Guideline to Doing Business in Ethiopia: Especially Investing on Agriculture in Ethiopia
Ethiopia is located in the horn of Africa and is bordered North & NE by Eritrea, East by Djibouti and Somalia, South by Kenya and, West and South West by Sudan. The total area coverage is about 111.5 million ha and out of this 74.3 million ha is suitable for agriculture and there are 18 Major agro ecological zones in the country.
National Development Policy
In response to the economic, social and political challenges, the Ethiopian government adopted the national policy in the objectives of Integrating comprehensive and rational role of the state in the economy; Encouraging private and foreign investments; Increasing community participation and Decentralization in economic management. The main strategy adopted is known as Agricultural Development led industrialization (ADLI). ADLI gives at most importance for agricultural sector as the engine for economic growth of the country. It emphasizes on the commercialization of small holder farmers as well as enhanced growth in the rural area.
The Agricultural Sector in Ethiopia
As mentioned above, the agriculture sector has a Market oriented agricultural development policy. Agriculture in Ethiopia contributes 45% of the GDP; 80% of the employment opportunity and 90 % of the foreign exchange of the country.
The Agricultural sector includes Crop production; Livestock production; Fishery; Beekeeping; Forestry… etc…
The organ entrusted with foreign investment in Ethiopia is the Ethiopian Investment Agency in collaboration with the Ministry Of Agriculture. Agricultural investment is open for foreign investment in Ethiopia. Accordingly any foreign investor can invest as 100% foreign owned foreign company or in joint partnership with Ethiopian investor (company or an individual), after fulfilling the capital requirement for company establishment in Ethiopia. Then the full formation of the business requires the registration of the company as per Ethiopian law. The business can be setup in one of the following forms:
Up to now the main Agricultural products in Ethiopia are Cereals, pulses, oil crops fruits, vegetables, fibers, Crops, coffee, tea, spices, and other industrials crops. The livestock products includes live animal for slaughter purposes, meat, hide and skin, milk, egg, hair & others.
Currently the prioritized commodity/Industrial crops by Ethiopian government are Cotton, Rubber tree, Palm oil, Sugar cane. The government identified 3,673,806 ha land in Oromia, Benishangul Gumuz, Gambela, SNNP, Afar and Somalia for this purpose. So far the government has transferred 466,803 ha land for investors and there is a remaining 3,207,003 ha land to transfer for investors investing on these agricultural production.
The Lease period depends on type of crop ranging from 25-50 years and land acquisition for foreign investors starts from 5,000ha of land but based on the performance of the investors, land will be added.
Ownership of Immovable Property: As per the Investment Proclamation a foreign investor has the right to own a dwelling house and other immovable property requisite for his investment. This right includes those investors who have invested prior to the coming in to force of Proclamation Number 769/2012
The Emergence of Industrial Development Zones in Ethiopia: The Federal government is currently encouraging the establishment of manufacturing industries. Accordingly for the industrial sector to have a leading role in the economy, the Federal Government of Ethiopia has established Industrial Development Zones in regions. This zone development will be undertaken by the Federal Government or where necessarily by joint investment of government and private sector.
Opportunities and Investment Incentives
Ethiopia has an opportunity of political and macro-economic stability; fast economic growth; good governance, conducive environment; clear investments laws and policies; Investment Guarantees and protections; competitive, hospital and trainable labor and Employment law; vast and fertile land; Agricultural investment support institutions organized at all level; abundant and diversified natural resources and diverse climate and attractive Investment incentives. The Ethiopian investment laws and policies provide the following incentives.
Labor and Wage Policy
Employing Workers in Ethiopia and the employer-employee relationships are governed by the labour proclamation number 377/2003. The Ethiopian Investment Policy makes it easy to the Investor to mobilize its laborer from region to region without any restriction with efficient, economic manner and standard benefit of the workers. Therefore, to provide a sufficient number of labors for the new investment, it is advisable to mobilize additional manpower from highly populated areas. And investors are allowed to bring in or employee expat employees in case of unavailability in the local market from abroad who have practical experience to transfer the modern technologies and add value on productivity.
Duty and Tax policy
Basically the Ethiopian tax law provides Direct and Indirect Taxes. If you are a business company intending to open a new business here in Ethiopia or an already established business, here is the list of taxes imposed on business companies operating in Ethiopia. However there are tax incentives in Ethiopia. Accordingly any income derived from an approved new manufacturing, agro-industrial or agricultural investment is exempted from the payment of income tax ranging from 2-5 years depending up on the area of investment, the volume of export and the location in which the investment is undertaken. Below you find a brief note on this.
