The Ethiopian Government has made commendable efforts, through legislative and procedural reforms, to improve the investment climate of the country and thereby attracting more foreign direct investment. In line with market-oriented economic policy, the investment regime has been liberalised through a series of Government legislation. Since 1992, the investment law has been revised four times to ensure the participation of more foreign investments in various sectors of the economy. The latest law is promulgated in January 2020.
After the appointment of the current Prime Minister (Abiy Ahmed) in April 2018, the Ethiopian Government has taken a fresh road to economic reform, starting by privatising fully owned government enterprises and boosting the private sector. As the role of FDI in the private sector being a key component to a nation’s economy, it was held by the government that amending the existing investment law (Proclamation No. 769 of 2012 as amended in 2014) is a vital step to the reform. As a result the New Investment Proclamation (the Investment Proclamation) was approved on 30 January 2020 by the House of Peoples Representatives. However, the Investment Proclamation is not yet published in the official legal gazette of Ethiopia, the Federal Negarit Gazette.
Major Amendments to the 2020 Investment Proclamation and Draft Investment Regulations
Opening of reserved/restricted sectors to foreign investment
One of the major changes the Investment Proclamation has brought is the restoration of the “negative listing” of investment areas that are open to foreign investors enabling foreign investors to enjoy a greater opportunity with regards to the areas that they can invest in. The negative listing approach employs the opening of all economic sectors to FDI except those that are expressly reserved/restricted by law. This approach aspires to cope with the ever-changing technological evolutions and pace of business in a globalised economic sphere. This approach is a reversal of the 2012 Investment Proclamation and Regulations which adopted the “positive listing” method that was restrictive by design. Under this method, all investment activities open for FDI were positively listed and foreigners could not directly invest in areas not specifically appearing on the list. This has now changed into a negative listing whereby foreigners can invest in all areas of investment except those explicitly reserved.
As part of the negative listing approach, the Investment Proclamation provides three categories of investment areas. These are areas exclusively reserved for joint investment with government, areas exclusively reserved for domestic investors and areas exclusively reserved for joint investment with domestic investors. All other sectors not reserved in the aforementioned sectors will be open for foreign investment. The Investment Proclamation avoided a category of sectors that will exclusively be held by the government and introduces a new category of sectors in which joint investment with domestic investors will be mandatory. Some of the areas of investment which were exclusively reserved for Ethiopian nationals under the previous laws are likely to be opened for foreign investments with the condition that foreign investors undertake these investments in joint venture with the government and/or domestic investors.
Even if it has not yet been made final and approved by the Council of Ministers, the Draft Investment Regulations (the Draft Investment Regulations) to implement the Investment Proclamation has provided the details of the sectors eligible for the above categories. The Draft Investment Regulations divides sectors allowed for foreign investors in context of joint investments into to two depending on minimum percentage of local content (indigenisation) requirement. These are:
Areas of investment in which foreign investor(s) can own up to a maximum of 75% of share capital
A foreign investor jointly investing with a domestic investor (Ethiopian nationals or companies wholly owned by Ethiopian nationals) in the following areas can own up to a maximum of 75% of share capital of a joint venture company. These areas are:
- forwarding and shipping agency services;
- domestic air transport services; and
- inland public transport having a capacity of more than 45 seats and freight transport services having a capacity of more than 32 tones.
- Areas of investment in which foreign investor(s) can own up to a maximum of 49% of share capital
A foreign investor jointly investing with a domestic investor (Ethiopian nationals or companies wholly owned by Ethiopian nationals) in the following areas can own up to a maximum of 49% of share capital of a joint venture company. These areas are:
- advertisement and promotion works;
- audiovisual services, motion picture and video recording, and production and distribution services;
- accounting and auditing services;
- mass media services;
- making indigenous traditional medicines; and
- Grade 2 construction services.
Furthermore, investment in the transmission and distribution of electricity energy through the national grid system, previously reserved for the government, is now open for joint venture investment with the government.
