Ministry of Finance Issues New Draft Investment Incentive Directive: A Complete Overhaul of the Incentive Framework

Ministry of Finance released a draft directive titled "Directive Issued for the Implementation of Investment Incentives" (the "Draft Directive"). The Draft Directive is intended to operationalise the Investment Incentives Council of Ministers Regulation No. 586/2026 (the "Regulation"), which was published on 23 February 2026 and substantially restructured Ethiopia’s investment incentive framework.

The Regulation and the Draft Directive represent a significant departure from the previous incentive regime established under Regulation No. 517/2022 and its implementing Directive No. 1064/2025. The revised framework moves away from the traditional model of full income tax holidays and toward reduced income tax rates, performance-based incentives, enhanced accountability, and more detailed compliance requirements. The changes are therefore relevant not only to prospective investors but also to existing investors whose incentives were granted under the previous framework.

This legal update highlights the principal changes introduced by the new framework, explains the principal eligibility and compliance requirements, and considers their practical implications for existing and prospective investors.

Regulation No. 586/2026, published on 23 February 2026, provides the legal foundation for the revised investment incentive regime. It replaced Regulation No. 517/2022, as amended by Regulation No. 566/2025. Among the most significant changes are the replacement of full tax holidays with reduced income tax rates, the introduction of a more performance-oriented incentive structure, the establishment of a USD 10 million minimum capital threshold for eligibility for reduced income tax rates subject to the treatment applicable to SMEs, the introduction of deductible capital expenditure, and the revision of customs duty and tax incentives.

The Draft Directive is intended to translate the broad framework established by the Regulation into operational procedures. It addresses eligibility, application and documentation requirements, monitoring and reporting obligations, administrative consequences for non-compliance, and transitional arrangements. Because the Draft Directive remains a draft, its provisions should be distinguished from the provisions of Regulation No. 586/2026 that are already in force. Please read the full details in the attachment.