Legal Alert | Ethiopia’s New Investment Law: Key Changes

On January 30, 2020, the House of People’s Representative approved a draft Investment Proclamation (“New Proclamation”) that replaces the Investment Proclamation No. 769/2012 (“Existing Proclamation”)[1]. The New Proclamation becomes effective as of the date of its publication in the official Nagarit Gazetta. The New Proclamation will be supplemented by a new investment regulation to be enacted by the Council of Ministers (“New Regulation”). In this issue of our legal update, we present a summary of the key changes introduced by the New Proclamation. As the New Regulation is still in the draft stage, we will follow up this update once the regulation is approved by the Council of Ministers.

  1. Expanded Investment Objectives: under the Existing Proclamation, the policy priority is heavily orientated towards attracting foreign direct investment (FDI) in manufacturing and agriculture sectors with the aim of primarily strengthening domestic production capacity. The New Proclamation further expands the objectives to encompass the following: (a) improve the global competitiveness of Ethiopia’s economy; (b) increase export performance; (c) generate more and better employment opportunities; (d) accelerate the inward transfer and diffusion of knowledge, skill and technology; (e) maximize linkages between foreign and domestic investments and (f) leverage foreign capital to promote the competitiveness of domestic investors. Further, the New Proclamation envisages to regulate not just investment administration but also enhance investment attraction, retention and expansion with a view to ensure that investments deliver on their promises.
  1. Shift in Approach to Sector Regulation: Since 1991, Ethiopia has enacted four investment proclamations regulating FDI. Except for the Existing Proclamation, all three legislations followed what is known as a “negative-list” approach to foreign investment. A negative list approach provides an exhaustive list of investment areas that are restricted to foreign investments and makes all other sectors open for investment by foreigners. This approach was changed in 2012 with the enactment of the Existing Proclamation which introduced a hybrid system of “negative” and “positive” listing. Currently, the areas that are restricted to foreign investment and the areas that are permitted for foreign investors are all expressly listed in the law. Sectors that are not on the list have been prohibited for foreign investors. While the current listing approach succeeded in attracting selected priority investment sectors, particularly in agriculture and manufacturing industries, it was proven restrictive in enabling the active participation of other sectors such as services and information technology. The New Proclamation reverses the current positive-listing approach to a negative listing approach whereby areas that will be restricted from foreign participation will be exhaustively provided in the New Regulation with the implication that all other areas will be permitted areas of investment for foreign investors.
  1. Areas of Investment: as part of the negative listing approach, the New Proclamation provides three categories of investment areas:
  1. areas exclusively reserved for joint investment with government
  2. areas exclusively reserved for domestic investors
  3. area exclusively reserved s for joint investment with domestic investors.

All other sectors not reserved in accordance with (a)–(c) above will be open for foreign investment.  The New law eliminates a category of sectors that will exclusively be held by the government and introduces a new category of sectors in which joint investment with domestic investors will be mandatory. Details of the sectors eligible for the above list will be provided in the New Regulation. This list has been reviewed several times in the process of the preparation of the draft legislations and it will be preemptive to publish the list when it has not yet been made final and approved by the Council of Ministers.

