Ethiopia’s Year in Review: Highlights of New Legislation

HAPPY ETHIOPIAN NEW YEAR!

The year 2016 in the Ethiopian calendar (September 11, 2023 – September 10, 2024 G.C) saw significant legislative activity, with 53 proclamations and regulations published in the Federal Negarit Gazette. In addition, government bodies such as the Ethiopian Investment Commission, the National Bank of Ethiopia, the Ministry of Finance, and the Ethiopian Capital Markets Authority issued several directives to regulate their respective sectors. These laws covered a broad range of areas, including foreign investment, foreign exchange, banking, taxation, land, special economic zones, environment, data protection and public enterprises. The legislative reforms are expected to continue with more draft legislation in the pipeline. This summary provides brief insights on the new laws and Ethiopia’s changing regulatory landscape.

INVESTMENT

Directive to Regulate Foreign Investors’ Participation in Restricted Export, Import, Wholesale and Retail Trade Investment No.1001/2024

In March 2024, the Ethiopian Investment Board issued a historic Directive No.1001/2024 allowing foreign investors to enter sectors previously reserved for domestic investors. The liberalized sectors include import trade, export trade, retail, and wholesale trade. This directive represents a major shift in Ethiopian investment policy, which had remained largely unchanged since the early 1970s. For a full analysis of the directive, read our insights here.

Special Economic Zone Proclamation No.1322/2024

In May 2024, the new Special Economic Zone (SEZ) Proclamation No.1322/2024 was introduced, replacing the previous legal framework for industrial parks. The new law aims to attract investment, boost industrialization, and better integrate Ethiopia into the global value chain. It establishes a comprehensive framework to regulate various types of parks, including industrial parks, free trade zones, logistics parks, science and technology parks, and service parks. The Proclamation also provides a range of incentives to investors in the SEZ, such as tax holidays (including exemptions on income tax, dividend, and withholding tax) and customs duty exemptions. It also offers a streamlined one-stop-shop service for business registration, licensing, and other administrative processes. All existing industrial parks and new SEZs and parks will now be governed by this law.

Export Trade Duty Incentive Scheme Proclamation No.1324/2024

In August 2024, the Export Trade Duty Incentive Schemes (Amendment) Proclamation No. 1342/2024 came into effect, amending Proclamation No. 768/2012. Key changes include the authority granted to the Ethiopian Customs Commission to issue indefinite extensions on the requirement to use raw materials imported for export production within one year. The amendment further simplifies the extension process by removing the rule that applications must be submitted one month before the initial period ends. Penalties for non-compliance have been significantly reduced, with penalties for misuse of raw materials or failure to secure an extension cut from 50% to 10%. The amendment further removes the 5% duty on re-exported non-conforming raw materials while maintaining a 95% refund under the duty drawback scheme, making re-exporting more favourable for exporters. Changes to the bonded input supplies warehouse scheme also reduce penalties from 50% to 10% and allow indefinite extensions for justified reasons, offering exporters more flexibility in managing their timelines. A new provision requires beneficiaries importing raw materials under a supplier’s credit or franco-valuta basis to provide proof of demand, such as a purchase order, agreement, or evidence that the materials are supplied by an affiliated foreign company for export. Overall, the amendment reflects a move towards a more business-friendly environment by offering procedural flexibility, reducing penalties, and accommodating the realities of export trade.

FOREIGN CURRENCY REGULATION

Foreign Exchange Directive No. FXD/01/2024

On 29 July 2024, the National Bank of Ethiopia introduced a landmark Foreign Exchange Directive No. FXD/01/2024 marking a major shift in the country’s foreign exchange regulations. The Directive introduced a competitive, market-based exchange system, liberalizing Ethiopia’s foreign exchange regime. It sets rules for various foreign exchange-related activities, including exchange rate determination, foreign exchange retention, exports, imports, services, remittances, payment instruments, foreign currency accounts, capital account transactions, and the repatriation of profits and dividends. For a full analysis of the directive, click here.

CAPITAL MARKET

Capital Market Service Providers Licensing and Supervision Directive No.980/2024

In January 2024, the Ethiopian Capital Market Authority (ECMA) issued the Capital Market Service Providers Licensing and Supervision Directive No.980/2024 (Service Providers Directive). The directive lists 15 categories of service providers that are required to obtain licenses from ECMA – including broker, dealer, investment advisor and investment bank licenses. This Directive is complemented by the Capital Market Authority Fee Directive No.996/2024 – which provides the applicable license application, licensing and renewal fees. The Service Providers Directive specifies that service providers must be incorporated according to their specific business structure; for example, only a Private Limited Company or a Share Company can obtain a broker or dealer license. The directive also requires service providers to establish a corporate governance framework, including a board structure with an election committee, a risk management and compliance committee, and an audit committee. Additionally, service providers must maintain a fidelity guarantee equal to 20% of their net worth, and 40% of their assets must be liquid.

