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Document Information:
- Year: 2002
- Country: Ethiopia
- Language: English
- Document Type: Domestic Law or Regulation
- Topic: Taxation and Fiscal Issues
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FEDERALNEGARIT GAZETA
OF THE FEDERAL DEMOCRATIC REPUBLIC OFETIDOPIA
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Iuni 8th
Year No. 34
ADDIS ABABA-41hJuly. 2002
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+*’P”f’) f”‘IIt,…,c’i A”‘Ih,”~-r..hJlh 9′”/)&-tf. fhL'”OODtr).J CONTENTS
Proclamation’ No. 286/2002 Income Tax Proclamation page 1867
. PRQCLAMATION NO. 286/2002
.’ INCOME TAX PROCLAMATION
WHEREAS, the Declaration on Economic Policy of the
Government of the Federal Democratic Republic of Ethiopia inaugurates a new era in social ari’d economic relations and
institutions in this country;
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O~’ 10f WHEREAS, in consequence of these developments, the
Fe~-r tD-h1′ hf+ff~ f1.{1.9′”‘)””,”fhOlf.U’&-flTtD- f1,)”11existing system of Income Tax needs to be changed and
~h ~,e, ODGIf9”f .?e~’It’Pdl1: “’11:1 , hhL”‘LOODtr).Jadjusted to the basic principles of fiscal treatment in a free
market economy;
.
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WHEREAS, it is believed thatmodernizing the tax system
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and broadening the tax base promotes economic growth by
fh.,tlt;”!, 61:1-r A”‘I9′”ITfT f”‘U..,lI0011′), ht;t-OD~O-rJ encouraging saving and investment;
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~’i(Ili) ODU’I.-r fOlf.h.,.flD. NOW, THEREFORE, in accordance with Article 55(1)
;t-tD-~Ad and (11) of the Constitution, it is hereby proclaimed as
9′”6&-tf. li follows:
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Unit Price CHAPTER I
Substantive Provisions
Section1
General
1. Short Title
This Proclamation may be cited as the “Income Tax
Proclamation NO.286/2002″
2. Definitions
In this Proclamation, the meanings of terms defined in
other laws of Ethiopia apply unless a different meaning is expressly provided herein. For the purposes of this
Proclamation the following terms shall have the
meanings given to them hereunder:
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-0(1+’ . F!IdnI Neaari! Gueta No. 34 4- July, 2002 Page 1868
l)”Person” shall mean any individual, body, or as- sociation of persons (including a business represen-
tative residing and doing business in Ethiopia on behalf
of the principal).
2) “Body” shall mean any company, registered part-
nership, entity formed under foreign law resembling
a company or registered partnership, or any public
enterprise or public financial agency that cmies out
, business activities including body of persons cor-
porate or pnincorporated whetOeu’createQ.ar recog-
nizedunder.,a 1~~,Jlf!?r~~~n Etbio~ja ~e1sewhere
and any foreIgn b6dy~s” business agent doing
. business in Ethiopia C:)O~~alfof th,~rinqipal.
.3}. ‘ ‘Association of persons’ ‘Shall mean~ as5ociation
of individuals or,an 8S$.qciationthat includes one or
more members who are not individuals, but not
including any association falling within the de-
finition of “body”. .”
4) ..”Related person” means:
(i) a natural person and;
(a) any relative of that nafurafperson’;-‘o’f
(b) a trust in respect of which such relative is
or may be a benefj9iary; or
(ii) a trust and a person who is or may 1?e a
beneficiary,in respect of that trust;~r ‘
(iii) a partnership,joint venture, or unincorporated
association,or body or private company; and(a) any”memberthereof; or
(b) aoy other person where that person and a . memberof such partnership,’j61l1tveit-
ture, or unincorporated association ~r
body, or private company as the case
may he, are related persons in tenn~of
‘thisdefinitiOn;or
(iv) an incorporated com’pany, other than a closed ‘
(a)’& person;otherthan an incOrporated Corn- pany, where that person or that person ~nd
a. pe~on a person related to thefust
mentionedperson in tenns of this de~
finition controls 10 percent ormo~ of; .
(i) the right to vote in the first mentioned
company; or, .,
(ii) the rights to distributions capital or proflts
of the first-mcQtioned company. either
directly or through ooe or more interposed
companies, partnerships, or trusts; or
(b) any other incorporated company in which
the first mentioned person refelTed to in
(a) or that person and a person related to
that fU’Stmentioned person in tefms of this
defmition controls 10 percent or more of:
(i) the right to vote in the first .mentioned
oompany, or f.’ ,~.
