EthiopiaTax Obligations Detailed

In Ethiopia, employers shoulder various tax obligations, including payroll taxes and contributions to social security.

Employer Obligations

• Social Security Contributions: Employers contribute 11% of an employee's basic salary to the social security system. This is mandatory for Ethiopian citizens and optional for foreign nationals of Ethiopian origin. Foreign nationals without Ethiopian origin are not eligible. Payment is due within 30 days of the deduction.
• Pension Fund Contributions: Employers contribute 11% of the employee's basic salary to the Private Organizations Pension Fund. This is overseen by the Private Organization Employees' Social Security Agency.
• Payroll Tax (PAYE): Employers withhold Pay As You Earn (PAYE) tax from employee salaries and remit it to the tax authorities by the end of the following month. The tax rates are progressive, ranging from 0% to 35% based on the employee's income. This system removes the need for employees to file separate tax returns for employment income.
• Corporate Income Tax: A flat rate of 30% is levied on corporate profits. A reduced rate of 25% applies to large-scale mining operations. Payment is due by the last day of the fourth month following the end of the tax year (July 8th - July 7th).

Employee Obligations

• Social Security Contributions: Employees contribute 7% of their basic salary to the social security system. This is mandatory for Ethiopian citizens and optional for foreign nationals of Ethiopian origin.
• Income Tax: Employees do not file separate returns for income earned through employment. PAYE is withheld and remitted directly by employers. However, if an employee has other sources of income, an annual tax return is due on either August 7th or September 7th, depending on their income level.

Additional Information

• Tax Year: The Ethiopian tax year runs from July 8th to July 7th.
• Minimum Wage: There is no national minimum wage, but a monthly amount of 420 ETB is recommended for the public sector.

Please note that this information is based on the latest available data as of February 5th, 2025, and might be subject to change due to legislative updates or other factors.

In Ethiopia, employee tax deductions encompass various areas, including income tax, pension contributions, and withholding tax, impacting both employers and employees.

Income Tax

• Taxable Income: Includes employment income, business profits, and investment income.
• Tax Rates: Progressive rates apply to employment income. Consult the tax brackets for specific rates and deductible fees based on monthly salary.
• Tax Withholding: If income is solely from Ethiopian employment, tax is withheld at the source. Other income sources require filing an Ethiopian Personal Income Tax Return (Form PIT 1).

Pension Contributions

• Mandatory Contributions: Compulsory for Ethiopian citizens employed by private organizations registered with the Private Organisation Employees Social Security Agency. Optional for foreign citizens of Ethiopian origin. Not applicable to other foreign nationals.
• Contribution Rates:
  • Employer: 11% of the employee's basic salary.
  • Employee: 7% of their basic salary.
• Payment Deadline: Within 30 days from the deduction date.
• Non-Compliance: Failure to remit contributions for three months allows the Social Security Agency to deduct arrears from the company's bank account.

Withholding Tax (WHT)

• Obligation: All entities and specified sole proprietors must deduct WHT on domestic transactions.
• Rates: Generally 2% of the transaction value. 30% if the supplier fails to provide a Taxpayer Identification Number (TIN) and valid trade license.
• Thresholds:
  • Services: ETB 3,000
  • Goods: ETB 10,000
• Remittance: Monthly to the tax authority.

Other Deductions

• No provisions exist for deductions related to employment expenses, alimony, charitable contributions, childcare, life insurance premiums, or mortgage interest.
• No standard deductions or personal allowances are available.

Additional Information

• Residency: Individuals residing in Ethiopia for over 183 days in a 12-month period are considered residents for tax purposes. Residents are taxed on worldwide income, non-residents only on Ethiopian-sourced income.
• Union Dues: Employers are legally obligated to deduct union dues from employee salaries and transfer them to the union's bank account upon employee consent.
• Tax Year: July 8th to July 7th.
• Further Information: Always consult with a tax professional for personalized guidance. Tax laws and regulations are subject to change, and this information is current as of February 5, 2025.

In Ethiopia, Value Added Tax (VAT) is a consumption tax levied on most goods and services.

