Different corporate structures
Incorporation of a business in Bosnia and Herzegovina is primarily governed at the entity level, more specifically Federation of Bosnia and Herzegovina (“Federation of BiH”) and the Republic of Srpska, by the entity's company laws and laws on registration of business entities. In Federation of BiH, the registration is in jurisdiction of the Registry of Business Entities kept by the municipal courts while in Republic of Srpska, as of 2013 the Intermediary Agency for IT and Financial Services serves as a one-stop-shop for registration of business entities which reduced the process of incorporation dramatically.
Business activities on the market are performed through one of the legal entities prescribed by the company laws, each having different corporate structure which can, in general, be freely chosen.
The following forms may be used for incorporation of company:
Unlimited Joint Liability Company is a company of at least two persons who bear unlimited mutual liability of the company. The company is founded by a founding contract of two or more domestic or foreign legal entities or physical persons. Every member has the right and obligation to manage the company. The company has no statute and no management bodies because members manage the company directly, including representation of the company.
Limited Partnership is a company in which at least one member has unlimited liability for the liabilities of the company including members’ private assets and at least one member bears the risk of up to the value of their share in the partnership. A Limited Partnership is founded by a contract of two or more domestic/foreign legal entities. The partner which bears unlimited liability for company's debts manages the business and represents the company.
Joint–Stock Company is a company with basic capital divided into shares founded with the establishment agreement by domestic/foreign shareholders (i.e. with decision on establishment in case of one shareholder). A Joint-Stock Company is not liable for the obligations of shareholders. The minimum share capital is BAM 50,000 (approx. EUR 25,000) if the shares are listed on the stock exchange or BAM 20,000.00 (approx. EUR 10,000) if the shares are not listed on the stock exchange.
Limited Liability Company (LLC) is a separate legal entity having at least one shareholder. The liabilities of the company cannot pass to the shareholders save in exceptional circumstances (piercing the corporate veil). A member in a limited company is liable up to the value of his investment in that company. The shares of the LLC are expressed in percentages (for example, 5%, 10%, 51%, 100% or any other). A shareholder can have only one share in the company. The share capital may consist of money or any contributions "in kind" (such as property, rights and services, under the conditions prescribed by the law). Minimum share capital in Republic of Srpska is BAM 1.00 (approx. EUR 0.50), and BAM 1.000,00 (approx. EUR 500.00) in Federation of BiH, and the value of individual share cannot be less than BAM 100 (approx. EUR 50.00).
The limited liability company is by far the most common used legal form in practice. This is due to the rather straightforward incorporation procedure and minimal requirements in relation to the share capital of the company.
On the other hand, due to the unlimited liability of shareholders for the debts of the company, general and limited partnerships are rarities in Bosnia and Herzegovina, whereas the incorporation procedure for joint stock company is rather complex and time-consuming, which also makes this legal form rarely used in practice.
The business in Bosnia and Herzegovina may also be conducted through a form which does not represent a legal entity i.e. branch office and representative office and therefore the founder remains liable for all obligations assumed by branch office or representative office. The most common presence of the foreign investors in Bosnia and Herzegovina (without establishment of a legal entity) is through the representative office. Activities of the representative office are very limited and include market research, contract or investment preparations, technical cooperation and similar business facilitation activities. The registration of the representative office, is performed before the Registry of Representative Offices, maintained by the Bosnia and Herzegovina Ministry of Foreign Trade and Economic Affairs.
Incorporation requirements (registration, capital and management requirements)
The founding document of the LLC is the Memorandum of Association, which may be in a form of a decision in case there is only one shareholder of the company or the agreement in case there are several shareholders. In Republic of Srpska, in the case of a sole founder who is registering minimal share capital, it is necessary only to notarize a signature of the founder or authorized person.
In Federation of BiH, incorporation of LLC requires the submission of the Memorandum and other documents to the Registry of Business Entities of the municipal court where the headquarters of the company are situated. In Republic of Srpska, the role of one-stop-shop is performed by the Intermediary Agency for IT and Financial Services that acts as intermediary between the court and the applicant, whereby the court is issuing the Incorporation Certificate and the agency delivers it to the applicant. Once this document is issued and delivered, the LLC is considered registered and legally permitted to commence its business activities. The procedure of incorporation is finalized with the issuance of the Incorporation Certificate. In practice, the incorporation procedure in FBIH is finalized 7-15 days upon submission of the complete application. In Republic of Srpska, the incorporation is usually finalized within 5-10 days.
In Federation of BiH, following the registration of the company, there are a few other registrations that have to be completed (the so-called post-registration procedure) - including registration with the Federal Institute for Statistics, general tax registration, customs registration and VAT registration (if applicable). Required time for post-registration procedures is approximately two weeks (provided all the documents are collected in a timely manner). On the other hand, in Republic of Srpska there are no additional obligatory registrations after the registration of the company. The company is obliged to either appoint a certified accountant or to engage an accounting agency immediately after the incorporation.
To register an LLC, the founder should submit the documentation prescribed by the Republic of Srpska/Federation of BiH Law on Registration of Business Entities. Generally, all documents must be originals and translated by a court sworn translator into local language. Depending on the country of notarization of documents additional legalization may be required.
Corporate governance of the LLC in the Federation of BiH can be organized as one-tier (shareholders' assembly and one or more directors) or two-tier system (with additional supervisory board). In the Republic of Srpska, corporate governance of the LLC is organized as one-tier system.
The Assembly operates through sessions and the Memorandum governs the scope of its powers (in the case of the sole shareholder, the functions of the shareholders' assembly are performed by the shareholder itself). Management of the company consists of one or more directors who don’t have to be the company’s shareholders and who are in charge for day to day businesses of the company. Director of the company does not have to be employed by the company, provided that he/she has concluded the management agreement with the company. If a person appointed as a director is a foreigner, it is necessary that he/she obtains a residence and work permit.
In Federation of BiH, the Supervisory Board is required if the company has more than 10 shareholders or if the company has the share capital of BAM 1 million (approximately EUR 511,300) and at least two shareholders. The Supervisory Board is appointed by the Assembly.
The LLC can be engaged in all legally permitted activities, which must be defined in the Memorandum of Association and registered with the relevant state authority. Certain activities (e.g. financial services and insurance services), may be performed only by an entity incorporated in a certain legal form (e.g. joint-stock company), and some activities require prior specific licenses, approvals or consents of Bosnia and Herzegovina regulatory bodies or authorities for transfer of LLC`s share (e.g. broadcasting, financial services, etc.). In addition to the requirement of obtaining a specific license, in the fields of the production and sale of arms, ammunition and explosives for the military use and military equipment and broadcasting, the foreign capital may not exceed 49% of the company's share capital.
The country´s legislation is open to Foreign Direct Investments with very few restrictions and foreign investors that enter the country intend to stay and reinvest. The main investment partners’ countries have strong historical and economic ties to Bosnia and Herzegovina, and have learned to navigate the administrative hurdles.
The state-level Law on the Policy of Foreign Direct Investment accords national treatment of foreign investors, i.e., foreign investors have the same rights as domestic investors.
The granted rights and benefits of 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 the foreign investors, the investors have the right to choose under which regime the respective foreign investment to be governed.
With the exception of the defence industry and certain elements of the media sector, where foreign control is limited to 49 percent of a single company, there are no restrictions on foreign investment. Furthermore the Bosnia and Herzegovina government does not screen or review foreign direct investments, except in the cases of privatization in order to ensure the privatization contract has been meet. If the privatization contract commitments are not fulfilled, the government retains the right to cancel the privatization contract.
Incentives for investors
There are several incentives for foreign direct investment, including exemptions from payment of customs duties and customs fees. In general the Federation and the Republic of Srpska the corporate income tax allows 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. Equipment of the foreign investor being imported as part of 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.
In the Federation of BiH the Law on Corporate Income Tax enables foreign investors to enjoy the following benefits:
In the Republic of Srpska a taxpayer who in the territory of the Republic of 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 of 30%.
Capital markets laws
Capital markets in Bosnia and Herzegovina are regulated on Entity level (Federation of BiH and Republic of Srpska). The legal framework for capital markets is to be found in the Federation of BiH and Republic of Srpska Securities Market Laws. These Laws regulate core issues related to definitions of terms, participants, institutions, and their authorities, rights, and obligations with regard to the capital markets in Bosnia and Herzegovina.
The Republic of Srpska Securities Market Law also regulates the establishment of the Republic of Srpska Securities Commission, determines its liabilities, authorities and method of work. The regulatory framework of capital markets in the Federation of BiH also includes the Law on the Securities Commission and the Law on the Securities Register. These laws define the place and role, as well as the basic authorities of the Securities Commission and Securities Register, as institutions that allow the normal functioning of the capital market.
Both Commission are a permanent and independent legal entity, which through regulation, support the establishment and development of a securities market in both entities. By doing so the efficient functioning of a regulated, fair and open securities market should be achieved in order to gain the confidence of all institutions and market participants, which at the end lead to the protection of investors and other market participants interests.
The main duties of the Securities Register in the Federation of BiH and the Republic of Srpska is the registering and safekeeping of securities, as well as safekeeping data on securities and all transactions related to transfer of ownership or change in their status.
Insider trading rules
Federation of BiH and Republic of Srpska Securities Market Laws prohibit the use of inside information. However, there is no evidence that insider trading regulation is well enforced in practice in Republic of Srpska. In Federation of BiH, few cases were fully investigated and closed. Both laws in similar ways define inside information, as publicly unavailable information and therefore they provide an advantage for the person in possession of such information, or which could have an impact on the price of securities if they were known to the public. The Federation of BiH and Republic of Srpska Securities Market Laws lists the relevant persons to whom the prohibition on insider trading applies, namely it includes members of management and of the body that carries out supervision; members of managements and of the body that carries out supervision and employees of authorized participants; persons employed, professionally engaged or persons who execute certain functions that enable them access to such information; persons who directly or indirectly possess 10% or more of registered capital of an issuer; relatives in direct line to the first degree of natural persons referred above; other persons who have received the information from the above mentioned persons (in the Federation of BiH), or for which the Commission establishes while carrying out supervision or in other way determines that they used inside information (in the Republic of Srpska). Both laws foresee fines and even the possibility of prison sentences.