”
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Federal Negarit Gaz.eta -No. 34 4111
July. 2002-Page 1869
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lI{to.1-o;r flf., “,,}”If.,1 (ii) the rights to distributions of capital or profits of the
fIrst-mentioned company, either directly orthrough one or more interposed companies, part-
nerships, or trusts; or
(c) any person where that person and the person referred to in (a) or the other incorporated company referred to
in (b) are related persons in terms of this definition; or
(d) any person related to the person referred to in (c) in terms of this definition; or
“Relative” in relation to a natural person; means: (i) the spouse of the rpeson; or(ii) an ancestor, lineal descendant, brother, sister, uncle, aunt, nephew, niece, stepfather, step-mother, stepchild, or adopted child of that person
or of the spouse, and in the case of an adoptedchild the adoptive parent; or
(iii) the spouse of any person referred to in paragraph (ii) and for the purposes of this defInition, any
adopted child is treated as related to her adoptive
parent within the first degree of consanguinity.
6) “Business” or “Trade” shall mean any industrial, com-
mercial, professionl or vocational activity or any otheractivity recognized as trade by the Commercial Code of
Ethiopia and carried on by any person for profIt.
7) “Taxpayer” shall mean any person subject to tax under this Proclamation.
8) “Withholding Agent” shall mean any person with a tax collection obligation under this proclamation.
9) “Permanent Establishment” shall mean a fIxed place of business through which the business of a person is
wholly or partly carried on. The following shall, in
particular, be considered to be a permanent establish-
ment:
(a) an administrative, branch, factory, workshop, mine,
quarry or any other place for the exploitation of
natural resources, and a building site or place where
construction and/or assembly works are carried out.
(b) A person shall be considered not to have a per- manent establishment if that person:
(i) uses facilities solely for the purpose of storage or
display of goods or merchandise belonging to that
person;
(ii) maintains a stock of goods or merchandise belon-
ging to that person solely for the purpose of
storage or display;
(iii) maintains stock of goods or merchandise belon-
ging to that person solely for the purpose of
processing by another person;
(iv) maintains a fIxed place of business solelly for the
purpose of purchasing goods or merchandise or a
collecting information for that penon’s busiDesa;
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09:”‘l.”:” f”‘l.lPlr1:C~~ ~ ‘}~~m- y..f>mlrA.:: tracts in the name of that person, that person shall be
I1’tj9″ wh.It- P’lrm-‘) f”‘l.lh’im-,}O-r f.,.mM treated as if it has a pennanent establishment in
P’lt-Ir fflm- 0.11”)9”M:”‘l.”-r ~,)1.”‘l.1P1r 1:C~:r
respect of any activities which the agent undertakes
OOlJlll.f>’I’?–r hff.U O”y. Ok1.A. (fI) O.,.HlH?–r for the person at the place at which those activities are
f P’ Ir ~ ‘).pll:J>(l.sP”f “.,.wf1’1hl1”’: O.,.wf1’1 P’tt-Ir carried on, unless the activities of such agent are
lf1m- fP’1r ~’).p1l:J>(l.Oh.-rf”kf 09:”‘l.”-r f”‘l.lPlrlimited to those mentioned in letter (b) above which,
f,)”l1: 1:C~-r hf(ljlD-9″I if exercised through a fixed place of business, would
oP) “7’)~m-9″ (lm-
01.”‘” Om”””” f’1″‘l.’li’)
wh.A. not make that fixed place of business a pennanent
wy.9″ 1r00′} “fl-011ll.1P1r O”7iJ:flD-9”
“””wh.A.
establishment.
hOlJ’l~”-r f,)”l1:
P’1r~’}””1l:J>ll.’) O”7hiJW~ -n~ (d) A person shall not be treated as if it has a pennanent
~,)1.ff.U flt–r wh.l-“f f,)'”11:P’1r~’)””1l:J>ll.m-‘) establishment where it merely carries on its business
f”‘l.fhiJm-~-r oPf.O~ f,}”l1: P’ Ir:fm-‘)
O”‘l..fhiJm- activities through a broker, general commission agent
).O:r w.p:r
‘lA.I1”’ Oll+.,.C 09:”‘l.”-r
f”‘l.lPlror any other agent of an independent status, provided
1:C~-r ~ ‘)~~m-hY..f>mC9″I that such agents are acting in the ordinary course of
IP) h,}1: h-C}’)f “”,,m-‘) ‘1-C}’)1OoP.f>nJm?- wy.9″
0″”” their business.
.
h-C},} f
~’I”I’C P’C f”‘l.lPlr OoPl1’~ 9″tl’}f~
-n:F
(e) The fact that a company controls OTIScontrolled by
h’).c;. ftb”m- 09:”‘l.”-r f”‘l.lPlr1:C~-r~,}1.I1”’ another company shall not of itself constitute either
.,.1.C”” hf.W(l!:9″:: company a Dennanent establishment of the other.
