Ethiopia's New Startup Proclamation No. 1396/2025

Ethiopia recently enacted the Startup Proclamation No. 1396/2025 (the "Proclamation"), introducing a long-awaited legal framework for the recognition, regulation, and support of startups and innovation-driven enterprises in Ethiopia. This insight highlights the main provisions and implications of the Proclamation.

Startup Definition and Designation

The Proclamation establishes a system of designating entities seeking to operate as Startups. Under the Proclamation, a Startup is defined as a person or group with no or limited business history that creates economic value by developing or adapting innovative, technology-driven products, services, or processes that are scalable and capable of transforming markets.

While a formal designation as a Startup by the Ministry of Innovation and Technology (MInT) is not mandatory, it is required to access the incentives, privileges, and support mechanisms provided under the Proclamation. To qualify for designation, a Startup must meet specific criteria, including:

• Being less than five years old from the date of its establishment;
• Owning the product, process, or service it offers, or submit a legal affidavit demonstrating ownership rights;
• Maintaining at least 25% ownership by the founder(s); and
• Not being a public company.

Once approved, MInT will issue a certificate of designation specifying the startup's name, founders, growth stage, and industry sector. This certificate serves as formal proof of the startup's designated status and is valid for a period of two years. Renewal applications must be submitted at least 30 days before expiration, and a Startup may hold the designation for a maximum cumulative period of eight years. Additional procedural requirements governing the registration and licensing of Startups will be provided in a Directive to be issued by the Ethiopian Investment Board.

Startup Ecosystem Builders

The Proclamation also formally introduces Startup Ecosystem Builders, recognizing the critical role they play in supporting startups. A Startup Ecosystem Builder refers to any person or entity that actively contributes to the establishment, growth, and sustainability of startups. This includes incubators, accelerators, co-working spaces, private equity funds, venture capital firms, angel investors, financial institutions, higher education institutions, technical and vocational training centers, research and development agencies, and non-governmental organizations that promote innovation and entrepreneurship. Similar to the Startup designation, designation is not mandatory for Startup Ecosystem Builders unless they seek to access the incentives under the Proclamation. To qualify for designation, Startup Ecosystem Builder applicants must:

• Hold the necessary commercial registration, business license, or investment permit;
• Demonstrate adequate resources to support startups, including technological infrastructure, financial capacity, physical facilities, and access to expert mentorship; and
• Be managed by individuals with proven competence in business development and innovation.

Upon approval, MInT issues an official certificate of designation, confirming the Startup Ecosystem Builder's status and defining its role within the startup ecosystem. Unlike Startups, there is no statutory maximum duration for holding the Startup Ecosystem Builder designation. The designation remains valid for five years, after which renewal is required, subject to verification of continued compliance with the prescribed requirements and performance standards. Further procedural requirements governing the registration and licensing of Startup Ecosystem Builders will be set out in a Directive to be issued by the Ethiopian Investment Board.

Foreign Startups and Ecosystem Builders

Foreign investors are permitted to participate in Ethiopia's startup scene either as Startups themselves or as Ecosystem Builders. The Proclamation defines a Foreign Investor, consistent with the Investment Proclamation, as any person or entity that has invested foreign capital in Ethiopia, including: a foreign national; an enterprise in which a foreign national holds an ownership stake; an enterprise incorporated outside of Ethiopia by any investor; or Ethiopians permanently residing abroad who prefer to be treated as Foreign Investors.

Under the Proclamation, both foreign Startups and Ecosystem Builders benefit from a significant exemption. The Proclamation exempts foreign Startups and Startup Ecosystem from the minimum capital requirements set under the Investment Proclamation No. 1180/2020. In addition, Foreign Startups and Ecosystem Builders are entitled to all the incentives provided under the Proclamation, with the exception of the Startup Grant Program. (as defined below).

The Proclamation also facilitates the entry of foreign talent into the ecosystem. A foreign national intending to join a Startup as a founder or partner is entitled to a work permit valid for three years and is eligible for a Startup Visa. However, the Proclamation does not define the scope or characteristics of the Startup Visa. Accordingly, its practical application will depend on whether it is formally included among the visa categories administered by the Immigration and Citizenship Service and on the procedures and requirements that may be prescribed under the relevant implementing directives to be issued.

Incentives

The Proclamation establishes a comprehensive framework of incentives designed to support and accelerate the growth of designated Startups and Startup Ecosystem Builders. These include financial grants, credit guarantees, tax exemptions, duty-free privileges, and loss carry-forward benefits.

i. Startup Grant Program

The Proclamation establishes the Startup Grant Program, a program designed to provide early-stage funding to help Startups cover essential costs related to their establishment, development, and operation.

