The National Bank of Ethiopia Issued a New Directive (Directive No. FXD/70/2021, New Directive) governing the retention and utilization of foreign currency earnings from export and inward remittance. Previously the area was regulated by the Directive No. FXD/66/2020 (Old Directive).

The basic changes introduced by the New Directive are highlighted below:

1. Retention Account “A” and Retention Account “B” has been eliminated: under the Old Directive Exporters of Goods and Services and Recipient of Inward Remittance (Beneficiaries)  were allowed to credit 30% of their foreign currency in Account A and hold for an indefinite time. 70% of the earning will be credited to Account B for 28 days only. The earnings were allowed to be utilised by the beneficiary for the importation of raw materials or other permitted items relating to the export business. Under the New Directive these two kinds of accounts are eliminated and only one Forex Retention Account is permitted.
   
   
2. Mandatory Surrender is established: under the New Directive all the beneficiaries are required to surrender 30% of the foreign currency earning to the commercial banks. Previously there was no surrender requirements applicable to the Beneficiaries.
   
   
3. The Amount of Proceeds to be Retained is reduced: the Beneficiaries are further required to sale 55% of the foreign currency earning to the bank immediately on the day of receipt at the prevailing buying exchange rate. The Beneficiaries can deposit 45% of the proceeds in retention account for an indefinite time. Note that this 45% shall be calculated once the 30% surrender is made on the total earnings.
   
   
4. The requirements for utilization of the foreign currency has been changed: under the Old Directive the foreign exchange under retention accounts can only be used to finance direct business relating to the export and some other permitted payments. Under the New Directive the Beneficiaries are allowed to use the foreign exchange for the importation of goods and services without restriction as long as it has a business license to import these goods and services.
   
   
5. A New Penalty is imposed on Banks: any bank that violates any provision of the directive is liable to pay 5,000 USD for each violation.

Disclaimer: This information is intended as a general overview and discussion of the subjects dealt with.  The information provided here was accurate as of the day it was posted; however, the law may have changed since that date.  This information is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation.  Mehrteab Leul & Associates is not responsible for any actions taken or not taken on the basis of this information.  Please refer to the full terms and conditions on our website. 

Copyright©2021 Mehrteab Leul & Associates.  All rights reserved.

As an institution that seeks to foster a healthy financial system as well as facilitate the rapid economic development of the country, the National Bank of Ethiopia (the “NBE”) has the power to formulate and implement those exchange rate policies that can help create a strong and stable economy. Whether it is by monitoring the foreign exchange transactions of banks, establishing the terms and conditions for foreign exchange transfers, or identifying those economic sectors that warrant the prioritized allocation of foreign currency, the role of the NBE in ensuring the efficient allocation of this important yet scarce resource cannot be overstated. This is particularly true in 2020, where the growing spread of the Novel Coronavirus and the troubling desert locust infestation has necessitated the reprioritization of Ethiopia’s decreasing foreign reserve coverage.

It is in this context that the new Transparency in Foreign Currency Allocation and Foreign Exchange Management Directives (“Directives No. FXD/67/2020”) came into effect in 05 October 2020. In doing so, there are some notable differences between Directives No. FXD/67/2020 and the Transparency in Foreign Currency Allocation and Foreign Exchange Management (as Amended) (“Directives No. FXD/62/2019”), particularly when it comes to how banks prioritize, allocate and utilize their foreign currency reserves. As such, this legal update seeks to assess the NBE’s recently issued Directives No. FXD/67/2020 in light of the previous Directives that regulated the allocation and management of foreign currency in Ethiopia.

One important change brought about by Directives No. FXD/67/2020 is the downgrading of particular payments that Directives No. FXD/62/2019 not only considered to be important for foreign investors but also economically essential; warranting the prioritized allocation of foreign currency. In downgrading profit and dividend transfers as well as the transfer of excess sales of foreign airlines from Second Priority payments to Third Priority payments, the NBE has reverted to its 2018 position of considering these payments less of a priority than those other goods and payments listed in 6.1(a) and 6.1(b) of the Directive.

