This briefing has been published by Atkilit Bekele of Mesfin, Tafesse & Associates, Ethiopia, who has agreed to Simmons & Simmons making it available online.
Registration and licensing are the dual obligations of any business person planning to operate in Ethiopia. These obligations have been regulated for the past six years by the Commercial Registration and Business Licensing Proclamation No.686/2010 (Previous Proclamation). The Previous Proclamation has now been repealed and replaced by the Commercial Registration and Business Licensing Proclamation No.980/2016 (the New Proclamation) effective from 05 August 2016.
No more annual renewal of commercial registration certificate
A business organisation acquires a legal personality through registration. The cancellation of the Commercial registration certificate puts an end to its legal personality.
The Previous Proclamation required a commercial registration certificate to be renewed either every year or once in every five years on the basis of the need of the business organisation. The choice of renewing every five years has never been practiced. Therefore, all business entities spend substantial time renewing their principal registration certificate every year.
Under the New Proclamation, the commercial registration certificate is not required to be renewed unless changes occur, for example, change of address.
Acknowledging franchisor-franchisee agreement
The New Proclamation introduces the concept of franchise arrangements. The Previous Proclamation was silent on the subject and, in practice, it was not clear whether the Ministry of Trade (MOT) would recognise such agreements which were, for all practical purposes, were presumed to be governed based on the principles of the law of contracts in general.
The New Proclamation has provided a definition of franchise agreement. It defines it as an agreement concluded for consideration between the franchiser and the franchisee in order to undertake business activities by using the trade name of the known product or service in order to share the nature and experience of the work under the leadership of the owner of the product and the service that have got recognition.
The New Proclamation calls for the products of the franchisee to be at the same level of quality with the products of the franchisor ie consumers should be able to get the same quality of product and service from the franchisee. Furthermore, franchise agreements are now clearly required or permitted to be registered. Having underlined the obligation of registration, the New Proclamation postpones detailed steps and procedures necessary for the registration to future regulations to be enacted to ensure its implementation. The New Proclamation, together with the implementing regulations and directives, is expected to pave the way for legitimising franchisor and franchisee relationships and clarifying what has been a grey area.
Introducing the concept of a holding company
The concept of a holding company is mentioned under various provisions of the Commercial Code of Ethiopia. However, those few provisions have not been found adequate to enable the business community to fully appreciate the concept and implement it and for the regulatory authorities to acknowledge and facilitate its implementation. The New Proclamation articulates the concept and mechanism to incorporate a Holding Company.
A Holding Company is defined under the New Proclamation as a company incorporating two or more limited liability companies and issued with a special registration certificate and managed by the holder. A Holding Company is made jointly and severally liable to third parties for the liabilities of its member companies.
The registration of a Holding Company will be undertaken by MOT. The requirements for the registration of Holding Company are to be provided under future regulations that will be enacted to implement the New Proclamation. A requirement has been stated that any membership change should be notified to the MOT so that registration certificate will be amended accordingly.
Legally reinforcing the abandonment of exclusive licenses for importers and distributors
Before Ethiopian Industrial Standard Code (EISC) came to effect business persons used to obtain a business license to operate as an exclusive importer or distributer of a product. Due to the introduction of EISC, which is used to categorise the type of business a person wants to engage in, a business license is only issued for business sectors listed in the Code. ESIC does not list exclusive importer or distributer as one business sector. As a result, currently, MOT does not issue a business license for an exclusive importer or distributer. The New Proclamation has confirmed the emerging practice and prohibited traders from being license as sole importer and/or distributer of a product. However, the New Proclamation empowers the Council of Ministers to permit sole importation and distribution based on the type of business and its national significance.
Border trade
The New Proclamation introduces the concept of Border Trade. Border Trade which it defines as a type of commercial activity through which a person or business persons residing at border areas undertake their commercial activities through bilateral agreements or unilateral decisions of the countries sharing border with Ethiopia pursuant to the border trade directive to be issued by MOT, including crossing the border of the country. Traders are required to acquire special boarder trade business license to engage in boarder trade.
Domestic and foreign chamber of commerce
Previously organisations established to support and protect the interests of the business community were considered as a charity organisation and required to be registered by the Charities and Societies Agency. However, due to the decision of the Charities and Societies Agency to exclude chamber of commerce from its jurisdiction, it was unclear as to which legal regime they belong to and which institution should regulate them. The New Proclamation has provided a solution by giving them a legal personality through registration at MOT.
The New Proclamation also allows foreign chamber of commerce’s to open a branch in Ethiopia and conduct the same activities as a domestic chambers of commerce with the approval of MOT.
No more proof of deposit of minimum capital requirement
The Commercial Code of Ethiopia provides that the minimum capital requirements to establish a private limited company and share company are ETB 15,000 (about $715) and 50,000 (about $2381) respectively. Sole proprietors and other forms of partnership were also required to indicate capital during registration. At the time of registration, business persons have been required to show the fulfilment of the capital requirement by producing a bank statement which confirms the deposit of the minimum capital in a block bank account.
This requirement used to discourage start-ups with ideas or knowledge from staring a business for lack of the capital.
