Ethiopia is a federal state with a civil law legal system, combined with procedural laws principally inspired by the common law system.


The sources of Ethiopian laws include the Constitution, International Treaties, Codes and Statutes, Decrees, Regulations and Directives and Customary Laws. A ruling of the Cassation Division of the Federal Supreme Court on the interpretation of the law has a binding effect on Federal and State Courts.

The Constitution provides legal status to some pre-existing religious and customary courts, and gives federal and regional legislatures the authority to recognise other courts. Sharia courts may hear religious and family cases involving Muslims. By law, all parties to a dispute must agree to the venue before a customary or religious court may hear a case.

Country overviewEthiopia flag

Population

105.4m

President

Mulatu Teshome (since October 2013)

Capital city

Addis Ababa (3.2m people)

Other major cities

Mekelle 0.358m people
Adama 0.355m people

Major industries

Agricultural products, tourism, food processing, beverages, textiles, leather, garments, chemicals, metals processing and cement.

Currency

Ethiopian birr

Languages

Amharic (official federal working language), Afaan Oromo, Somali, Tigrinya, Sidama, Wolaytta, Gurage, Afar, Hadiyya and more than 80 others.

Major religions

Orthodox Christianity and Islam


Legal information

Capital markets
Principal legislation

Commercial Code of Ethiopia

Corporate Governance

Ethiopia does not have a compiled Corporate Governance Code and provisions relating to corporate governance are found scattered in different pieces of legislation, including the Commercial Code.

See for example:

Additionally, the following Directives, issued per the relevant Proclamations, can be cited:

  • Limits on Board Remuneration and Number of Employees Who Sit on Bank Board Directives No. SBB/49/2011
  • Time Limit for Reduction and/or Relinquishing Shareholding Directive No. SBB/47/2010
  • Requirements for Persons with Significant Influence in a Bank Directive No. SBB/54/2012
  • Requirements for Licensing and Renewal of Banking Business Directive No. SBB/56/2013
  • Fraud Monitoring Directive No. SBB/59/2014
  • Credit Exposure to Single and Related Counterparties SBB/53/2012
  • Bank Corporate Governance Directive No. SBB/62/2015
Takeover / merger regulations

Trade Competition and Consumer Protection Proclamation No. 813/2013

Merger Directive issued pursuant to Proclamation No. 813/2013

Regulatory body or bodies

N/A

Listing rules

N/A

Public offers / disclosure regulations

N/A

Current No. of listed companies

N/A

Competition regulation
Legislation

The Trade Competition and Consumers Protection Proclamation No. 813/2013 and Merger Directive No 1/2016 regulate restrictive (anti-competitive) agreements and practices, as well as mergers.

The Proclamation also has provisions on the protection of consumers. Accordingly, the following are prohibited:

  • agreements between parties that prevent or significantly lessen competition with no outweighing technological efficiency or other pro-competitive gain;
  • price fixing;
  • setting of minimum resale price;
  • agreements for participation in tenders in a collusive manner;
  • dividing markets by allocating customers, suppliers, territories or specific types of goods or services; and
  • abuse of market dominance.

The Proclamation and the Directive require that all mergers with an annual turnover or assets greater than Birr 30,000,000 ($1,088,400, based on the prevailing exchange rate on February 13, 2018) be notified to the Trade Practice and Customer Protection Authority.

Ethiopia is also a Member State of COMESA and therefore subject to the COMESA Competition Rules and Regulations. Please see the COMESA summary in the AG section of the app, which can be found at the AG in Africa page.

Corruption / transparency
Corruption Perception Index score for 2017

35

Signatories to United Nations Convention Against Corruption (UNAC)?

Yes

Corruption Perception Index rank worldwide for 2017

107

UNAC ratified?

Yes

Signatories to the African Union Convention on Preventing and Combating Corruption?

Yes

Ratified?

Yes

Signatories to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions?

No

Disputes
Structure of the court system

Ethiopia has a dual court system, with two predominantly parallel court structures.

