Ethiopia
Country overview
Name - Federal Democratic Republic of Ethiopia
Capital city - Addis Ababa
Population (2021) - 120,283 million (World Bank)
Languages spoken (three most widely spoken) - Amharic, Afan Oromo, Somali
Neighbouring countries - Somalia, Kenya, South Sudan, Sudan, Eritrea, Djibouti
Economy
GDP – USD111.27 billion (2022) (World Bank)
Net inflow of FDI (2021) – USD 4.26 billion (World Investment Report)
Top three exports by value (2022) – gold, coffee, live animals, oil seeds, flowers. (Trading Economics)
Top three import sources (2022) – China, Saudi Arabia and United States. (Trading Economics)
Top three export destinations (2022) – Switzerland, Somalia and China. (Trading Economics)
Currency - Ethiopian Birr (ETB) – 1 USD = 545.8 ETB as at August 2, 2023
1. Current Economic Conditions
1 Recent legislation reforms
Since 2018, Ethiopia has undergone several holistic policy and legislative reforms. In light of this, several laws that have aimed at easing doing business have been enacted. The enactment of the new Commercial Code; Movable Property Security Rights Proclamation; Public-Private-Partnership Proclamation; Capital Market Proclamation; the revision of different investment regulations and the Ethiopian Civil Societies Proclamation, as well as the ratification of the New York Convention are among many others.
1.1 New Capital Market Law
The Ethiopian Government passed the Capital Markets Proclamation No. 1248/2021 to set up a local capital market with a clear set aim of developing the national economy through mobilizing capital, promoting financial innovation, and sharing investment risks. The Government has also set up a project team that has been working to draft proper directives for approval by the Board of Directors of the Capital Market Authority to supply detailed guidance and requirements to enable the effective implementation of the Capital Market Proclamation.
Last January, the Ethiopia Capital Market Authority (ECMA) disclosed that it has finalized preparations to start operation within the coming two years.
1.2 Public Enterprises Privatization Law
According to this 2020 Proclamation, privatization is a transaction that results in either the sale of assets or share capital of a public enterprise in full or in part to private ownership and control. The Proclamation considers extensively pre-privatization activities, public enterprise restructuring, and other activities before privatization. Essentially, the Proclamation provides for the procedure of conversion of a public enterprise to a share company, valuation of public enterprises, and issues relating to post-privatization
1.3 Telecom and Mobile Money Liberalization
Under the new investment law, the telecom sector has been liberalized for foreign participation. Following such liberalization, the Ethiopian Communications Authority issued a bid for a license to engage in the telecom sector. Safaricom Consortium has won the bid and successfully launched in the Ethiopian market. Further, a second bid for a license to enter into the Ethiopian telecom market has been issued. The government has also decided to sell 49% of its stake in its ownership of Ethio- telecom, a government-owned telecom
1.4 New Investment Law
On 30 January 2020, Ethiopia enacted a New Investment Proclamation. The major development in this new investment law is the shift from the positive listing of areas allowed for foreign investors to a negative listing which is broader. The government has also opened up previously closed sectors to foreign investment. In addition to this, these legislations lay down procedures for handling investors’ grievances and for resolving investor–state disputes, principally through domestic institutions.
1.5 Revision of the 1960 Commercial Code
Revising the old Commercial Code that has been in effect since 1960 has brought one of the major legislative changes. In this new Code liability limited partnership (LLP) has been recognized as one form of business organization.
1.6 Ratification of the 1958 New York Convention
Ethiopia ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 2020. The Convention applies to arbitration agreements and arbitral awards made only after Ethiopia acceded to the Convention.
2. Business vehicles/structures for doing business
Introduction
Business can be set up in the form of sole proprietorship, business organisations incorporated in Ethiopia (a one member private limited company, a private limited company, a share company or partnerships), branch of a foreign company, public enterprises, and cooperative societies. Partnerships are associations of persons whose liability is unlimited (except limited partners in limited partnerships and partners of limited liability partnership). Limited liability companies could take the form of a one member private limited company, a share company or a private limited company.
