Capital gains, which is the profit realized from the transfer of capital assets, is taxed in Ethiopia. The tax forms part of the income tax system and it is found under Schedule D of the Income Tax Proclamation No. 286/2002.
Rates, exemptions and considerations
Gains obtained from the transfer of the following properties, either by sale or donation will be subjected to Income Tax payable at the following rates:
- Building held for business, factory, and office 15% (Fifteen percent)
- Shares of companies 30% (thirty percent). The following exchanges of shares of a resident company, party to reorganization in exchange for share in another resident company, are not considered as transfer of share.
- a merger of two or more resident companies;
- the acquisition or takeover of fifty percent (50%) or more of the voting shares and fifty percent (50%) or more of all other shares by value of a resident company, solely in exchange for shares of a party to the reorganization;
- the acquisition of fifty percent (50%) or more of the assets of a resident company by another resident company solely in exchange for voting participation with no preferential rights as to dividends of a party to the reorganization;
- a division of a resident company into or more resident companies; or
- a spin-off (a type of corporate transaction forming a new company or entity)
The value of shares given in exchange in the reorganization must be equal to the value of the original shares. And The Tax Authority will investigate the transfer for possible tax avoidance objective.
For individuals, gain obtained from the transfer of residential buildings is exempted from tax. But such building must be fully used for dwelling for two years prior to the date of transfer.
Council of Ministers Regulation No. 78/2002 provide the basis for computation of gains obtained from the transfer of capital assets.
Calculation of Capital Gains
Calculation of capital gains is made as follows:
- When calculating the gain realized from the transfer of capital assets, the basis of calculation of the tax is the historical cost of the building or the par-value of the share, as appropriate.
- The gain obtained from the alienation of capital assets is the gain realized over the historical cost of the building or the par-value of the share as appropriate, and inflation adjustment at a rate determined by the appropriate authority.
- In respect of buildings, taxes paid for the land and the building are allowed as deduction.
- When calculating the capital gain realized from the transfer of buildings, the cost registered with the appropriate government body at the time of issuance of permit for the construction of the building is taken to be the cost of constructing the building.
Tax payable on gain realized from the transfer of buildings is applicable only to buildings in municipal areas.