Transfer pricing
The Ethiopian transfer pricing rules are in accord with the OECD Transfer Pricing Guidelines. The Ethiopian Revenue and Customs Authority is empowered to distribute, apportion, or allocate income, gains, deductions, losses, or tax credits between parties to a non-arm’s length transaction as is necessary to reflect the income, gains, deductions, losses, or tax credits that would have been realised in arm’s length transaction.
On the other hand, a taxpayer may request that the Tax Authority enter into an advance pricing arrangement (APA) to agree an appropriate set of criteria for the determination of the arm’s length conditions for certain future controlled transactions over a fixed period of time. A taxpayer has an obligation to provide details of transactions with related persons in order to verify that the transactions are consistent with the arm’s length principle.
Stamp duty
Stamp duty is payable on a range of legal instruments, including:
- memoranda and articles of association – Birr 350 upon first execution and Birr 100 upon any subsequent execution;
- contracts, agreements and memoranda – Birr 5;
- security deeds – at 1% of the value of the deed;
- awards – 1% of the value of the award if the value is determinable; and Birr 35 if the value of the award is undeterminable;
- bonds – 1% of the value of the bond;
- warehouse bonds – 1% of the value of the bond;
- collective agreements – Birr 350 on first execution and Birr 100 on any other subsequent execution;
- leases, sublease and subsequent transfer thereof – 0.5% of the value;
- notorial acts – Birr 5;
- powers of attorney – Birr 35;
- contracts of employment - 1% of the salary; and
- registers of title to property - 2% of the value of the property.
Exchange control
The National Bank of Ethiopia (NBE) regulates entry and remittance of foreign currencies through directives applicable to residents and foreigners. Nearly all outgoing and some incoming foreign currencies are regulated. Foreign investors may open foreign exchange accounts in commercial banks with the NBE's approval and, subject to the exchange regulations of the NBE, a person with a foreign exchange account can remit foreign currency abroad.
Losses
Investors who have incurred losses within the period of income tax exemption can carry forward such losses for a further half of the income tax exemption period following the expiry of the original exemption period.
A loss incurred in a tax year may be set off against taxable income in the following five tax years, provided that:
the same person holds more than 50% of the underlying ownership of the body (compared against the loss year); and the taxpayer’s books of account displaying the loss are audited and accepted by the Authority.
As an exception, a body that experiences an ownership change of greater than 50% will be allowed to carry forward the loss if:
- the body conducts the same business in the loss year, the intervening year and the carry forward year; and
- either:
- no new business activity is entered into before the loss has been fully deducted; or
- if a new business activity occurs, it was not entered into with the principal purpose of utilising the body’s tax losses.
Yet, if there has been two tax years in which a taxpayer has incurred a loss, and each of the losses have been carried forward, the taxpayer is not permitted to carry forward any further losses.
Loss carry back is also allowed for long term contracts. If a taxpayer under a long term contract experiences a final year loss in relation to the contract, then the taxpayer may carry forward the loss. However, this is prohibited if the taxpayer ceases to carry on business in Ethiopia at the end of the contract.
However if there have been two tax years in which a taxpayer has incurred a loss, and each of the losses have been carried forward, the taxpayer is not permitted to carry forward any further losses.
Interest
Foreign borrowings for non-residents who receive interest from an Ethiopian source must pay 10% tax, calculated from the gross amount of the interest. Residents and non-residents with permanent establishment in Ethiopia receiving interest income from savings deposits with an Ethiopian resident financial institution pay tax at the rate of 5%. Residents pay 10% tax on any other interest income they derive.
Withholding Tax
A business person importing goods for commercial use is obligated to pay an advanced payment of business income tax equal to 3% of the CIF value of the goods.
Except for micro-enterprises, bodies having legal personality, government agencies, non-profit organisations, and non-governmental organisations have a duty to withhold tax at the rate of 2% of the gross amount of payment, in relation to:
- the supply of goods involving more than 10,000 Birr in single transaction or supply contract; and
- supply of services involving more than 3,000 Birr in single supply contract.
Personal income tax
If an individual is an Ethiopian resident, he will be taxed on his worldwide income. If the income originates from an Ethiopian source, non-residents are obligated to pay tax in Ethiopia.
The Ethiopian income tax system is a schedular system in which different rate schedules are applicable to different sources of income.
Employment Income Tax
The provided marginal tax rate is applicable for monthly employment income:
- First Birr 600 is tax free
- Next Birr 601-1,650 taxed at 10%
- Next Birr 1,651-3,200 taxed at 15%
- Next Birr 3,201-5,250 taxed at 20%
- Next Birr 5,251-7,800 taxed at 25%
- Next Birr 7,801-10,900 taxed at 30%
- Above Birr 10,900 taxed at 35%
Rental Income Tax
- The first Birr 7,200 is tax free
- Next Birr 7,201-19,800 taxed at 10%
- Next Birr 19,801-38,400 taxed at 15%
- Next Birr 38,401-63,000 taxed at 20%
- Next Birr 63,301-93,600 taxed at 25%
- Next Birr 93,601-130,800 taxed at 30%
- Above Birr 130,800 taxed at 35%
Individuals obtaining business income pay taxes at the following rates
- The first Birr 7,200 is tax free
- Next Birr 7,201-19,800 taxed at 10%
- Next Birr 19,801-38,400 taxed at 15%
- Next Birr 38,401-63,000 taxed at 20%
- Next Birr 63,301-93,600 taxed at 25%
- Next Birr 93,601-130,800 taxed at 30%
- Above Birr 130,800 taxed at 35%
Taxes on other incomes
- 5% on Royalty
- 5% on insurance premiums that a non-resident earns from Ethiopia
- 10% on dividends
- 10% on interest
- 15% on management or technical fees that a non-resident earns from Ethiopia without having a permanent establishment
- 10% on income from performances by non-resident entertainers
- 15% on income from games of chance
- 15% on income from casual rental of asset
- 15% on capital gains from immovable assets
- 30% on capital gains from shares and bonds
- 10% on undistributed profits
- 10% on repatriated profits by body conducting business in Ethiopia through a permanent establishment
- 15% on other income
Value added tax
VAT is levied on goods and services provided by persons registered for VAT. Persons are required to be registered for VAT if their annual turnover exceeds Birr 1,000,000. VAT is currently charged at the rate of 15% of the value of the goods and services. Subject to certain qualifications, export goods and services are taxed at rate of zero percent.
