Resident companies are subject to corporate tax (‘CIT’) on their worldwide income earned from sources within and outside Ethiopia. Ethiopia follows a scheduler system in the classification of income from various categories, as follows:
a. Schedule A: Income from Employment
b. Schedule B: Income from Rental of Buildings
c. Schedule C: Income from Business
d. Schedule D: Other Income
e. Schedule E: Exempt Income
Expenses incurred during a year are deductible in determining taxable income to the extent necessary in deriving, securing and maintaining amounts included in taxable business income, and not disallowed by specific tax law provisions. Interest expenditure is deductible to the extent the borrower has used the debt to derive business income. However, the deduction of interest expenditure may be limited under 3 different sets of rules (see Sec 13.2).
Capital gains on sale or transfer of shares of companies are taxed as ordinary income whereas capital gains from sale or transfer of buildings held for business is taxed at reduced rates (See Sec. 8.1.1. for tax rates).
Capital gains or losses on transfers of assets used in a business (other than buildings) are taxed as business income, subject to certain conditions. Effective 30 August 2019, the consideration received from disposal of property held entirely for deriving rental income or for use as a business asset exceeding the net book value of the asset will be included in the rental income or business income (taxed at the standard current rate of 30%), whereas the consideration exceeding the cost of the asset will be subject to tax at the rate available for gains on immovable property (15%) (see Sec 8.1.1).
Dividends paid by public companies or withdrawal of profits by private limited companies are subject to withholding taxes (See Sec 8.1.1. for rates). However, if a resident company or a partnership reinvests their earnings in the share capital of another company or partnership then such amounts are deductible from taxable income (except certain specific sectors) provided:
- The investing resident company holds at least 25% in value or number in share capital or voting rights of the other resident company; or
- The investing partnership firm holds at least 25% of value of capital in other partnership firm.
The Revenue Authority of Ethiopia has amended the law to include tax on “windfall profits”. Windfall profit is defined as profit obtained by any person as a result of a change occurred in local or international economic and political situations without its own efforts. However, the businesses to which such windfall taxation shall apply and the rates of tax, are yet to be declared by the authorities. Generally, business entities engaged in mining, petroleum industry and financial services are considered as beneficiaries of windfall gain.