Ethiopia Proposes Major Income Tax Reforms, Including Quarterly Prepayments for Large Businesses

Addis Ababa, Ethiopia –
Ethiopia’s new draft Income Tax Proclamation proposes a significant shift for Category “A” taxpayers, requiring businesses with annual income exceeding 2 million birr to pre-pay 25% of the previous fiscal year’s profit tax liability each quarter. Instead of settling the entire tax due after submitting the annual report, companies will make these advance payments throughout the year. The final tax liability will be calculated at year-end, with any balance settled or refunded after closing accounts.

The Ministry of Finance says the change is aimed at improving revenue predictability and strengthening fiscal management, but it will require businesses to carefully plan their cash flow to meet quarterly obligations.

Beyond this major adjustment, the draft proclamation introduces several other important reforms:

• New Taxpayer Categories
  • Category “A”: Annual income over 2 million birr.
  • Category “B”: Annual income below 2 million birr.
    This simplified classification is intended to clarify compliance obligations.
• Revised Income Tax Brackets
  • Updated income tax brackets for both employees and businesses aim to better reflect economic realities and promote fairness.
• Dividend Tax Clarification
  • The long-standing debate over dividend taxation is resolved: dividends will not be taxed at the corporate level to encourage reinvestment and expansion.
  • However, a 15% dividend tax rate will apply to distributed profits received by shareholders.
• Lower Withholding Tax Rate
  • The withholding tax rate is reduced to 3%, easing the burden on qualifying payments.
• Restrictions on Large Cash Transactions
  • Payments or receipts of cash exceeding 30,000 birr will now trigger fines.
  • The measure is designed to reduce informal cash transactions and promote formal banking channels.

The Ministry is encouraging public and industry feedback on the draft before it is finalized and submitted to Parliament, describing the reforms as part of efforts to modernize the tax system, boost compliance, and support sustainable economic growth.