The Ethiopian income tax system follows a scheduler approach as a result income from different sources shall be taxed and treated separately.  Accordingly the income tax proclamation has introduced four kinds of schedules :1. Schedule A
All incomes from employment shall be taxed based on this schedule . The proclamation has made it clear that only incomes of employees shall be taxed based on this schedule. Incomes of persons getting their economic benefits from activities akin to employment will be taxed based on other schedules. For instance a person working as an independent contractor will be taxed based on schedule C .(Arts.10-11 of the income tax proclamation)
2.Schedule B Income
All incomes from rental of buildings shall be taxed using this schedule(arts.14-16 of the proc.). In case of buildings the proclamation has not made a distinction among buildings made of different materials . In practice all buildings made of any kind of material are subject to the payment of the tax so long as the owner gets an income from the building.
This schedule makes a distinction between an income from rental of building by physical persons and bodies corporate . Accordingly all incomes by physical persons shall be taxed using this rate :

Schedule ‘B’

Taxable Income from Rental (per year)

Income Tax Payable

Over Birr

to Birr




exempt threshold
















Over 60,000



On the other hand incomes of bodies corporate from the same activity shall be tax at a flat rate of 30 % with no exemptions for smaller incomes .
Schedule C
Incomes from business shall be taxed based schedule C . Business according to the law is any

industrial, commercial professional or vocational activity or any other activity recognized as trade by the Commercial Code of Ethiopia and carried on by any person for profit . According to the definition any industrial ,commercial or vocational activity can be considered as a business and be subject to the payment of the tax so long as the person is carrying out this activity for profit.
This schedule also makes a distinction between the income derived by physical and juridical persons . Consequently incomes of physical persons shall be taxed using a schedule similar to the above one . Whereas incomes from bodies corporate shall be taxed at a flat rate of 30 %.
Schedule D
All incomes which cannot be subject to either schedule A,B or C shall be subject to this schedule . This scheule was intended to be used in order to impose a tax on incomes which cannot be subject to one of the sceduk



Every state has an interest in collecting as much revenues as possible so as to provide the necessary public services. Different countries apply different rules in order to determine their tax jurisdiction.   

The Ethiopian income tax law uses resident as a defining criteria in order to determine the tax jurisdiction of the country. The law clearly provides the following


This Proclamation shall apply to residents of Ethiopia with respect to their worldwide income.

The Proclamation shall apply to non-residents of Ethiopia with respect to their Ethiopian source Income.


  Therefore, Ethiopia’s jurisdiction to tax extends in case of residents to all incomes earned in Ethiopia and in case of no residents with respect to Ethiopian source income only. 

  Generally, resident is defined in the Civil Code and the tax law has also provided grounds for acquiring residence in Ethiopia. Accordingly, the tax laws lists down two standards in order to determine the residence of taxpayers The first standard is used to determine residence in case of juridical person while the other is used to determine the same matter in case of physical persons.


Accordingly, a physical person shall be considered to be resident of Ethiopia if she has a domicile in Ethiopia or works as diplomatic or similar official post outside of Ethiopia.[1] A domicile is not defined in the income tax laws, according to the definition of the civil code a person will be considered to have established domicile in a place where he has established the principal seat of his business and of his interests, with the intention of living permanently in the area.[2] Intention to live permanently in one area is an important requirement for the purpose of domicile.


Moreover, a person who stays in Ethiopia for more than 183 days in a period of twelve calendar months will be considered as resident of Ethiopia.[3] The 183 days can be either continuous or intermittent, in any way if an individual stay in Ethiopia counts to be 183 day he is required to pay an income tax from all his incomes including those incomes generated abroad.


 In case of juridical person, the body will be considered to be resident to Ethiopia if either one of the following is present:


·                     If the principal office of the company is located in Ethiopia.[4]

·                      If the effective management of the company is located in Ethiopia.[5]

·                      If the company is registered by the ministry of trade and industry.[6]


  As provided in article 5(3) of the proclamation a body would be considered as a resident of Ethiopia if the effective management of the body is located in Ethiopia. Though the meaning of effective management is   not clearly provided in the law it is possible to assumet 

fective management is the one with the power of hiring and firing workers and giving decisions that can drastically affect the structure, business and any other aspect of the company. So if such management of the company is located in Ethiopia, even if the plant or factory is located in other country the company will be considered to be resident of Ethiopia so far as the tax laws are concerned. Practically the two offices are inseparable.


Finally, as provided in article 5(4) of the proclamation resident person also includes a permanent establishment of a non-resident person in Ethiopia.[7] This provision extends tax jurisdiction to foreign firms operating in Ethiopia on the income attributable to operations inside Ethiopia. The presence of laws on levying income on permanent establishment can help close loopholes for evasion of tax by foreign companies.


A permanent establishment is defined in Article 2 (9) of the income tax proclamation. Consequently, a person will be considered to have a permanent establishment if he has:-


[ A]n administrative branch factory workshop , mine , quarry or any other place for the explanation of natural resources and a building site or place where construction and or assessmbly works are carried out[8]

This definition of permanent establishment would not include income of foreign companies earned in other countries without the assistance of the local permanent establishment.


Hence, a company incorporated under the laws of Kenya and having its head office in Kenya, without having any branch in Ethiopia, will be out of the jurisdiction of Ethiopia. However, if the company establishes a permanent establishment in Ethiopia so long as this permanent establishment is concerned the company will be inside the jurisdiction of Ethiopian tax laws.


Nonetheless, the definition of permanent establishment in our country does not allow for the imposition of tax on transactions considered as “force of attraction”.[9]


[1] See art.5(1)(a) of the proc.

[2] See art.5(1)(b) of the proc.

[3] See art.5(1)(c) of the proc.

[4] See art.5 (3)a of the Proclamation.

[5] (3) b.

[6] Id art.5 (3) (c).

[7] See art. 5(4) of the Proclamation.

[8]  See art. 2(9)(a) See also  art.2(9)(b)(i)-(v) –has listed down establishments that cannot be considered as a permanent establishment

[9] This is an activity similar to the activities normally carried out by the permanent establishment but being carried out by the head office.



    Tax Law Lecturer and a consultant on Ethiopian Tax laws 

    taxation of illegal incomes in Ethiopia 

    Who is required to pay an income tax in Ethiopia 

    November 2012