Investment Guide Bosnia and Herzegovina

Transcription

1 OCTOBER 2007 Investment Guide Bosnia and Herzegovina Bosnia and Herzegovina In cooperation with Prerad ANALYSES OF THE UNICREDIT GROUP NEW EUROPE RESEARCH NETWORK

2 Imprint Published by UniCredit Group/Bank Austria Creditanstalt Aktiengesellschaft Authors: Sándor Gardó, Goran Saravanja Chapters 1.6, 2. were kindly made available by Consultatio Edited by CEE Economics Department Bernhard Sinhuber, Tel. +43 (0) Produced by BA-CA Public Relations Department Tel. +43 (0) Printed by Ueberreuter Layout: Horvath Grafik-Design Disclaimer This document (the Document ) has been prepared by UniCredito Italiano S.p.A. and its controlled companies* (collectively the UniCredit Group ). The Document is for information purposes only and is not intended as (i) an offer, or solicitation of an offer, to sell or to buy any financial instrument and/or (ii) a professional advice in relation to any investment decision. The Document is being distributed by electronic and ordinary mail to professional investors and may not be redistributed, reproduced, disclosed or published in whole or in part. Information, opinions, estimates and forecasts contained herein have been obtained from or are based upon sources believed by the UniCredit Group to be reliable but no representation or warranty, express or implied, is made and no responsibility, liability and/or indemni fication obligation shall be borne by the UniCredit Group vis-a-vis any recipient of the present Document and/or any third party as to the accuracy, completeness and/or correctness of any information contained in the Document. The UniCredit Group is involved in several businesses and transactions that may relate directly or indirectly to the content of the Document. Accordingly, the UniCredit Group may hold a position or act as market maker in any financial instrument mentioned in the Document. Information, which is not reflected in the Document, may therefore be available to persons connected with the UniCredit Group. The Document has been approved for distribution in UK by the London branch of UniCredit Banca Mobiliare S.p.A., regulated by the FSA for the conduct of investment business in the UK. It has not been approved for distribution to or for the use of private customers, as defined by the rules of the FSA. The Document may not be distributed in USA, Canada, Japan or Australia. *) Including Koc Financial Service A.S., a joint venture established pursuant to the laws of Turkey, of which UniCredit Italiano S.p.A. has a 50 % shareholding.the definition of control is pursuant to Italian laws. 2 Investment Guide Bosnia and Herzegovina, October 2007

3 Summary Country Facts Bosnia and Herzegovina Political framework Economic background Foreign trade Foreign Direct Investment Economic environment for investors Investment incentives Legal Foundations and General Conditions for Investment General information Company law Accounting and reporting law Labour law Legal regulations governing foreign nationals Social insurance regulations Tax regulations Appendix Republika Srpska Federation BiH...41 UniCredit Group CEE banking network...44 Investment Guide Bosnia and Herzegovina, October

4 UniCredit Group in Bosnia-Herzegovina UniCredit Group in Bosnia-Herzegovina UniCredit Group currently operates 3 subsidiaries in Bosnia-Herzegovina HVB Central Profit Banka, Nova Banjalucka Banka and UniCredit Zagrebacka Banka. Sarajevo The three banks have combined total assets of about EUR 2 billion and are the number 1 in the country with a market share of 25 per cent. Together, the banks operate a country-wide network of 170 branches and serve over 1 million retail and corporate customers. In early 2008, it is planned to integrate HVB Central Profit Banka and UniCredit Zagrebacka Banka to form the new UniCredit Bank in Bosnia-Herzegovina. By implementing the standards and expertise of other UniCredit Group members, the three banks enriches its classical banking products (loans, deposits, payments) with the high quality and prompt service. In addition to a wide variety of existing products, our advisors throughout the network of branches are prepared to offer you innovative products (including basic treasury products) tailored for your needs. UniCredit Group s services for corporates incude: Account processing transaction account for cash flows and payment transactions account statements Types and periods of statements delivery chosen by the client MT 940 Sending the account statement for the bank's client to another bank, and for the specific client of that bank, via SWIFT MT 940 messages Cash transactions cash deposits cash withdrawal Payment services Internal payment transactions Domestic cumulative payments International payment transactions Deposit of the founding capital/privatization Issuing receipts for deposits of founding capital in the bank, and services of depositing privatization capital (additional investments). E-banking Card payment 4 Investment Guide Bosnia and Herzegovina, October 2007

5 Services of the International Markets Division The Bank's Treasury is a part of the UniCredit Group Treasury, the UniCredit Group's "gate" to the global financial market. By connecting with international financial centers and branches in Central and Eastern Europe, our Treasury transfers its know-how around the world. Deposits On-sight deposits Deposits on the transaction account of the company, in BAM or any other convertible currency. Interest: For deposits on transaction account, interest is calculated on a monthly basis. Term deposit Term deposit for a fixed period on a deposit account. The largest banking network in Central and Eastern Europe Bank Austria Creditanstalt as a part of the UniCredit Group is responsible for the markets in Central and Eastern Europe (CEE). UniCredit Group operates the largest international banking network in CEE with more than 3,100 branches and outlets, with 62,500 employees and approximately 25 million customers. Ranking among the top financial groups in Europe, UniCredit Group has a presence in 20 countries, with over 35 million clients and 7,500 branches, approximately 135,000 employees and total assets of approximately EUR 869 billion as of 30 June Financing UniCredit Group offers short-term and long-term financing services to its clients. Documentary business Outline loan for guarantee/credit issuing This is universal financial arrangement which entails multiple guarantee/credit issuing during the period which is covered with an outline loan agreement. Guarantees Banking guarantees issued as security for domestic and international transactions, with the following types of guarantees: Payment guarantee Advance guarantee Bidding guarantee Guarantee for quality job execution Quality guarantee Guarantee for the return of retained amount Customs guarantee Confirmed nostro guarantees towards abroad: for all, above mentioned guarantees except for the customs guarantees. Your contact at HVB Central Profit Banka Zelenih beretki Sarajevo info@hvb-cpb.ba Nova Banjalučka Banka Marije Bursać Banja Luka Info@novablbanka.com UniCredit Zagrebacka banka Kardinala Stepinca b.b Mostar uizaba@unizaba.ba Investment Guide Bosnia and Herzegovina, October

6 Summary Summary Form of Government: Governmental System: Presidency: Republic Parliamentary democracy Haris Silajdzic, Nebojsa Radmanovic, Zeljko Komsic (since 6 November 2006) Prime Minister: Nikola Spiric (since 11 January 2007) High Representative: Miroslav Lajcak (since 1 July 2007) Area: 51,209 km 2 ; a total of 1,538 km of shared borders with Croatia (932 km), Montenegro (249 km), Serbia (357 km) Population: 3.9 million (Bosnian: 48%; Serb: 37 %; Croat: 14 %) Capital: Sarajevo (population of some 400,000) Administration: Federation of Bosnia and Herzegovina (10 cantons, 79 municipalities), Republika Srpska (63 municipalities); Brčko District GDP (2006): EUR 9.8 billion Per capita GDP (2006): EUR 2,540 Currency: Convertible mark (ISO-code: BAM), 1 BAM = 100 fening; Avg. exchange rate (2006): BAM/EUR = 1.956; BAM/USD = The Dayton Peace Accord at the end of 1995 created a state with weak central institutions and two very different entities. This structure has not made it easy to pursue a path of coordinated political, legal and economic reforms. Nevertheless, following pressure from the international community, some progress has been made in recent years in strengthening the central state and in creating an effective market economy and a single economic space. Bosnia and Herzegovina has seen high economic momentum in recent years, which is expected to continue also in the years ahead. However, economic growth will be limited to around 6 % unless decisive action is taken with a view to institutional and economic reforms. These are not only a prerequisite for faster Euro-Atlantic integration, but also an important factor in raising the country s attractiveness as an investment location for foreign investors and in increasing Bosnia s competitiveness on international markets. While price stability bolstered by the currency board arrangement will remain a crucial asset of the Bosnian economy in the years ahead, in order to enhance macroeconomic stability Bosnian policymakers will have to cope with an increasing fiscal burden, high unemployment and a current account deficit which is unsustainable in the longer term. FDI inflows into Bosnia and Herzegovina have been fairly low so far in comparison to other CEE countries. Attracting more FDI would, however, be crucial in accelerating structural reforms and for Bosnia to catch up with its CEE peers. FDI inflows are expected to reach record levels in 2007 on higher privatisation revenues, but against an uneven development within the two entities. In fact, most of the recent privatisation projects were concentrated in the RS, while the FBiH has recently not made substantial progress in structural reforms. Therefore, it is essential that the pending privatisation deals do not fall victim to political squabbling. 6 Investment Guide Bosnia and Herzegovina, October 2007

7 1. Country Facts Bosnia and Herzegovina 1.1 Political framework Following its proclamation of independence from the Federal Socialist Republic of Yugoslavia, Bosnia and Herzegovina (BiH) was internationally recognised in April At more or less the same time Bosnia s Serbs proclaimed the Republika Srpska of Bosnia and Herzegovina and withdrew from national government bodies. Shortly afterwards war broke out in BiH and was only ended by belated international community pressure in 1995 through the Dayton Peace Agreement. The Dayton Agreement created a Bosnian state with weak centralised institutions and two entities: the Bosniak-Croat Federation (FBiH) is predominantly inhabited by Bosnian Muslims and Croats while the Republika Srpska (RS) is dominated by ethnic Serbs. By recognising Republika Srpska and cantonalising FBiH, the Dayton Agreement entrenched the divisions that were created through Bosnia s war of independence. Implementing and co-ordinating reforms to this day between the two entities and on the whole territory of BiH remains difficult on account of the institutional set-up imposed on the country by the international community. That task nonetheless has become less arduous since 1997 when the international community enhanced the powers of the High Representative, who is responsible for the political and civil implementation of the Dayton Peace Agreement. The current High Representative is Miroslav Lajcak from Slovakia, who was appointed on 1 July The highest political body in Bosnia is the presidency which is composed of one representative of each of the three constituent peoples, who is elected to a four-year term. At the most recent elections in October 2006 the Croat Zeljko Komsic, Bosniak Haris Silajdzic and Serb Nebojsa Radmanovic were elected. The president of the presidency rotates every 8 months. The presidency nominates the Chairman of the Council of Ministers (CoM) who is confirmed by the House of Representatives. The CoM is the executive branch of government in BiH at the national level. The CoM has responsibility for foreign policy, justice, defence, external trade, finance (in particular approval of lower level budgets and the collection of VAT and customs duties), the co-ordination of communication and transport between entities, human rights and refugee return and civil affairs. The national parliament comprises two houses, the House of Representatives, with 42 members of which two-thirds come from FBiH and the remaining 14 from RS. The upper house or House of Peoples has 15 representatives consisting of 5 representatives from each constituent nation. In the 1 October 2006 elections the Bosniak vote was split between the Party of Democratic Action (SDA) and the Party for BiH (SBiH). The Serbian vote was won by the Party for Independent Social Democrats (SNSD) which ensured its popularity by campaigning for an independence referendum should Kosovo gain independence from Serbia. A not insignificant part of the Croatian vote appears to have gone to the Social Democrats while the traditional Croatian party in BiH, the Croatian Democratic Union (HDZ), managed only three representatives, in part because of a split which saw a Croats Together coalition led by HDZ 1990 emerge to secure two seats. Both entities have bi-cameral Houses of Parliament and despite progress in transferring some power to the national level these remain the most influential levels of government in BiH. In addition, FBiH is divided into 10 cantons. In FBiH, after complex negotiations, a broad-based coalition of Bosniak and Croatian parties formed a government in March 2007, while the SNSD s clear-cut victory in RS made forming a government there a much easier task. (Table 1) Distribution of Seats in the Bosnian House of Representatives after the elections of 1 October 2006 Party Seats Party of Democratic Action SDA (Bosniak) 9 Party for Bosnia and Herzegovina SBiH (Bosniak) 8 Party of Independent Social Democrats SNSD (Serb) 7 Social Democratic Party of BiH SDP 5 Serbian Democratic Party SDS 3 Croatian Democratic Union of BiH HDZ BiH 3 Croats Together HZ 2 Other 1 5 Total 42 1) Five Parties have one representative each: BiH Patriotic Party - Sefer Halilovic, Party of Democratic Progress RS, People s Party Work for Betterment (FBiH), Democratic People s Alliance (RS) and Democratic People s Community (FBiH) Source: Electoral Commission of BiH, UniCredit Group New Europe Research Network Investment Guide Bosnia and Herzegovina, October

8 Country Facts Bosnia and Herzegovina Over a decade after the end of hostilities peace is a welcome feature in BiH. Yet the country remains divided ethnically, politically and territorially, with the political process overshadowed by a lack of trust. The main goal of the international community is to create a uniform economic space within the framework of a politically strong, unified state. Although there has been definite progress in that regard the two entities in BiH continue to enjoy a very high degree of independence. This is most evidently seen by the refusal of RS to accept a unified police force in BiH which so far has halted Bosnia and Herzegovina s progress in signing and ratifying the Stabilisation and Association Agreement (SAA) with the European Union. As a result it is too early to speculate when BiH will become a candidate country for EU accession. The same applies to entry into the NATO pact. 1.2 Economic background While the war of independence understandably largely brought a halt to economic activity, a concerted effort by the international community to rebuild the country s infrastructure and set up institutions saw double-digit growth in the second half of the 1990s. While the expected gradual decline in international community financial assistance did see growth slow, the benign international economic conditions of the early 2000 s, in particular low interest rates combined with large-scale privatisation of the banking sector, provided a strong impetus for economic growth in recent years. Thus, economic growth has been robust for almost five years, driven by a combination of export growth as productivity has risen in sectors which benefited from private capital, and by favourable terms of trade as stronger global demand for steel and commodities has pushed up export prices while the introduction of a value added tax last year has seen an anticipated improvement in reporting. At the same time, a largely privately-owned banking sector has brought about financial deepening which has been a key feature of the robust economic growth exhibited by the BiH economy in recent years. Thus, economic growth in 2006 reached 6.2 % and with the outlook for the global economic environment and demand for commodities broadly positive, economic growth should remain near current rates also in the years ahead. Initially, investment in trade and other services was more pronounced, but in light of the privatisation activity in the cement and steel sectors and continued strong performance in the aluminium sector, driven by strong global demand for commodities, a broader recovery in the industrial sector has become evident in recent years. The political division of Bosnia and Herzegovina is, however, still reflected in industrial development. Failure to implement reforms in the first few years after the end of the armed conflict caused economic progress in Republika Srpska to fall behind that of the Federation of Bosnia and Herzegovina. A slow catching-up process has been under way since In 2005, industrial production in FBiH grew at a rate of 6.1 % yoy, compared to almost 20 % in RS. This trend continued in 2006 and was particularly pronounced in the metal-producing industry, which became more competitive following foreign investments in the sector. With average growth of 19.1 % yoy, industrial production grew Economic development (Chart 1) ( ) Industrial production (Chart 2) ( ) yoy, % 12,000 10,000 8,000 6,000 4,000 2, Nominal GDP (EUR mn, left scale) Real GDP growth (%, yoy, right scale) FBiH RS BiH Source: CBBH, UniCredit Group New Europe Research Network Source: CBBH, UniCredit Group New Europe Research Network 8 Investment Guide Bosnia and Herzegovina, October 2007