  1. Expanded definition of “Domestic Investors”: the definition of domestic investors under the Existing Law includes (a) Ethiopian nationals (b) foreign nationals treated as domestic investor under separate laws (e.g., Ethiopian Diaspora) and (c) government, public enterprises and cooperatives. Under the New Proclamation, these categories are fully maintained but expanded to also include foreign nationals or foreign enterprises accorded a domestic investor status previously. This expansion offers legal recognition to foreigners and their descendants that have lived and invested in Ethiopia for generations (e.g. Armenians, Italians, Indians, Rastafarians).
  1. Expanded definition of “Investment” and “Capital”: the existing definition of investment is limited to new investments in cash or in kind and the expansion/upgrading of existing investments. The New Proclamation expands this definition to include the acquisition of existing enterprises, in whole or in part, as an eligible form of foreign investment to be regulated by the New Proclamation. Further, the current definition of “capital” is expanded to include intellectual property rights and other tangible and intangible business assets as valid capital contributions.
  1. Empowering More Sectoral Government Institutions to Regulate Investment: currently, the Ethiopian Civil Aviation Authority and Ethiopian Energy Authority are granted delegated powers to issue, suspend and revoke investment permits in the area of aviation and energy. This list is expanded to include the Ethiopian Communication Authority  which is granted similar mandate to issue, suspend and revoke investment permits for investors in telecommunication sector.
  1. Expanded Waiver of Minimum Capital: Under the Existing Law, foreign investors are required to commit a minimum foreign capital ranging from USD 50,000- USD200,000 depending on the sector of investment and joint investment with domestic investors. Waiver of such capital was restricted to investors re-investing their profits and dividends in the country. The New Proclamation maintains the same minimum capital requirement but broadens the waivers to also include (a) persons elected as members of board of directors following the conversion of a private limited company to share company thereby legitimizing the concept and practice of nominal shareholding to qualify as director and (b) foreign investors buying the entirety of an existing enterprise owned by foreign investors or the shares thereof.
  1. Expanded Investment Administration Organs and Clarification of Mandates: under the Existing Proclamation, the key investment administration organs are the Investment Board (“Board”), the Ethiopian Investment Commission (“EIC”) and the regional investment bureaus. The New Proclamation provides clarity on the composition and mandate of these organs and introduces new bodies. The following are the key changes:
  1. Additional Mandate to EIC: the New Proclamation grants EIC broad powers that would allow it to meet its renewed objective of establishing a conducive investment climate, attract and retain investments, and implement a transparent and efficient investment administration system. Some of these new mandates are:
  1. Provision of Investment Land: the New Proclamation introduces a new mandate to regions to establish transparent and predictable system for land allocation. Thus, regional states are required to identify and classify land to be used for investment projects. Regions may establish special procedures that will allow them to respond to land requests by investors within a maximum of 60 days (for manufacturing sector) and maximum of 90 days for other sectors.
  1. Social and Environmental Protection: a new clause is introduced that obliges investors   to promote social and environmentally sustainable values including environmental protection standards and social inclusion objectives in carrying out their investment projects.
  1. Immovable Property Ownership: the Existing Proclamation grants foreign investors or foreign nationals treated like a domestic investor the right to own immovable property requisite for their investment and a dwelling house. Under the New law, the right to own immovable properties requisite for investment is maintained. However, only large investors will be permitted to own one dwelling house.
  1. Grounds for Suspension of Investment Permits: the Existing Proclamation provides that an investment permit may be suspended if the investor violates the provisions of the proclamation, regulation or directives issued without providing details of the specific grounds for suspension. Under the New Proclamation, specific grounds are exhaustively listed on the basis of which an investment organ may suspend investment permits.
  1. New Rules on Work Permit: the existing investment law provides that any investor may employ duly qualified expatriate experts required for the operation of its business. The New Proclamation qualifies this clause stipulating that the qualified expats must be in the positions of ‘higher management, supervision, trainers and other technical professions.” Further, it is provided that such expats may only be employed when it is ascertained that Ethiopians possessing similar qualifications or experiences are not available. In terms of foreigners in top management positions, the New Proclamation maintains the existing rule that there will be no restrictions on top management positions but further clarifies what “top management” constitutes. Top management includes chief executive officer, chief financial officer and chief operations officer. In addition, the New Proclamation grants the spouse of an investor or a foreign worker the right to be employed and obtain a work permit in Ethiopia.
  1. Grievance Handling & Settlement of Disputes: under the Existing Proclamation, investors are permitted to lodge any complaint related to their investment with the EIC with the right of appeal to the Board. An elaborate grievance handling rules are provided under the New Proclamation offering alternative and predictable timelines for resolution of investment disputes. These include:
  1. Investment Regulations: as a departure from the existing law, the New Proclamation only provides general framework and rules on FDI and delegates detailed provisions on sector listing, investment administration, one-stop shop services, technology transfer agreements, and other matters which will be governed by the New Regulation. Further, a separate regulation is expected to regulate incentives that will be offered to investors.

[1] MTA was a member of the taskforce that prepared the New Proclamation and a Draft Investment Regulation