Corporate tax in Ethiopia

Summary

Business Income Tax Rate (%) 25 / 30 / 35 (a)
Capital Gains Tax Rate (%) 15 / 30 (b)
Branch Tax Rate (%) 25 / 30 / 35 (a)
Withholding Tax (%)
Dividends 10 (c)
Interest
On Deposits 5 (c)
On Foreign Loans 10
Royalties for the Right to Use Artistic Works 5 (c)
Royalties Paid by Holders of Large-Scale Mining Licenses
Precious Minerals 8
Semiprecious Minerals 6
Metallic Minerals 5
Industrial Minerals 4
Construction Minerals 3
Salt 4
Geothermal 2
Technical Services Rendered Outside Ethiopia 10
Income from Casual Rental of Property (on Annual Gross Income) 15 (c)
Purchases of Goods for More than ETB10,000 2 (d)
Purchases of Services for More than ETB500 2 (d)
Branch Remittance Tax 10 (e)
Net Operating Losses (years)
Carryback 0
Carryforward 3 / 10 (f)

a) The standard business income tax rate is 30%. Income from large-scale min­ing operations, excluding petroleum, natural gas and oil shale, is taxed at a rate of 25%. A 35% rate applies to income from small-scale mining opera­tions, with the same exclusions. Income from petroleum, natural gas and oil shale operations is taxed at the standard rate of 30%.

b) The 15% rate applies to gains derived from transfers of buildings located in municipal areas that are used for a business. The 30% rate applies to gains de rived from transfers of shares of companies.

c) This is a final income tax that is withheld at source for both residents and nonresidents.

d) This rate applies if the supplier provides a tax identification number. Other­wise, the rate is 30%. For further details, see Section B.

e) Remittances by branches to their foreign headquarters are considered to be distributions of dividends and are accordingly subject to income tax at a rate of 10%.

f) Companies in the mining sector may carry forward losses 10 years. Also, see Section C.

Taxes on corporate income and gains

Business income tax. Resident companies are subject to business income tax on their worldwide income. Nonresident companies are subject to tax on their Ethiopian-source income only. A com­pany is resident in Ethiopia if it satisfies any of the following conditions:

  • It has its principal office in Ethiopia.
  • Its place of effective management is located in Ethiopia.
  • It is registered in the trade register of the Ministry of Trade and Industry or of the trade bureaus of the regional governments of Ethiopia. Registered companies include permanent establish­ments of nonresident companies in Ethiopia.

Tax rates. The standard business income tax rate is 30%. Income from large-scale mining operations, excluding petroleum, natural gas and oil shale, is taxed at a rate of 25%. A 35% rate applies to income from small-scale mining operations, with the same exclu­sions. Income from petroleum, natural gas and oil shale opera­tions is taxed at the standard rate of 30%.

Certain investment activities approved by the Ethiopian Invest ment Authority qualify for income tax exemptions and other incentives. For example, new export-oriented investments in manufacturing, agro-industrial activities or the production of agricultural prod­ucts may qualify for income tax exemptions ranging from two to seven years, while two-year tax exemptions are available for in­vestments in the expansion and upgrading of existing businesses engaged in such activities. The availability and length of tax ex­emptions depend on the distance of the place of investment from Addis Ababa, the capital city. The exemptions are designed to encourage investors to invest in remote areas that are less devel­oped but endowed with resources. Enterprises that incur losses during the period of income tax exemption may carry forward their losses to years following the expiration of the tax-exemption period for a period equaling half the tax-exemption period. The normal loss carryforward period is three years (see Section C).

Tax on “windfall profit” obtained by a person as a result of change that occurred in local or international economic situations that was not caused by the person’s own efforts will be applied as soon as the Ministry of Finance and Economic Development prescribes the following:

  • Businesses subject to the “windfall profit” tax
  • The amount of income to be considered “windfall profit”
  • The effective date for application of the tax

Shortly after parliament approved an amendment of the income tax proclamation providing for the introduction of a tax on “wind­fall profit” during its 18 November 2010 session, the Ministry of Finance and Economic Development (MoFED) instructed com­mercial banks to pay 75% of the profit that the MoFED deter­mined that the banks made because of the devaluation of the birr. The amendment to the proclamation stated that businesses in the finance sector and oil exploration and mining sector were likely to be subject to such tax.

Capital gains. Capital gains derived from transfers of buildings located in municipal areas that are used for a business, factory or office are subject to tax at a rate of 15%. Capital gains de rived from transfers of shares of companies are subject to tax at a rate of 30%.

Subject to certain limitations, losses incurred on transfers of the properties described above may be used to offset gains. Unused capital losses may be carried forward indefinitely.

Subject to limitations, gains or losses are recognized on transfers of assets used in a business (other than buildings) and are subject to business income tax.

Administration. The Ethiopian Revenues and Customs Authority (ERCA) administers and collects certain taxes, including the busi­ness income tax and capital gains tax of companies. The Ministry of Mines and Energy collects mining taxes.

The tax year (year of assessment) is the Ethiopian budgetary year, which runs from 8 July to 7 July of the following calendar year. If a company’s accounting year differs from the Ethiopian bud­getary year, its base period for the tax year is the accounting year ending within the tax year.

Advance income tax of 2% is withheld from payments for goods or services if the payments exceed certain thresholds. The tax is withheld from payments for goods if the amount payable in a single transaction or supply contract is more than ETB10,000. For payments for services, tax is withheld if the amount payable in a single transaction or contract is more than ETB500.

Companies must file annual tax returns, together with their an nual accounts, within four months after the end of their accounting year. Companies must pay the tax shown in the tax return reduced by the amount of the advance payments withheld and any foreign tax credits. The tax office audits the company’s return and annual accounts to determine the final assessment.