9 much faster in Republika Srpska than in the Federation (7.5 %). In the first seven months of 2007 industrial production rose by 12.6 % yoy in the Federation with the manufacturing sector recording an increase in production of 21.7 % yoy over this period. Apart from traditionally strong sectors such as metals and metal products production, food and beverage and furniture production have also performed well to date this year. In Republika Srpska, however, industrial production has risen by only 0.1 % yoy even though the manufacturing sector has seen an expansion of 6.5 % yoy. This was due to the contraction in the relatively more important electricity, gas and water supply segment of 14.9 % yoy in this period. One should also bear in mind that last year industrial production rose by a very strong 19 % yoy, which in itself is a reason for slower growth in industrial production this year. The currency board system remains the cornerstone of the economy, having anchored inflationary expectations and removed uncertainty in respect of exchange rate policy. Under this regime the exchange rate of the convertible Bosnian mark (KM; ISO-code BAM) has been pegged to the euro at a rate of since 1999 (and before then to the Deutsch Mark at a rate of 1:1 from 1997 on). The price differential between the two entities has narrowed significantly in recent years, a development that heralds the slow integration of both economic regions. Thus, as the RS economy continues to integrate in increasing measure with the FBiH economy and becomes less dependent on the Serbian economy which has a higher inflation rate, the inflation differential between the entities has narrowed. After several years of low inflation, inflationary pressures intensified in 2006, averaging over 7 %. To a large extent this was the result of a one-off effect associated with the introduction of a flat 17 % VAT. In the first seven months of 2007 consumer prices have averaged 1.6 % yoy in FBiH and 0.6 % yoy in RS, with higher services prices being mitigated by lower goods prices. By the end of this year consumer prices will have increased on the back of a base effect, while increases in food prices in the autumn will also be a source of short-term inflationary pressure. Although the labour market has seen an increase in employment this year, it remains loose, meaning that there is little evidence of wage pressures and thus labour market related inflationary pressures. Foreign exchange reserves (by ensuring a sufficient coverage of money supply) are of the utmost importance for the credibility of the currency board. In this respect, the Central Bank of BiH has seen foreign exchange reserves rise from EUR 153 mn in June 1998 to EUR 5.9 bn at the end of June 2007, covering 5.1 months of imports of goods and services and providing a significant cushion in the event of unexpected market shocks. Labour market conditions remain tough. An unemployment rate of some 45 % signals the need for an extensive labour market reform and more intensive structural reform efforts (restructuring and privatisation of the corporate sector). In fact, despite the robust performance of the economy in recent years, no major improvements were seen on the labour market, with the unemployment rate moving in the region of % in the years This high unemployment rate would seem to reflect Inflationary developments (Chart 3) ( ) Foreign exchange reserves (Chart 4) ( ) ,600 3,000 2,400 1,800 1, Dec. 98 Mar. 99 Jun. 99 Sep. 99 Dec. 99 Mar. 00 Jun. 00 Sep. 00 Dec. 00 Mar. 01 Jun. 01 Sep. 01 Dec. 01 Mar. 02 Jun. 02 Sep. 02 Dec. 02 Mar. 03 Jun. 03 Sep. 03 Dec. 03 Mar. 04 Jun. 04 Sep. 04 Dec. 04 Mar. 05 Jun. 05 Sep. 05 Dec. 05 Mar. 06 Jun. 06 Sep. 06 Dec. 06 Mar. 07 Jun FBiH RS BiH Gross FX reserves (EUR mn, left scale) Import cover (months, right scale) Source: CBBH, UniCredit Group New Europe Research Network Source: CBBH, UniCredit Group New Europe Research Network Investment Guide Bosnia and Herzegovina, October

10 Country Facts Bosnia and Herzegovina a high number of unofficially employed persons. The number of employed in BiH rose by 16,000 between January and June 2007 to some 670,000, while the number of unemployed rose by 1,400 over this period to 530,000. The unemployment rate thus fell from 44.8 % to 44.2 %. The unemployment data between the entities differ appreciably, with the unemployment rate in the Federation totalling 48 % and only 35 % in Republika Srpska. At the same time, real wages in the BiH grew by 9.1 % yoy in the first half of 2007, reflecting the stronger economic growth. In recent years, a unified customs law and value added tax have been implemented in BiH, which have simplified the business environment and boosted tax revenues. Indeed, the fiscal position improved markedly in 2006 as a result of the introduction of the VAT and the maintenance of 2005 spending levels. This year, the overall fiscal position in the country is expected to deteriorate somewhat on account of increased recurrent spending. There is some uncertainty regarding the extent of domestic claims against the government; together with the generous compensation schemes (e.g. restitution, war damage, frozen foreign currency deposits) adopted in 2006 these are expected to additionally burden the budget in the coming years. However, the IMF estimates that Bosnia Herzegovina s public debt will remain around 25 % of GDP even after bonds to cover these claims have been issued. In addition, 2006 saw the enactment of statutory borrowing limits on government which will help maintain the stability of medium-term fiscal policy. Nonetheless, with a government sector amounting to roughly 50 % of GDP and the extent of government liabilities on account of domestic claims unclear, continued prudence in fiscal policy will be necessary to lock in macroeconomic stability. Given a fixed exchange rate regime, a low level of international competitiveness and strong domestic demand (boosting imports of both consumer and capital goods, with the latter mainly being driven by FDI inflows) BiH has struggled with extensive external imbalances for over a decade, with the current account deficit amounting to some 20 % of GDP in recent years. Last year, however, saw the current account deficit narrow to 10.7 % of GDP from 19.8 % in Improved reporting of exports on the back of the newly-introduced VAT, the favourable terms of trade effects of higher commodity prices, as well as the employment of private capital beyond the financial sector in the last few years have all contributed to stronger export growth in recent years. Evidently, BiH s relative sensitivity to world commodity prices does present a risk in terms of further reducing the current account deficit. Strong domestic demand in an environment of continued financial deepening, which has seen credit growth in the order of 25 % yoy in recent years and is expected to remain high, driven by increasing competition despite higher interest rates in the euro zone, will also limit the scope for a further reduction of the current account deficit. At the same time, the modest progress expected with a view to restructuring and privatising the corporate sector and the related expansion of ex- Current account balance (Chart 5) ( ) Credit and deposit growth (Chart 6) ( , yoy, %) ,000 1,500 2,000 2,500 3,000 3,500 4, Aug. 98 Nov. 98 Feb. 99 May 99 Aug. 99 Nov. 99 Feb. 00 May 00 Aug. 00 Nov. 00 Feb. 01 May 01 Aug. 01 Nov. 01 Feb. 02 May 02 Aug. 02 Nov. 02 Feb. 03 May 03 Aug. 03 Nov. 03 Feb. 04 May 04 Aug. 04 Nov. 04 Feb. 05 May 05 Aug. 05 Nov. 05 Feb. 06 May 06 Aug. 06 Nov. 06 Feb. 07 May Current account balance (EUR mn, left scale) Current account balance (% of GDP, right scale) Credit growth (left scale) Deposit growth (right scale) Source: CBBH, UniCredit Group New Europe Research Network Source: CBBH, UniCredit Group New Europe Research Network 10 Investment Guide Bosnia and Herzegovina, October 2007

11 port capacities and increased cohesion in regional trade through membership in CEFTA should to some extent mitigate the upward pressures on the current account in the coming years. There can be no denying that Bosnia and Herzegovina has come a long way in the last 5 years. Over a decade after the end of hostilities the BiH economy is more diverse and more developed than at any time previously. Key reforms such as the privatisation of the banking sector, the harmonisation of customs duties, introduction of value added tax, enactment of government borrowing limits as well as a broadening of investment to include major industrial sectors such as steel have played an important role in bringing about this positive development. At the same time, foreign debt remains low and the fiscal position has improved in recent years. Despite high external imbalances, which have admittedly narrowed recently, the currency board arrangement remains credible. The financial sector has developed in a favourable manner with the advent of privatisation and the industrial sector has also attracted foreign investment in key industries such as steel, cement and aluminium. The energy and telecommunications sectors have also seen increased private investment in recent years. One should, however, also remember that benign international economic conditions have assisted the development of the BiH economy. Nonetheless, BiH is encumbered with a complex political system leading to duplication in many policy issues and poor policy co-ordination which in turn distorts incentives for cooperation between the two entities and the national government. Although some progress has been made with a view to the reform of the defence sector and the creation of conditions aimed at encouraging the return of refugees, efforts to enact amendments to the constitution in 2006 failed while police reform, which is being resisted by Republika Srpska, remains stalled and with it progress on signing the Stabilisation and Association Agreement with the EU. The SAA is in turn the first major step towards becoming an EU candidate country and for eventual membership of the EU itself. The lack of trust between the three constituent peoples of BiH combined with the complex political structures imposed upon the country by the Dayton Peace Agreement limit the scope for agreement on important reforms. 1.3 Foreign trade Due to the UN trade embargo against former Yugoslavia during , foreign trade with Bosnia and Herzegovina was adversely affected until the mid-1990 s. In the aftermath, foreign trade flows were largely limited to relief supplies for humanitarian purposes and supplies for UN troops, with different (and at the same time intransparent) trade systems and customs regulations at the entity level additionally impairing foreign trade flows. The foundations for a unified trade regime and customs policy were finally established in mid-1997 when the Parliament at the state level adopted the necessary laws, thereby providing the necessary legal base. The elimination of economic restrictions and the harmonisation of foreign trade policy structures paved the way for an impressive expansion of foreign trade volumes (total of exports and imports) from EUR 4 bn in 1998 to EUR 8.8 bn in Despite this favourable development, an analysis of the country s foreign trade reveals the deep-rooted structural problems of the Bosnian economy. In this regard, given the slow pace of corporate reform and thus sluggish domestic production, excess demand has to be met from foreign sources, which underscores Bosnia and Herzegovina s high import propensity. In the years imports rose by an average 8 % per annum (nominal, in euro terms) with the volume of imports reaching EUR 6.1 bn as of year-end 2006, after EUR 3.4 bn back in Although, in light of initial successes in corporate restructuring and privatisation, exports at 22 % on average grew much faster in the period than imports, with the volume of exports increasing nearly fivefold from EUR 600 mn in 1998 to EUR 2.7 bn in 2006, the import coverage of exports at 44 % is still fairly low. Additionally, the strong export growth of recent years has been mainly driven by raw materialbased sectors such as metals and metal products, mineral prod- Foreign trade volumes (Chart 7) ( ) 4,000 3,000 2,000 1, ,000 2,000 3,000 4,000 5,000 6,000 7, Exports (EUR mn) Imports (EUR mn) Source: CBBH, UniCredit Group New Europe Research Network Trade deficit (EUR mn) Investment Guide Bosnia and Herzegovina, October

12 Country Facts Bosnia and Herzegovina ucts, and wood and wood products, pointing to the need for more decisive structural reforms so as to increase the country s competitiveness in international markets in higher value-added and more capital intensive segments. Thus, in the period under review Bosnia and Herzegovina continuously struggled with high foreign trade deficits which were in the region of 50 % of GDP in the years Even if the country s trade deficit narrowed considerably in 2006 to EUR 3.2 bn or 35 % of GDP, this was more a result of temporary lower import demand and better statistical coverage of exports following the introduction of VAT at the beginning of 2006 and thus does not necessarily signal the commencement of a sustained improvement in the long term. With the waning of this base effect in 2007 the trade deficit is expected to rise again and is expected to widen further in on firmer domestic demand. But the modest progress expected with a view to restructuring and privatising the corporate sector and the related expansion of export capacities, as well as the growing cohesion of regional trade through membership of CEFTA (dismantling of regional tariff and non-tariff trade barriers) and accelerated integration into European structures after the eventual signing of the Stabilization and Association Agreement with the EU should to some extent mitigate the rising trend. As of year-end 2006, the country s main trading partners were Croatia (18.7 %), Italy (13.8 %) and Serbia (13.2 %), followed by Germany (12.9 %) and Slovenia (12.2 %); a structure which points to a significant geographical concentration on southern Europe. The regional origin of the country s imports largely corresponds to the regional export structure, with again Croatia (16.7 %) taking the lead, followed by Germany (12.3 %), Serbia (9.7 %), Italy (8.9 %) and Slovenia (7.3 %). At the same time, trade in goods reflects the ethnic division of the country, with the Federation of Bosnia and Herzegovina exchanging more goods with Croatia and Republika Srpska maintaining stronger trade relations with Serbia. Germany and Italy are Bosnia s most important trading partners within the European Union, with the EU absorbing roughly 58 % (1997: 25.3 %) of the country s exports and accounting for approximately 47 % (1997: 33.4 %) of Bosnia s imports. Thus, compared to other countries in the region, Bosnia s trade relations with the EU are not so well-developed. Nevertheless, the share of the EU in foreign trade is expected to rise in the years ahead, as the country is being integrated into the stabilization and association process for Southeast Europe and wants to conclude an SAA with the European Union, which would create a free trade zone. In the meantime, the country s foreign trade has been benefiting from unilateral moves by the EU to promote foreign trade (abolition of quotas, reductions of customs tariffs). Besides improving Bosnia s integration into the international economy via the intensification of economic ties with the EU within the framework of an SAA, a greater cohesion of regional trade is necessary. Indeed, the foundations for the creation of a free trade zone in Southeast Europe have been laid with the signing of the CEFTA agreement by eight South-Eastern European countries including Bosnia and Herzegovina in December After ratifying the CEFTA agreement Bosnia will be better placed to reap the benefits of tighter regional cooperation and stronger foreign direct investment inflows. Key export and import partners (2006) (Table 2) Exports Share in total Imports Share in total Trade (EUR mn) exports (%) (EUR mn) imports (%) balance (EUR mn) Croatia Croatia Croatia Italy Germany Germany Serbia Serbia Serbia Germany Italy Italy Slovenia Slovenia Hungary Austria Austria Slovenia USA Hungary Switzerland 88.5 Hungary Turkey Austria 68.1 Switzerland Czech Rep USA 17.8 Other Other 1, Other 1,563.6 Total 2, Total 5, Total 3,182.7 Source: CBBH, UniCredit Group New Europe Research Network 12 Investment Guide Bosnia and Herzegovina, October 2007

13 Given the abundance of minerals and raw materials, according to product groups Bosnia s exports are dominated by raw materialbased sectors, with the segments base metals, mineral products as well as wood and wood products accounting for nearly half of Bosnia s total exports. In fact, the main winner of the corporate restructuring process in Bosnia until now is the metal industry, with both quantity (large-scale privatisations boosting corporate efficiency) and price effects (strong global demand for base metals) contributing to the sector s significant export share gains in total exports of some 5.5 percentage points since The ongoing privatisation process of Aluminij Mostar in the Federation of Bosnia and Herzegovina is expected to even further increase the Exports by product group (Chart 8) (2006) Other 17.6% Hides & skins 2.2% Processed foodstuffs 2.8% Textiles & textile articles 4.9% Footwear & headwear 5.8% Chemical products 6.7% Wood & wood products 9.0% Source: CBBH, UniCredit Group New Europe Research Network Base metals & articles 26.9% Machinery & mechanical appliances 12.5% Mineral products 11.8% sector s relative strength in exports. Beside the metal sector, chemical and mineral products have also more or less significantly gained export shares in recent years, while at the same time the export share of wood and wood products has nearly halved since 2003 given the lack of structural reforms in the sector, with more than 80 % of forest land still held by the state. On the import side, the share of raw material-based sectors is significantly lower with mineral products and base metals accounting for 26.9 % of Bosnia s total imports. Technology intensive sectors such as machinery and mechanical appliances as well as transport equipment account for a share that is fairly similar reflecting the need of the economy to modernise and consumer s preference for western consumer goods. At the same time, with a combined share of above 14 %, processed foodstuffs and vegetable products still represent a large component of total imports. The share of textile imports in total imports increased significantly to 5.3 % as of year-end 2006 (2003: 3.5 %) given stronger import competition from China following the expiry of the Multi-Fibre Agreement as of end Foreign Direct Investment Based on its favourable geographic location, Bosnia and Herzegovina is ideally situated for accessing the neighbouring markets in the South-Eastern European region. Nonetheless, due to the political uncertainty and the slow progress made in structural reforms, foreign investors for a long time have been cautious about becoming involved in the country, despite the fact that an adequate legal framework has been created, which offers both domestic Import by product group (Chart 9) (2006) Net FDI inflows (Chart 10) ( ) Other 16.5% Vegetable products 4.1% Plastic and rubber 4.7% Textiles & textile articles 5.3% Transportation equipment 7.0% Chemical products 9.3% Mineral products 16.5% Machinery & mechanical appliances 15.9% Base metals & articles 10.4% Processed foodstuffs 10.1% Net FDI inflows (EUR mn, left scale) Net FDI inflows (% of GDP, right scale) Source: CBBH, UniCredit Group New Europe Research Network Source: CBBH, UniCredit Group New Europe Research Network Investment Guide Bosnia and Herzegovina, October