Market manipulations on the securities market are prohibited. Therefore any action with an aim to manipulate the prices of securities is prohibited and especially: the trade of securities without an actual transfer of ownership over the securities; issue an order for the purchase or sale of a security on basis of knowledge that another person has provided or will provide an order for the purchase or sale of the same security at the same or a similar price and the trade of securities with the purpose of increasing or decreasing their price or creating the illusion of trading.
The law in both Entities impose the disclosure obligations on directors’ dealings with the company’s shares. As such acquisitions of the company’s shares by directors are restricted and conflicts of interest are regulated by law. In addition, there is also the obligation for the companies itself to set measures in order to mitigate the risks of directors dealings and insider trading. In Republic of Srpska, listed companies must either adopt the Standards of Corporate Governance issued by the Securities Commission (i.e., the Republic of Srpska Corporate Governance Code) or issue their own code. In either case, companies must disclose a statement certifying their compliance or explaining the reasons for non-compliance. In Federation of BiH, listed companies are only recommended to implement the Corporate Governance Code under the “comply or explain” approach. The Corporate Governance Code should also deal with the
There is no obligation of foreign investors to notify any institution when it comes to the establishment of local companies or investment into such. The competent registry authorities provide the relevant ministries with such information. However certain types of transactions, e.g. foreign shareholder loans, fall under the competent Law on Foreign Exchange Operations and are therefore subject to be reported to the relevant Ministry of Finance.
Public takeovers bids for companies in Bosnia and Herzegovina are relatively uncommon. The strategic companies in Bosnia and Herzegovina remain mostly under state control. The privatization process is underway in both the Federation of Bosnia and Herzegovina and The Republic of Srpska. Both entities have adopted their separate Takeover Acts. The Takeover Acts apply to the acquisition of voting and/or non-voting shares, including securities convertible into shares, of companies registered with the relevant Securities Commission of Federation of BiH or Republic of Srpska, whether such acquisition takes place on or off the stock exchange. It regulates mandatory bids for the shares of stock companies registered with the Commissions.
In general, the percentage of voting shares held in the target company that triggers mandatory takeover offer is 25% in the Federation of BiH and 30% in the Republic of Srpska of total number of issued shares. However, there are certain exemptions when a mandatory bid to be made is not required, these include, among others, certain types of "passive acquisitions" that trip the 30% threshold, including acquisitions of shares by inheritance, by a division of marital assets, as a creditor in bankruptcy proceedings or through a merger of two companies.
Pursuant to the Takeover Act, the purchase price in the takeover offer cannot be lower than the higher of (i) the highest price at which the acquirer or a party acting jointly with the acquirer had acquired voting shares of the same target in the period of one year prior to the date when the obligation to launch a takeover offer is created, or (ii) the average stock exchange price within the period of six months in the Republic of Srpska and three month in the Federation of BiH preceding that date.
The Law on Obligations in Bosnia and Herzegovina recognizes institute of agency through the commercial agency.
Participants in the commercial agency are agent and principal, and they are obliged to conclude a written agreement regulating their mutual rights and obligations. Under the applicable law, an agent is obliged to permanently take care that third parties enter into agreements with his principal, as well as to conclude agreements with third parties in a principal’s name (if obtains prior authorization). The agent has the right to receive compensation for services performed for the principal.
The principal is entitled to engage more than one agent for the same type of business on the same territory. On the other side, the agent is not allowed to represent more than one principal on the same territory for the same type of business, without a prior consent of its principal.
Agent has to act with the attention of a good businessman in performance of its activities. If not agreed otherwise, the agent will not be responsible to the principal for execution of the obligations arising from the agreements concluded as the result of agent’s activities. In order to secure its receivables towards the principal, the agent has right of pledge on the collected payments on behalf of the principal or pledge on principals belongings in the agent’s possession.
Termination of the agreement on commercial agency is subject to the following specifics:
The Law on Obligations provides two more types of agency: commission business and intermediation, but these two types do not correspond to the common law interpretation of the term agency. Commission business refers to the representation of a client by a commission agent in its own name and for the client’s account. On the other side, intermediary refers to the representation of the principal by an intermediary in order to find and make connections between its principal and third party with the aim of negotiation on the conclusion of a particular agreement between these parties.
It is important to emphasize that agreements on commercial agency must be always reviewed from the prospective of the local competition law.
The Bosnia and Herzegovina laws do not regulate distribution agreements, but the general principles of contract law would be applicable on these agreements. There are no specific requirements regarding the mandatory form of a distribution agreement, as well as regarding the manner of regulation of contractual relations between the parties.
Distribution agreements have certain common characteristics with agency agreements, however distribution agreements differ from the agency agreements due to fact that distributor acts in its own name and on its own account.
There are no specific rules regarding the termination of the distribution agreements.
Distribution agreements should be always subject to the review from the prospective of the local competition law, since certain provisions in distribution agreements may amount to restrictive agreements governed under the local competition law.
Choice of law
The choice of law is subject to autonomy of the parties’ will. If the parties choose the local courts as a dispute resolution mechanism, we certainly would recommend the Bosnia and Herzegovina law as applicable, given that there are very high costs related to obtaining legislation from a foreign country as well as translation to local official languages. Furthermore, local judges are far more efficient in applying local laws which they have knowledge about and sufficient experience in.
Choice of dispute resolution forum
In terms of resolving the commercial disputes between foreign investors and their local contractual partners, the parties may choose to stipulate in their agreements whether their disputes will be resolved by arbitration or local courts.
Arbitration. Arbitration proceedings in Bosnia and Herzegovina are governed by the entity’s civil procedure laws. Arbitration is not commonly used in Bosnia and Herzegovina, and there are currently only two arbitral bodies in Bosnia and Herzegovina i.e. the Arbitral Court of the Foreign Trade Chamber of Bosnia and Herzegovina and the Arbitral Court of the Trade Chamber of Republic of Srpska. However, it is common practice for legal entities to agree upon a foreign arbitral body as the authority competent for resolving potential commercial disputes. Foreign arbitral awards are generally recognized and enforced under local law the same as local awards or judgements, only subject to fulfilment of conditions for enforcement and recognition stipulated by the relevant laws.
Regarding the expectations and protection of foreign investors, there are more than 30 bilateral Investment Treaties that Bosnia and Herzegovina signed (“BITs”). BITs give additional protection to the investors and they are signed with the following countries: Albania, Austria, Belarus, Belgium, China, Croatia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hungary, Pakistan, India, Islamic Republic of Iran, Italy, Kuwait, Qatar, The former Yugoslav Republic of Macedonia, Moldova, Montenegro, Malaysia, Netherlands, Portugal, Lithuania, Romania, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine and United Kingdom.
All these BITs provide for additional protection of the foreign investors in Bosnia and Herzegovina. They all prescribe several levels of possible solutions for a potential dispute resolution. The first level implies an attempt for an amicable solution (usually through negotiations, if necessary by seeking expert advice, or by conciliation between the contracting parties through diplomatic channels).
In the absence of an amicable settlement, the dispute shall be submitted, at the option of the investor, either to the competent jurisdiction of the contracting party where the investment was made, or to the arbitration as an alternative dispute resolution forum. Most of the BITs contain an option for the investor to address the following forums:
Arbitration represents an alternative to resolving disputes before the local courts. Parties can agree to arbitrate a dispute arising out of a domestic or international business transaction, or any private law matters which the parties can freely dispose of, except for disputes that are reserved to the exclusive jurisdiction of the courts.
An award rendered in Bosnia and Herzegovina has the power of final and enforceable court decision and does not need to go through the process of recognition, thus it is directly enforced as any court decision of the local courts. Bosnia and Herzegovina is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (i.e. the New York Convention). Bosnia and Herzegovina placed reservations to the original text of the New York Convention so that it will apply the convention only: (i) for the recognition and enforcement of awards made in the territory of another contracting state, on the basis of reciprocity; (ii) to differences arising out of legal relationships, whether contractual or not, that are considered commercial under the national law; and (iii) to those arbitral awards which were adopted after the New York Convention came into effect.
There are numerous reasons for choosing arbitration over the judicial dispute settlement system, such as:
Local courts. The division of the state in different political units has resulted in the division of the court system, i.e. the presence of a total of four judicial systems - the system at the state level, the system at the level of the two entities and at the Brčko District level.
The judicial system of Bosnia and Herzegovina has been the subject of a number of reforms in the past two decades which continue to be implemented. The aim of these reforms is to simplify and improve the efficiency of the existing system and to improve the efficiency of the courts.
However, the Bosnia and Herzegovina judiciary still demonstrates certain drawbacks. In the process of accession to the EU, Bosnia and Herzegovina will be required to fulfil specific preconditions in the area of judiciary, such as the strengthening of judicial institutions and the rule of law. The problem is also in a large number of backlog cases which continue to grow.
Commercial disputes are mostly handled at entity level courts i.e. basic and municipality courts, cantonal and district courts and the supreme courts of the entities as the final court instance. The supreme courts are rule on extraordinary legal remedies. The Republic of Srpska has specialized commercial courts while the Federation of BiH only has separate departments for commercial disputes with Municipality courts.
The main legislative framework governing the judicial enforcement procedure in Bosnia and Herzegovina are the entity level laws on enforcement procedures. Although there are two separate legislations depending on the competent court for the debtor’s property, the laws are almost identical. The main objective of the enforcement procedure is to ensure effective and efficient recognition of rights conferred by a competent court. The enforcement procedure enables the holder of a right to oblige the (natural or legal) person in infringement of a right to comply with it and thus restore the rule of law, with the support of the competent state authorities.
