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Ethiopia-Netherlands

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Tax Treaty between Ethiopia and the Netherlands has Entered into Force

The income tax treaty between Ethiopia and the Netherlands entered into force on 1 September 2016, and the protocol to the treaty will enter into force on 30 September. The treaty and protocol were signed 10 August 2012 and 18 August 2014 respectively.

Taxes Covered

The treaty covers Netherlands income tax, wages tax, company tax and mining tax, as well as the Caribbean Netherlands (BES Islands) income tax, wages tax, property tax and revenue tax. It covers Ethiopian tax on income and profit imposed by the Income Tax Proclamation No. 286/2002, and the tax on income from mining, petroleum and agricultural activities.

Offshore PE

The treaty includes the provision that a permanent establishment will be deemed constituted if an enterprise carries on offshore activities in the territorial sea and any area beyond the territorial sea within the jurisdiction of a Contracting State for a period or periods aggregating more than 30 days within any 12-month period.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 10% of the paying company's capital; otherwise 10% if the paying company is resident in Ethiopia and 15% if the paying company is resident in the Netherlands
  • Interest - 5%
  • Royalties - 5%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares or other comparable interests deriving more than 50% of their value directly or indirectly from immovable property situated in the other State, other than immovable property in which that company or the holders of those interests carry on their business - exemptions apply:
    • For shares traded on a recognized stock exchange;
    • Where the resident owned less than 50% of the shares or other comparable interests prior to the first alienation; and
    • Where the gains are derived in the course of a corporate reorganization, amalgamation, division or similar transaction

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Ethiopia applies the credit method for the elimination of double taxation, while the Netherlands may apply the exemption or credit method depending on the type of income and the applicable provisions of its domestic law.

2014 Protocol

The 2014 protocol to the treaty add Article 21A (Limitation on Benefits), which includes the provision that a resident of a Contracting State will only be entitled to the benefits under Articles 10 (Dividends), 11 (Interest) and 12 (Royalties), if such resident is a qualified person. Qualified persons include:

  • An individual;
  • A contracting state, or a political subdivision or local authority thereof;
  • A pension fund; and
  • A company meeting certain conditions, including:
    • The company's shares are regularly traded on a recognized stock exchange, or at least 50% of its shares are directly owned by one or more companies whose shares are traded on a recognized stock exchange (subject to additional conditions); or
    • The company is engaged in an active trade or business in its Contracting State of residence (other than making or managing investments for the company's own account, unless these activities are banking or insurance carried on by a bank or an insurance company); or
    • The company is a headquarters company for a multinational corporate group which provides a substantial portion of the overall supervision, financing or administration of the group, and has, and exercises, independent discretionary authority to carry out these functions (subject to additional conditions).

Residents that are not qualified persons may still be entitled to the benefits if the competent authority of the Contracting State granting the benefits is satisfied that the establishment, acquisition or maintenance of such company, or of its entitlements to such benefits or the conducts of its operations does not have as its main purpose or one of its main purposes to secure such benefits.

The 2014 Protocol also replaces Article X of the protocol originally signed with the treaty to clarify that the 5% reduced withholding tax rate for dividends will apply as long as the Netherlands applies a full tax exemption to participation dividends that a company receives from a company resident in Ethiopia.

Effective Date

Both the treaty and protocol apply in Ethiopia from 8 July 2017 and in the Netherlands from 1 January 2017. However, the treaty includes that Article 26 (Exchange of Information) will only apply after Ethiopia has informed the Netherlands that it is capable of fulfilling the obligations of Article 26.

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