Ethiopia’s Shift to Performance-Based Investment Incentive: An Analysis of Investment Regulation No. 586/2026
Ethiopia has recently enacted an investment incentive legislation titled ‘Investment Incentive Regulation No. 586/2026 (“Incentive Regulation”), which repeals and replaces the Investment Incentive Regulation No. 517/2022. The Income Tax (Amendment) Proclamation No. 1395/2025 has repealed all incentives under other legislations and mandates that all income tax incentives must be granted exclusively through the Incentives Regulations. Under the Incentive Regulation, the framework moves away from blanket tax holidays approach under the repealed law and instead introduces performance‑based incentives, tying benefits to measurable outcomes such as employment creation, achievement of export targets, transfer of skills, and utilization of domestic inputs, among others. Investors will only qualify for incentives upon meeting these performance requirements. The objective of this approach is to link incentives to tangible economic and social outcomes, moving away from the broad exemptions without accountability that characterize the previous incentive regime.
Types of Incentives
The Incentives Regulation states that the following incentives can be granted: income tax at a reduced rate than the regular rate; exemption from minimum alternative tax; exemption from dividend tax; exemption from capital gains tax; customs duty and tax incentives and investment capital allowance. In relation to eligibility for reduced income tax, the Incentives Regulation provides that except for small and medium enterprises, investors would be eligible for such incentive only if they invest at least 10 million USD or the Ethiopian Birr equivalent.
Income Tax Incentives for Investors Outside Special Economic Zones
Investors engaged in activities listed under Table 1 of the Incentive Regulation are entitled to a lower income tax rate of 15% (fifteen percent). The duration of income tax incentive is yet to be determined by a directive to be issued by the Ministry of Finance.
Income Tax Incentives for Special Economic Zone Developers and Enterprises
SEZ Developers are entitled to reduced income tax rate of 5% on annual taxable income for a period of 10 years. SEZ Developers are also exempt from tax on dividends distributed to shareholders for a period of 5 years and Minimum Alternative Tax for a period of 10years.
SEZ Enterprises, on the other hand, are eligible for a reduced income tax rate of 15% but the exemption period is yet to be determined by a directive to be issued by the Ministry of Finance. That said, the Incentive Regulation provides that SEZ Enterprise engaged in the manufacturing of fertilizer is eligible for reduced rate of 5% on its annual taxable income for 10 years from the date of commencement of operations.
Income Tax Incentives for Companies listed in the Securities Market
Companies that list in a securities exchange licensed by the Ethiopian Capital Market Authority are eligible for a reduced business income tax rate of 25% for a period of three years from the date of initial public offering. This incentive, however, does not apply to financial institutions and companies that have offered their shares for trading on an over-the-counter market. The introduction of this type of incentive aims to support the growth of the nascent securities market in Ethiopia.
Income Tax Incentives for Startups
Designated startups and designated startup ecosystem builders are eligible for a reduced income tax rate of 5% for ten years and are exempted from tax on dividends distributed to shareholders for 5 (five) years.
Further, designated startup ecosystem builders enjoy exemption from capital gains tax realized from the sale of ownership interests in a startup, exemption from tax on dividends distributed to shareholders for five years and exemption from Minimum Alternative Tax for three years for the loss they incurred from their investment in the startup.
Customs Duty and Tax Incentives
New investors operating in sectors listed in Table 3 of the Incentives Regulation are entitled to import capital goods and construction materials either duty-free or at a reduced tax rate that apply at the time of importation. To qualify, such goods must be necessary for the implementation of the project and must receive formal approval from the relevant government authority.
Administration of Incentives
The Ethiopian Investment Commission, together with Regional investment bureaus, is tasked with receiving applications for incentives, verifying eligibility, and forwarding them with recommendations to the Ministry of Finance for final approval.
Given the shift towards performance-based incentives, investors eligible for incentives are required to enter into a performance agreement with relevant investments departments/institutions. The performance agreement includes performance indicators such as level of investment, amount of capital employed, number of jobs created, quantity of production, technology transfer, the manner of undertaking the project, among others. Incentives may be suspended if the investor fails to meet its obligations under the performance agreement.
Concluding Remarks[AP071.1]
Investment Incentive Regulation No. 586/2026 restructures the previous incentive framework to a performance-based system centered on Performance Agreements. These agreements condition incentives on meeting targets for capital employed, job creation, quality of production, technology transfer, and other applicable performance indicators. Investors must undergo regular compliance assessments to ensure they are meeting the terms of their Performance Agreements to retain their incentive, with enhanced oversight measures set by the regulation including inspections and post-clearance audits to verify the use of duty-free imports.