Although the recently enacted Investment Proclamation No. 1180/2020 states that any foreign investor has the right to not only remit the profits and dividends accruing from their investment but also those proceeds from the sale of the business or the transfer of shares, Directives No. FXD/67/2020 will likely make such transactions lengthy as the allocation of foreign currency is not only based on prioritized categories but also on a first come first serve basis. As such, even though Directives No. FXD/67/2020 requires banks to allocate 45% from half of their foreign currency reserves for all imports of goods and services to Third Priority imports and payments, the NBE’s first come first serve policy as well as the fourteen other payments and imports in this category will likely result in the diminished availability of funds for these two important transactions.

Another notable change brought about by Directives No. FXD/67/2020 is its specificity on who can request for special priority allocation of foreign currency. Whilst Directives No. FXD/62/2019 merely stated that the Governor or Vice Governor of the NBE may give special priority approval on a case by case basis, Directives No. FXD/67/2020 limits the discretion of both the Governor and Vice Governor by listing financial institutions, the federal government, regional governments, and city administrations as those that can request for special priority.

Although it is possible to infer from Directives No. FXD/67/2020 that financial and governmental institutions have supplanted investors when it comes to making such special requests, it is important to note that most of the essential imports are still prioritized for foreign exchange allocation. For example, pharmaceutical goods such as medicine and laboratory reagents continue to be classified as first priority essential goods that banks are now mandated to allocate 10% of their foreign currency reserves to.

Similarly, inputs for agricultural and manufacturing investments are still designated as secondary priority imports, making access to foreign currency relatively easier for those investors that wish to purchase and import fertilizers, seeds, and pesticides as well as manufacturing chemicals and raw materials. With Directives No. FXD/67/2020 also entitling bank presidents to approve the import of spare parts for those faulty machinery that can disrupt production, it is our opinion that Directives No. FXD/67/2020 is more supportive of the manufacturing and agricultural sectors than the Directive it repealed.

Furthermore, foreign investors are already exempted from the registration process that underpins this priority scheme, as they are still afforded foreign exchange on demand for some of their fiduciary interests. Whether it is the repayment of the principal interest or fees of external debt obligations, the payment of suppliers’ credit, the repatriation of salary by foreign employees, or fees related to consultancy, commissioning and royalties, neither the limitation placed on special priority requests nor the de-prioritization of certain payments will hinder their ability to fulfill their fiduciary responsibilities to their creditors as well as their employees.

In conclusion, the enactment of Directives No. FXD/67/2020 will likely make payments related to profit and dividend transfers as well as the transfer of excess sales of foreign airlines a lengthy process as the allocation of foreign currency is not only based on prioritized categories but also on a first come first serve basis. However, Directives No. FXD/67/2020 still affords foreign investors the right to obtain foreign exchange on demand for some of their most essential fiduciary responsibilities.

Disclaimer: This information is intended as a general overview and discussion of the subjects dealt with. The information provided here was accurate as of the day it was posted; however, the law may have changed since that date. This information is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. Mehrteab Leul & Associates is not responsible for any actions taken or not taken on the basis of this information. Please refer to the full terms and conditions on our website.

Copyright©2020 Mehrteab Leul & Associates. All rights reserved.

Introduction

The Ethiopian Government has made commendable efforts, through legislative and procedural reforms, to improve the investment climate of the country and thereby attract more foreign direct investment. Since 1992, the investment law has been revised four times to ensure the participation of more foreign investments in various sectors of the economy. The latest law, the Investment Regulations No. 474/2020 (the “Regulation”) was promulgated on 02 September 2020.

The Regulation, in a stark deviation from its predecessor has changed the “positive list” approach into a “negative list “. In the repealed Investment Regulation of 2012, foreign investors were only allowed to invest in sectors expressly listed in the investment regulation or in sectors opened by the decision of the Ethiopian Investment Board. The shift towards a ‘negative list’ is probably the most significant aspect of the new investment law because foreign investors are now allowed to invest in any investment area except those that are expressly reserved.