14 Country Facts Bosnia and Herzegovina and foreign investors the same level playing field for business opportunities. Although from 2002 on, against the background of initial successful privatisation efforts (mainly in the steel and banking sectors) and further improvements in the legal framework, FDI inflows have picked up somewhat, they peaked temporarily at EUR 530 mn in 2004 and slowed again to an average of only EUR 380 mn per annum in 2005 and 2006 given the stop-and-go character of structural reforms. Nevertheless, in the country attracted more FDI than in the period In 2007 foreign direct investment inflows to Bosnia are expected to accelerate again and are forecast to reach a record high of some EUR 1.2 bn or about 12 % of estimated GDP on the back of several large-scale privatisations. In this context, in March 2007 the government of the Republika Srpska finalised the sale of a 65 % stake in Telekom Srpska to Serbia s state-owned Telekom Srbija for EUR 646 mn. Moreover, it sold the oil refinery Brod, fuel retailer Petrol and lubricant producer Modrica to Russia s Zarubezhneft for a total of EUR 120 mn and signed a EUR 1.5 bn deal with Czech CEZ on investments in the energy sector until These projects are, however, concentrated on the Republika Srpska, while the Federation of Bosnia and Herzegovina has recently not made substantial progress in privatising state-owned enterprises. Therefore, it is essential that the pending privatisation of the aluminium plant Aluminij Mostar does not fall victim to political squabbling. Inward FDI stock (Chart 11) ( ) Inward FDI stock by country of origin (Chart 13) (2006) 2,750 2,500 2,250 2,000 1,750 1,500 1,250 1, Other 24.5% Turkey 1.9% Netherlands 2.2% Serbia 2.6% Italy 2.7% Switzerland 3.4% Germany 7.5% Austria 30.8% Croatia 13.4% Slovenia 10.9% Inward FDI stock (EUR mn, left scale) Inward FDI stock (% of GDP, right scale) Source: CBBH, UniCredit Group New Europe Research Network Source: CBBH, FIPA, UniCredit Group New Europe Research Network FDI stock in international comparison (Chart 12) (2006) FDI stock by economic sector (Chart 14) (share in %, 2006) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Estonia Hungary Albania BiH Bulgaria Croatia Macedonia Inward FDI stock per capita (EUR, left scale) Inward FDI stock (% of GDP, right scale) Montenegro Romania Serbia Other 0.4% Transport 1.5% Tourism 1.6% Other services 6.8% Trade 9.1% Non-banking financial enterprises 11.5% Manufacturing 40.7% Banking 28.3% Source: CBBH, UniCredit Group New Europe Research Network Source: CBBH, FIPA, UniCredit Group New Europe Research Network 14 Investment Guide Bosnia and Herzegovina, October 2007

15 FDI stock in Bosnia and Herzegovina has reached some EUR 2.6 bn or 26.5 % of GDP as of year-end 2006, representing a per capita FDI stock of roughly EUR 680. These figures give Bosnia and Herzegovina a low ranking in terms of FDI not only in comparison with more advanced CEE countries (e.g. Estonia, Hungary), but also in comparison with all of its SEE peers except for Albania. But, provided that the privatisation projects mentioned above are pushed through as planned and structural reforms accelerate Bosnia s FDI stock could even double in absolute terms in the years A sustained inflow of direct investment and thus significant catching-up with the regional peers in terms of FDI, however, also calls for an acceleration of Bosnia s EU integration process by signing the Stabilization and Association Agreement (SAA) with the EU and a further harmonisation of the country s legal and administrative systems with EU standards. Moreover, as the privatisation process draws to an end in the medium term, privatisation-related FDI inflows will weaken. Consequently, in the near future Bosnia will have to refocus on attracting green-field FDI by offering investors an improved legal and business environment. Investors from Austria (30.8%) have accounted for the lion s share of FDI stock in Bosnia-Herzegovina, followed by investors from Croatia (13.4%), Slovenia (10.9), Germany (7.5%) and Switzerland (3.4%). Member states of the European Union have displayed the keenest interest in investing in Bosnia and Herzegovina, accounting for roughly 65 % of total FDI stock as of year-end But according to the ethnic division of the country also neighbouring Croatia (13.4%) and Serbia (2.6%) are ranked among the top 10 foreign investors, with the latter moving up in the FDI ranking in 2007 after Serbia s Telekom Srbija acquired Republika Srpska s Telekom Srpska in mid decrease somewhat following large-scale privatisations in the services sector (e.g. Telekom Srpska). 1.5 Economic environment for investors Compared to the banking sector, privatisation in other sectors of the economy has not proceeded so well. Nevertheless, the country was successful in privatising a large proportion of smaller companies by direct sale, in particular in the Federation. Privatisation of medium-sized enterprises and major strategic firms, on the other hand, has progressed slowly, often hindered by a lack of political will to see these companies transferred into private ownership. Many of the existing companies throughout the economy are of limited attractiveness for potential foreign investors due to obsolete production technology (stemming from the lack of capital) and weak productivity. Major investments to modernise the existing facilities are necessary in order to make the firms competitive on the international stage and to employ the country s human resources more efficiently. It should be stressed that Bosnia and Herzegovina offers some compelling advantages for foreign investors. The country s central location in the Balkans makes it an ideal base for accessing the entire South-Eastern European region, with the recently signed CEFTA agreement promising a substantial easing of the conditions for trade in the region. On the other hand, Bosnia s infrastructure, in particular the country s transportation infrastructure, is in need of improvement. Together with the international community and supported by international financial assistance, intensive efforts are underway to remedy this issue. Bosnia and Herzegovina is also inter- Given the abundance of raw materials, the manufacturing industry, mainly the metal, mineral and chemical industries, have been the main beneficiaries of FDI activity up to now, attracting 40.7 % of Bosnia s total FDI stock by year-end But, given a fairly consistent privatisation policy implemented in the financial sector in both entities, the financial sector accounts for a roughly similar share in total FDI stock, with some 70 % of total financial sector investment going to the banking sector and the remainder to nonbanking financial intermediaries (e.g. insurance and leasing companies). Given the recently concluded and pending privatisation deals in the energy sector (e.g. oil refinery Brod, fuel retailer Petrol, lubricant producer Modrica, oil company Energopetrol) and the metal industry (e.g. Aluminij Mostar), the manufacturing industry is expected to remain the most attractive segment for foreign investors also in the coming years, even though its share will Comparison of gross monthly wages (Chart 15) (2006, EUR) 1,200 1, Slovenia Croatia Czech Rep. Hungary Poland Slovak Rep. BiH Serbia Montenegro Macedonia Romania Albania Bulgaria Source: National Statistical Institutes, UniCredit Group New Europe Research Network Investment Guide Bosnia and Herzegovina, October

16 Country Facts Bosnia and Herzegovina esting as a sales market in its own right. Almost all segments of the market exhibit a potential, although this is limited to some extent by the still relatively weak purchasing power of the population. There are a number of strong arguments in favour of locating manufacturing firms in Bosnia and Herzegovina: for example, at EUR 300 per month, the level of wages is among the lowest among transition countries, although one of the highest in South-Eastern Europe. In addition to the relatively low labour costs, the ample supply of labour and the qualification level of the labour force are positive factors. Many potential employees have many years experience of working abroad, along with the attendant language skills. Moreover, one should not ignore the favourable tax environment, especially in the Republika Srpska and the Brcko District (with a corporate tax rate of 10 %), although more still needs to be done in regard to tax harmonisation in the two entities. Last but not least, there are currently five special economic zones in Bosnia and Herzegovina, offering wide-ranging financial incentives and customs relief for both domestic and foreign investors. Indicators of competitiveness (Table 3) 2006 PL HU CZ SK SI EE LV LT CEE-8 BiH BG HR RO TK Population (mn) Average age, years Youth education attainment level, % 1 Science and technology n.a graduates 2 GDP per capita (EUR) 7,110 8,848 11,011 8,151 14,807 9,690 7,018 6,995 8,227 2,541 3,268 7,704 4,501 4,365 Gross wages monthly average (EUR) , Labour productivity n.a per person (EU25=100) R&D expenditure, % of GDP n.a Corporate tax rate (%) RS: 10%/ FBiH: 30% EBRD Infrastructure reform index n.a. FDI (% of GDP, avg ) Ease of doing business (World Bank rank) 3 1) Percentage of the population aged 20 to 24 having completed at least upper secondary education. 2) Tertiary graduates in science and technology per 1,000 of population aged years. 3) The rank is obtained by taking into account, among other, time and cost to open a new business, strenght of legal rights index, cost of export-import and recovery rate in bankruptcy. 175 contries in total. Source: Central banks; National statistical offices; World Bank; EBRD; UniCredit Group New Europe Research Network Selected economic indicators (Table 4) f 2008f 2009f Nominal GDP (EUR bn) GDP per capita (EUR) 2,100 2,252 2,541 2,758 3,036 3,326 Real GDP yoy, (%) Inflation (CPI) yoy, eop (%) Inflation (CPI) yoy, avg (%) Unemployment rate (%, average) Exchange rate /, eop/avg Current account/gdp (%) FDI/GDP (%) Budget balance/gdp (%) Public debt/gdp (%) Total external debt/gdp (%) ) Public foreign debt Source: CBBH, Republika Srpska Institute of Statistics, Federal Office of Statistics, UniCredit Group New Europe Research Network 16 Investment Guide Bosnia and Herzegovina, October 2007

17 1.6 Investment incentives Tax incentives Legislative authority in tax-related matters is granted to both entities of the entire state of Bosnia and Herzegovina, i.e. the Federation of Bosnia and Herzegovina (FBiH) and the Republika Srpska (RS). The tax regulations in the two entities are quite different in some respects. For example, in FBiH the rate of corporate tax is 30 %, whereas it is 10 % in RS. Companies which are 100 % foreign-owned are fully exempt from corporate tax for a period of 5 years. For joint ventures, an exemption is available in the rate equivalent to the percentage of foreign participation, as long as this is greater than 20 %. Following the expiry of the exemption period, the normal rate of tax is applicable Free trade zones There are several free trade zones in BiH. A current list can be found on the website of the FIPA ( In regard to opening bank accounts, foreign nationals and BiH citizens are given equal treatment. There are no restrictions on the repatriation of profits. Furthermore, foreign investors have the same rights in respect of the acquisition of land and property. In order to create investment incentives, the government of FBiH offers the following tax concessions and exemptions: Newly formed companies are 100 % exempt from corporate tax in the 1st year of business operations, 70 % tax exempt in the 2nd year, and 30 % exempt in the 3rd year. Companies in which foreigners hold at least a 20 % share are subject to a lower rate of corporate taxation, with the tax rate reduced in accordance with the ratio of foreign capital invested. If the company is 100 % foreign-owned, then the earnings are 100 % tax exempt. This concession is granted for a period of 5 years from the beginning of business operations. Enterprises which reinvest their earnings and do not distribute dividends may apply for a tax exemption of 100 % of the invested amount, or 75 % of the amount if the investment is made in a company operating in a different sector in FBiH. Companies which employ more than 50 % handicapped persons are exempt from taxation. In Republika Srpska (RS) the following tax concessions and exemptions are available: Taxable persons who invest in property, plant and equipment in RS, who purchase a stake in another enterprise or who invest capital in their own enterprise, have the option of reducing their taxable base by the amount of the investment. Enterprises whose scope of activities covers the rehabilitation of disabled persons and who employ disabled persons are exempt from corporate tax. These zones are available to foreign and domestic companies for international business transactions. Although they are a part of the customs territory of BiH, goods which are stored there are not subject to payment of customs as long as they are stored in accordance with the regulations which apply in the free trade zones. Trading with goods and services within the free trade zone is only possible if the traded goods are produced in the free trade zone. Investors in free trade zones can lease property, structures and other facilities for up to 30 years. Enterprises in free trade zones are exempt from all taxes and levies, with the exception of taxes and social security contributions paid in connection with employment. There are no restrictions on investments in free trade zones and on the transfer of profit and on the retransfer of capital. No customs and other duties are charged for imports or exports. Both entities have their own regulations governing the free trade zones which are located in their territory State institutions in the field of foreign direct investment (FDI) In 1999, the Foreign Investment Promotion Agency (FIPA) was created as a state institution for the support and promotion of foreign direct investment. The agency is answerable to the Council of Ministers. The main goal of FIPA ( is to support and identify potential investors, to improve the image of BiH in terms of increasing foreign investment, and to improve and broaden the overall conditions for investments. Investment Guide Bosnia and Herzegovina, October

18 Country Facts Bosnia and Herzegovina The main tasks of FIPA include: Compilation and publication of macroeconomic data, Assistance with investments, Establishment of contacts with authorities and businesses, Support in selecting the most appropriate form of investment, Preparation of company profiles (for the foundation of joint ventures with state-owned and private companies) Providing information on investments for the improvement of infrastructure Assistance with legal regulations, taxes and duties. 18 Investment Guide Bosnia and Herzegovina, October 2007

