Legal and tax toolbox

Foreign investors enjoy two-level protection under the Constitution i.e. (i) guarantee for repatriation of the invested capital and gained profits, and (ii) elimination of the possibility for reduction of the rights which arise from the invested capital by law or other regulation. The goals and obligations for ensuring free movement of capital and protection of investments, stipulated in the Stabilisation and Association Agreement between North Macedonia and the European Union are also in line with the principles guaranteed by the Constitution.  

The protection of foreign investments is further strengthen through bilateral and multilateral international treaties. In particular, North Macedonia is a signatory party to the ICSID Convention and has signed around 40 bilateral investment treaties (BITs) which enable ICSID arbitration for the nationals of the counterparties – regional neighbours, European Union member states, countries from Asia and Africa. The BITs foresee transparency, free transfer of all payments relating to investments in some cases, as well as banning expropriation and guaranteeing compensation for losses. In addition, North Macedonia has signed:

1. an Agreement for the Encouragement and Protection of Investment with the OPEC Fund for International Development;
2. a Free Trade Agreement with the EFTA States;
3. the Central European Free Trade Agreement.

In order to further facilitate the free trade and the business operations of foreigners around 49 double taxation treaties are concluded with countries like Russia, Great Britain, Luxembourg, Switzerland, Qatar, etc. These agreements provide a range of taxation reliefs as low as 0% on dividends, depending on the signatory-country, as well as reliefs on interest, royalties from copyright and other income.

The national legislation ensures non-discriminatory and equal treatment with respect to the protection of the rights of the foreigners before the institutions of North Macedonia. Foreigners can seek protection of their contractual and statutory rights before the courts of North Macedonia. Also, eligible disputes can be resolved before international arbitrations. All foreign arbitral decisions can be enforced after being recognized in accordance with the terms of the New York Convention. Within contractual relations, the parties can opt for competence of a foreign court whose decision would be subject to recognition as well.

Incentives for investors

An essential part of the incentives for investors are focused on the companies within the Technological Industrial Development Zones (TIDZs). TIDZs are investment-friendly areas of territory of the Republic of North Macedonia conceived to serve high-tech clean industry. Companies enjoy significant incentives in regards to special customs and tax regimes.

Becoming an entity registered for performing a business activity in North Macedonia is the first step to being a TIDZ user, followed by signing an agreement to perform business activities in the TIDZ with its founder, as well as obtaining a decision for commencement of operations.

Having in mind the environmental precautions necessary, the TIDZs welcome foreign and domestic companies willing to perform activities in the area of (i) manufacturing and service activities; (ii) storage of goods for the purposes of the company user of the TIDZ; (iii) bank and other financial activities; (iv) insurance activities and reinsurance of real estate and people; and (v) other activities exclusively for the purposes of the performance of the working activities in the TIDZs.

The TIDZs have become North Macedonia’s most attractive investment opportunities, due to the generally favourable economic climate, but mostly due to the incentives the Government has provided to attract foreign investors, as follows:

1. corporate income tax exemption for the first 10 years;
2. personal income tax exemption on salaries for the first 10 years;
3. certain custom fees exemptions;
4. grants of up to EUR 500k towards building costs;
5. long-term lease of construction land for a period up to 99 years;
6. exemption from compensation for arranging construction land (i.e. free infrastructure and free connection to utilities such as natural gas, electricity etc.); and
7. assistance for justified education costs in the form of special or general training of workers.

Besides the aforementioned tax reliefs, the user of a TIDZ is also exempt from VAT for trade of goods and services within the TDIZ and import of goods in the TDIZ which are intended for purposes of production. This exemption is not applicable for trade, nor import of goods and services which are intended for end users.

A new Law on the Financial Support of Investments was adopted in 2018, regulating the procedure for granting financial support to investments of the business entities that will invest in the Republic of North Macedonia. The investment project for which the financial support is granted cannot last longer than 5 years from the start of its realization. Beneficiaries of financial support may be business entities that started a productive initial investment, if they fulfil certain conditions. The beneficiary of the financial support participates in the investment with its own funds, with at least 25% of the total eligible investment costs. The total financial support that can be paid cannot exceed 50% of the amount of the eligible costs realized. For large investment projects, the amount of financial support represents a percentage of the justified investment costs.

Financial support cannot be granted to an entity in the TIDZ, as well as to entities outside TIDZ, for the same eligible costs for which state aid has already been granted.