An enforcement procedure may be initiated on the basis of a valid enforcement instrument submitted to the court by the creditor. An enforcement instrument is a final and enforceable court or arbitration decision, court or arbitration settlement, enforceable notarial deed, enforceable decision rendered in administrative proceedings or an administrative settlement (conditioned to be referred on a monetary obligation) or another document that the law expressly indicates as having such quality (such as a reorganization plan in bankruptcy proceedings, mediation settlement etc.).
Jurisdiction in enforcement procedures belongs to the local court where the debtor’s headquarter/domicile is situated or the debtor’s property is situated, unless otherwise provided by the law. Immediate acts of execution are performed by the court appointed enforcement officer or directly by the bank/registry/court if applicable.
There are several enforcement forms that can be carried out (depending on the object of enforcement), simultaneously or successively, until the amount claimed is entirely recovered:
The EU’s legislation has exceptional importance for Bosnia and Herzegovina as an instrument for strengthening the economy, but also with regard to the reform of the public procurement system in Bosnia and Herzegovina aimed at harmonizing it with EU law. The the legal and institutional framework of public procurement in Bosnia and Herzegovina is largely harmonized with the relevant European norms in this area. The existing Law on Public Procurement is a unique and basic act which regulates the area of public procurement in Bosnia and Herzegovina, for every institution in Bosnia and Herzegovina, the entities, Brčko District of Bosnia and Herzegovina, at the cantonal, city, or municipal level, as well as legal persons established for a specific purpose with the objective of meeting the needs of general interest, publicly funded or managed entities.
The award procedures depend on the value of procurement. When the value of procurement is below BAM 50,000.00 in case of supplies and services, or BAM 80,000.00 in case of works, the contracting authority may apply one of the procedures defined in the Law on Public Procurement, except for direct agreement, and shall have to meet the requirements regulated for each specific procedure. The application of open or restricted procedure, or negotiated procedure with or without publication of notice, or design contest or competitive dialogue is obligatory when the value of procurement for supplies and services amounts to or exceeds:
In general, the Law foresees either an open and restricted public procurement procedure. In an open procedure any interested bidder may submit a bid, whereby the restricted procedure features a pre-qualification stage and a bid submission stage. In addition, the Law on Public Procurement foresees a negotiated procedure with or without publication of notice and the competitive dialogue.
Public contract for procurement of supplies, services or works may be awarded in a negotiated procedure with publication of notice:
In exceptional cases procurement contracts may be awarded by applying the negotiated procedure without publication of the procurement notice:
The competitive dialogue can be used if the subject of procurement is particularly complex thereby considering the technical specifications and legal / economic structure. The contracting authority invites all interested parties to submit an application for participation in the competitive dialogue and recognizes the applicants’ qualification based on the conditions determined in advance. The contracting authority performs the “competitive dialogue” with all qualified applicants, until an adequate solution is found. Once the solution is found, the contracting authority calls for submission of bids.
The deadline for submission of bids cannot be less than 45 days in open procedure and 35 days in restricted procedure. If the contracting authority has published an advance notice of planned procurements, with estimated values, the deadlines in open and restricted procedure can be reduced to 25 days.
Privatization in Bosnia and Herzegovina is an ongoing process. It is managed by the Federation of BiH Privatization Agency and cantonal privatization agencies in the Federation of Bosnia and Herzegovina, and the Republic of Srpska Investment-Development Bank. The Agency for Privatization in Federation of Bosnia and Herzegovina is a specialized organization performing professional, advisory, promotional, educational and other business activities relating to the privatization process. The Republic of Srpska Investment-Development Bank is authorized to sell state capital in and restructure enterprises with majority state capital which is subject to privatization. Privatization of the state-owned capital is carried through several methods: the sale of shares through the stock exchange, tender, acceptance of a public takeover bid, sale to employees of the company (so-called ESOP method), or a combination of previous methods.
The privatization process in the Federation entity started in 1999 but continued to suffer from delays despite the adoption of privatization strategies in 2014 and 2015. Attempts to sell 14 earmarked companies were largely unsuccessful, so far. The 14 companies are: Bosnalijek, Energopetrol, Energoinvest, Aluminij Mostar, Hidrogradnja, Remontni Zavod Travnik, Šipad export-import, Zenica Steel plant, KTK Visoko, Agrokomerc, Borac Confection Travnik, Tobacco Factory Mostar, Vitezit, and Holding Company Putevi BiH. The sale attempts failed because of the poor state of the companies as well as because of the high prices set by the Federation government. In the Republic of Srpska entity the privatization of state-owned companies is more advanced. However, progress in selling or liquidating remaining assets has been limited. Overall, strategic sectors such as transport, energy (and telecom in the Federation entity) are still dominated by state-owned companies.
The country’s legal framework for PPPs is characterized by fragmentation with several laws regulating PPPs at the entity and cantonal level. There is no PPP-specific law at the national level but the 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 (proposed by the Federal Ministry of Transport and Communications), which was adopted in April 2014 by the House of Peoples of the Parliament of Federation of BiH, and is still awaiting public hearing. The Federation of BiH-level Law on PPPs has been initiated mainly with Corridor Vc projects in mind. The cantons, on the other hand, were quicker to jump on the PPP board, and almost all cantons have already adopted PPP laws, mainly through ministries of finance or economy. Although difficult to implement Bosnia and Herzegovina has realized some projects in the PPP field, e.g. the Thermal Plant Stanari.
It is common business practice to form a Joint Venture or enter into a Consortia when one responds to a tender, especially if all the expertise required for the specific tender cannot be fulfilled by a single entity. A Joint Venture can be described as an individual entity where two or more shareholders share their expertise in order to win a specific contract for a set period of time. The Joint Venture is not part of the individual participant’s own enterprise.
Despite the fact that joint ventures are rare in Bosnia and Herzegovina, the Bosnia and Herzegovina Law on the Policy of Foreign Direct Investment and the Law on Companies of the Federation of BiH and the Law on Companies of the Republic of Srpska regulate the establishment of joint ventures, i.e. investment in companies with mixed ownership, as well as other types of foreign or domestic investment. Since Joint Ventures can be complicated to form and to find the correct partner for the Joint Venture can be challenging, despite the fact that even the Foreign Investment Promotion Agency, as well as other commercial chambers offer their assistance, companies prefer the option to form a consortium when responding to a tender.
A consortium is an association of two or more individuals, companies or organizations with the objective of participating in a common activity, such as responding to a tender, or pooling their resources to achieve a common goal. Within the consortium, each participant retains its separate legal status and the consortium’s control over each participant is generally limited to activities involving the joint endeavor, particularly the division of profits. As a consortium is formed by contract the general provisions of the Law on Obligations which addresses contract law apply.
The company which is incorporated in Bosnia and Herzegovina will have the status of a Bosnia and Herzegovina tax resident, and as such will be required to administer and pay all taxes which Bosnia and Herzegovina companies are required to pay under the general rules of applicable Bosnia and Herzegovina tax laws.
The most important taxes and public revenues which the company will be required to pay in Bosnia and Herzegovina include the following:
The matters regulated on the level of Bosnia and Herzegovina (for example, Value Added Tax matters) apply to the entire territory of the State. The matters not conferred to the State are regulated at entity level. Therefore, the legislation in Bosnia and Herzegovina may be adopted on different levels which in practice may mean that compliance requirements are imposed by several laws and regulations on different levels.
Value added tax
VAT system in Bosnia and Herzegovina is centralized since VAT Law applies to the whole territory of Bosnia and Herzegovina. The system is modelled after the EU VAT Directive, and majority of general VAT principles applicable throughout the EU apply also in Bosnia and Herzegovina. VAT is regulated by the Law on Value Added Tax (VAT Law), Rulebook on applying of the VAT law (VAT Rulebook), and a number of other VAT regulations which prescribe detailed rules for implementation of general rules of the VAT Law.
Generally, a taxable person is an entity (legal and natural persons) who independently carries out supplies of goods and services, within its business activities.
Only registered VAT taxpayers are required to pay VAT on their supplies of goods and services, and have the right to deduct input VAT charged to them by their suppliers. Taxable persons whose turnover in a 12-months period exceed, or will exceed, BAM 50.000 (app. EUR 25.000) are required to register for VAT. Entities whose turnover does not exceed this threshold may register for VAT, but are not required to.
Transactions subject to VAT include the following:
The VAT Law prescribes the list of exemptions from VAT including two main principal groups of exemptions:
Tax Base and Tax Rates
The standard VAT rate is 17%.
Tax base for assessment of VAT constitutes everything which the taxpayer received or will receive from the customer in consideration for the supply.
Non-residents in Bosnia and Herzegovina VAT system
Non-resident entities who are performing taxable supplies on Bosnia and Herzegovina territory are required to register for VAT purposes and to appoint a VAT representative who is jointly liable for the VAT due of a non-resident entity, and is jointly responsible for administration of VAT.
Non-residents who are not performing taxable supplies in Bosnia and Herzegovina are entitled for a refund of VAT charged by Bosnia and Herzegovina tax payers, under general conditions which domestic taxpayers have to fulfil for deduction of VAT.
Individuals who are not permanently residing in Bosnia and Herzegovina are also entitled for refund of VAT if VAT amount is higher than BAM 100 (EUR 50).
Personal Income Tax and social security contributions
Rules governing taxation of personal income are prescribed by the Law on Personal Income Tax (“PIT Law”) and accompanying secondary regulations with the PIT Law.
Types of income subject to personal income tax
Taxation of income from labour
Social security contributions
Salaries (and other similar types of income generated from labour) are subject to obligation to pay contributions for mandatory social security insurance. The rates of social security contributions due on salaries are as follows:
|Republic of Srpska||F of BiH(employer)||(employee)|
|Pension and disability||18,5%||6%||17%|
Tax and social security contributions are payable by the employer in the moment of payment of salary.