Directive on Licensing, Operation, and Supervision of Securities Exchanges, Derivatives Exchanges, and the Over-the-Counter Market No.1009/2024

In July 2024, ECMA issued the Licensing, Operation, and Supervision of Securities Exchanges, Derivatives Exchanges, and the Over-the-Counter Market Directive No.1009/2024 (“Securities Exchange and OTC Directive”). This directive sets the requirements for operating a Securities Exchange and OTC market. A Securities Exchange must have a minimum capital of 500 million Birr (∼$4.4Million), with 20% of its total assets in cash and liquid assets, while an OTC market must have at least 25 million Birr (∼$223,000) in paid-up capital and 40% of its assets in cash and liquid assets. The directive requires the board members and key personnel of both the Securities Exchange and OTC market to meet “fit and proper criteria,” which evaluate their knowledge and ethical conduct. ECMA has the authority to approve or reject any proposed board member or key personnel who do not meet these standards. A Securities Exchange must have proper trading infrastructure, technology, member rules, and arrangements for listing and trading securities, as well as clearing and settlement systems with an authorized central securities depository or a licensed securities depository and clearing company. Only ECMA-licensed service providers can trade on the Securities Exchange and OTC market, so retail investors cannot trade directly. The directive allows trading of securities not listed on the Securities Exchange in the OTC market, except for government securities and large blocks of securities.

TAX REGULATION

VAT Proclamation No. 1341/2024

In August 2024, a new Value Added Tax Proclamation No. 1341/2024 entered into force replacing a previous legislation that was in place for 22 years. The new proclamation expands the scope of application of the VAT regime to encompass transactions that were previously not included, such as electronic and digital transactions. The Proclamation removed or restricted goods and services that were previously exempted from VAT. For example, electricity and water consumption, transport services and financial services, which were previously fully exempt, are now only partially exempt. Since the introduction of the new proclamation, the Ministry of Finance issued Directive No.1021/2024 to provide a threshold for electricity and water consumption that will be VAT-exempt. Accordingly, only domestic electricity consumption up to 200 kWh per month and domestic water consumption up to 15 cubic meters per month will be VAT exempted. Similarly, financial service provision (banking and insurance), which previously benefitted from blanket exemption from VAT, is now subject to limitation. Under the new law, only listed financial activities (“positive list”) will benefit from the exemption and other financial services will now be subject to VAT. The positive list of financial services that are exempt from VAT includes loan and credit services, guarantees, savings, deposits, financial derivative transactions, forex transactions etc…while other revenue-earning services such as commission and various fee payments by financial institutions will no longer be VAT exempt. Insurance premiums and insurance proceeds, which used to benefit from VAT exemption are now subject to VAT to the extent the insurance proceed relates to a taxable activity. However, health and life insurance premiums and proceeds remain exempt. Other changes in the new law include the reversal of the VAT filing period from the previous 3-month to a monthly filing obligation.

BANKING BUSINESS REGULATION

Bank Corporate Governance Directive No. SBB/91/2024

In June 2024, the National Bank of Ethiopia (NBE) replaced the Bank Corporate Governance Directive No. SBB/71/2019 with the Corporate Governance Directive No. SBB/91/2024, expanding on existing rules and adding new requirements. A key change is that banks must now have at least nine board members. The directive also requires that one-third of the board members be non-shareholders, known as independent directors, who are nominated by the board through the Nomination and Remuneration Committee and then elected by shareholders. The Directive also requires banks to ensure that at least two female members are elected to the board, marking a change from the previous rule, which only required female directors if eligible candidates were available. The Directive allows a maximum of two bank employees to be elected to the board, but these employees cannot serve as the chairperson of the board. Another significant change introduced by the Directive is the establishment of a new Board of Directors Committee, the credit committee, which is tasked with assisting the board in reviewing and overseeing the bank’s overall lending activities. This committee must consist of at least four directors, including at least one independent director.

Limitations on Investment of Banks Directive No. SBB/92/2024

To encourage Ethiopian bank’s investment in the capital market, the National Bank of Ethiopia (NBE) issued a new Directive No. SBB/92/2024 which revised the investment limitation previously imposed on banks. Banks can now, with prior approval from NBE, acquire up to 100% equity in a capital market service provider, except for credit rating agencies. This change may lead to banks opening or obtaining licenses to operate as brokerages, dealers, or investment banks.

