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Bosnia and herzegovina

Serbia
Capital Sarajevo
Population 3,507,000
Area 51,209 SQ KM (19,772 sq mi)
Currency CONVERTIBLE MARK (BAM)
GDP USD 18.17 billion
gdp per capita USD 5,181
FDI (2013-2017) USD 1,903 million
corporate tax 10%
vat 17%

GENERAL OVERVIEW

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. It is expected for Bosnia and Herzegovina to gain the Candidate Status during the year 2019.

Economic activity of Bosnia and Herzegovina in 2017 recorded the growth in exports of goods with rate of 16.8 %, as well as slight increase in the final consumption. The largest trading partner of Bosnia and Herzegovina is EU, covering 68.6% of overall foreign trade of the country.

Foreign direct investments in Bosnia and Herzegovina rose to €398 million in the year 2017, according to Central bank data, representing an increase by 38.19% compared to the prior year (2016).

LEGAL SNAPSHOT

Bosnia and Hercegovina (BiH) has in recent years tried to increase direct foreign investments. Therefore it has adopted and amended several laws and bylaws concerning employment, corporate, financial regulations etc. Although the political environment and complex government structures create certain obstacles to economic development and foreign direct investments, a survey conducted among foreign investors in 2018 gives a pretty optimistic view of investment conditions in BiH as 99% of investors are planning on expending their workforces and 62% of companies intend to increase their investing activities in BiH.

The Stabilization and Association Agreement between the EU and BiH entered into force on June 1 2015. It establishes a close partnership between the EU and BiH and deepens the political, economic and trade ties between the two parties. In 2018, the country adopted the much-anticipated Framework Energy Strategy until 2035, paving the path for investments in energy infrastructure.

TAX INCENTIVES

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
1 Albania In force
2 Algeria In force
3 Austria In force
4 Azerbaijan In force
5 Belgium In force
6 China In force
7 Croatia In force
8 Cyprus In force
9 Czech Republic In force
10 Finland In force
11 France In force
12 Germany In force
13 Greece In force
14 Hungary In force
15 Ireland In force
16 Iran, Islamic Republic of In force
17 Italy In force
18 Jordan In force
19 Kuwait In force
20 Qatar In force
21 North North Macedonia In force
22 Malaysia In force
23 Moldova In force
24 Montenegro In force
25 Netherlands/Holland In force
26 Norway In force
27 Pakistan In force
28 Poland In force
29 Romania In force
30 Slovakia In force
31 Slovenia In force
32 Spain In force
33 Sri Lanka In force
34 Sweden In force
35 Serbia In force
37 Turkey In force
38 United Arab Emirates In force
39 United Kingdom and Northern Ireland In force

SPECIAL ECONOMIC ZONES

There are four active free economic zones in Bosnia and Herzegovina, all of them in the Federation. Three of them function as fully private organisations, whilst the Visoko Free Zone is operated under a PPP arrangement. The zones house around 100 companies. These zones account for 6% of all country exports; employ more than 1 700 people, and had a combined turnover of about EUR 300 million in 2014.

Special economic zones in Bosnia and Herzegovina (2014)

Special economic zone Area (in hectares) Number of users Main operating Industry Number of people employed Total exports (EUR millions)
Hercegovina 43.6 41 Metallurgy to be obtained 22
Visoko 17.1 23 Textile ~1000 228
Vogošća 11 30 Automotive ~500 24
Lukavac 7.5 1 Wood processing 190 7