Income from capital
Capital gains tax
Position of foreign nationals
There is a significant number of countries whose citizens can enter Bosnia and Herzegovina without any visa requirement. In the majority of cases it is allowed to stay in Bosnia and Herzegovina for 60 – 90 days in a period of 6 months. All citizens from EU can stay up to 90 days in a period of 6 months without a visa. Foreigners entering Bosnia and Herzegovina should possess BAM 150 (approximately EUR 77) per day.
For citizens who needs visa approval, there is a special form which should be fulfilled and submitted ether in their countries or in specific cases when entering Bosnia and Herzegovina.
There are no specific or unusual conditions for getting visa approval, comparing to other countries in the region.
All relevant information and changes in the list of countries whose citizens can enter Bosnia and Herzegovina without visa can be found at the web page of the Ministry of Foreign Affairs Bosnia and Herzegovina (www.mvp.gov.ba/konzularne_informacije/vize/default.aspx).
In accordance with labor regulations, foreign citizens have the same rights as Bosnia and Herzegovina citizens. For certain positions like work in state administration, only Bosnia and Herzegovina citizens can work.
Citizens from other counties can start working in Bosnia and Herzegovina after obtaining two kinds of permits:
Foreign citizen will acquire at the police office a so called ‘white card’ residence registration certificate when entering Bosnia and Herzegovina. After receiving that document, the request for a work permit is to be submitted and when the work permit is received, the residence permit can be issued.
The employer submits the request for the work permit to the relevant employment authority. Certain documents should be submitted, e.g. basic information regarding the foreign citizen, passport copy, court registration of the employer, proof of paid tax obligations, information regarding the work position and an explanation on why the foreign citizen should be employed at that specific position etc.
If there are Bosnia and Herzegovina citizens registered as unemployed and are fulfilling conditions for that work position, the request for work permit could be rejected. This condition will not be applicable to foreign investors or foreign citizens who have founded a company.
The work permit is issued for a maximum period of one year. It could be prolonged annually without any limitation. In any case it cannot last longer than the residence permit.
There are certain engagements for which a work permit is not needed, in most cases these positions are temporary (up to 3 months). However, work wttestations should be obtained instead of a Work permit in these cases, in a much simpler and faster procedure.
Foreign citizens working in Bosnia and Herzegovina should apply for a temporary residence permit (valid up to one year maximum). The temporary residence permit could be prolonged without limitations.
The temporary residence permit for work reasons will be approved after delivery of following documents:
A foreign citizen cannot sign an employment contract or start working based on only a work permit. A temporary residence permit has to be obtained as well. The Work and Temporary residence permits are linked, meaning that the Temporary residence permit is approved based on the Work permit for a specific work position and only for that work position.
Work permits are issued at a local level while Temporary residence permits are issued at the state level.
Pursuant to the applicable laws on employment of foreigners and laws on entry and movement of foreigners, shareholders and investors which are not company representatives or employed in the local company, do not need to obtain a Work permit or Temporary residence permit.
Temporary residence permits can also be issued for various reasons, not only for employment reasons based on an issued Work permit, such as educational reasons, humanitarian reasons, living with family members etc.
Contract form requirements
Employment contracts. The employment contract must be concluded in writing and before the commencement of work. It must contain all of the mandatory elements prescribed by the Labour Law i.e. (i) name and seat of the employer; (ii) name and residence of the employee; (iii) date of commencement; (iv) work position, workplace, work duration and work schedule; (v) salary and other remunerations; (vi) annual leave; (vii) contract term; (viii) termination notice period and other elements prescribed by the Labour Law. Certain mandatory elements can be stipulated by indicating the exact provision of the law or internal enactments of the employer. The employment contract cannot contain terms which are less favorable to the employee than those set out under the Labor Law, collective bargaining agreements (if applicable) and internal enactments of the employer
Foreigners. Employees with foreign citizenship need to obtain work and residence permits before concluding the employment contract and commencing work.
Representatives. The engagement of a Director/CEO/other representative can be executed through establishing employment or without establishing employment (manager contract in which rights and obligations must be regulated). In RS, the representative is entitled to compensation for his engagement which in both cases (employment contract or manager contract) has the legal nature of a salary.
Other types of engagements. There is also an option to engage staff based on other types of contracts, which include:
Minimum employment terms and conditions
Fixed and indefinite terms. Employment may be established with a person with at least 15 years of age (with the consent of the parent/guardian until 18 years of age – minors, for which separate regimes apply in terms of minimum terms and conditions). Employment is established for an indefinite term or fixed term. Fixed term employment may be established with one or more consecutive contracts (with or without interruptions) with a maximum duration up to 24 months in the Republic of Srpska and 36 months in the Federation of Bosnia and Herzegovina.
In the Republic of Srpska, fixed term employment should be considered an exception, which is justified by objective reasons such as predetermined deadlines, the performance of a specific work or the occurrence of a specific event. Exceptionally, fixed term employment may be established for a longer period than 24 months under certain legal conditions set out by the Labour Law. In case of fixed term employment, the reasons for concluding such an employment must be indicated in the employment contract.
Working hours. Employment can be established for a full-time engagement (40 hours weekly or exceptionally shorter) or for a part time engagement (at least 1/4 of full time in the Republic of Srpska).
The employer may request the employee to work overtime only in certain cases determined in the Labour Law such as vis major and an unexpected increase of volume of work. Overtime in the Republic of Srpska is defined up to 4 hours daily, up to 10 hours weekly and up to 180 hours yearly. It is possible to increase the maximum amount of yearly hours up to 230 by collective bargaining agreements. Overtime in the Federation of Bosnia and Herzegovina is defined up to 8 hours weekly. The employees are entitled to a salary increase for overtime and night work (from 22.00 hours to 06.00 hours). It is important to mention that there are specific rules regarding minor and maternity protection regarding overtime and night work.
The employer can organize working hours in a way to distribute more working hours in a certain period of the year (but not longer than 52 hours weekly or 60 hours weekly for seasonal work) and less working hours in the rest of the year. The distribution of working hours must be 40 hours weekly on average throughout the year in both entities.
Breaks and leaves. The daily work break is 30 minutes for employees with at least 6-hour engagements and 15 minutes for employees with 4 to 6-hour engagements (only applicable for the Republic of Srpska). Every employee has the right to a minimum 12-hour rest between two working days, as well as a minimum 24-hour rest weekly in the Federation of Bosnia and Herzegovina and 36 hours in the Republic of Srpska.
Annual leave is defined as minimum 20 working days per year. The minimum days of Annual Leave are increased by the number of years of work experience and in other cases prescribed by the collective bargaining agreements (if applicable), internal enactments of the employer or employment contract. Annual leave in the Federation of Bosnia and Herzegovina cannot last longer than 30 working days.
It is prescribed that the employee should use the entire annual leave at once, but based on the request of the employee and approval of the employer, it can be used in two parts in the Federation of Bosnia and Herzegovina or several parts in the Republic of Srpska, whereas the first part is minimum 12 working days in the Federation of Bosnia and Herzegovina and 10 working days in the Republic of Srpska, and the remaining days must be used latest until June 30th of the following year.
The employee is entitled to compensation for unused annual leave if, at the time of employment termination, he/she has unused annual leave due to the employer’s fault.
Paid leave. The employee has the right to a paid leave for personal needs, for a maximum of 5 working days in the Republic of Srpska (except in case of death of a family member) and 7 working days in the Federation of Bosnia and Herzegovina, per calendar year. Paid leave is used in certain cases prescribed by the collective bargaining agreements, internal enactments of the employer or employment contracts (e.g. marriage, child birth, serious illness of an immediate family member, natural disasters, moving etc.).
In the Republic of Srpska, the employee is entitled to 3 working days of unpaid leave for religious purposes while in the Federation of Bosnia and Herzegovina, the employee is entitled to 4 days for these purposes (2 paid, 2 unpaid).
Maternity leave. Employees are also entitled to maternity leave and child care leave. Maternity and child care leave last for 1 year and an additional 6 months for twins, three and more children in the Republic of Srpska. The maternity leave can commence 28 days prior to expected delivery date, based on medical findings. If the child needs special care, one of the parents is entitled to work halftime until the child reaches three years of age.
Sick leave. An employee is entitled to a sick leave every time there are appropriate medical grounds. Sick leave cannot be limited in time. During sick leave, the employee in the Federation of Bosnia and Herzegovina is entitled to compensation of the salary in amount of 80% of the basic salary in case of work unrelated sickness or injury and 100% of the salary in the case of work-related sickness or injury, pregnancy and maternity leave and tissue or organ donation. In the Republic of Srpska, the compensation varies from 70% to 90% depending on the type of sickness or injury. Compensation is covered by the employer for the first 42 days of sick leave in the Federation of Bosnia and Herzegovina and first 30 days of sick leave in the Republic of Srpska, while the relevant health insurance authority will compensate the employer for the compensation paid after these periods.
Salary. The Labour Law provides for a rather complex mandatory structure of the salary and numerous mandatory payments. The monthly salary is determined in the employment contract or internal enactments of the employer (and exceptionally in the collective bargaining agreements).
The salary consists of: (i) the basic salary (which is calculated in the Republic of Srpska based on the coefficient of complexity of the work post and the minimum price of labour determined by the Government or in another way which cannot amount to lower); and (b) the increase for work efficiency in accordance with the internal enactments of the employer or employment contract; and (c) in the Federation of Bosnia and Herzegovina – other salary increases.
In the Republic of Srpska, the monthly salary is increased by 0.3% for each year of work if it is not otherwise regulated by law, collective bargaining agreements or the employment contract.
There are several other obligatory salary increases as well as other obligatory remunerations prescribed by the Labour Law, collective bargaining agreements, internal enactments of the employer and employment contracts (difficult work conditions, overtime, night work, work on holidays and non-working days, food allowance, transportation to work, daily substance allowance etc.).
