Recent Reforms To Ethiopia's Investment Incentive Framework

Executive Summary

Ethiopia has long offered tax holidays and other investment incentives to attract capital, including income tax exemptions and customs duty relief on capital goods. Building on that, the country has introduced important reforms to its investment incentive regime through two key legal instruments: Investment Incentive Amendment Regulation No. 566/2025 and Incentive Directive No. 1064/2025. Together, these measures aim to update the way investors access tax breaks, customs duty exemptions, and other privileges, while also introducing clearer rules for how these benefits are granted, monitored, and revoked.

The reforms present opportunities for well-structured, compliant projects, especially in export-oriented manufacturing, mining, petroleum, agriculture, construction, and tourism. However, stricter eligibility criteria, a ban on transferring duty-free privileges, and potential regulatory ambiguities must be navigated with caution.

Key Changes Under the Regulation

Employment-Based Incentives

Tax holidays linked to job creation abroad have been significantly tightened. Companies are now expected to meet much higher thresholds for placing Ethiopian workers overseas before qualifying for one- to three-year income tax exemptions.

Duty-Free Import of Vehicles

The Ministry of Finance has been empowered to allow duty-free imports of pickup and station wagon vehicles for companies in sectors such as mining, petroleum, agriculture, construction, and tourism, particularly those operating in remote areas. The Ministry will issue further directives to define the scope of these exemptions.

Transfer of Duty-Free Privileges

A notable change is the removal of the ability to transfer duty-free privileges between investors. This means that goods imported free of customs duties can no longer be passed on to other investors, even if they also enjoy similar benefits.

Mining and Petroleum Incentives

Mining and petroleum companies remain eligible for duty-free imports of spare parts and equipment, with exemptions tied to project timelines. The Ethiopian Investment Board has also been granted the authority to provide additional incentives for strategic projects in this sector.

Key Highlights of the New Incentive Directive

Cancellation of Tax Holidays

The Directive introduces a clear process for cancelling tax holiday incentives. Authorities may revoke these benefits if they were granted based on false information, if the project is terminated, or if investors fail to meet reporting and compliance obligations. Investors have the right to explain, appeal, or contest such decisions, but if a cancellation is upheld, they will be required to repay exempted taxes along with penalties.

Expansion and Upgrading

Investors who expand or upgrade their projects can continue to access income tax relief, provided production capacity increases by at least 50%. Temporary drops in production will not automatically result in a loss of incentives if they are due to external factors beyond the investor's control.

Customs Duty Exemptions

The Directive clarifies the types of construction materials and capital goods that qualify for duty-free importation, with a phased approach tied to project progress. It also requires investors to buy locally, rather than import, if capital goods are available in sufficient quantity and quality at a reasonable price.

Transitional Provisions

Investors licensed under earlier laws may choose to benefit from the new framework if it is more favorable. At the same time, existing incentives granted before the reforms remain valid, with some exceptions for raw materials, construction materials, and unlimited import privileges.

Documentation Requirements

The Directive also sets out detailed documentation that investors must provide to claim income tax relief, including proof of licensing, audited financial reports, and evidence of export performance where applicable. Details are as below:

Type of Investment	Documents to be Submitted
Income Tax relief for new investment	Letter of Support from the institution that issued the investment license; Copy of the Investment License Certificate; Valid Cooperative Registration Certificate (if the applicant is a cooperative); Land title deed or, where applicable, a Lease Agreement in cases where land has been acquired through lease.
Income Tax relief for the expansion or upgrading of an investment	Letter of Support from the institution that issued the original investment license; Valid Investment License Certificate specifically issued for the expansion or upgrading project; Audited Financial Report evidencing the investment expenditure incurred for the expansion or upgrading activities; Audited Financial Report demonstrating the volume of production or services rendered within one year following the completion of the expansion; Documentary Evidence confirming compliance with income tax reporting obligations during any prior business profit tax exemption period, if applicable.
Investors engaged in export activities	For enterprises operating within an industrial park: A customs declaration confirming that at least 80% of the produced goods have been exported. For enterprises operating outside an industrial park: A customs declaration confirming that at least 60% of the produced goods have been exported.

Looking Ahead

These reforms bring greater structure and detail to Ethiopia's incentive framework, but they also introduce challenges. The ban on transferring duty-free privileges, for example, could complicate business transactions, while some drafting inconsistencies may create uncertainty for regulators and investors alike.

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.