Presence of Foreign Entities
Incorporating a subsidiary company and opening a branch of a foreign company are the main vehicles for foreign entities to trade in Ethiopia. Foreign companies may also promote their business in Ethiopia by opening a commercial representative office. A branch of a foreign company is treated as an extension of its parent foreign company. In contrast, a subsidiary of a foreign company is treated as separate from its parent company.
Foreign investors that come to operate in Ethiopia by winning international bids can also set up a project office to perform a specific contract.
Registration requirements and level of protection offered to share-holders of the various business vehicles
Companies
A one member private limited company is a limited liability business organisation incorporated by a unilateral declaration of a single shareholder. This form of legal entity was recognized for the first in 2021 by the Revised Commercial Code of Ethiopia.
A share company and a private limited company are associations of capital formally established by the signing of a memorandum of association and articles of association.
A private limited company and a share company require a minimum of two and five shareholders respectively. The maximum number of shareholders in a private limited company cannot exceed 50.
Once shareholders have signed the memorandum and articles of association before a public notary and the same are deposited in the commercial register, the company becomes a legal person. After registration, obtaining a business license is necessary to start business operations.
Companies are legal persons whose liabilities are met by their assets only. Shareholders of companies are liable only to the extent of their contributions.
Private limited companies are not subject to detailed regulations when compared to a share company, which the law regulates strictly. A private limited company is more of a family company while a share company is a public company. A share company is required to have a board of directors and auditor/s and it should also conduct a general meeting of shareholders at least once a year. A private limited company is not required to have an auditor unless the number of its shareholders exceeds 10 or its total assets exceeds 10 million Ethiopian Birr.
A private limited company cannot issue transferable securities like bonds, debentures, while a share company can issue transferable securities.
Branch of Foreign Entities
Foreign incorporated companies can register a branch in Ethiopia to undertake business activities.
The requirements for registering a branch of a foreign company include the submission of:
notarised and authenticated minutes of a resolution passed by an authorised organ of a foreign business organisation authorising the opening of a branch in Ethiopia
Certificate of incorporation of a foreign parent company
Copies of memorandum and articles of association or similar documents of the business organisation.
There are four types of partnership recognised under Ethiopian law. These are limited liability partnership, general partnership, limited partnership and joint venture. Partnerships should be formed by a partnership agreement and registration is a prerequisite for a partnership to obtain legal personality. However, these requirements do not apply to joint ventures, which have no legal personality.
Sole Proprietor
A sole proprietor is a person who conducts a business in his/her own name with unlimited liability. For a sole proprietor to operate a business, he/she has to obtain a commercial registration certificate and a business license.
Trade Representative Office (TRO)
Foreign investors who are not interested in trading activities can register a commercial representative (liaison) office and appoint a commercial representative to undertake pro - motional activities in Ethiopia.
Before starting its operation, the commercial representative should be registered with the Ministry of Trade and Regional Integration and get a certificate of commercial representative. To secure the certificate, among other things, a minimum of USD100,000 has to be brought into Ethiopia, which is expected to cover salaries and operational expenditures of the office for a year. After the issuance of a valid certificate, a commercial representative can promote the products and services of the principal foreign company, study projects that will enable the principal to make investments in Ethiopia and to promote export products of Ethiopia in the country of origin of the principal company.
Registration requirements
Registration is a requirement for companies to do businesses in Ethiopia. Operating a business without obtaining a business license entails administrative and criminal liabilities.
Business rights and regulatory environment
Licenses and regulatory
Requirements to trade
Various kinds of permits, registrations and licenses are required to operate business in Ethiopia. These include investment permit, business license, commercial and tax registrations. No person may carry out a commercial activity without obtaining a valid business license.