The structure of the Ethiopian federal court system is as follows:

  • Federal Supreme Court – This is the highest court in the country (including the Cassation Division) and has the power to review and overturn decisions issued by the Federal Courts and State Supreme Courts involving fundamental errors of law. It also gives binding judgments on the interpretation of laws which amount to legal precedents;
  • Federal High Courts; and
  • Federal First Instance Courts.

The structure of the Ethiopian state court system is as follows:

  • State Supreme Courts (in each state's capital city), which includes a cassation bench with powers to review fundamental errors of state law;
  • State High Courts (in zonal regions of each state); and
  • State First Instance Courts.

There are municipal courts (First Instance and Appellate Courts) in Addis Ababa and in cities in the state of Oromia with a population of over 10,000. Reviews of Appellate Court decisions can be brought before the Federal Supreme Court.

Kebele (Social Courts) hear property and monetary claims of up to 5,000 birr, the decisions of which can be appealed to the First Instance Municipal Courts. Some states also have Social Courts for small claims.

Sharia Courts are also established and recognised under the law. The Federal Sharia Courts are constituted in a three-level structure with a Federal First Instance Court of Sharia, a Federal High Court of Sharia and a Federal Supreme Court of Sharia.

Additionally, the Ethiopian constitution provides for the recognition of customary courts not established by law. The authority of these courts stems from tradition and local customs. Parties must voluntarily submit themselves to the jurisdiction of Sharia Courts and customary courts.

Enforcement of foreign judgments

The execution of foreign judgments is governed by the Ethiopian Civil Procedure Code and the Federal Courts Proclamation Number 25/1996.

The power to execute foreign judgments is given to the Federal High Court, which has first instance jurisdiction over applications for the enforcement of foreign judgments or decisions.

Under Article 456 of the Ethiopian Civil Procedure Code, unless expressly provided for by international conventions, foreign judgments cannot be executed in Ethiopia except in accordance with the following conditions:

  • the execution of Ethiopian judgment is permitted in the country in which the original judgment was given;
  • the judgment was given by a duly established and constituted court;
  • an opportunity was provided for the judgment debtor to appear and present his case;
  • the judgment in question is final and enforceable; and
  • the execution is not contrary to public order.

The Ethiopian court to which the application is made will permit the party against whom judgment is to be enforced to present their observations within a certain time period, and will also decide whether pleadings may be submitted.

The provisions for the enforcement of a foreign judgment apply by analogy when the enforcement of a foreign award is sought.

Enforcement of arbitral awards

An arbitral award obtained in a foreign country may be enforced in Ethiopia if the following conditions required under Article 461 of the Ethiopian Civil Procedure Code are fulfilled:

  • execution of foreign awards is allowed in the jurisdiction in which the award to be enforced was given;
  • the award was made following a regular arbitration agreement or other legal act in the jurisdiction where it was made;
  • the parties have equal rights in appointing the arbitrators and were summoned to attend the proceedings;
  • the arbitration tribunal was regularly constituted;
  • the award does not relate to matters which could not be submitted to arbitration under the Ethiopian laws or is contrary to public order or morals; and
  • the award is of such nature as to be enforceable on the condition laid down in Ethiopian laws.
Arbitration

The principal piece of legislation governing arbitration is the 1960 Ethiopian Civil Code (Articles 3325-3345). Under Ethiopian law, parties may refer an existing dispute or a dispute that may, in future, arise from a contract to arbitration.  The procedure to be followed during an arbitration is prescribed by the Civil Procedure Code, and therefore should be as similar as possible to proceedings before a court. An appeal from an arbitral award is allowed on certain grounds but a party may waive this right. The appeal must be made to the court which would have had an appellate jurisdiction had the dispute not been referred to arbitration.

