Tax Guide for US Expats Living and Working in Ethiopia
Who Is Liable For Income Taxes in Ethiopia
Residents are subject to tax on their worldwide income. Nonresidents are subject to tax on their Ethiopian-source income only.
An individual is considered to be resident in Ethiopia if any of the following circumstances exist:
- He or she has a domicile in Ethiopia and a habitual abode in Ethiopia.
- He or she is a citizen of Ethiopia who serves abroad as a consular, diplomatic or similar official of Ethiopia.
- He or she is physically present in Ethiopia for more than 183 days in a period of 12 calendar months, either continuously or intermittently.
Income subject to tax. The taxation of various types of income is described below.
Employment income. Employment income includes any payments in cash or in kind received by an individual as a result of employment, including income from former employment or prospective employment.
Employment income is subject to tax at progressive rates ranging from 10% to 35%. For a table of these rates.
The following categories of employment income are exempt from income tax:
- Income derived by casual employees who do not work for more than 1 month for the same employer in any 12-month period.
- Pension, provident fund and all other forms of retirement contributions paid by employers, up to 15% of the monthly salary of the employee.
- Subject to reciprocity, income from employment received by diplomatic and consular representatives and other persons employed in an embassy, legation, consulate or mission located in a foreign state for the performance of state affairs if such individuals are nationals of that state and bearers of diplomatic passports or if, in accordance with international usage or customs, they are normally exempt from income tax.
- Actual cost of medical treatment of the employee paid by the employer.
- Subject to limits set by the tax authorities, the following payments:
— Transportation allowances.
— Reimbursement of traveling expenses incurred on duty.
— Traveling expenses paid on the commencement or termination of employment to employees recruited from a location other than the place of employment. For foreign employees, these expenses include traveling expenses to or from their country if such payments are made in accordance with specific provisions of the employment contract.
- Hardship allowance.
- Allowances paid to members and secretaries of boards of public enterprises and public bodies as well as to members and secretaries of study groups established by the federal government or regional governments. In this context, secretaries are individuals who arrange and attend meetings and record minutes of meetings. They are usually paid a certain amount per meeting by public enterprises.
Rental income from buildings. Rental income from buildings derived by individuals is subject to tax at progressive rates ranging from 10% to 35%. For a table of these progressive rates.
Self-employment and business income. All business profits derived in Ethiopia are subject to tax. Taxable business income is determined for each tax year on the basis of the income statement. Business income derived by individuals is subject to tax at progressive rates ranging from 10% to 35%.
Dividends are subject to a 10% final withholding tax. Interest received on deposits and royalties are subject to a 5% final withholding tax. Interest paid on foreign loans is subject to a final withholding tax at a rate of 10%.
Directors’ fees. Directors’ fees are considered employment income. Fees for board members of public enterprises are not taxed.
Other income. A 15% final tax is imposed on annual gross income from games of chance and from the casual rental of property not related to a business activity that is taxable under the tax law.
All payments made for technical services (expert advice or technological services) rendered to resident persons outside of Ethiopia are subject to a 10% withholding tax.
Taxation of employer-provided stock options. Ethiopian tax law does not specifically address the treatment of stock options. Such options are usually not available because currently Ethiopia does not have companies whose shares are publicly traded on a stock market. However, the income tax law states that income earned in any form by employees in cash or in kind is taxable unless it is explicitly exempted from tax by the law. Based on this measure, a stock option is taxed as an employee benefit.
Capital gains and losses. Gains derived from the transfer (sale or gift) of buildings used for a business, factory or office are subject to tax at a rate of 15%. Gains derived from the transfer of buildings used as a residence are exempt from tax. Gains derived from the sale of shares of companies are subject to tax at a rate of 30%. Subject to limitations, losses incurred on the transfer of such properties may be used to offset gains derived from such transfers. Unused losses can be carried forward indefinitely. However, losses are not recognized on transfers to associates (related persons).
Deductions
General. In principle, all expenses incurred wholly and exclusively to produce income are deductible. However, measures in the tax law contain limitations on the deduction of expenses.
Employment deductions. Employees may not claim deductions from employment income.
Business deductions. Expenses incurred wholly and exclusively in the production of gross business income may be deducted from income derived from the same source. However, certain items may not be deducted, including the following:
- Voluntary pension or provident fund contributions exceeding 15% of the monthly salary of the employee
- Interest in excess of the rate used in transactions between the National Bank of Ethiopia and commercial banks, increased by two percentage points
- Damages covered by insurance policies
- Punitive damages and penalties
- Income tax paid on business income derived from entrepreneurial activities and recoverable value-added tax
- Representation expenses exceeding 10% of the salary of the employee
- Personal consumption expenses
- Entertainment expenses
- Donations or gifts (however, donations to registered charities, public schools and health institutions are tax deductible to the extent that they do not exceed 10% of taxable income)
Depreciation of business assets calculated at rates specified by the tax authorities can be claimed as a deduction. If a revaluation of business assets takes place, no depreciation is allowed for the amount of the revaluation.
Rates. Progressive tax rate tables apply separately to employment income, business income and rental income. Employers must withhold the tax from each payment to an employee and pay the tax over to the tax authorities for each month.
Credits. For details regarding the foreign tax credit.
Relief for losses. Individuals may carry forward net operating losses from businesses for three years. However, if a business incurs losses following the year of the loss, the loss-carryforward period may be extended for a year for each loss year in the three-year period, up to a maximum loss-carryforward period of six years. Earlier losses must be offset first. Losses may not be carried back.
Nonresidents. Nonresidents are subject to tax at the same rates as residents on Ethiopian-source income only.
B. Other taxes
Certain property, including land and buildings, is subject to annual property taxes. Ethiopia does not impose wealth and net worth taxes.
C. Social security
For employees of government organizations and public enterprises, contributions to a government-operated retirement fund must be made in accordance with the law.
Employers and employees must make monthly contributions at rates of 6% and 4%, respectively.
Employees of private businesses and nongovernment organizations are not subject to the scheme described in the preceding paragraph. In general, these employees may participate in provident fund schemes operated by their respective employers. The contribution rate varies depending on the scheme. Participation in the scheme is usually covered in an employee’s compensation package. To encourage domestic saving and investment, the Ethiopian government is planning to introduce a private sector social security scheme.
We have been preparing US income tax returns for US Citizens and permanent residents living in Ethiopia for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Ethiopia and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Ethiopia tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Ethiopia Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in Ethiopia, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Ethiopia.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a consultation by phone, skype or email