Ethiopia’s Directive on Tax Incentives for Investment Expansion: Key Provisions and Benefits

Ethiopia’s latest directive on tax incentives for investment expansion, Directive No. 941/2023, aims to stimulate economic growth by providing substantial benefits to investors. This directive, which falls under the Investment Incentives Regulations No. 517/2022, offers key incentives such as income tax exemptions and duty-free importation of capital goods for businesses that expand or upgrade their operations. By understanding and leveraging these tax incentives for investment expansion in Ethiopia, businesses can significantly enhance their growth potential while contributing to the country’s overall economic development.

Introduction

Ethiopia’s Ministry of Finance has issued Directive No. 941/2023 to provide tax incentives aimed at encouraging the expansion and upgrading of investments. This directive, grounded in the Investment Incentives Regulations No. 517/2022, offers significant benefits such as income tax exemptions and duty-free importation of capital goods. This legal brief outlines the key provisions, conditions, and implications of these incentives for investors.

General Provisions

The directive is formally titled as “Directive No. 941/2023 to Provide for the Application of Tax Incentives for Expansion/Upgrading of Investments.” Key terms are defined in accordance with the Investment Proclamation No. 1180/2020 and the Investment Incentives Regulations No. 517/2022.

Incentives on Income Tax Exemption for Expansion or Upgrading of Existing Enterprises

Utilization of Incentives: Investors who expand or upgrade their enterprises can benefit from business income tax exemptions based on the scale of their expansion:

  • 50-70% Increase: Exemption on 60% of the tax payable on profits from the increased volume.
  • 71-90% Increase: Exemption on 80% of the tax payable on profits from the increased volume.
  • Over 90% Increase: Full exemption on 100% of the tax payable on profits from the increased volume.
  • 100% Increase in Variety or Volume: Exemption based on the attached schedule for new production or service lines.

Conditions for Eligibility: To qualify for such incentives, investors must:

  • Demonstrate engagement in production or service activities for at least 36 months.
  • Provide certified financial statements showing investment in modernization or increased production/service type.
  • Fulfill tax declaration obligations during any prior exemption periods.

Maintenance of Accounts: Investors must maintain separate accounts for income and expenses related to the expansion or upgrading, adhering to the apportionment rule under Article 76 of the Income Tax Proclamation No. 979/2016.

Incentives on Duty-Free Importation of Capital Goods and Building Materials

Criteria for Exemption from Customs Duties Investors can import capital goods duty-free if they:

  • Show a business plan indicating a volume increase of at least 50% or a 100% increase in variety.
  • Obtain special approval from the Ministry of Finance for cases where modernization benefits productivity and service delivery.

Miscellaneous Provisions

Liability: Investors and auditors who provide false or misleading documents to benefit from these incentives face legal penalties under the Tax Administration Proclamation No. 983/2016.

Effective Date: The directive is effective from its publication date on the Ministry of Finance’s website.

Conclusion

Directive No. 941/2023 underscores Ethiopia’s commitment to fostering investment growth through substantial tax incentives. By understanding and leveraging these provisions, investors can significantly benefit from income tax exemptions and duty-free importation, thereby supporting their business expansion and contributing to the nation’s economic development.

For detailed guidance and legal support on navigating these incentives, please don’t hesitate to get in touch with us..