According to the Federal Income Tax Proclamation No. 979/2016 (hereinafter the Proclamation), tax is imposed on business income for each tax year at the rates specified below.

Business Income Tax Rates

As per the Proclamation, the tax rates are as follows:

1. Taxable business income of bodies (e.g., PLC, Share Company) is taxable at the rate 30%;
2. Taxable business income of other taxpayers (individuals and Micro Enterprises) is taxed in accordance with the following Table:

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Taxable Business Income

The taxable income of a taxpayer for a tax year is the total business income of the taxpayer for the year reduced by the total deductions allowed to the taxpayer for the year.

Taxable Income= Business income - (deductions + exemptions)

The taxable income of a taxpayer for a tax year is determined in accordance with the profit and loss, or income statement, of the taxpayer for the year prepared in accordance with the financial reporting standards, subject to any modifications made in the Proclamation, regulations made by the Council of Ministers, and directives issued by the Ministry. Thus the reader should consult these laws to identify the constituents of business income, deductions and exemptions in order to accurately calculate business income tax. 

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Business Income

The Proclamation under Article 21 states that business income of a taxpayer for a tax year shall include the following:

• the gross amounts derived by the taxpayer during the year from the conduct of a business, including the gross proceeds from the disposal of trading stock and the gross fees for the provision of services (other than employment income);
• the gross amounts derived by the taxpayer during the year from the investment of the capital of a business, including dividends, interest, and royalties;
• a gain on disposal of a business asset (other than trading stock) made by the taxpayer during the tax year;
• any other amount included in business income of the taxpayer for the tax year under the Proclamation.

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Deductions

Article 22 of the proclamation provides for expenditures that are subjected to deductions which include:

• any expenditure to the extent necessarily incurred by the taxpayer during the year in deriving, securing, and maintaining amounts included in business income;
• the cost of trading stock disposed of by the taxpayer during the year as determined in accordance with the financial reporting standards;
• the total amount by which the depreciable assets and business intangibles of the taxpayer have declined in value during the year from use in deriving business income as determined under Article 25 of this Proclamation;
• a loss on disposal of a business asset (other than trading stock) disposed of by the taxpayer during the year;
• any other amount allowed as a deduction to the taxpayer under this Proclamation for the year. For instance, the cumulative reading of article 24(1) and article 63 of the proclamation, stipulates that charitable donations are deducted from the total amount of business income.

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Exemptions

Article 65 of the proclamation is devoted to exempted incomes. Some of the exemptions are:

• an amount paid by an employer to cover the actual cost of medical treatment of an employee;
• travelling expenses paid to an employee recruited from place other than the place of employment on joining or completion of employment, including, in the case of a foreign employee, travel expenses from and to their country of origin, but only if the travel expenses have been paid pursuant to specific provisions of the employee’s contract of employment;
• food and beverages provided for free to an employee by an employer conducting a mining, manufacturing, or agricultural business;
• contributions by an employer to a pension, provident, or other retirement fund for the benefit of an employee provided the monthly total of contributions does not exceed 15% of the monthly employment income of the employee;
• a pension to the extent exempt from tax under the Private Organizations Employees Pension Proclamation.

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