January 29, 2026
On January 20, 2025, during its 52nd regular meeting, Ethiopia’s Council of Ministers approved the revised investment incentive regulations, recognizing them as a transformative policy tool. These regulations will take effect upon their publication in the Federal Negarit Gazette.
The regulation is rooted in Investment Proclamation No. 1180/2012 and associated laws, marking a significant advancement in Ethiopia’s strategy to attract foreign direct investment while ensuring accountability and performance measurement.
It transitions towards a performance-based incentive model that emphasizes high-capital sectors, particularly agriculture and mining, which are crucial for economic diversification and job creation. In my view, this regulation not only fills the gaps of previous frameworks but also enhances Ethiopia’s competitiveness against regional counterparts like Kenya, potentially boosting FDI inflows and promoting sustainable growth in these essential sectors.
The regulation introduces several refined mechanisms to incentivize investments, particularly in agriculture. Notably, it emphasizes investment capital allowances, a one-time deductible expense on capital assets, calculated per the stated schedule to reward substantial capital infusions that drive technological advancement and productivity. This is complemented by income tax rates lower than normal, exemptions from alternative minimum tax, dividend tax, and capital gains tax, as well as customs duty and tax waivers on capital goods, construction materials, and vehicles. These incentives are conditional on performance agreements, which mandate verifiable outcomes in areas like job creation, technology transfer, and environmental protection.
What makes this framework compelling is its focus on transparency and revocation clauses, ensuring incentives are revocable if misused, thereby enhancing accountability. Regulatory authorities, including the Ethiopian Investment Commission and Ministry of Finance, are tasked with rigorous monitoring, including annual reporting on foregone revenue and economic impacts.
This performance-oriented design aligns incentives with national objectives, such as balanced regional development and efficient resource utilization, making it particularly attractive for horticulture and floriculture investors who often require significant upfront capital for irrigation, greenhouses, and cold-chain infrastructure.
In my assessment, these elements create a smart ecosystem: incentives are time-bound, non-transferable (except as specified), and non-cumulative, reducing fiscal risks while maximizing developmental returns. For horticulture and floriculture—classified under agricultural investments eligible for incentives—the regulation promises to catalyze exports of high-value crops like flowers, fruits, and vegetables, leveraging Ethiopia’s favourable climate and proximity to European markets.
This new regulation repeals the Council of Ministers Investment Incentives Regulation No. 517/2014 (as amended), marking a clear departure from its predecessor. The 2014 framework, while progressive, primarily offered blanket income tax holidays (typically 2-7 years for agriculture, extendable in remote areas) and duty exemptions without stringent performance ties. It focused on sector-specific exemptions, capital-based allowances and mandatory performance agreements introduced. For instance, under No. 517/2014, horticulture investors could import unlimited capital goods duty-free, but there was less emphasis on monitoring outcomes, and it became suspicious for potential inefficiencies in revenue foregone.
The new approach refines this by making incentives focused on capital scale and performance, as per the preamble’s intent to adapt to international dynamic conditions. In horticulture and floriculture, where investments often exceed millions in USD for modern farms, the capital allowance could provide more substantial upfront relief than the previous holiday periods alone. Moreover, the emphasis on accountability, through fenced accounting systems and revocation for non-compliance, addresses criticisms of earlier incentives being prone to abuse. Transitional provisions allow existing investors to opt into the new system, offering flexibility while preserving vested rights. Overall, this evolution, in my view, elevates Ethiopia’s regime from incentive-driven to impact-driven, better suiting sectors like floriculture that demand long-term sustainability.
In comparison, Kenya, a regional leader in horticulture and floriculture, provides a useful comparator. Kenya’s flower industry, centered around Lake Naivasha and other valleys, generates over $800 million annually in exports, contributing significantly to GDP and employing hundreds of thousands. Its incentives, primarily under the Export Processing Zones Act and Special Economic Zones framework, include 10-year corporate tax holidays (reducing to 20-25% thereafter), duty-free imports of capital goods and raw materials, and VAT exemptions for exports. Additional supports encompass streamlined export processes, infrastructure facilitation, and access to carbon credit projects for sustainable practices. The government also promotes value addition through processing incentives and has invested in cold-chain logistics to minimize post-harvest losses.
Some critics argue, however, that Kenya’s system faces challenges: bureaucratic levies, inconsistent tax policies, and water scarcity issues have prompted calls for more coherent incentives. Unlike Ethiopia’s new regulation, Kenya’s lacks explicit performance agreements, leading to occasional incentive retractions (e.g., from EPZs) amid fiscal pressures. In floriculture, Kenyan exporters benefit from preferential EU market access but contend with higher operational costs due to less aggressive capital relief compared to Ethiopia’s proposed allowances.
Ethiopia’s new framework, in my opinion, holds a competitive edge. By tying incentives to capital employed and verifiable performance—such as job creation and environmental safeguards—it offers a more predictable and accountable environment for FDI. For horticulture investors, Ethiopia’s lower land and labor costs, combined with duty-free imports and tax exemptions, could outpace Kenya’s, especially in scaling operations. Ethiopia’s focus on the substitution of imported products domestically and technology transfer aligns well with floriculture’s need for innovation, potentially drawing investors deterred by Kenya’s regulatory hurdles. Recent data indicate that Ethiopia’s floriculture exports have grown rapidly, and some critics argue that regulation could accelerate that trajectory, positioning Ethiopia as a formidable rival.
This regulation is vital for attracting strong investors and FDI, as it balances generosity with fiscal prudence. By prioritizing high-capital, high-impact sectors like horticulture and floriculture, it fosters job creation , potentially thousands in rural areas, technology infusion, and export earnings—key to Ethiopia’s ambition of middle-income status. The embedded monitoring enhances trust, mitigating risks of incentive misuse that have plagued similar policies elsewhere.
In conclusion, as someone attuned to economic dynamics, I believe this regulation is a good proposition—elegantly designed to allure global capital while delivering tangible results. It surpasses its predecessor in sophistication and edges out Kenya’s in accountability, paving the way for Ethiopia to bloom as a horticultural powerhouse. Investors in these sectors should adopt and engage promptly, leveraging performance agreements to secure these benefits and contribute to Ethiopia’s vibrant economic narrative.
Nonetheless, every incentive must thoughtfully consider the specific sub-sector’s contributions, like the floriculture sub-sector, for their exceptional contribution to employment generation per farm, their incomparable foreign currency generation per unit area, their effectiveness in technology transfer, and their role in transforming the country’s business and economic landscape.
In this context, incentives should be flexible with a keen awareness of the dynamic nature of the horticultural export sub-sector and the support mechanisms provided by competing nations. Additionally, there should be powerfulness for regulatory agencies to offer exceptional support for specific sectors, such as horticulture, recognizing their unique export potential and importance.
About the Author:
Mekonnen Solomon is the former Director of Horticulture Investment and Horticultural Export Coordinator for Ethiopia and can be reached at ehdaplan@gmail.com