I. “10.” “7f1-r “7iJTm-9″fh.’1tj”‘l. 1””’9” f1.1f,):
OoP1.O 10) “Income” shall mean every son of economic benefit
~~-r f”’11 C}f.I1′,)9″ h”7iJ:flD-9″ 9″,}~ 01’~ 1′}H1I including nonrecurring gains in cash or in kind, from
wf.9″ O’}f.”-r OOlJiJ:flD-9″
oPA.tl~”l-nC h4-~f.,.h whatever source derived and in whatever fonn paid
credited or received.
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:fID-SI . 11) “Taxable Income” shall mean the amount of income
12) subject to tax after deduction of all expenses and other deductible items allowed under this Proclamation and
Regulations issued there under;
“Employee” shaH mean any individual, other than a
contractor, engaged (whether on a penn anent or tem- porary basis) to perfonn services under the direction and
control of the employer;
(a) “Unskilled Employee” shall mena an employee
who has not received vocational training, does not
use machinery or equipment requiring special skill,
and who is engaged by an employer for a period
aggregating not more than 30 days during a
calendar year;
(b) “Contractor” shall mean an individual who is
engaged to perfonn services under an agreement bywhich the individual retains substantial authority to
direct and control the manner in which the services
are to be perfonned.
13) “Tax Authority” shall mean the Federal Inland Revenue Head Office or any of its branch offices estblished in any
part of Ethiopia and the tax authorities of the Regional
States.
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B!’ Federal Negarit Gazeta-Mo. 34 4. May, 2002.-Page 1871
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~. 14) “Minister” shall mean the Minister of Finance and
Economic Development and “Ministry” shall
mean the Ministry of Finance and Economic
Development.
15) “Fiscal Year” shall mean the budgetary year of the
Ethiopian Government.
16) “Category A taxpayer”, “Category B taxpayer”,
and “Category C taxpayer” shall have the respec-
tive meanings given to them in a regulation to be
issued hereunder.
,3. Scope of Application . 1) This Proclamation shall apply to residents of
Ethiopia with respect to their worldwide income.
2) The Proclamation shall apply to non-residents of
Ethiopia with respect to their Ethiopian sourceIncome.
4. Obligation to pay Income Tax Every person having income as defmed herein shall pay
income tax in accordance with this Proclamation
5. Residence 1) An individual shall beresident in Ethiopia, if he:
(a) has a domicile within Ethiopia;
(b) has an habitual abode in Ethiopia; and/or
(c) is a citizen ‘of Ethiopia and a consular,
diplomatic or similar official of Ethiopia posted
abroad.
2) An individual, who stays in Ethiopia for more than 183 days in a period of twelve (12) calendar months,
either continuously or intermittently, shall be
resident for the entire tax period.
3) A body shall be resident in Ethiopia, if it:
(a) has its principal office in Ethiopia;
(b) has its place of effective mangement in Ethiopia;
and/or
(c) is registered in the trade register of the Ministry of
Trade and Industry or Trade bureaux of the
Regional Governments as appropriate.
4) “Resident person” includes a permanent establish- ment of a non-resident person in Ethiopia.
6. Source of Income
Income taxable under this proclamation ahall include, but
not limited to: (a) income from employment;
(b) income from business activities;
(c) income derived by an entertainer, musician, or
sports person from his personal activities;
(d) income from enterpreneurial activities carried on
by a non-resident through a permanent establish-
ment in Ethiopia;
(e) income from movable property attributable to a
permanent establishment in Ethiopia;
(t) income from immovable property and appur-
tenances thereto, income from livestock and
inventory in agriculture and forestrj, and income
from usufruct and other rights deriving from
immovable property is uch property is’ situated in
Ethiopia;
(g) mcome from the alienation of property referred to
in (e);
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Federal Negarit Gazeta
-July, 2002-Page 1872
(h) dividends distributed by a resident company;
(i) profit shares paid by a resident registered partner-
ship;
(j) interest paid by the national, a regional or local
Government or a resident of Ethiopia, or paid by a
non-resident through a permanent establishment
that he maintains in Ethiopia;
(k) license fees (including lease payments, and
royalties paid by a resident or paid by a non-
resident through a permanent establishment that
he maintains in Ethiopia.
7. Foreign Tax Credit 1) If during the tax period a resident derives foreign source income, the Income Tax payable by that
resident in respect of that income shall be reduced by
the amount of foreign tax payable on such income.
The amount of foreign tax payable shall be substan-
tiated by appropriate evidence such as a tax assess-
ment, a withholding certificate or any other similar
document accepted by the Tax Authority.
2) However, the reduction of the Income Tax provided
by Sub-Article (1) shall not ex ceed the tax payable
in Ethiopia that would otherwise be payable on the
foreign source income.
