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A Directive to Provide for the Application of Tax Incentives for Expansion/Upgrading of Investment (Directive No. 941/2023)

Ministry of Finance941/2023

Summary

This directive provides for the application of tax incentives for the expansion or upgrading of existing investments in Ethiopia. It details income tax exemptions and customs duty exemptions on capital goods for eligible investors who meet specific criteria for increasing production volume, variety, or modernizing operations.

Who's affected

Investors in Ethiopia who are engaged in expanding or upgrading their existing production or service rendering enterprises.

Action required

Investors should review the directive to determine their eligibility for tax incentives related to expansion or upgrading and submit the required documentation to the relevant regulatory institution.

Key points

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  • Directive No. 941/2023 outlines tax incentives for investment expansion or upgrading.
  • Eligibility requires meeting specific criteria for increased production volume or variety.
  • Investors can benefit from income tax exemptions and duty-free import of capital goods.
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    • Separate bookkeeping for expansion/upgrading activities is mandatory.
    • Penalties exist for fraudulent documentation.
    • The directive is effective upon publication on the Ministry of Finance website.

Requirements

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  • Investors must submit evidence of being engaged in production or service rendering activities for at least thirty-six (36) months.
  • Investors must submit audited financial statements showing capital invested for modernization, new technology, or increased production/service.
  • Investors must submit audited financial statements showing the volume of production or service rendered within a year after upgrading completion.
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    • Investors who previously received tax exemption must submit proof of fulfilling their declaration obligations.
    • Investors must maintain separate books of accounts for income and expenditure related to expansion/upgrading.
    • Investors must demonstrate an increase in production volume by at least 50% or an increase in variety by at least 100% to qualify for duty-free import of capital goods.
    • Investors who fail to expand or upgrade as per the business plan must pay duties and taxes on goods imported duty-free.

Rights and permissions

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  • Right to income tax exemption on profits derived from expansion or upgrading based on the percentage of capacity increase.
  • Right to import capital goods duty-free for expansion or upgrading.
  • Right to special approval for duty-free import of goods if the enterprise has a special nature and the goods will modernize production, increase productivity, or increase variety.

Restrictions

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  • Income tax exemption only applies to income obtained from the expansion and upgrading.
  • Investors who cease operations and re-engage in another investment qualifying for tax exemption are not entitled to exemption for the period already used.
  • New companies where a shareholder of a dissolved company owns 50% of the shares are not entitled to exemption for the period utilized by the dissolved company.
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    • Investors ceasing operations can only apply for tax exemption as a new investor, not for expansion or upgrading.
    • Investors must pay duties and taxes if they fail to expand or upgrade as per the business plan.
    • Penalties apply for providing exaggerated, false, misleading, or fraudulent documents.

Penalties

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  • An investor providing false or fraudulent documents regarding business activities will be required to pay the business income tax for the period of exemption.
  • An auditor preparing or cooperating in preparing false or fraudulent documents will be liable as per Article 48 of the Tax Administration Proclamation No. 983/2016.
  • Auditors found responsible for misconduct will be reported to the Accounting and Auditing Board of Ethiopia.

Objectives

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  • To provide for the application of tax incentives for the expansion or upgrading of investment.
  • To grant income tax exemption on income obtained from the expansion or upgrade.
  • To allow duty-free importation of capital goods for expansion or upgrading of existing investment.

Organizations

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  • Ministry of Finance
  • Regulatory Institutions
  • Accounting and Auditing Board of Ethiopia

Legal references

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  • Investment Incentives Regulations No. 517/2022, Article 5
  • Investment Incentives Regulations No. 517/2022, Article 12(5)
  • Investment Proclamation No. 1180/2020
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    • Income Tax Proclamation No. 979/2016, Article 76
    • Tax Administration Proclamation No. 983/2016, Article 118(2)
    • Tax Administration Proclamation No. 983/2016, Article 48
    • Financial Reporting Proclamation
Original sourcehttps://justice.gov.et/en/directives/a-directive-to-provide-for-the-application-of-tax-incentives-for-expansion-upgrading-of-investment-directive-no-941-2023/
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