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).
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.
1. Law on investments - Generally, BiH’s legal framework does not discriminate against foreign investors. The state-level Law on the Policy of Foreign Direct Investment accords national treatment to foreign investors. They are entitled to invest in any sector of the economy in the same form and under the same conditions as those defined for local residents. There are two exceptions – the defence industry and some areas of publishing and media, where foreign ownership is restricted to 49%. The granted rights and benefits for foreign investors, imposed by the respective law, cannot be terminated or overruled by subsequently passed laws and regulations. If any subsequently passed laws and regulations are more favourable for foreign investors, they have the right to choose under which regime the respective foreign investment is to be governed.
There are several incentives for foreign direct investment, including exemptions from payment of customs duties and customs fees. Generally, in the Federation and the Republic of Srpska, the corporate income tax allows the offsetting of losses against profits over a five-year period. Foreign investors can open bank accounts in all jurisdictions and transfer their profits abroad, without any restrictions. The equipment of the foreign investor, being imported as part of the share capital, is exempt from paying customs duties (with the exception of passenger vehicles, slot and gambling machines). In addition, both entities stipulate additional incentives.
2.Corporate law - The incorporation of a business in BiH is primarily governed at the entity level. Foreign investors wishing to establish a business presence in BiH have an opportunity to incorporate a branch office or a representative office of the foreign company, or establish a local company. There are 4 forms of business entities: unlimited joint liability company, limited partnership, limited liability company and joint stock company.
3. Tax regime - One of the reasons for investing in BiH is its favorable tax system. BiH has one of the lowest rates of VAT in the region and Europe, as well as very acceptable corporate tax rates – that are also among the lowest in the region and Europe. Corporate income tax (CIT) systems in BiH have been partially harmonized, in the past few years, and are now on an identical level of 10%. The CIT Laws also prescribe more detailed rules on the taxation of permanent establishments of foreign taxpayers. The VAT system in BiH is centralized since the VAT Law applies to the whole territory of BiH, whereby there exists a single VAT rate of 17%. The system is modelled after the EU VAT Directive, and the majority of general VAT principles applicable throughout the EU also apply in Bosnia and Herzegovina.
4. Free trade regime - BiH signed several free trade agreements which provide for preferential customs treatment of goods originating from the signatory countries. The most important free trade agreements include the SAA with the EU, the FTAT with Turkey, the CEFTA a multilateral treaty, applicable in Albania, Bosnia and Herzegovina, Croatia, Macedonia, Moldova and Montenegro and the EFTA, a multilateral treaty, applicable in Switzerland, Norway, Iceland and Lichtenstein.
5. Labour Law - Staff engagement in BiH is regulated on the entity level. Thereby the Laws foresee different possibilities for engagement. This include the classic employment agreement, management contracts for a Director/CEO/other representative, concluding an agreement on temporary and periodic work, service agreements, the agreement on work out of the premises of the employer. Employees with foreign citizenships need to obtain work and residence permits before concluding employment contract and commencing work. From a potential investor’s point of view, the main disadvantage of the existing labour Laws are the protection of employees, by the courts and the difficult conditions for cancelling employment agreements.
6. Visa regime - There is a significant number of countries whose citizens can enter BiH without any visa requirement. In the majority of cases, they are allowed to stay in BiH for 60 – 90 days in a period of 6 months. There are no specific or unusual conditions for getting visa approval compared to other countries in the region.
7. Laws on Public-Private Partnership - The country’s legal framework for PPPs is characterized by its fragmentation to several laws regulating PPPs at an entity and cantonal level. There is no PPP-specific law at the national level, only on an entity level. The Republic of Srpska has its own Law on Public Private Partnership. The Federation of BiH has had a draft version of the Law on PPPs since 2009.
|Complex government structures|
|Time consuming case proceedings (court and administrative)|
|High salary contributions|
|Difficult conditions for cancellation of employment agreements|
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|
|21||North North Macedonia||In force|
|33||Sri Lanka||In force|
|38||United Arab Emirates||In force|
|39||United Kingdom and Northern Ireland||In force|
|Global Competitiveness Index||RANK 91|
|Ease of doing business||RANK 86|
|Starting Business rank||RANK 175|
|Global logistics report||RANK 72|
|Rank||Institutions||Infrastructure||Health||Skills||Labor market||Product market||Business dynamism||Innovation|
|Bosnia and Herzegovina||111||89||52||87||112||106||106||114|
|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;|
“The overall experience has been positive. Despite certain technical barriers that arise (slow administration, complicated legal regulations, possible corruption), it is not necessary to lapse the investment because in the end, investment in production and work in Bosnia and Herzegovina pays off.”