Fiscal Policies:

OBJECTIVES:

a) Promote the optional allocation of resources across sectors, institutions and regions

b) Promote an equitable distribution of income and wealth so that the benefits of development are over time more and more equitably distributed across members of the society.

c) Enhance the competitiveness of Eritrea's export products in foreign markets.

d) Ensure adequate incentives for both domestic and foreign private capital so as to achieve an increasing rate of investment overtime.

e) Promote domestic savings.

f) Foster greater competition in the domestic market.

g) Ensure that the revenue yield of the tax system as a whole grows at least in line with the growth rate of GNP.

TAX REGIME:
A. DUTIES & TAXES LEVIED ON IMPORTS & EXPORTS:

•   Capital goods, intermediates, industrial spare parts and raw-materials pay a nominal customs duty of 2%.
•   Raw materials and intermediate inputs shall be subject to 5% sales tax.
•   However, all sales tax on all materials and inputs that has been used for export production will be rebated.
•   Exports are exempted from export duties and sales taxes.

B. INCOME TAX:

•   On personal income from 2%-30%
•   On non-corporate profit 2%-30%
•   On corporate profit, flat rate of 30%
•   On rent income from 2%-30%
•   There shall be no taxes on declared dividends.
•   Any net loss incurred in one year may be set off against taxable business income in the next five years, earlier losses being set off before later losses.

Monetary

Regulations:

•  A unified exchange rate of ERN 15 per $ 1 applies to all transactions.
•  Authorized banks are officially allowed to transact freely in the foreign exchange markets.
•  Travelers are required to declare their foreign currency holdings upon entry or departure as of January 2005.
•  The bank of Eritrea (BE) prescribes a 0.50% commission on sales and a 0.25% commission on purchases of foreign exchange, except for bank note transactions.
•  Authorized dealers are permitted, but not required, to levy an additional service charge of up to 0.25% for buying and 0.75% for selling foreign exchange.
•  The bank of Eritrea (BE) oversees all foreign exchange transactions of the authorized dealers. It may from time to time issue regulations, directives and instructions on foreign exchange matters. The National Licensing office issues licenses for importers, exporters, and commercial agents; the ministry of Trade and Industry regulates foreign investments. The Asmara Chamber of Commerce issues certificates of origin for exports.
•  Most imports financed with official foreign exchange are effected under LCs or on a cash-against documents basis.

Trade

regulations:

Objectives of Trade Policy:

a. Promote economic growth and a healthy balance of payments.

b. Expand access to sources of raw materials, technology and know-how.

c. Remove domestic market limitations for marketing of outputs and thereby improve employment opportunity.

d. Enhance efficiency in production and competitiveness in price and quality of commodities and services.

e. Promote regional cooperation and economic integration.

f. Increase attraction of Eritrea to direct foreign investment.

Short and Long-term Trade Policies:

a. The government will foster liberal internal and external trade regimes with limited interventions that would not contradict the tenets of free trade. This will mean, among other things, liberalizing and simplifying the licensing regime and reducing and eliminating tariff and non-tariff barriers.

b. The government will foster export based industries and services by providing:

•   Preferential financing
•   Assistance in international market penetration
•   Information backup (information with regard to new products and processes, foreign market entry requirements, new laws, regulations, etc.)
•   Assistance in meeting the rigorous quality standard required by the international market. To this end, there will be facilities (Standard Institute of Equivalents) to measure and verify that world standards are met.

c. Participation in regional bilateral and multilateral trade and economic cooperation will be actively encouraged. Similarly, access to preferential trade agreements and zones will be sought.

d. The government will assist and encourage the private sector to play a leading role in both the domestic and external markets. The public sector role will be limited to regulatory functions, selected price stabilization roles, and the import or export or critical commodities and supplies, the requirements for which cut across sectors.

e. The government will help bui8ld the institutional capacity to help make Eritrea a trading nation.

f. Participation of Eritreans living abroad in trading activities will be encouraged and supported.

Requirements For Foreign Investment / Joint ventures:

The policy principles in regard to the promotion of investments:

•   Private investment, both local and foreign, is allowed to participate in all sectors of the economy with no restrictions and discrimination.
•   The government is taking all necessary policy and other supportive measures to promote, encourage and develop the private sector and protect its interests.

DOMESTIC CAPITAL AND FOREIGN DIRECT INVESTMENT (FDI)

•   Domestic capital and FDI are given equal opportunity.
•   FDI is welcome with open and equal access to the economy available to the local investor. All sectors of the economy are open to foreign investors.
•   Inflow of FDI is encouraged by a conductive investment atmosphere.
•   Foreign capital may establish an enterprise on its own and/or in partnership with local capital.

Tax Incentives:

A. DUTIES AND TAXEX LEVIED ON IMPORTS & EXPORTS

•   Capital goods, intermediates, industrial spare parts and raw-materials pay a nominal customs duty of 2%.
•   Raw-materials and intermediate inputs shall be subject to 5% sales tax.
•   However, all sales tax on all materials and inputs that have been used for export production will be rebated.
•   Exports are exempted from export duties and sales taxes.

