Understanding Ethiopia's Tax System and Reforms in 2025

Ethiopia operates under a federal tax structure, where both the central government and regional states levy taxes independently. A portion of state-collected revenues is transferred to the federal government, which then redistributes funds based on demographic, economic, and fiscal criteria. Since the early 1990s, Ethiopia has undertaken significant tax reforms aimed at modernizing its revenue system. These efforts have focused on broadening the tax base, reducing rates, streamlining compliance procedures, closing loopholes, enhancing tax incentives, and improving public awareness among individuals and businesses about tax responsibilities.

A major milestone was the introduction of Value Added Tax (VAT) in 2003. Further advancements came with the enactment of the Federal Income Tax Proclamation No. 979/2016 and the Tax Administration Proclamation No. 983/2016, which laid the foundation for a more transparent and efficient tax regime. All relevant legal documents are accessible through the Ethiopian Revenue and Customs Authority’s official website.

In addition, Ethiopia and China signed a bilateral agreement on the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income on May 14, 2009. The treaty entered into force on January 1, 2013, following the completion of domestic ratification procedures by both countries. This agreement supports cross-border investment and provides clarity for Chinese enterprises operating in Ethiopia.

Main Taxes and Current Rates in Ethiopia

The Ethiopian tax framework includes both direct and indirect taxes. Key levies include corporate income tax, business (sales) tax, capital gains tax, excise duty, import tariffs, personal income tax, withholding tax, export tax, and VAT. Each tax follows distinct calculation methods and applicability rules.

Corporate Income Tax

Companies in Ethiopia are subject to a flat corporate income tax rate of 30% on net profits. Dividend distributions to shareholders incur a 10% withholding tax. For individuals and micro-enterprises engaged in commercial activities, progressive tax rates apply based on annual turnover:

1. Annual income up to 7,200 ETB: 0% tax rate
2. 7,201–19,800 ETB: 10%
3. 19,801–38,400 ETB: 15%
4. 38,401–63,000 ETB: 20%
5. 63,001–93,600 ETB: 25%
6. 93,601–130,800 ETB: 30%
7. Over 130,800 ETB: 35%

Business (Sales) Tax

A 2% business tax applies to domestic sales of goods and certain services—including construction, grain milling, tractor rentals, and agricultural harvesting—for taxpayers not registered for VAT and with annual taxable turnover below 500,000 ETB. Essential items such as bread, milk, medicines, medical devices, and healthcare services are exempt. All other taxable services are subject to a 10% rate.

Capital Gains Tax

Gains from the sale of real estate are taxed at 15%. Capital gains derived from the transfer of company shares or bonds are taxed at a higher rate of 30%, reflecting the country’s approach to regulating financial asset transactions.

Excise Tax

Following the adoption of the new Excise Tax Proclamation in February 2020, Ethiopia imposes excise duties on select domestically produced or imported goods. Rates vary widely—from 5% to as high as 500%—depending on product categories. Products typically subject to excise include alcohol, tobacco, soft drinks, luxury vehicles, and telecommunications services.

Import Duties

Customs tariffs are assessed on a classification basis, with rates ranging from 0% to 35%. Duty exemptions may apply to capital goods, machinery, and raw materials used in export-oriented industries, encouraging industrial development and foreign investment.

Personal Income Tax

Individuals are taxed on monthly earnings under a progressive scale:

1. Monthly income up to 600 ETB: 0%
2. 601–1,650 ETB: 10%
3. 1,651–3,200 ETB: 15%
4. 3,201–5,250 ETB: 20%
5. 5,251–7,800 ETB: 25%
6. 7,801–10,900 ETB: 30%
7. Over 10,900 ETB: 35%

This structure ensures lower-income earners face minimal burden while higher salaries contribute proportionally more to national revenue.

Export Tax

Ethiopia maintains a largely export-friendly policy. With the exception of coffee—a key cash crop—no other goods are subject to export duties. This incentivizes export diversification and strengthens the country’s position in global agricultural and manufacturing markets.

Withholding Tax

A 3% withholding tax is applied to the CIF value (cost, insurance, and freight) of imported goods. However, if the importer is a legal entity, government body, private nonprofit organization, or NGO, the rate is reduced to 2%. This mechanism helps ensure upfront tax collection and improves compliance.

Value Added Tax (VAT)

VAT is levied at 15% on businesses with annual turnovers exceeding 500,000 ETB. Several transactions are exempt, including exports of goods and services, international transport services directly linked to passenger or cargo movement, and supplies consumed during international flights—such as lubricants and disposable materials. These exemptions align with international best practices and support trade competitiveness.

For multinational companies navigating Ethiopia’s evolving fiscal landscape, partnering with experienced overseas HR and compliance services can streamline operations. SailGlobal offers tailored support in payroll administration, tax compliance, and workforce management for businesses expanding into East Africa.