The types of financial support include:

Financial support for investments for the support of:
New employment;

• Cooperation with domestic suppliers;
  • Technological development and research;
  • Investment projects of significant economic interest;
  • Increase in capital investments and revenues;
  • Redemption of funds from enterprises in difficulty.
• Financial support for competitiveness:
  • Competitiveness on the market;
  • Conquering new markets and increasing sales.

The competent authorities to which the request for granting financial support (with accompanying documentation) are filed are the state agency Invest North Macedonia and the North Macedonia Free Zones Authority, while support is granted by the Government.

Outside the above, companies incorporated with foreign capital can enjoy the same incentives as the domestic ones (e.g. exemption from certain taxes and contributions when hiring certain categories of the population; grants; etc.).

Protected investments / investment guarantees

In November 2015, the new Law on Investment was enacted in order to, among others, improve investment surroundings in Serbia. One of the goals of the law explicitly stated is providing equal treatment to the domestic and foreign investors.

In this regard, the Law on Investment prescribes the following rights for both domestic and foreign investors: freedom to invest, protection of acquired rights, guarantees against expropriation, national treatment of foreign investors, freedom to effectuate payments towards foreign entities, the right to transfer profits and property of the foreign investor (this includes in particular the right of foreign investors to freely transfer financial and other assets in relation to the investment, after the payment of all taxes and other relevant obligations) and consensual dispute resolution.

The Law on Investment strictly prescribes the obligation of government bodies to act urgently, in regards to the effectuation and maintenance of investments and obligations of investors, and within their limitations to enable unhindered investments and follow and control the realization of rights of the investor and the effectuation of obligations by the investor, i.e. undertaken obligations of the Republic of Serbia in regards to the investment.

In addition, Serbia is a party to the ICSID Convention and has signed a relatively wide range of bilateral investment treaties (e.g., with Germany, Russia, Austria, etc.) generally containing consent to ICSID arbitration.

Incentives for investors

Regulatory and institutional framework

The terms and conditions for the award of subsidies for new investments are prescribed by the Law on Investments and two government decrees:

• the Law on Investments which regulates general legal framework for investments in the Republic of Serbia, formation and operations of the Economic Development Council and incorporation and operations of the Serbian Development Agency (“Agency”),
• the Decree on State Aid prescribing the general substantive terms under which the Government may provide subsidies to stimulate new investments.
• the Decree on the Terms and Procedures for the Promotion of Direct Investments (“Subsidies Decree”): the decree prescribes in detail the conditions and the procedure for granting subsidies to interested applicants, in accordance with general terms set out in the Decree on State Aid. In that respect, this decree is the main guiding regulatory act which prescribes both substantive and procedural rules for the granting of the subsidies.

The administration of the process for the granting of the subsidies is entrusted to the Economic Development Council and the Agency. Council approves decisions on granting the incentives while Agency performs administrative, technical and professional activities for the Council.

The type of subsidies available under the Subsidies Decree

The most important type of subsidies available for direct investments under Subsidies Decree is direct cash subsidies.

In addition to direct cash subsidies, investors may also qualify for exemption of customs duties (save for import VAT) on import of equipment which will be contributed as non-monetary contribution in the share capital of an investor’s company in Serbia.

Criteria to qualify for the subsidies

To be eligible for the subsidies interested investors have to satisfy three types of conditions:

Conditions concerning the investor: eligible investors may be either a foreign, or a local company. The Subsidies Decree allows the possibility that the applicant is a foreign company, provided that if it obtains the subsidies it will have to establish a subsidiary that will act as a direct beneficiary. Companies which qualify as large companies (more than 250 employees and annual turnover over EUR 43 million) may be awarded the subsidies only if the subsidies will have a material impact on the investment project (the size, the total funding, or the speed of the completion of the project, or if the project would not have been made without the subsidies).

Conditions concerning industry sector: subsidies may be given only for investments in the production sector and sector of services which could be subject of international trading. International trading services include services which are provided through information and communication technologies primarily to users outside of the territory of the Republic of Serbia (development of computer programs, storage and processing of data, user and project centers). Certain industries such as transport, software development, lottery, tobacco, weapons and ammunition, energy sector, do not qualify. 

Conditions concerning the financing of the project: under the Subsidies Decree the investor has to fund at least 25% of the total cost of investment from its own sources.

