Setting Up New Business in Ethiopia

Located in the horn of Africa, Ethiopia is the largest country in the Easter sub-region next to the Republic of Sudan of over 1.14 million square kilometers of land area about 13.2 million hector of 12% is cultivable, 40% is pastureland and this together with seasonal rainfall and abundant water resource has made agriculture the mainstay of the country’s economy. Due to this Ethiopians, engaged on foreign trade, export are mainly dominated by agricultural products such as coffee, oilseeds & pulses, hides and skin and in manufacturing, textile and garments leather and leather products also make sizable contribution to export.

Current data shows that investment is rising and the economy is growing at an unprecedented rate and tangible progress in Ethiopia. Moreover, both local and foreign investors are in venture in business now. The number of tourist arrival is also increasing at significant rate.

Types of Business Entities

Ethiopian law recognizes six different kinds of business entities. Therefore in Ethiopia business can be carried out in one of the following six different kinds of business forms. These are Sole Proprietorships, Partnership, General Partnerships, Limited Partnerships, Share Companies, Private Limited Companies, and Joint Ventures. Let’s have a brief look at them.

Share Company

A share Company will be established as per the 1960 Commercial Code of Ethiopia and the Ethiopian Investment Laws. The purpose of the company is free but there are a few sectors limited to citizens and the public sector. The minimum number of founders of a share company is five in number. The company can be formed with a minimum capital of ETB 50,000. The share company liability is limited to the assets of the company. The cost of its incorporation is less than USD 150. Formal registration or investment certificate is required. The company’s name shall be as agreed among the share holders and shall not offend public policy nor the rights of third parties and shall include the words “share company”. Memorandum of understanding and articles of association is required. Full subscription of capital, in addition to at least 25% of the capital paid up capital. Contribution of share holder’s equity and sole of shares plus other financial sources is necessary.

Income tax of share holders is based on the amount of divides with progressive rate.

Private limited company

It will be established as per The 1960 Commercial Code of Ethiopia and the Ethiopian Investment Laws. The purpose of the company is free but there are a few sectors limited to citizens and the public sector. The minimum and maximum number of members of a private limited company is two and fifty respectively. The minimum capital requirement to establish a Private limited company is ETB 15,000. The Liability of a Private Limited Company is limited to the company’s assets. The cost of incorporation for private limited company is not less than SOUSD.

The company name shall be as agreed but with disclosing the nature of business in it and shall include the words “private limited company”

Moreover duly signed memorandum of understanding and Article of association is required.

The sources of credit of a private limited company is from contribution of share holders equity and other financial sources income tax of share holders based on amount of dividends with progressive tax rate.

Joint Venture

A foreign investor may team up with a domestic investor or company for a joint investment, usually in the form of partnership or private limited company or share company. Under the investment proc.282/2002 a minimum capital of USD 60,000, except in consultancy service and publishing, is required from a foreign investor who intends to enter into a joint venture partnership with a domestic investor. There is no restriction at all in share ownership in a joint venture. A foreign investor who wishes to invest in partnership with domestic investors in areas of engineering, architecture, accounting and auditing services, project studies or business and management consultancy services or business and management consultancy services or publishing is required to invest USD 25.000 only per project. The foreign partner can satisfy this minimum equity capital either in cash and /or in kind.

Company Registration

All foreign companies intending to invest in Ethiopia are required by law to get registered in accordance with the commercial code of Ethiopia. The Ethiopian Investment Commission, representing the Ethiopian Ministry of Trade and Industry, carries out such company registration.

Opening a Branch Office of an Overseas Company

An overseas company wishing to invest through a branch office is required to submit the essential documents to the Ethiopian Investment Commission. Foreign companies wishing to open liaison offices must submit their application to the Ministry Of Trade And Industry.

Even though, in Ethiopia, land is a public property both rural and urban lands are made available to investors at competitive price on a lease hold bases which run from 50-99 years.

Visas are required for all for all foreign visitors to Ethiopian with the exception of nationals of Kenya and the Sudan. Visas may be available before departure or upon arrival. The main department for immigration and nationality affairs issues a residence permit to a foreign investor, upon submission of an investment permit issued in his/her name.