B. INCOME TAX

The marginal tax rates range, as follows:

• On personal income from 2%-30%
• On non-corporate profit 2%-30%
• On corporate profit, flat rate of 30%
• On rent income from 2%-30%

- Profit derived from mining activities will be taxed as per the mining legislation (proclamation No 69/1995)
- There shall be no taxes on declared dividends.
- Any net loss incurred in one year may be set off against taxable business income in the next five years, earlier losses being set off before later losses.

Free Trade Zones:

In an attempt to boost export by creating conductive investment environment, at present, the government has enacted proclamation NO 115/2001 with provisions that permit to establish free zones in Eritrea. Some articles of the proclamation are as follows:

Article 24: GRANTING OF LICENSES

The Authority may grant or refuse to grant to any person:
a. a license to develop and/or manage a free zone; or
b. a license for trading or engaging in industrial or storage or other activities.        

Article 25: APPLICATION FOR A LICENSE

1. Any person may apply to the authority for:
a) a developer's license; and/or
b) a license for trading or engaging in industrial or storage or other activities

2. Each application shall
a) be in writing
b) addressed to the authority
c) specify the free zone to which the application relates
d) be supported by information required and prepared in special forms.

3. In deciding whether to grant or refuse a license, the authority shall have regard to the extent to which the proposed activity will contribute to:
a) the growth of employment and exports;
b) the development of worker skills & technology;
c) the development of the surrounding region; and
d) other priority government objectives;

4. If the project is industrial, the applicant should explain by simple statement approximately the quantities to be imported as raw material, the final products, his or her requirements for water, electricity, gas and labour.

5. For any license the applicant shall pay all the requisite fees to the authority.

IMPORT & EXPORT OF GOODS:

1. Free zones established under this proclamation shall operate under customs control pursuant to the  customs proclamation (proclamation 112/2000) and free zone customs regulations issued by the minister under article 60 (1) of the customs proclamation.

2. The investors may import or export all kinds of goods, except the prohibited items, with out payment of any customs duties or taxes provided all customs procedures are observed.

3. Goods imported into and exported from a free zone shall, pursuant to article 60(2) of the customs proclamation, be exempted from all import and export licensing requirements and other restrictions other than those imposed on grounds of public morality or order, public hygiene or health, or relating to the protection of patients, trademarks, copy rights, and other intellectual property.

Article 31: TAX EXEMPTION

1. Persons with a free zone developer's license granted under article 24 shall be granted exemption from the payment of any or all taxes, including income tax from personal income, profit, income from rent, sales tax, service tax, excise tax, stamps duty, tax dividends and with holding taxes for a period of 15 years from date of issue of the license.

2. Any investor engaged in trading or industry or storage or other activities in the free zone may not pay any tax including taxes for his or her profit or bank interest from accounts or bank business documents or shares.

Article 32: REPATRIATION OF INCOME AND PROFIT

Foreign investors may repatriate income and profits arising from activities in a free zone permitted in any license without restriction.

Article 33: SETTLEMENT OF INVESTMENT DISPUTES

1. Investment disputes that arise in a free zone can be settled in a manner agreed between the parties in the dispute, or if there is an agreement between Eritrea and the  home country of the other party, by that agreement, or by using the International Convention for the settlement of Investment Disputes (ICSID) or by arbitration.

2. An arbitration tribunal shall consist of two arbitrators appointed by the two arbitrators failing to agree on the nomination of a third member within 15 days, the matter shall be refereed to the  chief Executive of the authority who shall appoint the chairperson of the Arbitration Tribunal.

Article 34: THE OPERATION OF FOREIGN CURRENCY ACCOUNTS

1. Persons holding a free zone license issued under article 24 shall be permitted to operate a foreign currency account with a bank in Eritrea.

2. Investors are permitted to deal in all currencies to transfer, receive, pay open letter of credit and engage in all types of bank activity with-out any restriction.

3. The Bank of Eritrea shall be consulted by the Authority about the terms and conditions referred to sub-article (2) of this article.

4. The Bank of Eritrea shall supervise the operation of the foreign currency accounts. It shall be empowered to request any information it considers necessary from the account holder or concerned bank.

Environment

Legislation:

The Department of Environment as the responsible body for coordinating and monitoring all environmental issues, has been diligently working to prepare the Environmental law for the past few years.
The Government of Eritrea and the UNDP have agreed on the preparation of Environmental Framework Law so as to enable to address the Environmental issue in its broader sense.
As a step forward to the preparation of an Environmental Frame work Law which will be used as an Umbrella law, a draft of Support the Development of Legislative and Regulatory Framework is in place.
The Environmental Framework Law preparation is planned to be carried out in the years 2006 -2007.
Currently the department of environment follows the Environmental management plan and Environmental Impact assessment procedures and guidelines.

Labour Laws:

On October 15, 1999 Eritrea signed the following seven ILO core conventions.

1. Convention No. 87 Freedom of Association and protection of the Right to organize (1948)
2. Convention No. 98 Right to organize and collective Bargaining (1949)
3. Convention No. 29 Forced labour (1930)
4. Convention No. 105 Abolition of forced labour (1957)
5. Convention No. 111 Discrimination (Employment and  Occupational) (1958)
6. Convention No. 100 Equal Remuneration (1951)
7. Convention No. 138 Minimum Age (1973)

The government of Eritrea has also declared the labour proclamation of Eritrea-proclamation No 118/2001, which is prepared to reflect as much as possible the ILO conventions.