Ethiopia: MoF announces 2025-26 budget, includes

Ethiopia’s 2025–26 budget introduces major tax reforms, including an alternative minimum tax, revised personal and business income tax rates, digital economy taxation, withholding rules, cash transaction limits, and new measures for corporate entities, capital gains, excise, and environmental taxes.

Ethiopia’s Minister of Finance has released the Income Tax (Amendment) Proclamation No. 1395/2025, which was enacted in July 2025, introducing major revisions to the Federal Income Tax Proclamation No. 979/2016.

The key changes are as follows:

Taxpayer classification and new minimum tax regime

The categorisation of taxpayers has been revised, defining Category “A” taxpayers as bodies or persons whose annual turnover exceeds ETB 2,000,000. Category “B” taxpayers are individuals (excluding bodies) with a yearly turnover below ETB 2,000,000.

Alternative minimum tax (AMT)

A crucial addition is the creditable Minimum Alternative Tax (MAT). A body or person engaged in business income activity must now pay a minimum tax if their calculated tax payable falls below 2.5% of their total turnover for the assessment year. This minimum tax rate is generally 2.5% of turnover. Specific variations apply to financial institutions, such as banks, which calculate the minimum tax on 2.5% of their net banking income, and insurance companies, which use 2.5% of their gross premium income. The minimum tax paid in a year can be utilised as a tax credit against future tax obligations for up to five years, provided it only reduces the future tax payable down to the minimum tax level.

New rules for specific corporate entities

Limited liability partnerships and collective investment funds are explicitly not subject to corporate income tax. Instead, these entities operate as pass-through structures, requiring limited liability partnerships to withhold income tax distributed to members, and collective investment schemes to withhold dividend tax on profits given to shareholders.

Permanent establishment (PE) rules

The time threshold for construction or service activities to constitute a permanent establishment in Ethiopia is reduced from 183 days to 91 days.

Undistributed profit and repatriated profit

To encourage reinvestment, bodies must pay a tax of 15% on undistributed profits, unless they are demonstrably reinvested in accordance with upcoming directives. Similarly, non-resident bodies operating through a permanent establishment (PE) in Ethiopia are liable for a 15% tax on repatriated profits. If a PE fails to remit profit within twelve months from the end of the tax year, it is assessed as if it were remitted.

Dividend tax

The income tax rate for dividends derived by a resident of Ethiopia is 15% of the gross amount. The same 15% rate applies to dividends derived by a non-resident attributable to an Ethiopian PE. However, dividends distributed within a ‘Group of companies’—where the controlling company holds over 50% of the shares—are exempt from this tax.

Interest and royalty rates

Non-resident interest income attributable to an Ethiopian PE is taxed at 10% of the gross amount. Interest income earned by financial institutions from deposits in other financial institutions, or interest income from the sale of goods/services on credit, is subject to tax under Schedule C (Business Income). For residents, royalty income is generally taxed at 10% of the gross amount, reduced to 5% for royalties concerning art and culture.

Withholding taxes

The general withholding tax rate for payments made for the supply of goods (over ETB 20,000 in one contract) or services (over ETB 10,000 in one contract) is set at 3%. If a supplier fails to provide their Taxpayer Identification Number (TIN) or relevant business license, the withholding rate rises substantially to 30% of the gross payment.

Digital economy taxation

Income from digital services provided by non-residents is now taxable as Ethiopian-source income, with a Digital Services Tax capped at 5%. Digital content creators must declare income, and platforms facilitating payments must report transactions exceeding a set threshold.

Administrative reforms and cash transaction limits

The amendments introduce stringent rules regarding cash transactions to combat tax evasion. A taxpayer may not receive a payment exceeding ETB 50,000 in cash (whether aggregated in a day, for a single transaction, or for a single event). Payments must be made via specified methods such as account payee cheque, bank draft, bank-to-bank transfer, or authorised electronic payment. Payments made by a taxpayer in excess of this limit, if paid in cash, are disallowed as a deduction. Violators who receive cash exceeding the threshold are liable to pay the amount received as an administrative penalty.

Advance tax payments

Taxpayers must pay 25% of the previous year’s tax quarterly, with adjustments made in the annual return.

Capital gains and offshore transfers

Gains from indirect transfers of Ethiopian property are taxable if over 20% of the value is derived from Ethiopian assets, with specific formulas for partial taxation.

Other tax changes

Other tax measures include a 15% excise tax and VAT on fuel, which will likely impact fuel prices. Additionally, stamp duty obligations are being expanded to cover documents associated with excise tax administration. A new motor vehicle circulation tax will also be introduced, specifically targeting fuel-powered vehicles, as part of efforts to address environmental and fiscal concerns.

Revised personal income tax rates

Monthly employment income:

Ranges from 0% for income up to ETB 2,000 to 35% for income over ETB 14,000.

The tax rates/brackets are as follows:

ETB 0 to 2,000 – 0%
ETB 2,001 to 4,000 – 15%
ETB 4,001 to 7,000 – 20%
ETB 7,001 to 10,000 – 25%
ETB 10,001 to 14,000 – 30%
over ETB 14,000 – 35%

Annual rental and business income:

Similar progressive rates, with 0% for income up to ETB 24,000 and 35% for income exceeding ETB 168,000.

The tax rates/brackets are as follows:

ETB Up to 24,000 – 0%
ETB 24,001 to 48,000 – 15%
ETB 48,001 to 84,000 – 20%
ETB 84,001 to 120,000 – 25%
ETB 120,001 to 168,000 – 30%
over ETB 168,000 – 35%

Presumptive tax for Category B taxpayers:

A new regime applies to annual gross sales, with rates ranging from 2% for sales up to ETB 100,000 to 9% for sales just under ETB 2,000,000. Exemptions apply to VAT-registered businesses, those opting for net income taxation, and professional service providers.

The tax rates/brackets are as follows: