Transition to Performance-Based Investment Incentives under Regulation No. 586/2026

1. BACKGROUND

Pursuant to the powers vested in it under the Investment Proclamation, the Income Tax Proclamation, and the Customs Proclamation, the Council of Ministers has repealed Investment Incentive Regulation No. 517/2022 and issued the Tax and Customs Investment Incentives Council of Ministers Regulation No. 586/2026. The Regulation introduces a revised, performance-based investment incentive framework that prioritizes strategic sectors, takes into account the level of capital employed, and links incentives to measurable and verifiable performance. The summary below highlights the key features of the framework, including the types of incentives provided.

2. INCENTIVES PROVIDED UNDER THE REGULATION

The Regulation provides several fiscal incentives for investments in sectors deemed eligible under the framework. These incentives include:

I. Investment capital allowance (Deductible Capital Expenditure)
II. Reduced business profit tax rate
III. Exemption from capital gains tax and dividend tax
IV. Exemption from Minimum Alternative Tax; and
V. Import Customs duty and Tax incentives.

I. Deductible Capital Expenditure

One of the fiscal incentives introduced under the Regulation is the Deductible Capital Expenditure, which allows a one-time deduction calculated as a percentage of the cost of capital assets incurred at the commencement of operations. In contrast to the depreciation deductions provided under the Income Tax Proclamation and its implementing Regulation, which allocate deductions over the useful life of an asset at prescribed annual rates, the Deductible Capital Expenditure provides a form of accelerated tax relief.

Under the applicable schedule, up to 50% of the qualifying capital expenditure may be deducted in the first tax year in which operations commence, provided that the investor has obtained a valid business license, which is an essential precondition for accessing income tax incentives. The remaining capital cost is subsequently deducted over the following years, typically at a rate of 25% per annum, depending on the asset category.

Once this one-time allowance is utilized, any capital expenditure becomes subject to the ordinary depreciation rules under the Income Tax Proclamation and Regulation.

It is important to note that this incentive applies to eligible expenditures (which is yet to be prescribed in a Ministry of Finance Directive) on assets such as buildings, machinery, and equipment, as outlined in Schedule 2 of the Investment Regulation.

Under the Regulation, only investors who invest at least two million United States Dollars (USD 2,000,000) or its equivalent in Birr in investment activities are eligible for the deductible capital expenditure. The Regulation also sets out additional conditions and eligibility criteria for claiming this allowance.

In addition to capital expenditures, investors are also permitted to deduct costs related to scientific research, whether conducted internally or outsourced, provided that such research is directly related to the investor’s business activities during the relevant tax year.

II. Reduced Business Profit Tax Rate

Departing from previous frameworks that provided blanket business profit tax exemptions, the Regulation introduces reduced business profit tax rates ranging from 25% to 5% for the applicable incentive period. Once the incentive period expires for a given sector, the standard corporate income tax rate of 30% applies.

Excluding small and medium enterprises (SMEs), eligibility for the reduced tax rate requires an investment of at least USD 10,000,000 (or equivalent in Ethiopian Birr). SMEs are those enterprises recognized as such by the Ministry of Labor and Skills and other Authorized Government organs, and will only become beneficiaries of the incentives provided under the Regulation as per Directives to be issued by the Ministry of Finance in consultation with relevant government organs.

The Regulation provides a range of specific reduced-rate incentives, as follows:

Special Economic Zone (SEZ) Developers and Sub-Developers benefit from a 5% reduced income tax rate on their annual taxable income for 10 years.
SEZ Enterprises operating within these zones generally qualify for a 15% reduced tax rate for the period specified for each sector in the Regulation’s schedules.
Fertilizer manufacturers within a SEZ benefit from a 5% tax rate for 10 years from the commencement of operations.
Investments outside SEZs are eligible for a 15% reduced income tax rate for the period specified in Table 1 of the schedules attached to the Regulation.
Designated start-ups are granted a 5% reduced income tax rate on taxable income for 10 years.
To support capital market development, companies that publicly list their shares on a licensed securities exchange are entitled to a reduced business income tax rate of 25% for three years from the IPO date. This incentive does not apply to shares offered on over-the-counter markets and to financial institutions.

The Regulation further introduces incentives to encourage green investments, as follows:

Companies recognized by the Environmental Protection Authority and participating in carbon trading or emissions trading systems are eligible for a 15% reduced income tax rate for 10 years from the commencement of operations.
Investors transitioning to at least 50% self-generated renewable energy, after previously relying on non‑renewable sources, and those utilizing 50% or more of their production inputs from recycled materials, qualify for a 15% reduced income tax rate for 5 years from the start of renewable energy use subject to submission of an annual energy audit report certified by the competent authority.

To prevent overlap, the Regulation stipulates that an investor eligible for multiple reduced income tax rate incentives may benefit only from the one that provides the greatest advantage.

III. Exemption from “Other Income” Taxes;

The Regulation further introduces incentives in the form of exemptions from “other” income taxes, including capital gains tax and dividend tax, which were not provided under the previous incentive frameworks.

