Introduction

The House of Peoples’ Representatives of Ethiopia has approved a new amendment cited as Income tax Proclamation No. 1395/2017 to the Federal Income Tax Proclamation 979/2016. This decision was made during the House’s second emergency session held July 17th, 2025. The amendment is aimed at modernizing the tax system and keeping up with changes in the economy. It gives attention to taxing digital activities, increasing government revenue, and encouraging investment. It also aims to reduce the tax burden on low-income individuals and improve how taxes are collected and enforced. The effective date of the amendment is July 7th, 2025, except for the local withholding tax which is effective from August 1, 2025 (As per confirmation from the tax authority). Below 21 sections present the amendments briefly and compare the old and new adjustments.

A. Summary of the Amendments

1, Categories of taxpayers are minimized from three categories to two categories

There are two categories of taxpayers. 

1. A, ‘Category A’ :- a body and any other person whose annual turnover exceeds Birr 2,000,000 (two million birr) 
2. B, Category “B” taxpayers, taxpayers excluding bodies whose annual turnover is less than Birr 2,000,000 (two million Birr)” 

Previously the taxpayers were categorized into three as ‘Category A’, ‘Category B’ and ‘Category C’.

2, Employment Income Tax Changes

The tax brackets for employment income have been adjusted, with an increase in the tax-free threshold from 600 birr to ETB 2,000 per month. The top marginal tax rate of 35% now applies only to monthly incomes exceeding ETB 14,000. Below table compares the old bracket and the new bracket. This shall be effective from July 1, 2025, from a practical point of view.

3, Rental Income Tax Adjustments

Similar to employment income, the tax brackets on rental income earned by individuals have been adjusted upward. The structure remains graduated, but the thresholds have been increased.

4, Business Income Tax for Individuals

For individuals earning business income, the income tax brackets have been revised to match the new employment and rental income brackets. This adjustment seeks to maintain consistency in tax treatment across various types of personal income.

5, Presumptive Taxation for ‘Category B’ Taxpayers: (old Article 49, New Article 50)

The previous lump-sum turnover tax (TOT) system has been abolished. In its place, businesses with annual turnover under 2 million birr will pay a tax calculated between 2% and 9% based on their annual gross sales as below table.

6, Corporation Tax

The corporate income tax rate remains unchanged at 30%. No amendments were made to this rate, but advance income tax payment is introduced as mentioned in the below sections.

7, Introduction of Advance Income Tax Payment

The amended regulation requires Category “A” and “B” taxpayers to make advance income tax payments every quarter. Category “A” taxpayers must pay 25% of the previous year’s tax within 5 days after each quarter, while Category “B” taxpayers must do the same within 15 days, starting from Hamle 1 (July 8). 

New taxpayers are exempt from advance payments in their first year; Category “A” pays at the time of their first annual return, and Category “B” pays between Hamle 1 and Hamle 30 (July 8–August 5).

8, Introduction of Minimum Alternate Tax

A minimum alternate tax of 2.5% on gross income is introduced where in a year of assessment the total assessable profits from all sources of business income of a body or a person results in tax payable below 2.5% of the turnover in the same tax year. The minimum tax rate is as below, 

• 2.5% of the turnover of a body or person; or
• 2.5% of net banking income, in the case of banks. 
• 2.5% of the gross premium income for life and non-life insurance businesses, in the case of an insurance company
• 2.5% of the commission amount, in the case of a price-regulated company, 

Tax credit is allowed for up to 5 years and to the extent it is reduced to the level of minimum without the reduced business income tax paid. 

The minimum tax does not apply for Presumptive Taxation application for ‘Category B’ taxpayers (total gross revenue tax regime).

For taxpayers declaring losses over multiple years. This tax ensures that loss-making taxpayers still contribute a minimum tax amount, which will be credited against any future tax liability once the business becomes profitable.

9, Local Withholding Tax rate and threshold increase

The local withholding tax has increased to 3% from the previous 2%. The threshold at which withholding tax must be deducted also has been increased to ETB 10,000 from payments for service purchase (previously was ETB 3,000) and to ETB 20,000 from payments for purchase of goods (previously was 10,000 ETB).

10, Dividend Income Tax increase: (Old Article 55, new Article 57)

The withholding tax rate on dividends has increased from 10% to 15%. This tax is final, meaning recipients do not have to pay additional tax on these dividends.

This is not applicable if a body distributes dividend to a permanent establishment in Ethiopia or to a resident which is member of a group of companies. 

No deductibles allowed in connection with the distribution made in accordance with the above and the taxpayer shall not record the distributed amount as cost or setoff and shall not include such an amount in the income of the taxpayer.

“Group of companies” means a company (also referred to as “Controlling Group Company”) which directly or indirectly has more than one companies (referred as “Controlled companies”) in which it owns more than 50% of the shares.

