Key takeaways
- In Ethiopia, business expenses are deductible when they are incurred to earn, secure or maintain business income; companies pay 30% corporate income tax on the adjusted profit.
- Depreciation follows fixed rates: buildings 5% (straight-line), computers and software 20% straight-line or 25% diminishing value, other assets 15%/20%; start-up costs are amortised at 25%.
- Since Proclamation No. 1395/2025 (in force July 2025), a minimum alternative tax of 2.5% of turnover applies when tax on profits would be lower, and expenses settled in cash face strict deductibility restrictions.
- Watch the limits: interest more than 2 percentage points above the bank benchmark is not deductible, bad debts need documented recovery efforts, fines and penalties are never deductible, and losses carry forward for five years.
Last reviewed: October 2026
Whether you run an Ethiopian PLC, a branch or a project office, the deductibility of expenses decides most of your effective tax rate. This guide summarises the rules in force in 2026 – including depreciation rates, interest and bad-debt limits and loss carry-forwards – with practical examples.
Ethiopia business expenses – key figures (2026)
| Item | Rule |
|---|---|
| Corporate income tax | 30% on adjusted business income (also branches and project offices) |
| General deductibility test | Incurred to earn, secure and maintain business income |
| Buildings and structural improvements | 5% straight-line |
| Computers, software, data storage | 20% straight-line or 25% diminishing value |
| Other depreciable assets | 15% straight-line or 20% diminishing value |
| Pre-operational (start-up) expenses | Business intangible, 25% straight-line |
| Interest | Not deductible above benchmark + 2 percentage points (exceptions for recognised lenders) |
| Losses | Carried forward up to 5 years (special rules) |
| Minimum alternative tax (since July 2025) | 2.5% of turnover when profit-based tax is lower; excess creditable for up to 5 years |
What can a business deduct?
Deductible expenses typically include:
- Cost of goods sold and direct costs of producing income;
- Salaries and benefits paid to employees (subject to employment tax withholding);
- Rent, utilities, professional fees and other operating costs;
- Depreciation of business assets at the prescribed rates;
- Interest on business loans within the benchmark limit;
- Bad debts written off after reasonable recovery efforts, including legal action;
- Donations to Ethiopian charities and societies, or in response to a government call for development or emergency purposes.
What is not deductible?
- Fines, penalties and punitive damages for breaching any law, regulation or contract;
- interest above the benchmark + 2-point threshold;
- bad debts without documented recovery efforts;
- donations outside the permitted categories;
- personal or capital expenditure (capital items are depreciated instead);
- entertainment expenses beyond what the law allows;
- income tax itself and distributions of profit.
Depreciation in practice
Assets used in the business are depreciated using the method used in the financial accounts (straight-line or diminishing value), except buildings and intangibles, which must use straight-line.
Example: An Addis Ababa software company buys laptops and servers for ETB 2,000,000. Using the 25% diminishing-value rate, it deducts ETB 500,000 in year 1 and ETB 375,000 in year 2. A new office building costing ETB 20,000,000 is depreciated at 5% straight-line – ETB 1,000,000 a year.
Interest, bad debts and losses
- Interest: if the rate exceeds the National Bank of Ethiopia/commercial bank benchmark by more than 2 percentage points, the excess is not deductible – unless the loan is from a recognised financial institution or a foreign bank permitted to lend. Thin capitalisation rules also apply to related-party debt.
- Bad debts: deductible only when identifiable and after all reasonable steps (including legal action) have failed.
- Losses: carried forward for up to five years; if losses of two years have both been carried forward, no further losses can be carried forward. Losses during tax holidays can be carried forward for half the holiday period.
What changed with Proclamation No. 1395/2025
- Minimum alternative tax (MAT): if the tax computed on assessable business income is below 2.5% of annual turnover, the business pays 2.5% of turnover instead. MAT paid in excess of regular tax can be credited against regular income tax for up to five years.
- Cash payments: the amendment strictly restricts the deduction of business expenses paid in cash – pay suppliers by bank transfer and keep registered receipts.
- Practical effect: for low-margin businesses, the deduction rules above matter less than the MAT floor; model both before pricing contracts.
Points for foreign founders and location-independent professionals
- Branches and project offices of foreign companies are taxed at 30% like local companies.
- Withholding taxes apply to many payments (e.g. to non-residents for services); budget for them as they affect your effective cost.
- Keep invoices and contracts: Ethiopia's Ministry of Revenues relies heavily on documentation and registered receipts.
Frequently asked questions
What business expenses are deductible in Ethiopia?
Expenses incurred to earn, secure and maintain business income: direct costs, salaries, rent, utilities, professional fees, depreciation, interest within limits, qualifying bad debts and donations to Ethiopian charities.
What is the corporate tax rate in Ethiopia?
Corporate income tax is 30% of adjusted business income, also for branches and project offices of foreign companies.
How long can losses be carried forward in Ethiopia?
Up to five years, but if losses from two years have both been carried forward, no further losses may be carried forward. Losses in a tax holiday can be carried forward for half the holiday period.
What depreciation rate applies to computers in Ethiopia?
Computers, software and data storage equipment can be depreciated at 20% straight-line or 25% diminishing value.
Related guides
Sources
- PwC Worldwide Tax Summaries – Ethiopia: Corporate deductions
- PwC Worldwide Tax Summaries – Ethiopia: Taxes on corporate income
- Ethiopian Income Tax Proclamation No. 1395/2025; Ministry of Revenues
This guide is general information, not personalised tax advice.
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