Ethiopia's Income Tax Proclamation No. 1395-2025 (Amendment)

Income Tax Proclamation No. 1395-2025 (Amendment)

Ethiopia's Income Tax Proclamation (1395-2024) seeks to overhaul the national tax system to boost revenue improve equity and streamline compliance. Its goals include expanding the tax base, curbing evasion, and enhancing public service funding through fairer taxation.

Major reforms include taxing digital economic activities, adjusting income brackets, introducing an Alternative Minimum Tax, tightening cash controls, and simplifying rules for small businesses.

Implementation hinges on strong administrative capacity, clear guidelines, and informed taxpayer engagement.

Contents

• Key Amendments and Additions (1/12)

Key Amendments and Additions (1/12)

1. Article 2: New Tax Categories and Definitions added
   • Income from Digital Content Creation: Income from creating, distributing or selling digital media or products through video sharing services, social media platforms. voice transmission podcast services and live transmission platforms. This includes ad revenue, sponsorships, affiliate earnings, among others.
   • Digital Services: Services that involves digital content, as shall be defined by a regulation to be issued by the Council of Ministers.
2. Article 3: Revised Taxpayer Categories
   • The Proclamation calls for a major change in taxpayer classification by dissolving Category "C" and incorporating its members into a broadened Category "B." The two new categories are:
     • Category A: Businesses or individuals with annual turnover exceeding ETB 2 million. These taxpayers must maintain full accounting records and are subject to stricter compliance requirements.
     • Category B: Individuals with turnover below ETB 2 million. They benefit from simplified tax regime, but professional service providers must still comply with basic reporting.
3. Article 4: Definition of Permanent establishment
   • The proclamation reduces the identification of permanent establishment duration from 183 days to just 91 days. This change applies to foreign entities operating and providing services in both service-based and construction-related activities, including consultancy, technical work and projects mandating them to maintain records and will now be classified as having a permanent establishment.
   • Technical services including professions such as accounting, engineering, legal, IT, and financial consulting service providers – which irrespective of their annual turnover, are now required to maintain book of records in accordance with Article 86 of this Proclamation.
4. Article 6: Source of Income - Income from non-residents
   • Income derived by a person who is not a resident of Ethiopia from the provision of digital services in Ethiopia shall be treated as income sourced in Ethiopia.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.