks. It is payable in addition to VAT.

Turn over tax, under the total value of 500,000 Birr, is applicable to pay 2 or 10 percent from annual taxable transactions on goods sold or service rendered locally.

All income from domestic or foreign sources is taxed whether it is obtained as remuneration, profit or gains, from employment, business activities or any activity which brings income to the beneficiary.

For depreciation allowance, assets are categorized into different classes. The categories and rates of depreciation are:

  1. Buildings and structures 5%;
  2. Intangible assets 10%;
  3. Computers, information systems, software products and data storage equipment 25%; and
  4. All other business assets including automobiles, buses and minibuses 20%.

Every investor has a tax obligation and is required to obtain a tax payer identification number (“TIN”) form the Federal Customs and Revenue Authority. An investor that will involve in taxable activity has also an obligation to register for VAT.

In summary, main taxes in Ethiopia include:

 

 

No

                    TYPE OF TAXES

                                  RATE

1

Corporate Income Tax

 30%

2

Turn Over Tax

2% and 10 %

3

Excise Tax

0% up to 100%

4

Customs Duties

0% up to 35%

5

Income Tax from Employment

0% up to 35%

6

Withholding Tax

2%

7

Value Added Tax

15%

8

Export Tax

Nil (with exception of hides and skins- 150%)

9

Royal Tax

     5%

10

Dividend Tax

    10%

 

CUSTOM DUTY EXEMPTION: Incentives according to Ethiopian Investment Commission.

To encourage exports, the Commission out lined, Ethiopian products except coffee and services destined for export are in fact exempted from the payment of any export tax and other taxes levied on exports.

Manufacturing or agricultural who has invested at least USD 200, 000 or equivalent Ethiopian Birr at the prevailing rate and created permanent employment opportunity for at least 50 Ethiopian nationals shall be entitled to import, at any time, duty free capital goods necessary for the existing enterprises:

In other area of investment eligible for customs duty and has invested at least USD 200,000 or equivalent Ethiopian Birr at the prevailing rate and created at least for 50 people permanent employment opportunity shall be allowed to import duty free capital goods necessary for the existing enterprises up to 5 years from the date acquiring a business license or other appropriate license.

Further more Custom Duty exemption of spare parts worth up to 13% of the total value of the capital goods imported.

All imported goods to Ethiopia are subjected to customs duties and taxes, unless exempted by law. Taxes applicable on imported goods are: Import (Customs) duty, Withholding Tax (a fixed rate of 3%), Excise Tax (if applicable), VAT (a fixed rate of 15%) and Surtax (a fixed rate of 10%).

Duty is tariff collected on the value of the good calculated on the basis of its actual total costs. It is levied in accordance with the rules of the international convention on the harmonized customs description and coding system. Sur-tax applies on all imported goods, except those exempted by the Council of Ministers Regulation No. 133/2007 at 10 percent rate. Excise tax is paid on imported goods with a percentage rate ranging from 0 to as high as 100. VAT on imported goods is a flat rate of 15 %. A 3 percent withholding tax applies also on imported goods. These taxes are calculated based on the cost and freight rate. But the Ethiopian Revenues and Customs Authority provides its own CD with details on prices on various goods. The rate is usually calculated as per the price on the CD.This CD is to be updated every three months.

Source: Ethiopian Investment Guide, 2015