Type of incentives (fiscal and non-fiscal) in Bosnia and Herzegovina

Incentives Awarded aid Eligibility criteria Condition for use of aid Length of incentives Zone specific
Value-added tax exemptions in free zones Exemption from VAT on goods imported into the zone for production purposes. Be a domestic or foreign company registered and operating in BIH. Located in the zone and undertaking trading activities. No limitation while in the zone. Yes,but not applied
Customs duty exemptions for companies registered in a free zone Customs-free imports of raw material and semi-finished goods, as well as imports of machinery and equipment. Be a domestic or foreign company registered and operating in BIH. Be a domestic or foreign company registered, established and operating in one of Bosnia and Herzegovina’s free zones. n/a Yes
(General) custom duty exemptions Customs-free imports of machinery and equipment (with the exception of passenger vehicles and slot machines). Be a foreign company registered and operating in BIH. Investment to be made by the foreign firm. n/a No
Customs-free imports of all equipment and machinery to be used for reconstruction and renovation purposes. Be a domestic or foreign company registered and operating in a BIH. n/a n/a No
Customs-free imports of raw material and semi-finished goods, as well as imports of machinery and equipment. Be a foreign company registered and operating in BIH. Move production lines to Bosnia and Herzegovina from a third country. n/a No
Customs-free imports of equipment and goods. Be a domestic or foreign company registered and operating in BIH. Goods and equipment to be used solely for trade and promotion purposes. n/a No
Excise exemption for all export goods. Be a foreign company registered and operating in BIH. Undertake export activities.  n/a No
Aid for participation in trade fairs Economic support for companies intending to participate in national and international trade fairs. Be a domestic or foreign company registered and operating in a BIH. Participate in national and international trade fairs in the company’s sector. n/a No
Federation BIH
Tax exemptions after re-investment in the Federation 30% reduction in corporate income tax for the pertinent fiscal year. Be a foreign company registered and operating in FBIH. Re-invest at least 50% of profit in production equipment and machinery. Per fiscal year No
50% reduction in corporate income tax for a period of five fiscal years. Be a foreign company registered and operating in FBIH. Invest a minimum of BAM 20 million (Bosnian marks) in the Federation over 5 years, with an initial investment of at least 4 million BAM. 5 fiscal years No
Tax exemptions based on the creation of new workplaces Chance to claim tax deductions of twice the annual gross salary of each new employee. Be a domestic or foreign company registered and operating in FBIH. Provide a full-time contract lasting at least 12 months AND certify that the worker has not previously worked or has links with the company over the previous five years. 12 months No
Republika Srpska (RS)
Tax exemptions based on the acquisition of property Corporate income tax deductions. Be a foreign company registered and operating in RS. Real estate or property acquired to be used for the production/working needs of the company. n/a No
Tax exemptions based on the creation of new workplaces Corporate income tax deductions. Be a foreign company registered and operating in RS. Employ at least 30 new employees, providing permanent, full time contracts for a minimum of one year. 12 months No

 

Regulatory framework

- Law on Free Zones ("Službeni Glasnik BiH" No. 99/09) Federation BiH ("Službeni Novine FBiH" No. 2/95; 37/04 and 43/04) Republika Srpska ("Službeni Glasnik RS" No. 65/03)
- Custom Law (Instructions on Custom Proocedures in Free Zones, "Službeni Glasnik BiH" No. 91/09 and (Draft) CUstoms Law No. 58/15)
- SUbordinate legal acts delegated to these laws.

 

Zone name Size (ha) Number of investors Cumulative investment in EUR millions
Vogošća 11 30 n/a
Visoko 17 23 n/a
Holc (Lukavac) 7.5 1 n/a
Hercegovina (Mostar) 44 41 n/a

INDEX

Global Competitiveness Index RANK 91
Ease of doing business RANK 86
Starting Business rank RANK 175
Global logistics report RANK 72

Global competitiveness report 2017-2018

Rank Institutions Infrastructure Health Skills Labor market Product market Business dynamism Innovation
Bosnia and herzegovina 111 89 52 87 112 106 106 114

Electricity prices

EUR/kwh HOUSEHOLD NON HOUSEHOLD
  2015 2016 2017 2015 2016 2017
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

Monthly salary

Net average monthly salary (2017) € 448

Gross average monthly salary (2017) € 676

INVESTORS CONFIDENCE

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.

EDINA VELIĆ, HEAD OF LEGAL DEPARTMENT, PERUTNINA PTUJ
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Partners

Ebrd

Strategic partner

Karanovic Nikolic

Content partner

Confida

Content partner

I&F McCann

Communications partner