19 2. Legal Foundations and General Conditions for Investment 2.1 General information The federal republic of Bosnia and Herzegovina was established by the Dayton Peace Agreement (signed in Paris on 14 December 1995). The constitution sets forth a political and economic framework for Bosnia and Herzegovina (hereinafter referred to as BiH ), with the republic consisting of two constitutional entities that were created: the Federation of Bosnia and Herzegovina (hereinafter: FBiH) and the Republika Srpska (hereinafter: RS). Both entities (regional units) were granted important competencies by the constitution, and the centralised state (federal government) only has limited influence over the entities. According to the constitution, the state as a whole (BiH) is responsible for foreign policy and foreign trade, customs and currency policy, migration issues, international law enforcement, telecommunications and sovereignty over the country s airspace. Since 2006, the centralised state has also been responsible for defence policy. All other areas are regulated at the level of the entities. Based on the constitution, the entities are required not to enact any regulations which contradict the laws of BiH. The entities are responsible for all competencies which are not expressly assigned to BiH (similar to the general clause in the Austrian federal constitution) Federation of Bosnia and Herzegovina The Federation of Bosnia and Herzegovina (FBiH) consists of 10 cantons, which are further subdivided into municipalities. The capital is Sarajevo. Competencies in the field of public administration are divided between the government of FBiH, the cantonal governments and the municipalities. All powers which are not expressly assigned to the government of FBiH fall under the competency of the cantonal governments. According to the constitution, the cantonal governments can, however, cede certain competencies to the municipalities within their respective cantons Republika Srpska The Republika Srpska (RS) is the other entity comprising the state of BiH. The Parliament of RS consists of two chambers. The National Assembly has 83 delegates. In addition, there is a council of peoples, in which Serbs, Bosniaks and Croats are represented with equal numbers. The President of Republika Srpska is directly elected by the public. The capital is Banja Luka, where all of the institutions are based Brcko District In addition to the two entities, the Brcko corridor was created by an arbitration process (1998) with the status of a self-governing administrative district with its own government, police force, judicial system and budget. The Brcko District is located within the territory of the Republika Srpska. Accordingly, two different legal frameworks may apply (indeed, actually three taking into account that the Brcko District can pass certain laws itself) for commencing business activity in BiH. Nonetheless, the government of BiH endeavours to simplify the legal and administrative conditions in order to promote economic activity. The goal is to create a reliable framework for business activity in BiH by harmonising the fields of customs, sales tax (VAT) and administration. 2.2 Company law Depending on a company s domicile, two different legal frameworks apply in the field of company law in BiH (see explanation above). Both entities also have different regulatory frameworks for the legal areas capital market, accounting and auditing, contract law, commercial registry, etc. as well as for the regulation of and the institutions involved in securities, such as the securities commission, securities register and the securities exchange. Special laws apply for banks, insurance companies and investment funds, for example. In both FBiH and RS, enterprises can be founded and operated with the following legal forms: general partnership, limited partnership, company limited by shares or company with limited liability. Investment Guide Bosnia and Herzegovina, October

20 Legal Foundations and General Conditions for Investment In addition to the aforementioned forms, a limited partnership can be transformed into a partnership limited by shares. Pursuant to the regulations in RS, a separate legal form is provided for a public company which is founded and managed by the public authorities. Unlike the situation in Austria, all of the aforementioned legal forms are classified as legal persons. Both in FBiH and in RS, there is essentially freedom of choice when it comes to deciding the legal form of a company to be founded. Nevertheless, in certain sectors special legislation applies, which prescribe mandatory legal forms for the performance of certain activities, for example banks, insurance companies and investment funds must operate as joint stock companies. Fundamentally speaking, a company can be founded by domestic and/or foreign natural or legal persons, unless this violates legal regulations. The issue of whether the founders are natural or legal persons, and the ownership structure within the newly founded company have no mandatory effects on the legal nature or the legal form of a company General partnership A general partnership (društvo s neograničenom solidarnom odgovornošću d.n.o. in FBiH; ortačko društvo in RS) consists of at least two partners, who bear personal, joint and several, and unlimited liability vis-à-vis a third party in respect of the company s debts. A company must be entered in the Register of Firms at the competent local court if its annual profit exceeds BAM 100,000. entitled to represent the company internally and externally, for a limited or unlimited period. Any partner may assign his right to represent the company externally to a third party (such as an authorised signatory). In the event that a company is managed by several partners, each of the partners is generally entitled to make decisions and to conduct the day-to-day business of the company; it is also possible to agree on joint management. In respect of the distribution of profits and the obligation to cover debts, the legal regulations call for these to be divided equally between the partners. It is, however, possible to agree on a different apportionment of profit and debt in the partnership agreement. Grounds for the winding-up of a general partnership include the expiry of a specific period (to the extent that this is agreed in the partnership agreement), a court ruling or the termination of the partnership by the partners Limited partnership A limited partnership (komanditno društvo k.d. in both FBiH and RS) also consists of at least two partners, namely at least the limited partner and the unlimited partner. In both entities, limited partnerships must be entered in the Register of Firms, in respect of which only the shares of the unlimited partner need be registered. In regard to rights and obligations, the unlimited partners are equivalent to the partners in a general partnership (in RS unlimited partners may only be natural persons, whereas in FBiH legal persons may also be unlimited partners). There are differences between the two entities with regard to the partners of general partnerships. In FBiH legal persons may also be partners in a general partnership, while in RS only natural persons are allowed to be partners in a general partnership. A general partnership is created by concluding a partnership agreement. The name of the company must include the name of at least one partner and the words et al. Partners can make their contributions to the partnership in cash, in kind or in the form of rights and/or services, but only in the form of personal services rendered by the partner. Limited partners are liable to third parties in respect of the company s debts only up to the amount of their contribution as specified in the partnership agreement, insofar as the contribution was not made. In both entities, limited partners may be either natural or legal persons. A limited partnership is created by concluding a partnership agreement. In the partnership agreement, the type of participation and the degree of participation of the unlimited partners and limited partners is specified. Otherwise, the description of a general partnership generally also applies to limited partnerships. Basically, all partners are entitled and required to manage and represent the partnership externally, but it is possible to conclude an agreement under which only one or more partners are There are different regulations for limited partners. The management and external representation of a limited partnership is generally the responsibility of the unlimited partners. A limited 20 Investment Guide Bosnia and Herzegovina, October 2007

21 partner may only represent the company externally on the basis of a written power of attorney signed by all unlimited and limited partners. Accordingly, if a limited partner who is not entitled to represent the company concludes a contract with third parties on behalf of the company, said limited partner bears unlimited, personal liability for the obligations arising from the contract. A limited partnership does not end with the death of a limited partner, loss or limitation of the unlimited partner s capacity to conduct business or execution sale of the assets of the limited partner by public auction. The same grounds apply as noted above for general partnerships Corporations Founding of corporations For the foundation of a corporation, a written deed of foundation must be concluded between all the founding members. Foundation of single-member companies is performed by a resolution of foundation. The deed of foundation or the resolution of foundation must contain the following provisions: Name and registered office (business address) of the company, Business objective, Nominal capital and original capital contributions (or share capital and contributions), Conditions for and the method of determining and distributing profit, and covering losses, Election and tasks of the executive bodies, Representation of the company, Reserves, Procedure for changing the legal form, Amendment of the articles of association, Other aspects which are of importance for the company s business activities, Liquidation Bodies of corporations a) Members meeting (Annual General Meeting) Key purpose of the members meeting (Annual General Meeting) is: To approve the articles of association, To determine company policy, To approve the annual report and financial statements, To approve the allocation of the profit and losses, To adopt a resolution on the increase or reduction of capital, To adopt a resolution on any amendments to the articles of association, the legal form and name of the company, To appoint the members of the Management Board, the president of the Management Board, members of the Supervisory Board, the auditor and liquidator and the removal of the same, and to establish the remuneration for the exercise of these functions. b) Management Board Key responsibilities of the Management Board include: Preparation of proposals and decisions of the Annual General Meeting and implementation of the decisions of the Annual General Meeting, Taking general decisions which do not fall within the competence of the Annual General Meeting, Preparation of the annual report and financial statements and interim reports, Proposal on the allocation of profit, Election of a director from its ranks, Formulation of guidelines for the director, in the interests of implementing company policy, Approval of cooperation with other companies, Decisions on investment (within the scope provided by the articles of association), Decisions on the sale of shareholdings in other companies (within the scope provided by the articles of association), and Resolution on the foundation of subsidiary companies. c) Director Key responsibilities of the director include: Initiation and execution of business transactions, Representation of the company vis-à-vis third parties, and Responsibility for ensuring that the company s business activities comply with the legal provisions. If several persons are appointed as directors one of them shall be appointed as Chief Executive Officer, and the other directors shall be referred to as Executive Directors. The senior management (management of the company) is composed of the director(s). d) Supervisory Board Key responsibilities of the Supervisory Board include: Monitoring legal compliance of the actions of the Management Board and the director(s), Approval of interim reports and the annual report and financial statements and the legal compliance of the same, Investment Guide Bosnia and Herzegovina, October

22 Legal Foundations and General Conditions for Investment Establishing that the company s accounting is properly performed, Proposal on the distribution of profit, Reporting on the audit findings of the auditor Joint stock company By founding a joint stock company (dioničko društvo d.d. in FBiH, akcionarsko društvo a.d. in RS) an investor limits his economic risk to the amount of capital invested in the company s shares. Shareholders are not responsible for the liabilities of the company (except in cases of abuse). A joint stock company may have an unlimited number of shareholders. Founders and shareholders of a joint stock company may generally be domestic or foreign natural or legal persons, unless there are special regulations with different provisions. Single-member joint stock companies are also possible. A joint stock company may be founded in two ways: a singlestep formation or formation by incorporators and subscribers (successive foundation). Single-step formation occurs when the issue and subscription of the shares is fully completed upon conclusion of the articles of incorporation, or, in the case of a single incorporator, by the decision that any further subscribers/purchasers of shares are also incorporating members of the company. Upon acquisition of all the shares, the company is incorporated. In a formation by incorporators and subscribers, the incorporators acquire a certain number of shares upon conclusion of the articles of incorporation, and the remaining shares are issued publicly. Both in FBiH and RS, formation by incorporators and subscribers is subject to the legal regulations which apply to the capital market and to approval by the Securities Commission. The company is incorporated with the resolution of incorporation adopted at the meeting of incorporators. A special regulation in RS limits the number of incorporators to between 1 and 50 for single-step formation. In the case of formation by incorporators and subscribers, at least two incorporators must sign the articles of incorporation and the shares must be offered in an initial public offering. Capital subscribed during foundation can be paid in in cash, in kind and/or by the assignment of rights Regulations in FBiH For single-step formation or formation by incorporators and subscribers, the minimum registered capital requirement is BAM 50,000 in FBiH. Contributions in kind or the assignment of rights are credited to the minimum registered capital. The total amount of minimum subscribed registered capital and all cash and in kind contribution are to be paid in, or effected prior to entry of the company in the Register of Securities Issuers (maintained by the Securities Commission) and subsequent entry in the Register of Firms and the Securities Register. The minimum nominal value of a share is BAM 10. The Annual General Meeting of a joint stock company elects the Management Board ( nadzorni odbor ) and the Supervisory Board ( odbor za reviziju ), both of which must have at least one chairperson and two members. The Management Board appoints one or more directors Regulations in RS The minimum registered capital under a single-step formation is BAM 50,000. This can be raised in the form of subscribed capital and as in kind contributions. For formation by incorporators and subscribers, the minimum registered capital is BAM 100,000. The shareholdings of each incorporator must amount to at least BAM 500. The minimum nominal value of a share is BAM 1. All in kind contributions must be provided prior to the company s entry in the Register of Firms which is required by law and which is performed by the local court; the in kind contributions are a prerequisite for entry in the Register of Firms. 50 % of the cash contributions must be paid up by that time and the rest must be paid up within 2 years of the company s entry in the Register of Firms. If the cash contributions amount to more than 50 % of the statutory minimum share capital, at least 20 % must be paid up prior to entry of the company in the Register of Firms for single-step formations, while 20 % must be paid up prior to the meeting of incorporators for formation by incorporators and subscribers. The Annual General Meeting of a joint stock company elects the Management Board ( upravni odbor ) and the Supervisory Board. The Management Board appoints the director. The management of a joint stock company can generally consist of the director alone. If more directors are appointed, one director shall be appointed as Chief Executive Officer. If the management of the company consists of several directors, it is not necessary for decisions 22 Investment Guide Bosnia and Herzegovina, October 2007

23 to be made by way of formal voting by all directors. The Chief Executive Officer is vested with the authority to make decisions independently and is personally responsible for his decisions. A joint stock company with less than 50 shareholders and/or less than 100 employees is not required to have both corporate bodies General regulations Both in FBiH and in RS, the issue price of the shares may not be lower than their nominal price, whereby fees and other formation costs are to be borne by the incorporators and may not be covered by a reduction of the subscribed capital. Such costs may be offset against future earnings of the company if an agreement is concluded to this effect. A higher minimum share capital is required by law in certain sectors. For example, BAM 15 million for banks, BAM 1 million for life insurance companies, and BAM 2 million for other risk insurers and reinsurance companies, etc. Securities are no longer issued in paper form, but are treated in accordance with the principles of property law. The Securities Register is now only maintained in electronic form. The legitimacy of this process is overseen by the capital market supervisory authority. For this reason, there are no bearer shares in BiH, only registered shares. Every joint stock company is required to publish its articles of association and changes in the ownership structure in the Securities Register. Consequently, the Register shows the ownership structure and the changes in the ownership of freely traded shares. Although one cannot find a specific definition of a public limited company in BiH legislation, the legal regulations governing the capital market in FBiH and in RS stipulate that all issuers whose shares are issued via a public offering and/or are traded on an exchange or other regulated market are considered to be public limited companies. Such issuers are required to have their annual financial statements audited by an independent auditor and to publish such annual financial statements Limited liability company A limited liability company (društvo s ograničenom odgovornošću d.o.o. in FBiH and in RS) is a widespread legal company form, as in most other economies. It can be formed by one or more persons. A natural or legal person can acquire 100 % of the shares of an existing limited liability company, even if the company was formed by several partners General regulations A limited liability company is formed by the signing of articles of agreement by the founding members. If a single-member limited liability company is being formed, it is sufficient for the founder to sign a foundation resolution. In contrast to joint stock companies, the gradual payment of the capital contribution does not result in formation by successive formation. In particular, the deed of foundation must contain the rights and obligations of the members (especially with regard to procedures and deadlines for the acquisition of ownership shares, procedures and deadlines for the acquisition of ownership shares, which must be paid up when the company is entered in the Register of Firms). If the company is founded for a limited period of time, the date or the circumstances of dissolution are to be stated. Share capital subscribed during foundation can be paid in in cash, in kind and/or by the assignment of rights. Both in FBiH and in RS the minimum amount of share capital is BAM 2,000, and the minimum capital contribution of a member is BAM 100. Contributions in kind and/or contributions in the form of assignment of rights are credited to these amounts. All contributions in kind and at least 50 % of the cash contributions must be paid up prior to the company s entry in the Register of Firms and as a prerequisite for such entry. All members must pay in at least the aforementioned amounts. During the process of foundation, each member can only acquire a percentage of shares in the company which is equivalent to his share of the entire share capital. In contrast to a joint stock company, securities and other documents related to ownership shares or other rights may not be issued. Nevertheless, a limited liability company is entitled to issue certificates which serve solely as proof of ownership of a share and, as such, are not transferable and do not have any legal effects in the sense of securities. These certificates can only be transferred by written contract or inheritance. Against this background, a limited liability company must maintain a Register of Ownership Shares, so that actions by third parties can be deemed to be valid and binding to the extent that they are performed in good faith and in reliance on the entries in said Register. In respect of the transferability of shares in limited liability companies, the remaining members have a right of pre-emption. Investment Guide Bosnia and Herzegovina, October