3) In the case of a taxpayer subject to Income Tax on
Schedule C income, any reduction of tax prescribed
by Sub-Article (1) shall be limited to the tax that
would otherwise be payable in Ethiopia computed as
if Article 28 (loss carry forward) of this Proclamation
applied separately to each foreign country in respect
of profit and losses derived from sources therein.
4) The reduction of tax prescribed by this Article shall
be calculated separately in respect of each foreign
country from which income or profit is derived.
8. Schedules ofIncome This Proclamation provides for the taxation of income in
accordance with four schedules, as follows:
1) Schedule ‘A,’income from employment;
2) Schedule ‘B,’ income from rental of buildings;
3) Schedule ‘C,’ income from business as defined in
Article 2(6), but not including activities covered by
the Rural Land Use Fee and Agricultural Activities
Income Tax Proclamations issued by regional states;
4) Schedule ‘D’, other income including income from:
(a) royalties;
(b) income paid for services rendered outside
of Ethiopia;
(c) income from games of chance;
(d) dividends;
(e) income from casual rental of property;
(f) interest income;
(g) specified non-business capital gains.
9. Foreign Exchange Transactions All net gains and losses arising from any transactions in
foreign exchanges shall be brought to account for tax
purposes as additions to taxable income or deductible
losses in the year in which they are realized.
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th) +oPitit,e. o-~;J- lh. Tf-k far f’} .,..til.,., l1.1~’Federal Negarit Gazeta- No. 344111July, 2002-Page 1873
SECTION n
Schedule’ A’ Income /Employment Income
10. Taxable Income 1) Every person deriving income from employment is.
liable to pay tax on that income at the rate specified
in Schedule A, set out in Article 11. The first Birr
150 (one hundred fifty Birr) of employment
income is excluded from taxable income.
2) Employers have an obligation to withold the tax
from each payment to an employee, and to pay to the
Tax Authority the amount withheld during each
calendar month. In applying the preceding, income
attributable to the months ofNehassie and Pagumen
shall be aggregated and treated as the income of one
month.
11. Tax Rate
Schedule A
12. Determination of Employment Income 1) Employment income shall include any payments or
gains in cash or in kind received from employment
by an individual, including income from former
employment or otherwise or from prospective
employment.
2) The type of taxable fringe benefits and the manner
of their assessment shall be determined by
Regulations to be issued by the Council of Minis-
ters.
3) Income received in the form of wages does not
include representation and other similar expen-
ditures (on social functions, guest accommodations,
etc.)
13. Exemptions The following categories of income shall be exempt
from payment of income tax hereunder:
(a) income from employment received by casual
employees who are not regularly employed
provided that they do not work for more than one(1) month for the same employer in any twelve
(12) months period;
(b) pension contribution, provident fund and all forms
of retirement benefits contributed by employers inan amount that does not exceed 15% (fifteen
percent) of the monthly salary of the employee;
(c) subject to reciprocity, income from employment,
received for services rendered in the exercise of
their duties by:
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10
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15
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20
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25
42,601 60,000
30
h60,000 Olf.
35Taxable Income from Rental
Income Tax
(per year) payable
Over Birr to Birr
0 1800
exempt threshold
1,801 7,801
10
7,801 16,800
15
16,801 28,200
20
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25
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30
Over 60,000 35
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10. ,;JCf.1.OD~AI Federal Negarit Gazeta-No. 344111July, 2oo2-Page 1874
(i) diplomatic and consular representatives, and
(ii) other persons employed in any Embassy,
Legation, Consulate or Mission of a foreign
state performing state affairs, who are national
of that state and bearers of diplomatic pass-
ports or who are in accordance with inter-
national usage or custom normally and
usually exempted from the payment of in-
come tax.
(d) income specifically exempted from income tax by:
(i) any law in Ethiopia, unless specifically amen-
ded or deleted by this Proclamation;
(ii) international treaty; or
(iii) an agreement made or approved by the
Minister.
(e) the Council of Ministers may by regulations exempt
any income recognized as such by this Proclamation
for economic, administrative or social reasons.
(f) payments made to a person as compensation or a
gratitude in relation to:(i) personal injuries suffered by that person;
(ii) the death of another person.
Section III
Schedule ‘B’ IncomelIncome From Rental of Buildings
14. Taxable Income IncoI]le tax shall be imposed on the income from rental
of buildings.
15. Tax l<.ite The tax payable on rented houses shall be charged,
levied and collected at the following rates:
(a) on income of bodies thirty percent (30%) of
taxable income,
(b) on income of persons according to the Schedule B
(hereunder)
Schedule 'B'
16. Detennination of Income
1) Income from rental of building shall be computed as follows:(a) if the tax payer leased furnished quarters the
amounts received attributable to the lease of
furniture and equipment shall be included in
income.
