The amendments aim to modernise Ethiopia’s tax system, improve compliance, simplify procedures, and broaden the tax base to include emerging and digital sectors.
The Ethiopian House of Peoples’ Representatives approved the Income Tax (Amendment) Proclamation No. 1395/2025 on 17 July 2025, introducing extensive changes to the Federal Income Tax Proclamation No. 979/2016.
The amendments aim to modernise Ethiopia’s tax system, improve compliance, simplify procedures, and broaden the tax base to include emerging and digital sectors.
Corporate income tax & alternative minimum tax (AMT)
The corporate tax rate remains 30%. Entities whose income tax liability falls below 2.5% of turnover are subject to AMT, including those with investment incentives. AMT credits can be carried forward for five years. Banks, insurers, and commission-based businesses apply AMT to net banking income, gross premiums, or commissions, respectively.
Permanent establishment
The minimum presence threshold for non-resident entities to establish a permanent establishment (PE) has been reduced from 183 to 91 days. The amendment also defines “technical services” for service PEs.
Withholding taxes and non-resident taxation
Revised withholding tax rates aim to align with international standards and enhance cross-border revenue collection.
Dividends and share subscriptions
A forthcoming directive will clarify tax treatment for dividends used to settle unpaid share subscriptions.
Advance tax payments
Quarterly advance tax payments are now mandatory, calculated as 25% of the previous year’s total income tax. Overpayments can be refunded, and underpayments must be settled at year-end.
Digital economy & services tax
Income from digital content creation is taxable. Professional activity is taxed under business income rules; non-professional activity is subject to a 15% final withholding tax. A Digital Services Tax of up to 5% will apply to resident and non-resident digital service providers, with details in an upcoming regulation.
Charitable donations and withholding tax adjustments
The amendment allows tax deductions for charitable donations to government-prioritised development activities, with the Ministry of Finance able to raise the standard 10% limit for key sectors. It also increases the withholding tax on domestic goods and services to 3%, with new thresholds of ETB 20,000 for goods and ETB 10,000 for services per contract.
Indirect transfers
Gains from offshore transfers of Ethiopian assets are now taxable if over 20% of the asset value derives from Ethiopian property within 365 days before the transfer.
Taxpayer categories
Category C is eliminated. Category A now includes businesses with annual turnover over ETB 2 million; Category B applies to smaller businesses, with professional service providers required to maintain accounts regardless of turnover.
Employment, rental, and business income tax
Monthly income tax exemption rises from ETB 600 to ETB 2,000. Top monthly and annual tax brackets are increased, with rates up to 35%. Limited liability partnerships and collective investment funds are exempt from corporate tax but must withhold tax on distributions.
Reporting obligations
Government entities must report information on foreign employees, including non-diplomatic staff at embassies and international organisations.
The Proclamation will take effect retroactively in phases: AMT and other amendments are effective from 8 July 2025, Schedule D and domestic withholding tax from 7 August 2025.
