Software Developers, Cloud Service Providers Get Tax Holidays

Intending to create an ecosystem conducive to innovation and technology development, the federal government has labeled five ICT-related investment areas as eligible for income tax and duty incentives.

The tax holidays, which are part of a new investment incentive regulation that extends special rights for specific sectors to promote private sector investment, selected the five categories after they were identified by the Ministry of Innovation & Technology (MINT) needing a boost.

As a result, any domestic or foreign investor who establishes a new business in (1) software development, (2) data center and cloud service; (3) business outsourcing process; (4) startup development service; and (5) Research, innovation, enrichment and development works; is set to be exempted from income tax for four years.

The exemption, which includes business income tax and employment tax, further extends to five years if the investment is outside the capital and its surrounding areas.

In addition, new businesses engaged in these sectors can also import duty-free capital goods and construction materials necessary for establishing a new enterprise or expanding.

Businesses established before the regulation are also entitled to some exemptions. However, the type and amount of the incentives have not been covered in the new law, and the Ministry of Finance is expected to come up with a directive covering invectives for existing businesses.

The new investment incentive regulation which was passed into law on May 22, 2022, by the Council of Ministers also carries loss carry forward benefits allowing an investor who has incurred a loss within the period of income tax exemption to carry forward the loss for half of the exemption period after its expiry.

Ethiopia uses a standard classification that provides a comprehensive list of different types of business licenses that can be acquired across various sectors. There are over 500 types of business licenses. In addition to these classifications, government institutions may issue specific permits for areas not covered in the list.

MINT, which was asked to provide a list of business areas under its eye to be exempted, selected the five business areas as needing a push.

This is not the first time Ethiopia has tried to gear some legal support to its innovative ecosystem. Ethiopia’s startup act which is in the draft stage aims to provide customized support for startups and incentivize entrepreneurship.

The draft introduces various interventions specifically targeted to solve the major issues startups and ecosystem players have faced, including tax breaks. However, the draft has been on halt for two years and has not passed into law yet.