Income tax exemptions based on areas of investment: A foreign investor who engages in investment in the state of Gambela, Benishangul/Gumuz, Afar except in areas within 15 km right and left of the Awash river, Somali, Guji and Borena zones of the state of Oromia, south Omo zone, Kaffa zone, Sheka, Segen, Bench Maji, Sheka, Dawaro, is entitled to an Income Tax Deduction of 30% for three consecutive years. The income tax exemption period varies from one sector of investment to another.
Income Tax Exemptions Based On Expansion of Investment: A foreign investor expanding or upgrading his existing enterprise in relation to the additional income generated by the expansion of the enterprise is also entitled to income tax exemption.
Income Tax Exemptions Based On Exporting Of Products or Services: A foreign investor who exports or supplies to an exporter as production or service input, as a minimum 60% of the products or services is entitled to income tax exemption for two years.
If an investor, particularly, engaging in an area of manufacturing or information and communication technology development cannot construct his own production building, the income tax exemption incentive will be one year lesser than what is provided in the law.
Income derived from an expansion or upgrading of an existing manufacturing, agro-industrial or agricultural enterprise is exempted from income tax for a period of two years if it exports at least 50% of its products and increases, in value, its production by 25%.
Even though the investor should pay the land rent which is cheapest as compare to other countries; the government gives 2 to 5 years grace period based on the commercial crop harvest period, which gives economic yield.
Loss Carry Forward
Business enterprises that suffer losses during the tax holiday period can carry forward such losses for half of the income tax exemption period, after the expiry of such period.
Customs Duty Exemption
A 100 percent exemption from the payment of import customs duty and other taxes levied on imports is granted to investment capital goods and construction materials necessary for the establishment of a new enterprise or for the expansion or upgrading of an existing enterprise as well as spare parts worth up to 15 percent of the value of the imported capital goods;
Investment capital goods imported without the payment of import customs duties and other taxes levied on imports may be transferred to investors enjoying similar privileges;
Exemptions from customs duties or other taxes levied on imports are granted for raw materials and packing materials necessary for the production of export goods. Taxes and duties paid on raw materials and packaging materials are drawn back at the time of exports of finished products. The voucher system and bonded manufacturing warehouse facilities are also in place.
All goods and services destined for export are exempted from any export and other taxes levied on exports.
The project is accepted by the Ethiopian Development Bank, if the investor secured (deposit) 30% of the investment (In cash) the Bank gives up to 70% loan.
Loans New Projects
Borrowers who wish to obtain financing for new export oriented and manufacturing projects are required to provide initial cash equity contribution of 30% of the total project cost. Projects under this category include: live animals, horticulture, leather products, textile and garment, horticulture and floriculture crops, cotton and other foreign currency generating projects.
Loans for Expansion Projects
Borrowers who wish to obtain financing for expansion of existing export oriented and manufacturing projects are required to provide an initial equity contribution of 30% of the total required expansion capital. This can be in form of cash or in form of the projects assets, provided that the project’s assets are uncollateralized and valued at no less than 2/3 of the required loan amount. Any shortfall in the assets valuation has to be met with a cash contribution.
The Banks gives its clients a maximum grace period that involves the period of implementation up to the commencement of operation. The grace period cannot exceed 3 years.
To encourage private investment and promote the inflow of foreign capital and technology into Ethiopia, the following incentives are granted to investors (both domestic and foreign) engaged in new enterprise and expansion in areas qualified for investment incentives. Ethiopia provides the following guarantees to foreign investors
Repatriation of Capital and Profits
Capital repatriation and remittance of dividends and interest is guaranteed to foreign investors under the investment proclamation.
Any foreign investor has the right, in respect of an approved investment, to make the following remittances out of Ethiopia in convertible currency at the prevailing rate of exchange on the date of remittance.
Investment Guarantees and Protections
In Ethiopia, no investment can be expropriated or nationalized by the government except for public interest and then, only in conformity with the requirements of the law. The constitution of the Federal Democratic Republic of Ethiopia protects private property. The investment proclamation also provides investment guarantees against measures of expropriation and nationalization that only may occur when required for public interest and in compliance with the requirements of the law. But even so, adequate compensation, corresponding to the prevailing market value, has to be paid in advance in case of expropriation or nationalization of an investment for public interest.
