The Income Tax (Amendment) Proclamation No. 1395/2025 has been enacted, revising most provisions of Ethiopia’s Federal Income Tax Proclamation No. 979/2016. This document outlines the main legislative changes from the amendment.
Definitions and Scope
- Income from Digital Content Creation:
- A new definition covers income generated via online platforms, including advertisements, sponsorships, subscriptions, and digital or physical product sales.
- Digital Service:
- Defined broadly to encompass services involving digital content, with detailed scope to be provided through regulation.
- Gross Sales Income:
- Defined for use in assessing small businesses, particularly for Category B taxpayers.
- Permanent Establishment:
- The threshold for determining a permanent establishment based on the duration of services or construction projects has been reduced from 183 to 91 days.
Taxpayer Classification
The previous three-tier system (Categories A, B, and C) has been reduced to two categories:
- Category A: Entities and individuals with annual turnover exceeding ETB 2,000,000.
- Category B: Individuals with turnover below ETB 2,000,000.
- The Annual gross income threshold Category shall be subject to revision at least every Five years by the Minister.
Digital Services by Non-Residents Now Taxable
Income from digital services provided by non-residents is now considered Ethiopian-source income. This ensures that foreign platforms offering services in Ethiopia are subject to local tax obligations.
Income Tax Rates Revised
The amendment adjusts the income tax brackets for employment, rental and Business income
Employment Income (Monthly):
| Monthly Income Range (ETB) | Tax Rate |
| Up to 2,000 | Tax-exempt |
| 2,001 to 4,000 | 15% |
| 4,001 to 7,000 | 20% |
| 7,001 to 10,000 | 25% |
| 10,001 to 14,000 | 30% |
| Exceeding 14,000 | 35% |
Rental Income (Annual):
| Annual Rental Income (ETB) | Tax Rate |
| Up to 24,000 | Tax-exempt |
| 24,001 to 48,000 | 15% |
| 48,001 to 84,000 | 20% |
| 84,001 to 120,000 | 25% |
| 120,001 to 168,000 | 30% |
| Exceeding 168,000 | 35% |
Business Income (Annual)
| Annual Taxable Business Income range (ETB) | Tax Rate |
| Up to 24,000 | 0% |
| 24,001 – 48,000 | 15% |
| 48,001 – 84,000 | 20% |
| 84,001 – 120,000 | 25% |
| 120,001 – 168,000 | 30% |
| Above 168,000 | 35% |
Other Tax rates are revised
| Category | New Rate |
| Dividends | 15% |
| Royalties | 10% |
| Games of Chance | 20% |
| Capital Gains (Immovable Property – Class A) | 15% |
| Capital Gains (Shares/Bonds – Class B) | 15% |
Minimum Alternative Tax (MAT)
A new Minimum Alternative Tax requires taxpayers to pay at least 2.5% of annual turnover if their calculated tax is lower. Exemptions include entities in liquidation and corporate bodies under debt restructuring. The tax also applies to those receiving incentives under tax incentive laws.
New Presumptive Tax regime is introduced
Category B taxpayers will be levied presupmtive tax on their annual Gross Sales, The rate of tax in respect of tax under this Article shall be;
| Range | Value |
| 0 – 100,000 | 2% |
| 100.001 – 500.000 | 3% |
| s00,001 – 1,000,000 | 5% |
| 1,000,001 – 1,500,000 | 7% |
| 1,500,001 – 2,000,000 | 9% |
Professional service providers, VAT-registered businesses, and businesses that elect to maintain books of account, regardless of their annual sales, are required to keep books of account in accordance with the standards applicable to Category “A” taxpayers.
Administrative and Compliance Requirements
Advance Tax Payments:
Category A and B taxpayers must make quarterly advance tax payments equal to the previous year’s tax. New taxpayers follow special quarterly or annual payment rules depending on classification.
Restriction on Cash Transactions:
Cash payments exceeding ETB 50,000 per transaction are prohibited; such payments must be made via cheque, transfer, or authorized electronic means.
Income Tax Incentives Clarified
Except income tax incentives granted by this proclamation and income tax regulations issued by the council of ministers as well as the investment incentives regulations all other tax exemptions granted by other laws are repealed excluding the cooperative except those for cooperatives.
Reporting Obligations for Digital Platforms:
Platforms must report income earned by Ethiopian creators. Creators must file annual returns regardless of reporting by platforms and obtain TINs if they exceed prescribed thresholds.
Tax Treatment of LLP’s and Investment Funds
Limited Liability Partnerships and Collective Investment Funds are exempted from corporate income tax but are required to withhold and remit tax on distributed profits.
Tax on Undistributed Profits and Reinvestment Rules
The amendment repeals introduce a 15% tax on undistributed profits of a corporate body unless such profits are reinvested in accordance with a directive to be issued by the Ministry of Finance. Key elements of the new provision include:
Scope of Undistributed Profit: Refers to net profit not:
- Distributed to shareholders.
- Used to increase the company’s capital within 12 months from the end of the tax year; or
- Remitted to a foreign company operating through a permanent establishment.
Reinvestment Exception:
Profit is considered reinvested if used to increase the company’s capital or shareholders’ equity, subject to further rules under ministerial directive.
Introduction of Aggregate Income Taxation
The Amending Proclamation introduces the principle of aggregate taxation for individuals with multiple income sources. Previously, income from different schedules could be taxed separately, allowing for multiple uses of the tax-free threshold. The new framework mandates the following:
Combination of Incomes:
Taxable income from various sources (e.g., employment, rental, business) must be combined into a single aggregate figure.
Single Tax Calculation:
The progressive tax rates are applied to this total aggregate income, ensuring the tax-exempt bracket is utilized only once.
Tax on Repatriated Profits by Permanent Establishments
The amendment introduces a specific tax regime for repatriated profits earned by non-resident entities operating in Ethiopia through a permanent establishment. This provision imposes a final tax on the transfer of profits abroad and establishes a mechanism to ensure timely remittance. The key elements are as follows:
Tax Rate:
A 15% tax is imposed on profits repatriated by a non-resident body through its permanent establishment in Ethiopia.
Presumptive Taxation for Delayed Remittance:
If the permanent establishment fails to repatriate its profits within 12 months from the end of the tax year, the tax authority will assess the profit as if it had been remitted. In such cases:
- The 15% tax is levied based on the assumption of remittance; and
- No further tax is imposed at the actual time of remittance.
Regulatory Framework:
The detailed procedures and application of this provision will be governed by regulations to be issued by the Council of Ministers.
Repeal of Turnover Tax Proclamation
The amendment repeals the Turnover Tax Proclamation No. 308/2002 and its subsequent amendments, effectively eliminating the concept of turnover tax from Ethiopia’s tax system.