1. Major Amendments in the Regulation

1.1 Opening of Reserved/Restricted Sectors to Foreign Investment

One of the major change the Regulation has brought is the restoration of the “negative listing” of investment areas that are open to foreign investors which enables foreign investors to enjoy a much greater opportunity with regards to the areas that they can invest in. The negative listing approach employs the opening of all economic sectors to FDI except those that are expressly reserved/restricted by law. This approach aspires to cope with the ever-changing technological evolutions and pace of business in a globalized economic sphere. This approach is a reversal of the 2012 Investment Regulation which adopted the “positive listing” method that was restrictive by design.

As part of the negative listing approach, the Regulation provides three categories of investment areas. These are areas exclusively reserved for joint investment with government, areas exclusively reserved for domestic investors and areas exclusively reserved for joint investment with domestic investors. All other sectors not reserved in aforementioned sectors will be open for foreign investment.

1.1.1 Areas of investment that are open for foreign investment:

1.1.1.1           Electronic commerce;

1.1.1.2           Real estate development;

1.1.1.3           Education services;

1.1.1.4           Health services excluding primary and middle level health services

1.1.1.5           Grade 1 construction and drilling services;

1.1.1.6           Wholesale of petroleum and petroleum products and wholesale of own products produced in Ethiopia;

1.1.1.7           Import of liquefied petroleum gas and bitumen;

1.1.1.8           Cement manufacturing;

1.1.1.9           Capital goods finance business;

1.1.1.10        VAS (Value Added Services);

1.1.1.11        Management consultancy services;

1.1.1.12        Engineering consultancy services;

1.1.1.13        Repair and maintenance of heavy industry machineries and medical equipment;

1.1.1.14        Operating lease of industry-specific heavy equipment’s, machineries and specialized vehicles;

1.1.1.15        Star-designated national cuisine restaurant service;

1.1.1.16        Star-designated hotel, lodge, resort, motel, guesthouse and pension services;

1.1.1.17        Producing bakery products and pastries for export market;

1.1.1.18        Railway transport services;

1.1.1.19        Cable-car transport services;

1.1.1.20        Cold-chain transport services;

1.1.1.21        Freight transport services having a capacity of more than 25 tones;

1.1.1.22        Manufacturing;

1.1.1.23        Agro-processing and commercial farms;

1.1.1.24        Any investment activity that doesn’t fall under one of the below three categories (areas exclusively reserved for joint investment with government, areas exclusively reserved for domestic investors and areas exclusively reserved for joint investment with domestic investors).

1.1.2 Areas allowed for foreign investors to jointly invest with the government:

1.1.2.1           Manufacturing of weapons, ammunition and explosives used as weapons or to make weapons;

1.1.2.2           Import and export of electricity;

1.1.2.3           International air transport services;

1.1.2.4           Bus rapid transit; and

1.1.2.5           Postal services excluding courier services.

1.1.3 Areas of investment in which foreign investor/s can own up to a maximum of 49% of share capital:

A foreign investor jointly investing with a domestic investor (Ethiopian nationals or companies wholly owned by Ethiopian nationals) in the following areas can own up to a maximum of 49% of share capital of a joint venture company. These areas are:

1.1.3.1           Freight forwarding and shipping agency services;

1.1.3.2           Domestic air transport service;

1.1.3.3           Cross country passenger transport service using buses with a seating capacity of more than 45 passengers;

1.1.3.4           Urban mass transport service with large carrying capacity;

1.1.3.5           Advertisement and promotion services;

1.1.3.6           Audiovisual services; motion picture and video recording and distribution; and

1.1.3.7           Accounting and auditing services.

1.1.4 Areas of investment exclusively reserved for domestic investors:

1.1.4.1           Banking, insurance and microfinance businesses, excluding capital goods finance business;

1.1.4.2           Transmission and distribution of electrical power through integrated national grid system;

1.1.4.3           Primary and middle level health services;

1.1.4.4           Wholesale trade, excluding wholesale of petroleum and petroleum products and wholesale of own products produced in Ethiopia, electronic commerce;

