Commercial Law in Ethiopia: An Easy Reference Guide

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Ethiopia, formerly also known as Abyssinia, is one of the oldest countries in the world and an ever independent country located on the Horn of Africa, in the east of the continent. It is a landlocked country bordered by Eritrea to the north, Djibouti and Somalia to the east, Sudan and South Sudan to the west, and Kenya to the south.

Business Vehicles
There are different available forms of business ownership for foreigners:
 Sole proprietorship
 Partnership
 Private Limited Company (PLC)
 Share Company (SC)
 Branch
Commonly used are PLC and SC. Both are limited liability companies. A PLC has to have at least two shareholders and not more than fifty. A SC on the other hand requires a minimum of five shareholders with no maximum limitation. Currently, the Commercial Code is being revised and it is expected to introduce a one man company.
Shares in a SC are freely transferable unless restricted by the company’s constitutive documents. Transfer of shares in a PLC is subject to shareholders’ approval except where it is an internal transfer as between shareholders. Public offering allowed only to SCs.

The following steps need to be taken in order to incorporate a business entity.
 trade name registration
 obtaining investment permit
 authenticating memorandum of association and articles of association
 tax registration: obtaining taxpayer identification number (TIN)
 opening bank account
 commercial registration
 certificate of competence, as appropriate
 business license
A business entity is formed once it is issued with the commercial registration certificate, and business license
is required in order to commence a business operation. Depending on the specific sector of the business, a certificate of competence is required as a condition of obtaining a business license. Note all these services, except for certificate of competence, are rendered for (foreign) investors by one-stop-shop service at the Ethiopian Investment Commission.

Regulatory and Reporting
Companies are required to keep books and accounts. At the end of each financial year, SCs are required to prepare a detailed inventory and valuation of assets and liabilities, draw up a balance sheet and a profit and loss account, and prepare a report on the state of the company’s activities and affairs during the last financial year (including exact statement of the total amount of remuneration of the directors), all of which shall be submitted to the Ministry of Trade and Industry for publication.
What is more, appointment of auditors is mandatory for all SCs and PLCs with more than twenty members. Both SCs and PLCs are required to cause audit of their financial statements by an auditor every fiscal year and submit reports.

Share Capital
Foreigners are required to allocate a minimum capital of $200, 000 (which goes as low as $50,000 depending on the specific sector and whether or not a domestic investor is involved) for a single investment project. However, a foreign investor re-investing his profits or dividends generated from his existing enterprise is not required to allocate a minimum capital.
In respect of SCs, the full amount of the capital has to be subscribed and one fourth of it be paid as a condition of incorporation, and as long as this one fourth fulfils the minimum capital requirement discussed above the remaining three fourth could be paid over a period of five years from incorporation. In respect of PLCs, the capital has to be fully paid as a condition of incorporation. Shares are issued at par value which cannot be less than ETB 10. Shares may not be issued at a price lower than their par value, however may be issued with premium.

SCs shall be managed by board of directors, comprising 3 to 12 members. Directors shall only be appointed from among members of a company. Bodies corporate are eligible to be appointed as directors but cannot be the chairperson of the board. No citizenship or residency requirement exists for directorship. The term of directors is three years, but subject to re-election. Decisions are taken on absolute majority.
A general manager shall also be appointed by the board of directors. Secretaries are not required, but every

decision shall be signed by at least one secretary appointed for the meeting passing the decision.
On the other hand, PLCs are not required to have directors. PLCs are managed by one or more managers who may or may not be members. Where there are more than 20 members in a PLC, decisions are taken at meetings of the members.
Managers of PLCs have full powers, subject to the objectives of the company. Restrictions in the powers of managers do not bind third parties even if properly published.

Are local shareholders required?
Except for areas of investment that are reserved for joint investment with government, there is no requirement of having a local shareholder.

Branch Company
A branch company may be formed in Ethiopia. Mostly suitable for foreign business entities entering Ethiopia by wining international bid and conducts a specific activity. Similar procedures as above are followed to incorporate a branch company.
General note: When a foreign entity wishes to undertake business in Ethiopia, it is required to present proof of its valid existence in its country of origin and a resolution by the foreign entity that it wishes to do business in Ethiopia in a specified vehicle or to acquire and operate a specified business or to acquire shares in a specified entity.

 Trade Competition and Consumers Protection Proclamation No. 813/2013 (“Proclamation”)
 Merger Directives No. 1/2016
The law is enforced by the Trade Competition and Consumers Protection Authority (“Authority”) and the Federal Trade Competition and Consumers Protection Appellate Tribunal (“Tribunal”), both situated in the capital, Addis Ababa.
The law is applicable to:

transactions conducted within the Federal Democratic Republic of Ethiopia (on-shore transactions); and
transactions having effect within the Federal Democratic Republic of Ethiopia (off-shore transactions).
In principle all mergers are required to be notified to the Authority, but mergers between parties whose combined annual turnover, asset or registered capital is below ETB 30,000,000.00 (approximately USD 1.05 million at the current exchange rate) are presumed to have been notified to the Authority and are only required to be notified to the body authorized to register merger approvals in the commercial register.
Mergers shall not be implemented (come into effect) before obtaining the approval of the Authority.