Anti-money laundering, anti-bribery and corruption
The Prevention and Suppression of Money-Laundering and Financing of Terrorism Proclamation No. 780/2013, the Criminal Code of 2004, Prevention and Suppression of Terrorism Crimes Proclamation No.1176/2020, Corruption Crimes Proclamation No. 881/2015, Revised Anti-Corruption Special Procedure and Rules of Evidence (Amendment) Proclamation No. 882/2015, Financial Intelligence Centre Establishment Council of Ministers Regulation No. 171/2009, Revised Federal Ethics and Anti-Corruption Commission Establishment (Amendment) Proclamation No. 883/2015 and the National Payment System Proclamation No. 718/2011 are major laws that regulate crimes related to money laundering, bribery and corruption in Ethiopia.
Competition
The Trade Competition and Consumers' Protection Proclamation No. 813/2013 aims to promote competitive practices in the local market, and eliminate or prevent anti-competitive and unfair trade practices. It also regulates anti-competitive practices such as price-fixing, collusive tendering, market and consumer segregation, refusals to deal to sell or render services, practices intended to eliminate competitors, and practices regarded as abuse of dominance. The threshold for a merger notification is 30 million ETB.
Regarding mergers, the law requires the consent of shareholders and the amendment of memorandum and articles of associations for mergers to take place. Two or more firms may merge, either by taking over or by the formation of a new firm. A decision to merge shall be taken by each of the firms concerned. Special meetings of shareholders of different classes or meetings of debenture holders shall approve the taking over or being taken over. The claims and liabilities of the firms that have been merged shall pass to the firm taking over as a result of the merger.
Consumer protection
The Trade Competition and Consumers' Protection Proclamation No. 813/2013 established the Trade Competition and Consumer Protection Authority. However, Trade Competition and Consumer Protection Authority was dissolved and its mandates has been transferred to the Ministry of Trade and Regional Integration since September 2021. Under this Proclamation, consumers have the right to be provided with accurate information on the quality and type of goods or services, and to claim for remedies in relation to problems associated with such transactions.
Data protection and privacy
Ethiopia does not have a comprehensive law, which is specifically designed to regulate privacy and data protection issues. However, there are a set of rules contained in various pieces of legislation that guarantee the right to privacy in an indirect fashion.
Environmental law
The law provides that all investors have an obligation to observe social and environmental sustainability values including environmental protection standards and social inclusion objectives in carrying out their investment projects. The specific laws on environmental protection in Ethiopia are the Environmental Pollution Control Proclamation No. 300/2002 and the Environmental Impact Assessment Proclamation No. 299/2002. Proclamation No.300/2002 imposes obligations on companies to prevent environmental pollution in the course of their operations and penalizes failure to do so.
Intellectual property (IP)
Ethiopia acceded to the Convention establishing the World Intellectual Property Organisation (WIPO) in 1998. The Ethiopian Constitution of 1995 provides the foundation for protection of intellectual property rights. Additionally, the Inventions, Minor Inventions and Industrial Designs Proclamation No. 123/1995, the Copyright and Neighbouring Rights Proclamation No. 410/2004 (as amended by Proclamation No. 872/2014) and Trademark Registration and Protection Proclamation No. 501/2006 are in place to protect intellectual property rights.
Land rights
The Constitution of Ethiopia provides that ownership of land belongs to the state and the nations, nationalities and peoples of Ethiopia. The Constitution similarly provides that the Government will ensure the right of private investors to use land on a lease holding basis.
The Urban Land Lease Proclamation of 2011 gives investors the right to use of land on leasehold for periods of 15 years up to 99 years. The land cannot be mortgaged or sold, but the lease value of the land and the fixed assets thereon may be mortgaged or transferred to third parties. Regional governments and municipal administrations are authorised to allocate rural and urban land on rent lease in accordance with their respective laws.
Employment and labour relations
Currently, the principal legislations that regulate private employment relationships in Ethiopia include the Labour Proclamation (Proc. No. 1156/2019), the 1960 Ethiopian Civil Code) and the Private Enterprise Employees Social Security Proclamation (Proc. No. 715/2011), as amended. These sets of law are complemented by different decisions of the Cassation Division of the Federal Supreme Court.