Enforcement of arbitral awards

An arbitral award obtained in a foreign country may be enforced in Ethiopia if the following conditions, prescribed under Article 461 of the Ethiopian Civil Procedure Code, are fulfilled:

  • the execution of foreign awards is allowed in the jurisdiction in which the original award was given;
  • the award was made following a regular arbitration agreement or other legal act in the jurisdiction where it was made;
  • the parties have equal rights in appointing the arbitrators and were summoned to attend the proceedings;
  • the arbitration tribunal was regularly constituted;
  • the award does not relate to matters which could not be submitted to arbitration under the Ethiopian laws or is contrary to public order or morals; and
  • the award is of such nature as to be enforceable on the condition laid down in Ethiopian laws.
Foreign investments
Foreign Investment Incentives

Some of the foreign investment incentives available in Ethiopia are:

  • unhindered repatriation of funds (in respect of approved investments);
  • guarantee against expropriation and nationalisation, however this may occur for public interest reasons, subject to the Government providing a guarantee of "adequate" compensation corresponding to the prevailing market value of property;
  • ownership of immovable property requisite for the investment;
  • remittance of funds;
  • 100% foreign ownership of companies is permitted in areas open for foreign direct investment, subject to required minimum capital investments of:
    • USD 200,000 for a single investment project; or
    • USD 100,000 for architectural, engineering or technical consultancy if wholly-owned;
  • no restrictions on equity ownership in joint venture investments in areas open for foreign direct investment, subject to required minimum capital investments of:
    • USD 150,000 for joint investments on a single project with a domestic investor; or
    • USD 50,000 for joint investments with a domestic investor for architectural, engineering or technical consultancy;

(All of the joint investments mentioned above require an investment permit from the Ethiopian Investment Commission)

  • exemption from import customs duty and other taxes levied on imports. An investor eligible under a duty incentive is also allowed to import spare parts, the value of which may not be greater than 15% of the total value of the capital goods, within five years
  • potential income tax holiday for 2-9 years if conditions are met.
Foreign Investment Rules

Listing Companies N/A

Regulation
General

The Constitution of the Federal Democratic Republic of Ethiopia, Proclamation No. 1/1995

Banking
  • Banking Business Proclamation (Proclamation No. 592/2008)
  • Monetary and Banking Proclamation (Proclamation No. 83/1994)
  • Limits on Board Remuneration and Number of Employees Who Sit on Bank Board Directives No. SBB/49/2011
  • Time Limit for Reduction and/or Relinquishing Shareholding Directive No. SBB/47/2010
  • Directives to Authorize the Business of Interest Free Banking No. SBB/51/2011
  • Asset Classification and Provisioning for Development Finance Institution Directive No. SBB/52/2012
  • Minimum Capital Requirement for Banks No. SBB/50/2011
  • Requirements for Persons with Significant Influence in a Bank Directive No. SBB/54/2012
  • Requirements for Licensing and Renewal of Banking Business Directive No. SBB/56/2013
  • Liquidity Requirement (5th Replacement) Directives No. SBB/57/2014
  • Reserve Requirement – 6th Replacement Directive No. SBB/55/2013
  • Fraud Monitoring Directive No. SBB/59/2014
  • Credit Exposure to Single and Related Counterparties No. SBB/53/2012
  • Bank Corporate Governance Directive No. SBB/62/2015
  • Transparency in Foreign Currency Allocation and Foreign Exchange Management Directives No. FXD/45/2016
Insurance
  • Insurance Business Proclamation No. 746/2012
  • Requirements for Licensing and License Renewal of Insurance Business Directive No. SIB/33/2013
  • Requirements for Persons with Significant Influence in an Insurer Directive No. SIB/32/2012
  • Reinsurance Company Establishment Directive No. SRB/1/2014
  • Information Exchange Scheme on Outstanding Premium Directive No. 36/2013
  • Limits on Board Remuneration and Number of Employees Who Seat on the Board of an Insurer Directive No. SIB/37/2014
  • Insurance and Reinsurance Business Fraud Monitoring Directive No. SIB/39/2014
Tobacco
Pharmaceuticals
  • Food, Medicine and Health Care Administration and Control Proclamation No. 661/2009
  • Food, Medicine and Health Care Administration and Control Council of Ministers Regulation No. 299/2013
Food, medicine and healthcare
  • Food, Medicine and Health Care Administration and Control Proclamation No. 661/2009
  • Food, Medicine and Health Care Administration and Control Council of Ministers Regulation No. 299/2013
Advertising

