European Union, on September 20, 2016, accepted Bosnia and Herzegovina’s membership application and welcomed the progress made by the Bosnia and Herzegovina authorities in implementing their Reform Agenda 2015-2018. The Economic Reform Agenda represents a crucial instrument for Bosnia and Herzegovina economic-social development and it creates conditions for stepping-up European integrations process of Bosnia and Herzegovina. Agenda defines numerous reform in the area of public finance, business climate, labour market, social welfare reform, rule of law, and public administration reform.
The European Commission’s Questionnaire is prepared and will be handed over to EU Commission on February 28th, 2018. By the end of 2018 or at the beginning of 2019 Bosnia and Herzegovina is expected to gain the Candidate Status.
Economic activity of Bosnia and Herzegovina in 2017 recorded the growth in exports of goods with rate of 16,5 %, as well as slight increase in the final consumption. The largest trading partner of Bosnia and Herzegovina is EU, covering 70,7% of overall foreign trade of the country.
Foreign direct investments in Bosnia and Herzegovina rose to €197.7 million in the first half of 2017, according to Central bank data, representing an increase by 66.8 % compared to the prior-year period.
One of the reasons for investing in Bosnia and Herzegovina could be favorable tax system. Bosnia and Herzegovina has one of the lowest rates of VAT (17%) in the region and Europe, as well as the very acceptable corporate tax rates that are also among the lowest in the region and Europe (10%)
A) Tax incentives for corporate income tax
In Federation of Bosnia and Herzegovina:
Law on Corporate Income Tax enables foreign investors to enjoy the following benefits
- The taxpayer who invests in production equipment more than 50% of the total profit in the current tax period, shall be reduced of the obligation of the calculated tax for 30% of the amount in the year of investment.
- The taxpayer who in a period of 5 consecutive years makes investments from its own funds, in the total amount of €10 million starting with the first year when taxpayer has to invest at least €2 million, shall be reduced of the obligations of the calculated income tax for 50% of the amount in the year of investment.
- The taxpayer is entitled to a tax-deductible expense in the double amount of the gross wage paid to newly employees if meets the following conditions:
- Duration of the employment contract must be at least for a period of 12 months with full-time working hour
- New employee was not employed with the taxpayer or a related person in the previous five years.
In Republika Srpska:
A taxpayer who in the territory of the Republika Srpska invests in equipment, facilities and real estate for carrying out production activities in the amount of more than 50% of realized profit (the tax base) for current tax period, the income tax liability shall be reduced by 30%.
A-1) Capital losses and its compensations
Laws on corporate tax income provides that realized capital loss, for the company, will be transferred and compensated by the reduction of the tax base (in the period of 5 years) – but only for losses realized in the company located in the individual entity.
A-2) Reservations and tax reductions
The laws on corporate tax income in both entities provide the reducing of tax base for, by the laws, determined reservations (e.g. reservations for environmental protections etc.)
B) Personal tax incentives
Certain incentives are provided by the laws on personal income tax in the entities such as tax deductions that include personal exemption and deduction for each dependent family member, which increases and decreases the basis for calculation of income tax.
C) Contributions benefits
Laws on social security contributions have foreseen certain benefits such as: in the textile, leather and footwear industry, the tax base is determined as the product of the average monthly salary in the entities with the lower coefficient.
D) Employing unemployed persons
According to the laws in both entities, at the beginning of every year, the Employment Bureaus publish a public call – the program for co-financing of employment - and companies can apply. The aim of the program is covering/paying wage costs for a period of one year - for employees taken from the Employment Bureaus.
E) Agreements on avoidance of double taxation
Bosnia and Herzegovina has signed the agreements on avoidance of double taxation with 39 countries which refer to the laws that regulate corporate income tax, property tax and personal income tax. Depending on the particular country, it is provided to pay certain taxes only in one country (or tax difference) if the taxpayer is operating a business in two countries which have signed the agreement. The list of countries is as follow:
|No.||Countries||Avoiding double taxation|
|9||Czech Republic||In force|
|16||Iran, Islamic Republic of||In force|
The former Yugoslav Republic of
|33||Sri Lanka||In force|
|38||United Arab Emirates||In force|
|39||United Kingdom and Northern Ireland||In force|
|Global Competitiveness Index||RANK 103|
|Ease of doing business||RANK 86|
|Starting Business rank||RANK 175|
|Global logistics report||RANK 97|
|Rank||Institutions||Infrastructure||Health and primary education||Higher education and training||Labor market efficiency||Technological readiness||Business sophistication||Innovation|
|Bosnia and Herzegovina||126||100||56||91||123||69||115||123|
|Bosnia and Herzegovina||0.081||0.083||0.086||0.063||0.061||0.059|
|EU - 28||0.209||0.205||0.204||0.121||0.116||0.114|
According to preliminary data of the Central Bank of Bosnia and Herzegovina (CBBH) on FDI for the first half of 2017 within the Balance of Payments (with estimated reinvested earnings) Bosnia and Herzegovina attracted 387 million BAM or €198 million. Data for the first six months indicate increase of FDI for 66.8% compared with the same period of 2016 either 1.3% compared with five years average.1
Overview of annual amount of FDI and preliminary data for the first half of a year, Period 2010 - 2017, in millions of EUR
|2010||2011||2012||2013||2014||2015||2016||I - VI 2017|
|Annual amount (FDI Flows)||307||357||307||208||415||314||274||/|
|First half of a year (Balance of payments)||166||114||136||264||245||213||119||198|
The preliminary data for a certain period of the year are not necessarily an indicator of annual trends. However, on the basis of projects implemented by foreign investors in Bosnia and Herzegovina, and the expressed interest of potential investors, we can be optimistic and expect growth of foreign direct investments in the future.
