Legal Alert: Ethiopia Replaces Investment Incentive Regulation -- Six Critical Changes Effective 23 February 2026

By Amare Ashenafi Aragie -- Deputy Managing Partner, Former Court Manager Federal Supreme Court, 18+ Years' Experience

Six Things Every Investor Must Know

1. Tax Holidays Are Abolished -- Replaced by Reduced Rates

The zero-tax holiday system is gone. Qualifying investors now pay reduced rates -- 5% for SEZ developers and recognized startups, 15% for most priority sectors, 25% for companies listing on the Ethiopian Securities Exchange -- rather than paying nothing. Automatic extensions for export performance or geographic location are also abolished; any future extension requires an explicit Ministry of Finance directive.

2. A 50% Capital Expenditure Deduction Is Now Available

For the first time, investors in priority sectors can write off 50% of eligible capital goods and construction material costs in the year operations commence (Table 2 of the Regulation). Minimum investment: USD 2,000,000. This replaces the financial benefit of the old tax holiday for large capital-intensive projects, providing a significant first-year cash flow advantage.

3. A Performance Agreement Is Now Mandatory Before Any Incentive Is Activated

Every incentive beneficiary must sign a binding Performance Agreement with the Ethiopian Investment Commission committing to specific employment, capital, production, and export targets. Failure to meet these targets can result in suspension of all incentives. The agreement must be signed before incentives are activated -- there is no grace period.

4. The USD 10 Million Threshold Applies Only to the Reduced Income Tax Rate

The minimum capital requirement of USD 10 million (Article 7(2)) applies exclusively to the reduced income tax rate. Customs incentives, dividend exemptions, capital gains exemptions, and the capital expenditure deduction (USD 2 million threshold) are not subject to it. SMEs access other incentives through Ministry directives.

5. Ring-Fencing Is Now Mandatory for Multi-Business Investors

Under Article 17(2), any investor engaged in two or more investment fields must report each field's income separately for tax incentive purposes. Companies that currently consolidate results across business lines must establish separate accounting records per incentive-eligible investment or risk losing the incentive for the relevant tax period.

6. Existing Investors Are Protected -- But Should Assess Whether to Opt In

Incentives granted under Reg 517/2022 continue until their original expiry date. Investors who already hold permits may however elect to transition to the new framework under Article 36(2) if the reduced rate or capital allowance would offer greater benefit -- for example, where a major expansion is planned. This election is irreversible and requires careful analysis before it is made.