Employees are entitled to a minimum wage. This minimum wage has to be paid as a basic salary and the employee is entitled on top of that to other mandatory payments as regulated by the law. The employer has to regularly provide the employees with the salary slips and keep the records on salary payments as provided by the Labor Law. Salaries must be paid in intervals no longer than 30 calendar days.
Employment may be terminated only in specific cases prescribed by the Labour Law (expiry of fixed term employment contract, dismissal in accordance with the provisions of the Labour Law, retirement, mutual agreement on employment termination, court decision etc.) Different employment termination reasons trigger different rules and procedures that have to be conducted.
Expiry of fixed term employment. Even though the employment is terminated based on the very provisions of the employment contract, it is important to note that if the employee continues to work for the employer after the fixed term has expired, such employment will transform into an indefinite term employment.
Retirement. In case of retirement, the employer may unilaterally issue a resolution on employment termination (without the employee’s consent or request) only if the employee has reached 65 years of age and at least 15 years of service in the Republic of Srpska or 20 years of service in the Federation of Bosnia and Herzegovina (cumulative conditions). In other cases, when the employee has fulfilled conditions for early retirement which are prescribed by special retirement regulations the employee’s request is mandatory. In such cases, when the employee submits a request, the employer issues a resolution or enters into mutual agreement with the employee that confirms employment termination due to retirement.
Mutual agreement. The content of this agreement is subject to free arrangement between the parties but it must be in writing. In any case, this agreement should regulate all mutual rights and obligations in relation to employment termination (termination notice, severance payment, non-competition clause, repossession of items etc.). This agreement is valid in the Republic of Srpska starting from the day the employee verifies his/her signature at the Municipality. We highlight that, from the Labour Law perspective, severance payment is not mandatory in this case but it can be stipulated by the parties.
Termination of employment by the employer. The employer may terminate the employment contract only if there is a justified reason as prescribed by the Labour Law i.e.:
The decision on employment termination encompasses justification of the employment termination and instruction on legal remedy. In case of a court dispute, the employer is obliged to provide proof for existence of justifiable reasons for termination.
Protected Group. The employer cannot terminate employment during pregnancy, sick leave for work related reasons, maternity leave and the childcare period as prescribed by the Labour Law. There are also specific procedures on terminating employment to employee syndicate representatives and former representatives.
Severance payment. In certain cases, prescribed by the Labour Law, the employee has the right to severance payment. The conditions which must be fulfilled is that the employment contract was concluded for an indefinite term and the employee was employed with the employer for at least two years. The minimum amount is 1/3 of the net average salary paid to the employee in the three months prior to termination, for each year the employee was employed with the employer. The maximum amount is 6 average salaries paid to the employee in the three months prior to termination.
Redundancy. There are specific provisions of the Labour Law and a detailed procedure which must be followed in case of mass termination of employment contracts, which also includes the involvement of the employees syndicate and relevant Employment Agency.
Non-compete. Local regulations enable certain restrictive covenants in the employment contract, the most important being the non-compete clause. The non-compete clause is prescribed by the law for the duration of the employment. The employment contract can prescribe for a non-compete clause after the termination of employment. In the Federation of Bosnia and Herzegovina, the non-compete clause can be set for no longer than 2 years after employment termination while in the Republic of Srpska, this clause can be set for 1 year after employment termination. In this case, the employer has to undertake by the employment contract an obligation to pay to the employee monthly remuneration in the minimal amount of half of the average salary of the employee in the months prior to contract termination.
Confidentiality clause. Apart from the non-competition clause, local employment contracts often contain a confidentiality clause during employment and a certain time following employment termination (usually unlimited), which prohibits disclosure of company’s business secrets.
Competent courts and authorities
Tax authority. Employment must be reported to the competent Tax Authority (for registering the employee in the social security insurance system) right at the commencement of work and the Tax Authority is authorized to fine the employer with severe monetary sanctions in case of any delays.
Disputes. In Bosnia and Herzegovina, there are no special labour courts, but labour disputes are dealt with by the regular civil courts – Basic and Municipality courts, Cantonal and District courts and the Supreme courts of the entities as the final court instance. The Supreme Court is in charge on deciding on extraordinary legal remedies.
In the Republic of Srpska, the employee who finds that his employment right was violated is entitled but not obligated to submit a claim directly to the employer. The employee is also entitled to file a petition for peaceful settlement within 30 days from gaining knowledge on the violation but no longer than 3 months from the executed violation. This petition is obligatory if the employee is to file a further lawsuit to the court (6 month statute of limitation period).
In the Federation of Bosnia and Herzegovina, the employee who finds that his employment right was violated is entitled to submit a claim directly to the employer within 30 days from gaining knowledge on the violation, which claim is obligatory in case the employee will pursue his rights further at the relevant courts (except for termination of employment). The statute of limitation period for filing a lawsuit at the relevant court is 90 days from failing to peacefully resolve the dispute.
Monetary claims deriving from employment are subject to a three-year statute of limitation.
The Ministry of Labour. The Ministry of Labour supervises application of the labour regulations through the Labour Inspection, which often performs field controls – regular or extraordinary controls, based on an individual’s application (which can also be anonymous). If the Labour Inspection identifies a certain failure of the employer to abide by the laws, it may initiate a misdemeanor procedure against the employer.
Other. In addition, there are certain authorities whose field of activity may include some aspects of employment relations (though not exclusively), such as Ombudsman (for discrimination cases). Ombudsman does not have the power to enact binding decisions, but his recommendations are observed by the authorities.
Relevant authorities for the protection and enforcement of intellectual property rights arising from trademarks are the following:
General remark: the legal regime for real estate in Bosnia and Herzegovina is regulated at entity level, more specifically Federation Bosnia and Herzegovina and the Republic of Srpska. In order to avoid repetition, we have provided a general overview, with indication of significant differences in the applicable regime between Federation of BiH and Republic of Srpska.
The applicable legislation in Bosnia and Herzegovina, more specifically, the Law on Property Rights of Federation of BiH and the Law on Property Rights of Republic of Srpska recognize ownership as a property right which entitles its holder to freely possess, use and dispose with the real estate and exclude third persons from enjoying those rights, within the limits set by the applicable legislation.
A property may be expropriated if so required in the public interest, in accordance with the applicable law on expropriation. The public interest for expropriation may be determined by the law or by a Government decree for specific development projects in the areas of: traffic, business, industrial, commercial, utility, healthcare, educational, culture, defense and administration infrastructure in Federation of BiH, i.e. education, health care, social welfare, culture, water distribution, sports, traffic, energy and utility infrastructure, state, provincial and municipal institutions, defense, environment and disaster protection, mineral resources exploitation, as well as public housing projects in Republic of Srpska. In case of expropriation, the person whose property is the subject of expropriation is entitled to market price compensation.
Purchase of real estate in Bosnia and Herzegovina by foreign legal entities and natural persons is subject to reciprocity – provided that a Bosnian resident may acquire land and buildings in the country in which such foreign entity is established, i.e. natural person is resident. Apart from this general rule, the law provides for certain restrictions in terms of the right of foreigners to acquire real estate. In particular, foreign legal entities and natural persons may not acquire ownership in an area which was, due to interests and security of the concerned entity determined as an area in which foreigners may not acquire ownership.
If a foreign entity establishes a subsidiary in Bosnia and Herzegovina, such subsidiary is treated equally to any other local entity acquiring land and buildings, regardless of the origin of the founder or its controlling share. This means that foreign persons and entities may indirectly own real estate in Bosnia and Herzegovina through their local subsidiaries under the same conditions as local legal and physical persons.
Real estate rights
Ownership is the most common form of real estate titles in Bosnia and Herzegovina. The ownership of land, buildings and special units within the building are separable. However, in accordance with newly established unity of ownership over real estate rule, implemented in Federation of BiH in 2013, i.e. RS in 2009, transfer of the ownership title to objects without simultaneous transfer of title to the land necessary for the use of such objects is not possible.
The right of disposal and the right of use over state owned property are common in practice and represent a characteristic and legacy of the socialist political system which restricted private ownership. However, the laws on property rights, introduced the possibility of converting the right of disposal/use over state owned property to ownership right, with some restrictions.
Construction right entitles its beneficiary to construct a building on a plot owned by another person, with the obligation of the beneficiary to pay the owner a fee. The constructed building and the construction right form a legal unity, so they may only jointly be transferred or burdened. The construction right may be instituted based on an agreement or court decision. The construction right requires double registration at the land registry, as a lien of the servient plot and as a separate estate.
The easement right is a right of the owner of one immovable property (dominant estate) to perform certain activities for the benefit of this property on an immovable property of another (servient estate), or to demand from the owner of the servient estate to refrain from doing on his estate something otherwise lawful. The most common form of easement is the right of passage over the neighboring estate in order to access the own estate. The easement rights may be instituted based on an agreement, the law and decision of the competent authority or based on adverse possession. When instituted based on an agreement, it is considered that the easement is instituted at the moment of its registration as the lien of the servient estate.
Generally, ownership over real estate is acquired in the moment of registration of the ownership in the relevant public registry - land registry, for which the legal assumption applies that it truly and completely reflects the factual and legal status of the real estate. The land registry, which is maintained by the municipality courts in Federation of BiH, and the Republic Administration for Geodetic and Property Affairs in Republic of Srpska contains data on legal title to real estate and encumbrances established thereon, if any, as well as the size of real estate.
In Federation of BiH, another public registry maintaining data on real estate is the cadastral registry, originally developed for technical purposes (to record land lots), which determines the exact area covered by particular land lot, etc., and does not maintain data on legal title to real estate and mortgages (if any), but indicates the possession status over the real estate. Since in some municipalities the land registry has been destroyed during the wars, the cadastral registry (together with written agreement and/or possession of the relevant real estate) is the conclusive evidence of the title. However, this is an exception to the general rule that any transfer of ownership over the real estate in Federation of BiH is effectuated by registration of the transfer with the competent land registry.