ENVIRONMENTAL REGULATION

Forest Development, Protection, and Utilization Regulation No. 544/2024

In April 2024, the Forest Development, Protection, and Utilization Regulation No. 544/2024 came into force, setting the first detailed legal framework for carbon trading in Ethiopia’s forestry sector. Building on the Forest Development, Conservation and Utilization Proclamation No. 1065/2018, the Regulation outlines the management and use of forests, defines types of forest developers, and specifies the requirements for accessing incentives. It regulates forest carbon trading across different forest types, outlines the use of revenue from carbon sales, including profit-sharing schemes, and clarifies the roles of regulatory bodies. For a full analysis of the Regulation, click here.

Environmental Protection Authority Establishment Regulation No. 545/2024

In May 2024, the Council of Ministers enacted Regulation No. 545/2024 to define the powers, duties, and organization of the Ethiopian Environmental Protection Authority (EPA). The Regulation grants the EPA authority to issue environmental standards and licenses, including certificates of competence for consultancy services in environmental and social impact assessment and licenses related to the import, export, transport, and storage of industrial chemicals. The EPA also licenses individuals and entities involved in the collection, transportation, storage, reuse, recycling, disposal, and transboundary movement of hazardous waste. The EPA also regulates carbon stored in ecosystems and monitors technologies supporting climate change adaptation and mitigation. The Regulation also establishes a framework for environmental tribunals and courts.

LAND REGULATION

The Rural Land Administration and Use Proclamation No. 1324/2024

On August 14, 2024, the Rural Land Administration and Use Proclamation No. 1324/2024 came into effect, replacing the 2005 Proclamation. The new Proclamation introduces several new provisions, including expanded landholding rights for farmers, pastoralists, semi-pastoralists, and religious institutions, allowing them to use land rights as collateral to access finance. The Proclamation permits landholders to collateralize their land use rights as surety, setting terms for repayment, conditions for default, and limitations on creditor rights, which cannot exceed ten years. The Proclamation also allows for sharecropping agreements, where landholders can share their land use in exchange for a portion of the crop. It also establishes a National Rural Land Information System and Regional Rural Land Administration and Use Institutions to manage rural land, including registration, surveying, land transfers, leases, and expropriation. The Proclamation sets new criminal liabilities, including fines and imprisonment for offences such as invading or damaging private, communal, or state land, unlawful construction, misuse of land contrary to land use plans, forgery of landholding certificates, and illegal buying or selling of land.

The Expropriation of Land Holdings for Public Purpose, Payments of Compensation and Resettlement (Amendment) Proclamation No. 1336/2024

In July 2024, the Expropriation of Land Holdings for Public Purpose, Payments of Compensation and Resettlement (Amendment) Proclamation No. 1336/2024 came into effect, revising Proclamation No. 1161/2019. The previous Proclamation allowed the government to expropriate land for public service development and set the types of compensable properties for landholders whose land was expropriated or damaged. The amendment changes several provisions, including those related to compensation payments and appeal procedures. Previously, the responsibility for compensation or resettlement payments for land expropriated for public use was on the land-acquiring body. Under the amendment, if the land is expropriated for federal infrastructure or social service development, the regional administration where the development occurs must make the compensation payments. For all other expropriations for public purposes, the responsibility remains with the land-acquiring body. The new law has also introduced changes to the appeal process in land expropriation cases. A person with complaints about a land expropriation order can first apply to a Complaint Hearing Body, with the possibility of appeal to an Appeal Hearing Council and regional High Court or the Federal First Instance Court, as applicable. Further, if land is expropriated for federal infrastructure or social service projects, lawsuits involving federal institutions will be filed at the first instance court where the federal institution is located. For these federal projects, only the president of the Federal First Instance Court can suspend development work, freeze or deduct funds from bank accounts, or order injunctions or the arrest of officials.

DATA PROTECTION

Personal Data Protection Proclamation No. 1321/2024.

In July 2024, the Personal Data Protection Proclamation No. 1321/2024 came into effect providing the first comprehensive legislation dealing with individuals’ rights to privacy. The Proclamation will survive the person’s death and will remain valid for ten years after the death. For full insight on the proclamation, click here.

