How to Understand Ethiopia’s Supreme Court Ruling on Retained Earnings

The Federal Supreme Court of Ethiopia has ruled that using retained earnings to pay up subscribed capital is not considered reinvestment, but rather debt offsetting. This means that dividends used to pay subscribed capital will be subjected to a 10% tax.

The Ministry of Revenue’s ability to retroactively impose taxes on shareholders’ reinvested dividends is even more worrisome. This means that the government could go back several years and demand that shareholders pay taxes on dividends that they had already reinvested in the company.

Worth revisiting Article 61 of the Federal Income Tax Proclamation 979/2016, which reads “Tax shall be paid at the rate of 10% on the net undistributed profit of a body in a tax year to the extent that it is not reinvested, in accordance with the directive to be issued by the Minister.”

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