On the other hand, investment areas, including banking and insurance, that were exclusively reserved for Ethiopian nationals in the previous laws are now open to any person falling within the definition of domestic investor, including foreign nationals of Ethiopian origin. Investment areas that are exclusively reserved for domestic investors include banking, insurance and micro-credit and saving services, retail trade (excluding retail of own manufactured products produced in Ethiopia), import trade (excluding liquefied petroleum gas and bitumen) and few other selected areas of investment that are enclosed into the list with a view to protect domestic investors and small and medium enterprises.
New work permit rules and investment visa
The Investment Proclamation preserves the former rule that any investor may employ duly qualified expatriate experts required for the operation of its business and there will be no restrictions regarding top management positions. However, it further explains what “top management” constitutes. Top management includes chief executive officer, chief financial officer and chief operations officer. Moreover, the Investment Proclamation allows the spouse of an investor or a foreign worker the right to be employed and obtain a work permit in Ethiopia which was not addressed under the 2012 Investment Proclamation. The Investment Proclamation further provides that the Ethiopian Investment Commission or a delegated investment organ may facilitate the processing of visa applications of foreigners and their dependent family members coming to Ethiopia in relation to investment.
Establishment of the Federal Government and Regional State Administrations Investment Council
This is a council chaired by the Prime Minister. The Investment Proclamation established this Council in order to simplify investment and facilitate a synchronised investment system between the Federal government and regional State administration. The Council among other things prevent and resolve limitations to the provision of investment services including the allocation of land by regional state investment administration bodies.
Approval of brownfield investments by the Investment Commission
The 2012 Investment Proclamation requires that a foreign investor seeking to buy an existing enterprise in order to operate it in its current state or to buy shares of an existing enterprise shall obtain prior approval from the Ministry of Trade and Industry. However, the Investment Proclamation changed this and now the approval of brownfield investments is transferred from the Ministry of Trade and Industry to the Ethiopian Investment Commission.
Grievance handling rules
The Investment Proclamation included elaborate grievance handling rules and time efficient resolution of investment disputes. It went to the extent of introducing an arrangement where an investor may file a complaint to the Ethiopian Investment Commission against any decision of federal executive bodies’ decision where it considerably affects its investment.
On the other hand, regulations in relation to minimum investment capital (which ranges from a minimum of USD50,000 to a maximum of USD200,000 per project), repatriation of dividend and profits, access to external loan, the right to open foreign currency account, registration of technology transfer agreement and export-oriented non-equity based foreign enterprise collaboration agreement, one stop services, investment guarantee and protection and ownership of immovable property in the 2012 Investment Proclamation are all maintained in the Investment Proclamation.
The amendment of the 2012 Investment Proclamation is a part of Ethiopian Government’s bid to reform the economy. In its Preamble, the Investment Proclamation provides that it is aimed at producing an economic framework that fast tracks the global competitiveness of the national economy, increases export performance and generates more and better employment opportunities. In the Draft Investment Regulations which is expected to be approved by the Council of Ministers, the Ethiopian Government has taken significant steps in opening up investment areas for foreign participation. Under the Draft Investment Regulations, anything that is not expressly reserved for domestic investors is presumed by implication as open for foreign investment. This is a major change from the 2012 Investment Proclamation, which used to provide that anything that is not expressly open for foreign investment is by implication reserved for domestic investors.
The Excise Tax Proclamation No. 307/2002 (Previous Proclamation) that had been in effect since 2003 has been repealed. The Ethiopian Parliament has approved a new Excise Tax Proclamation No. 1186/2020 (New Proclamation) on 13 February 2020. Below we provide a summary of the major changes introduced by the New Proclamation.
The scope of application of the New Proclamation is on excisable imported goods and those manufactured in Ethiopia by licensed manufacturers. Excisable goods are those itemised in a Schedule attached to the Proclamation which currently lists 19 classes of goods and 378 specific items classified under each of the classes.