Conditions concerning the investment project: to qualify for the subsidies the investment project has to satisfy criteria in relation to the amount of investment and the number of new employees. The qualifying criteria depend on the level of development of the area where the investment will be made, as follows:

1. Investment in the production sector in devastated areas, which includes employment of at least 10 new employees and where the cost of the investment is at least EUR 100,000;
2. Investment in the production sector in a municipality classified in the fourth group of development, which includes employment of at least 20 new employees and where the cost of the investment is at least EUR 200,000;
3. Investment in the production sector in a municipality classified in third group of development, which includes employment of minimum 30 new employees, and if the cost of the investment is at least EUR 300,000;
4. Investment in the production sector in a municipality classified in the second group of development, which includes employment of minimum 40 new employees, and if the cost of the investment is at least EUR 400,000;
5. Investment in the production sector in a municipality classified in the first group of development, which includes employment of minimum 50 new employees, and if the cost of the investment is at least EUR 500,000;
6. Investment in the service sector which may be subject to international trade where the cost of investment is at least EUR 150,000 and which includes employment of at least 15 new employees.
7. Investment in the agriculture and fishing sector where the cost of investment is at least EUR 2 million and which includes employment of at least 25 new employees.

Where:

• “the cost of investment” includes only investments in fixed assets, not in the current assets (raw material, inventory and similar do not qualify). Both tangible and intangible assets (under certain criteria) qualify. Tangible assets include land, buildings, and equipment. Under the Subsidies Decree, leased equipment qualifies only if the equipment is leased under a financial lease. Cost of intangible assets (patents, licenses, trademarks, know-how) may be recognized up to 50% of the total cost of investment (tangible and intangible assets), for large companies.
• “employment of new employees” means the employment of Serbian nationals for the indefinite period of time (temporary employment for a limited period of time does not qualify). Only persons employed after the submission of the application for the subsidies qualify.

The amount of subsidies

The amount of subsidies to be awarded to the eligible investor is assessed on the basis of criteria prescribed by the Decree, provided that the total amount of subsidies cannot exceed prescribed maximal amounts depending on the volume of the investment. 

The amount of subsidies which may be awarded to individual investor are assessed against the cost of employment. The cost of employment includes the total cost of gross salaries (including tax and social security contributions) paid by the investor/beneficiary to his new employees in a 2-year period after the completion of the investment. The amount of subsidies ranges from 20% (for the most developed municipalities) to 40% (for the least developed municipalities) of the cost of employment, providing that the subsidy cannot exceed EUR 3,000 (for the most developed municipalities) to EUR 7,000 (for the least developed municipalities) per employee.

The amounts listed in paragraph above may be increased on the basis of the following two factors:

1. the cost of investment,
2. workforce intensive projects.

The cost of investment – On the basis of the cost of investment, the amount of incentives in already mentioned paragraph above may be increased for between 10% (for the most developed municipalities) to 30% (for the least developed municipalities) of the total amount of cost of investment.

Workforce intensive projects are projects which result in employment of at least 200 new employees. For these projects, the amounts of subsidies from already mentioned paragraph may be increased in the following manner:

1. for 10% of the cost of employment, if the investor/beneficiary employs at least 200 new employees,
2. for 15% of the cost of employment, if the investor employs at least 500 new employees, or
3. for 20% of the cost of employment, if the investor employs at least 1,000 new employees.

Against these criteria, the maximal amounts of subsidies are as follows:

1. For investments of up to EUR 50 million - the total amount of subsidies cannot exceed 50% of the cost of investment.
2. For small companies (up to 50 employees and up to EUR 10 million annual turnover) – the amount of subsidies set out in item (a) above may be up to 70%, and for medium-sized companies (up to 250 employees and up to EUR 50 million annual turnover) up to 60%.
3. For investments of EUR 50 million to EUR 100 million - the total value of subsidies cannot exceed 25% of the cost of investment.
4. For investments over EUR 100 million - the total value of subsidies cannot exceed 17% of the cost of investment.

