Capital Gains Taxation of Shares and Bonds Under the Ethiopian Income Tax Law: Comparative Analysis of the Adequacy of the Existing Rules for the Capital Market
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Date
2025-05-01
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Addis Ababa University
Abstract
This study examines the adequacy of the existing rules of capital gains taxation (CGT) on the transfer of shares and bonds under Ethiopia’s income tax regime, contextualized within its implications for the nascent capital market. Through doctrinal analysis of Ethiopia’s income tax laws, regulations, directives, drawing on interviews with Ethiopian tax authorities, capital market stakeholders, alongside a comparative assessment of six jurisdictions (USA, UK, South Africa, Nigeria, Kenya, and Morocco), the research highlights critical inefficiencies in the existing regime which was established before the advent of a formal capital market. The research findings show the challenges of a regressive 30% flat tax rate on transfer of shares and bonds, particularly when compared to lower rates applied to immovable assets, which exacerbates market illiquidity, disproportionately penalizes securities transactions, and perpetuates a “lock-in effect”. Further, the lack of differentiation between short-term and long-term capital gains which exacerbates speculative trading, the absence of preferential treatment for listed securities which disincentivizes formal market participation, and inadequate provisions for small businesses, contrasts sharply with global best practices, undermining Ethiopia’s aspirations to cultivate a dynamic securities exchange. Practical challenges such as undervaluation of transactions and administrative inefficiencies in tracking small-scale gains further compound compliance gaps and equity concerns
In light of these challenges, the author recommended for; reduction of CGT rates on transfer of shares and bonds to 15% or less, introduction of tiered tax rates with a 1-year holding period to distinguish short-term (taxed as ordinary income) and long-term gains (preferential rates),in addition to introduction of SME-focused exemption per defined thresholds, implementing tax-free thresholds to alleviate administrative burdens, and to safeguard fiscal integrity. The study also advocated for harmonizing tax policies with capital market objectives, such as exempting or lowering taxes for securities listed on the ESX to enhance market participation. By addressing these gaps, Ethiopia can foster a dynamic capital market, and harness securities trading as a sustainable source of public financing. Ultimately, this research seeks to contribute to the development of a more favorable legal environment for capital market operations in Ethiopia
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Ethiopia’s income tax regime, contextualized within its implications for capital market