Ethiopia Exempts Startup And Software Developers From Tax For Four Years
The federal government of Ethiopia has designated five ICT-related investment areas as ones that are eligible for income tax and duty tax incentives in an effort to foster an environment that is amenable to the development of new technologies and innovations.
The five categories were chosen for the tax holidays as a result of the Ministry of Innovation and Technology (MINT) determining that they were in need of a boost and as part of a new investment incentive regulation that extends special rights for specific sectors to promote private sector investment. In other words, the tax holidays are a form of investment incentive regulation.
As a consequence of this, any domestic or foreign investor who establishes a new business in one of the following five categories will be exempt from paying income tax for the subsequent four years: (1) software development; (2) data centre and cloud service; (3) business outsourcing process; (4) startup development service; and (5) Research, innovation, enrichment, and development works.
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If the investment is made outside of the capital and the areas immediately surrounding it, the tax exemption period increases to five years. This applies to both the company income tax and the employment tax.
In addition, new firms that operate in certain industries are eligible to import duty-free capital goods and building materials, which are essential for launching a new business or growing an existing one.
Additionally eligible for certain exclusions are companies that were in operation prior to the regulation. However, the new law does not address the kind or magnitude of the incentives, and it is anticipated that the Ministry of Finance will issue a directive addressing incentives for companies that are already in operation.
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The new investment incentive regulation, which was turned into a law on May 22, 2022, by the Council of Ministers, also carries loss carry forward benefits, which allow an investor who has incurred a loss while the investment is still exempt from income tax to carry forward the loss for half of the exemption period after the exemption has expired.
In Ethiopia, a standard classification is used to offer a complete list of the numerous sorts of business licences that can be gained across a variety of industries. There are more than five hundred distinct kinds of business licences. In addition to these categories, governmental entities have the authority to issue specific permits for domains that are not included on the list.
MINT was requested to offer a list of business categories that it is monitoring that should be exempted, and it chose these five business areas as ones that require a push.
Ethiopia has made previous attempts to provide its inventive environment with some form of legal protection, so this is not the first time it is doing so. The Startup Act of Ethiopia, which is currently in the prototype phase, aims to provide individualised support for new businesses and encourage entrepreneurial endeavours.
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The document proposes the implementation of a number of initiatives, including tax incentives, that are expressly aimed at resolving the most significant challenges that have been faced by startups and other actors in the ecosystem. Despite this, the draught has been on hold for the past two years, and it has not yet been enacted into law.
Ethiopia startup tax Ethiopia startup tax
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer, who has several years of experience working in Africa’s burgeoning tech startup industry. He has closed multi-million dollar deals bordering on venture capital, private equity, intellectual property (trademark, patent or design, etc.), mergers and acquisitions, in countries such as in the Delaware, New York, UK, Singapore, British Virgin Islands, South Africa, Nigeria etc. He’s also a corporate governance and cross-border data privacy and tax expert.
As an award-winning writer and researcher, he is passionate about telling the African startup story, and is one of the continent’s pioneers in this regard. You can book a session and speak with him using the link: https://insightsbyexperts.com/view_expert/charles-rapulu-udoh