(See for example: Articles 643, 812, 847 and 848 of the Criminal Code)

  • Trade Competition and Consumers Protection Proclamation No. 813/2013
Electronic communications
  • Telecom Fraud Offence Proclamation (Proclamation No. 761/2012)
  • Computer Crime Proclamation (Proclamation No. 958/2016)
Alcohol
  • Food, Medicine and Health Care Administration and Control Proclamation No. 661/2009
  • Food, Medicine, and Health Care Administration and Control Regulation No. 299/2013
  • Advertisement Proclamation No. 759/2012
  • The Excise Tax Proclamation No. 307/2002
Financial services
  • Customer Due Diligence of Banks (Directive No. SBB/46/2010)
  • Micro Financing Business Proclamation (Proclamation No. 626/2009)
Taxation
Transfer pricing

The Ethiopian transfer pricing rules are in accord with the OECD Transfer Pricing Guidelines. The Ethiopian Revenue and Customs Authority is empowered to distribute, apportion, or allocate income, gains, deductions, losses, or tax credits between parties to a non-arm’s length transaction as is necessary to reflect the income, gains, deductions, losses, or tax credits that would have been realised in arm’s length transaction.

On the other hand, a taxpayer may request that the Tax Authority enter into an advance pricing arrangement (APA) to agree an appropriate set of criteria for the determination of the arm’s length conditions for certain future controlled transactions over a fixed period of time. A taxpayer has an obligation to provide details of transactions with related persons in order to verify that the transactions are consistent with the arm’s length principle.

Stamp duty

Stamp duty is payable on a range of legal instruments, including:

  • on memoranda and articles of association – Birr 350 upon first execution and Birr 100 upon any subsequent execution;
  • contracts, agreements and memoranda – Birr 5;
  • security deeds – at 1% of the value of the deed;
  • awards – 1% of the value of the award if the value is determinable; and Birr 35 if the value of the award is undeterminable;
  • bonds – 1% of the value of the bond;
  • warehouse bonds – 1% of the value of the bond;
  • collective agreements – Birr 350 on first execution and Birr 100 on any other subsequent execution;
  • leases, sublease and subsequent transfer thereof – 0.5% of the value;
  • notorial acts – Birr 5;
  • powers of attorney – Birr 35;
  • contracts of employment - 1% of the salary; and
  • registers of title to property - 2% of the value of the property.

Exchange control

The National Bank of Ethiopia (NBE) regulates entry and remittance of foreign currencies through directives applicable to residents and foreigners. Nearly all outgoing and some incoming foreign currencies are regulated. Foreign investors may open foreign exchange accounts in commercial banks with the NBE's approval and, subject to the exchange regulations of the NBE, a person with a foreign exchange account can remit foreign currency abroad.

Losses

Investors who have incurred losses within the period of income tax exemption can carry forward such losses for a further half of the income tax exemption period following the expiry of the original exemption period.

A loss incurred in a tax year may be set off against taxable income in the following five tax years, provided that:

  • the same person holds more than 50% of the underlying ownership of the body (compared against the loss year); and
  • the taxpayer’s books of account displaying the loss are audited and accepted by the Authority.

As an exception, a body that experiences an ownership change of greater than 50% will be allowed to carry forward the loss if:

  • the body conducts the same business in the loss year, the intervening year and the carry forward year; and
  • either:
    • no new business activity is entered into before the loss has been fully deducted; or
    • if a new business activity occurs, it was not entered into with the principal purpose of utilising the body’s tax losses.

Yet, if there has been two tax years in which a taxpayer has incurred a loss, and each of the losses have been carried forward, the taxpayer is not permitted to carry forward any further losses.

Loss carry back is also allowed for long term contracts. If a taxpayer under a long term contract experiences a final year loss in relation to the contract, then the taxpayer may carry forward the loss. However, this is prohibited if the taxpayer ceases to carry on business in Ethiopia at the end of the contract.

