This legal update briefly discusses the newly enacted regulation on investment incentives. The Investment Incentive Regulation No. 517/2022 (New Incentive Regulation), approved by the Council of Ministers on 21 May 2022, has come into force since it is now published in the Federal Negarit Gazette. This Regulation has repealed the investment incentives provided under the Council of Ministers Regulation No. 270/2012 as amended (2012 Investment Regulation). However, Directives issued prior to the enactment of the New Incentive Regulation shall continue to be in force until replaced by new directives. In addition, the fate of the Ethiopian Investment Board decisions (not included in the New Incentive Regulation) made before April 2020 shall be determined by a directive to be issued by the Ministry of Finance (Directive). That said, incentives that were previously granted under the 2012 Investment Regulation shall continue to be valid and enforceable.
The New Incentives Regulation is aimed at: promoting investment in national priority sectors; increasing foreign direct investment and ensuring that incentives are properly destined for their intended purpose.
In this legal update, matters concerning income tax exemption, customs duty incentives and their administration under the New Incentive Regulation are covered.
On Income Tax Exemption:
- New investments qualify for income tax exemption incentive if their business activity is eligible under the Schedule to the New Incentives Regulation (Schedule). In addition, investors who invest in areas far from the center and/or with very low infrastructure development, as will be determined by a Directive, will be entitled to 30% deduction on income tax for three consecutive years in addition to income tax exemption under the relevant Schedule; and a possible five year income tax exemption is contemplated for star designated hotels, lodges and resorts in selected tourist destinations. Further, investors who provide employment opportunities to Ethiopians outside of Ethiopia shall be entitled to income tax exemption under certain conditions.
- For existing eligible investments looking to expand and upgrade their activities, income tax exemption considerations for the additional income generated through expansion or upgrading will be determined by a Directive.
- Direct and indirect exporters of goods and services of at least 60% of their products or services are eligible to a one time income tax exemption of two years on top of the income tax exemption provided under the Schedule. If the investment is in an industrial park and the investor exports 80% and above of its products, a one-time two years income tax exemption will apply in addition to the sector-specific incentive under the relevant Schedule.
- An investor becomes eligible for income tax exemption upon obtaining a business license or expansion permit. That said, an investor should obtain tax exemption certificate to properly exercise its exemption right. An investor who submits tax incentive certificate after taxes on production or supply of service are paid shall not be entitled to a refund of the tax paid.
- Should an investor incur losses during the income tax exemption period, such investor is allowed to carry forward the loss for half of the income tax exemption period after the expiry of such period. The loss carried forward period shall not exceed five income tax years. Losses incurred during additional income tax period (in the context of income tax exemption on top of those provided under the Schedule) shall not be carried forward.
On Customs Duty Incentives
- New investors or investors engaged in expanding or upgrading existing investments engaged in sectors listed under the Schedule are entitled to import capital goods and construction materials free of taxes and duties. Such goods and materials will be allowed to be imported duty free when they are deemed necessary for the project and approved to qualify for duty-free privilege in line with applicable Directives. Eligible investors are also allowed to import spare parts duty free but the value of such spare parts cannot be greater than 15% of the total value of the capital goods within five years from the date the investor becomes eligible for the incentives or from the date its business license is issued.
- Capital goods are defined to include equipment and other similar tangible goods used for the production of goods and provision of services. The treatment of intangibles such as information technology software is far from clear under the definition.
- Customs duty exemption with respect to motor vehicles would be regulated by a Directive. That said, the Regulation explicitly states that pickups (unusually) and station wagon vehicles cannot be allowed to be imported duty free.
On Administration of Incentives
- A major shift under the New Incentive Regulation is that it has mapped the respective roles, duties and responsibilities of the various regulatory bodies entrusted with investment incentives administration.
- In line with previous legislations including the Customs Amendment Proclamation No. 1160/2019, the exclusive mandate to give final decision on investment incentives rests with the Ministry of Finance under the New Incentive Regulation.
- Ethiopian Investment Commission and their counterparts at Regional and City Administrations are mandated to accept applications, verify eligibility, and pass on such applications with their recommendation to the Ministry of Finance for final approval. It is to be noted that duty free incentive application for items to be imported is lodged through the Ethiopian Electronic Single Window portal.
- Lastly, the Ministry of Revenue and the Customs Commission are empowered to implement tax holiday incentives and duty free importation of eligible goods, respectively. These institutions, similar to EIC and counterpart Government organs, have a duty to monitor compliance, maintain record and conduct appropriate audits on the proper implementation of the respective incentives.
The New Incentive Regulation sheds light on Government priority sectors. However, certain priority sectors such as telecommunications, education and primary/secondary healthcare do not qualify for income tax exemption. Of course, the Ministry of Finance may grant income tax exemption to these and other sectors on a case-by-case consideration. Finally, while the incentives administration regime sets out clear mandates of the respective organs of Government, the successful implementation of the reporting, supervision and audit related mandates will depend on institutional readiness and seamless coordination.
The information contained in this legal update is only for general information purposes. Nothing herein shall be considered and relied upon as a legal advice or a substitute thereto.