Legal Update on the New Investment Incentive Regulation 517/2022

  1. Introduction

Following the passage of the Investment Proclamation and Regulation of 2020, the Council of Ministers of the Federal Democratic Republic of Ethiopia issued Investment Incentive Regulation No 517/2022 (hereafter the “Regulation”) on 12th July 2022. The Regulation has a total of six parts and a schedule that lists eligible sectors for the investment incentive included in the Regulation named “Investment Areas and Income Tax Incentives Schedule”.  

The previous regulation (Investment Incentives and Investment Areas Reserved for Domestic Investors Regulation No.270/2012 and its amendment Regulation No. 312/2014) did not govern the investment in minerals, petroleum, and natural gas as the then investment proclamation didn’t govern but this new incentive regulation does even though the current investment proclamation does not.

  • Investment Areas Entitled to Tax Incentives

The Regulation broadens the range of industries in which investors can receive tax incentives in the form of either tax exemptions or duty-free privileges. Investments in software development, data center, and cloud services, business process outsourcing, start-up service development, and research, innovation, enrichment, and development work are examples of businesses that can now qualify for tax incentives under the Regulation.

  • Incentives
    1. Income Tax Exemption

Investors are eligible for incentives beginning from the date they obtain a business license or expansion permission, as specified in the annexed schedule. Among the investments that are entitled to income tax exemption is an investor who helps secure employment opportunities for Ethiopians living abroad. To benefit from the exemption, the investor must present evidence to the Ministry of Labor and skill although it shall not exceed six years.

It is important to note that investments in mining and petroleum industries do not qualify for tax incentives, but customs duty incentives.

An investor who invests in areas far from the center for instance those investments in star-designated hotels, lodges, and resorts that are in new, unconventional, and selected tourist destination locations is entitled to a five-year tax exemption.

Investors must keep records and submit books of accounts to the tax office to qualify for incentives. If the investor invests in numerous incentive-eligible industries, a separate record for each must be kept. Failure to keep books of accounts results in penalties and also denies incentives for that year. Investors must show eligibility for tax incentives before paying income taxes. It is not feasible to claim tax incentives once the tax has been paid.

2. Customs Duty Incentive

The Regulation also governs procedures that allow investors to import duty-free capital goods, construction materials, and motor vehicles free from customs duties. The investor must submit a list of capital goods and permitted building materials or a document explaining the list or bill of quantities of construction materials to be imported duty-free for approval. If a duty-free investor buys capital goods or building materials from local manufacturers, he will be repaid the import tax paid for the raw materials or components needed to make such goods.

Total or partial customs duty exemptions for investment-related motor vehicles will be determined by the Ministry based on the kind and nature of investment projects. It is to be noted that pickups and station wagons are not exempt from customs taxes.

  • Duties and Responsibilities of Regulatory Institutions in Implementing the Regulation

In the process of putting the Regulation into effect, various government agencies have been given specific duties and responsibilities. The Ministry of Finance is the primary government agency that has been empowered with putting the new Regulation into effect. It will be in charge of handling requests for eligibility for investment incentives and approving those requests. It also has the discretionary right to broaden the actors who are eligible for income tax exemption. The Ethiopian Investment Commission (EIC) is responsible for reviewing exemption requests from investors to ensure their compliance with applicable legislation and relevant directives before forwarding them to the Finance Ministry for final approval. In addition to reporting to the Ministry on investor activity, EIC is tasked with following up with them to ensure that the benefits are being used appropriately. Comparable duties for the implementation of the new Regulation have been entrusted to the Ministry of Revenues, the Customs Commission, the Regional Investment Regulatory Bodies, and other authorities.

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