24 Legal Foundations and General Conditions for Investment At the members meeting, each member has the number of votes equivalent to his ownership ratio in the share capital. The deed of foundation and/or the articles of association can stipulate that certain or all decisions be reached by circular resolution without the need to convene a meeting of the members. Meetings of the members can be convened by the managing director and/or by members who hold at least a 10 % share in the registered share capital. In respect of a single-member limited liability company, the sole member attends to the responsibilities of the members meeting and the sole member must immediately record in writing and sign all decisions which are made Regulations in FBiH If a limited liability company has more than 10 members, it must appoint a Supervisory Board. Moreover, companies with at least two members and share capital of more than BAM 100,000 must also appoint a Supervisory Board. In a company without a Supervisory Board, all of the members are entitled to oversee the operations of the company Regulations in RS A limited liability company with more than 40 employees is required to appoint a Management Board and a Supervisory Board. One body is sufficient Foundation of a limited liability company with foreign participation The following steps are necessary for the commencement of business activities by a limited liability company with the participation of foreign legal or natural persons: 1) Preparation a. Preparation and conclusion of a resolution of foundation (in the case of a single-member limited liability company) or articles of association (for two or more members); b. Procurement of proof of the foreign investor s identity; c. Inquiry with the Register of Firms if the envisaged company name for the company to be founded is liable to be confused with the name of a company that has already been registered; d. Payment of the cash contribution of the founding share into a temporary deposit account; e. Procurement of documents on the deposit of contributions in kind (real estate, plant and office equipment) and/or the assignment of rights which are deemed to be part of the capital contribution; and f. Organisation of the business premises for the registered office. 2) Registration: a. Registration of the foreign investment at the BiH level is carried out at the Ministry of Foreign Trade and Economic Relations; b. Entry in the Register of Firms (see ); c. Procurement of a company stamp; d. Classification and entry at the Central Statistical Office in the relevant entity; e. Registration with the customs authority in respect of foreign trade and for the purpose of establishing contact with said authority; f. Registration with the tax authority in the relevant entity; g. Registration of the company as an employer with the social security authorities (for pension and health insurance of employees); h. Obtaining a confirmation of compliance with the mandatory technical standards from the competent authority. Under normal circumstances, the registration process takes about 30 days; fees amount to BAM 1,200 (use of the services of a lawyer is recommended, the fees for which are not included in the aforementioned amount) Conducting business activities In both FBiH and RS, enterprises are essentially allowed to conduct all activities in respect of which there are no legal restrictions. Economic agents are free to pursue whatever business line they wish, but for some business activities permits are required from the competent authorities (at the entity level). The following sectors are subject to permit approval and are regulated by special laws: Banks, insurance companies, investment companies, financial consulting, production of and trade in medication, electricity, mining and forestry, supply of water and natural gas services, etc. Regulations governing trade in arms are the responsibility of the state as a whole (BiH). Upon entry in the Register of Firms, an enterprise is not required to prove that it can actually conduct the business activity it has selected. Business may commence immediately upon the company s entry in the Register of Firms. As soon as a company is entered in the Register of Firms, the competent administrative authorities review ex officio whether or not the conditions for commencing business activities are fulfilled. The competent authority reviews the company s equip- 24 Investment Guide Bosnia and Herzegovina, October 2007

25 ment, the number, qualifications and health of the employees, compliance with safety regulations and with fire prevention and environmental protection regulations. A company may only conduct business if it is registered in the Register of Firms (activities related to the business entered may, however, be conducted); accordingly, companies may describe their business objectives in their articles of association. The court where the Register of Firms is maintained assigns the stated activities to certain categories. These categories are regulated in the Classification of Economic Activities (legal source: Official Gazette of the Federation BiH, No. 6/95) and the Resolution on the Classification of Economic Activities (legal source: Official Gazette of the Federation BiH, No. 28/98, 36/98, 47/00), and in the Act on the Classification of Activities (legal source: Official Gazette of RS, No. 113/04). Companies are entered in the Register of Firms on the basis of the classification, and the Central Statistical Office of the relevant entity is notified of the companies together with the activity which is entered in the Register. If a company conducts several types of classifiable activities, it is classified according to the one which is most predominant Register of Firms In both entities, legal persons (all named companies) and sole traders must be entered in the Register of Firms. If the founder of the company is a foreign legal person, in the course of being entered in the Register of Firms, said party must prove that it is registered in the Register of Firms in its country of domicile. Foreign natural persons must present proof of identity (passport) in the course of registration for the Register of Firms. If a domestic founder is also the founder or majority owner of another company in BiH, he must present certification issued by the competent local tax authorities that said company has no debts to creditors or to the tax authorities. The Register of Firms is maintained by the cantonal courts in FBiH and by the local courts in RS Business activities of foreigners in BiH A foreign national may be active in BiH in the following ways: 1) through the founding of a company in BiH (see previous section) The company is subject to the same rights and obligations as any other company registered in BiH (taxation, accounting, preparation of annual reports and tax returns, submission of tax returns). 2) through the establishment of a branch office in BiH The scope of business activities of a branch office is limited. Aside from certain exceptions, a branch office may not conduct independent business activities and does not have legal capacity (hence, it is unable to exercise rights or assume obligations autonomously). As a result, a branch office can only represent its parent company and prepare contracts on its behalf Procedure for the establishment of a branch office by a foreign company The establishment and business activities of branch offices by foreign companies in BiH is governed by the resolution on the establishment and on the business activities of branch offices of foreign companies in BiH, and these regulations are applicable throughout the entire territory of BiH. A branch office can be established by a foreign company (individually or together with other foreign companies) and must be registered in the Register of Firms of the country of domicile of the founding company. Branch offices are established to conduct market research, and for advertising and informational purposes and for representation. A branch office is a part of the foreign founding company, which means that it does not have the status of a legal person in BiH and thus can only execute orders on behalf of the founder (whilst indicating its status as a branch office). As a result, branch offices cannot conclude contracts on behalf of the founder. There are exceptions with regard to branch offices of foreign airlines. Such branch offices are entitled to sell airline tickets in compliance with the international agreements valid in BiH. The BiH Ministry of Foreign Trade and Economic Relations is responsible for the process of entering branch offices of foreign companies in the Register of foreign branch offices and for maintaining said Register. A branch office must also be registered with the competent court responsible for the registered office of the branch office. In order to be entered in the register, the foreign branch office must submit an application containing the name and registered office of the founding company, the registered office of the branch office and the basic information on the head of the branch office. Investment Guide Bosnia and Herzegovina, October

26 Legal Foundations and General Conditions for Investment The following documentation must be submitted together with the application: Resolution on the establishment of the branch office, Resolution on the appointment of the head of the branch office, Description of the activities of the branch office, Proof of registration of the foreign company in the Register of Firms of its country of domicile, through the original copy or through a notarised copy, or other proof of formation of the company, Proof of payment of the fees in the amount of BAM 100 to the Ministry of Finance and Treasury of BiH. Originals of the application and the accompanying documentation shall be submitted, as well as legalised notarised translations of such in one of the official languages of Bosnia and Herzegovina. The Ministry of Foreign Trade and Economic Relations of BiH is required to enter the branch office in the Register of foreign branch offices within 10 days of submission of the application and to adopt a resolution on such entry. As soon as the branch office is entered in the Register of Firms, it may commence activities in BiH. The foreign founding company must notify the Ministry of Foreign Trade and Economic Relations on the commencement of business activities by the branch office within three months of being notified of the resolution to enter the branch office in the Register of Firms. Changes in the data contained in the application form must be notified to the authorities and are subject to the payment of fees. Grounds for the removal of a branch office from the Register of Firms include: Termination of business activities by the founding company, Closure of the branch office, Failure to comply with labour law regulations, Failure to replace the head of the branch office within a period of 60 days, Violation of BiH law, or Liquidation by court order. 2.3 Accounting and reporting law As responsibility for this field is delegated to the entities, there are currently two different sets of legal regulations on accounting and auditing in BiH Regulations in FBiH All legal persons with their registered office in FBiH are required to maintain accounting records and to prepare annual financial statements. The Accounting Act of FBiH stipulates that accounting records and statements may only be prepared in accordance with the provisions of this Act, the international accounting principles and the International Financial Reporting Standards (IFRSs). Unlike Austria, the Accounting Act does not make any distinction based on a company s size. As a result, all companies must maintain the full scope of accounting records and prepare statements in accordance with the accounting standards. Accounting is to be performed in one of the official languages of the country (Bosnian, Croatian, Serbian) and values are to be indicated in the local currency (the national designation is KM = konvertibilna marka and the international code (ISO 4217) is BAM = Bosnia and Herzegovina konvertibilna marka). It is required by law to maintain a general ledger (ledger containing the final entries and journal) as well as supplementary subledgers (analytical records and other accounts). The general ledger must be stored for an unlimited period, the journal for 10 years and the subledgers for five years. The business year in FBiH corresponds to the calendar year. Annual statements are to be prepared as at 31 December of each year; moreover, semi-annual interim reports are to be prepared as at 30 June of each year. Annual and semi-annual financial statements must be submitted to the tax authorities in FBiH by all legal persons prior to 28 February of the year following the year under review and by 31 July of the year under review, respectively. Annual financial statements must be certified by a licensed independent auditor. The chart of accounts and the reporting forms (balance sheet breakdown, structure of the profit and loss statement) are mandated pursuant to the business activity of the company (companies, banks and similar financial institutions, insurance companies, non-profit organisations, etc.). The reporting forms are harmonised with forth EU Directive. Annual financial statements include: Balance sheet Statement of profit or loss Cash flow statement Statement of change in equity Accounting principles and notes 26 Investment Guide Bosnia and Herzegovina, October 2007

27 The annual financial statements of joint stock companies must be disclosed to the Securities Commission of BiH, the shareholders (upon request) and the general public within 15 days of being adopted by the General Meeting of Shareholders. The semi-annual financial statements must be submitted to the Securities Commission within 7 days of being adopted by the Supervisory Board. The business year in RS corresponds to the calendar year. Annual financial statements are to be prepared as at 31 December (annual financial statements) and 30 June (semi-annual financial statements). Annual financial statements are to be submitted to the tax authorities by 28 February of the following year, while semi-annual financial statements are to be submitted by 31 July. The annual financial statements of privatisation mutual funds must be submitted to the Securities Commission and published in a daily newspaper in FBiH within 4 months of the end of the business year. Semi-annual financial statements and quarterly interim statements must be submitted to the Securities Commission within 45 days of the end of the half-year or quarter. Annual financial statements of joint stock companies (as well as of banks, insurance companies, privatisation mutual funds, etc.) must have been audited before the Annual General Meeting. The Annual General Meeting must take place within 6 months of the end of the business year. The International Standards on Auditing (ISA) apply. Licenses for auditing firms are issued by the Auditing and Accounting Office of FBiH. Foreign auditors may only conduct audits in FBiH together with local auditing firms Regulations in RS All legal persons with their registered office (domicile) in RS are required to maintain accounting records and to prepare annual and semi-annual financial statements. The accounting law of RS stipulates that the International Financial Reporting Standards (IFRSs) are to be applied. All companies, regardless of size, are required to apply these Standards without any restriction. Accounting is to be performed in one of the official languages of the country and values are to be indicated in the local currency. By law, all companies in RS are classified into the following categories based on the number of employees, the amount of sales revenues and the total assets of the last set of annual financial statements. Two of the three criteria must be met for classification: Small Medium Large Total assets x AMGW 1 30,000 x AMGW > 30,000 x AMGW Sales revenues 8,000 x AMGW 40,000 x AMGW > 40,000 x AMGW Number of employees > 250 1) AMGW = Average Monthly Gross Wages/Salary in RS Small companies are not required to prepare semi-annual financial statements. Nonetheless, companies with annual earnings of over BAM 1,500,000 or more than 50 employees are also required to prepare semi-annual financial statements. Privatisation mutual funds are also required to submit quarterly reports to the Securities Commission of RS in accordance with the Commission s provisions. The annual financial statements are to be structured as required for the different legal forms of legal entities (enterprises, banks and other financial institutions, insurance companies, privatisation mutual funds and other legal persons). The structures required for the financial statements are harmonised with EU Directive No. 4. Charts of accounts are also required. Annual financial statements include: Balance sheet Statement of profit or loss Cash flow statement Statement of change in equity Notes The auditing of annual financial statements is mandatory for all medium-sized and large enterprises, as well as for banks and other financial organisations, mutual funds and insurance companies, regardless of their size. The International Standards on Auditing (ISA) apply in RS. Auditing must be completed by 30 September of the following year. Audits may be performed by auditing firms approved by the Ministry of Finance of RS, which have their registered office in the territory of RS. The auditing firm must be majority-owned by a certified auditor or a certified auditing firm in RS. A foreign auditing firm can only found an auditing firm in RS on the basis of reciprocity regulations, and a local auditor must have at least a 51 % share in the capital. Auditing firms from Investment Guide Bosnia and Herzegovina, October

28 Legal Foundations and General Conditions for Investment outside the territory of RS may only carry out audits together with a domestic auditing firm. In RS there are no disclosure requirements, in contrast to Austria. 2.4 Labour law There is no uniform labour law in BiH; each of the entities has its own labour-related standards. Nevertheless, these regulations are generally consistent with each other. Working hours: In both territorial units of the country, the statutory normal working time is 40 hours per week. Minimum wage: The minimum wage in FBiH is 55 % of the average monthly wage (as of March 2007: roughly BAM 350) and BAM 205 per month in RS. Conclusion of employment contracts: A written employment contract must be concluded in both entities. Vacation leave: Regulations on mandatory vacation time have not yet been harmonised. A draft bill for the harmonisation of statutory vacation leave has been submitted, but has not yet been passed. Presently, employees in both entities are entitled to 18 working days of vacation leave (incl. Saturdays). Sick leave: The employer bears the cost of sickness pay for the first 42 days of sick leave. The costs must be advanced by the employer starting from the 43rd day of sick leave, but these expenses are later refunded to the employer by the health insurance fund. Maternity leave: The statutory length of maternity leave in both entities is one year. In FBiH maternity leave is not deemed to be sick leave and the cantons are required to pay maternity pay on the basis of canton-level regulations. In RS, maternity leave is deemed to be sick leave and the employer is required to bear the costs of maternity pay for the first 4 months, after which the health insurance fund bears the costs for another 6 months. Employees have a right to maternity leave for the remaining 2 months, but are not entitled to maternity pay during that period. Termination of employment relationships: Reasons for termination of an employment relationship are specifically enumerated. Grounds for termination are: death of the employee, mutual agreement between the employer and the employee, retirement, court ruling, expiry of a limited term of employment, sentencing by court to imprisonment, etc. Both the employer and the employee can terminate the contractual relationship in compliance with the agreed period of notice. There are legal regulations governing justified dismissal by the employer, and for the justified departure by the employee. 2.5 Legal regulations governing foreign nationals Employment of foreign nationals Employment of foreign nationals in BiH falls under the competence of the entities. The laws of both entities contain strict regulations which specify that foreign nationals with tourist visas may not be issued work permits Regulations in FBiH Employment of foreign nationals in FBiH is governed by the Act on the Employment of Foreign Nationals. Pursuant to this Act, a foreign national can receive a work permit for FBiH only under the condition that the competent authority for internal affairs grants the person in question a permanent or temporary right of residence in FBiH. Based on this right of residence, the competent labour administration office will issue a work permit to the foreign national. The work permit entitles a foreign national to conclude an employment contract or a contract on the performance of temporary work or casual work with an employer Regulations in RS Employment of foreign nationals in RS is governed by the decree on special requirements for the employment of foreign nationals and stateless persons. Foreign nationals wishing to found a company and/or spend a longer period of time in the RS are required to submit the following documents to the Department for Foreign Nationals in the Ministry of the Interior of the RS: Approval of the Ministry for Economic Relations with the International Community Extract from the Register of Firms Application for a residence permit in the RS Evidence that the fee has been paid The residence permit is initially issued for a period of 6 months. This can in each case be extended, before expiry, for a period of 1 year. 28 Investment Guide Bosnia and Herzegovina, October 2007