The real estate purchase agreement typical elements are: designation of the parties, designation of the real estate and the purchase price. The ownership is transferred based on a validly given statement containing explicit consent of the previous owner for transfer of the ownership (“clausula intabulandi”), which is usually given in the real estate purchase agreement; however it can also be given in a separate document.,.
Buyer and seller liability
Generally, the buyer's liability\obligation arising from the real estate sale-purchase agreements is the payment of the purchase price and payment of potential interests, if any. The seller is responsible for material and legal defects of the property.
The seller is liable to the buyer in case there are any claims of the third parties which may exclude, diminish or restrict rights of the buyer acquired from the seller. If such claims arise, the seller is obliged to protect the buyer, by providing any assistance which would result in rejection of the claim or right of the third party. If not, the sale agreement is considered automatically terminated by the law and the buyer is entitled to compensation of damages. Seller’s liability may be contractually restricted or excluded except in case when the seller was aware of the defect.
The seller is liable for material defects in case e.g. the property is not fit for regular use, or the property is not fit for the special purpose of which the seller was aware, or the property does not have the characteristics explicitly or implicitly agreed by the parties.
This liability of seller may result in automatic termination of the agreement, in case the seller failed to remedy existing imperfections in the additional term provided by the buyer. The buyer is also authorized to require damages compensation.
Banking and financing
In Bosnia and Herzegovina, there is no financing model specific for real estate. The terms under which the bank will provide project financing depend on the bank's business policy and, in most cases, the type of security the developer is able to provide.
Most common securities for financing real estate projects in Bosnia and Herzegovina include (i) mortgages on existing properties, (ii) registration of first rank mortgage right over the property under construction (which is registered at the land registry as an encumbrance over the land plot on which the property is constructed and which ensures the bank a first rank mortgage once the construction is finalized), (iii) pledge over movable property, (iv) pledge over shares (v) warranties, (vi) insurance and reinsurances policies, and (vii) bills of exchange.
The undertakings of the borrower include all standard undertakings relating to information such as provision of financial statements, compliance certificates, property monitoring and undertakings on the title, maintenance and development of the property, right to remedy borrower’s failure to perform, insurance, environmental matters and similar.
The list of conditions precedent to drawdown would depend on the project due diligence results and development specifics of the project. Key conditions to the drawdowns usually focus on the property title, secured construction permits, secured agreements with customers which would ensure revenue stream(s) for the project, insurance and similar.
The matters related to the lease of real estate are regulated by the general Law of Contract and Torts and the Law on Lease of Business Buildings and Premises of Bosnia and Herzegovina which applies to lease of premises used for conducting economic activities. Although the Law on Lease of Business Buildings and Premises is rather obsolete and does not reflect the current market conditions, it is still applicable and it has to be observed. It provides for a number of conservative solutions, including the fact that a lease agreement concluded for an indefinite period shall be terminated through the competent court. Furthermore, it provides limited reasons for termination of the agreement – use of the premises contrary to the agreement, delays in payment of the rent, failure of the lessor to equip/maintain the premises as agreed.
The lease agreement typically includes precise determination of the subject of lease, rent amount, manner of payment of rent amount, lease period, sub-letting possibility, manner of use of the leased premises, possibility\restrictions to change one or both of the parties, securities (deposit amount, bank/corporate guarantees, promissory notes), indexation, reasons for early termination, etc.
The lease is usually not registered in the public registries, however, the parties may agree to register a long-term lease (long-term being every lease exceeding the period of six months) in the land registry. Such registration provides protection for the lessee from eviction in case of sale of real estate in the enforcement procedure, as the applicable legislation provides that the lease agreement registered at the land registry (if registered prior to the initiation of the enforcement or establishment of mortgage over real estate) shall remain in force after the sale of real estate and change of ownership, whereas the new owner shall take place of the lessor in the lease agreement concluded with the previous owner.
In Federation of BiH, the urban planning permit is an administrative act which confirms that the construction is in line with spatial planning documentation and other terms and conditions envisioned for respective location. Specifically, the urban planning permit determines the planning and technical conditions which the investor must fulfil, such as the shape and the size of respective plot, materials and architecture guidelines, conditions for protection from natural and human-made disasters etc., as well as other terms and conditions determined by the earlier obtained permits and consents. Due to the complex administrative structure of Federation of BiH, the urban planning permit (as well as other permits) may be issued on a federal or cantonal level, which depends on the complexity and importance of respective building. In Republic of Srpska, the equivalent administrative act is referred to as the location conditions which is issued by the municipal department for spatial planning, or the Ministry for Spatial Planning in cases when the building is located in two municipalities.
Construction and use
Prior to commencement of the construction works, the investor must obtain a final and binding construction permit issued by the competent authorities which represents the authorization for starting the construction works based on the main design and other documents that determine the structure of the facility, materials and construction techniques. The construction permit will be issued within 30 days from submitting the request with the required accompanying documentation in Federation of BiH, i.e. 15 days in Republic of Srpska.
In Federation of BiH, the construction permit is valid for one year within which the construction has to start, otherwise the permit will expire. However, the construction permit may be extended for an additional year if the delays can be justified. In Republic of Srpska, the construction permit is valid for three years, whereas there is no possibility for extension.
Prior to obtaining the construction permit and starting of construction work, the investor is obliged to have valid and enforceable property rights over the property where the building will be constructed. In other words, the investor must prove that it has a legally valid right to build at the respective location, such as ownership over land, concession right, or the right to use land for construction
Once the construction is completed, as part of the procedure for issuance of the use permit, the competent technical commission is required to assess if the building has been completed in accordance with the designs and various permits obtained throughout the permitting procedure. Based on the use permit, the investor may commence the use of the building and submit the request for registration of the building at the land registry.
The banking sector in Bosnia and Herzegovina is regulated at entity level (Federation of BiH and Republic of Srpska). The Central Bank of Bosnia and Herzegovina (CB) is a state level institution Bosnia and Herzegovina and its main function is monetary stability. There are Banking Agencies at entity level, in charge of supervision and regulation of the banking sector.
Opening and maintaining the accounts is regulated by the Law on Domestic Payments (“Official Gazette of Republic of Srpska”, no. 52/2012 and 92/2012 and “Official Gazette of Federation of BiH”, no. 48/2015 and 79/2015, the “Law on Domestic Payments”) and by relevant bylaws of the Ministry of Finance of Republic of Srpska and Federation of BiH, such as the Rulebook on Opening and Closing Current Accounts at Authorized Organizations for Domestic Payments (“Official Gazette of Republic of Srpska”, no. 71/2012 and “Official Gazette of Federation of BiH”, no. 83/2015). Accounts can be opened for performing national and international payment transactions, both by residents and non-residents. One natural person/legal entity may have more than one account opened. Legal entities need to have one account determined as a main account. Before opening of account, the bank is obliged to determine the identity of the client and adhere to KYC procedure, which includes determination of an ultimate beneficial owner of the client - legal entity.
The Law on Foreign Exchange Operations (“Official Gazette of Republic of Srpska”, no. 96/2003, 123/2006, 92/2009 and 20/2014 and “Official Gazette of Federation of BiH”, no. 47/2010, “FX Law”) and its relevant Rulebook on the Conditions and Manner of Opening, Maintaining and Closing Accounts of Non-Residents (“Official Gazette of Republic of Srpska”, no. 89/2007, “Official Gazette of Federation of BiH”, no. 56/2010) prescribe the conditions subject to which banks open accounts of non-residents, and the manner of maintaining and closing such accounts.
The Law on Payment Transactions (“Official Gazette of Republic of Srpska”, no. 12/2001 and “Official Gazette of Federation of BiH”, no. 32/2000 and 28/2003, the “Law on Payment Transactions”) regulates payment transactions and payment orders, credit and debit transactions, responsibilities for damage from payment transactions, withdraws from accounts.
The Law on Anti Money Laundry and Financing of Terrorist Activity Prevention (“Official Gazette of BH”, no. 47/2014 and 46/2016, ‘’Law on AML’’) regulates obligations for identification of clients, monitoring of transactions and clients’ behavior, risk assessment of clients and products, in accordance with international standards. The Law on AML prescribes that every cash transaction of BAM 30.000 (approx. EUR 15.000) needs to be backed up with documentation regarding origin of funds. Also, if bank has any reason to doubt the validity or truthfulness of a document or an information, it can ask for additional documents or even stop the transaction. Bank is entitled to reject the transaction as well as to stop future cooperation with the client, if the client falls to submit relevant documents and explanation and if the client is considered as high risk.
Under general provisions of the Law on Banks (“Official Gazette of Republic of Srpska”, no. 4/2017 and “Official Gazette of Federation of BiH”, no. 27/2017, “Law on Banks”), only entity duly organized and licensed by the Banking Agency may provide loans in Bosnia and Herzegovina. The Law on Banks recognizes two types of such entities: banks and microcredit financial institutions. There are several decisions of the Banking Agencies stipulating in more detail conditions for granting loans, as well as documentation clients need to provide to the bank before approving the loan.
The Law on Banks introduces several provisions which are increasing a risk awareness and control in banks mainly regarding loan business as well as provisions regarding increased supervision.
Provisions of the FX Law regulate the conditions of granting the cross-border loans (locally: zajmovi) and credits (locally: krediti) making the difference between the terms “credit” which refers only to cross-border debiting by banks (both domestic and foreign) and “loan” which refers to cross-border debiting by entities whose primary business activity does not include granting the loans (e.g. cross-border shareholder loans, etc.).
The FX Law sets out the obligation for Bosnia and Herzegovina resident to report the Ministry of Finance on each cross-border debiting and/or granting a credit or a loan (both financial and commercial) till January 31 for the previous year in Republic of Srpska and within 15 days from the day of entering into credit/loan agreement in Federation of BiH.