Ethiopia is a member of the World Bank affiliated Multilateral Investment Guarantee Agency /MIGA/ which issues guarantees to investors against non-commercial risks such as expropriation. Moreover, Ethiopia is also concluding bilateral investment promotion and protection agreements with various countries. So far Ethiopia has concluded bilateral investment and double taxation avoidance treaties with the following countries:
30 Bilateral Investment Treaties (BITs) 1994 – 2009: Algeria, Kuwait, Austria, Libya, Belgium and Luxemburg, Malaysia, China ,Netherlands, Denmark, Russia, Djibouti ,South Africa, Egypt ,Spain, Equatorial Guinea, Sudan, Finland ,Sweden, France, Switzerland, Germany, Tunisia, India ,Turkey, Iran, United Kingdom, Israel , USA, Italy ,Yemen
12 Double Taxation Avoidance Treaties (DTTs) 1996– 2008: Algeria, Romania, Check Republic, Russia, France, South African, Israel, Tunisia, Italy, Turkey, Kuwait, Yemen.
Ethiopia has also signed the World Bank treaty, ''the Convention on Settlement of Investment Disputes between States and nationals of other states /ICSID/
With a population of about 77 million, Ethiopia provides a steady and growing domestic market, which is one of the largest in Africa. With regard to agricultural growers can sell their own produces directly to international markets and/or local.
Price is determined either by the current market or by negotiations taking place between participants.
Ethiopia is a member of the Common Market for Eastern and Southern Africa (COMESA) agreement embracing 20 countries in Eastern and Southern Africa. Exports and imports with member countries enjoy preferential tariff rates.
Everything but Arms of the European Union (EBA): Ethiopia is a beneficiary of Everything but Arms (EBA) of the European Union.
African Growth and Opportunity Act (AGOA) and the Generalized System of Preference (GSP)
Under the African Growth and Opportunity Act (AGOA) program, Ethiopia is entitled to duty-free and quota-free U.S. market access and essentially all export products of Ethiopia are eligible for duty-free and quota-free U.S. market access.
Even though the absence of National Agricultural Certifier Institution, the country has organic farming proclamation, on the other hand there are about 6 international certifiers agents that certify the agricultural organic products.
The Direct and Indirect Taxes applicable in Ethiopia
The principal Direct and Indirect taxes in Ethiopia taxes currently in place are profit tax, turn over tax (TOT), value-added tax (VAT), excise tax, customs duty and income tax from employment. VAT has replaced sales tax. TOT and withholding taxes have been introduced recently. Other taxes include corporate tax, dividend income tax, royalties and stamp duties.
The Government has recently been introducing a series of measures to reform the tax system with a view to encouraging investment and foreign trade. On the whole, the reform process is to reduce the rates but broaden the base.
Corporate Income Tax: The corporate income tax (tax on profit) in Ethiopia is 30 per cent.
Turn Over Tax (TOT): A 2 per cent tax is payable from supplying of goods to the local market and rendering of construction, grain mill, tractor, combine harvesting services undertaken in the country. A 10 per cent tax is payable on other sectors excluding the above mentioned services.
Excise Tax: Excise tax is levied on selected items when produced locally or imported from abroad. The tax rate ranges from ten per cent to hundred per cent.
Customs Duties: Customs duties are payable on imports by all persons and entities which have no duty-free privileges. The main regulation on customs duty has introduced a harmonized system of classification of goods and the rate of customs duty ranges from 0 to 35 per cent.
Income Tax from Employment: Personal income tax is payable as per Proclamation No.286/2002. According to this law, the first Birr 150 of monthly personal income is exempted from payment of income tax. For monthly income of Birr 151 and above the marginal tax rates range from 10 per cent to 35 per cent with 7 income brackets as shown below.
Export Taxes: There are no taxes on export products and services from Ethiopia except the ones levied on raw and semi-processed hides and skins, and wet-blue cow hide, pickled sheep skins with wet-blue sheep and wet blue goat skins at flat rate of 150%.
Withholding Tax: Withholding tax is payable on import of goods and is set at 3 per cent of the same cost, insurance and freight. In case of organizations, having legal personality, government agencies, private non-profit institutions, and non-governmental organizations (NGOs), the amount withheld is 2 per cent of the gross amount of payment.
Value Added Tax: Value added tax is levied on those businesses whose turnover is over and above Birr 500,000 per year. They are expected to pay 15 per cent VAT. All export goods and basic services, however, are exempted from VAT.
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Note: This guide provides vital information on investment in Ethiopia and its practice, especially agricultural investment in Ethiopia. This note on the investment laws and policies of Ethiopia is not intended to substitute professional advice given with full knowledge of the specific circumstances of each case and proficiency in the law of Ethiopia.
Such information about investment in Ethiopia can be available from an Ethiopian Lawyer, Ethiopian Investment Lawyer, Ethiopian Tax Attorney, Ethiopian, Ethiopian Employment Lawyer and Ethiopian Immigration Attorney.