Executive summary

The Federal Democratic Republic of Ethiopia (FDRE) enacted the Income Tax Proclamation (Amendment) No. 1395/2025 on 17 July 2025, introducing significant changes to the taxation of digital content creation, taxpayer categories, employment income, rental income, business income and other key areas. The amendment aims to modernize the tax system, broaden the tax base, and enhance compliance with evolving economic realities. The amendments took effect on 8 July 2025 while some took effect on 7 August 2025.

Detailed discussion

New definitions

"Income from digital content creation" is defined as income received in cash or in kind from creating, distributing or selling digital media or products via video sharing services, social media platforms, podcasts and live transmission platforms. This includes:

• Advertisements and sponsorships
• Product agreements and support
• Affiliate marketing and product classifications
• Contributions from sponsors, cash gifts or crowdfunding
• Subscription fees
• Sales of digital or physical goods
• Goods or services received in lieu of advertisements
• Other related payments

A "digital service" is any service involving digital content, subject to further definition by regulation.

Revised taxpayer categories

The amendment revises taxpayer categories to better reflect economic realities:

*ETB is the abbreviation for Ethiopian Birr.

The amendment states the tax authority can reclassify taxpayers based on annual declarations, and thresholds may be adjusted every five years to keep pace with the economy.

Permanent establishment

Reduced threshold: Businesses providing services or undertaking construction projects now create a permanent establishment (PE) if their activities last more than 91 days (down from 183 days).

Expanded definition of technical services: Technical services now include accounting, auditing, economic and investment, financial, legal, engineering, architectural, surveying, IT, management, social affairs and similar professional services.

Employment income tax

The new law increases the tax-free threshold for employment income and compresses income brackets, making the system more progressive.

The amendment states that the Ethiopian Investment Commission and Ministry of Labour and Skills must notify the tax authority when issuing or renewing expatriate work permits.

Enhanced cooperation between the Ministry of Revenue and Ministry of Foreign Affairs for information sharing on employment income of embassy and international organization staff.

Rental income tax

Income from rental of buildings, residences, and warehouses, excluding industrial establishments, greenhouses under capital goods leases, and warehouse spaces are subject to revised tax rates:

Business income tax rates for individuals

Individuals (excluding Category B taxpayers taxed on gross sales) face new business income tax:

Limited liability partnerships and registered collective investment funds are exempt from corporate income tax but must withhold and remit tax on distributed income.

Taxation of Category B taxpayers

Presumptive business taxes are eliminated. Individuals with annual turnover below ETB2m are taxed on gross sales.

Exemptions regarding gross sales taxpayers

Taxpayers that are not permitted to pay their taxes based on gross sales include:

• Professional services providers (e.g., accounting, architectural, consulting, legal)
• Value-added tax (VAT)-registered businesses
• Those opting for net income taxation

Digital content creation and service taxation

Both resident and nonresident persons providing digital services in Ethiopia are subject to income tax at a rate not exceeding 5% (the rate is to be determined by regulation). Income from digital content creation is taxable as business income if:

• It is earned regularly with the intent to profit.
• The creator is an organization.
• The creator maintains books of account or has deductible business expenditures.

Otherwise, it is taxed as other income at 15%.

Online platforms facilitating payments for Ethiopian resident creators must report gross income to the Tax Authority.

All digital content income must be declared annually.

Minimum alternative tax

If total assessable profits result in tax payable below 2.5% of turnover, a minimum tax applies:

• 2.5% of turnover (body/person)
• 2.5% of net banking income (banks)
• 2.5% of gross premium income (insurance)
• 2.5% of commission amount (price-regulated entities)

Entities under liquidation or debt restructuring are exempt, however.

Additionally, for taxpayers with incentives, minimum tax applies after the incentives are taken into account.

Quarterly advance payment of income tax

Taxpayers are now required to pay 25% of their prior year's tax as an advance payment within 30 days after each quarter. The final payment is due at annual declaration, minus advance payments.

If the taxpayer overpays an advance payment, it will be refunded as per the income tax proclamation.

Withholding on domestic transactions

With the exception of micro enterprises, bodies with legal personality, government agencies, nonprofits, and other taxpayers must withhold 3% (previously 2%) of gross payments for:

• Supply of goods over ETR20k (previously ETR10k)
• Supply of services over ETR10k (previously ETR3k)

If the supplier does not have a taxpayer identification number (TIN) and business license, the withholding rate is 30%.

Employees with multiple employers or self-withholding must file a declaration within 30 days of year-end.

Withholding on other income — residents and PEs

A resident of Ethiopia who derives income from the following income types shall be liable for income tax at the rate indicated:

Exemptions

These items are exempt from income tax:

• Premiums collected by Ethiopian Deposit Insurance Fund
• Premiums from new share issuance
• Dividends paid to companies holding ≥12.5% voting rights

Income of nonresident persons

Nonresidents are taxed at the new rates below:

Offshore indirect transfers

Gains from the sale/transfer of shares/membership interests are taxable if, within the prior 365 days more than 20% of value is derived from Ethiopian property.

The full amount of the gain is taxable if more than 50% of value over the prior year is from Ethiopian property. Otherwise, part of the gain is taxable using formula provided in the amendment.

Miscellaneous provisions

The previous turnover tax system is repealed. Payments exceeding ETR50k must be made via authorized banking channels, and exemptions apply for public bodies, banks and others specified by directive.

Effective dates

The withholding tax on domestic payments is effective from 7 August 2025. All other provisions are effective from 8 July 2025.

Next steps

Taxpayers and investors should assess the impact of the amendment on their operations and ensure compliance with the new requirements.