Registration and licensing by the tax authority
The New Proclamation has introduced a system by which all producers and suppliers of excisable goods have to be mandatorily registered and licensed by the Tax Authority for production and supply of excisable goods and services in Ethiopia and engagement in activities subject to the licensing in a Directive to be prescribed by the Ministry of Finance.
The New Proclamation has introduced the application of a specific excise tax rate that is based on the quantity or weight of goods along with an Ad Valorem rate (i.e. based on percentage of value) as opposed to the Previous Proclamation which adopts only the latter type of excise tax rate. Ad Valorem rates range from a minimum of 5% (e.g. rubber tyre) to a maximum of 500% (most used vehicles with a cylinder capacity exceeding 1800 cc and aged more than seven years). Specific rates are adopted for goods such as beer (in which specific and ad valorem rates apply alternatively, whichever is higher) and cigarettes (in which a combination of both rates apply).
The Ministry of Finance is empowered to increase or decrease the Excise Tax Rate up to a maximum of 10% of the rate indicated under its first Schedule. In order to cater for inflation, the Tax Authority is given the responsibility to apply an inflationary adjustment at least once a year on the Standard Excise Tax Rates according to a Directive to be issued by the Ministry of Finance.
Tax base and time of payment
As a significant shift from the Previous Proclamation, the tax base for goods produced locally is now the factory selling price. This is the price paid by the purchaser or the fair market value of the goods in case of related party transactions less the applicable VAT on supply of goods, the cost of Excise Stamp and the cost of returnable packaging. Excise tax must be shown separately on the transactional invoice.
For imported goods, the tax base is the value of goods to be determined as per the Customs Proclamation plus the applicable Customs Duty payable on the goods.
For goods manufactured locally, the time of exit of goods from factory or their consumption therein determines the time of payment of the tax. On the other hand, the time of entry of goods into Ethiopia is when the tax must be paid for imported goods with the exception of petroleum products in which the Ministry of Finance could give special permits to change such time.
Exemption, refund and deduction
The New Proclamation introduces elements the fulfilment of which renders goods not excisable. It also lists situations and items that are exempt from the payment of Excise Tax. Excisable goods exported or sold to persons with a tax free privilege, excisable goods destroyed by the producer following the Tax Authority’s approval and excisable goods lost or destroyed by accident or other factors beyond one’s control are exempt items in the New Proclamation. The Ministry of Finance is also given the power to exempt goods from the tax due to economic, social and administrative reasons.
The New Proclamation has also introduced a mechanism by which an Excise Tax that is already paid to the Government could be refunded to the taxpayer based on occurrence of certain events such as loss or destruction of goods or their return to the seller by the purchaser.
The deduction of Excise Tax paid on inputs is also allowed for a local manufacturer of all excisable goods save for alcohol, tobacco and sugar.
A monitoring mechanism on excisable goods
The New Proclamation has introduced a monitoring mechanism of excisable goods by the Tax Authority while excisable goods are inside the manufacturing factory of an authorised producer. Accordingly, an officer of the Tax Authority is empowered to investigate the nature and status of excisable goods, to weigh their weights, and count their quantity inside the factory. Authorised manufacturers of excisable goods are in turn obliged to register list of inputs and outputs in an approved form and set up a mechanism by which the officer of the Tax Authority can realise its monitoring responsibilities.
Excise tax stamp
The New Proclamation empowers the Ministry of Finance to issue a Directive that governs stamps that are to be used to identify excisable goods, alcohol products that are exempt from the tax, export goods and those goods produced for the consumption of exempt entities. The time, place and manner of administration of such excise tax stamps is also to be addressed in this Directive. The type and content of the excise tax stamps is to be publicized by the Tax Authority in newspapers having nationwide circulation.
New excisable items and changed tax rates
The other major change introduced by the New Proclamation is the levying of the tax on items that were not excisable under the applicable excise tax law and change of the tax rate on already excisable goods.