Ethiopian labour law classifies employment relationships into managerial and non-managerial employment. The Labour Proclamation No. 1156/2019 governs non-managerial employees, and the Ethiopian Civil Code applies to managerial employees. The Proclamation defines ‘Managerial Employee’ as an employee who, by law or delegation, of the employer, is vested with powers to lay down and execute management policies, and depending on the type of activities of the undertaking, with or without the aforementioned powers, an employee who is vested with power to hire, transfer, suspend, layoff, dismiss, or assign employees, and includes a legal service head who recommend measures to be taken by the employer regarding such managerial issues, using his independent judgement, in the interest of employer.
Employment of foreign nationals
Under Ethiopian law, employers can employ expatriates only for positions that could not be filled by Ethiopian nationals. Foreign employers may, however, employ expatriates for top management positions without any restriction.
Corporate governance
Laws governing corporate governance
The Ethiopian Commercial Code of 2021, the Banking Business Proclamation No. 592/2009, Bank Corporate Governance Directives No. SBB/62/2015, the Insurance Business Proclamation No. 746/2012 and the Commercial Registration and Business Licensing Proclamation No. 980/2016 are the principal sources on corporate governance.
Banking and finance
The Commercial Code of 1960 (Book IV), the National Bank of Ethiopia Establishment Proclamation No. 591/2008, the Banking Business Proclamation No. 592/2008 (as amended), the Insurance Business Proclamation No. 746/2012, the Capital Goods Leasing Business Proclamation No. 103/1998 (as amended), the Registration and Supervision of Capital Goods and Capital Goods Leasing Agreement Regulation No. 309/2014, the Micro-Financing Business Proclamation No. 626/2009, and different directives of the National Bank of Ethiopia regulate the financial services sector in Ethiopia.
Financial services are reserved for Ethiopian nationals and foreign nationals of Ethiopian origin. Foreign financial institutions are not allowed to operate in Ethiopia and foreign nationals and companies are prohibited from owning shares of local financial institutions.
A foreign company may open a local bank account through its subsidiary or branch or representative offices duly registered in Ethiopia.
Foreign exchange regulations
Ethiopia has a number of exchange control directives issued by the national bank of Ethiopia at various times. All capital brought in and invested in Ethiopia should be registered by the Ethiopian Investment Commission and the National Bank of Ethiopia. Technology transfer agreements should also be registered with the Ethiopian Investment Commission to avoid difficulties during repatriation.
It is very important to comply with the requirements set forth above as subsequent requests for repatriation of profits and dividends and other payments depend in large part upon compliance with this requirement.
Foreign investors having business in Ethiopia have the right to repatriation of profits and dividends accruing from their investments, principal and interest due on foreign loans, payments related to technology transfer, payments related to collaboration agreements, capital gains proceeds from transfer of shares or transfer of partial ownership to a domestic investor, proceeds from the sale or liquidation of the business and compensation paid to an investor under the investment laws.
Private equity
The law requires that foreign investors should obtain approval from the Ethiopian Investment Commission in order to acquire shares of existing companies. The approval of the Ministry of Trade and Regional Integration (the successor of Trade Competition and Consumers Protection Authority on merger related issues) is also a requirement.
Tax, duties and tariffs
The principal taxes currently in place are corporate income tax, value added tax (VAT), customs duties and excise taxes. A number of final withholding taxes are imposed on income such as income from employment, dividend, and royalties.
Ethiopia follows a classical corporate income taxation system in which tax is imposed both at corporate and shareholder level. Corporate income tax rate is 30% and dividend tax rate is 10%. All entities (except those currently enjoying income tax holidays) that carry on business or trade are subject to corporate tax. A business or a trade is defined as any industrial, commercial, professional or vocational activity or any other activity recognised as trade by the Commercial Code of Ethiopia and carried on by any person for profit.
Partnerships are treated as entities for tax purposes and are therefore subject to corporate income tax.
Distribution of dividends is subject to 10% withholding tax at the time of declaration of dividends by companies. Companies are liable for withholding of dividend tax regardless of whether they distribute dividends or not unless they transfer the dividends declared to increase their capital within the time limit set down in directives issued by the Tax Authorities.
