Ethiopia Personal Income Tax

Residents are subject to tax on their worldwide income. Nonresidents are subject to tax on their Ethiopian-source income only.

An individual is considered to be resident in Ethiopia if any of the following circumstances exist:

  • He or she has a domicile in Ethiopia and a habitual abode in Ethiopia.
  • He or she is a citizen of Ethiopia who serves abroad as a con­sular, diplomatic or similar official of Ethiopia.
  • He or she is physically present in Ethiopia for more than 183 days in a period of 12 calendar months, either continuously or intermittently.

Income subject to tax. The taxation of various types of income is described below.

Employment income. Employment income includes any pay­ments in cash or in kind received by an individual as a result of employment, including income from former employment or pro­spective employment.

Employment income is subject to tax at progressive rates ranging from 10% to 35%. For a table of these rates, see Rates.

The following categories of employment income are exempt from income tax:

  • Income derived by casual employees who do not work for more than 1 month for the same employer in any 12-month period.
  • Pension, provident fund and all other forms of retirement con­tributions paid by employers, up to 15% of the monthly salary of the employee.
  • Subject to reciprocity, income from employment received by diplomatic and consular representatives and other persons employed in an embassy, legation, consulate or mission located in a foreign state for the performance of state affairs if such individuals are nationals of that state and bearers of diplomatic passports or if, in accordance with international usage or cus­toms, they are normally exempt from income tax.
  • Actual cost of medical treatment of the employee paid by the employer.
  • Subject to limits set by the tax authorities, the following payments: — Transportation allowances.

— Reimbursement of traveling expenses incurred on duty and subsistence daily allowance for individuals who are assigned outside a radius of 25 kilometers from their duty location.

— Traveling expenses paid on the commencement or termina­tion of employment to employees recruited from a location other than the place of employment. For foreign employees, these expenses include traveling expenses to or from their country if such payments are made in accordance with spe­cific provisions of the employment contract.

— Meal allowance for employees working in manufacturing, agricultural, mining and petroleum extraction activities.

  • Hardship allowance.
  • Allowances paid to members and secretaries of boards of public enterprises and public bodies as well as to members and secre­taries of study groups established by the federal government or regional governments. In this context, secretaries are individu­als who arrange and attend meetings and record minutes of meetings. They are usually paid a certain amount per meeting by public enterprises.

Rental income from buildings. Rental income from buildings derived by individuals is subject to tax at progressive rates ranging from 10% to 35%. For a table of these progressive rates, see Rates.

Self-employment and business income. All business profits derived in Ethiopia are subject to tax. Taxable business income is determined for each tax year on the basis of the income state­ment. Business income derived by individuals is subject to tax at progressive rates ranging from 10% to 35%. For a table of these progressive rates, see Rates.

Investment income. Dividends are subject to a 10% final with­holding tax. 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. Interest received on deposits and royalties are subject to a 5% final withholding tax. Interest paid on foreign loans is subject to a final withhold­ing tax at a rate of 10%.

Directors’fees. Directors’ fees are considered employment income. Fees for board members of public enterprises are not taxed.

Other income. A 15% final tax is imposed on annual gross income from games of chance and from the casual rental of prop­erty not related to a business activity that is taxable under the tax law.

All payments made for technical services (expert advice or tech­nological services) rendered to resident persons outside of Ethiopia are subject to a 10% withholding tax.

Taxation of employer-provided stock options. Ethiopian tax law does not specifically address the treatment of stock options. Such options are usually not available because currently Ethiopia does not have companies whose shares are publicly traded on a stock market. However, the income tax law states that income earned in any form by employees in cash or in kind is taxable unless it is explicitly exempted from tax by the law. Based on this measure, a stock option is taxed as an employee benefit.

Capital gains and losses. Gains derived from the transfer (sale or gift) of buildings used for a business, factory or office are subject to tax at a rate of 15%. Gains derived from the transfer of build­ings used as a residence are exempt from tax. Gains derived from the sale of shares of companies are subject to tax at a rate of 30%. Subject to limitations, losses incurred on the transfer of such prop­erties may be used to offset gains derived from such transfers. Unused losses can be carried forward indefinitely. However, losses are not recognized on transfers to associates (related persons).

