Introduction

Directive No. 1064/2025 was issued by the Ethiopian Ministry of Finance to implement and regulate investment incentives provided under the Council of Ministers Regulation No. 517/2022. It outlines the rules and conditions under which eligible investors can access income tax holidays and customs duty exemptions, introduces procedures for monitoring and compliance, and ensures that the government can assess revenue forgone through these incentives. The directive is based on the powers given to the Ministry by Article 26 of Regulation No. 517/2022 and Article 19(4) of the Proclamation on the Powers and Duties of Executive Organs (Proclamation No. 1263/2021).

Income Tax Holidays for Qualifying Investors

One of the core elements of the directive is the grant of income tax holidays to qualifying investors. To benefit, an investor must operate in an incentive-eligible sector and must present an investment license, a business license, and a letter of support from the appropriate federal or regional investment authority confirming that the investment has been completed. The investor must also explicitly request the income tax holiday through the supporting letter. For expansion or upgrading projects, additional criteria from Directive No. 941/2023 must be met. These tax holidays are designed to encourage capital investment in priority sectors, promote job creation, and stimulate industrial development across the country.

Compliance and Reporting Obligations

The directive also introduces important compliance measures. Investors benefiting from tax holidays are obligated to submit their financial statements to the Tax Authority in accordance with the timelines set under the Income Tax Proclamation. Late submission will attract administrative penalties as per the Tax Administration Proclamation. In cases where investors fail to declare income due to extraordinary circumstances such as natural disasters, war, or similar force majeure events, exemptions from penalties and continued entitlement to the tax holiday may be granted, provided the reasons are substantiated and verified by the relevant investment authority.

Revocation of Tax Holidays

The directive outlines the circumstances under which a tax holiday can be revoked. These include submission of false or misleading documents during the application process, termination of the investment activity, or failure to comply with the investor’s obligations under the regulation. If revoked, the investor must repay all previously exempted taxes, including any interest and penalties. Before revocation, the Ministry of Finance must follow a formal process: it must receive a written request from the Tax or Investment Authority, notify the investor of the intended cancellation, and allow the investor a chance to respond within 10 days. If the response is unsatisfactory or not provided, the Ministry will issue a cancellation decision, which the investor may appeal within 30 days.

Customs Duty Exemptions

The directive provides detailed procedures for importing capital goods and construction materials free of customs duties. Construction materials eligible for exemption include structural steel, doors, windows, glass, ceramic and aluminum materials (only for educational, hotel, and hospital use). These materials must be imported in three sequential phases: 30% of the total amount to initiate construction, 30% of the remaining 70% upon verification of prior usage, and the final 40% once the previous imports are confirmed to have been used as intended. If an investor wishes to import all materials at once, they must provide a financial guarantee (bank or cash bond) to the Customs Commission. Additionally, the Commission is mandated to perform audits on duty-free imports to ensure proper use.

Promotion of Domestic Sourcing

Importantly, the directive promotes domestic sourcing of goods. If capital or construction goods are available in the domestic market in adequate quantity, acceptable quality, and at a reasonable price, the investor must procure them locally. The Ministry of Industry is responsible for certifying the availability of such goods and may deny import incentives if suitable domestic alternatives exist. If duty or tax was paid on inputs used to manufacture such locally sourced goods, a refund may be claimed through the Customs Commission based on input-output coefficients provided by the Ministry of Industry.

Special Provisions for Special Economic Zones (SEZs)

Special provisions are also made for Special Economic Zones (SEZs). Developers, sub-developers, administrators, and enterprises operating in SEZs recognized by the Ethiopian Investment Board are eligible for tax holidays as outlined in a schedule attached to the directive. The aim is to foster investment in designated zones that offer infrastructure, regulatory advantages, and coordinated services for businesses.

Sector-Specific Regulations

The directive includes specific rules for sectoral activities. For example, although manufacturing of nails and iron sheets is generally excluded from incentives, an exception is made when these are produced from raw materials. Similarly, incentives are available for technical and vocational training institutions but explicitly exclude gymnasiums and bodybuilding centers. In the case of grain processing, only industrial activities that transform raw grains through chemical or mechanical means are eligible; basic food preparation such as baking injera or bread does not qualify.

Loss Carry-Forward Rules

The directive further provides rules for loss carry-forward during the tax holiday period. Losses incurred during this time can be offset against profits earned in the half-period following the end of the tax holiday, helping businesses manage financial downturns during their formative years. However, any loss incurred during the offset period itself cannot be carried forward further.

Oversight and Record-Keeping

To ensure proper oversight, the Tax Authority must maintain detailed records of all beneficiaries of income tax holidays, including names, investment sectors, duration and legal basis of incentives, and estimated revenue forgone. This information must be submitted to the Ministry of Finance on a quarterly basis (within 15 days of the start of each quarter), beginning July 1.

Transitional Provisions

Finally, the directive includes transitional provisions. Investors who were granted incentives under the repealed Investment Incentives Regulation No. 270/2005 (as amended) will continue to receive those incentives according to the terms originally granted. This ensures legal continuity and protects investor confidence.

Conclusion

In conclusion, Directive No. 1064/2025 establishes a comprehensive legal framework for implementing investment incentives in Ethiopia. It balances the need to attract and support investment with robust reporting, compliance, and enforcement mechanisms to safeguard public revenue. It also provides clarity to investors, government bodies, and regulators regarding their respective roles and obligations in administering tax and customs incentives.