29 Foreign nationals or stateless persons can be employed for a limited or unlimited period if the competent labour administration office in RS issues them a permanent or temporary residence permit for the territory of RS. A prerequisite for the granting of a residence permit is that no national citizens are available with similar qualifications. In addition to the aforementioned conditions, there is a possibility of employing persons with temporary residence permits in the fields of business, technology, education, culture and sports within the framework of a cooperation agreement between a foreign country or an international organisation and RS or on the basis of other humanitarian activities Visa requirements BiH requires visas for nationals from numerous foreign countries. No visa is required for nationals of the successor states of the former Yugoslavia, the USA, Switzerland, Austria and most of the members of the European Union to enter BiH. Authorities at the national level (BiH) are responsible for the issuance and processing of visas. Foreign nationals who require a visa must complete an application form which is available in three languages (Bosnian, English and French) and must include a valid passport. There are four kinds of visas: business visas, private visas, tourist visas and transit visas. In addition to the application form, a visa for business travel also requires presentation of an invitation of a partner company registered in BiH, which must be confirmed by the Foreign Trade Chamber of BiH. The visa is valid for up to three months. for the stated destination or proof that no visa is required for such destination. Visa fees for BiH depend on the number of entries and range from EUR 31 for single-entry visa to EUR 72 for multiple-entry visas. A visa is valid for 90 days, with the exception of business trips. Such visas can be issued for a period of one year. 2.6 Social insurance regulations General regulations The most important forms of social security in BiH are the entitlement to a pension and disability insurance, health insurance and unemployment insurance. Different regulations are in place in FBiH and RS in this regard. Bosnia and Herzegovina has concluded social insurance contracts with all European countries. In accordance with these contracts, nationals of the signatory countries who are employed in such countries but are seconded to BiH will be insured in accordance with the provisions of their home country up to the end of the 24th calendar month following their secondment to BiH. This, in turn, means that these employees remain insured with their social insurance institutions in their home countries and need not pay any social insurance contributions in BiH Regulations in FBiH In FBiH, social security contributions are deducted from the employees earnings (employee contributions) and employer contributions are also levied, which are dependent on the amount of earnings. The basis for calculation is the gross earnings. Applications for private visas must be accompanied by certification that the applicant does not have a criminal record. Furthermore, a bank confirmation is required that proves that the applicant has the necessary financial means to cover the minimum costs of the visit, in an amount equivalent to USD 30 per day. Applications for tourist visas must be accompanied by a photocopy of the travel agency voucher, a photocopy of the return ticket and a bank confirmation is required that proves that the applicant has the necessary financial means to cover the minimum costs of the visit, in an amount equivalent to USD 50 per day. In the case of transit visas, the application must be accompanied by a certified copy of the passport (first page) and the valid visa The employee contribution for all employees in FBiH is 32 % (17 % pension and disability insurance, 13 % health insurance and 2 % unemployment insurance). Local employers must also pay an additional contribution amounting to 11.5 % of the assessment basis (7% pension and disability insurance, 4 % health insurance and 0.5 % unemployment insurance). The employer is responsible for the calculation and deduction of social security contributions. Employers whose registered office is not in FBiH are not required to pay social security contributions on the earnings, regardless of whether they employ national citizens or foreign natural persons. Investment Guide Bosnia and Herzegovina, October

30 Legal Foundations and General Conditions for Investment Regulations in RS Pursuant to the Social Security Act, the basis for calculation is the net earnings and all other remuneration paid by the employer in accordance with the employment contract, the collective wage agreement or labour statutes. Social security contributions are not broken down into the share paid by the employer and the employee. The contributions amount to 24 % for pension and disability insurance, 15 % for health insurance, 1 % for unemployment insurance and 2 % for the child support contribution. 2.7 Tax regulations Introduction Pursuant to the Dayton Agreement, responsibility for financial policy, the creation of a taxation system and the issuance of tax laws is vested with the entities. Since 1 January 2006, both territorial entities have a uniform VAT of 17 % for all goods and services (see section 2.7.4). There are, however, significant differences in terms of direct taxes (income tax and corporate tax) Regulations in FBiH Corporate tax This tax must be paid by companies or other legal persons who generate income from the sale of products or services. All companies which have their registered offices in the territory of FBiH are subject to this tax. This tax is levied on incomes generated inside the territory of FBiH and outside the territory of FBiH. Taxpayers can also be enterprises which are not domiciled in FBiH. In this case, only incomes generated from transactions in FBiH are subject to the tax. The rate of corporate tax is 30 % and a wide range of tax concessions is offered. Tax returns must be prepared and submitted to the tax authority by 31 March of the following year. Tax advances for corporate taxes must be paid on a monthly basis and are calculated on the basis of the income generated in the previous year. Basically, the tax return is structured as follows: 1. Earnings (losses), calculated in accordance with the accounting standards of FBiH 2. Expenses which are not recognised for tax purposes (stated separately) 3. (1+2) Income subject to taxation 4. (Unapplied) tax loss carryforwards from the last five years 5. (3 4) Tax base 6. (Point 5 x 30 %) Calculated corporate tax 7. Deductions from the calculated tax: a) Newly-founded company (for the first three business years) b) Investment of foreign capital (five years) c) Investment in tangible assets (in accordance with the prescribed procedure) d) Free trade zones and users of free trade zones (five years) e) Corporate tax paid in other countries a+b+c+d+e = Total deduction 8. (6 7) Calculated tax after deductions (tax liability) 9. Tax advances 10.(8 7) Tax payment due (tax refund due) Pursuant to the corporate tax act, loss carryforwards may be applied over a period of 5 years. The loss carryforwards can be applied at the company s discretion. Expenses which are not recognised for tax purposes (item 2 in the above format) include the following, for example: fines, representation costs in excess of 0.5 % of total turnover, expenses for humanitarian, cultural, education and other purposes in excess of 0.5 % of total turnover, depreciation or amortization in excess of the maximum rates allowed for tax purposes, etc. The method of linear depreciation is recognised for tax purposes. The maximum depreciation rates for tax purposes for the key items of tangible assets are as follows: 1. Buildings 10 % 1.1. Management, administration, office and other 3 % buildings for the provision of services 1.2. Residential buildings, hotels and restaurants 5 % 1.3. Roads and supply facilities 14.3 % 2. Plant and business equipment, vehicles and machinery 20 % 2.1. Equipment for water supply, water plants 14.3 % and sewerage systems 2.2. Computers and environmental protection equipment 33.3 % 3. Perennial crops 14.3 % 4. Breeding herd 40 % 5. Intangible assets 20 % 30 Investment Guide Bosnia and Herzegovina, October 2007

31 For more information on tax deductions as per item 7, please see the section on investment incentives in BiH (section 2.7.1). The employer is responsible for the calculation and deduction of taxes on wages and salaries. All deductions must be listed individually (independently of one another) and the sum total is applied (please note, however, that the sum total of the total deduction calculated under item 7 for a specific year may not exceed the amount of corporate tax due for the year). The law on corporate tax stipulates a tax at source of 15 % on dividends, licensing fees and interest paid to legal and natural persons which are not domiciled in FBiH. Note: A new corporate tax act is expected to be passed in FBiH and the contents of such are still uncertain. It is expected that the rate of corporate tax will be lowered and the number and types of tax concessions will be reduced Income tax Collection of income tax in FBiH is carried out at the federal level or the cantonal level depending on the type of income. Various tax rates are applied depending on the type of income. The following are taxed: 1. Salaries and other income from employers (income from non self-employed activity) 2. Income from assets and ownership rights 3. Income from author fees, patents and technical inventions 4. Inheritance and gifts 5. Income from gambling 6. Income from handicraft activities Wages and salaries which are earned by natural persons on the basis of a regular employment relationship are subject to this tax, as are other (additional) incomes. The regular pay of the employee is taxed at a rate of 5 %, based on the net earnings. Additional incomes which can be earned in the course of a regular employment relationship include: vacation pay, per diem allowances for business travel, allowances for meals during working hours, pension benefits, jubilee allowances, etc. Such incomes are not taxed if they do not exceed the maximum statutory limits listed below. Income in excess of these limits is taxed at 69 %. Amounts not subject to tax: Allowances for meals: 2 % of the average monthly income in FBiH (as of March 2007: approximately BAM 350); Vacation pay: 70 % of the employee s earnings or three months of average income in FBiH, whichever is the higher; Per diem for business travel: for travel within BiH 10 % of the average income in FBiH, for travel abroad fixed amounts for each country (ranging from BAM 40 to 120); Pension benefits three monthly incomes of the employee or three average monthly incomes in FBiH in the past three months, whichever is the higher, etc. Taxation of wages and salaries (item 1) is regulated at the FBiH level. The other incomes of natural persons stated above (items 2 6) are subject to taxation in accordance with the cantonal regulations. Tax rates and concessions vary from canton to canton. As a result, there is no annual tax return in which all types of incomes are taxed together Income tax at the Federation level This tax applies to wages and salaries received by natural persons. Persons domiciled in the Federation are subject to this taxation, in respect of income from both domestic and foreign sources, as well as persons who are not domiciled in the Federation in respect of incomes earned within the territory of the Federation. The following additional incomes are taxed at 30 %: Incomes based on part-time or casual work contracts Incomes on the basis of a contract for services Remuneration for members of supervisory boards or other bodies Incomes earned by professional athletes The following incomes are exempt from tax: Welfare benefits Payments by the health insurance fund Premium payments from personal and property insurance Tuition benefits and aid for students (secondary and university level) Compensation for psychological injuries, reduced ability to work and compensation for intangible damages suffered Investment Guide Bosnia and Herzegovina, October

32 Legal Foundations and General Conditions for Investment Payments on the basis of other regulations on the rights of disabled civilians and civilian victims of war Income tax at the cantonal level 1. Income tax payable by individual craftsmen The tax rate ranges between 25 and 30 %. 2. Taxation of incomes from renting and leasing and from the assignment of ownership rights This tax applies to natural persons who earn incomes from renting or leasing real or moveable property as well as income from other assets and from other ownership rights (most of the cantons do not have a tax on capital gains). The tax rate ranges between 0 and 20 %. 3. Income from author fees, patents and technical inventions The tax rate ranges between 0 and 20 %. 4. Inheritance and gift tax This tax applies to natural persons who inherit or are gifted property, i.e. who inherit or are gifted the right to use and enjoy the benefits of the assets. The tax rate ranges between 0 and 10 %. 5. Gambling tax This tax applies to persons who earn income through gambling activities; the tax is calculated and deducted by the party disbursing the winnings. Petroleum products Alcohol and alcoholic beverages (except wine) Wine Beer Soft drinks Coffee Tobacco and tobacco products from BAM 0.30 to 0.40 per litre BAM 15 per litre of pure alcohol BAM 0.25 per litre BAM 0.20 per litre BAM 0.10 per litre from BAM 1.00 per net kilogramme to BAM 3.50 per net kilogramme 49 % of the retail price excl. VAT Tax on the acquisition of real property A tax on the acquisition of real property is charged for the sale of real estate, trade in real estate and other forms of acquisition of such items. The tax base is determined by the tax authorities. The seller pays the tax, which however can also be paid by the purchaser. Transfer of ownership may not occur without proof that the tax has been paid. As the cantons are responsible for the tax on property acquisition, there are slight differences in the rates among the cantons and the exceptions made by them. The tax rate for the acquisition of property ranges from 5 to 8 % (5 % in most cantons) Net asset tax The net asset tax is regulated at the cantonal level. The tax is paid by natural and legal persons (in certain cantons it is only paid by natural persons). The tax rate ranges between 0 and 20 %. Note: It is expected that the FBiH will pass uniform legislation on taxing the income of its citizens, i.e. taxation will no longer occur at the cantonal level Excise tax The following products are subject to excise tax: oil and petroleum products, tobacco and tobacco products, alcohol and alcoholic beverages, soft drinks, beer, coffee. Excise tax is paid by the importer (upon customs declaration), by the producer (upon sale) or by the commercial purchaser from another entity (upon receipt of delivery). Excise tax is identical for imported and domestic products, and is applicable as follows: It is levied on real estate (buildings or apartments for vacation or recreational purposes, business premises, garages) and moveable property (motor vehicles, sailing boats, gaming tables in casinos, gaming machines and gambling machines). The rates of tax are: BAM 1 to 4 per square metre for real estate from BAM 20 (for vehicles) to BAM 15,000 (for gaming tables in casinos) in respect of moveable property Other indirect taxes and levies Tax on the consumption of alcohol and alcoholic beverages, which is to be paid by the restaurant operator. The tax rate varies between 3 and 20 % (depending on the canton and type of beverage). 32 Investment Guide Bosnia and Herzegovina, October 2007

33 Levies on the installation of signage on streets from BAM 50 to BAM 100 per square metre (not mandated in all cantons), similar to the fee levied on the use of public space in Austria. Other fees (administrative, court and utility fees) in accordance with the regulations of FBiH, the cantons and the municipalities Regulations in RS Corporate tax Legal persons who generate income through the sale of products or services are required to pay corporate tax. This includes persons domiciled in RS (legal persons who are registered in the Register of Firms of RS) and persons not domiciled in RS (legal persons domiciled in FBiH or a different country), who generate incomes in RS. The tax rate is 10 % and a relatively small number of tax concessions are offered. In contrast to FBiH, no loss carryforwards are allowed. Expenses not recognised for tax purposes include: Expenses for humanitarian, cultural or education-related purposes in an amount in excess of 1 % of total turnover; Expenses for sports purposes in an amount in excess of 1 % of total turnover; Expenses for representation, sales promotion and advertising in an amount in excess of 3 % of total turnover; Membership fees and contributions to political organisations, contributions and fines, etc Income tax Income tax regulations in RS govern the taxation of the entire income of natural persons. Persons domiciled in RS who have incomes generated in RS, in another entity or another country are required to pay income tax. Persons domiciled in RS are deemed to be persons who have a residence in the territory of RS and who spend more than 183 days per year, continuously or with interruptions, in the territory of RS. Tax advances for corporate taxes must be paid on a monthly basis and are calculated on the basis of the income generated in the previous year. Tax returns must be prepared and submitted to the finance authority by 10 March of the following year. The tax base is generally structured as follows: 1. Earnings (losses), calculated in accordance with the accounting standards 2. Determination of expenses not recognised for tax purposes 3. (=1+2) tax base; 4. Deductions from the tax base: Investment in tangible assets Investment in securities and participations 5. (=3 4) assessment basis for the calculation of taxes 6. (=Point 5 x 10 %) Calculated corporate tax 7. Any taxes paid outside RS 8. (=6 7) Assessed tax liability 9. Less tax advance payments 10.Supplementary payments or credits of contributions Point 7 covers all corporate tax amounts which companies not domiciled in RS may have paid on incomes earned outside the territory of RS. Moreover, persons who are not domiciled in RS are required to pay income tax on their incomes generated within the territory of RS. The following incomes are subject to income tax: Incomes from non self-employed activity Incomes from agriculture and forestry Incomes from handicraft activities Incomes from author fees, patents and technical inventions Incomes from capital assets Capital gains Tax returns must be submitted by 15 March of the following year. Tax is levied at a fixed flat rate of 10 % and there is no provision for progressive taxation. Annual income tax is calculated and reported as follows: 1. Personal net income Wages and salaries Benefits for meals during working hours, vacation pay, supplementary food aid for the winter, etc. Compensation for the use of own vehicle Compensation for lodging costs for foreign assignments Compensation for public transportation costs over and above the ticket price Per diem payment over the statutory maximum limits Investment Guide Bosnia and Herzegovina, October

