Income Tax (Amendment) Proclamation No 1395 2025 Ethiopia

On 17 July 2025, the House of Peoples’ Representatives passed the Income Tax (Amendment) Proclamation No. 1395/2025, which introduces significant amendments to the Federal Income Tax Proclamation No. 979/2016. The amendment introduces substantial changes aimed at modernizing Ethiopia’s tax system, simplifying administrative procedures, improving compliance and revenue collection, and expanding the tax base to cover emerging and digital business sectors. This summary outlines the key changes, their practical implications, and the associated compliance timelines:

1. Reduction in Minimum Presence Threshold for Permanent Establishment
2. Corporate Income Tax & Alternative Minimum Tax (AMT) 
3. Advance Tax Payments
4. Taxation of Indirect Transfers of Ethiopian Assets
5.  Application of Income Tax Incentives and Tax Exemptions
6. Special Support on Dividends Used to Settle Outstanding Share Subscriptions
7. Digital Economy & Digital Services Tax
8.  Withholding Taxes & Non-Resident Taxation
9.  Deductibility of Interest on Loan
10. Deductibility of Expenses Paid in Cash
11. Deductibility of Charitable Donations and Withholding Tax Adjustments
12. Taxpayer Categories
13. Employment, Rental, and Business Income Tax
14. Reporting Obligations
15. Category B Taxpayers
16.  Effective Dates of Enforcement
     

Conclusion

These reforms represent a significant shift in Ethiopia’s tax regime, introducing far-reaching changes such as the taxation of the digital economy, provisions on indirect transfers of shares, the implementation of an Alternative Minimum Tax (AMT), the reduction of the presence threshold for triggering a permanent establishment (PE), and the imposition of enhanced compliance obligations.

Corporate taxpayers, particularly multinationals and cross-border service providers should carefully assess their exposure, review and update compliance frameworks, and closely monitor the issuance of supporting regulations and directives to ensure timely and effective implementation of these changes