Who is required to pay taxes an Income tax in Ethiopia ?

Every state has an interest in collecting as much revenues as possible so as to provide the necessary public services. Different countries apply different rules in order to determine their tax jurisdiction.   

The Ethiopian income tax law uses resident as a defining criteria in order to determine the tax jurisdiction of the country. The law clearly provides the following

This Proclamation shall apply to residents of Ethiopia with respect to their worldwide income.

The Proclamation shall apply to non-residents of Ethiopia with respect to their Ethiopian source Income.

Therefore, Ethiopia’s jurisdiction to tax extends in case of residents to all incomes earned in Ethiopia and in case of no residents with respect to Ethiopian source income only. Therefore, in this whole process of determining tax jurisdiction the resident and nonresident distinction is an important one.

Generally, resident is defined in the Civil Code and the tax law has also provided grounds for acquiring residence in Ethiopia. Accordingly, the tax laws list down two standards in order to determine the residence of a particular person. The first standard is used to determine residence in case of juridical person while the other is used to determine the same matter in case of physical persons.

Accordingly, a physical person shall be considered to be resident of Ethiopia if she has a domicile in Ethiopia or works as diplomatic or similar official post outside of Ethiopia.[1] A domicile is not defined in the income tax laws, according to the definition of the civil code a person will be considered to have established domicile in a place where he has established the principal seat of his business and of his interests, with the intention of living permanently in the area.[2] Intention to live permanently in one area is an important requirement for the purpose of domicile.

Moreover, a person who stays in Ethiopia for more than 183 days in a period of twelve calendar months will be considered as resident of Ethiopia.[3] The 183 days can be either continuous or intermittent, in any way if an individual stay in Ethiopia counts to be 183 day he is required to pay an income tax from all his incomes including those incomes generated abroad.

 In case of juridical person, the body will be considered to be resident to Ethiopia if either one of the following is present:

·                     If the principal office of the company is located in Ethiopia.[4]

·                      If the effective management of the company is located in Ethiopia.[5]

·                      If the company is registered by the ministry of trade and industry.[6]

As provided in article 5(3) of the proclamation a body would be considered as a resident of Ethiopia if the effective management of the body is located in Ethiopia. Though one is not in a position to articulate precise definition of an effective management, it is reasonable to consider that an effective management is the one with the power of hiring and firing workers and giving decisions that can drastically affect the structure, business and any other aspect of the company. So if such management of the company is located in Ethiopia, even if the plant or factory is located in other country the company will be considered to be resident of Ethiopia so far as the tax laws are concerned. Practically the two offices are inseparable.

Finally, as provided in article 5(4) of the proclamation resident person also includes a permanent establishment of a non-resident person in Ethiopia.[7] This provision extends tax jurisdiction to foreign firms operating in Ethiopia on the income attributable to operations inside Ethiopia. The presence of laws on levying income on permanent establishment can help close loopholes for evasion of tax by foreign companies.

A permanent establishment is defined in Article 2 (9) of the income tax proclamation. Consequently, a person will be considered to have a permanent establishment if he has:-

[ A]n administrative branch factory workshop , mine , quarry or any other place for the explanation of natural resources and a building site or place where construction and or assessmbly works are carried out[8]

This definition of permanent establishment would not include income of foreign companies earned in other countries without the assistance of the local permanent establishment.

Hence, a company incorporated under the laws of Kenya and having its head office in Kenya, without having any branch in Ethiopia, will be out of the jurisdiction of Ethiopia. However, if the company establishes a permanent establishment in Ethiopia so long as this permanent establishment is concerned the company will be inside the jurisdiction of Ethiopian tax laws.

Nonetheless, the definition of permanent establishment in our country does not allow for the imposition of tax on transactions considered as “force of attraction”.[9]

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[1] See art.5(1)(a) of the proc.

[2] See art.5(1)(b) of the proc.

[3] See art.5(1)(c) of the proc.

[4] See art.5 (3)a of the Proclamation.

[5] Id.art.5 (3) b.

[6] Id art.5 (3) (c).

[7] See art. 5(4) of the Proclamation.

[8]  See art. 2(9)(a) See also  art.2(9)(b)(i)-(v) –has listed down establishments that cannot be considered as a permanent establishment

[9] This is an activity similar to the activities normally carried out by the permanent establishment but being carried out by the head office.