Forms of Enterprises for Carrying Out Investment in Ethiopia

By Dagnachew Tesfaye, Partner at DMLF 

The Investment Proclamation No 1180/2020 identifies four forms of enterprises as vehicles to run investment business in Ethiopia.These are sole proprietorship, enterprises that are established in Ethiopia or abroad, public enterprises established by relevant law and cooperative societies formed under the relevant law. The focus of this article is to see in detail these types of enterprises.

Sole proprietorship

The Commercial Code of Ethiopia 1243/2021 (New Commercial Code) on Article 3 and 5 provides the fact that the Commercial Code provisions apply to sole traders. This form of business is conducted by physical persons and the liability is unlimited. Sole proprietors are subject to corporate income tax and not that of dividend tax.

Enterprises Established in Ethiopia or Abroad

The form of business organizations that can be established in Ethiopia are provided on Article 174 of the New Commercial Code. These are 1/General partnership; 2/ Limited partnership; 3/ Limited liability partnership; 4/ Joint venture; 5/ Share company; 6/ Private limited company; and 7/ One person private limited company. The liability in General Partnership is joint and several whereas in Limited Partnership some members have limited liability while others have unlimited liability. LLP are forms of partnership established with the aim of doing professionally recognized skill based business activities. The liability of the members is limited. Joint Ventures are the only form of partnerships that have no legal personality and are not known to third parties. 

Companies in the form of share companies, private limited company and one person private limited company provide members with limited liability. Share companies are established with 5 or more(unlimited) members. Whereas Private Limited Companies can be established by members ranging from 2-50. Finally there is one-person private limited company which resembles a private limited company with the exception that the member is a single person.

Enterprises formed abroad or multinational companies can engage in investment in Ethiopia by registering the mother company as a branch or multinational company in Ethiopia. Here there is no need to form a new company under Ethiopian law.

Public Enterprises Established by Relevant Law

Public Enterprises means an Enterprise governed by the Public Enterprises Proclamation No. 25/1992. Such enterprises are wholly state owned that carry on for gain manufacturing, distribution, service rendering or other economic and related activities.  The Ethiopian government issued the Public Enterprises Privatization Proclamation No. 1206/2020”. The aim is to enhance their competitiveness, improve their access to capital and improve the quality and accessibility of their services. As a result private sector participation is needed for both domestic and foreign investors. The private sector can participate in public enterprises under the privatization process. Privatization has been defined in the Proclamation as ‘’ a transaction or transactions resulting in either a sale of assets or share capital of a Public Enterprise, in full or in part, to private ownership’’. Here mentioning the Ethiopian Investment Holding that is established by Council of Ministers Regulation No 487/2022 is paramount as the biggest investment hand of the Ethiopian government.

Cooperative Societies Formed By Relevant Law

Cooperative societies are formed and registered in accordance with the Cooperative Societies Proclamation No 985/2016. Cooperative Societies are established by individuals on a voluntary basis to collectively solve their economic and social problems and to democratically manage the same. The cooperative society may be established to engage in production or services rendering activities or both. Any cooperative society shall not be liable beyond its total asset and it has limited liability as per Article 11 of the Cooperative Society Proclamation. 

In summary the Investment Proclamation allows investors to choose from different forms of enterprises or organizations to form their investment business in Ethiopia. The choice ranges from working as a sole trader to forming a partnership or establishing a company. The investor is free to engage in public enterprises as well as cooperative societies with limited liabilities. If the foreign investor wants to register as a branch, still the investment law allows it to do so.

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Investment Incentives for Foreign Investors: Remittance of Funds

By Mahlet Mesganaw, Partner at DMLF

The latest Investment Proclamation of Ethiopia No 1180/2020 (the Investment Proclamation) provides for any foreign investor in Ethiopia to remit funds out of Ethiopia in a convertible foreign currency at the prevailing exchange rate on the date of transfer. This is a major incentive that is put in the proclamation to attract direct foreign investment. Who is eligible for such an incentive and what type of earnings are eligible for remittance shall be discussed below.

Who is Eligible?