However if there have been two tax years in which a taxpayer has incurred a loss, and each of the losses have been carried forward, the taxpayer is not permitted to carry forward any further losses.

Interest

Foreign borrowings for non-residents who receive interest from an Ethiopian source must a pay 10% tax, calculated from the gross amount of the interest. Residents and non-residents with permanent establishment in Ethiopia receiving interest income from savings deposits with an Ethiopian resident financial institution pay tax at the rate of 5%. Residents pay 10% tax on any other interest income they derive.

Withholding Tax

A business person importing goods for commercial use is obligated to pay an advanced payment of business income tax equal to 3% of the CIF value of the goods.
Except for micro-enterprises, bodies having legal personality, government agencies, non-profit organisations, and non-governmental organisations have a duty to withhold tax at the rate of 2% of the gross amount of payment, in relation to:

  • the supply of goods involving more than 10,000 Birr in single transaction or supply contract; and
  • supply of services involving more than 3,000 Birr in single supply contract.
Personal income tax

If an individual is an Ethiopian resident, he will be taxed on his worldwide income. If the income originates from an Ethiopian source, non-residents are obligated to pay tax in Ethiopia.

The Ethiopian income tax system is a schedular system in which different rate schedules are applicable to different sources of income.

Employment Income Tax

The provided marginal tax rate is applicable for monthly employment income:

  • First Birr 600 is tax free
  • Next Birr 601-1,650 taxed at 10%
  • Next Birr 1,651-3,200 taxed at 15%
  • Next Birr 3,201-5,250 taxed at 20%
  • Next Birr 5,251-7,800 taxed at 25%
  • Next Birr 7,801-10,900 taxed at 30%
  • Above Birr 10,900 taxed at 35%
Rental Income Tax
  • The first Birr 7,200 is tax free
  • Next Birr 7,201-19,800 taxed at 10%
  • Next Birr 19,801-38,400 taxed at 15%
  • Next Birr 38,401-63,000 taxed at 20%
  • Next Birr 63,301-93,600 taxed at 25%
  • Next Birr 93,601-130,800 taxed at 30%
  • Above Birr 130,800 taxed at 35%

Individuals obtaining business income pay taxes at the following rates

  • The first Birr 7,200 is tax free
  • Next Birr 7,201-19,800 taxed at 10%
  • Next Birr 19,801-38,400 taxed at 15%
  • Next Birr 38,401-63,000 taxed at 20%
  • Next Birr 63,301-93,600 taxed at 25%
  • Next Birr 93,601-130,800 taxed at 30%
  • Above Birr 130,800 taxed at 35%
Taxes on other income
  • 5% on Royalty
  • 5% on insurance premiums that a non-resident earns from Ethiopia
  • 10% on dividends
  • 10% on interest
  • 15% on management or technical fees that a non-resident earns from Ethiopia without having a permanent establishment
  • 10% on income from performances by non-resident entertainers
  • 15% on income from games of chance
  • 15% on income from casual rental of asset
  • 15% on capital gains from immovable assets
  • 30% on capital gains from shares and bonds
  • 10% on undistributed profits
  • 10% on repatriated profits by body conducting business in Ethiopia through a permanent establishment
  • 15% on other income
Value added tax

VAT is levied on goods and services provided by persons registered for VAT. Persons are required to be registered for VAT if their annual turnover exceeds Birr 1,000,000. VAT is currently charged at the rate of 15% of the value of the goods and services. Subject to certain qualifications, export goods and services are taxed at rate of zero percent.

Capital gains tax

Gains on disposal of immovable assets are subject to capital gains tax at the rate of 15%; while gains on disposal of shares and bonds are taxed at the rate of 30%.

Payroll tax and social security

Please see above under employment tax in regards to payroll tax. In respect of Ethiopian citizens, employers and employees must make monthly contributions of 11% and 7%, respectively, of the employment income to the pension scheme.

Technical service fees

A non-resident who derives technical fees from Ethiopia is subject to withholding tax at the rate of 15%. A non-resident individual is an individual who is not:

  • domiciled in Ethiopia;
  • present in Ethiopia for more than 183 days in one year period; or
  • an Ethiopian citizen posted abroad as a consular, diplomatic official or similar official.

