The New Investment Proclamation No. 1180/2020: A Brief Overview
One part of the economic reform programs in Ethiopia is improving the country's ranking in the World Bank's Ease of Doing Business. As part of the Ease of Doing Business Project, the Ethiopian Investment Commission (EIC) has been responsible for revising the investment proclamation, which has been in effect since 2012. After several consultations with the private sector representatives and the development community, the final draft was presented to the House of Peoples' Representatives (HPR) in January 2020 and was approved by the House. After the approval, the law-making process necessitated for it to get publicized in the Federal Negarit Gazette to enter into effect. Accordingly, the new investment proclamation, cited as "Investment Proclamation No. 1180/2020" was publicized on April 2, 2020, officially repealing the long-lasted Investment Proclamation No. 769/2012 as amended from time to time.
Following this the Council of Ministers is expected to enact the Investment Regulation, which mainly puts the new proclamation to the ground. The Proclamation more of sets the high-level policy and institutional arrangements in relation to investment.
Though we will need to wait until the regulation gets enacted to see the real effect of the changes, highlights of the major changes introduced by the new investment proclamation are briefly described below:
Definition of Capital – Under the new proclamation "Capital" is defined as to include intellectual properties. From intellectual properties, the repealed proclamation only recognized patent as a possible capital contribution by an investor. With this new proclamation, however, in addition to patent, valuable trademarks, copyrights, and other creative works of the human intellect, which could fall under the realm of 'intellectual property’, could be contributed as a capital with all the benefits associated with it.
Scope of the New Investment Proclamation – Investments in relation to prospecting, exploration and development of minerals and petroleum are excepted from the scope of the new investment proclamation. There will be a separate legal regime governing investments in these sectors. That being said, similar to the repealed proclamation, the Ethiopian Civil Aviation Authority, the Ethiopian Energy Authority, EIC delegates the Ethiopian Communications Authority to license investors in their respective sectors.
Sectors Open for Foreign Investors – the new investment proclamation changed the sector listing approach from positive listing, listing of areas that are allowed for foreign investors, to a negative listing approach, listing of areas that are not allowed for foreign investors. Details of the specific sectors that are closed for foreign investors will be provided by the investment regulation, which is yet to be enacted. In general, this is considered as a positive development as it expands the areas that foreign investors could engage in. Another noteworthy change made by the new investment proclamation, concerning the sector restriction, is that it got rid of the sectors that were left for the government's monopoly. As per the new investment proclamation there will not be a sector that will be reserved for the government only. The new sector listing has four major categories i.e. those reserved for joint venture with the government; sectors reserved for domestic investors and those that are reserved for joint venture by foreign investors and domestic investors. Any sector that is not specifically mentioned in any of the categories listed in the above categories will be open for foreign investors.
Minimum Capital Requirement – With regards to the minimum capital that foreign investors are required to bring in, the new investment proclamation maintained the status quo. As per the new investment proclamation, similar to the repealed one, foreign investors are required to allocate a minimum capital of USD 200,000 for a single investment project. If the foreign investor is investing jointly with a domestic investor, the minimum capital required will be USD 150,000. For investment in the areas of architectural or engineering works or related technical consultancy services, the minimum capital requirement is USD 100,000 and if the foreign investor is investing jointly with a domestic investor, it will get reduced to USD 50,000. In both the new and repealed proclamations, foreign investors are not required to meet the minimum capital requirement, if they are re-investing profit generated from an investment already registered in Ethiopia. Besides, the new proclamation expanded the list of conditions in which foreign investors might not be required to meet the minimum capital requirement. As per the new proclamation in addition to reinvesting of profit, persons elected as members of a board of directors following the change of a private limited company to a share company; and a foreign investor buying the entirety of an existing enterprise owned by a foreign investor or the shares therein will not be required to meet the minimum capital requirement.
Period of Limitation to Register a Capital – any foreign investor bringing in foreign capital to the country is required to get that registered at the National Bank of Ethiopia and acquire a registration certificate from the EIC, which also used to be the case under the repealed proclamation. However, the new proclamation provides that such capital is required to be registered within one year. If not, the investor might lose its right to repatriate the proceeds of the investment in convertible foreign currency.
Investment Permit Issuance and Renewal – the EIC will issue an investment permit for investors and investors are required to obtain investment permit to commence their project in Ethiopia. An investment permit is only valid until the company becomes operational and is issued with a business license to market its products. As per the repealed investment proclamation, an investment permit is valid only for one year. If an investor was not able to finish the project and become operational within a year, it had to present a valid reason for the EIC explaining why and EIC might renew the investment permit for an additional one year. The new investment proclamation kept the renewal period at one year but has changed the validity period to two years.
In addition to new projects, a foreign investor seeking to buy an existing enterprise in order to operate it in its current state or to buy shares of an existing enterprise is required to obtain prior approval from the EIC. This service used to be provided at the Ministry of Trade in the past. The inconsistency of the application of the investment laws by the two organs has been a challenge in the past.
Duty to report – the new investment proclamation compels investors to provide the EIC with a quarterly report on the investment project status.
Employment of Expats – an investor is allowed to hire duly qualified foreigners in the position of higher management without any restriction. The term ‘higher management’ position has created ambiguity in the past. However, the new investment law defined it to include the CEO, COO, and CFO. In addition, investors are allowed to hire expatriates in the position of supervision, trainers and other technical professions only if they can ascertain that Ethiopians possessing similar qualifications or experience required by the sector are not available. The investor is responsible for replacing, within a limited period of time, such expatriate employees by Ethiopian by arranging and providing the necessary training.
One-Stop Service – EIC provides investors with a one-stop-shop service for investors. As per the repealed proclamation, these one-stop services culminate and will no longer be provided by the EIC as soon as the investor gets a business license. However, the new investment proclamation promises investors that these services will continue to be provided by the EIC even after the investor gets a business license. In order to effectively do that the EIC will be adding renewal of a business license as part of its one-stop service package.
Investment Dispute Settlement – As a rule, a dispute with any Ethiopian Government organ might not be referred to arbitration or any form of out of court dispute settlement mechanism. However, the new investment proclamation provides for a state-investor dispute to be resolved amicably as much as possible through discussion/negotiation. If no resolution is reached within 6 months, matters can be submitted to the court having jurisdiction. It also provides for the possibility that foreign investors and the government may submit to resolve disputes through arbitration.
Investment Administration Organs – In addition to the Ethiopian Investment Board, the Ethiopian Investment Commission, and Regional Investment Organs, the new investment proclamation established Standing Council on Inter-Government Relations. In the past one of the main challenges was the lack of coordination between the federal investment commission and regional administrative organs mainly in terms of allocating land and providing support. The newly established Standing Council is expected to fill that gap.
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