Ethiopian investment incentive schemes are generally outlined in the following major laws:
|Investment Proclamation No. 1180/2020||DOWNLOAD|
|Council of Ministers Investment Regulation No. 474/2020||DOWNLOAD|
|Council of Ministers Investment Incentives Regulation No. 517/2022||DOWNLOAD|
|A Directive to Provide for the Application of Tax Incentives for Expansion/Upgrading of Investment - No. 941/2023||DOWNLOAD|
|Customs Proclamation No. 859/2014||DOWNLOAD|
|Customs Proclamation Amendment No. 1160/2019||DOWNLOAD|
|Excise Tax Proclamation No. 1186/2020||DOWNLOAD|
|Income Tax Proclamation No. 979/2016||DOWNLOAD|
|Export Trade Duty Incentive Schemes Proclamation No. 768/2012||DOWNLOAD|
According to these laws, there are three types of incentives under the Ethiopian Investment Incentive Scheme:
The reader is advised to consult the above stated laws to have a comprehensive understanding of Ethiopian investment incentives scheme.
1. Fiscal Incentives
Fiscal incentives are tax measures geared to encourage industrial development designed to assist manufacturing entrepreneurship. The fiscal incentives under the current legal system are incentives relating to customs duty, income tax duty, and export incentives.
Customs Duty Exemptions
Customs duty exemptions are applicable to both domestic and foreign investors engaged in eligible new enterprises. Customs duty exemptions are only to be set by the Ministry of Finance.
Income Tax Exemptions
The new investment proclamation indicates that the council of ministers will issue a regulation providing income tax exemptions. Further, there are some government organs empowered to provide incentives for specific sectors. For instance, the Ministry of Innovation and Technology is vested with the power to establish and implement system for incentives to investors contributing to the advancement of innovation and technologies development works. The Environment, Forest and Climate Change Commission is empowered to establish incentives to encourage prevention of environmental degradation or pollution.
Fiscal incentives available to all exporters include:
- With the exception of a few products (e.g. semi-processed hides and skins-150%), no export tax is levied on Ethiopian export products
- Duty Drawback Scheme: this scheme offers investors an exemption from the payment of customs duties and other taxes levied on imported and locally purchased raw materials used in the production of export goods. Duties and other taxes paid are drawn back 100 percent at the time of the export of the finished goods. The beneficiaries of this scheme are producer exporters, indirect producers, raw material suppliers and exporters.
- Voucher Scheme: A voucher book means a document printed by the Ministry of Revenue, to be used for recording the balance of duty payable on raw materials imported or bought from bonded input supplies warehouse, for use in the production of goods for external market by persons availing themselves of the voucher scheme. In plain words, a voucher is a printed document having monetary value, which is used in lieu of duties and taxes payable on imported raw materials. Exporters cannot be the beneficiaries of the voucher scheme rather producer exporters, indirect producers and raw material suppliers.
- Bonded Factory and Manufacturing Warehouse Schemes: producers not eligible for voucher scheme but having licensed for bonded are entitled to operate such factory or warehouse in importing of raw materials duty free. Beneficiaries of this scheme are persons who are engaged in the production of export commodities. Additionally them must have a manufacturing plant which meets the national standards and obtain a certificate of eligibility.
Another common form of fiscal incentive to encourage foreign and domestic investment is to allow certain rights against an applicable business tax. In this regard, the Ethiopian Income Tax Proclamation No.979/2016 accords two basic rights for investors; loss carry forward and foreign tax credit. Loss carry forward allows an investor to carry a loss (where a total amount of allowed deductions exceed the total amount of the business tax in a given tax year). An investor cannot carry forward a loss of a given fiscal year for more than two years.
Investors are also entitled to a foreign tax credit for a foreign business income. This means that an investor (who is a resident) is allowed a tax credit where he has paid a foreign income tax in respect of a business income tax. However, a resident is only allowed if he/she/it has paid the foreign income tax within 2 years after the end of the fiscal year and produces a receipt for the tax from the foreign tax authority.
Further, investors are also allowed to deduct certain expenditures from a taxable business income; particularly, a cost of trading stock disposed by the tax payer during the fiscal year.
2. Non-fiscal Incentives
Non- fiscal incentives are given to all investors who produce export products. Such investors will be allowed to import machinery and equipment necessary for their investment projects through suppliers’ credit and franco-valuta basis. Franco-vaulta means using one’s own hard currency to import an item instead of applying for it and getting permission from the government.
A foreign investor has the also a right to make the following remittances out of Ethiopia in convertible foreign currency; profits and dividends; principals and interest payments on external loans; payments related to technology transfer agreements; proceeds from the sale or liquidation of an enterprise; compensation paid to an investor; and proceeds from the sale or transfer of shares or partial ownership of an enterprise to a domestic investor.
Another form of non-fiscal incentives is external loan. The Investment Proclamation entitles investors the right to acquire external loan as long as it is in accordance with the external loan directive of the National Bank of Ethiopia (NBE). According to this directive, an investor is required to obtain a guarantee or approval from the Government or the NBE before concluding a loan agreement.
The investment proclamation further entitles an investor to open a foreign currency account in banks in Ethiopia for the purpose of its investment as per the applicable directive of the National Bank of Ethiopia.
3. Financial Incentives
Financial incentives are grants that may be provided by the government to foster the success of firms in selected sectors. These grants may be provided by the government as investment grants or ―direct subsidies‖ which may cover the entire or substantial part of capital, production or marketing costs in relation to an investment project.
These are some of the financial incentives under the current scheme:
- Guarantee by Development Bank of Ethiopia (DBE) that covers 80% of loan and interest provided by commercial banks to exporters with bankable export project except for coffee export.
- DBE grants a soft loan for strategic investment projects, mainly by domestic investors, in priority sectors (agriculture, agro processing, manufacturing and extractive industries). Repayment term goes up to 20 years and interest rate ranges between 9-9.5% depending on export capability. Also longer grace period (up to five years) is provided, and the project itself is taken as collateral.
- Domestic investors engaged in the manufacturing sector and undertaking their investment in industrial parks (with export orientation) can access 85% start-up loan from the DBE. (See Development Bank of Ethiopia's Credit Policy, which is available here, for further information on the above three incentives)
- The DBE grants a Soft loan for capital goods/machinery purchase by SMEs (domestic businesses with paid up capital ranging between ETB 500,000 - ETB 7.5 million). DBE finances full cost of machinery including installation cost (ETB 1 million - 30 million) using the capital good/machinery as a collateral; interest rate of about 9%; repayment schedule goes up to five years with grace period of about six months after commissioning/commencement of production or service provision. However, the investor has to contribute at least 20% of the machinery value for running cost. Ownership is transferred up on full repayment.