Restrictive practices
Both horizontal and vertical relationships of business persons are regulated. Any form of arrangement which has the effect of preventing or significantly lessening competition- unless justified by outweighing technological, efficiency, or pro-competitive gain- is prohibited. In addition, certain categorically listed practices between/amongst business persons, in both a horizontal and vertical relationship, are also prohibited. These are agreements between business persons in a horizontal relationship that involve, directly or indirectly, (i) fixing a purchase or selling price or any other trading condition; (ii) collusive tendering; and (iii) dividing markets by allocating customers, suppliers, territories, or specific types of goods and services. An agreement between business persons in a vertical relationship that sets a minimum resale price is also prohibited.

Abuse of dominance
The Proclamation prohibits abuse of dominance, open or dubious. Generally, a business person is deemed to have a dominant market position, either by himself or acting together with others in a relevant market, if it has the actual capacity to control prices or other conditions of commercial negotiations or eliminate or utterly restrain competition in the relevant market.

A violation of the Proclamation may result in the imposition of an administrative penalty of 5 to 10 percent of the business person’s turnover. Violation of some aspects of the Proclamation could also attract criminal sanctions, fine of 5 to 10 percent of the business person’s turnover and rigours imprisonment up to 7 years.

The Trade Competition and Consumers Protection Proclamation No. 813/2013 (“Proclamation”) also governs consumer protection. Consumer is, for the purpose of the law, a natural person who buys goods and services for his personal or family consumption, and not for manufacturing activity or resale. The Proclamation provides for price display and affixation of labels of goods, receipt issuance and keeping pads, and disclosure of trade name and other relevant information. The Proclamation also regulates commercial advertising, defects in goods and services, distribution of goods and services, and mandates regulation of price
and distribution of basic goods and services to the Ministry of Trade and Industry, the Council of Ministers and appropriate Regional authorities. In addition, the Proclamation contains list of prohibited acts and provisions in relation to the rights of consumers.
A Consumer has the right to:

get sufficient and accurate information or explanation;
buy goods and services on the basis of his own choice;
not to be obliged to buy for the reasons that he looked into quality or options of goods and services or he made price bargain;
be received humbly and respectfully by any business person;
be protected from such acts of the business person as insult, threat, frustration and defamation; and
claim compensation from the manufacturer, importer, wholesaler, retailer or any other person who have participated in the supply of goods or services for damages he has suffered because of purchase or use of the goods or services.
Contractual waiver of such rights of consumers is of no effect.
Violation of the provisions of the Proclamation in relation to consumer protection could attract criminal sanctions, fine of 5 to 10 percent of the business person’s turnover and rigours imprisonment up to 7 years.
At present, Ethiopia does not have a comprehensive data protection law. The Constitution of the Federal Democratic Republic of Ethiopia (“Constitution”) guarantees the right to privacy and provides that everyone has the right to the inviolability of his notes and correspondence including postal letters, and communications made by means of telephone, telecommunications and electronic devices.
This right can only be limited on compelling circumstances put in place in accordance with specific laws aimed at the safeguarding of national security or public peace, the prevention of crimes or the protection of health, public morality or the rights and freedoms of others.
A data protection and privacy law has been drafted by the relevant organ long ago but has never been tabled for discussion at the parliament.

Court Structure
The Constitution of the Federal Democratic Republic of Ethiopia (the “Constitution”) has established an independent judiciary with a dual court structure; the federal courts and the state courts with their own independent structures and administrations. The federal courts are the Federal First-Instance Court (“FFIC”), the Federal High Court (“FHC”), and the Federal Supreme Court (“FSC”). The state courts are the State First Instance Courts Supreme Court (commonly known as Woreda Courts), State High Courts (commonly known as Zonal Courts), and State Supreme Courts (“SSCs). The jurisdictions of the FHC and of the FFICs are delegated by the Constitution to the SSCs and Zonal Courts respectively, unless a FHC and the FFICs are established in the relevant states.
Supreme federal judicial authority is vested in the FSC, i.e. the FSC has the highest and final judicial power over federal matters. By the same token, SSCs have the highest and final judicial power over state matters. However, the FSC has a power of cassation over any final court decision containing a basic error of law and an interpretation of law by the Cassation Division of the FSC with not less than five judges is binding on federal as well as state courts at all levels.
Also, the House of the Federation has exclusive jurisdiction on all constitutional disputes.

