Income tax on employment income

For tax purposes, an employee is defined as an individual engaged to perform services under the direction and control of another person. This engagement can take place on either a permanent or temporary basis. The definition does not include independent contractors but does cover directors, other office holders when it involves managing an entity, government appointees and people holding public office.

Income tax applies to any employment income that such individuals receive – whether payments or gains are in cash or in kind – by virtue of that employment. Income from former or prospective employment is also included.

All income tax regulations are issued by the Council of Ministers, which outlines what are classed as taxable fringe benefits and how they will be assessed.

Employers are obliged to withhold income tax from each payment made to an employee. The taxes withheld must be paid to the Ethiopian Revenues and Customs Authority (ERCA) within 30 days from the end of each calendar month in which the tax was withheld. Such payments should also be accompanied by a statement about each employee receiving taxable income for the month.

Individual Income Tax Rate

The employment income tax that an employee has to pay amounts to a final tax on their employment income. Current rates are set out in the following table:

Income tax from employment Progressive rates from 0 to 35%
Up to ETB 600 0%
ETB 601- 1,650 10%
ETB 1,651 – 3,200 15%
ETB 3,201 – 5,250 20%
ETB 5,251 – 7,800 25%
ETB 7,801 – 10,900 30%
Above ETB 10,900 35%

Tax rates:

Salary Income Tax = Calculated taking the Gross Salary * Tax Rate) – Deduction
Employee Pension – Gross Salary x 7 %
Net Income = Gross Salary-Salary Income Tax – Employee Pension – Taxes which are applicable
Employee Pension – 7 %
Company Pension – 11 %

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exemption from employment income tax

Certain categories of income are exempt from employment income tax. The most common components of an employee’s package that are fully or partially exempt are listed below:

  • Any amount paid by an employer to cover the actual cost of an employee’s medical treatment would be exempt from tax;
  • An allowance paid to an employee in lieu of transportation, which meets certain conditions, would qualify for exemption. The allowance must be referred to in an employment contract. The maximum tax-exempt allowance is currently set at ETB 2,200 per month, but the allowance cannot exceed 25% of an employee’s salary. It is also important to note that the allowance does not cover instances in which an employer arranges for, or gives, a vehicle to a staff member who then uses it to travel between their residence and place of work;
  • If an employee is granted a hardship or weather allowance as a result of working in a remote and/or desert area within Ethiopia, for example in Asosa or Gambela, a portion of that allowance would be tax-exempt. The tax exempt percentage depends on the specific place in which the staff member works. More details can be found in Directive No. 21/2001 and Directive No. 102/2007 issued by ERCA;
  • If an employee receives a per diem allowance for traveling more than 25km from their place of work, either ETB 255 per day or 4% of their monthly salary, whichever is greater, will be exempt from income tax. The allowance must be referred to in the employment contract and the wording should indicate that the allowance will only be paid for per diem purposes and will not cover expenses incurred by staff members in their daily commute from their place of residence to the office. It will also not cover expenses paid to an employee who possesses a company vehicle or uses a transportation service provided by their employer. Moreover, there is a monthly limit, which means that the maximum amount a staff member can receive in tax-exempt form per month is ETB 2,200. This monthly amount should not exceed 25% of the employee’s monthly salary;
  • Amounts paid to an employee for work related travel costs are exempt from tax as long as documented evidence of those costs exists and they are in line with prevailing land and air transport fares. Transport expenses paid to expatriate employees on leaving the country following the termination of their employment contract are exempt subject to certain conditions too. These expenses should be covered under their employment contract, which is supposed to include a clause outlining the cost of repatriation. But such expenses should not exceed prevailing land or air transport fares and there are also limits on how much luggage can be transported – the limit is currently 300kgs. This exemption also covers inbound expatriate travel expenses, but again the employment contract must contain appropriate wording on the matter;
  • Employees who work in the mining, manufacturing or agricultural sectors and receive food and beverages on a free-of-charge basis from their employer will have a portion of the cost exempt from employment income tax. How much depends on the industry concerned.
  • If an employer contributes towards an employee’s pension, provident or other retirement fund, these contributions will be exempt from employment income tax as long as their total monthly contribution does not exceed 15% of the staff member’s monthly income.

Allowable Deductions and Tax Credits :

A deduction between ETB 60 and 1,500 of the taxable amount is applied, according to the total income of the taxpayer.
Some items are exempt from employment income, including:

  • employer contributions to retirement benefits (capped at 15% of monthly salary)
  • amounts paid by employers to cover the actual costs of medical treatment, hardship and other allowances
  • pension contributions
  • certain scholarships
  • daily allowance for field work up to the higher of 4% of the basic daily salary or ETB 500
  • maintenance or child support payments.

Special Expatriate Tax Regime

Individual residents are subject to tax on worldwide income, non-residents only on the income with Ethiopian source.
Any individual who lives in Ethiopia for more than 183 days during a 12-month period, whether continuously or intermittently, will be considered as resident for the entire tax period.
In addition to normal tax rates, certain payments made to non-residents are subject to a 15% withholding tax.
Certain types of income of non-resident are subject to specific rates, as follows:

  • 5% of the gross amount of an insurance premium or royalty
  • 10% of the gross amount of a dividend or interest
  • 15% of the gross amount of the fee for a management or technical fee.

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