• Dividend Tax Exemptions:

Dividends distributed to shareholders of SEZ developers and sub-developers are exempt from tax for 5 years.
For startup ecosystem builders, which include entities that actively contribute to the establishment, development, and sustainability of startups such as incubators, accelerators, and co-working spaces, dividends received from a startup are exempt from tax for a period of 5 years. Similarly, dividends distributed by startups to their shareholders are also exempt from tax for 5 years.

• Capital Gains Tax Exemption:

– The only capital gains tax exemption provided under the Regulation is for gains realized from the sale of ownership in a start-up by a recognized start-up ecosystem builder.

IV. Exemption from Minimum Alternative Tax

The Incentive Regulation provides specific exemptions from the recently introduced Minimum Alternative Tax (MAT):

• SEZ Developers and Sub-Developers are exempt from MAT for 10 years.

• Investors in Start-ups are exempt from MAT for 3 years, to the extent of losses incurred in the start-up, provided the investor can demonstrate that such losses directly result from their investment.

V. Custom Duty and Tax Incentives

In conformity with the repealed investment incentive framework, the Regulation grants investors customs duty and tax benefits on the importation of capital goods and construction materials, while specifying separate provisions for those operating within SEZs and those outside such zones.

Recognized Developers, Sub-Developers, Administrators, and Enterprises operating within a SEZ are permitted to import capital goods and construction materials with the benefit of customs duty and tax incentives. Such investors may import these goods without limitation as to quantity or timing.
Investors operating outside an SEZ and engaged in activities listed in Table 3 of the Schedule attached to the Regulation can import capital goods and construction materials for new investments with customs duty and tax incentives. However, unlike the previous framework, these incentives cannot apply to the expansion or upgrading of existing investments.
In addition, investors outside an SEZ may import eligible capital goods and construction materials only up to the date of issuance of the business license. As an exception, for investments implemented in phases where importation is required at different stages, investors may continue to benefit from customs duty and tax incentives for subsequent phases, provided that the phased implementation is clearly specified in the performance agreement concluded with the Ethiopian Investment Commission (EIC), as explained below.
In relation to duty free importation of Motor Vehicles, the Ministry of Finance is to issue a directive after submission to and approval of proposals by the Investment Board.

VI. Ministry of Finance’s Power to Grant Fiscal Incentives

In providing a window for the introduction of additional incentives, Article 32 of the Incentive Regulation vests the Ministry of Finance (MoF) with the power, where an incentive is deemed necessary to achieve the objectives of the Regulation and there is sufficient economic justification, to permit, through a directive, the granting of investment incentives to investors engaged in investment activities not specified in the Regulation.
In exercising this power, the MoF issued a circular letter dated 13 April 2026, with reference No. ተፓመ/ነ/883/18, grounded in the policy objective of ensuring uninterrupted production and service delivery through the efficient supply of inputs to manufacturers and the mitigation of supply chain disruptions. On this basis, the circular introduces an income tax exemption on taxable income derived from the sale of imported goods by Free Trade Zone investors that import goods from abroad and supply them to the domestic market.

3. CONDITIONS AND ADMINISTRATION OF INCENTIVES

A major shift under the Regulation pertains to the administration of investment incentives. The Regulation stipulates that investors undertaking activities covered by the specified incentives shall be required to enter into a Performance Agreement with EIC.

Such a Performance Agreement needs to specify key performance indicators, including but not limited to the level of investment, capital employed, number of jobs created, production volume, technology transfer, project implementation approach, and other relevant metrics, and shall establish a reporting and monitoring mechanism to ensure compliance.

The Regulation further specifies that the Performance Agreement must explicitly provide for the government’s authority to suspend incentives if the investor fails to meet their obligations under the Agreement.

The Regulation also provides that incentives are only available for registered tax payers maintaining and submitting separate accounting records for each investment project or line of business for which the incentive is granted.

The Regulation additionally provides that a system of ring fencing will be established to ensure that the incentives are utilized exclusively for the purposes for which they are intended and for eligible expenditure. This is not clear whether the government is intending to limit incentives per location of investment activities, in the direct sense of the term “ring-fencing”, or otherwise.

4. STATUS OF EXISTING INCENTIVES GRANTED

Investors who were granted incentives under the repealed investment laws will continue to enjoy those benefits until the expiration of the incentive period granted. The Regulation further provides that investors who obtained an investment permit prior to its issuance, or before 23 February 2026 (the date on which the Regulation came into force), will remain entitled to incentives provided under the repealed framework. Nevertheless, the Regulation offers such investors the option to be treated under the new incentive regime.

Legal Disclaimer

This publication is provided for general informational purposes only and does not constitute legal advice or a legal opinion. The information contained herein is based on the text of the For Investment Providing Tax and Customs Incentive Council of Ministers Regulation No. 586/2026. The application of the law may vary depending on specific facts and circumstances, and subsequent directives, amendments, or regulatory guidance may affect the analysis set out above. Readers should not act or refrain from acting on the basis of this publication.