1.1.4.5           Retail trade, excluding retail of and electronic commerce as provided under appropriate law, of own products produced in Ethiopia;

1.1.4.6           Import trade, excluding liquefied petroleum gas and bitumen;

1.1.4.7           export trade of raw coffee, khat, oil seeds, pulses, minerals, hides and skins, products of natural forest, chicken, and livestock including pack animals bought on the market;

1.1.4.8           Construction and drilling services below Grade I;

1.1.4.9           Hotel, lodge, resort, motel, guesthouse, and pension services, excluding those that are star-designated;

1.1.4.10        Restaurant, tearoom, coffee shops, bars, nightclubs, and catering services, excluding star-designated national cuisine restaurant service;

1.1.4.11        Travel agency, travel ticket sales and trade auxiliary services;

1.1.4.12        Tour operation;

1.1.4.13        Operating lease of equipment’s, machineries and vehicles, excluding industry-specific heavy equipment’s, machineries and specialized vehicles;

1.1.4.14        Making indigenous traditional medicines;

1.1.4.15        Producing bakery products and pastries for domestic market;

1.1.4.16        Grinding mills;

1.1.4.17        Barbershop and beauty salon services, smithery, and tailoring except by garment factories;

1.1.4.18        Maintenance and repair services, including aircraft maintenance repair and overhaul (MRO), but excluding repair and maintenance of heavy industry machineries and medical equipment;

1.1.4.19        Aircraft ground handling and related services.

1.1.4.20        Saw milling, timber manufacturing, and assembling of semi-finished wood products;

1.1.4.21        Media services;

1.1.4.22        Customs clearance service;

1.1.4.23        Brick and block manufacturing;

1.1.4.24        Quarrying;

1.1.4.25        Lottery and sports betting;

1.1.4.26        Laundry services, excluding those provided on industrial scale;

1.1.4.27        Translation and secretarial services;

1.1.4.28        Security services;

1.1.4.29        Brokerage services;

1.1.4.30        Attorney and legal consultancy services; and

1.1.4.31        Private employment agency services, excluding such services for the employment of seafarers and other similar professionals that require high expertise and international experience and network.

1.1.4.32        Transport services, excluding the following areas:

(a)            Railway transport services;
(b)            Cable-car transport services;
(c)            Cold-chain transport services;
(d)            Freight transport services having a capacity of more than 25 tones; and
(e)            Transport services reserved for joint investment with the Government or domestic investors.

Disclaimer: This information is intended as a general overview and discussion of the subjects dealt with. The information provided here was accurate as of the day it was posted; however, the law may have changed since that date. This information is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. Mehrteab Leul & Associates is not responsible for any actions taken or not taken on the basis of this information. Please refer to the full terms and conditions on our website.

Copyright©2020 Mehrteab Leul & Associates. All rights reserved.

Holding company is a company that typically confines its activities to owning stock/shares in and supervising management of other companies. In Ethiopia, neither the repealed Commercial Registration and Business Licensing Proclamation No. 686/2010, nor the Commercial Code of 1960 gave recognition to the formation of holding companies. However, practically, there are de facto group of affiliated and holding companies in Ethiopia. For instance, MIDROC Ethiopia Groups, East African Holdings, DH Geda Group of Companies and Kangaroo Business Groups are among the practical examples of holding or group of related/affiliated companies. 

To accommodate the practical situation in this regard, the new Commercial Registration and Business Licensing Proclamation No. 980/2016, which came into force on the 5th of August 2016, recognizes the formation of holding companies. This law provides that two or more private limited companies can establish a holding company. The holder company shall be jointly and severally liable with its member companies to the claim of third parties. 

Additionally, the new law recognizes and regulates franchisee trade agreement, border trade business and opening of branch offices by foreign chamber of commerce in Ethiopia. Furthermore, the new law prohibits operating as a sole importer or distributor. It also relaxed the rules on the requirement of certificate of competence. 