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hlLU O:l”T O”‘ODAb.,.en- &p’}mI.Y “th” ODIPI.-r
..,-fle “h~”ft-.. (b) sub-lessors shall pay the tax on the difference
between income from sub-leasing and.the rent paidto the lessor, provided that the amoimt’ received
from the sub-lessor is greater than the an10untpayable to the lessor. ..
– (c) the following amounts shall be deducted from
income in computing taxable income:(i) taxes p~d with respect !o the land and buil-
dings being leased; except income taxes; and
(ii) for taxpayers not maintaining books of ac-
count, one fifth (1/5) of “the gross incomereceived as rent for buildings furniture andequipment as an allowance for repairs, main-
tenance and depreciation of such buildings,
furniture and equipment;
(iii) for taxpayers maintaining books of account,
the expenses incurred in earning, securing,and maintaining rental income, to the extent
that the expenses can be proven by the
taxpayer and subject to the limitations
specified by this Proclamation; deductible
expenses include (but are not limited to) the cost of lease (rent) of land, repairs, main-tenance, and depreciation of buildings, fur-
niture and equipment in accordance withArticle 23 of this Proclamation as well as
interest on bank loans, insurance premiums.
2) The owner of a building who allows a lessee to sub-lease
is liable for the payment of the tax for which the sub-
lessor is liable, in the event the sub-lessor fails to pay.
3) At the earlier of the time construction of a rental building
is completed or when the building is rented, the owner
and the builder are required to notify the administrationof the kebele in which the building is situated about such
completion and the name, address, and tax identification
number of the person (or persons) subject to tax onincome from rental of the building. The kebele adminis-
tration has the obligation to communicate this infor- mation or information obtained by the administrations
own initiative to the appropriate tax authority. Section IV
Schedule ‘c’ IncomelBusiness Income Tax
17. Scope ofSchedule ‘C’Income
Income Tax shall be imposed on the taxable business income realized from entrepreneurial activity.
18. TaxableBusiness Income
Taxable business income shall be determined per tax
period on the basis of the profit and loss account or income statement, which shall be drawn lD com-
pliance with the Generally Accepted Accounting
Standards, subject to the provisions of this
Proclamation and the directives issued by the Tax
Authority .
Tax Rate
1) Taxable buisness income of bodies is taxable at the rate of 30%.
2) Taxable business income of other taxpayers shall
be taxed in accordance with the following Schedulec.
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Taxable Business Income
. ,
( r, ear)
Over Birr
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20. Ded~ctibJeExpcnses
In the determination, of business incQme ,subject to
tax in Ethiopia, deductions shall be allowed for
,expenses incurred for the purpose of earning,
securing, and maintaining that business income to the
exteI1t that the expenses can be, proven by the
taxpayer and subjeCt to the limitations specified by .. . ~) .-;.
this Proclamation.
21. Non-Deductible Expenses
1) The follow1n{ expenses shall not be deductible:
(a)1he cost of the acquisition, improvement,,renewal, 'JIld. reconstructipn of business
assets that are depreciated pursuant to
. ArticJe 23. of this Prqclamation;
(b) an increase of the, share of capital of a
company or the basic capital of a registered
partnership; ,
(c) voluntary pension or providenJ.,Jund cqn.
Ui,butiOnsover and above 1~% of the
monthly salary of the employee. "
(d) declared dividends and paid-out profit
'shares;
(e) interest in excess of the rate used between
the National Bank of Ethiopia and the
cOmmerciAlbanks increased by two (2)
percentage points. '
(f) damages covered by insurance policy;
(g) punitive damages and penalties;
(h) the creation or increase of reserves.
provisions and other special.purpose fundsunless otherwise allowed by this
Proclamation;
(i) Income Tax paid on Schedule C income and
recoverable V a1ue~Added Tax;
(j) representation expenses over and above
10% of the salary of the employee;
(k) personal consumption expenses;
(I) expenditures exceeding the limitS set forth
by this Proclamation pr Rejulations issued
hereunder.
(m) entertainment expenses;
(n) donation or gift.
2) Notwithstanding the provisions of Sub-Article (1) (n) of this Artiete, the Council of Ministers may
by Regulations allow donations or gifts Pl'Ovic1ed
for public use to be deducted.
3) Interest paid to shareholders on loaDS and
advances shall not be deductible to the" extent
that the loan or advances in respect of which the
interest paid exceeds on average dUrin. 'the tax
periOd four times the IIDOIIDt orthe sb8N c:apital.
1bis sub-Article does not apply 10 batab and
insurance companies.
