By Dagnachew Tesfaye, Managing Partner at DMLF
Farm-out agreements allow mining or petroleum companies (farmor or transferors) to transfer part of their rights and obligations to another entity (farmee or transferee) usually in exchange for consideration. In Ethiopia, such farm-out agreements need to be approved and registered by the regulatory authority. The farm-out agreements need to adhere to Mining Operation Proclamation No 678/2010, as amended by Proclamation Nos 816/2013 and 1213/2020. For petroleum operation the Petroleum Operation Proclamation No 295/1986 shall govern.
The tax treatment of farm-out agreements were mentioned on Federal Income Tax Proclamation No 979/2016, Article 43. A farm-out arrangement exists if there is an agreement whereby a licensee or contractor( referred to as transferor) has entered into an agreement ( known as farm-out agreement) with a person (referred to as transferee) for the transfer of part of the interest of the transferor in mining right or petroleum agreement. The consideration given by the transferee for the transferred interest wholly or partly includes the transferee agreeing to incur expenditure or undertaking some or all of the work commitments of the transferor in respect of the part of the interest retained by the transferor.
The business income tax rate applicable to a licensee in mining or petroleum agreement is 25%.
To sum up, farm-out agreements are important in enabling mining and petroleum companies to realize their production or exploration potential. Subject to the laws of the country, these farm-out agreements transfer rights and obligations between parties. For entities who wish to farm-out transactions in Ethiopia, it is essential to obtain legal counsel skilled in mining and petroleum agreements in line with the laws of Ethiopia.
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