The new excisable goods include fats and oils, foods containing sugar, chocolates and cacao products, fireworks, plastic bags, plastic vehicle tyres, artificial flowers and fruits, human and synthetic hair, tractors, special purpose vehicles, trailers, gambling and video game machines are among the newly introduced excisable items.
The manufacturing and importation of excisable products without having the appropriate license results in an administrative penalty amounting to double of the excise tax that would have been payable. Fines ranging from ETB 50,000 – 200,000 and imprisonment ranging from a minimum of three to a maximum of seven years are also included as criminal penalties in the New Proclamation for offences committed in violation of the different mandatory provisions of the law. Such administrative and criminal liabilities are in addition to those already provided in the Tax Administration Proclamation unless provided in an overlapping manner, in which case the New Proclamation applies.
No effective date is specified and the President of Ethiopia has not signed in the copy of the New Proclamation that was circulated by the Ministry of Revenues. Nonetheless, the Ministry of Revenues circulated the copy with a notice to taxpayers stating that the New Proclamation will take effect beginning from the 14 February 2020, a day after the approval of the Proclamation in the Parliament.
Normally and in the absence of a relevant rule in the law itself, new laws that have been approved by the Ethiopian Parliament – the House of Peoples Representatives, begin to take effect when they are published in the nation’s official publication, the Federal Negarit Gazeta. Article 57 of the Federal Constitution of Ethiopia provides that laws passed by the Parliament must be signed by the President of Ethiopia within fifteen days and it is if the President fails to sign the law within such period that the law will take effect without his/her signature.
Leaving the above controversy on the New Proclamation’s effective date aside, there is a grace period of six months for persons engaged in manufacturing of excisable goods to continue manufacturing without having the appropriate license as indicated above. In addition, those goods for which a letter of credit has already been opened before issuance of the New Proclamation and those goods imported into Ethiopia within six months from entry into force of the New Proclamation will be excised based on the Previous Proclamation.
We are delighted to have hosted our annual #legalupdate followed by a cocktail reception at Hyatt Regency on October 29, 2019. A number of #laws have been passed this year, bringing sweeping changes to the #Ethiopian legal landscape. Our lead #lawyers did an excellent job presenting the major highlights of the relevant #legalreforms to our clients, partners, and business associations. The update covered the New Employment Proclamation, Civil Society Proclamation (NGOs), Tax Related Directives, and a keynote interview with Dr. Brook Taye, Senior Legal Advisor to the Ministry of Finance. Thank you Brook Taye (Ph.D.), Tadesse Lencho, Benyam Tafesse, and Zelalem Yibrah for your incredible presentations, and huge thanks to our attendees for making the forum interactive.
Mehrteab Leul and Associates Law Office (MLA) is pleased to be recognized by the Legal 500 as a Tier one firm in Ethiopia. We believe the ranking accurately reflects our first-rate legal services.
More than 11,000 brand owners and IP professionals from 150 countries have gathered in Boston for the 2019 INTA Annual Meeting, which kicked off last Saturday. We are so glad Benyam Tafesse is representing MLA. International Trademark Association (INTA)
The 2nd Annual Ethiopia Infrastructure, Power & New Energy Investment Summit which took place in Addis Ababa 19-20 May, 2015) focused on showcasing power projects, new energy infrastructure developments and partnership opportunities. The Summit was attended by several representatives of the Ministry of Water, Energy & Irrigation, Ethiopian Electric power, Ethiopian Electric Corporation and numerous prospective investors from the private sector.
MLA’s Energy practice group, represented by Dr. Tadesse Lencho & Mr. Zelalem Yibrah, attended showcasing the energy expertise of the office as well as DLA Piper Africa group. MLA’s Delegates utilized this unique chance of converging under one roof with government officials, private equity and debt investors, venture capitalists, institutional investors and fund managers, key players in the sectors, energy operators, power developers and other services providers along with development and other multilateral/bilateral agencies to their level best.