34 Legal Foundations and General Conditions for Investment Remuneration of members of steering committees and supervisory boards Remuneration of representatives Other personal income 2. Net incomes from handicraft activities 3. Net incomes from author fees, patents and technical inventions 4. Incomes from capital assets 5. Annual income (= ) 6. Tax-exempt portion four average monthly net incomes (as of March 2007: approximately BAM 555 per month) 7. Income (=5 6) 8. Special expenses up to 10 % of income (Point 7 x 10 %) 9. Tax base (=7 8) 10.Deduction from the assessment basis for dependent family members (max. 50 %) 11.Assessment basis for the calculation of income (=9 10) 12.Calculated income tax (= Point 11 x 10 % tax rate) Incomes from capital assets include incomes from the renting of real or moveable property, but do not include interest and dividend payments. These latter two items are tax-free Gambling tax Natural persons who win more than BAM 100 are subject to payment of gambling tax. The tax base for the winning of property or rights is the selling value of such property or rights (as determined by the competent authority). The tax rate ranges between 5 and 20 %. The tax is to be deducted and paid by the party disbursing the winnings Property acquisition tax This tax applies to the transfer of actual rights in real property (ownership rights, usufruct rights, usage rights, rental rights for apartments and business premises) as well as the transfer of other rights (intellectual ownership rights such as patents and, licenses, permanent usage rights in an urban lot, rights to confiscated real property) which are used subject to payment of consideration. The tax is to be paid by the seller of the rights. The tax base for the transfer of real property is either the agreed price or the market value determined by the tax authorities, whichever is the higher. The tax rate is 3 %. In certain cases, no property acquisition tax is due if, for example, the rights are transferred to cover public obligations, if the ownership rights in the real estate of diplomatic missions and consulates of foreign countries are transferred subject to the condition of reciprocity, etc Property tax Property tax must be paid for the following rights in real property: ownership rights, usufruct rights, usage rights, rental rights for apartments or business premises, rights to the use of construction property. The holder of the rights is subject to the tax (both legal and natural persons) for real properties located within the territory of RS. The tax depends on the size of the real property: Residential property in urban areas of up to 100 square metres: BAM 0.3 per square metre; for over 100 m 2 : BAM 0.5/ m 2 for the entire area Weekend vacation houses for vacation and recreational purposes: BAM 1.0 per square metre Office space: BAM 1.0 per square metre Retail and dining floorspace: BAM 2.0 per square metre Land used for petrol stations: BAM 3.0 per square metre Petrol station as the only sale location: BAM 3,000 per station Business space for services: BAM 0.1 per square metre In exceptional cases, provisions are made for exemption from the property tax (for example, public buildings serving a general purpose, diplomatic missions and consulates subject to reciprocity, real property owned by religious organisations, production areas of less than 10 square metres, etc.). War veterans, pensioners and other persons registered by the social welfare centres are also exempt from the net asset tax in respect of their ownership rights in residential housing Other taxes Special taxes levied by the Republic Certain special taxes must be paid by all legal persons and sole traders as well as by all branch offices of foreign legal persons. In annual terms, these taxes amount to the following: for all legal persons active in the banking sector and for insurance companies active in property and pension insurance: BAM 5,000; for all legal persons engaged in some kind of trading activity or who are registered as providers of electrical power and postal services: BAM 2,500; 34 Investment Guide Bosnia and Herzegovina, October 2007

35 for all legal persons who carry out other activities and for branch offices of foreign legal persons: BAM 600; for sole traders active in the hotel and restaurant business or trade, or as providers of legal services or pharmacy services: BAM 250; and for sole traders who carry out other activities: BAM 50. Taxes on the organisation of gambling and entertainment games. All persons who organise gambling activities pursuant to the Act on Gambling are subject to the tax. The tax must be paid on a monthly basis, as follows: Gambling rooms BAM 3,000 Public premises with gambling machines (per machine) BAM 50 Public premises with gaming machines BAM 100 Sports betting offices BAM 1,000 Organisers of classic bingo games must pay a tax in the amount of 10 % of total income. Taxes on public services, established by the municipal councils institutions, financial services, international transport and services of diplomatic and international organisations as well as small businesses with annual turnover of less than BAM 50,000. Enterprises must register with the Agency for Indirect Taxes. The administration of value added tax is carried out by an independent authority, the Indirect Taxation Authority for Bosnia and Herzegovina (Uprava za indirektno oporezivanje, Ulica Bana lazarevica bb, Banja Luka, Tel: , Fax: , which is based in Banja Luka. There are branch offices of the authority in Sarajevo, Mostar and Tuzla. Tax liability arises at the delivery location or the site where the service is rendered. There are exceptions in relation to real property, international transport (only the section falling within Bosnian territory is liable to tax) and catalogue services (transfer and use of rights, marketing services, services of auditors, tax consultants, translators, etc., banking and financial services, personnel services and telecommunications services). Special Republic-level taxes must also be paid on the final consumption of motor fuels (petrol and diesel). According to the law, these taxes range from BAM 0.05 to BAM 0.3 per litre; their exact amount is determined by the government Value added tax As of 1 January 2006, a general value added tax (PDV = porez na dodatnu vrijednost) was introduced in Bosnia and Herzegovina, with a uniform rate of 17 % for all products, goods and services. The following are subject to payment of the tax: all legal and natural persons who perform economic activities in an independent capacity, foreign businesses without a permanent establishment in Bosnia via a tax representative or the recipient of services of a foreign company if such has no tax representative in Bosnia, recipients of imported goods and recipients of construction services, as well as all companies which state value added tax in their invoices. The following services are exempt from VAT: Postal services, health care services, services by political parties, services of social, humanitarian and religious institutions, services provided by social insurance organisations and educational The obligation to pay the tax arises at the time of delivery or when the service is provided, upon the issuance of an invoice, receipt of an advance or partial payment, imports or own consumption. The assessment period for value added tax is the calendar month. A monthly value added tax advance return must be submitted by the 10th of the following month. The input tax deduction is essentially structured along the lines of EU regulations Import and customs duties A uniform customs policy is applied in the territory of Bosnia and Herzegovina, as required by the law on the customs policy of Bosnia and Herzegovina. The regulations which apply to resident legal persons are also valid for foreign companies registered in Bosnia and Herzegovina. This also applies to customs regulations; one exception though is machinery and equipment and business equipment which are based on foreign investment, or the furnishing of branch offices of foreign companies, which are treated separately in the regulations. Investment Guide Bosnia and Herzegovina, October

36 Legal Foundations and General Conditions for Investment In principle, the customs duties and other levies are to be paid for imported goods at the rates specified in the Customs Act. The customs rates vary depending on the origin and nature of the goods, the economic activity, the degree of processing, the purpose etc., and range from 0 to 20 % (with the average customs duty at roughly 10 %). An investment by a foreign company in machinery and equipment and business equipment is exempted from the tax. This includes: tangible assets which are not older than 10 years and spare parts for such assets, materials for the erection and repair of buildings, low-value business goods and equipment for environmental protection. Exceptions include passenger vehicles (off-road vehicles and passenger cars with a maximum of nine seats including the driver s seat), and gambling machines and gaming machines. An application for exemption from customs duty is to be submitted to the competent customs authorities together with the contract on foreign investment, certification of registration of the foreign investment with the competent authorities, a description of the goods according to the customs nomenclature, a statement by the investor that the equipment is not older than 10 years, and certification from an authorised institution that the imported equipment complies with the relevant environmental and labour safety standards. Goods intended for renovation and refurbishing projects for which a special permit by the competent BiH authorities or the competent regional authority is available are also exempt from customs duty. Such an exemption can be considered if an application is submitted to the competent customs office, accompanied by a description of the goods according to the customs nomenclature. Moreover, the overall value as confirmed by the competent BiH ministry or regional unit must be indicated (depending on the level at which the project is approved). maintenance, repair and servicing of the equipment for the work of the branch office. A prerequisite for this is, however, that the replaced parts are transported abroad, destroyed under the supervision of the customs authority or handed over to the customs authorities for their free use. Temporary import is permitted on the basis of the approval of the customs office for the period of one year. Where this is justified, such period may be extended until the winding up of the branch office. With regard to the payment of customs duty on temporarily used products, there are two options: full exemption and partial exemption. Equipment and furnishing for the operations of a branch office do not fulfil the conditions for complete exemption from import customs duty. Goods which are imported temporarily for the requirements of branch offices of foreign companies are subject to payment of a customs duty of 3 % per month (i.e. 36 % annually) provided that the total amount due to customs over a longer period does not exceed the amount due to customs which would be payable pursuant to the regular customs rates. The amount due to customs is determined based on the nature of the goods (equipment) in accordance with the customs tariffs. The purchase of office furnishings is excepted from the partial exemption and the full customs duty must be paid for this Ownership of real and moveable property Legislation pertaining to ownership and other property rights in real and moveable property is the responsibility of the two entities. The purchase of business equipment by a branch office is subject to the customs procedures for temporary use (subject to the condition of reciprocity). Pursuant to the decision on the temporary import and export of goods, equipment for branch offices, such as telecommunications equipment, passenger vehicles, delivery vehicles, computers, copy machines, etc. which are intended for official business purposes of foreign companies may be temporarily imported. Temporary import is also permissible for parts of the equipment for technical and technological improvements, for replacement, Property law applies to real and moveable property. Ownership is the right to possess a piece of property, to use such for its intended purpose and to preclude all others from use of the property. All natural and legal persons have the right to exclusive use of their property. Property cannot be confiscated from anyone unless such confiscation occurs in the public interest or in legally regulated cases, in accordance with the principles of international law. Any natural or legal person can be the owner of property. Essentially, foreign natural persons can acquire ownership in property in the same manner as residents, unless the law provides other- 36 Investment Guide Bosnia and Herzegovina, October 2007

37 wise. Foreign natural or legal persons who conduct business activities in BiH may acquire ownership in: Commercial buildings, Apartments, Residential buildings, Building land (on which the aforementioned buildings are located or where such are to be built). Acquisition of ownership in real property in the territory of BiH can be restricted for foreign legal and natural persons insofar as the acquisition of real property in the foreigner s country of domicile or origin is not possible for citizens of BiH (principle of reciprocity). In BiH, title and modus are required for the acquisition of ownership rights. Title can be acquired through a valid contract (based on a legal business activity), the decision of an authority, or inheritance. The modus for the acquisition of ownership in moveable property is transfer/taking possession. For acquisition of real property, the property must be entered in the Land Register (modus). The competent local court (depending on the location of the real estate) maintains the Land Register. The property is entered on the basis of an approval by the real estate transaction authorities. The decision of the real estate transaction authorities is based on the application for entry in the Land Register. An appeal against the decision of the real estate transaction authorities may be lodged at the competent court within 15 days (of notice being served). A person s ownership in property is deleted upon acquisition of ownership by a third party. An owner is generally entitled to sue for ownership against an (unlawful) occupier of property. To succeed, the owner must prove that he is the owner of the property and that the plaintiff has taken possession of the property. There is no statute of limitation on claims for the enforcement of ownership. claims are satisfied first. A mortgage can also be created on several properties for the purpose of securing a claim. Transfer of a mortgage does not require the consent of the mortgagor. Possession is deemed to be tenure or occupancy of an object (physical possession). A person can also have possession of something if he entrusts an object to the safekeeping of a third party (indirect possession). The lawful holder or occupier is entitled to sue any party disturbing his property for unlawful interference with possession. Legal action on the grounds of unlawful interference with possession must be filed within 30 days of becoming aware of such interference, but within one year at the latest Double taxation agreements Internal measures are currently being implemented in FBiH and RS to prevent double taxation. Parties required to pay tax in BiH which have paid taxes in another entity on incomes generated in that entity are entitled to a tax credit, i.e. to deduct the tax paid in BiH. Persons who are not domiciled in BiH and earn incomes or revenues in BiH are required to pay tax in BiH (pursuant to the provisions of FBiH or RS). Currently, bilateral treaties on double taxation are being prepared with the following countries: Austria, Macedonia, Croatia, Slovenia, Serbia, Montenegro, Qatar, Germany, etc. All of these contracts are to comply with the OECD model Bankruptcy Bankruptcy proceedings are instituted for the settlement of the debts of the debtor in bankruptcy. This procedure involves the selling off of the debtor s assets, and the revenues are used to satisfy the claims of the creditors. The grounds and proceedings for bankruptcy are regulated by law. Liens on moveable and real property can be created on the basis of a court ruling, contract or by operation of law. Property may be encumbered by a mortgage in favour of a creditor as security against specific claims. This gives the mortgage creditor the assurance that the encumbered property can be sold for the purpose of satisfying his claims (insofar as the debtor cannot settle his obligations in another manner). In accordance with the legal provisions, the creditor s claims can be satisfied by sale of the pledged property. Satisfaction of creditors occurs in order of priority; the creditor entered first has priority over subordinated creditors and over others for which no pledge has been given, as his A petition in bankruptcy can be filed at the competent bankruptcy court by the debtor in bankruptcy or by the creditors within 30 days of occurrence of the debtor s insolvency. The bankruptcy court is required to process the petition in bankruptcy within 15 days and to initiate proceedings or to issue an order for correction within 15 days. It is possible to withdraw the petition in bankruptcy prior to initiation of bankruptcy proceedings. A creditor who initiates the proceedings must settle the court fees determined by the judge presiding over the bankruptcy proceedings within 15 days of the initiation of the proceedings; if these court fees are not settled, the petition in bankruptcy will be dismissed by the competent judge. Investment Guide Bosnia and Herzegovina, October