Deductions

General. In principle, all expenses incurred wholly and exclu­sively to produce income are deductible. However, measures in the tax law contain limitations on the deduction of expenses.

Employment deductions. Employees may not claim deductions from employment income.

Business deductions. Expenses incurred wholly and exclusively in the production of gross business income may be deducted from income derived from the same source. However, certain items may not be deducted, including the following:

  • Voluntary pension or provident fund contributions exceeding 15% of the monthly salary of the employee
  • Interest in excess of the rate used in transactions between the National Bank of Ethiopia and commercial banks, increased by two percentage points
  • Damages covered by insurance policies
  • Punitive damages and penalties
  • Income tax paid on business income derived from entrepre­neurial activities and recoverable value-added tax
  • Representation expenses exceeding 10% of the salary of the employee
  • Personal consumption expenses
  • Entertainment expenses
  • Donations or gifts (however, donations to registered charities, public schools and health institutions are tax deductible to the extent that they do not exceed 10% of taxable income)

Depreciation of business assets calculated at rates specified by the tax authorities can be claimed as a deduction. If a revaluation of business assets takes place, no depreciation is allowed for the amount of the revaluation.

Rates. Progressive tax rate tables apply separately to employment income, business income and rental income.

Employers must withhold the tax from each payment to an em­ployee and pay the tax over to the tax authorities for each month. The following is the progressive rate table for monthly employ­ment income.

 

Monthly employment income
Exceeding Not exceeding Rate
ETB ETB %
0 150 0
150 650 10
650 1,400 15
1,400 2,350 20
2,350 3,550 25
3,550 5,000 30
5,000 35

 

For “bodies,” the business income tax rate is 30%. For other tax­payers, the following is the progressive rate table for annual busi­ness income.

Annual business income (ETB)

Exceeding    Not exceeding                            Rate (%)                                                                              

0                            1,800                                                      0

1,800                    7,800                                                     10

7,800                   16,800                                                    15

16,800                 28,200                                                   20

28,200                42,600                                                   25

42,600                60,000                                                   30

60,000                     —                                                         35

The following is the progressive rate table for annual rental income.

Annual rental income (ETB)

Exceeding            Not exceeding                         Rate (%)                                                                             

0                            1,800                                                             0

1,800                   7,800                                                            10

7,800                 16,800                                                           15

16,800                 28,200                                                          20

28,200                 42,600                                                          25

42,600                 60,000                                                          30

60,000                     —                                                                35

Although identical rate tables apply to business income and rental income, these types of income are taxed separately.

Credits. For details regarding the foreign tax credit, see Section E.

Relief for losses. Individuals may carry forward net operating losses from businesses for three years. However, if a business incurs losses following the year of the loss, the loss-carryforward period may be extended for a year for each loss year in the three-year period, up to a maximum loss-carryforward period of six years. Earlier losses must be offset first. Losses may not be car­ried back.

Nonresidents. Nonresidents are subject to tax at the same rates as residents on Ethiopian-source income only.

Other taxes

Certain property, including land and buildings, is subject to annual property taxes. Ethiopia does not impose wealth and net worth taxes.

Tax on “windfall profit” obtained by a person as a result of a 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

Social security

For employees of government organizations and public enterprises, contributions to a government-operated retirement fund must be made in accordance with the law. The monthly contribution rates are 11% for employers and 7% for employees.

Under the social security law, employees of private businesses and non-government organizations are subject to the scheme described in the preceding paragraph beginning in July 2011. Only Ethiopian citizens are required to be involved in this scheme. In general, employees may continue to participate in provident fund schemes operated by their respective employers if they were involved in such scheme before July 2011. The contribution rate varies depending on the scheme. Participation in the scheme is usually covered in an employee’s compensation package.

Tax filing and payment procedures

The tax year is the Ethiopian budgetary year, which runs from 8 July to 7 July of the following calendar year.

Individuals who receive employment income only are not required to file personal income tax returns. Instead, employers must with­hold tax from each payment to an employee and to pay to the tax authorities the amount withheld during each calendar month. This withholding tax represents the final tax liability of employees.