Trademark, Trade Name and Firm/Company Name in Ethiopia

Trademarks

Under the Ethiopian legal system, trademarks are regulated by the Trademark Registration and Protection Proclamation No.501/2006 (the Proclamation) and the Trademark Registration and Protection Council of Ministers Regulation No. 273/2012 (the Regulation). The Proclamation defines a trademark as “any visible sign capable of distinguishing goods or services of one person from those of other persons and it includes words, designs, letters, numerals, colors or the shape of goods or their packaging or the combinations thereof. ” (Article 2 (16)) The Regulation provides that the use of trademarks means attaching a trademark to goods or packaging or labeling of goods; displaying the trademark closely associated with the goods; placing the trademark in advertising or promotional material in relation to goods or services; or in any other way establishing a relationship between the trademark and the goods or the services (Article 2 (6)).

Trademarks are registered in Ethiopia by filing an application for registration with the Ethiopian Intellectual Property Office (EIPO). Following this, the application will undergo formality and substantive examinations. If the application is accepted, a notice inviting possible opposition to the registration of the mark will then be published in a gazette having nationwide circulation. If no opposition is lodged, EIPO will register the mark and issue a certificate of registration in favor of the registrant. Once registered, trademarks have to be renewed every seven years. 

Trade Names

Trade names are regulated under the Commercial Code of Ethiopia and the Commercial Registration and Business Licensing Proclamation No. 686/2010 (the Registration Proclamation). The Commercial Code defines a trade name as “the name under which a person operates a business and which clearly designates its business.” (Article 135 of the Commercial Code cum Article 2 (9) the Registration Proclamation)

Under Ethiopian law, any person desiring to engage in a commercial activity shall register its trade name at the place where it is registering in the commercial register. Before the registration of a trade name in the commercial register and in the trade name register, it shall be verified that the trade name has not been registered already. In order to verify this, there is a legal requirement to cause the publication in a newspaper which has a nationwide distribution, at the expense of the applicant, of a notice indicating the subsequent registration of the trade name. Where no objection is lodged against the registration of the trade name within 15 days following publication of the trade name in a newspaper, the registering office will issue a trade name registration certificate to the applicant upon the applicant’s payment of the necessary fee. The registration of a trade name shall be a prima facie evidence of entitlement to and validity of the same trade name. 

Company/Firm Names

Company/firm names are regulated by the Ethiopian Commercial Code of 1960 (The Code) . There is no express definition given as to what constitutes a company/firm name.  However, a firm name or company name is impliedly provided for under Articles 135 (2), 207 (3), 280 (3), 305, 514, etc. of the Code. The Code’s rules on share companies provide that company name shall be as “agreed but shall not offend public policy or the rights of third parties and shall include the words ‘Share Company’” (Article 305). Similarly, the rules of the Commercial Code on private limited companies provide that a private limited company may have a firm-name which may indicate the nature of its business and the firm-name shall be followed by the words “Private Limited Company” (Article 514).

Firm/company name is used to identify and distinguish business organizations from each other for the purpose of allocating rights and duties attributable to them. It is possible to apply to the registering office to reserve a given firm/company name. In order to do this, the applicant must submit three alternative names to the registering office. After conducting a name search, if one of the names fulfils the requirements under Ethiopian commercial law and is available for use, the registering office will reserve/register the name. Once reserved, a company name can only be valid for a period of six months. This means that an entity under formation must be incorporated under the company/firm name within six months from the date the name was reserved/registered. Before signing memorandum and articles of association, founders or members of a business organization shall first reserve/register a firm/company name because the company name has to feature in these documents.

Individual traders and business organizations (including foreign investors) must have a firm name or company name registered with the concerned government organ before commencing business in Ethiopia. Regarding the institutional frameworks, it is the EIPO that has a mandate to register trademarks whereas the Ministry of Trade, Ethiopian Investment Commission and regional trade bureaus are empowered to register and administer trade names and company names in Ethiopia. 

In conclusion, it is possible to have trade name which is the same as or different from trademark and/or company name and vice versa. However, a business organization can have only one company/firm name and more than one trademarks and trade name.