Security by foreign litigants
Generally, the court may, either of its own motion or on the application of any defendant, order the plaintiff, for reasons to be recorded, to give within the time fixed by it security for the payment of all costs incurred and likely to be incurred by any defendant.
If it appears to the court that the plaintiff or applicant is residing out of Ethiopia and that such plaintiff or applicant does not possess any sufficient immovable property in Ethiopia other than the property, if any, in suit, then the court is required by law to make such order.

Unless otherwise expressly provided, the costs of and incident to all suits are in the discretion of the court and the court has full power to decide by whom or out of what property and to what extent such costs are to be paid and to give all necessary directions to this effect.

Legal practitioners
The Federal Courts Advocates’ Licensing and Registration Proclamation No. 199/2000 and the Federal Court Advocates’ Code of Conduct Council of Ministers Regulations No. 57/1999 govern the conduct of legal
practitioners who are generally referred to as advocates without distinction. The Federal Attorney General is the responsible body to implement these laws.
Ethiopian Bar Association and Ethiopian Lawyers Association exist only as a non-governmental organization without having a regulatory power over advocates.

Alternative dispute resolution
Arbitration is a recognized form of dispute resolution mechanism in Ethiopia. It is governed by the 1960 Civil Code of the Empire of Ethiopia and the 1965 Civil Procedure Code of the Empire of Ethiopia. The capacity to dispose of a right without consideration is required for the submission to arbitration of a dispute concerning such right. Recognized arbitration forums include the Addis Ababa Chamber of Commerce and Sectoral Associations and the Ethiopian Chamber of Commerce and Sectoral Associations. The formation of an international arbitration centre is also being discussed. Ethiopia is not a party to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. However, the country is currently in the process of ratifying the convention and is expected to be ratified before the end of this year (2012 E.C). Foreign judgments and arbitral awards will be recognized and enforced upon fulfilment of the requirements of public interest, reciprocity and due process related requirements. Generally, courts are a preferred form of dispute settlement mechanism.

Governing legislation
 The Labour Proclamation No. 1156/2019 (for non-managerial employees in private organizations);
 The 1960 Civil Code of the Empire of Ethiopia (in relation to managerial employees, as defined in the Labour Proclamation);
 The Federal Civil Servants Proclamation No. 1064/2017 (for civil servants in government institutions); and
 subsidiary legislations issued in accordance with these laws.

Particulars of employment
A contract of employment is be deemed formed where a person agrees directly or indirectly to perform work for and under the authority of an employer for a definite or indefinite period or piece work in return for wage. Unless otherwise provided by law, a contract of employment is not subject to any special form.
However, where the contract of employment is not made in written form, the employer is required to give the worker, within 15 days from the conclusion of the contract, a written and signed statement containing (i) the
name and address of the employer; (ii) the name, age, address and work card number, if any, of the worker; and (iii) the type of employment and place of work the rate of wages, method of calculation thereof, manner and interval of payment and duration of the contract, which shall then be signed by both parties.
If probation is agreed, it has to be made in writing and specifically state the employment relationship is on probation. Probation may not last for more than 60 working days. Unless the law or work rules or collective agreement provides otherwise, the worker is entitled during the probation period the same rights and obligations that a worker who has completed his probation period has.
Minimum conditions of employment are built into the employment relationship by operation of law, save for where the employee is afforded more favourable terms and conditions than those provided for in the law or collective agreement or work rules of the employer.

Forms of contracts
 Contracts for indefinite period/ Permanent employment- any contract of employment is deemed to have been concluded for an indefinite period except for those provided under Article 10 of the Labour Proclamation, and of course except where probation is agreed.
 Contracts foe definite or piece work/ Temporary employment- employment contracts that are made in accordance with Article 10 of the Labour Proclamation. These are basically short term works that does not happen regularly like, seasonal works performed only for a specified period of the year, temporary placement of a worker to fill a vacant position, performance of urgent work to prevent damage or disaster to life or property, performance of work in the event of abnormal pressure of work, performance of specified piece work for which the employee is employed.

Termination / Dismissal
 A contract of employment could be terminated by the operation of the law, by agreement, or unilaterally by one of the parties. A contract of employment may only be terminated by the employer where there are grounds connected with (i) the worker’s conduct; or (ii) the worker’s capacity; or (iii) the organizational or operational requirements of the undertaking. An employer could terminate employment contract without notice only on limited circumstances provided by the law, or as agreed by a collective agreement, in which summary dismissal by the employer is warranted. These are all related to the employee’s misconduct.
 The employer cannot exercise its right of termination due to the misconduct of the employer after the lapse of 30 working days from the date the employer knew the existence of a ground for the termination.
 In relation to managerial employees, while the employer is entitled to terminate the contract of a managerial employee, the employee is entitled to fair compensation up to his three months wage, having regard to such facts as the nature and duration of the services of the employee, the financial position of the undertaking, and any other circumstances the court thinks fit, where the employer terminates a contract or refuses to renew it without good cause justifying fully this decision. Notice is required to be given to the employee, unless the employer pays immediately the employee’s wages for the notice period.