Other taxpayers are classified into the following three categories:

  • Category A: companies incorporated under the laws of Ethiopia or in a foreign country or individuals whose annual turnover is above ETB500,000. They must file tax returns and pay tax within four months after the end of the tax year.
  • Category B: individuals whose annual business turnover is be­tween ETB100,000 and ETB500,000. They must file tax returns and pay tax within two months after the end of the tax year.
  • Category C: individuals whose annual business turnover is below ETB100,000. They must file tax returns and pay tax within one month after the end of the tax year.

Double tax relief and tax treaties

Ethiopia has entered into double tax treaties with various coun­tries, including Algeria, the Czech Republic, France, India, Israel, Italy, Kuwait, the Netherlands, Romania, the Russian Federation, South Africa, Tunisia, Turkey, the United Kingdom and Yemen.

Foreign tax paid by residents may be claimed 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.

Types of visas

Ethiopia requires that visitors entering the country have an entry visa. The following are the types of visas that Ethiopia issues to foreigners:

  • Diplomatic visa
  • Special visas
  • Work visa
  • Immigrant visa
  • Tourist visa
  • Transit visa
  • Student visa
  • Exit visa
  • Reentry visa

Ethiopian embassies issue tourist visas. These visas are valid for a period of one, two or three months and, in exceptional cases, for a period of up to six months.

Depending on the duration of the work, a business visa is valid for up to three months. However, the regulations require an expa­triate to also obtain a work permit if he or she is working for more than 60 days. Ethiopian embassies issue a business visa after verifying the request submitted by the employer or by the Ethiopian client (the entity responsible for bringing the expatriate to Ethiopia).

Work permits

A work permit is a document issued to an expatriate to work in Ethiopia for a certain time period as requested by the employer and permitted by the Ministry of Labor and Social Affairs.

The Ministry of Labor and Social Affairs issues a work permit if it is satisfied with the application of the employer. Qualification is determined based on the educational merits and work experi­ence, which need to be proved to the satisfaction of the authori­ties. Nonreturnable copies of educational and experience certifi­cates need to be presented together with the originals for verifica­tion purpose. Expatriates should have the original documents required for the work permit application and be in the country at the time of application. Notarization by Ethiopian consular ser­vices is required for educational documents obtained from for­eign institutions.

The employer must justify the necessity of employing the for­eign employee for the particular position. The current Ethiopian Investment Proclamation states the following with respect to the employment of foreign professionals: “Any investor may employ, in accordance with the law, duly qualified senior expatriate experts and managers required for the operation of his business; provided that Ethiopians with comparable qualifications are not available, and the investor shall be responsible for replacing, within a limited period, such expatriate personnel by Ethiopians and for arranging the necessary training thereof.”

Residence permits

A residence permit is a document issued to a foreigner who is allowed to reside in Ethiopia by the Security Immigration and Refugees Affairs Authority.

In general, after a work permit is issued, an individual may obtain a resident permit from the Security Immigration and Refugee Affairs Authority. The residence permit is valid for one year and can be renewed annually. During the period of validity of the residence permit, the holder of the permit may travel freely to and from Ethiopia.

To change employees, consent must be obtained from the Ministry of Labor and Social Affairs.

Family and personal considerations

Work permits for family members. Family members must have resident permits. When the employer applies to the Security Immigration and Refugee Affairs Authority for his or her work permit, he must provide to the authority a full list and informa­tion regarding his or her family members who want to live with him or her in Ethiopia. This information includes names, pass­port numbers, nationalities and countries of residence. On re quest, family members may obtain residence permits based on their inclusion in this list. To be employed, family members must obtain a work permit even if they have a residence permit.

Driver’s licenses. A foreign driver’s license held by an expatriate employee is valid in Ethiopia if the foreign country accepts Ethiopian driver’s licenses. The Ethiopian Transport Authority, which is the authority for converting foreign driver’s licenses and issuing equivalent Ethiopian licenses, issues a list of countries whose driver’s licenses are acceptable in Ethiopia.

To obtain a converted driver’s license, the foreign license must be authenticated by the embassy of the expatriate’s home country located in Addis Ababa. The Ethiopian Ministry of Foreign Affairs then approves the foreign license. After reviewing the documen­tation, the Bureau of Transport and Communication issues an equivalent Ethiopian driver’s license.

An expatriate who does not have a valid driver’s license must pass an examination given by the Ethiopian Transport Authority to obtain a driver’s license.