Payments and security
Payment operations between Bosnia and Herzegovina residents are regulated by the Law on Domestic Payments and the Law on Payment Transactions and relevant bylaws, including all means of payment through banks, payment institutions and electronic money institutions..
Payment transactions between Bosnia and Herzegovina residents and non-residents are regulated under the FX Law. Pursuant to the FX Law, cross–border payments can be done solely under: (i) Current transactions (locally “Tekući poslovi”) and/or (ii) Capital transactions (locally “Kapitalni poslovi”). Capital transactions are transactions whose purpose is transfer of capital. Capital transactions include: direct investments, investments in real estate, transactions with securities, credit transactions, etc. Current transactions include: payments based on foreign trade transactions and other current foreign transactions (as determined by the law governing foreign trade), payments on the basis of repayment of the principal and interest deriving from loans, repatriation of investments, as well as transferring abroad and bringing-in the profits stemming from direct investments, transfers to individuals on the basis of pensions, and other public welfare benefits, transfers based on taxes and fees, inter-government cooperation, indemnity on the basis of insurance contracts, transfers on the basis of enforceable and effective decisions, transfers based on lottery winnings, concession fees, membership fees and fines and other transfers, as well as transfers of funds needed for family sustenance costs.
Each cross-border payment transaction should be documented with appropriate evidence of legal ground.
Regarding the securities, their establishment is regulated by different rules depending on the type of security instrument (e.g. mortgage, registered pledge over share(s), movables, receivables, bills of exchange, guarantees, etc.). As a mutual obligation for almost all types of security instruments granted under the Bosnia and Herzegovina law, the respective regulations require registration with the relevant local registers (Pledge Registry of Real Estate Cadaster).
The official currency of Bosnia and Herzegovina is BAM (locally: Konvertabilna marka). The exchange rate is determined by the Law on CB and is linked with EUR, as 1 EUR : 1.95583 BAM. All payments in Bosnia and Herzegovina should be executed in BAM. The FX Law stipulates that payments in Bosnia and Herzegovina may be executed in foreign currency in specific cases provided under the FX Law (e.g. payments of deposit as a security, selling/leasing of real estate, foreign exchange credits between residents, etc.). Payment operations between BiH residents and non-residents abroad may be executed in BAM as well as in foreign currencies through bank accounts.
The FX Law also stipulates that obligation can be concluded in foreign currency, but payment is to be executed in local currency.
Generally, all foreign documents (documents obtained from non-Bosnian registries, corporate decisions of foreign entities or documents generally signed in a foreign country) to be provided to the Bosnian authorities in the registration process are subject to certification requirements –or legalization of the document and translation by a court sworn interpreter. Thus, certification requirements for each non-Bosnian document must be determined in each specific case depending on the type of document and country of origin of the document in question.
The banks in Bosnia and Herzegovina may request a comprehensive set of documents for opening of bank accounts due to anti-money-laundering regulations. These documents primarily relate to determining the ultimate ownership of a Bosnian company and depending from the case at hand, the opening of bank account may become a rather complicated and time consuming procedure.
Immediately upon incorporation, the company is obliged to perform the payment of the local utility taxes for highlighting the company's name on the business premises. The amount of this utility tax is determined by the local authorities and may depend on the registered business activities of the company.
The company is obliged to maintain various records in its registered office such as Memorandum of Association, minutes from the General Assembly or meeting, book of shares, book of decisions (in Republic of Srpska) agreements, various internal rulebooks, such as the fire protection, work safety, employment rulebook and other legal instruments.
Liability of directors
Liability of directors could be observed from perspective of: (i) civil liability to the company and third parties resulting from breaches of various duties and responsibilities of director imposed by the laws and regulations; and (ii) liability for offences.
As per applicable company laws, the director is considered as a person with special obligations towards the company. This implies that the director is obliged to conduct his duties with the care of a good businessman always taking care that he acts in the best interest of the company and avoids any conflict of interest in relation to the company. Failure to act in accordance with the mentioned obligations may result in a claim by the company against the director and the right of the company to request compensation of damages.
Liability for offences is liability for breach of the statutory provisions. There are several types of offences:
Acts perpetrated by director can be attributed to the company as well (meaning that the company will be prosecuted if the conditions for criminal liability of legal persons are met (inter alia if the offence was committed with the intention to gain benefits for the company, if the offence was perpetrated upon instruction of the company's internal bodies or if the company uses the goods gained by the offence).
All natural persons who are employed with the company are enjoy paid social security contributions on their salaries. Contributions are calculated on the basis of gross wage and include contributions for pension insurance, health insurance and unemployment. The employer is required to calculate and withhold the prescribed amount of the social security contributions upon each payment of the salary to its employees.
The customs system is centralized on the level of Bosnia and Herzegovina.
The rules governing the system of foreign trade in goods in Bosnia and Herzegovina are established by several laws enacted by the Bosnia and Herzegovina Parliament, including in particular the following:
Bosnia and Herzegovina 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 following:
Main authority in charge for enforcement of customs regulations in Bosnia and Herzegovina is the Indirect Taxation Authority (“-ITA”), as an independent state authority. The ITA, through custom offices, is in charge for: customs clearance, customs supervision and other activities in relation to the control of foreign trade in goods and services.
The Import Tariffs of BiH are harmonized each year with the Combined Nomenclature of EU and legislative regulations. Goods imported into BiH and placed in free circulation are subject to payment of value added tax (VAT) at the rate of 17 percent while certain groups of products (e.g. coffee, cigarettes, oil, oil derivatives etc.) are subject to payment of specific taxes (excise) in accordance with the Law on Excise of Bosnia and Herzegovina. The rates of specific taxes have an ad valorem and/or specific rates form.
Benefits and Exemptions
Irrespective of tariff rates set by the Law on Customs Tariff, some goods are exempt from customs duties under specific conditions. The following goods are exempt from customs duties:
In order to import equipment representing the investment of a foreign person, the foreign investor should submit a written request for exemption from paying import duties to the competent customs authority (according to the place of seat of the company) along with the following documents:
The Customs Office issues a decision within 15 days upon submission of the request.
Free trade zones are part of the customs territory of Bosnia and Herzegovina which are specially fenced and marked and where business activities are carried out under special conditions in accordance with the Law on Customs Policy and the Law on Free Zones.
Advantages of the Free Trade Zones:
Corporate Income Tax Laws
The corporate income tax system in Bosnia and Herzegovina is not regulated at the state level. The tax system is under the jurisdiction of two entities, Federation of BiH and Republic of Srpska, and a separate administrative unit, Brčko District of Bosnia and Herzegovina. The year 2016 has brought new Corporate Income Tax Laws (“CIT Laws” or “CIT Law”) to the two entities. The new CIT Laws are applicable for the calculation of tax in the 2016 tax year. Besides the new laws, the Ministers of Finance in both entities issued relevant bylaws in order to regulate specific matters more closely and prescribe a procedure for tax reporting. The new legislation limits deductibility of interest, prescribing more detailed transfer pricing rules and rules on deductibility of expenses of write-off of receivables, and generally reduces the number of available tax relieves. The CIT Laws also prescribe more detailed rules on taxation of permanent establishments of foreign taxpayers. The tax rate remained at 10%, which is one of the lowest tax rates in Europe.
The income of legal entities from another entity or the Brčko District generated through permanent establishments (PE) will be subject to corporate income taxation in the entity in which the PE is registered (with respect to the profit generated in that relevant entity). The CIT Law in Republic of Srpska also considers legal entities from Federation of BiH and Brčko District as subject to corporate income taxation for income generated from real estate in the Republic of Srpska, even if they do not have a registered PE in the Republic of Srpska. Furthermore, both laws more closely define PEs in terms of non-residents as subject to corporate income taxes.
Tax deductible costs
A significant number of provisions of the CIT Law of the Federation of BiH provides for different treatment and more detailed regulation of tax deductible costs. Generally, transactions which are not performed for business purposes, and which are not aimed to generate profit, are not recognized as tax deductible. Only documented expenses which have incurred for the purpose of generating profit can reduce the tax base, provided that they are adequately presented in income statements.
Under the CIT Law of the Federation of BiH, the deductibility of interest paid to related parties is further limited. The interest is deductible if the total amount of loans from related parties does not exceed four times the capital of the taxpayer. If the amount of loans is higher, the proportional part of the interest is deductible. The rules on deductibility of interest do not apply to financial institutions (banks and insurance companies).
In the Republic of Srpska, only interest that is due in the relevant tax year is tax deductible for that tax year. Under the latest amendments of the CIT Law of the Republic of Srpska applicable for calculation of the tax in 2017, the deduction of interest will be further limited to the amount of 30% of the taxpayer’s tax base in the current tax year. This limit relates to interest in general, not only interest payable to related parties.
Provisions for the future mandatory costs related to environmental protection as well as provisions related to expenses expected within the guarantee period for sold goods, are tax deductible. The CIT Law of Republic of Srpska in addition prescribes that provisions for retained deposits and for remunerations and employee benefits are tax deductible.
Donations are not deductible if their amount exceeds 3% of annual income, while business entertainment expenses are deductible up to 30% of their total amount.
The new CIT Laws provide, in both entities, fairly similar conditions under which write-offs of receivables are considered as tax deductible. The write-off of receivables is tax deductible if receivables were not collected within 12 months and if the taxpayer initiated a court procedure or forced collection for the purpose of collection of the receivable, or if it filed a claim in a liquidation or bankruptcy procedure of the debtor. In case that a taxpayer deducted the expenses of written-off receivables and later collected the due, the taxpayer is obliged to increase the tax base for the collected amount.
The write-off of receivables by financial institutions is tax deductible up to the amount of such write-off calculated under the rules set in laws on monetary and banking operations.
Related party transactions
CIT Laws introduced in-depth regulation of transfer pricing.