Interest on bank deposits is subject to 5% withholding tax, which is final. Interest paid on loan from foreign lender recognised as a financial institution by the National Bank of Ethiopia is subject to a 10% withholding tax, which again is final. The borrower in Ethiopia must withhold the 10% tax on a foreign loan in order to obtain deduction of the interest in Ethiopia.
The withholding tax rates may be reduced by the provisions of an applicable double taxation treaty for non-resident shareholders but these reductions are subject to taxpayers meeting beneficial ownership limitations. Ethiopia has ratified double taxation treaties with countries like UK, France, Israel, Romania, Russia, Turkey, South Africa, Tunisia, Algeria, Yemen and Czech Republic.
Capital gains tax applies to transfers of shares, bonds and buildings held for business purposes. The capital gains tax rate on transfer of shares or bonds is 30% of the gain. The capital gains tax on transfer of buildings held for businesses is 15% of the gain.
VAT is chargeable on the supply of goods or services by registered suppliers. Suppliers are normally required to register for VAT if their annual turnover of supply exceeds one Million Ethiopian Birr. Some supplies are exempted from the VAT. These include financial services, educational, health and transportation services. Some supplies, most notably exports and international transport services, are zero-rated under the VAT regime of Ethiopia.
Import duties are payable on imports by all persons and entities which have no duty-free privileges. The rate of customs duties ranges from 0% to 35%. Other taxes may also be imposed on imports: Excise duties on selected goods (e.g., tobacco); surtax on many imports; value added tax (15%) and an advance payment of corporate tax (3%).
Most export products and services from Ethiopia are free from export tariffs. However, some exports from Ethiopia such as raw hides and skins are subject to export duties.
Ethiopian investment and tax laws grant tax incentives in the form of duty free privileges for imports, income tax holidays, and in some cases income tax deductions. The tax incentives depend on the type, size and location of investments.
Charities and societies
The major law that governs civil society organizations (CSOs) in Ethiopia is the Civil Society Organisations Proclamation No. 1113/2019 (the ‘Proclamation’). There are major aspects and significant developments of this law as compared to the previous law and regime which placed excessive restrictions.
Mining and energy
Ethiopian Constitution Provides for State form of land and resource tenure. The fast-growing mining sector, primarily as a result of the foreign direct investment, in Ethiopia, has necessitated the revision of antiquated mining laws that were in place. Currently, there are a number of laws that govern mining operations, petroleum operations, and transaction in precious minerals. The laws that currently regulate the industry include: Mining Operations Proclamation No. 678/2010; Mining Operation (Amendment) Proclamation No. 816/2013; Petroleum Operations Proclamation No. 295/1996; Mining Operations Regulation No. 423/2018 and Transaction of Precious Minerals Proclamation No. 651/2009. The laws regulate the requirements and procedures for acquiring the different licenses (Reconnaissance, Exploration and Mining) that are required to undertake various activities associated with mining and minerals. The rights and duties that these licenses carry are also dealt with under these laws. These laws task, among others, the FDRE Ministry of Mines and Petroleum and the respective regional bodies to license and supervise entities that are involved in the mining industry.
Investments in the Ethiopian energy sector are regulated principally by the Energy Proclamation No. 810/2013 (as amended by Proclamation No 1085/2018), the Energy Regulation No. 447/ 2019, Geothermal Resources Development Proclamation No. 981/2016 (as amended by Proclamation No. 1204/2020) and Regulations No. 453/2019, EEA Directive No. 418/2020 and Ethiopian Energy Authority Establishment Regulation No. 308/2013.
Pursuant to the Investment Proclamation No. 1180/2020, the business of generation of electricity as well as off- grid transmission and distribution are open to foreign investors either to carry out the investment in a solely foreign- owned entity or through a joint venture with a local company or the government.
Real estate and conveyancing
Ethiopia's current investment policy not only encourages foreign investment in the real estate sector but it is 100% free and suitable for foreigners to enter into the sector. Nonetheless, there are no duty free privileges or any other incentives provided by the government to the sector.