Companies that fail to pay tax by the due date must pay interest at a rate that is 25% above the highest commercial lending inter­est rate that prevailed during the preceding quarter, together with administrative penalties.

Dividends. A 10% final income tax that is withheld at source is imposed on dividends paid by share companies and withdrawals of profits from private limited companies. The tax applies to both residents and nonresidents. If shareholders decide to reinvest their dividends to expand the activities of the company, the dividends are exempt from tax, with the exception of certain sectors.

Remittances by branches to their foreign headquarters are consid­ered to be distributions of dividends and are accordingly subject to income tax at a rate of 10%.

Income withholding taxes are imposed on interest, royalties and certain other types of income. For a listing of these taxes, see Section A.

Dividend tax on retained earnings. Business entities that are oper­ating in Ethiopia are required to pay a dividend tax of 10% of their retained earnings. Companies must pay the dividend tax on annual basis within 12 months after the end of the tax year without regard to the distribution of the retained earnings to the sharehold­ers. However, undistributed retained earnings may be exempted from the tax if the retained earnings are converted to capital within the 12 months after the end of the company’s tax year.

Withholding tax on imports. Withholding tax is collected from busi­ness income taxpayers at a rate of 3% at the time of importation of goods for commercial use. The amount of this tax may be credit­ed against the taxpayer’s income tax liability for the year.

Foreign tax relief. Foreign tax paid may be used as a credit against tax payable with respect to the foreign-source income, limited to the amount of tax in Ethiopia that would otherwise be payable on such income.

Determination of trading income

General. Taxable income is the amount of income subject to tax after the deduction of all expenses and other deductible items allowed under the tax law.

Expenses are deductible to the extent they are incurred for the purpose of earning, securing, and maintaining business income, if it can be proved that the expenses are genuine.

Subject to restrictions, reinvestments by resident companies of their profit to increase the capital of another company may be de ducted for tax purposes.

Foreign-exchange gains and losses. All net gains or losses arising from transactions in foreign exchange are considered to be tax­able income or deductible losses in the year in which they arise.

Provisions. Specifically identifiable provisions for bad debts are allowed if the company has taken all reasonably necessary steps to recover the debts. General provisions and provisions for stock obsolescence are not allowed.

Financial institutions may deduct special (technical) reserves in accordance with the National Bank of Ethiopia directives. How­ever, the taxable income of banks is increased by amounts with­drawn from such reserves.

Tax depreciation. Buildings and other structures are depreciated using the straight-line method at an annual rate of 5%. A straight-line depreciation rate of 10% applies to intangible assets.

The following assets are depreciated using a pooling system.

Assets Rate (%)
Computers, information systems, software products and data storage equipment 25
Fixed assets of companies engaged in mining activities 25
Other business assets 20

Under the pooling system, the depreciation rate is applied to the depreciation base, which is the book value of the category as re­corded in the opening balance sheet of the tax year, increased by certain costs incurred during the tax year, and decreased by cer­tain amounts received during the tax year. The tax base is in­creased by the following costs: the cost of assets acquired or created; the cost of improvements that are capitalized; and the costs of re newal and reconstruction of assets. The tax base is de­creased by the sales proceeds of assets disposed of and compen­sation received for the loss of assets.

A negative depreciation base is added to taxable income. If the depreciation base is ETB1,000 or less, the entire depreciation base is deductible.

No depreciation is allowed on the revaluation of business assets.

Maintenance and improvement expenses exceeding 20% of the depreciation base of a category of business assets increase the depreciation base of that category.

Fine arts, antiques, jewelry, trading stock and other business assets not subject to wear and tear and obsolescence may not be depreciated.

Relief for losses. If the determination of taxable business income results in a loss in a tax period, that loss may be set off against taxable income in the next three tax periods. Earlier losses are set off before later losses. A net operating loss may be carried for­ward and deducted only for two periods of three years.

Companies in the mining sector may carry forward losses 10 years.

If, during a tax period, the direct or indirect ownership of the share capital or the voting rights of a body change more than 25%, by value or by number, the right to a loss carryforward no longer applies to losses incurred by that body in that tax period and pre­vious tax periods.

Group of companies. The Ethiopian tax law does not allow the fil­ing of consolidated returns.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate
Value-added tax (VAT); levied on all supplies
of goods and services made in Ethiopia
and on imports, except for exempt goods
and services
Standard rate 15.00%
Exports of goods and services 0.00%
Equalization turnover tax; imposed on persons not registered for VAT
Goods sold locally 2.00%
Services rendered locally by contractors and grain mills, and on rentals of tractors and combine harvesters 2.00%
Other services 10.00%
Excise tax; levied on specified goods
manufactured in Ethiopia and on imports;
for locally produced goods, tax is imposed
when production is completed and is based
on production cost; for imports, tax is imposed
on Cost, Insurance and Freight (CIF) value;
rates vary among products; low rate applies to
textile and garment products, and high rate
applies to various items, including vehicles
with engines exceeding 1,800 cc
Rates 10% to 100%
Surtax on all imported items mentioned above Additional 20% of CIF value
Revenue stamp duties; levied on transfers
Of certain property, including vehicles
2.00%

Tax treaties

Ethiopia has entered into double tax treaties with various coun­tries, including the Czech Republic, France, Israel, Italy, Kuwait, Romania, the Russian Federation, South Africa, Tunisia and Turkey. Ethiopia has signed double tax treaties that have not yet been ratified with Algeria, Iran and Oman. Ethiopia also recently entered into double tax treaties with India and the United King­dom. However, Ethiopia has not implemented any of its double tax treaties.