The right to remit is available only to foreign investors and expatriates employed in an investment. Foreign investors are defined in the Investment Proclamation to include foreign national, enterprise in which a foreign national has an ownership stake, an enterprise incorporated outside of Ethiopia by any investor, or an enterprise established in Ethiopia by a foreign national, an enterprise in which a foreign national has an ownership stake and an Ethiopian permanently residing abroad and preferring treatment as a foreign investor. The right to remit earnings is therefore extended to such foreign investors.

The right to remit doesn’t extend to domestic investors. Even in situations where a domestic investor invests jointly with a foreign investor, the domestic investor does not have the right to remit his earnings out of Ethiopia. However, for domestic investors, the Investment Incentive and Investment Areas Reserved for Domestic Investors Council of Ministers Regulation No 270/2012(as amended) relating to investment incentives will apply to provide them(the domestic investors) with different incentives. 

What Earnings Are Remittable?

Earnings that are eligible for remittance are listed in the Investment Proclamation. These are profits and dividends accruing from investment; proceeds from transfer of shares or conferral of partial or total ownership of an enterprise to another investor; proceeds from sale, capital reduction or liquidation of an enterprise or compensation paid for expropriation. Concerning expatriates, they can remit, in accordance with applicable law, their salary earned from their employment in convertible foreign currency at the prevailing exchange rate on the date of transfer. 

The  directive of the National Bank of Ethiopia concerning allocation of foreign currency is Transparency in Foriegn Currency Allocation and Foreign Currency Exchange Management Directive No FXD/77/2021(Directive). The Directive states the fact that foreign exchange is a scarce resource that should be managed carefully to ensure its efficient and proper allocation. The Directive provides details of priority sectors in allocation of foreign currency. Remittance of funds by foreign investors is put as the third priority area in the Directive.

Conclusion

Foreign investors and expatriates are guaranteed the right to remit earnings in convertible foreign currency at the prevailing exchange rate on the date of transfer. Extending such an incentive for foreign investors and expatriates attracts direct foreign investment. Foreign exchange, as a scarce resource, should be managed carefully. However, guaranteed incentives by law, such as remittance of funds and earnings of foreign investors and expatriates, should be managed in  a manner not to defeat  the Investment Proclamation’s promise and objectives.

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Technology Transfer Agreement on Investment: the Requirement of Registration

By DMLF

The Investment Proclamations of Ethiopia from the old to the new incorporate technology transfer agreement as one form of growing the quality and quantity of investment in the country. From that of Investment Proclamation 37/1996, 280/2002, 769/2012 up to the recent one i.e. Investment Proclamation No 1180/2020, all allow any investor in Ethiopia to conclude technology transfer agreements. The option to conclude technology transfer agreement is available for any investor. Investment Proclamation No 1180/2020 defines “Investor” as a Domestic or Foreign investor who has invested capital in Ethiopia. Both foreign and domestic investors can conclude the technology transfer agreement relating to their investment. The aim is to enable the investor to acquire know-how and better compete in the world market.

Under Investment Proclamation No 1180/2020, “Transfer of Technology” is defined as the transfer of systematic knowledge for the manufacture of a product, the application or improvement of a process or for rendering service, including management and technical know-how as well as marketing technologies, but may not extend to transactions involving mere sale or lease of goods.

The only requirement for the investor who wishes to conclude a technology transfer agreement in relation to his investment is to have the agreement registered with the Ethiopian Investment Commission(EIC). The reason being a technology transfer agreement that is not registered  shall not have legal recognition. The fact that the technology transfer agreement is made known or for that matter registered  by  EIC will enable the investor to remit the payment related to technology transfer agreement  out of Ethiopia in convertible foreign currency at the prevailing exchange rate on the date of transfer. EIC shall notify the relevant Federal Executive Organs and copy the National Bank of Ethiopia the registration of a technology transfer agreement to facilitate the transfer of payments in convertible currency.

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Arbitration Center: the Need for a Regulation

By Dagnachew Tesfaye, Founder and Partner at DMLF

Ethiopia has updated and introduced through the Arbitration and Conciliation Working Procedure Proclamation No 1237/2021 the establishment of Arbitration Centers. Arbitration has been given due attention when Ethiopia ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards by Proclamation No 1184/2020. The Arbitration Center legally mandated to conduct arbitration has been the Chamber of Commerce and Sectoral Association by Proclamation 341/2003. An attempt has been made by private individuals to establish and conduct arbitration centers but due to lack of supporting legislation their effort was interrupted prematurely. 