Investment opportunities

Ethiopian’s investment code provides incentives for development related investments reduces capital entry requirements for joint ventures , permits the duty free entry of capital goods ( except computers and vehicles), opens the real estate sector to expatriate investors, extends the losses carried forward provision , cuts  the capital gains tax from 40 -10% and gives priority to investors in obtaining land for lease.

The exclusive right to generate and supply electricity other than from hydropower, above 25 megawatts, air transport service using aircraft with a seating capacity of more than 20 passengers or with a cargo capacity greater than 2700 kms, rail transport services or telecommunication services including the internet only in partnership with the government are the sectors that are reserved for the government of Ethiopia.

Foreign investment in Ethiopia

A foreign investor is allowed to invest in all areas of investment except those reserved for the government, Ethiopian nationals and other domestic investors.  Foreign investment in Ethiopia is regulated as described in proclamation number 280/2002.  According to this proclamation a foreign investor who intends to invest on his /her own, except in consultancy services and publishing is requires investing not less than USD 100,000 in cash and/or in kind as an initial investment capital per project. The minimum capital regard of a wholly foreign investor investing in consultancy, Services or publishing USD 50,000 which may be in cash and/or in kind.  a foreign investor reinvesting his/her profit or dividends or exporting 75% of his /her out puts ,however, is not required to allocate minimum capital .

Investment Incentives

To encourage private investment and promote the inflow of foreign capital and technology into Ethiopian, the following incentives are granted to both domestic and foreign investors engaged in areas eligible for investment incentives.

1.   Customs Import Duty

One hundred 100% exemption from the payment of import customs duties and other taxes levied on imports is granted to an investor to import all investment capital goods such as plant machinery and equipment, construction materials as well as spare parts worth up to 15% of the value of the imported investment of capital goods provided that goods are not produced locally in comparable quantity, quality and price. Exemptions from customs duties or other taxes levied on imports are granted for raw materials nece3ssory for the production of export goods.

2.   Exemption From Payment Of Export Customs Duties

Ethiopian products and services destined for export are exempted from the payment of any export tax and other taxes levied on exports.

3.  Income Tax Holidays

Any income derived from an approved new manufacturing and agro-industry investment or investment made in agriculture shall be exempted from the payment of income tax. For the period ranging from 2-6 years profit tax holiday is granted subject to council of ministers regulation Number 8412003 issued on the bases investment proclamation No 280/2002 moreover, the council of Ministers may also award profit tax holiday for greater than seven years. The period of exemption from profit tax begins from the date of the commencement of production or provision of services as the case may be.

4.  Loss carried forward

Business enterprises that suffer losses during the tax holiday period can carry forward such losses for half of the income tax exemption period following the expiry of the exemption period.

5.  Guarantees to investors

  • Repatriation of capital and profits
  • Guarantee against Exportation
  • Ethiopian is a member of the world Bank-affiliated Multilateral Investment Guarantee Agency( MI GA)which issues guarantees against non- commercial risks to enterprises that invest in signatory courtiers Ethiopia his also signed the world Bank treaty” the International convention on settlement of investment disputes between states and Nationals of other states ( ICSID)

Taxation

The principal taxes currently in place are the Profit Tax; Turn Over Tax/Value-Added Tax (VAT), Excise Tax, Customs Duty and Income Tax from Employment. The corporate income tax (tax on profit) in Ethiopia is 30% percent.

Principal Taxes Tax rate
Corporate income tax 30%
Turnover Tax (TOT) 2% and 10%
Excise tax 10% up to 100%
Customs duties 0% up to 35%
Income tax from Employment 0% up to 35%
Export tax ———————
With holding taxes 2 %
Value added tax 15%

Tax treaties

Ethiopia has concluded tax treaties with a number of countries and is also ready to conclude similar treaties with other countries for the purpose of a voidance of double taxation.

Patents and Trademarks

Regulations for the registration of patents and trademarks exist in Ethiopia.

Fikadu Asfaw practices law in Addis Ababa, Ethiopia and is a member of the LawGuru Attorney Network.

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