Overview of the New Investment Law

Investment is a vital engine for economic growth and socio economic transformation. It is one of the main considerations for policy makers, whenever economic development is formulated. Investment incentives to be accorded and the details of the laws and regulations governing the application of the investment policy may vary, depending on the time and circumstance or prevailing socio economic dynamics. The same is true for our investment laws including the latest one: investment proclamation number 769 /2012 and regulation number 270/2012.

Areas of investment reserved for domestic investors

The investment proclamation under article 7 and 8 stipulates that investment areas reserved for domestic and foreign investors shall be determined by the regulation to be issued by the council of ministers. Accordingly, the regulation issued by the council of ministers, developed two categories for domestic investment.

The first category is investments exclusively reserved for Ethiopian nationals, which includes banking, insurance and micro finance; packaging and forwarding; broadcasting and mass media; attorney and legal consultancy; preparation of indigenous traditional medicines; advertisement, promotion, translation; and air transport services that use aircraft with a seating capacity under 50 passengers. These investment areas are all excluded from income tax exemption or any other investment privilege.

The regulation has also selectively listed in a schedule: investment areas with corresponding income tax exemption benefits, depending on whether the place of investment is in Addis Ababa, and the Special Zone of Oromia surrounding Addis Ababa, or not. The schedule has identified 15 grand categories of investment areas, which are then sub categorized into specific investment areas. Among the 15 grand categories of investment areas, the first one, with 86 subcategories, is manufacturing followed by agriculture with 18 sub categories. In total the schedule has listed 124 investment areas for domestic investors. Depending on where and what they are investing in, they could be eligible for tax exemptions.

Investment areas foreign investors are not allowed to engage in.

The Investment Agency’s guide states that the inflow of Foreign Direct Investment (FDI) has been increasing over the last 20 years. Accordingly, out of the total investment projects licensed between 1992 -2012, the share of FDI is 15.71 pct. Among the 124 investment areas mentioned in the schedule, 11 are off-limits to foreigners. Five of these are in the manufacturing sector. Fabric finishing, tanning of hides and skins below finished level, the printing industry, cement manufacturing and making clay and cement products, are areas of manufacturing foreign investors are prohibited from entering in to.

Moreover, operating a tour business below grade one, construction sector involvement below grade one, provision of kindergarten, elementary and junior secondary education by constructing a building, providing diagnostic and clinical services and constructing buildings for the business and capital goods leasing , excluding leasing of motor vehicles; are areas of investment that foreign investors are barred from.

Yet, the board of the investment agency can allow foreign investment in areas reserved for Ethiopians under special circumstances. The board has exercised similar power before, and the new law upholds their right to do so.

A foreign investor is required to invest a minimum of USD 200,000 for a single project. Previously the amount was only USD 100,000. If the investment is made jointly with an Ethiopian, the minimum capital required is USD 150,000, which was USD 60,000 previously. However, if a foreign investor reinvests his or her profits or dividends generated from the existing enterprise, he or she is not required to allocate a minimum capital.

Income tax exemption privilege

Of the total 124 investment areas enumerated in the schedule, 94 of them- more than two thirds- can enjoy income tax exemption for a period ranging from one to five years, if the investment is located in Addis Abeba or the surrounding area. The same number of investment areas can enjoy income tax exemption for more periods if they are made in other locations. Investments are encouraged to be evenly distributed, the incentives increase in distances further from the centre, where infrastructure development is low and access to the market is difficult.

Thirty investment areas in Addis Abeba and the surrounding area are not entitled to be exempt from income tax. More than 20 investment areas are not entitled for the income tax privilege even though their location is not at the center. Nine other investment areas like perennial crop production, however, are provided income tax exemption, only if the investment location is not around the capital.

In addition, new investments made by enterprises in certain remote regional states enjoy a longer tax incentive period than what is stated in the schedule. Therefore, investments in the national regional states of Gambela , Benishangul Gumuz, Afar (except in areas within 15 km of the Awash River) Ethiopian Somali, Guji and Borena zones of the national regional state of Oromia, South Omo and Segen zone in Southern Nations, Nationalities and Peoples Regional States (SNNPR) are entitled to income tax deductions of 30 pct for three consecutive years after the expiry of the income tax exemption period specified in the schedule, as per article 5 of the regulation.

Income tax exemption, in addition to what is written in the schedule, has also been provided for expansion or upgrading of existing investment enterprises and for investors who export or supply for an exporter. In such cases at least 60 pct of their products or services shall be entitled to income tax exemption for two years in addition to the exemption provided for in the schedule.

As per article 29/6 of the investment proclamation, the board can forward recommendations for approval by the council of ministers to grant new or additional incentives other than what is provided under the existing regulation.

Exemption from customs duty

The regulation has exempted four categories of investment areas listed in the schedule from customs duty privilege for capital goods and construction materials. These are real estate development, publishing, export trade and wholesale trade. Based on the directive issued by the board, details of customs duties exemptions for motor vehicles in each investment areas have been identified and have become effective .The directive has made this issue very transparent and easy for reference both for the investors and the implementing agencies. The privilege for the duty free goods is transferable for third parties, both for those having similar duty free privilege or for the unprivileged; upon payment of customs duty before the transfer is effected.

One stop-shop service

The proclamation allows the Agency to provide construction permits, work permits, issuance of business licenses, issuance of tax identification numbers, notarization of memorandums and articles of association and amendments thereto and effecting registration of trade or firm as enumerated under article 30 of the proclamation. This is expected to solve many of the bureaucratic problems associated with processing various types of permits. However, the Agency provides these services only for investors engaged in manufacturing.

There are also services the Agency provides on behalf of the investors. The Agency executes the request of the investors for land, bank loans, residence permits, approval of environmental impact assessment studies conducted on their investment projects and requests to acquire water, electrical power, and telecom services. The provision of these services will alleviate most of the frequently complained about problems.

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