This regulation, issued by the Council of Ministers, provides detailed rules for implementing the Federal Income Tax Proclamation No. 979/2016. It clarifies definitions, calculation methods, and procedures for various types of income tax in Ethiopia.

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1. General Provisions & Definitions

• Purpose: To supplement the main Income Tax Proclamation (Proc. No. 979/2016).
• Definitions: Clarifies specific terms not fully defined in the main Proclamation, such as:
  • Interest: Payments by savings and credit associations are treated as interest.
  • Permanent Establishment: For determining the 183-day presence, connected projects of related persons are counted together.
  • Resident Individual: Any part of a day spent in Ethiopia (including arrival and departure) counts as a full day for residency tests. Holidays, sick leave, and work interruptions are also counted as days of presence.
• Key word and phrases

Fringe Benefits, Depreciation Deduction, Employment Income, Business Income Tax, Presumptive Business Tax, Withholding Agent, Loss Carry Forward, Rental Income, Tax Credit, Fair Market Value, Straight-line Method, Diminishing Value Method, Foreign Currency Exchange Gain/Loss, Repatriated Profit, Exempt Income

2. Employment Income (Fringe Benefits & Foreign Income)

• Fringe Benefits (Schedule ‘A’ Income): Defines what constitutes a fringe benefit and provides specific rules for valuing them:
  • Categories: Includes debt waiver, household personnel, housing, discounted loans, meals, private expenditure, property/services, employee share schemes, and vehicles.
  • Valuation: Each benefit has a specific calculation method. For example:
    • Vehicle: Valued at 5% of the vehicle’s cost (or fair market value) per year, with reductions for employee contributions, business use, and periods unavailable for private use. The value is halved after 5 years.
    • Housing: Valued based on fair market rent or the actual rent paid by the employer, less any employee contribution.
    • Property/Services: Valued at 75% of the normal selling price if provided by the employer’s business, otherwise at cost.
  • Tax Cap: The total tax on all fringe benefits for an employee cannot exceed 10% of their salary income.
• Foreign Employment Income:
  • Applies to resident employees working for non-resident employers (who don’t have a permanent establishment in Ethiopia).
  • Allows a tax credit for foreign income tax paid, limited to the Ethiopian tax payable on that foreign income.
  • The credit is calculated using the employee’s average Ethiopian employment income tax rate.

3. Rental Income (Schedule ‘B’ Income):

• Advance Rent: If rent is received for a period exceeding one year, the tax is calculated by spreading the income over the number of years it covers.
• Business Asset Leasing: Income from leasing business assets (like equipment) is taxed under Schedule ‘C’ (Business Income), not ‘B’.
• Rental Building Depreciation: Depreciation on rental buildings, furniture, and equipment is allowed using the same rules as for business assets.
• Rental Losses: Can be carried forward to offset future rental income.
• Foreign Rental Income: Tax credits are allowed for foreign income tax paid on foreign rental income.

4. Business Income (Schedule ‘C’ Income)

• Deductions:
  • Representation & Promotion Expenses: Limits on these will be set by a directive from the Minister.
  • Interest to Foreign Lenders: Deductible only if the borrower provides the tax authority with a copy of the National Bank of Ethiopia’s authorization for the loan.
  • Medical Expenses & Meals: These are generally deductible; however, limits on meals are set by a directive.
  • Charitable Donations: Deductible for donations supporting education, health, or the environment, including the taxpayer’s own charitable activities.
  • Head Office Expenses: Deductible for a permanent establishment when reimbursing its non-resident parent for actual expenses incurred for the establishment’s benefit.
• Depreciation (Deductions):
  • Methods: Taxpayers can use either the Straight-Line Method or the Diminishing Value Method, provided the same method is used in their financial accounts.
  • Asset Categories & Rates:
    • Computers, Software, Data Storage Equipment: 20% (Straight-line)
    • Greenhouses: 10%
    • Structural Improvements on Immovable Property (other than greenhouses): 5%
    • Other Depreciable Assets: 15%
    • Assets for Mining and Petroleum: 25%
    • Business Intangibles: Rates vary from 10% to 25%.
  • Building: Depreciation allowed only for the business portion.
  • Repairs & Improvements: Deductible up to 20% of the asset’s net book value. Amounts exceeding 20% are added to the asset’s value.
• Losses:
  • Loss Carry-Forward: Losses can be carried forward, but only if the books are audited and acceptable to the tax authority.
  • Loss Carry-Backward: Losses from long-term contracts can be carried backward.
• Foreign Currency:
  • Exchange gains are included in business income.
  • Exchange losses can offset gains. Unused losses can be carried forward indefinitely.
  • Hedging contracts must be considered when determining gains or losses.

5. Specific Entity Rules

• Banks: Only 80% of the loss reserve (calculated as per National Bank of Ethiopia rules) is deductible.
• General Insurance Companies: The deductible reserve for unexpired risks must be calculated using financial reporting standards.
• Life Insurance Companies: Taxable income is calculated using a specific formula accounting for premiums, investment income, claims, and reserves.
• Micro Enterprises: Treated like individuals, their obligation to keep books is based on their annual turnover.

6. Presumptive Business Tax (Category ‘C’ Taxpayers)

• Tax is calculated using the schedule attached to the regulation, based on either annual turnover or indicators like the number of seats in a vehicle.
• The Minister is required to revise this schedule at least every three years.
• A vehicle owner who drives their own vehicle for transport services must include the employment tax a driver would have paid in their tax calculation.

7. Other Income and Assets

• Casual Asset Rental (Schedule ‘D’): Relates to income from occasional rental by a person not regularly engaged in rental activities.
• Repatriated Profit: Defines how to calculate the tax on profits repatriated by a non-resident company with a permanent establishment in Ethiopia.
• Exempt Income (Schedule ‘E’): Includes:
  • Income paid to expatriate professionals for up to 5 years (subject to a directive).
  • Income of unskilled employees working for the same employer for no more than 30 days in a 12-month period.
  • Employer contributions to employee medical insurance.
• Asset Disposal and Cost:
  • For depreciation and capital gains tax, a transfer of a registrable asset is considered to occur at the time of notarization.
  • The cost of an asset for tax purposes includes the amount included in taxable income (or exempt income) plus any cash paid for it.

8. Administrative and Procedural Rules

• Books of Account: Category ‘B’ and ‘C’ taxpayers have specific record-keeping requirements. Some may use simplified accounting.
• Withholding Tax: Procedures for withholding agents, including issuing serial-numbered receipts. If a withholding agent fails to withhold, the taxpayer is not liable if they can prove they already paid the tax.
• Late Submission: Books of account cannot be rejected solely for being late, though penalties may apply.

9. Transitional and Final Provisions

• Grandfathering: Taxpayers with existing “depreciation pools” under the old law can continue depreciating them under the old rules.
• Implements Federal Income Tax Proclamation No. 979/2016
• Amended by Council of Ministers Federal Income Tax Regulation (Amendment) No. 485/2021
• Repeal: This regulation repeals the previous Income Tax Regulation No. 78/2002.
• Effective Date: As of July 8, 2016