Introduction
On July 15, 2025 Ethiopian parliament has approved new income tax amendment proclamation. The new amendment proclamation introduces major changes to the income tax system, including provisions on the tax base, types and rates of taxes, implementation methods, and legal compliance issues.
This legal update is prepared to explore the notions that the new proclamation introduced and the change it made on the previous income tax proclamation.
Purpose of the Amendment Proclamation:
These amendments are meant to make the tax system fairer. They aim to lower taxes for people with lower incomes, bring more people into the tax system, fix unjust parts of the current law, make the rules easier to understand, and help prevent tax evasion.
- New Introduced Concepts
- Taxation of Digital Income
One of the major changes in the new proclamation is that the addition of a new category of income to the tax system; which is income from digital content creation. The digital income covers both monetary and non-monetary earnings that individuals or organizations receive for producing and sharing digital content on various platforms, such as video-sharing sites, social media, podcasts, and live-streaming services. It also includes revenue from advertising, sponsorships, brand deals, affiliate marketing, fan donations, and the sale of digital or physical products.
Another new point introduced in the proclamation, is that, income generated by non-residents of Ethiopia through information transmitted to Ethiopia; such as cable, radio, optical fiber, television broadcasting, and VSAT or internet satellite will be considered as an Ethiopian source income regardless of its origin. According to Article 22 of the amendment proclamation, income from digital content creation can be considered a business income if these conditions are met:
- the activity is done with the intention of making a profit;
- It is carried out in a professional or organized way;
- and maintain book of records or has business expenditure.
- Cash Payment Limitations
As per article 29 one other significant and new change is regarding cash payment limitation and their penalty if they are overlooked. Any taxpayer is prohibited from receiving more than Birr 30,000 in cash in a single day, from a single transaction, except for certain legally permitted payment methods (account payee check, account payee bank draft, bank to bank transfer or payment method authorized by the national bank of Ethiopia excluding of government offices, public enterprise, banks, microfinance institutions, and others determined by the Ministry of Finance. Whoever violates these limitations will be subject to an administrative penalty of “double the excess amount received.
- Exempted Income Source
The new proclamation added new income sources that are exempted from tax as per article 28(1).That is, premium collected by the Ethiopian Deposit Insurance Fund, premium from new share issues by operating companies and dividends paid by a company to another Ethiopian-resident company holding more than or equal to 12.5% voting/control rights.
- Amendment
- Category of Tax Payers
The previous proclamation, as is widely known, classifies taxpayers into three categories: A, B, and C. However, the amendment proclamation reduces these classifications into two catagories: Category A and Category B. The income thresholds for these categories also been revised. Category A taxpayers are individuals or enterprises with an annual gross income of 2 million birr or more, while Category B taxpayers are individuals (excluding enterprises) whose annual gross income is less than 2 million birr.
- Change Regarding Permanent Establishments and Inclusion of Technical Services
The amendment on the definition of a permanent establishment which is the reduction of the time limit needed to establish a permanent establishment based on service provision. Currently, a business is considered a permanent establishment if it provides consulting services for more than 183 days in a 12-month period. The amendment lowers this limit to 91 days within the same timeframe, broadening its applicability. Regarding construction project, , a construction site or project will be seen as a permanent establishment if it lasts for 91 days or more within a one-year period.
Another major change is adding technical services as a recognized category. Article 5 of the proclamation defines these services to include administrative, technical, and consulting works, covering areas like; accounting, auditing, economics, finance, law, administration, engineering, architecture, surveying, and other professional services.
- Revision in the Income Tax Rate
One of the most significant improvements in the amended proclamation is the expansion of the tax-free threshold. While the previous law only exempted income up to 600 ETB, the current law increased this exemption to 2,000 ETB. This change reduces the tax burden on low-income earners. The current law also simplified the tax brackets. Compared to the previous law, which had more narrowly defined and segmented brackets starting from as low as 10%, the current law uses broader income bands and begins taxation at a higher income level (above 2,000 ETB) at a rate of 15%. Meanwhile, the top tax rate of 35% remains in place for higher-income groups, preserving the progressive nature of the system.
- Change in Rental Income Tax
In the earlier schedule, rental income is taxed beginning at 7,201 birr with a 10% rate, increasing progressively through several narrow income bands, with rates of 15%, 20%, 25%, 30%, and reaching a top rate of 35% for incomes above 130,800 birr.In contrast, the revised tax schedule simplifies the brackets significantly. It begins with a 0% rate for annual rental income up to 24,000 birr, followed by a 15% rate from 24,001 to 48,000 birr, then 20% from 48,001 to 84,000 birr, increasing to 25% up to 120,000 birr, 30% up to 168,000 birr, and finally a top rate of 35% for income above 168,000 birr.
The same goes for business income tax
- Change on Category B Tax Payer
The amendment introduces a progressive tax system on total annual income: 2% for income between Birr 0–100,000, 3% for Birr 100,001–500,000, 5% for Birr 500,001–1,000,000, 7% for Birr 1,000,001–1,500,000, and 9% for Birr 1,500,001–2,000,000.
However, this progressive rate does not apply to certain professions and groups. Accountants, architects, consultants, construction contractors, engineers, financial service providers, health and legal professionals, VAT-registered taxpayers, and those who choose to pay tax under Schedule “C” by submitting proper accounting records are excluded from this structure.
- Taxation from Entertainment Service
Under the existing proclamation, non-resident individuals or groups providing entertainment services in Ethiopia are taxed at a rate of 10%. However, the new proclamation increases this rate to 15%, applied to the gross income earned from such services, without allowing any deductions for expenses.
- Minimum Alternative Tax (MAT)
Article 23 recommends a Minimum Alternative Tax (MAT) to guarantee that all taxpayers conducting business contribute at least a minimum tax amount, regardless of whether they have income tax liability in a tax year below that amount. The Article stipulates that, if the total of the assessed income tax in any tax year from all sources of business is less than 2.5% of the taxpayer’s turnover, MAT is applicable and is presumably the governing law regardless of anything that states otherwise. MAT allows a flat minimum rate of 2.5% based on different bases depending on the nature of the taxpayer. For general businesses, the basis is 2.5% of turnover; for banks, 2.5% of net banking income; for insurance companies, the basis is based on gross premium income; for price-regulated companies, the basis is commission income. The MAT payable is reduced by the business income tax the taxpayer has paid under Article 18, so there is no duplication. MAT does not apply to entities under liquidation.
Conclusion
The new income tax proclamation marks a significant reform by introducing digital taxations, defining taxpayer categories, tightening cash transaction controls to promote financial transparency and formalization.
Compiled by Melkamu Destaw (Junior Legal Associate at MAP Legal Services LLP)
Disclaimer: This legal update is for informational purposes only and does not constitute legal advice. Million Alemu and partners Legal Services assumes no responsibility for any actions taken based on the information contained herein.
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