To further open the economy to international players, the government has introduced new investment incentives designed to stimulate private sector growth, including foreign investment in key sectors. The newly enacted directive replaces all previous laws and offers unprecedented tax benefits, such as extended tax holidays.
Issued last week by the Ministry of Finance, the directive establishes a comprehensive framework for income tax exemptions and customs duty waivers. Experts note that this new law employs a sector- and location-based approach to determine the duration of tax holidays, marking a significant shift from past policies.
For instance, developers operating in Special Economic Zones (SEZs) outside Addis Ababa and the surrounding Oromia Special Zone can receive income tax exemptions for up to 15 years.
In contrast, investments within Addis Ababa and its vicinity qualify for a 10-year tax holiday.
The directive also outlines conditions under which tax holidays may be revoked, including providing false information, terminating a project, or failing to meet reporting requirements.
In such cases, investors must repay the exempted taxes along with applicable interest and penalties.
Additionally, businesses that incur losses during the tax holiday can offset those losses against profits earned in the first half of the post-holiday phase.
Beyond tax incentives, the directive introduces customs duty exemptions to promote the use of locally produced goods.
Investors who source materials domestically instead of importing them may qualify for duty-free benefits.
Exemptions are also available for importing capital goods, construction materials, and spare parts, subject to phased importation and government verification.
The law emphasizes local procurement, requiring investors to purchase goods domestically if they are available in sufficient quantity, quality, and at competitive prices. Duties paid on inputs used to manufacture locally sourced products may be refunded.
The directive also outlines sector-specific provisions.
SEZ operators, including developers, sub-developers, administrators, and enterprises, are eligible for extended tax holidays, while special considerations apply to leasing companies and tourism-related investments, accompanied by detailed documentation requirements.
To ensure transparency, the directive mandates that the Tax Authority submit quarterly reports on tax exemptions and their impact on revenue. Under Article 9.2, the Tax Authority must provide investor data to the Ministry of Finance by the 15th day of the first month of each quarter.
The directive includes detailed annexes listing the required documents for both tax and customs incentives, streamlining the application process for investors.
This reform highlights the government’s commitment to fostering a more competitive and investor-friendly business environment.