The exact amount of subsidies which will be given to a specific investor within thresholds listed above will be assessed on the basis of the following criteria:

• References of the investor (market recognition, customer references, previous experience, success in the implementation of the investment projects, etc.);
• Participation (%) of unemployed persons whose qualifications are suitable for business activity of investor/beneficiary, in the total number of persons in the records of National Employment Service in the municipality in which the investment will be made;
• Number, i.e. percentage of employees with university degree who are to be employed in the investment;
• The amount and the type of the investment (greenfield or brownfield investment), i.e. the level of engagement of the construction industry in the investment;
• Technological level of the investment, in accordance with Eurostat classification;
• Previous relationships with suppliers and contribution of Serbian suppliers to the investment project;
• Effects of the investment on employees (training and salary levels);
• Previous and planned volume of international and overall turnover (before and after investment);
• Financial-market evaluation of the investment project (funding sources, liquidity, profitability, etc.);

Terms under which subsidies may be used

The subsidies may be awarded to the investor subject to the following conditions:

• That the investor/beneficiary completes the investment within 3 years as of the day of submitting of the application for subsidies. This deadline applies to both the completion of the investment and employment of new employees. The exact dynamics of the investment process within this general deadline should be set up in the agreement with the Government.
• That the investor keeps the investment (production) active and retains the number of employees at the agreed level for at least 5 years following the completion of the investment (3 years for small and medium-sized companies).
• That after the investor reaches the full employment to which it committed in his investment project, investor pays the employees their salaries regularly and in accordance with applicable labor laws

If the investor/beneficiary breaches any of conditions listed above (or other conditions which may be prescribed in the agreement with the Government) the investor/beneficiary will lose the right to subsidies, and will be required to pay back the amount of subsidies which has already been paid to it, together with interest for late payment.

The investor is required to submit a bank guarantee issued in favor of the Government, as a security for fulfillment of obligations set out in the agreement. The bank guarantee has to be active up until the investor/beneficiary fulfils all his obligations from the agreement with the Republic of Serbia.

The application, payment of subsidies and monitoring process

The application process includes the following main stages:

• The subsidies for promotion of direct investments may be given from the funds appropriated for this purpose in the state budget for the given year.
• Ministry in charge of commerce publishes a public invitation for the grant of subsidies. Invitation shall be also published on the website of the Agency.
• Interested investors submit their applications within deadlines set out in the public invitation, along with the accompanying documentation:
• Investor should also submit a letter of intent to the Agency. Letter of intent should contain data of investor, its business activity, previous investments etc.
• Agency performs assessment of projects and determines fulfillment of formal conditions for awarding of subsidies. Based on the Agency’s analysis, the Council issues its final decision on awarding of subsidies.
• The Council’s decision includes both the list of applicants who will be awarded the funds, and the amount of subsidies to be awarded to the successful applicants.
• The investor/beneficiary concludes the agreement with the Government (Subsidies Agreement).

The payment of subsidies is executed at the request of the beneficiary, which is delivered to the Ministry in charge of commerce (“Ministry”) in accordance with the dynamics set out in the Subsidies Decree and the Subsidies Agreement. Subsidies are paid in installments:

• proportionally to the participation of investment made in fixed assets in the given year in the total planned investment, as defined in the investment project; or
• proportionally to the number of employees employed in the given year compared to the total number of new employees, as defined in the investment project.

The Subsidies Decree prescribes a number of reporting and monitoring procedures aimed at fulfillment of beneficiary’s investment commitments. Beneficiary’s report must be submitted:

1. Within 60 days of the payment of the last installment i.e. as of the day of the completion of investment project and
2. Within 60 days as of the expiry of the guaranteed investment and employment

The Ministry performs the overall monitoring over the fulfilment of the investment project and prepares its report. The report of the Ministry should be delivered to the Agency. The Agency shall send report to the Council if finds that it is necessary that Council review the report.

If the beneficiary breaches any of its obligations set out in the Subsidies Agreement, the Government may activate the bank guarantee to collect the subsidies drawn by the beneficiary, together with interest for late payment.

Specific rules for investments of special interest for the Republic of Serbia

Investments of special interest for the Republic of Serbia (Large Investments) are subject to different rules concerning qualification conditions, procedure and deadlines for the completion of the investment.

Investments qualify for the Large Investments if they meet one of the following criteria:

1. direct investments in fixed assets in the amount greater than EUR 5 million (EUR 2 million in case of the least developed areas), or
2. investments which result in at least 500 (100 in case of the least developed areas) new employees.

Rules for awarding subsidies described in respect of direct investments in previous sections (including the maximal amount of incentives which may be awarded) generally apply also on the Large Investments, with few exceptions.

Because of the volume and importance of the Large Investments, the deadline for the completion of investments is longer – the Large Investments have to be completed within 10 years (compared to 3 years for other direct investments). 

As an exception to the procedure described in section 6.1, the investor may apply for subsidies for the Large Investments even without Ministry’s public invitation (i.e. even if Ministry has not published public invitation).