Legal framework
The 1960 Civil Code of Ethiopia, Urban Land Lease Holding Proclamation No. 721/2011, Investment Proclamation No. 1180/2020, Ethiopian Building Proclamation No. 624/2009, Building Regulation No. 243/2011 and the Building Directive, are the principal laws that govern land and real estate matters in Ethiopia.
However, Real estate is one of the under regulated sectors in Ethiopia. Since there is no single law that specifically applies to the sector, there exists a huge gap in laws that govern the area. A draft proclamation that provides for Real Estate Development, marketing and valuation has been in the in the pipeline for quite some time now.
The Urban Land Lease Holding Proclamation of 2011 gives investors the right to use of land on leasehold for periods of 15 years up to 99 years. The period of urban land lease is currently 99 years for residential purposes and 60 years for land acquired for commercial purposes. The land cannot be mortgaged or sold, but the lease value of the land and the fixed assets thereon may be mortgaged or transferred to third parties. Regional governments and municipal administrations are authorised to allocate rural and urban land to investors on lease in accordance with their respective laws.
Requirements
An investor who wants to develop real estate in Ethiopia must first secure an investment permit from the Ethiopian Investment Commission provided that it fulfils all requirements such as proof of a minimum capital of USD200,000 for a wholly foreign owned investment and USD150,000 for a joint investment of foreign and domestic investors, and payment of registration and permit fees. Any foreign real estate developer may acquire land in Ethiopia through lease from the government or a private contract. An investor who acquires land under a lease has to enter into a land lease agreement with the Government. Once the necessary permits and certificates have been acquired, an investor must then apply for and be issued with a construction permit from the competent office, on presentation of documents such as the proposed building plan and a land lease certificate.
Exiting an investment
Disposal of investment
Shareholders can dispose their shares in companies through direct sale to willing third party purchasers. There is also a possibility under the Ethiopian Commercial Code for companies to redeem their own shares.
Shareholders may also agree to contractually provide for call options in company bylaws or shareholders/investment agreement in accordance with which the sale or purchase of shares can be enforced under specified conditions.
Listing
There is no stock exchange market in Ethiopia. The Capital Market Proclamation No. 1248/2021 was came in to force in July 2021. This Proclamation established Ethiopian Capital Market Authority with a mandate to regulate secondary market in Ethiopia. There are ongoing activities to establish securities exchange in Ethiopia.
Stock acquisition, asset acquisition and business acquisition
The Ethiopian Investment Commission must approve the acquisition of shares of existing companies by foreign investors and the Ethiopian Trade Competition, and Consumer Protection Authority should approve an acquisition of share interests in existing companies in Ethiopia. Ministry of Revenue should issue tax clearance to the existing company before the acquisition of shares.
Investment protection
In Ethiopia, no investment can be expropriated or nationalised by the government except for public interest and then, only in conformity with the requirements of the law. The Constitution of Ethiopia protects private property. The Investment Proclamation also provides investment guarantees against measures of expropriation and nationalisation. In the event of expropriation or nationalisation, adequate compensation has to be paid in advance.
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 has also concluded bilateral investment promotion and protection agreements with various countries. Ethiopia has also signed (but not ratified yet) the Convention on Settlement of Investment Disputes between States and nationals of other states. Ethiopia acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and the New York Convention entered into force in Ethiopia as of 22 November 2020.
Firm overview
Mehrteab & Getu Advocates LLP (“MLA) is a leading full-service law firm in Addis Ababa. MLA is staffed with high-calibre lawyers who are accomplished in their fields of expertise as well as support staff which include legal assistants and other office personnel.
Practice areas
Arbitration and litigation
Aviation
Banking and finance
Charities and societies
Contract negotiation and drafting
Corporate and commercial
Employment and immigration
Hospitality and leisure
Intellectual property
Investment
Mergers and acquisitions
Mining and energy
Private equity
Real estate and conveyancing
Sovereign debt
Tax
Website
www.mehrteableul.com