The CIT Laws prescribe that a taxpayer may apply traditional transfer pricing methods (CUP, Resale Price, Cost Plus) in order to assess if the prices entailed in the transactions with the related parties are established on the basis of the arm’s length principle. Alternatively, the profit split method or the transactional net margin method or any other more appropriate method may be used if traditional methods are not adequate.
CIT Laws introduce the obligation of a taxpayer to hold proper transfer pricing documentation at the moment of filing the tax return. The Tax Administration (TA) may ask the taxpayer to present the transfer pricing documentation and the taxpayer has to provide it within the legal deadline (30 days in the Federation of BiH and 45 days in the Republic of Srpska). In addition, taxpayers that are involved in transactions with related parties in a volume exceeding the prescribed limit (app. EUR 250,000 in the Federation of BiH and EUR 350,000 in the Republic of Srpska) have to prepare a transfer pricing report and file it to the TA enclosed to the tax return.
Both in the Federation of BiH and Republic of Srpska, taxpayers may reduce their tax for 30% if they invest at least 50% of their profit into fixed assets in the current tax year. The incentive is related to investments into the equipment and immovable property that will be used in the production process. If a taxpayer sells the assets used for a tax credit within three years after the purchase, they are obliged to pay the tax that was credited in proportion to the value of the asset.
In the Federation of BiH, another tax credit is still available to taxpayers who invested in their fixed assets amounting to at least EUR 10 mil. within five consecutive tax years. The amount of tax credit is 50% of the assessed tax.
If taxpayers in the Federation of BiH using tax credits for investment into fixed assets distribute the dividend before the expiration period of three years following the tax credit period, they will be obliged to pay unpaid tax with additional penalty interest. Similarly, taxpayers have to pay credited tax if they use losses from previous years to reduce the tax base in two years following the tax credit period.
Another tax incentive is introduced to boost employment in the Federation of BiH. Taxpayers are allowed to deduct the double amount of salaries paid to new employees as an expense. In order to use this benefit, the terms of the employment have to be established for at least 12 months full-time and the employee could not be employed by the taxpayer or its related party within the previous five years.
The CIT Law of the Federation of BiH prescribes that a taxpayer may use only one tax incentive for investment into fixed assets per year. However, the investment tax credit may be used simultaneously with the tax incentive for employment of new employees.
It appears that a more favorable tax treatment in Bosnia and Herzegovina is for investors who primarily invest in production activities rather than in commercial activities.
An accelerated depreciation for the depreciation of assets used for environmental protection purposes is still available in the Federation of BiH. The depreciation rates for such assets may be 50% higher than regular depreciation rates (depreciation rates are prescribed in a range between 5% and 40%).
The CIT Laws introduce withholding tax to all service fees paid to residents of non-treaty countries. The withholding tax rate is 10%. Service fees paid to residents of treaty countries are subject to withholding tax only if paid for services listed in the CIT Laws (consulting, accounting, audit etc.) Also, it is prescribed that the withholding tax is payable even in cases when consideration is paid in kind.
Interest, dividends, royalties and rental fees for leasing of movable and immovable property paid to non-residents are subject to tax at a 10% tax rate. By exception, dividends distributed to foreign shareholders by a resident of the Federation of BiH are subject to tax at a 5% tax rate.
The transfer of profits generated through a PE is not subject to any withholding tax. However, a PE is required to pay a corporate income tax at a 10% general CIT rate before the transfer of profits.
Administrative expenses allocated to a PE by its non-resident parent are deductible in the percentage of the PE’s income in the total income of the parent company. For the purpose of allocating expenses, non-residents may use the allocation keys they find appropriate. By exception, interest and royalties paid by a PE established in the Republic of Srpska to its foreign parent are not tax deductible expenses for a PE. Interest and royalties paid to other related parties are deductible under the general rules set by the CIT Law.
Capital gains are regulated more closely, in particular in the Federation of BiH. Non-residents generating capital gains from the sale of immovable assets located in the Federation of BiH, the sale of shares in the local entity and the sale of IP rights, are obliged to pay the tax in the Federation of BiH. Non-residents are obliged to file the tax return and to assess and pay the capital gain tax within one month after the sale of the property. If a non-resident taxpayer fails to pay capital gains tax, the buyer of the property as well as the target company in the Federation of BiH are liable for tax payment.
Non-residents generating income in Republic of Srpska from the lease of immovable property, or capital gains from sale of immovable property, have to file an annual tax return and pay the tax under the general rules set by the CIT Law. Capital gains of non-residents from the sale of shares in the Republic of Srpska may be subject to tax in the Republic of Srpska if the property of the local company consists mainly of immovable assets located in the Republic of Srpska.
All companies which perform a financial services sector activity (banks, insurance companies, micro-credit organizations, etc.) are considered large.
Accounting standards: Applicable accounting standards:
Small and medium-sized enterprises can opt to apply full IFRS or IFRS for SMEs. Classification according to size:
Classification according to size
1) 50-250 employees in FBIH, RS and Brcko
2) Revenue: 2 – 8 million BAM in FBIH and RS (in Brcko 2.8 – 11 BAM million)
3) Value of assets: 1 – 4 million BAM in FBIH and RS (in Brcko 1.4 – 5.5 BAM million)
Companies which meet two “small” criteria and one “large” criteria are classified as medium
If two medium company criteria are not met
If two medium company criteria are exceeded
Micro (only in RS)
1) less than 5 employees
2) Revenue: less than 0.5 million BAM
3) Value of assets: less than 0.25 million
All companies which perform a financial services sector activity (banks, insurance companies, micro-credit organizations, etc.) are considered large.
Accounting regulating bodies: The entity-level Ministries of Finance are responsible for the legal and framework terms of financial reporting.
Accounting report currency and language: Accounting reports for the entities from Federation of BiH must be in Bosnian language, while the entities from the Republic of Srpska are reporting in Serbian language - figures must be in convertible marks (BAM). The reports must include balance sheet and income statement, and depending on the size of the company also cash-flow statement, equity changes statement and notes to financial statements.
Reporting periods: The fiscal year, as a rule, is identical to the calendar year. However, with the consent of the Ministry of Finance of the corresponding entity, a fiscal year which deviates from the calendar year can be defined. Legal persons classified as large and medium shall compile and present semi-annual financial reports, that is, financial reports prepared for the accounting period from 1 January to 30 June.
Timeline of submission: The semi-annual financial reports shall be submitted no later than 31 July of the current year. The annual financial report and the annual business report shall be submitted not later than last day of February of the current year, for the previous year. Legal persons that prepare and present consolidated financial reports shall submit these reports not later than the last day of April of the current year for the previous year.
Professional accountancy bodies: The Accounting and Auditing Commission of Bosnia and Herzegovina (AACBiH)
Certification and auditing: The audit of the annual financial statements by chartered individual auditors or auditing companies is separately defined for the Federation and Republic of Srpska as follows:
Auditing in FBiH: The following companies must carry out an annual audit:
Auditing in RS: The following companies in RS are obliged to carry out annual audit of their financial statements: Large companies and Companies of public interests.
Companies of public interest:
Audits are performed by auditing companies whose work is approved by the entity-level Ministry of Finance. Auditing standards applicable in Bosnia and Herzegovina (entire territory) are the International Standards on Auditing (ISA).
Transfer pricing scope: In Bosnia and Herzegovina, all transactions with related parties have to be compared to the market level, and the effect of differences has to be included in tax base.
Related party definition: Related parties are considered all individuals or legal entities that possess directly or indirectly 25% of a resident’s share capital or more than 25% of voting rights. A person/entity shall be considered as related party in case where it is determined that this person/entity intentionally enters into business transactions with a taxpayer with the aim of profit shifting, whereby such transactions will be treated as related party transactions.
Transfer pricing methods: The recognized methods of calculation of such prices are:
No above method is preferred over another. This implies that taxpayers are allowed to choose methods to be used in determination of “arm’s length” prices and preparation of transfer pricing study. The method is chosen on the level of each type of transaction. Combining two or more methods is also allowed. However, the one that has been chosen must be practically applicable and should result eventually in reasonable estimate of effects in accordance with the “arm’s length” principle.
Transfer pricing study: Preparation of the study is mandatory for all entities conducting transactions with related parties: the documentation prepared for the Federation residents (i.e. “local file”) and documentation prepared on a group level (i.e. “master file” - this segment refers to group companies operating in two or more countries, realizing BAM 1.5 billion gross revenue on consolidated level). TP documentation should be in one of the official languages of BiH, while the master file may be in English language. However, the FBiH Tax Authority reserves the right to request a translation of the TP documentation.
Who is obliged to prepare: All entities conducting transactions with related parties.
Submission dates: The legislation requires a taxpayer to disclose on the annual tax return the difference between market and transfer prices which are not at arm’s length, and the tax base should be adjusted accordingly. The taxpayer is not obliged to submit the transfer pricing documentation together with the tax return to the Tax Authority of FBiH (except the standardized forms – „notification on related party transactions“). Nevertheless, the taxpayer is obliged to submit the transfer pricing documentation to the FBiH Tax Authority within the period of 45 days when officially requested by it.
The notification form, TP-900 form is submitted until 31 March of the current year for the previous year- Starting from 1 January 2018, there are additional forms in place:
Advance transfer Pricing Agreements (APA): Not applicable.
Thin capitalization: Not recognized interest expense is the interest calculated on debt in the excess of 4:1 debt-to-equity ratio.
BEPS Actions – Implementation timeline
Announced timeline for the implementation of the BEPS Action 13 with regards to Country-by-country reporting (applies to MNEs with annual consolidated group revenue equal to or exceeding €750 million in the previous year, regulations extend to subsidiary entities, the filing obligation is imposed on the local entity. No automatic exchange is envisaged in local TP regulations for the time being) applies for the periods after 1 January 2018 for Federation and after 1 January 2016 for Republic of Srpska.