STATE-OWNED ENTERPRISES REGULATION

Federal Government Owned Enterprises Proclamation No. 1314/2024

In May 2024, the Federal Government Owned Enterprises Proclamation No. 1314/2024 came into effect, replacing the Public Enterprises Proclamation No. 25/1992, which had been in place for over 30 years. The key amendments introduced by the Proclamation include the expansion of the scope and definition of “state-owned enterprises” (“SOE”). Previously, public enterprises were defined as wholly state-owned public enterprises. The new law expands SOEs to encompass majority government-owned businesses, companies formed from the conversion of wholly state-owned enterprises, and companies where the state holds a golden share or has effective control even with a minority share. The concept of “golden shares” was introduced by the Privatization of Public Enterprises Proclamation No. 1206/2020 to allow the government to protect national interests with voting and veto rights in privatized entities. Previously, an SOE may only be established by a regulation of the Council of Ministers. The new law permits the establishment of an SOE by a holding company (a fully state-owned holding company established to hold, own, supervise and exercise control over SOEs). In addition, the proclamation expands the scope of an SOE “supervising entity” to include a state-owned holding company. The SOE Proclamation introduces principles that emphasize good corporate governance practices, requiring that at least one-third of the board members of an SOE to be independent, with a minimum of five years of experience, and drawn from various professional backgrounds. It also clarifies the role of SOEs in public service provision, ensuring that their public service obligations are clearly defined in their establishment regulations or articles of association. The Ministry of Finance is mandated to own the government’s share in SOEs and monitor and mitigate the impact of SOEs on public finances.

NON-PROFIT REGULATION

Registration and administration of Foreign Organizations Directive 986/2024

The Ethiopia Authority for Civil Society Organization (“Authority”) issued the Registration and Administration of Foreign Organizations Directive No.986/2024, which provides detailed requirements in relation to foreign organizations (or customarily known as foreign NGOs). To be registered and operate in Ethiopia, a foreign NGO must first be established in a foreign jurisdiction. The Directive outlines the required documents for registration and provides guidance on the content to include in the work plan. Each year, foreign NGOs must submit the next year’s work plan, along with a report detailing project performance, budget, and funding sources. With prior authorization from the Authority, a foreign NGO may open separate foreign currency and ETB bank accounts for each project if required by different donors to ensure accountability. Futher, if the local representative of the NGO travels outside Ethiopia, they must appoint a replacement unless it is clear that the work can be managed online. If the delegate will remain in charge for more than 45 days, the Authority must be notified.

DRAFT LAWS

Draft Banking Proclamation

The Council of Ministers has approved a Draft Banking Proclamation that has opened the Ethiopian banking sector to foreign investors. For a full analysis of the draft proclamation, visit our legal insight here.

Draft National Bank Establishment Proclamation

In June 2024, the Council of Ministers endorsed the Draft National Bank Proclamation, which aims to replace the existing National Bank of Ethiopia Establishment Proclamation No. 591/2008 (as amended). The Draft Proclamation introduces several amendments and incorporates existing practices. It expands the definition of “bank” to include foreign subsidiaries and branches, aligning with the Draft Banking Business Proclamation. The Draft Proclamation gives the National Bank of Ethiopia (NBE) additional powers, including the ability to establish a Regulatory Sandbox for testing new financial products, similar to the Ethiopian Capital Market Authority’s Sandbox. The Draft Proclamation empowers NBE as the “resolution authority” to intervene in failing financial institutions to protect depositors and creditors. It also prohibits the use of unauthorized digital currencies in Ethiopia without NBE’s approval and allows NBE to issue a Central Bank Digital Currency (CBDC) as legal tender in the future. Furthermore, NBE is authorized to regulate franco-valuta importation terms, potentially repealing the existing Franco-Valuta Regulation No. 88/2003, which currently gives this power to the Ministry of Revenue.

Draft Public Offer and Trading of Securities Directive

The Ethiopian Capital Market Authority (ECMA) has released the Draft Public Offer and Trading of Securities Directive (PO Directive) for public consultation. This PO Directive outlines the procedures for offering securities, managing share companies under formation, and handling convertible debt. It mainly regulates how securities can be offered to the public or traded on securities exchanges or over-the-counter markets. It requires that securities be registered with ECMA if they are to be publicly offered, listed, or traded. Issuers must submit a registration statement that includes a prospectus detailing the issuer’s business, financial status, securities information, and associated risks to inform investors. Some securities offerings are exempt from registration, including private placements to up to 50 predetermined investors, issuances to Qualified Investors such as financial institutions and government entities (limited to 100 investors unless ECMA approves otherwise), and small offerings of up to 10 million Birr. Even exempt issuers must notify ECMA and provide relevant offer documents and payment details. Issuers must also appoint a transaction advisor, such as an investment bank or corporate advisor, to ensure compliance with legal requirements unless exempt from registration or prospectus issuance. Moreover, the Capital Market Proclamation No. 1248/2021 requires publicly offered securities to be registered with the central securities depository, moving from paper-based to electronic securities, a shift ECMA is expected to regulate through a directive on dematerialization. The PO Directive will be complemented by the Ethiopian Securities Exchange (ESX) Rule Book, which will set out listing requirements for equity and debt securities, ongoing obligations for listed companies, and delisting processes.

For more information, contact –

Maya Misikir maya@mekdesmezgebu.com

Mekdes Mezgebu mekdes@mekdesmezgebu.com