EritreaTax Obligations Detailed

In Eritrea, employers face specific tax obligations, primarily regarding employee income tax and VAT, while employer payroll taxes are absent.

Employer Obligations

• Employer Payroll Taxes: There are no employer-specific payroll taxes in Eritrea.
• Employee Income Tax Withholding: Employers are responsible for withholding employee income tax, calculated at a flat rate of 2% of the employee's annual taxable income. This is a crucial responsibility for employers to ensure accurate deductions and timely payments to the tax authorities.
• Municipal Tax: A 4% municipal tax, based on the employee's salary, is paid by the employer to the local municipality where the employee resides. This functions similarly to a payroll tax, although it is technically levied on the employee's income.
• Value Added Tax (VAT): Businesses selling goods and services in Eritrea are subject to VAT, a consumption tax. The standard rate is 15%. The rate may differ based on the specific goods or services offered.
• Social Security Contributions: While some sources suggest the presence of social security contributions, confirmed details on rates and implementation are unavailable. This information should be clarified with local authorities or legal experts.

Employee Deductions

• Income Tax: Employees are subject to a 2% flat income tax rate on their annual taxable income. This means the tax burden remains consistent regardless of income level, unlike progressive tax systems.
• Rehabilitation Tax: A 2% rehabilitation tax is levied on employees' monthly income to support national development projects. This tax is separate from the income tax and contributes directly to specific government initiatives.

Additional Considerations

• Minimum Wage: While there's no national minimum wage, the public sector has a minimum pay of 360 ERN. Private sector wages are subject to market forces and negotiation.
• Payroll Cycle: Eritrea follows a monthly payroll cycle.
• 13th-Month Pay: No statutory requirement exists for 13th-month pay in Eritrea.

It is important to consult with local authorities or tax professionals for the most current and specific regulations, as tax laws can change. This information is current as of February 5, 2025, and might be subject to change.

Employee tax deductions in Eritrea primarily consist of income tax, a 2% rehabilitation tax, and a 4% municipal tax paid by the employer but based on the employee's salary. There is no VAT on services within Eritrea as of February 5, 2025.

Income Tax

Eritrea has a progressive income tax system, with rates ranging from 2% to 48% based on the employee's gross salary, including allowances and benefits. The specific income brackets and corresponding tax rates for 2025 are not available in the provided sources.

Rehabilitation Tax

All Eritrean residents, including employees, pay a 2% rehabilitation tax on their monthly income. This tax is separate from income tax and contributes to national development initiatives.

Municipal Tax

While paid by the employer, the municipal tax is calculated as 4% of the employee's salary. This tax revenue goes to the local municipality where the employee resides.

Value Added Tax (VAT)

Currently, services provided within Eritrea are not subject to VAT. However, there is a possibility of VAT implementation in the future. It's advisable to remain informed about potential changes in Eritrean tax legislation.

Social Security Contributions

Employers are responsible for contributing 8% of the employee's gross salary to the social security system. This contribution covers various benefits within the system. There is also a possible Skills Development Tax levied on employers, though the exact rate isn't specified in the provided sources. Employees do not directly contribute to social security.

Eritrea utilizes a sales tax system, not a Value Added Tax (VAT) system.

Sales Tax in Eritrea

Eritrea's sales tax system was established in 1994 and is governed by the Sales and Excise Tax Regulation 64/1994 and subsequent amendments. This system applies to both goods and services, with the sales tax on services often referred to as services tax.

Tax Rates

• 5%: Applies to specific locally produced and imported goods (e.g., certain dairy products, sugar, petroleum oils, some pharmaceuticals) and services (e.g., construction, internet services). The specific list of goods and services subject to this rate is detailed in the relevant legislation.
• 10%: Applies to specific services provided in Eritrea (e.g., telecommunications, legal services, consultancy services). As with the 5% rate, the specific list is detailed in the relevant legislation.
• 12%: This is the general rate applied to goods not falling under the exempt, 5%, or 10% categories.

Registration

There is no registration threshold for sales tax in Eritrea. All businesses involved in the supply of taxable goods or services are subject to the sales tax regulations.

Basis of Computation

The basis for calculating sales tax differs depending on the nature of the transaction:

• Locally produced goods: Wholesale price, inclusive of any excise tax.
• Imported goods: Cost, Insurance, and Freight (CIF) value plus customs duty and excise duty.
• Locally rendered services: The fee charged for the service.

Offsets/Refunds

Eritrean sales tax operates as a final tax. Offsets against payables or receivables are not permitted. There is no provision for refunds.

Exempt Goods and Services

While the complete list of exemptions is detailed within the Eritrean tax legislation, some examples include basic foodstuffs, electricity, educational services, financial services, certain machinery and parts, and medical supplies. It's essential to consult the official schedules within the legislation for a comprehensive understanding of applicable exemptions.

Eritrea's tax incentives primarily focus on attracting foreign investment and promoting specific sectors like export-oriented businesses.

Free Zones

• Tax Exemptions: Businesses operating within designated free zones are exempt from various taxes, including corporate income tax, personal income tax on profits, and taxes on bank interest and dividends.
• Eligibility: Investors engaged in trading, industry, storage, or other commercial activities within the free zones.

Export Incentives

• Tax Exemptions: Exports are exempt from export duties and sales taxes. Rebates are available for sales taxes paid on materials and inputs used in export production.

General Tax Provisions

• Loss Carryforward: Businesses can offset net losses incurred in one year against taxable income over the next five years.
• Dividend Taxation: Declared dividends are typically not subject to taxation.

Recovery and Rehabilitation Tax

• This is a 2% tax on the net income of Eritreans living abroad. Payment grants certain political and economic rights, such as land ownership.

Other Potential Incentives

While not explicitly detailed as formal tax incentives, certain sectors may benefit from specific provisions:

• Agriculture: Lower lease rates for land are available for agricultural activities.
• Mining: Specific tax regulations apply to mining activities, which might include incentives for investment. It's recommended to consult the applicable mining legislation (Proclamation No. 69/1995) for detailed information.

It is important to note that the Eritrean tax landscape might be subject to change and updates. It is recommended to verify the latest regulations and consult with relevant authorities for the most up-to-date and comprehensive information. This information is current as of February 5, 2025, and may be subject to changes. It is essential to confirm the current tax incentives and application procedures with the Eritrean government authorities before making investment decisions.