11, Undistributed Profit Tax rate increase

Tax rate has been increased on undistributed profits from the previous 10% to 15%. Companies that declare profits but do not distribute them as dividends or reinvest them within one year following the end of the tax period will be liable for this tax.

12, Repatriated Profit Tax rate increase

The withholding tax on repatriated profits i.e profits transferred from a foreign branch to its head office outside Ethiopia has been raised from 10% to 15%.

13, Interest Income Tax

Interest income is now subject to a 10% final withholding tax, up from the previous 5%. This applies to interest earned by Ethiopian residents who derives interest and non-residents who derives Ethiopian source interest that is attributable to a permanent establishment of the non-resident in Ethiopia. 

If the income is earned by the financial institution from deposit of money to another financial institution or other similar transaction, the interest income is subjected to tax under ‘schedule C’.

If the interest income is derived from sale of goods or services on credit, the tax shall be paid in accordance with ‘Schedule C’.

14, Royalty Income Tax rate increase: (Old Article 54, New Article 56)

For residents of Ethiopia, the withholding tax rate on royalty payments has increased to 15% on the gross amount of the royalty and 10% in the case of royalties related to art and culture. 

For non-residents who derived an Ethiopian source royalty that is attributable to a permanent establishment of a non-resident in Ethiopia is liable for income tax rate at 15% on the gross amount of the royalty.

Previously the tax rate was flat at 5% for residents and non-residents derive royalty income.

15, Income from winning games

The tax rate on income from winning at games of chance held in Ethiopia is increased from 15% (Article 57, sub-Article 1 of 979/2016) to 20%. The tax is levied on the gross amount of the winning.

16, Gains on Disposal of Certain Investment Assets rate and calculation adjustment

The rate of Income tax on gains on the disposal of immovable assets, a share or a bond is set at 15%. Previously the rate for ‘class A’ (immovable assets) taxable asset was 15% while it was 30% for ‘class B’ Asset (shares and bonds). 

Moreover, the amount of gain on disposal of a taxable asset by a person should be computed at the following formula: - 

(A-B) -C = the amount of gain 

Where=> A=the consideration for the disposal of the asset 

        B=the cost of the asset 

        C= 30% 

“Taxable asset” means shares, bonds and buildings but with respect to buildings does not include a building held for and wholly used as a private residence for two (2) years prior to the disposal of the asset.”

Previously the amount of gain on disposal of a taxable asset was the amount by which the consideration for the disposal of the asset exceeds the cost of the asset at the time of disposal.

17, The rate increases on nonresident tax (old article 51, New Article 52)

The rate on non-resident tax is as below

1. a) For insurance premium or royalty 15% of the gross amount of the premium or royalty. (previously the rate was 5%)
2. b) for a dividend, 15% (fifty percent) of the gross amount of the dividend; (previously the rate was 10%)
3. c) for interest, 15% (fifty percent) of the gross amount of the interest; (previously the rate was 10%)
4. d) for a management or technical fee, 15 % of the gross amount of the fee.”. (No change)

18, Tax Rate increase on Non-resident Entertainers (Old Article 53, New Article 55)

Tax rate has been increased from 10% to 15% on non-resident entertainer or group of non-resident entertainers who has derived income from the participation by the entertainer or group in a performance taking place in Ethiopia. The tax is calculated on the gross income derived from the performance without deduction of expenditures.

19, Introductions of Digital Content Creation Income

Income derived from digital content creation such as YouTube, social media, podcasting, and online sales is now subject to tax. If the income qualifies as business income, it will be taxed under normal business income tax rates. Otherwise, a final tax rate of 15% applies. This measure seeks to formalize the taxation of the growing digital economy.

20, Introduction of Digital Services Tax: (New Article 53)

A new tax of up to 5% may be imposed on digital services provided by foreign companies to Ethiopian consumers, such as streaming services or cloud computing. The specific rate and details will be set by regulation from the Council of Ministers. This tax aims to capture revenue from foreign digital service providers.

21, Introduction of Limiting Cash Transactions: (added after sub article (1) (n) of the old

Article 27 or the New Article 29)

The amended Income Tax Proclamation introduces a clear limitation on the use of cash in commercial transactions. Specifically, any payment or receipt exceeding ETB 30,000 in a single transaction must be conducted through a formal banking channel, such as a bank transfer, cheque, or digital payment method.

Failure to comply with this rule has two key consequences:

For the recipient – accepting cash in violation of this limit may subject them to penalties or other enforcement measures under the tax law.

For the payer – any expenditure paid in cash above the threshold will not be considered a deductible expense for tax purposes. This disallowance can significantly increase the taxable income and hence the tax liability of the payer.

B.  Tabular summary of the Income Tax Amendment.