VAT Rates and Thresholds

• Standard Rate: 15% applies to most goods and services.
• Zero Rate: 0% applies to exports, international transport, and gold.
• Exempt Supplies: Basic foodstuffs, fuel, electricity, postal services, medicine, dwellings, education, books, and financial services are exempt. As of June 20, 2024, previously VAT-exempt goods like certain cereals, pulses, agricultural inputs, prepared foods, capital goods, and medical items are also exempt.
• Registration Threshold: Mandatory registration is required if your taxable turnover surpasses ETB 2,000,000 (approximately US$17,500 as of October 2, 2024) in any 12-month period. Voluntary registration is possible for businesses below this threshold. Note: Non-resident digital service providers are also subject to VAT if they meet the registration threshold.

Filing and Payment

• Filing Frequency: Monthly for businesses with annual turnover of ETB 70,000,000 or more. Quarterly for businesses below this threshold.
• Deadlines: VAT returns must be submitted by the last day of the month following the reporting period. For example, returns for January are due by the last day of February.
• Payment: VAT is typically due at the time of import for imported goods. For other supplies, payments are due with the return submission by the last day of the month following the reporting period.

VAT Invoices

VAT invoices must include:

• Your business name and address
• Your VAT registration number
• Invoice date and sequence number
• Buyer's name, address, and VAT registration number (if applicable)
• VAT amount and rate applied to each item
• The final amount after tax
• Currency used

Administration

The Ethiopian Revenues and Customs Authority (ERCA) administers VAT.

General Information About Ethiopian VAT

• The VAT system was introduced in 2003 and has undergone several revisions, with the most recent being Proclamation No. 1341/2024. This proclamation seeks to modernize the VAT system, especially concerning electronic transactions and non-resident businesses providing digital services.
• Ethiopia uses a CIF (Cost, Insurance, and Freight) method for calculating import duties and taxes, meaning these are calculated on the combined value of goods, shipping, and insurance.
• Penalties can be imposed for late filing, late payment, or other non-compliance with VAT regulations.
• While this information aims to provide a comprehensive overview, consulting with a tax advisor is always recommended for specific business situations and up-to-date guidance, especially due to frequent changes in regulations. This information is current as of today, February 5, 2025, and might change due to legislative updates or adjustments in tax policy.

Ethiopia offers a range of tax incentives to attract investment and stimulate economic growth. These incentives encompass various sectors and activities, including manufacturing, agriculture, ICT, and export-oriented businesses.

Income Tax Incentives

• Tax Holidays: New businesses are generally eligible for income tax holidays ranging from one to six years, depending on the sector and location of the investment. Businesses located in underdeveloped regions with poor infrastructure may receive additional incentives. As of January 14, 2025, further amendments to tax incentives have been proposed and are awaiting official publication in the Negarit Gazette.

• Investment Expansion/Upgrade: Businesses expanding or upgrading existing operations and increasing production capacity by at least 50%, or introducing a new production line by at least 100%, are entitled to income tax exemptions.

• Export-Oriented Businesses: Investors who export at least 60% of their products or services, or supply to an exporter, may receive an additional two-year income tax exemption. This is in addition to the standard tax holiday benefits.

• Industrial Parks: Industrial park developers can benefit from income tax holidays of up to 15 years. Enterprises operating within industrial parks may receive income tax holidays of up to 10 years.

• Employment Incentives: As per the proposed amendments from January 14, 2025, companies employing a significant number of Ethiopian citizens will be eligible for income tax exemptions, scaled according to the number of employees. Employing 2000–3000 Ethiopians grants a 1-year exemption, 3001–5000 a 2-year exemption, and over 5000 a 3-year exemption.

Duty Exemptions

• Capital Goods and Raw Materials: Exemptions from customs duties and other taxes on imported capital goods, construction materials, spare parts, raw materials, and vehicles used for investment projects are available.

Other Incentives

• Loss Carry Forward: Losses incurred during the tax holiday period can be carried forward for a period equivalent to half the duration of the tax exemption period.

General Information on Taxes in Ethiopia

Value Added Tax (VAT) is applicable at a standard rate of 15%. Customs duties range from 0-15%. Excise tax rates vary based on product type, from 0-35%. There is also a withholding tax, the rates of which span from 0-100%. These are general rates and can be subject to specific exemptions or reductions based on the applicable incentives. Foreign investors are guaranteed against expropriation or nationalization under the Ethiopian Constitution and Investment Law. Repatriation of profits, dividends, and loan repayments in convertible currency is permitted. Ethiopia has double taxation avoidance treaties with several countries.

It's important to note that tax regulations and incentive programs can be subject to change. The information provided here is based on the latest available information as of February 5, 2025. It is advisable to consult with relevant authorities or tax professionals for the most current and specific details pertaining to individual investment projects.