FYR Macedonia

Macedonia

Elena Kostovska
Eurofast Global
Macedonia

Macedonia is developing its tax system to attract more foreign direct investment, explains Elena Kostovska of Eurofast Global

The Former Yugoslav Republic of Macedonia is situated in Southeast Europe and borders with five other countries. It is a sovereign republic with a multi-party parliamentary democracy. Authority is based on the principle of strict division of functions and responsibilities among the holders of legislative, executive and judicial powers.

Recent years have seen major changes in FYR Macedonia's economic landscape. This small landlocked country of two million people is consistently trying to establish itself as one of the preferred jurisdictions in Europe for tax structuring by introducing a number of tax reforms and incentives for domestic and foreign companies and investors. In addition, through multilateral and bilateral free-trade agreements, for example with Turkey and Ukraine, the FYR Macedonia has gained access to 650 million consumers from the EU, EFTA and Central European Free Trade Agreement (CEFTA) countries. Furthermore, around 40 double tax treaties with other countries have already been signed.

A number of international companies have started operating in the country, both as greenfield projects and through different methods of acquisition and privatisation. FYR Macedonia has a number of advantages, such as an educated workforce and high educational standards, a strategic location (ideal for transit and distribution centres for European markets), a developed road infrastructure, a modern digital telecommunications network that is fully Wi-Fi-enabled, as well as increasingly attractive tax schemes.

Foreign exchange

The Foreign Exchange Law states that authorised banks can perform payments to or from foreign countries. There are no restrictions on the payments. Profits and dividends from inbound investments can be transferred abroad freely once the corporate tax has been paid.

There are no restrictions on foreign direct investment (FDI) by nonresidents. Transactions between residents and nonresidents need to be registered at the Central Bank. Certain domestic entities with activities abroad can maintain deposit accounts in foreign banks but only with the permission of the Central Bank. Nonresidents can also open a bank account.

Corporate income tax

A corporate income tax flat rate of 10% was introduced from 2008. All resident legal entities deriving income either in FYR Macedonia or abroad are subject to corporate income tax. Foreign legal entities (not registered on the territory of the FYR Macedonia) are also subject to corporate income tax on income realised in the country.

Companies operating in technological-industrial development zones (TIDZs) are entitled to corporate income tax breaks. These include a 10-year corporate income tax holiday as well as a 50% reduction on the personal income tax rate (5% instead of 10%) for the first five years.

Furthermore, to stimulate additional foreign and domestic investments, corporate tax on retained earnings has been completely abolished.

Withholding tax

Dividends (given that tax has been levied on the income out of which the dividends have resulted)	10%
Interest	10%
Royalties	10%

These rates may be reduced if a more favourable tax treaty exists.

Value added tax

Value added tax in FYR Macedonia is 18%, with a preferential rate of 5% (including computer software and hardware products).

Technological industrial development zones

A number of foreign corporations have also been investing heavily in the TIDZ (two in Skopje, one in Stip and one in Tetovo). There are numerous incentives offered for companies investing in TIDZs, such as:

0% VAT and customs duties for export production
0% excise
0% corporate income tax for the first 10 years (10% afterwards)
0% property tax for the first 10 years (normal rates afterwards)
5% personal income tax for the first five years (10% afterwards)
Free connections to piped natural gas, electricity, water and sewage

Property tax

Property tax is paid on real estate (except for properties exempt from tax, according to the law on property taxes) as well as on certain types of movable properties (such as motor vehicles). Tax rates are proportional and range from 0.1%to 0.2% on the value of the property. A 50% tax reduction is allowed to an individual taxpayer if the individual lives with his family in a residential building or flat.

Inheritance and gift tax on immovable property

Inheritance and gift tax is imposed on real estate and on the right of owning and using a property received as a gift or inheritance. This tax is also payable on cash, stocks, bonds and securities received in the same ways, provided that the market value of the property is higher than the average total annual salary in FYR Macedonia for the previous year. Foreign individuals and entities are also subject to this tax which is imposed on the gifts and inheritance relating to properties on the territory of FYR Macedonia. The tax rate ranges between 2% and 3% for second degree relatives, and 5% for third degree relatives and unrelated parties. First degree relatives are exempt from paying tax on inherited or gift properties.

Tax on real estate and real estate rights sales

This tax is imposed on profits realised from the sale of immovable property and respective rights to that property. The transfer of securities on the basis of compensation is also considered as a taxable real estate turnover. The tax rates for real estate turnover are proportional and range from 2% to 4%.

Capital gains

Capital gains from the sale of immovable property, securities and equity participations in companies are only subject to 10% tax. Thirty per cent of the capital gains from the sale of equipment, immovable property and securities is exempt from capital gains tax.

Immovable property owned for a period of three years or more is also exempt from capital gains tax.

Market outlook for real estate
FYR Macedonia is a relatively unexplored real estate investment location, mostly due to the relatively long stalemate during the transition period (after the fall of Yugoslavia and up to the full economic, social and political independence of the country). Recently, domestic and foreign investments have provided some momentum to the market and made the country's real estate more attractive. The real estate potential of the country is largely based on the steadily growing demand, particularly for residential and commercial properties. Future Nato membership is expected to further amplify the demand in the market.

The city of Skopje is the country's economic, political and cultural centre and generates more than 50% of the national GDP, which is also reflected in the volume of real estate investments when compared to other regions in the country. However, other less explored regions are also gaining momentum. Skopje has seen an increase in the constructions of shopping malls, particularly towards the city's outskirts. Recent investments by Slovenian, Israeli and Turkish companies are evident. An interesting development sector is likely to be hotels and tourism. In addition, the office and parking space market is expected to boom due to the lack of quality office and parking locations.

Foreign property investments
The amendments to the Constructions Law in 2008 have liberalised the real estate environment for foreign companies and individuals. Residents of EU and OECD member countries may buy residential and commercial properties under the same conditions applicable to locals. They can also acquire the direct right of ownership or enter into a long-term lease, subject to obtaining the consent of the minister of justice and the permit issued by the Ministry of Transportation and Communications and the Ministry of Finance. Other, non-EU/OECD country residents can acquire ownership under the terms of reciprocity (regulated by the Ministry of Justice).

There are no limitations on the type of plots of land that can be acquired by foreign entities or individuals (private or state owned). Land can be leased on a short or long term (five years to 99 years), as well as given under concession. Nonresidents cannot acquire agricultural or forest areas, but can conclude long-term lease contracts under the terms of reciprocity.

State-owned construction land
State-owned construction land is disposed of through public tender procedures. The minimum bidding prices are set by the Ministry of Transport and Communications and are in accordance with the Construction Land Price Determination.