An entity is non-resident if it is not incorporated or formed in Ethiopia or if it does not have a place of effective management in Ethiopia.

Dividends

Tax is imposed at the rate of 10% on dividends paid by an Ethiopian resident company. Similarly a 10% tax is levied on dividends from an Ethiopian source that are attributable to a permanent establishment of a non-resident in Ethiopia.

Corporate income tax

Corporate income tax is payable each year on the profits of a company at the rate of 30%. Other entities that are analogous to companies, referred to as “bodies” within the Income Tax Proclamation, are subject to corporate income tax at the same rate.

A body is defined as company, partnership, public enterprise or public financial agency, or other body of persons whether formed in Ethiopia or elsewhere. Bodies pay tax on their sources of income as detailed below:

  • 5% on royalty
  • 5% on insurance premiums that a non-resident earns from the insurance of a risk in Ethiopia
  • 10% on dividends
  • 10% on interest
  • 15% on management or technical fees that a non-resident earns from Ethiopia without having a permanent establishment
  • 10% on income from performances by non-resident entertainers
  • 15% on income from games of chance
  • 15% on income from casual rental of assets
  • 15% on capital gains from immovable assets
  • 30% on capital gains from shares and bonds
  • 10% on undistributed profits
  • 10% on repatriated profits by a non-resident conducting business in Ethiopia
  • 15% on other income
Royalties

A resident of Ethiopia who derives royalty and a non-resident who earns royalty from an Ethiopian source are subject to a 5% tax on royalties.

Thin cap regulations

Foreign controlled resident companies and permanent establishments in Ethiopia whose average equity ratio in a tax year is in excess of 2:1 are disallowed an interest deduction for the excessive debt paid in the tax year. Nevertheless, this rule does not apply if the amount of the average debt does not exceed the amount that a financial institution would be prepared to lend to the company in an arm’s length transaction, having regard to all the circumstances of the company.

A foreign controlled resident company is defined as a resident company in which more than 50% of the membership interests in the company are held by a non-resident person either alone or together with a resident person or persons. Average debt is calculated by dividing the sum total of a company's debt at the end of each calendar month in a tax year by twelve. A similar calculation is made for average equity for a tax year.

Real property tax

Land and buildings are subject to annual property taxes.

Export processing zone

Export processing zones are included in Industrial Parks. An Industrial Park is defined as an area with a distinct boundary designated by the appropriate organ, intended to develop comprehensive, integrated, multiple or selected functions of industries. It must be equipped with infrastructure and various services such as road, electric power and water (i.e. a one stop shop) and have special incentive schemes aimed at achieving planned and systematic development of industries, mitigation of the impacts of pollution on environment and human beings, and the development of urban centres.

Industrial Parks comprise of special economic zones, technology parks, export processing zones, agro-processing zone, free trade zones and the like, designated by the Investment Board. Industrial parks, including export processing zones, operating in Addis Ababa and the Special Zone of Oromia surrounding Addis Ababa enjoy an income tax exemption for 10 years, while those operating in other areas enjoy an income tax holiday for 15 years.

A foreign or a domestic investor can participate in export processing zones as an industrial park developer, industrial park operator or industrial park enterprise.

An industrial park developer is any profit-making public, public-private or private developer engaged in designing, constructing or developing industrial parks in accordance with the investment laws, industrial park enterprise permits and industrial park enterprise agreements.

Industrial park operator, on the other hand, is any profit making enterprise that operates, maintains or promotes industrial parks in accordance with the investment laws, industrial park enterprise permit and industrial park enterprise agreement.

An industrial park enterprise is a public, private or public-private enterprise owned by Ethiopians, foreigners or jointly by foreigners and Ethiopians. It possesses developed land under the industrial park via a sub-lease or by renting or building a factory within the industrial park to engage in manufacturing activity or in service provision for profit.

An industrial park developer, industrial park operator or industrial park enterprise should obtain investment permit and register its business.