Bosnia and Herzegovina
Sead Salkovic and Slobodan Mihajlovic
Eurofast Taxand
Bosnia and Herzegovina
The tax system in Bosnia is complex, but reforms are making the
country a more attractive destination for investors, explain of
Eurofast Global and Slobodan Mihajlovic of Eurofast Taxand.
Bosnia and Herzegovina (B&H) segmented into the two territorial
entities – the Federation (FBiH) and Republic of Srpska (RS), with a
separately established District of Brcko (District) – possesses a
complex tax system. In terms of enforcement of fiscal and tax policy,
B&H is exclusively competent in respect of indirect taxation, while
all other types of direct taxation are regulated under the jurisdiction
of specific entities and District in particular.
Indirect taxation reform
In 2006, to create unique legislation on indirect taxation, the
Indirect Taxation Authority, headquartered in Banka Luka, has been
established and is responsible for the collection and distribution of
indirect taxes at the level of B&H. Accordingly, indirect taxation
in B&H refers to collection of VAT, customs, excise tax, export
duties and other taxes charged on transfer of services and goods,
including taxes on transport and tolls.
The main achievement of the VAT system is a flat tax rate at 17% that is applicable on the entire territory of B&H.
VAT system in B&H
According to many tax experts and other officials, VAT system reform
has started by passing of the Law on VAT in 2006, which represents an
important milestone towards the inclusion of B&H into EU integration
processes.
The Law on VAT
The standard tax rate of 17% is valid in both the Federation and the
RS. The law, which is aligned with the Sixth EU Directive on VAT,
introduced the obligation to regulate the system of VAT on the whole
territory of B&H, and applies to imports of goods to the territory
of B&H as well as goods and services supplied in the territory of
B&H.
In accordance with the law, persons who are subject to VAT are:
- Taxpayers who perform the supply of goods or services on which VAT is chargeable;
- Tax representatives of a taxpayer without seat or permanent
establishment in B&H and who performs the supply of goods and
services in B&H;
- Recipients of services purchased for business improvement in cases
when the service provider is not based in B&H and has not designated
a tax representative;
- Any person who shows VAT on an invoice or any other document serving as an invoice;
- In the case of importation, the recipient of the goods or the
customs debtor determined in accordance with custom regulations; and
- The recipient of goods and services relating to the construction of immovable property (subject to conditions)
In general, the tax liability is incurred at the time of carrying out
activities such as; delivering goods or performing services, issuing of
an invoice, making whole or part payment before the invoice is issued,
and the existence of a liability to pay customs debt on import of goods
or at the moment such liability would arise.
The period for calculation of VAT is the calendar month, whereas
taxpayers are obliged to submit an application and payment of VAT by the
10th day in the month after the tax period. Furthermore, registered
taxpayers of VAT in B&H are any person whose annual taxable turnover
exceeds 50,000 BAM ($40,000).
Activities exempt from VAT
Determined by the law on VAT, the activities exempted from VAT
include: public postal services, medical and health care, social
security, education and sports services, as well as services performed
by registered religious organisations. An exemption also applies to
services related to insurance and reinsurance, granting and managing
loans, deposits, savings and bank accounts and management of investment
funds.
The zero VAT rate applies in the case of export of goods from B&H
and on behalf of the seller, providing services (transportation)
directly related to export or import goods, humanitarian delivery and
charitable activities and services on behalf of other brokers or
services performed by the agent or done outside of B&H (subject to
conditions specified within the Law). Specific exemptions apply to the
importation of goods intended for free trade zones and warehouses
(except customs), delivery of goods in accordance with customs
regulations, which are temporarily stored, and any services in
connection with such traffic.
VAT taxation of goods and services
In accordance with the provisions of the Law, VAT is paid at the place of supply of goods.
Following the general rulings regarding defining the origin of tax
liability and the place of completed services, set by the law on VAT,
the source of the completed services will be considered as the source of
the service provider's jurisdiction. Certain exceptions apply relating
to specific areas. For isntance the place of service is considered to be
the place where the property is located, if the services performed
directly relate to real estate. In addition, in cases of transfer,
transfer of property rights, intellectual property rights, advertising,
legal services, auditing, accounting, interpreting, translating and
other related consulting services, banking, insurance, reinsurance,
employment mediation, mediation services and telecommunications services
as well as mediation in connection with these services, the calculation
and payment of VAT depends on where the location of the recipient of
these services is. Accordingly, if such services are performed from
outside of B&H, the place of service is considered to be the place
where the recipient of services has its headquarters or is domiciled.