005A005A005A001100440045005C00560056004C0051004C0044004F0044005A0011004600520050
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4) In the case of bodies other than companies, Sub-
Article (3) above shall apply as if for the referenceto share capital there were substituted a reference to
basic capital.
22. Trading Stock
1) For the purposes of ascertaining the income of a person for a tax period from a business, there shall
be deducted the cost of trading stock of the businessdisposed of by that person during that period.
2) The cost of trading stcok disposed of during a tax
period is determined on the basis of the average-
cost method, i.e. the generally accepted accountingprinciple under which trading stock valuation is
based on an average cost of units on hand.
3) The term “trading stock’ means any business asset
that is either used in the production process and
becomes part of the product, or that is hold for sale.
23. Depreciation
1) In the determination of taxable business income, the owner of the business assets may deduct
depreciation for business assets.
2) Fine art, antiques, jewelry, trading stock and other
business assets not subject to wear and tear and
obsolescence shall not be depreciated.
3) The acquistion or construction cost, and the cost of
improvement, renewal and reconstruction, of buil-
dings and constructions shall be depreciated in-
dividually on a straight-line basis at five per cent(5%).
4) The acquisition or construction cost, and the cost of
improvement, renewal and reconstruction, of intan-
gible assets shall be depreciated individually on a
straight-line basis at ten percent (10%).
5) The following two categories of business assets
shall be depreciated according to a pooling systemat the following rates:
(a) Computers, information systems, software
products and data storage equipment: twenty-
five (25%).
(b) All other business assets: twenty percent
(20% ).
6) In each category as referred to in Sub-Article (5),
the rate of depreciation specified in that Sub-Articleshall be applied to the depreciation base of the
category .
7) The depreciation base shall be the book value ofthe
category as recorded in the opening balance sheet
of the tax period:
(a) increased by the cost of assets acquired or
created and_the cost of improvement, renewaland reconstruction of assets in the category
during the -tax period.
(b) decreased by the sales price of assets disposed
of and the compensation received for the loss
of assets due to natural calamities or otherinvoluntary conversion during the tax period.
8) If the depreciation base is a negative amount, that
amount shall be added to taxable profit and the
depreciation base shall become zero.
9) Ifthe depreciation base does not exceed Birr 1,000
the entire depreciation base shall be a deductible
business expense.
10) If a revaluation of business assets takes place, no
depreciation shall be allowed for the amount of the
revaluation.
11) In determination of taxable business income a
deduction is permitted in respect of each category
of business assets for the maintenance and im-
provement expenses of business assets belonging
to that category for the acutal amount of the
expenses, but not in excess of twenty percent(20%) of the deprciation base of the category at the
end of the year. Any actual expenses exceeding this
twenty percent (20%) shall increase the de-
preciation base of that category.
005A005A005A001100440045005C00560056004C0051004C0044004F0044005A0011004600520050
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Y,1.~lAd Federal Negarit Gazeta-No. 34
4th July, 2002-Page 1878
.
24. 1 'ransfers of Business Assets
I) When assets used in a business are sold, exchanged, or otherwise transferred, gain or loss is recognized
on the transfer.
2) Transfers of business assets among companies
which are parties to a reorganization are not treated
as a disposal of the property.
3) The value of business assets held by a company or
companies which are parties to a reorganization is
the same as the value of such assets immediately
before the reorganization. Similarly, the balance
value of any depreciation categories shall be carried
nvp.r.
4) "reorganization" means:
(a) a merger of two or more resident companies;
(b) 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 ex-
change for shares of a party to the reor-
ganization;
(c) the acquisition of fifty percent (50%) or more
of the assets of a resident company by another
resident company solely in exchange for voting participations with no preferential
rights as to dividends of a party to the
reorganization;
(d) a division of a resident company into or more
resident companies; or
(e) a spin-off
The Tax Authority shall ensure that the mer-
ger, acquisition, takeover, division, or spin-off
is not having tax avoidance as a principal
objective.
5) The rules of Sub-Article (1) - (4)shall not apply to
the transfer of assets described under Article 23(5).
6) Loss shall not be recognized on the transfer of a
business asset to related person within the meaning
of Article 2(4).
25. Bad Debts
In the determination of taxable business income, a
deduction shall be allowed for a bad debt if the
following conditions are met:
(a) an amount cOITesponding to this debt was
previously included in the income;
(b) the debt is written off in the books of the taxpayer;
and
(c) any legal action to collect the debt has been taken
but the debt is not recoverable.
26. Special Reserves for Finance Institutions
In the determination of taxable business income of
finance institutions a deduction shall be allowed for
special (technical) reserves in accordance with the
directives issued by the National Bank of Ethiopia; the
business income, however, shall be increased by
amounts drawn from such reserves.