Funds obtained through the program may not be used for personal or unrelated commercial expenses. MInT may disburse the grant directly to the designated Startup or through a designated Startup Ecosystem Builder. A designated Startup that has received a grant is not eligible to reapply for another grant within one year of receiving the initial funding.

ii. National Credit Guarantee Scheme

The Proclamation also establishes a National Credit Guarantee Scheme (the "Scheme"), which is supervised by the National Bank of Ethiopia (NBE). The Scheme aims to enhance access to finance for designated Startups, designated Startup Ecosystem Builders, and micro, small, and medium enterprises (MSMEs) by providing loan guarantees to eligible entities. This mechanism enables beneficiaries to obtain credit from financial institutions that might otherwise be unavailable due to limited collateral or credit history. The objectives of the Scheme include:

• Issuing credit guarantees to designated Startups, Ecosystem Builders, and MSMEs;
• Investing its assets to ensure sustainability and growth; and
• Making payments to participating financial institutions on valid claims, in accordance with the terms of the issued guarantees.

Beneficiaries under the Scheme are required to repay the full amount of their loans and must use the borrowed funds strictly for the purposes stated in their loan applications.

iii. Tax Exemptions

The Proclamation offers a range of tax incentives designed to alleviate the financial burden on designated Startups and promote innovation-driven entrepreneurship. Designated Startups are entitled to benefit from the investment incentives available under the applicable investment laws. In addition, for the duration of their designation period, designated Startups enjoy:

• Income tax exemption
• Withholding tax exemption; and
• Income tax exemption on dividends distributed to shareholders.

Moreover, foreign nationals employed by designated Startups are exempt from employment income tax. The Proclamation further clarifies that any grant, incentive, or donation received by a designated Startup that does not involve debt or equity conversion will be considered non-taxable income.

iv. Loss-Carry Forward

Another key incentive introduced under the Proclamation is the loss carry-forward mechanism. Designated Startups that incur financial losses during their income tax exemption period are permitted to carry these losses forward for up to half of the duration of the expired exemption period. This provision helps reduce the financial strain on early-stage companies as they transition toward profitability.

Furthermore, the Proclamation provides that investors who have invested in designated Startups that incur losses on their investments are entitled to deduct 100% of such losses from their own financial statements. However, any loss carried forward may only be carried forward for a maximum of two years.

v. Duty-Free Imports

The Proclamation also grants duty-free import privileges to designated Startups, enabling them to import capital goods free of customs duties for up to four years from the date of their designation. Designated Startups that purchase capital goods from local manufacturers are eligible for a refund of duties and taxes paid on inputs used in the production of those goods, as facilitated through the Ethiopian Customs Commission.

Similar duty-free privileges are extended to designated Startup Ecosystem Builders, allowing them to import the capital goods necessary for the establishment, expansion, or upgrading of their facilities.

Establishment of Fund of Funds

The Proclamation establishes a "Fund of Funds", organized as a share company jointly owned by the Ethiopian government, private sector participants, and potentially Foreign Investors. The Fund of Funds serves as a key financing mechanism within the startup ecosystem, primarily investing in venture capital funds that, in turn, provide financing to Startups.

By channelling capital through established investment vehicles, the Fund of Funds aims to stimulate venture financing, attract foreign capital, and strengthen international linkages that support the growth of Ethiopia's domestic startup ecosystem. Once the Collective Investment Scheme Directive is issued by the Ethiopian Capital Market Authority, it is expected to have a material impact on the regulatory treatment and structural design of the Fund of Funds, including its governance, investor participation, and compliance obligations.

Conclusion

By establishing a clear legal framework for the recognition and support of startups and ecosystem builders, introducing incentive schemes that are more favourable than those ordinarily available under the general investment regime, and creating financing mechanisms such as the Grant Program, Fund of Funds, and the Scheme, the Proclamation lays an institutional foundation for the sustainable growth of the country's startup ecosystem.

The effectiveness of this framework, however, will ultimately depend on the speed and quality of its implementation. In particular, the various directives and guidelines to be issued by the MInT and the Ethiopian Investment Board will be critical in operationalizing the Proclamation. The comprehensiveness, clarity, and timeliness of these instruments will determine the extent to which the new regime succeeds in fostering innovation, entrepreneurship, and access to finance.

In this regard, it is notable that MInT has already commenced the collection of information on existing startups as part of its ecosystem preparedness activities under the approved national action plan for implementing the Proclamation. This initiative aims to raise awareness of the new framework and enhance engagement among ecosystem participants, representing an important early step toward the effective implementation of the Proclamation.

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