38 Legal Foundations and General Conditions for Investment The bankruptcy court is the local district court with jurisdiction over the registered office of the legal person or place of residence of the natural person. The judge in charge of bankruptcy proceedings presides over the proceedings from the time when the petition in bankruptcy is filed until the end of the proceedings. The provisional administrator who is appointed by the judge in charge of the proceedings is required to submit a report determining whether or not the conditions for initiation of bankruptcy proceedings have been fulfilled and whether the debtor s assets cover the costs of the bankruptcy proceedings. Based on this report, the judge can initiate the bankruptcy proceedings. The administrator who is appointed by the judge after initiation of the bankruptcy proceedings is required to prepare a list of the debtor s assets and to submit the same to the judge within 45 days of his appointment. Furthermore, immediately following his appointment as administrator, the administrator must conclude a liability insurance policy with regard to his personal liability as an administrator. The meeting of creditors consists of all creditors who enforce their claims against the debtor in bankruptcy within 30 days of initiation of the bankruptcy proceedings. The provisional meeting of creditors is used by the judge in charge of bankruptcy proceedings to protect the creditors interests until the establishment of the committee of creditors. The committee of creditors is appointed by the meeting of creditors. The following parties are represented in the committee creditors: the creditor with the largest claim, creditors with smaller claims, a representative of the debtor s employees and other creditors. The subject matter of the bankruptcy proceedings is the assets of the insolvent party, consisting of the total amount of the assets of the debtor in bankruptcy upon institution of the bankruptcy proceedings and the assets acquired by the debtor in bankruptcy during the bankruptcy proceedings. The invitation to the bankruptcy hearing must be made public for 15 to 30 days. Immediately following the bankruptcy hearing the judge in bankruptcy ends the proceedings and publishes the results in the Official Gazette. An appeal against the decision of the bankruptcy court can be lodged within 8 days of publication (or dispatch, in the event that the decision is not published). If the judge in bankruptcy fails to address the merits of the appeal for legal remedy, the court of first instance shall refer the case to the appeals court for a ruling. In regard to the enforcement of execution, bankruptcy courts in FBiH and RS are only competent for enforcement against debtors who are domiciled in FBiH or RS. The proceedings cover all the assets of the debtor regardless of whether these are located in FBiH, RS or abroad. In regard to the recognition of foreign rulings on the initiation of bankruptcy proceedings, the general regulations on the recognition of foreign court rulings apply. The application for recognition is to be submitted to the bankruptcy court in the area in which the debtor is domiciled in FBiH or RS. If the debtor does not have a domicile or a permanent establishment in FBiH or RS, the court with jurisdiction over the location where the debtor s assets or a portion of said assets are located shall have jurisdiction. In the event that the permanent establishments or the assets of the debtor are located within the jurisdictions of several courts, the court at which the petition in bankruptcy is filed shall have jurisdiction. Foreign administrators and creditors may appeal against decisions on recognition of the ruling to initiate bankruptcy proceedings. In a petition for recognition of the ruling of a foreign court to initiate bankruptcy proceedings, the administrator or creditors can also request the initiation of bankruptcy proceedings in FBiH or RS. In the event that the petition for recognition of the ruling of a foreign court to initiate bankruptcy proceedings is rejected, at the request of the creditor or the administrator the bankruptcy court shall initiate bankruptcy proceedings in FBiH or RS if such proceedings are necessary to satisfy the claims of the creditors. Your contact partner: CONSULTATIO Wirtschaftsprüfung GmbH & Co KEG Mr. Gerhard Pichler, Certified Auditor and Tax Consultant, General Manager A-1210 Vienna, Holzmeistergasse 7 9, tel: (+43 1) ext gerhard.pichler@consultatio.at, website: Mr. Siegfried Scheiner, Certified Auditor and Tax Consultant A-1210 Vienna, Holzmeistergasse 7 9, tel: (+43 1) ext siegfried.scheiner@consultatio.at Law offices of Miroslav and Dragomir Prerad Mr. Miroslav Prerad, Attorney BIH Banja Luka; Milana Tepica 4, tel: (+387) advokat.prerad@blic.net 38 Investment Guide Bosnia and Herzegovina, October 2007

39 3. Appendix 3.1 Republika Srpska Balance Sheet ASSETS 1. UNPAID SUBSCRIBED CAPITAL 2. FIXED ASSETS Intangible assets Formation expenses Research and development costs Concessions, patents, licences and other rights Goodwill Other intangible assets Property, plant and equipment Land, forest, perennial crops Buildings Production and business equipment and furnishings Tools and inventories Breeding herd Other fixed assets Payments on account and assets under construction Financial assets Shares in affiliated enterprises Shares in other enterprises Loans to affiliated enterprises Other loans Long-term securities Own shares Other long-term financial assets 3. CURRENT ASSETS Inventories Raw materials and supplies Work in progress Finished goods Goods and commodities Prepayments Current receivables Current receivables From affiliated enterprises Trade accounts receivable Special trade accounts receivable Other receivables Receivables from current financing activities From affiliated enterprises From current loans Marketable securities Bills of exchange Other receivables Cash and liquid assets Marketable securities Cash 4. OTHER RECEIVABLES AND ACCRUED ITEMS 5. LOSSES IN EXCESS OF EQUITY CAPITAL LIABILITIES 1. CAPITAL Subscribed capital Share capital ordinary shares Share capital preferred shares Share capital of companies with limited liability State capital Share premium Revaluation reserves Revenue reserves Mandatory reserves Reserves pursuant to statutes and other reserves Balance sheet profit of which: profit carried forward of which: annual profit Balance sheet loss of which: losses carried forward of which: annual loss 2. NON-CURRENT PROVISIONS Provisions for contingent costs and risks Pension provisions Negative goodwill Other provisions Investment Guide Bosnia and Herzegovina, October

40 Appendix 3. LIABILITIES Non-current liabilities Bonds, of which convertible Due to affiliated enterprises From non-current securities Non-current loans Other non-current liabilities Current liabilities Current loans from affiliated enterprises Current loans Other current liabilities Prepayments received, deposits and liens From trade accounts payable to affiliated enterprises From trade accounts payable Other operating liabilities Other special operating liabilities Liabilities to employees Liabilities from taxes, social security and other contributions Other liabilities 4. OTHER LIABILITIES AND DEFERRED ITEMS PROFIT AND LOSS ACCOUNT REVENUES FROM ORDINARY BUSINESS ACTIVITIES Revenues from the sale of goods for resale Revenues from the sale of products and services Other own work capitalized Revenues from premiums, subsidies and aid, etc. Other revenues Positive change in inventory Negative change in inventory OPERATING EXPENSES Sales input Material costs for production Other material costs Fuel and energy expenses Personnel expenses (salaries, wages and ancillary wage costs) Expenses for services Depreciation, amortization, and impairment losses Formation of provisions Intangible expenses Other taxes Social security contributions and levies OTHER INCOME Revenues from the sale of fixed and intangible assets Revenues from the sale of shareholdings and non-current securities Revenues from the sale of raw materials and supplies Revenues from previous periods Income from the discount of liabilities Income from the release of provisions Other revenues OTHER EXPENSES Expenses for depreciation and amortization of fixed and intangible assets Expenses from the sale of fixed and intangible assets Expenses from the sale of shareholdings and non-current securities Losses on the sale of raw materials and supplies Expenses carried forward from previous periods Deficits Depreciation of current assets Formation of provisions for contingent liabilities Other expenses OPERATING RESULT Financial income Financial income from affiliated enterprises Interest income Capital gains Other financial income Finance costs Financial costs for affiliated enterprises Interest expenses Capital losses Amortization of non-current financial investments Other financial expenses FINANCIAL RESULT PROFIT/LOSS ON ORDINARY OPERATING ACTIVITIES EXTRAORDINARY INCOME EXTRAORDINARY EXPENSES PROFIT/LOSS ON REVALUATION GROSS PROFIT/LOSS TAXES ON INCOME AND EARNINGS NET PROFIT/LOSS 40 Investment Guide Bosnia and Herzegovina, October 2007

41 3.2 Federation BiH Balance Sheet ASSETS 1. UNPAID SUBSCRIBED CAPITAL 2. FIXED ASSETS Intangible assets Patents, licences and concessions Formation expenses Research and development costs Goodwill Negative goodwill Other intangible assets Prepayments for intangible assets Property, plant and equipment Land and forest Buildings Production and business equipment and furnishings Perennial crops and breeding herds Residential buildings and dwellings Other fixed assets Prepayments for fixed assets Financial assets Shares in affiliated enterprises Shares in associated enterprises Loans to affiliated enterprises Loans to associated enterprises Other securities held as fixed assets Other loans extended Other non-current financial assets Other non-current receivables, deposits and liens Loans and accrued items 3. CURRENT ASSETS Inventories Raw materials and supplies, replacement and spare parts Work in progress Finished goods Goods and commodities Prepayments for inventories Receivables From trade accounts with affiliated enterprises From trade accounts with associated enterprises Other receivables from trade accounts Other receivables, deposits and liens Current receivables and accrued items Securities and shares Shares in affiliated enterprises Shares in other associated enterprises Other financial investments Loans to affiliated enterprises Loans to associated enterprises Other current loans Own shares Other current financial investments Cash and liquid assets 4. LOSSES IN EXCESS OF EQUITY CAPITAL LIABILITIES 1. CAPITAL Subscribed capital Capital reserves Revaluation reserves Other reserves Profit or loss carried forward Treasury shares 2. LIABILITIES Non-current liabilities To affiliated enterprises To associated enterprises Other liabilities from loans Other non-current liabilities Non-current deferred items and reserves Current liabilities To affiliated enterprises To associated enterprises Other liabilities from loans From trade accounts with affiliated enterprises Other trade accounts payable Liabilities from taxes and contributions Other liabilities Current deferred items and reserves Investment Guide Bosnia and Herzegovina, October

42 Appendix PROFIT AND LOSS STATEMENT Sales revenues Production costs for services for the generation of sales revenues Revaluation difference for inventories GROSS PROFIT/LOSS Sales costs Administration costs PROFIT/LOSS ON ORDINARY OPERATING ACTIVITIES Income from affiliated enterprises Income from investments in other enterprises Income from other financial investments Income from sales of financial investments Financial income Other revenues Expenses on the sale of financial investments Expenses from amortization of financial investments Finance costs Other expenses PRE-TAX PROFIT/LOSS Taxes on income and earnings PROFIT/LOSS AFTER TAXES Extraordinary income Extraordinary expenses EXTRAORDINARY RESULT Taxes on income and earnings from the extraordinary result PROFIT/LOSS AFTER TAXES ON THE EXTRAORDINARY RESULT ANNUAL PROFIT / ANNUAL LOSS Note: Although the profit and loss account provides for separate taxation of extraordinary earnings, the tax regulations in FBiH do not distinguish between ordinary activities and extraordinary activities. Total earnings are taxed at the same rate and in the same manner. 42 Investment Guide Bosnia and Herzegovina, October 2007

43 Investment Guide Bosnia and Herzegovina, October

44 UniCredit Group CEE banking network UniCredit Group CEE banking network The Baltics UniCredit Bank Estonia Branch Liivalaia Street 13/15, EST Tallinn Phone: UniCredit Bank Lithuania Branch Vilniaus Gatve 35/3, LT Vilnius Phone: UniCredit Bank (Latvia) Elizabetes Iela 63, LV-1050 Riga Phone: Bosnia and Herzegovina UniCredit Zagrebacka banka Kardinala Stepinca b.b., BH Mostar Phone: unizaba@unizaba.ba HVB Central Profit Banka Zelenih Beretki 24, BH Sarajevo Phone: info@hvb-cpb.ba Nova Banjalucka Banka Marije Bursac 7, BH Banja Luka Phone: info@novablbanka.com Bulgaria UniCredit Bulbank Sveta Nedelya Sq. 7, BG-1000 Sofia Phone: Croatia Zagrebacka banka Paromlinska 2, HR Zagreb Phone: Czech Republic Živnostenská Banka Na Prikope 858/20, CZ Prague 1, Phone: info@zivnobanka.cz www1.zivnobanka.cz HVB Bank Czech Republic Nám. Republiky 3a, CZ Prague 1, Phone: Hungary UniCredit Bank Szabadság place 5 6, H-1054 Budapest, Phone: info@unicreditbank.hu Macedonia BA-CA Representative Office Dimitrie Cupovski 4 2/6, MK-1000 Skopje Phone: office@ba-ca.com.mk Montenegro BA-CA Representative Office Hercegovacka 13, Podgovica Phone: ba-ca@cg.yu Poland Bank Pekao ul. Grzybowska 53/57, PL Warsaw Phone: Romania UniCredit Tiriac Bank Ghetarilor Street 23 25, RO Bucharest 1, Phone: office@unicredittiriac.ro Russia International Moscow Bank Prechistenskaya emb. 9, RF Moscow Phone: imbank@imbank.ru Yapi Kredi Moscow Goncharnaya emb. 2, RF Moscow Phone: yap@online.ru Serbia UniCredit Bank Rajiceva 27 29, Belgrade Phone: office@unicreditbank.co.yu Slovakia UniCredit Bank Šancova 1/A, SK Bratislava, Phone: Slovenia UniCredit Bank Šmartinska cesta 140, SI-1000 Ljubljana, Phone: info@si.bacai.com Turkey Yapi Kredi Yapi Kredi Plaza D Blok, Levent, TR Istanbul, Phone: Ukraine UniCredit Bank 14, D. Galitskogo St., UA Lutsk, Phone: Investment Guide Bosnia and Herzegovina, October 2007

45 This is a product of the New Europe Research Network. The New Europe Research Network involves all the research offices of the Group dealing with the CEE region, with the aim of providing a shared view in terms of economic developments at the single country and at the regional level Debora Revoltella UniCredit Group, CEE Chief Economist Network Coordinator Neweuroperesearch@unicreditgroup.eu UniCredit Group, CEE Economic Research Carmelina Carluzzo (CZ, PL, SK) Matteo Ferrazzi (HR, LT, TR) Hans Holzhacker (EST, RUS, UA) Fabio Mucci (BG, LV, RO) Lisa Perrin Bernhard Sinhuber Gerd Stiglitz UniCredit Bulbank Planning and Control Division, Economic Research Unit Kristofor Pavlov, Chief Economist Elena Georgieva Milen Kasabov Katerina Topalova Zagrebacka Banka Macroeconomic Research Goran Saravanja, Chief Economist Nenad Golac Zivnostenska Banka Financial Markets Division Patrik Rozumbersky, Chief Economist HVB Bank Czech Republic Economic Research Pavel Sobisek, Chief Economist Vaclac Verner UniCredit Tiriac Bank Economic Research Rozalia Pal, Senior Economist Anca Mihaela Stoica UniCredit Bank Slovakia Macroeconomics & Market Analyses Viliam Patoprsty, Chief Analyst Lubomir Korsnak Yapi Kredi Bankası Cevdet Akcay, Chief Economist Ahmet Cimenoglu, Head, Strategic Planning and Research Murat Can Aslak Eren Ocajverdi Yelda Yucel International Moscow Bank Treasury Sergei Kondrashov Valery Inyushin Sergei Alenkin Dmitriy Marushkevich UniCredit Bank Hungary Márta Szegö Biróné, Chief Economist Tibor Nagy Bank Pekao Macroeconomic Research Office Andrzej Bratkowski, Chief Economist Investment Guide Bosnia and Herzegovina, October

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47 GOOD ADVICE IS AT HAND: AUDITING TAX CONSULTING BOOKKEEPING PAYROLL ACCOUNTING CONTROLS IT AUDITS BUSINESS VALUATION COMMERCIAL LAW ADVICE IN CO-OPERATION WITH MEMBERS OF THE LEGAL PROFESSION BUSINESS CONSULTING PERSONNEL CONSULTING ADVICE ON FOREIGN EXCHANGE REGULATIONS ASSISTANCE WITH PARTNER SEARCH AND SETTING UP JOINT VENTURES SEMINARS FOR TRAINING AND ADVANCED TRAINING TRUSTEESHIP PERFORMANCE OF SUPERVISORY AND ADVISORY BOARD DUTIES CONSULTATIO Wirtschaftsprüfung GmbH & Co KEG Auditors Gerhard PICHLER Siegfried SCHEINER Holzmeistergasse 9, A-1210 Wien Tel: / Fax: / Co-operation with Androsch International Managementberatung Ges.m.b.H. / Management Consultants Opernring I, A-1010 Wien Independent Firm associated with AGN International Limited CONSULTATIO danovo-poradenska k.s./ Tax Consultants Karol CSANYI Stara Prievozska 2, SK Bratislava Tel: / Fax: / mail@consultatio.sk AGN CONSULTATIO Revizija in Svetovanje, d.o.o., Ljubljana Tax Consultant and Auditor Maja BARISIC Jana Husa 1a, SLO-1260-Ljubljana Tel: / Fax: / maja.barisic@gs-consultatio.si CONSULTATIO Kft. Gazdasági és Adóügyi Tanácsado/ Tax Consultants and Auditors Zsuzsa MAROSFALVI Zugligeti ut 6, HU-1121-Budapest Tel: / Fax: / office@consultatiobp.hu CONSULTATIO danove-poradenska s.r.o./ Tax Consultants Karol CSANYI Korunni 129, Vinohrady, CZ Praha 3 Tel: / Fax: / info@consultatio.cz NETWORK COMMUNICATIONS AGENCY / I. HAUSMANN