The Ethiopian Ministry of Finance released a draft amendment to the Income Tax Proclamation No. 979/2016, clarifying that dividends reinvested into share capital, including unpaid subscribed shares, will not be subject to the 10% dividend tax. Instead, these will now be formally recognized as tax-exempt reinvestments.

🔍 What Prompted This Change?

Earlier this year, the Supreme Court, in the Tsehay Industries case, ruled that reinvesting dividends to settle unpaid share capital did not qualify for exemption—and thus had to be taxed as retained earnings. As a result, numerous banks, insurers, and other investors faced retroactive tax liabilities of billions of birr .

This new draft amendment directly responds to that decision, restoring what the Ministry and many financial sector players consider the original intent of the law to encourage companies to reinvest profits without facing additional tax penalties.

✍️ What the Draft Specifies?

It introduces explicit wording stating that dividend payments used to settle unpaid share capital are treated as reinvestments.

Such transactions will receive the same tax exemption status as standard dividend reinvestments, so long as the process follows existing documentation requirements and occurs within the stipulated timeframe.

📈 Implications for the Financial Sector

Banks, insurers, and other corporations, which faced tax bills following Supreme Court rulings may now see those retroactive demands nullified, provided the amendment becomes law.

Shareholders and investors gain clarity and reassurance that dividend reinvestment remains encouraged and nondiscriminatory.

Tax disputes surrounding the issue may be withdrawn or dismissed, reducing ongoing legal uncertainty for major financial players.

⏳ Timeline & Next Steps

The draft amendment was published in early June 2025, and the Ministry of Finance is currently conducting public consultations and taxpayer feedback sessions . Once comments are reviewed, the draft will be sent to Parliament for approval. No enactment date has been announced.

✅ Bottom Line

This tax amendment reflects a major shift in tax treatment: affirming that reinvested dividends especially those used to boost share capital are legally exempt from the 10% withholding tax. The move reverses a controversial court interpretation and brings much-needed certainty to Ethiopia’s financial sector.