‘’Arbitration Center ” is defined under Proclamation No 1237/2021 as  a Center to be established by government or under private ownership to provide arbitration service. The Federal Attorney General (now the Ministry of Justice) is assigned to supervise arbitration centers, issue and renew licenses and provide criteria for the establishment of the same. The Proclamation states that  the details shall be stipulated by Regulation to be issued by the Council of Ministers.  

Thus the main aim of this brief article is to push the Council of Ministers for the adoption of the much needed Regulation on Arbitration Center. More than 30+ years ago various countries established their own Arbitration Centers namely Hong Kong, Singapore, Abu Dhabi and Dubai. These cities had success in terms of conducting arbitration in their region and world wide. London, Paris, Zurich or Stockholm were the European arbitration cities. Now Ethiopia updated its Arbitration rules and ratified the New York Convention. Addis Ababa has to be the next Arbitration Center in the Region.

Therefore this is a call for the Ministry of Justice to expedite the legal drafting and proposing the legislation for the Council of Ministers to issue the much anticipated Regulation on Arbitration Center.

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What is a Collaboration Agreement?

By Mahlet Mesganaw, Partner at DMLF

Introduction

Growing export-oriented services and products is essential to the economy of Ethiopia. Foreign currency generating export businesses have to be encouraged to narrow down the import and export in-balance. As a result, the Ethiopian government has introduced  export-oriented non-equity based foreign enterprise collaboration with a domestic investor. This concept of collaboration agreement was there in the previous Investment Proclamation No 769/2012. And now the same concept is incorporated in the current Investment Proclamation No 1180/2020 and Investment Regulation No 474/2020. What collaboration agreement is and the requirements for registration shall be the focus of this brief article.

Collaboration Agreement

Collaboration agreement is an agreement entered by and between a domestic investor and a foreign enterprise. The wording i.e. ‘foreign enterprise’ refers to the foreign company or sole proprietor with a registered business and not a natural person. The purpose of the agreement is, among others, for the foreign enterprise to provide guaranteed external market access, production know-how of products for export market, export business management know-how, export market know-how and strategies for the supply of raw materials and intermediate inputs needed for export products. The foreign enterprise is not required to contribute capital. Thus any domestic investor who enters in respect of export a collaboration agreement with a foreign enterprise shall have the agreement registered with the Ethiopian Investment Commission (EIC). A collaboration agreement that is not registered with EIC shall have no legal recognition.

Requirements for Registration

A collaboration agreement registration request needs to be accompanied with an application form signed by a domestic investor. With the application, the domestic investor shall submit a copy of a collaboration agreement signed in front of a notary between the domestic investor and foreign enterprise, a copy of valid business license or investment permit of the domestic investor and an authenticated copy of the commercial registration certificate or business license of the foreign enterprise.

Decision on the Application

EIC shall pass a decision of approval or rejection within 30(thirty) working days having conducted the necessary review. A deadline has been included in the current proclamation as opposed to the previous Investment Proclamation No 769/2012. Where EIC approves the agreement, then EIC shall issue a certificate of registration and hand the certificate to the domestic investor. In addition to that, the approval shall be communicated to the National Bank of Ethiopia(NBE) and other relevant federal executive government organs. Specific mention of the NBE is included in the current proclamation, as opposed to the previous investment proclamation, where service fee for the foerign enterprise requires allotment approval of foreign currency by the NBE. Where EIC rejects the application for registration of the collaboration agreement, EIC shall notify the domestic investor of its decision in writing. In the previous investment proclamation, the concept of rejection and communication of the same in writing has not been included. The current investment proclamation made improvements in this regard and included written communication detailing reasons why the registration request has been denied.

Conclusion

Collaboration agreement is created with the sole aim of growing export trade.  The agreement entered between a domestic investor and foreign enterprise is required to be registered to have a legal effect. The foreign enterprise is not required to contribute equity. Rather the foreign entity renders service in guaranteeing export market access and know-how for the domestic investor in consideration of service fee. The importance of export-oriented non-equity based foreign enterprise and domestic investor collaboration is essential in generating the much needed foreign currency for Ethiopia from export trade.

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