Ethiopia

Income Tax (Amendment) Proclamation

The House of People’s Representatives approved the Income Tax (Amendment) Proclamation (‘the Proclamation‘) on 17 July 2025, but the official publication of the gazetted law is yet to be published. Below are some of the key changes proposed in the Income Tax (Amendment) Proclamation.

Taxpayer classification

Taxpayers will be classified into two categories: Category A (turnover above 2 million Ethiopian birr [ETB]) and Category B (below ETB 2 million). Category C has been removed.

Minimum alternative tax (MAT)

A MAT of 2.5% of turnover or equivalent benchmarks applies if declared tax falls below the 2.5% of turnover threshold. This tax will apply regardless of tax incentives.

Category B gross sales taxation

Category B taxpayers will be required to pay tax based on gross sales, with rates ranging from 2% to 9%. Professionals and VAT-registered businesses will be excluded.

Undistributed or repatriated profits

Undistributed or repatriated profits that are not reinvested or remitted within 12 months will be taxed at 15%. This will be an increase in the tax rate from the current tax rate of 10%.

Offshore indirect transfers

Gains from offshore share transfers tied to Ethiopian assets will be taxable. The full gain will be taxed if value from Ethiopian property exceeds 50%; otherwise, a formula-based apportionment will apply.

Cash transaction limits

Payments above ETB 50,000 will be required to be made electronically or via cheque. Non-compliance will attract a penalty equal to twice the amount paid.

Digital service tax

Income from digital services provided in Ethiopia will be taxable for both residents and non-residents. The rate will be set by regulations to be issued but capped at 5%.

Dividend, interest, and royalty income

The proclamation has also revised the withholding tax (WHT) rates for dividends (15%), interest (10%), and royalties (5% to 10%) from the previous 10%, 5% to 10%, and 5%, respectively, depending on residency and context.

Capital gains tax (CGT)

All gains on shares, bonds, and buildings will be taxed at a unified tax rate of 15%.

Advance tax payments

Quarterly advance tax will be introduced for Categories A and B taxpayers. Newly registered taxpayers will be required to pay full tax at year-end.

Withholding obligations

The WHT rate has been increased to 3% on goods (above ETB 20,000) and services (above ETB 10,000). This will replace the current 2%.

Other provisions

• The permanent establishment (PE) threshold has been reduced to 91 days.
• Only incentives under the Investment Incentives Regulation remain valid.
• Cash violations will attract administrative penalties.

Economic liberalisation

In September 2020, the government gazetted Investment Regulation (IR) 2020, which, among other amendments, allowed foreigners to invest in areas or sectors that were previously restricted to the government or domestic investors. One of the key sectors that was open for foreigners through IR 2020 was the telecommunications sector.

IR 2020 also opened other sectors where foreign investors are now allowed to invest jointly with the government or domestic investors, some of which are as follows:

• Jointly with the government: international air transport services, bus rapid transit, import and export of electrical energy, etc.
• Jointly with domestic investors: freight forwarding and shipping agency, accounting and auditing, advertisement and promotion services, etc.

For the investments allowed jointly with domestic investors, the foreigner investor is not allowed to hold more than 49% of the share capital.

Further, the Council of Ministers approved a policy that aims at opening up the banking and telecommunication sectors to foreign investors.

In April 2024, the Ethiopian Investment Board issued a new directive to further regulate foreign investors’ participation in restricted export, import, wholesale, and retail trade. This new directive introduced significant changes to the previous regulations. 

Under the new directive, the retail and import sectors are now open to foreign investors, with the exception of fertilizer and petroleum. The export trade of raw coffee, khat, oilseeds, pulses, hides and skins, forest products, poultry, and livestock purchased from the market, as well as the wholesale of products, are now included in the sectors open to a broader scope of foreign investors.

The introduction of this new directive demonstrates Ethiopia’s renewed emphasis on enhancing the nation’s productivity and competitive stance in the global market.

Introduction of social welfare levy

The Council of Ministers approved a regulation to introduce social welfare levy on imported goods. The levy is earmarked for the rehabilitation and construction of education, training, and medical facilities and expansion of other social services. The levy will be at the rate of 3%.