27. Participation Deduction
1) If a resident company or partnership reinvests the
profit it earned to raise the capital of another
company or partnership subject to the conditions in
Sub-Article (2) and (3); such amount shall be
deductible from its taxable income.
005A005A005A001100440045005C00560056004C0051004C0044004F0044005A0011004600520050
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Federal Negarit Gazeta-No. 344111July, 2002-Page 1879
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f.U’fiA” 2) The deduction mentioned in letter (a) of Sub-
Article (1) shall apply to shares of resident com-
panies that are subject to taxation under Scdedule C and in which the investing body has a shareholding
of at least twenty-five percent (25%), by value or by
number, in the share capital or the voting rights.
3) The deduction mentioned in letter (b) of Sub-
Article (1) shall apply to basic capital of resident
registered partnerships that are subject to taxation
under Schedule C and in which the investing body
holds at least twenty-five percent (25%) by value of
basic capital.
4) The Council of Ministers shall by reg;ulations
determine the manner in which the; incentive
granted in this Article shall be applied.
28. Loss Carry forward
1) If the determination of taxable business income results in a loss in a tax period, that loss may be set
off against taxable income in the next five (5) tax
periods, earlier losses being set off before later
losses.
2) If during a tax period the direct or indirect
ownership of the share capital or the voting rights
of a body changes more than twenty-five percent
(25%), by value or by number, Sub-Article (1) shall
cease to apply to losses incurred by that body in that
tax period and previous tax periods.
3) A net operating loss may be carried forward and
deducted only for two periods of three years.
Transfer Pricing
1) Where conditions are made or imposed between persons carrying on business in their commercial or
financial relations which differ from those which would be made between independent persons, the
Tax Authority may direct that the income of one or
more of those related persons is to include profits
which he or they would have made but for those
conditions. The Tax Authority shall do so in
accordance with the directives to be issued by the
Minister.
2) In order to ensure the just and efficient application
of this Article the Tax Authority may make
agreements in advance with persons carrying on
entrepreneurial activities, subject to conditions if
necessary, that specified conditions between
related persons do not differ from those which would be made between independent persons.
30. Exemptions
1) The following categories of income shall be exempt from payment of business income tax
hereunder:(a) awards for adopted or suggested innovations
and cost saving measures, and
(b) public awards for outstanding performance tax
any field.
(c) income specifically exempted from income tax
by the law in force in Ethiopia, by internationaltreaty or by an agreement made or approved by
the Minister.
The revenue obtained by:
2)
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-HlC fDDaI.~2f “l1’lJ/.- (a) the Federal, Regional and Local Governments of
Ethiopia;
(b) the National Bank of Ethiopia
from activities that are incidental to their
operations shall be exempt from tax on Schedule
C income.
SECTION V
Scheduled Income/Other Income
31. Royalties
1) Royalties shall be liable to tax at a flat rate of five percent (5%).
2) The withholding Agent who effects payntnt shall
withhold the foregoing tax and account to the Tax
Authority within the time limit set out in this
Proclamation.
3) Where the payer resides abroad and the recipient is a
resident, the recipient shall pay tax on the royalty
income within the time limit set out in this
Proclamation.
4) This tax is a final tax in lieu of a net income tax.
5) The term “roayalty” means a payment of any kind
receivedas a consideration for the use of, or the
right to use, any copyright of literary, artistic or
scientific work, including cinematography films,
and films or tapes for radio or television broadcas-
ting, any patent, tradework, design or model, plan,
secret formula or process, or for the use or for the
right to use of any industrial, commercial or
scientific equipment, or for information concerning
industrial, commerciaLar..scientific experience.
32. Income from Rendering of
Technical Services
‘-‘
1) All payments made in consideration of any kind of
technical services rendered outside Ethiopia to
resident persons in any form shall be liable to tax at
a flat rate of ten percent (10%) which shall be
withheld and paid to the Tax Authority by the payer.
2) The term “technical service” means any kind of
expert advise or technological service rendered.
33. Income from Games ofChance
1) Every person derving income from winning at games of chance (for example, lotteries, tombolas,
and other similar activities) shall be subject to tax at
the rate of fifteen percent (15%), except for win-
nings of less than 100 Birr.
2) The payer shall withhold or collect the tax and
account to the Tax Authority in the manner
provided in Article 67.
3) This tax is a final tax in lieu of income tax.
34. Dividends
1) Every person deriving income from dividends from a share company or withdrawals of profits from a
private limited company shall be subject to tax at the
rate of ten percent (10%).
2) The withholding Agent shall withhold or collect the
tax and account to the Tax Authority.
3) This tax is a final tax in lieu of income tax.