Dispute resolution mechanisms and remedy
 Disputes related to dismissal should be submitted to the labour divisions of the regional or federal first instance courts (as the case may be), and disputes in relation to collective agreements to the Labour Relations Board. The labour division of the regional and federal first instance courts are required to give decisions within 60 days from the date on which the claim is lodged; and the party who is not satisfied with the decision of the regional or federal first instance court may appeal to the labour division of the regional or federal appellate court, within 30 days from the date on which the decision was delivered. The labour division of the regional or federal appellate court is required to give decisions within 60 days from the date on which the appeal is lodged.
 The labour division of the regional and federal appellate courts have jurisdiction over matters including (i) appeals against the decision of the labour division of the regional and federal first instance courts; and (ii) appeals against the decision of the Labour Relations Board on questions of law.
 Remedies available for unlawful termination by the employer ranges from compensation to severance pay to reinstatement.

 Ethiopia exercises a strict exchange control by its central bank, the National Bank of Ethiopia (NBE).
 NBE is authorized by law to appoint insurance companies, other financial institutions and authorized dealers to engage in transactions involving foreign exchange, gold or silver, and to delegate banks and other financial institutions to issue foreign exchange permits. Banks are delegated to engage in transactions involving foreign exchange and required to report such transactions on a weekly basis.
 The terms and conditions for the flow of foreign exchange and valuable goods/things to and from Ethiopia is determined by directives issued by NBE from time to time.
 It is prohibited to engage in any transaction of foreign exchange except with banks or authorized
dealers or with the special permission of NBE.
 Also, currency exchange daily rate is determined by NBE.

Income tax
Income tax is governed by the Federal Income Tax Proclamation No. 979/2016 and subordinate legislations. Income tax is levied on residents with respect to their worldwide income and on non-residents with respect to their Ethiopian source income. A list of exempt incomes is provided for under the Proclamation, which empowers the Council of Ministers to set limits on some of the lists and to exempt any income for economic, administrative, and social reasons.

Types of taxable income
Income from employment (Schedule “A”), income from rental of buildings (Schedule “B”), and income from businesses (Schedule “C”) are all taxable incomes. There are also other types of taxable incomes which are provided for by the Proclamation as other incomes (Schedule “D”). This covers:
a) Ethiopian source income of non-residents that is not attributable to a business carried on through a permanent establishment in Ethiopia (PE) (i.e. dividend, interest, royalty, insurance premium, management fee, or technical fee);
b) non-resident musicians and sportsperson;
c) royalties earned by residents as well as non-residents but conducting business through a PE;
d) dividends earned by residents as well as non-residents but conducting business through a PE;
e) interests earned by residents as well as non-residents but conducting business through a PE;
f) income from games of chance;
g) income from casual rentals;
h) capital gains;
i) windfall profit;
j) undistributed profit, to the extent not reinvested in the tax year;
k) repatriated profit of a non-resident conducting its business thorough a PE; and
l) other incomes.

Tax rates
Tax rates vary amongst the various types of taxable income and depending on the personality and residency of the person subject to tax. Schedule A income tax is levied monthly on a progressive rate up to 35%. An employer is obliged to withhold and file the tax within a month. On the other hand, Schedule B and Schedule C income taxes are levied yearly and the applicable rate for both of them is a flat rate of 30% for bodies (i.e. legal persons) and a progressive rate up to 35% for individuals.
Tax rates applicable to Schedule D are as follows:
Income earned by non-residents and not attributable to a business conducted by a PE
 insurance premium and royalties, 5% of the gross amount;
 dividend and interest, 10% of the gross amount; and
 management or technical fee, 15% of the gross amount.
Non-resident musicians and sportsperson, 10% of the gross income without a deduction
Royalties, 5% of the gross amount.
Dividends, 10% of the gross amount.
Interests, 5% of the gross amount of the interest on savings deposit and 10 % of the gross amount for any other interest.
Income from games of chance, 15% of the gross amount.
Income from casual rentals, 15% of the gross amount.
Capital gains, 15% on immovable assets and 30% on shares and bonds;
Windfall profits, at a rate as determined by the relevant authority from time to time.
Undistributed profit, 10% of the net undistributed profit.
Repatriated profit, 10% of the repatriated profit of the PE.
Other incomes, not falling in Schedules A, B, C or D as listed out above, 15% of the gross amount.
Double taxation treaties
Ethiopia has signed double taxation treaties with more than 30 countries. Only 14 of them are in force. Some of the rest are not ratified, and some others are ratified but no exchange of instruments is made.

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