However, the New Proclamation allows business persons to start a business by merely declaring their capital and register in the commercial registry without providing a bank statement as to the deposit of the capital in a blocked account. It must be noted though that this amendment does not include share companies which are still required to deposit their capital in a block bank account and show proof prior to registration.
No more competence certificate for renewal purpose
Under the Previous Proclamation, one of the required documents to renew a business license has been a renewed competence certificate issued by the relevant sectoral government institution. The New Proclamation has abolished this requirement by requiring a competence certificate only at the time of registration. MOT will require a renewed competence certificate if a major change occurs, for example, change of address or if the sectoral government institution which issued the competence certificate changes the requirements to be fulfilled in order to acquire the competence certificate.
Introduction of a period to acquire a business license
Unlike the Previous Proclamation which did not set a time limit for businesses to secure their business licenses and start their business operations after their registration, the New Proclamation requires businesses to acquire business license within one year of their registration. If the businesses do not acquire their business license within one year, MOT will be entitled to cancel their commercial registration certificate. However, a business person engaged in manufacturing or engineering or other similar activities is exempted from this time limitation. The exemption will apply only if the business person is able to submit sufficient justification for not completing its investment phase and acquiring a business license. The registration remains valid if the business person applies, every two years within the period set by the law to renew a business license.
The revival of the publication requirement
In the law that the Previous Proclamation repealed, ie the Commercial Registration and Business Licensing Proclamation No.67/1997, as well as in the Commercial Code, publication was one of the requirements to be fulfilled in the process of registering a business. The Previous Proclamation repealed the publication requirement permitting business entities used to assume legal personality without publication.
The New Proclamation revives the requirement of publication, in a newspaper with a nationwide distribution, when a business organisation is established.
Budget year
Different legislations use different time period as fiscal/budget year. The Income Tax for Mining Operation Proclamation No.53/1993, for the purpose of calculating and payment of income tax under the Proclamation, uses 31 December as closing and 01 January as the beginning of the fiscal year.
The Income Tax Proclamation No.282/2002, on the other hand, uses the Ethiopian government budget year which runs from 07 July - 06 July for the purpose of tax assessment. And exceptionally the Income Tax Proclamation states that a business organisation can change its accounting year upon the approval of the Ethiopia Revenue and Customs Authority (ERCA).
The New Proclamation, similar with the Income Tax Proclamation, states that the budget year runs from 07 July - 06 July and allows traders to use the Gregorian calendar as their budget year upon confirmation by ERCA.
Renewal period
The Proclamation requires a business license has to be renewed within four months after the completion of the budget year provided, however, that after expiry of the four months period, the business license can be renewed within the next two months without penalty.
The New Proclamation has slightly changed the provision in its form and provides that a business license has to be renewed within six months after the completion of the budget year. However, it does not have any change on the effect it brought on business entities than clarifying the confusion concerning this.
Submission of complaints on administrative decisions
The Proclamation without further detail provides that any person or business person who is not satisfied with the decision of an administrative organ can lodge an appeal in a regular court.
Under the New Proclamation, complaints on any administrative decisions have to be submitted within ten days after the decision is given. The administrative organ has to notify its decision within five days after it receives the complaint in writing. The applicant can submit its case within two months after the decisions of the administrative organ to a regular court which has jurisdiction. The right of appeal is limited to only issues of law. The introduction of timelines in the grievance review process would contribute to the predictability of the entire grievance hearing mechanism and enhance due process.
Limitation on being a manger of more than one business organisation
The Previous Proclamation limits a “manager of a share company” not be a manager of any other business organisation at the same time. The New Proclamation stretches this limitation by prohibiting any person, not only a manager of a share company, from serving as a manager of more than one business organisations at the same time. The limitation in the Previous Proclamation was a much contested rule by the business community and the New Proclamation appears to exacerbate it.
Penalty
The New Proclamation has added the following new offences:
- Any person who makes or conducts business on a forged business registration or business license will be punished with a fine from ETB 150,000 to 300,000 and with imprisonment from seven years up to 15 years and the goods and/or the service delivery equipment and/or manufacturing equipment with which the business was being conducted shall in addition be confiscated by the government.
- Any person who transfers its business license to third party through sell, lease or gift will be punished with a fine from ETB 50,000 to 100,000 and with imprisonment from five year up to ten years. If the transfer is to made to a foreigner he/she will be punishment with a fine from ETB 200,000 to 300,000 and with imprisonment from seven years to 15 years.
- Any person who does not notify the change address within the period specified in a future Regulation will be punished with a fine from ETB 5,000 to 10,000 and with imprisonment up to three months.
- Any person who made changes which will result in the amendment of the Principal commercial registration but fails to notify the Authority within 30 days will be punished with a fine from ETB 5,000 to10,000 and with imprisonment up to three months.
- Any person who refuses to give information or hides the activity of inspectors, who are appointed to follow the implementation of the New Proclamation and other laws which will be issued to implement this New Proclamation, will be punished with a fine from ETB 5,000 to10,000 and with imprisonment up to three months.
- Any person who violates other provisions of the New Proclamation or the regulations or a public notice which the Ministry of Trade may issue pursuant to this New Proclamation shall be punished with fine from ETB 5,000 to 10,000 and with imprisonment from three years to five years.
