The Federal Council of Ministers in its 10th regular session held on 06 August 2022 has introduced a Regulation that imposes Social Welfare Levy on imported goods which will be in force upon official publication of the Regulation in the Federal Negarit Gazette.
The Purpose and Content of SWL Regulation
The commonly applicable taxes on imported goods in Ethiopia include: Customs Duty, Excise Tax, VAT, Surtax, and Withholding tax. Given the urgency to increase fiscal space to enable the rehabilitation and construction of conflict-ridden regions, the government is working on increasing tax revenues, hence - the introduction of this Social Welfare Levy. The purpose of the Social Welfare Levy is therefore “to fulfil the commitment of the Government to provide and finance education, health and other social services.”
The Social Welfare Levy would be levied and collected on all types of goods imported into the country save for persons and organizations with diplomatic privileges and goods that are subject to surtax as per the Import Sur-Tax Regulation No. 133/2007.
The Levy would be collected at the rate of 3% of the aggregate cost, insurance and freight (CIF) value of the goods rather than on the value of the goods. This resembles the 3% Withholding Tax that is currently paid on goods imported for commercial use. Accordingly, other payable duty and taxes on imported goods such as Customs Duty, Excise tax, VAT and Surtax will not be taken into account to form the basis for computation of the Social Welfare Levy.
The information contained in this legal update is based on the draft regulation. The official Regulation is yet to be published on Federal Negarit Gazette. The information is for general information purposes only. Nothing in this legal update is intended as legal advice.
The Federal Council of Ministers has resolved in its 10th regular meeting held on 06 August 2022 to amend the existing Income Tax Regulation by adding share premiums as an additional item of exempt income. Although this amendment will take full effect upon its official publication in the Federal Negarit Gazette, we have prepared this update to give our clients an overview of what this amendment holds.
Exemption of Premium Income
The existing Income Tax Regulation No. 410/2017 (as amended) already has a list of incomes that are exempted from tax. The recent resolution by the Council of Ministers adds one important item to this list of exemptions on share premium, which is defined by the Ethiopian Commercial Code as the difference between the par value and the selling price of newly issued shares.
The status of tax on income generated by way of issuing new shares at a premium was not clear until the Ministry of Finance came up with the Capital Gains Tax Directive no. 8/2011 (hereinafter “the Directive”) which was effective from the 7th of August 2019, indicating that income derived by any company from the issuance of new shares in excess of the par value would be subject to income tax at the rate of 30%.
As per the amendment, “premium income obtained by going concerned from the sale of new shares to non-residents will be exempted from income tax”. By doing so, the amendment repeals what is stated in the Directive. For the income to be qualified for exemption under this amendment, it has to fulfill three cumulative elements.
First and foremost, the income should be the result of the sale of newly issued shares by a company rather than the sale of existing shares by the shareholders. The latter is not included under the exemption. The second requirement is that the issuance of new shares should be issued by a company that has the potential of continuing in the business for a foreseeable period. The last yet very important element is that the exemption is only applicable if the buyers of the new shares are non-residents. Although the rationale for excluding resident entities from the exemption is not clear and could be seen as going against the principle of tax neutrality, the preamble to the amendment resolution indicates that economical reason is the main objective for the amendment by way of increasing foreign direct investment in local companies in the form of share premiums.
The information contained in this legal update is based on the draft amendment. The official Regulation is yet to be officially published on Federal Negarit Gazette. The information is for general information purposes only. Nothing in this update is intended as legal advice.
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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.