Capital gains tax
Gains on disposal of immovable assets are subject to capital gains tax at the rate of 15%; while gains on disposal of shares and bonds are taxed at the rate of 30%.
Payroll tax and social security
Please see above under employment tax in regards to payroll tax. In respect of Ethiopian citizens, employers and employees must make monthly contributions of 11% and 7%, respectively, of the employment income to the pension scheme.
Technical service fees
A non-resident who derives technical fees from Ethiopia is subject to withholding tax at the rate of 15%. A non-resident individual is an individual who is not:
- domiciled in Ethiopia;
- present in Ethiopia for more than 183 days in one year period; or
- an Ethiopian citizen posted abroad as a consular, diplomatic official or similar official.
An entity is non-resident if it is not incorporated or formed in Ethiopia or if it does not have a place of effective management in Ethiopia.
Dividends
Tax is imposed at the rate of 10% on dividends paid by an Ethiopian resident company. Similarly a 10% tax is levied on dividends from an Ethiopian source that are attributable to a permanent establishment of a non-resident in Ethiopia.
Corporate income tax
Corporate income tax is payable each year on the profits of a company at the rate of 30%. Other entities that are analogous to companies, referred to as “bodies” within the Income Tax Proclamation, are subject to corporate income tax at the same rate.
A body is defined as company, partnership, public enterprise or public financial agency, or other body of persons whether formed in Ethiopia or elsewhere. Bodies pay tax on their sources of income as detailed below:
- 5% on royalty
- 5% on insurance premiums that a non-resident earns from the insurance of a risk in Ethiopia
- 10% on dividends
- 10% on interest
- 15% on management or technical fees that a non-resident earns from Ethiopia without having a permanent establishment
- 10% on income from performances by non-resident entertainers
- 15% on income from games of chance
- 15% on income from casual rental of assets
- 15% on capital gains from immovable assets
- 30% on capital gains from shares and bonds
- 10% on undistributed profits
- 10% on repatriated profits by a non-resident conducting business in Ethiopia
- 15% on other income
Royalties
A resident of Ethiopia who derives royalty and a non-resident who earns royalty from an Ethiopian source are subject to a 5% tax on royalties.
Thin cap regulations
Foreign controlled resident companies and permanent establishments in Ethiopia whose average equity ratio in a tax year is in excess of 2:1 are disallowed an interest deduction for the excessive debt paid in the tax year. Nevertheless, this rule does not apply if the amount of the average debt does not exceed the amount that a financial institution would be prepared to lend to the company in an arm’s length transaction, having regard to all the circumstances of the company.
A foreign controlled resident company is defined as a resident company in which more than 50% of the membership interests in the company are held by a non-resident person either alone or together with a resident person or persons. Average debt is calculated by dividing the sum total of a company's debt at the end of each calendar month in a tax year by twelve. A similar calculation is made for average equity for a tax year.
Real property tax
Land and buildings are subject to annual property taxes also known as roof tax. The government of Ethiopia currently has tabled a new property tax law for public discussion.
Export processing zone
Export processing zones are included in Industrial Parks. An Industrial Park is defined as an area with a distinct boundary designated by the appropriate organ, intended to develop comprehensive, integrated, multiple or selected functions of industries. It must be equipped with infrastructure and various services such as road, electric power and water (i.e. a one stop shop) and have special incentive schemes aimed at achieving planned and systematic development of industries, mitigation of the impacts of pollution on environment and human beings, and the development of urban centres.
Industrial Parks comprise of special economic zones, technology parks, export processing zones, agro-processing zone, free trade zones and the like, designated by the Investment Board. Industrial parks, including export processing zones, operating in Addis Ababa and the Special Zone of Oromia surrounding Addis Ababa enjoy an income tax exemption for 10 years, while those operating in other areas enjoy an income tax holiday for 15 years.
A foreign or a domestic investor can participate in export processing zones as an industrial park developer, industrial park operator or industrial park enterprise.
An industrial park developer is any profit-making public, public-private or private developer engaged in designing, constructing or developing industrial parks in accordance with the investment laws, industrial park enterprise permits and industrial park enterprise agreements.
Industrial park operator, on the other hand, is any profit making enterprise that operates, maintains or promotes industrial parks in accordance with the investment laws, industrial park enterprise permit and industrial park enterprise agreement.
An industrial park enterprise is a public, private or public-private enterprise owned by Ethiopians, foreigners or jointly by foreigners and Ethiopians. It possesses developed land under the industrial park via a sub-lease or by renting or building a factory within the industrial park to engage in manufacturing activity or in service provision for profit.
An industrial park developer, industrial park operator or industrial park enterprise should obtain investment permit and register its business.
