Amendments to Ethiopia's tax regime

At a glance

• Ethiopia recently enacted a new proclamation which introduces several changes to income tax regulations.
• The new law amended the employment income tax brackets and employers will need to apply the updated tax rates to salaries paid to their employees.
• The new law has introduced significant change to the definition of permanent establishment in Ethiopia.
• The new Proclamation introduced new provisions aimed at enhancing coordination among government agencies for the purpose of collecting information on foreign employees working in Ethiopia.

We would like to express gratitude to Mehrteab & Getu Advocates LLP for their contribution on this publication.

Ethiopia recently enacted the Federal Income Tax Amendment Proclamation No. 1395/2025, amending the previous Federal Income Tax Proclamation No. 979/2016, which had been in effect for over nine years. The new proclamation introduces several changes to income tax regulations, including provisions that directly impact employment relationships.

Employment income tax brackets

The new law amended the employment income tax brackets and employers will need to apply the updated tax rates to salaries paid to their employees. The revised monthly employment income tax brackets are as follows:

With this revision the minimum taxable income was increased from ETB600 to ETB2,000 and the lowest applicable rate has been increased from 10% to 15%. As a result, the tax brackets have been reduced from seven to six. Additionally, the highest tax bracket has reached over 14,000 whereas it was over 10,900 in the previous income tax proclamation.  

Reduced time threshold for permanent establishment status

The new law has introduced significant change to the definition of permanent establishment in Ethiopia. 

The new law stipulates that the provision of services including technical services and consultancy services, by a person through employees or other persons engaged for that purpose, but only where the services or connected business in Ethiopia continued for a period of or periods exceeding in the aggregate, 91 days in a tax year, or in any one-year period constitutes a permanent establishment. Similarly, a building site, or a construction, assembly, or installation project, or supervisory activities connected with such site or project will be a permanent establishment only when the site, project, or activities continue for more than 91 days in a tax year or in any one-year period. Previously, permanent establishment was triggered under these circumstances if the activity continued for more than 183 days in a one-year period.  

Businesses operating in Ethiopia through such arrangements should consider this change and must register in Ethiopia provided that they have meet the above pre-conditions.

New provisions on information sharing for foreign employees

The new Proclamation introduced new provisions aimed at enhancing coordination among government agencies for the purpose of collecting information on foreign employees working in Ethiopia.

The Ministry of Revenues in collaboration with the Ministry of Foreign Affairs, is tasked with establishing a system to record the list and addresses of employees working for organisations including foreign embassies and international organizations. The Ministry of Foreign Affairs will be responsible for collecting relevant employee information from these organizations and transmitting it to the Ministry, in accordance with procedures and timelines to be defined by the new system.

Additionally, government bodies responsible for issuing and renewing work permits for foreign nationals are required to inform the Ministry immediately after each issuance or renewal. The information to be provided includes the employee’s name, address in Ethiopia, employer’s name, type of work permit, duration of stay, salary, fringe benefits, and any other details required by the Ministry.