Israel – Ethiopia Tax Treaty

Business Activity in Ethiopia

Ethiopia has a large domestic market. With a population of over 120 million people (2023), it is Africa’s second-most populous country after Nigeria. From 2004 to 2019, its economy grew rapidly, averaging 9.5% per year, partly due to major public infrastructure investments. In 2022, Ethiopia’s real GDP grew by 6%, more than East Africa’s 4% average. Though agriculture has traditionally been the dominant sector in Ethiopia, the service sector is lately emerging as the main donor to GDP.

Bilateral Agreements Between Vietnam, and Israel

1. International Investment Agreement
2. Double Taxation Agreement

Reciprocal Promotion and Protection of Investments

The Reciprocal Promotion and Protection of Investments (RPPI) was signed on 25 November 2003 and went into effect on 14 February 2006. The RPPI is an agreement between Israel and Ethiopia that is designed to encourage and safeguard investments made by individuals and companies from each country in the territory of the other. These agreements typically include provisions related to non-discrimination, compensation for expropriation, dispute resolution, and the transfer of funds.

To read the agreement in English click here.

Convention on the Prevention of Double Taxation

The agreement between the Governments of Israel and Ethiopia regarding the avoidance of double taxation was signed on June 1, 2004, and entered into force on December 31, 2007.

To read the agreement in English click here.

Residency for Tax Purposes in Ethiopia

Residence of an Individual

Residency in Ethiopia is based on factors like having a permanent home, a usual place of living, or being physically present in the country. A person is considered a resident of Ethiopia if they meet one of the following criteria:

1. They have a permanent home in Ethiopia.
2. They spend more than 183 days in Ethiopia during any 12 months, whether those days are continuous or spread out.
3. They are an Ethiopian citizen working as diplomatic officials abroad.

To read about how an individual is considered a resident of Israel, click here.

Residency of a Company

In Ethiopia, a resident for tax purposes is generally a company that is incorporated in the country. Additionally, a foreign company can also be considered a resident if it has a place of effective management in Ethiopia during the tax year.

To learn about how a company is considered a resident of Israel, click here.

The Tax System in Ethiopia

Ethiopia’s Tax Authority is called the Ethiopian Revenues Ministry.

Income Taxation: 0% to 35%

Taxation of Companies and Branches: 30%

VAT: 15%

Capital Gains Tax: Class A: 15%; Class B: 30%

Withholding Tax

Inheritance Tax and Estate Tax in Ethiopia

Ethiopia does not apply an inheritance/estate tax.

Relocation to Ethiopia

Ethiopia is a vibrant economy that can be beneficial for investments, for those who are looking for advantageous business ecosystems supporting the growth of business. The following are some of the main characteristics of the economy in Ethiopia:

Growing Market: Ethiopia is the second most highly populated country in Africa but more than 70 percent of the population are under thirty. Economic expansion has increased the middle class’ purchasing power, including the growing middle class.

Low Production Costs: Ethiopia has lower production costs than many other African and global markets due to lower land, labor, and power costs.

Economic Reforms: Ethiopia is beginning to liberalize its market and privatize state-owned enterprises, opening new opportunities for companies.

Ethiopian Jews are one of the oldest Jewish communities outside Israel. Although little is known about their early history, they are believed to have adopted Jewish beliefs around the second or third centuries.

Real Estate Taxation in Ethiopia

Each regional state has the authority to levy and collect real property taxes; the rates vary between each regional state. There is no property transfer tax in Ethiopia.

Transfer of Funds from Israel to Ethiopia

According to section 170(a) of the Israeli Income Tax Ordinance, all payments transferred to non-Israeli residents are subject to a 25% withholding tax. However, this tax can be reduced or even waived if certain conditions are met. Our firm handles withholding tax matters with the Israeli Tax Authority.

As mentioned above, the countries have signed a tax treaty, that allows taxpayers to submit a 2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax, to potentially transfer the payments without paying the withholding tax.

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more.

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us.

For more information on money transfers abroad, click here.

Types of Business Entities in Ethiopia

Sole Proprietorship: This is owned and run by one individual who is responsible for all debts and obligations.

Partnership: This involves two or more people who share ownership and profits. There are two types:

• General Partnerships: All partners manage the business and are liable for its debts.
• Limited Partnerships: Some general partners manage the business and limited partners who invest but have restricted liability.

Private Limited Company: This type of company has between two and fifty members, with limited liability. The minimum capital required is ETB 15,000, and the owners’ liability is limited to their investment.

Share Company: Requires at least five founders and has a minimum capital requirement of ETB 50,000. The liability is also limited to the company’s assets.

Joint Venture: This allows foreign investors to partner with local investors. Specific capital requirements apply based on the nature of the business.

Incentive Laws in Ethiopia

Ethiopia provides a business income tax break that applies to the majority of sectors. Depending on their industry and location, new enterprises may be eligible for a one to six-year income tax exemption. Furthermore, if an investment is made in an area with very little infrastructure, investors might receive a 30% income tax discount for three years following the tax vacation.

Ethiopia permits resident taxpayers to claim a foreign tax credit for income obtained from commercial activities conducted outside the nation. This means that the Ethiopian income tax payable can be decreased by the amount of foreign tax paid on the same income. However, the credit cannot surpass Ethiopia’s tax rate on the same income.

Ethiopia Double Tax Treaties