35. Income From Rental of Property
Every person derving income from the casual rental of
property (including any land, building, or moveable
asset) not related to a business activity taxable under
Article 17 shall pay tax on the annual gross income at
the rate offifteen percent (15%). This tax is a final tax in
lieu of a net income tax.
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hce; 1 0cooC f 36.
Interest Income on Deposits
1) Every person deriving income from interest on deposits shall pay tax at the rate of five percent(5%).
2) The payer shall withhold the tax and account to the
Tax Authority in the manner provided in Article 67.
3) This tax is a final tax in lieu of income tax.
37. Gain on Transfer of Certain Investment Property
1) .
Income Tax shall be payable on gains obtained
from the transfer (sale or gift) of property described
in this Article at the following rates:
(a) building held for business, factory, office 15%
(fifteen percent)
(b) shares of companies 30% (thirty percent)
2) Gains obtained from the transfer of building held
for residence shall be exempt.
3) The basis for computation of gains obtained from
the transfer of properties described in this Articleshall be determined by Regulations to be issued by
the Council of Ministers.
4) Any exchange of shares in a resident company
which is a party to a reorganization – as defined in
Article 24(4) -in exchange for share in another
resident company which is also a party is not a disposal of the shares.
5) The value of the shares given in exchange under
Sub-Article (4) shall be equal to the value of the
original shares.
6) Loss on the transfer of such property shall be
recognized and be available to offset gain subject tothe following limitations:
(a) Loss on transfers under this Article may be used
to offset gain on transfers under this Article, but
may not be used to offset any other income orgain. Unused losses may be carried forward
indefinitely.
(b) No loss shall be recognized on transfer to
associates within the meaning of Article 2(4).
7) Any person authorized by law to accept, register or in any way approve the transfer of capital assetsshall not accept, register or approve the transfer
before ascertainig that the payment of the tax has b~en duly effected in accordance with this Article.
CHAPTER II
Procedural Provisions Section 1
General Provisions
38. Powers And Duties ofTax Authority
1) The implementation and enforcement of this Proclamation and of Regulations issued hereundershall be the duty of the Tax Authority.
2) Notwithstanding anything to the contrary in any
other law, the Tax Authority shall be empowered toinvestigate any statements, records and books of
account submitted by any taxpayer at any time by:
(a) sendmg duly accredited inspectors to the place
of business or practice of the tax payer to check
same or any vouchers, stocks of other materialitems of the taxpayer;
005A005A005A001100440045005C00560056004C0051004C0044004F0044005A0011004600520050
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llC’:f’)f t 0J.:J.IJO 1 (b) requiring the taxpayer or any employee thereof who
has access to or custody of any information, records
or books of account to produce the same and to attend during normal office hours at any reasonably
convenient tax office and answer any questions
relating thereof;
(c) requiring any person including municipality, Body,
Financial Institution Department or Agency of
Federal or Regional Government to disclose par-
ticulars of any information or transactions, in-
cluding any lending or borrowing which it may
have relating to the taxpayer.
39. Confidentiality ofTax Information
I) The Tax Authority and all persons who are or have
been its agents or employees shall maintain thesecrecy of all information except such information
as are required by the Commercial Code of
Ethiopia to be published by trade gazette, on
particular taxpayers received by them in an official
capacity, and may disclose such information only
to the following persons:
(a) employees of the Tax Authority, for the purpose
of carrying out their official duties;
(b) law enforcement agencies, for the purpose of
the prosecution of a person for tax violations;
(c) courts, in proceedings to establish a person’s
liability for tax, penalties, or interest, or in any
criminal case;
(d) tax authorities of a foreign country, in accor-
dance with an international treaty to which
Ethiopia is a party.
2) Persons who receive informaion under Sub-Article
(1) must maintain the secrecy of that informaion,
except to the minimum extent necessary to achieve
the object for which disclosure is permitted. Other
persons who receive information the disclosure of
which is regulated by this section may not further
disclose the informaion and must return documents
reflecting the informaion to the Tax Authqril’.
3) Information concerning a taxpayermay be disclosed
to another person with the taxpayer’s written con-
sent.
40. Code of Conduct for Tax Authority Employees
I) Each employee of the Tax Authority shall:
(a) be honest and fair, treating each taxpayer with
courtesy and respect;
(b) apply the law, regulations and rulings to each
case on the basis the objective facts in that case,
showing no partiality to members of his family
or to friends;
(c) refrain from participating in any determination
that will affect his or his spouse’s tax liability;
(d) where either a known family relationship or a
business interest might influence any deter-
mination he must, as an employee, make public(in the manner provided by regulations) such
relationship or interest;
(e) Subject to Article 39 protect the confidentiality
of any tax or duty information, and
(f) not solicit or accept any bribe or perfonn any
other improper act relating to the duty to
determine or collect any tax.
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