Total amount of Foreign Direct Investment (FDI) in Bosnia and Herzegovina was €6.6 billion (€6,629 million). In the structure of FDI, for the period May 1994 till December 2016, equity and reinvested earnings were €4.8 billion (€4,843 million) and other capital was €1.8 billion (€1,786 million).
According to the FDI Stock by countries, the largest share still refers to Austria (€1.3 billion), Croatia (€1.1 billion), Serbia (€1.1 billion) and Slovenia (€486 million).1Since the data is collected by different methodologies, both annual and quarterly amounts of FDI, within FDI Flows and the Balance of Payments are not identical. Within the FDI Flows are available data for the first half of 2017 but without the amount of reinvested earnings. FDI data, based on FDI Flows, for the period January – June 2017 confirm the increased by 29% compared with the same period of the previous year.
Top investor countries in Bosnia and Herzegovina, May 1994 - December 2016
Total amount €6.6 billion
|All other Countries||801|
Due to the good reputation and long industrial tradition of Bosnia and Herzegovina, the manufacturing sector received the largest amount of FDI (34%). A significant share of investment has been in banking sector (24%).
FDI Stocks by Industry, May 1994 - December 2016
|Other financial service||2%|
Based on value within Stock of FDI in December 2016, main activities and investors countries per activities
|Activities:||Main Investors Countries:|
|Financial service activities, except insurance and pension funding;||Austria / Croatia / Slovenia;|
|Telecommunications;||Serbia* / Slovenia;|
|Wholesale trade, except of motor vehicles and motorcycles;||Croatia, Slovenia, Austria, Germany, Netherlands;|
|Manufacture of coke and refined petroleum products;||Russian Federation;|
|Manufacture of food products;||Austria / Serbia / Croatia;|
|Retail trade, except of motor vehicles and motorcycles;||Serbia / Croatia / Austria / Spain / Germany / Switzerland / Slovenia;|
|Real estate activities;||Kuwait / Saudi Arabia / Croatia / United Arab Emirates / Austria|
|Manufacture of other non-metallic mineral products;||Austria / Netherlands / Croatia;|
|Manufacture of chemicals and chemical products;||Serbia;|
|Mining*;||United Kingdom / Austria / Croatia;|
FDI Flows in Bosnia and Herzegovina
Flows of FDI in Bosnia and Herzegovina, by years, € million
Main Investors Countries in last five years
|Year and amount per year in € million:||Main countries according value of FDI per year:|
|2016||274||Croatia / Austria / United Arab Emirates;|
|2015||314||Croatia / Netherlands / Italy;|
|2014||415||Russian Federation / Austria / Croatia;|
|2013||208||Serbia / Luxemburg / United Kingdom;|
|2012||307||Russian Federation / Austria / Croatia;|
Main Activities according amount of FDI:
|Year||Main activities according value of FDI per year|
|2016||Wholesale trade, except of motor vehicles and motorcycles / Financial service activities, except insurance and pension funding / Manufacture of tobacco products;|
|2015||Financial service activities, except insurance and pension funding / Real estate activities / Wholesale trade, except of motor vehicles and motorcycles;|
|2014||Real estate activities / Manufacture of coke and refined petroleum products / Financial service activities, except insurance and pension funding;|
|2013||Financial service activities, except insurance and pension funding / Wholesale trade, except of motor vehicles and motorcycles / Telecommunications;|
|2012||Wholesale trade, except of motor vehicles and motorcycles / Financial service activities, except insurance and pension funding / Retail trade, except of motor vehicles and motorcycles;|
“We were, amongst other benefits, attracted to Bosnia and Herzegovina by competitive labor force prices in comparison to high professional standards of local employees. Also, in the first years of operation, we had enjoyed tax policies which were highly in favor of foreign investors. A stable local currency pegged to Euro, low inflation rate as well as the rising incentives towards integration into the EU market, were additional levers for us to invest and settle in this area.”