VAT refund for non-resident companies in B&H
In accordance with the Law, non-resident legal entities are entitled
to VAT refund, which they are charged on goods and services provided by
the taxpayers in B&H. This relates to purchased goods or services
received for the purpose of doing business abroad, or if they do not
carry out supply of goods and services for the period of refund
validity. Non-residents must file a request for VAT refund to the
Indirect Taxation Authority of B&H. In most cases, funds are
reimbursed within 60 days of the VAT refund request submission.
Corporate profit and withholding taxation in B&H
A corporate profit tax (CPT) rate at 10 % is valid on the entire territory of B&H.
CPT Laws brought some changes as opposed to earlier withholding tax
regulation. Thus, Federation CPT Law has decreased the standard
corporate tax rate considerably, from 15% to 10%, reduced the
withholding tax on dividend payments to 5%, introduced better practical
mechanisms for the implementation of Double Tax Treaties (DTTs). The
most important change was the extension of withholding tax coverage. The
withholding tax is applicable on all income derived by a non-resident
without a permanent establishment in B&H from the services including
market research, tax advice, auditing, leisure and sports events,
insurance premium and telecommunication services as well as dividends,
interests and royalties paid to non-residents.
On the other hand, CPT Law in RS provides that the withholding taxes
apply irrespective of whether the income is received in RS or abroad.
The withholding tax rate of 10% applies on payments of interest,
royalties, entertainment and sport events, consulting, financial,
technical or administrative services, insurance premium, and lease for
movable property. However, there is no withholding tax on dividends
distributed in RS and District.
Domestic legal entities are required to calculate and pay withholding
taxes on the accounts of relevant tax authorities in B&H. The tax
base represents the gross amount of income paid by the domestic taxpayer
to non-resident recipients.
Notwithstanding the above, the withholding tax rate can be reduced or
eliminated under the DTTs between B&H and the country of foreign
legal entity. At this moment B&H has signed DTTs with 36 countries.
DTT and the protocol to the DTT on income and capital signed on February
5 2008 between Spain and Bosnia and Herzegovina is effective as of
January 4 2011.
New law on corporate income tax of Brcko District entered into force
To attract more foreign direct investment and to increase the
capacity of its overall economy, the Parliament of District Brcko
(District) adopted on December 15 2010 a new Corporate Income Tax Law.
The Law has entered into legal force as of January 1 2011.
The general tax rate of 10% on companies' income remains unchanged.
The Law brought about changes to tax base treatment. Income from
dividends received by legal entities in District, income from
written-off outstanding claims and income from interests on securities
are excluded from the taxable base.
Additionally, the Law introduced certain tax incentives for taxpayers
who invest in machinery and equipment for business purposes within the
District. Also gross wages paid to new recruits on an indefinite period
are excluded from the tax base under the condition that the taxpayer or
new recruits did not use any other employment incentives in the
District.
Concerning international taxation, the Law provides that the income
of a non-resident legal entity with a permanent establishment in
District is taxed in the same manner as a resident legal entity.
However, non-residents without permanent establishment are taxed only on
the income derived from the immovable property in District (including
income from the lease, right to use and transfer of the ownership of the
immovable property), income from transfer of shares of that legal
entity or the income from usage of natural resources in District
(including the income of transfer of rights connected with those natural
resources).
In cases when a legal entity from District generates income that is
taxable both in District and abroad, the amount of tax paid abroad can
be credited against the income that is paid in the District or can be
treated as a deductible expense. These tax credits can be carried
forward for a period of five years.
Eventually, irrespective of whether the income was received in
District or aboard, the Law introduces withholding tax at a rate of 10%
of the gross amount on the following payments to non-residents:
- Royalties;
- interests;
- sports and entertaining events ;
- technical services consideration from auditing, consulting, management, engineering and administrative services;
- insurance premium and insurance and reinsurance from the risks;
- rental of movable property;
- other services consideration/fees performed in District;
Notwithstanding the above, no withholding tax is applicable on dividends.
Tax incentives in B&H
CPT Law in Federation provides exemption of corporate profit tax for a
legal entity whose exports exceed 30% of total turnover within the
taxable year that the profit is determined.
A legal entity can be exempted from CPT where investments in
production within the Fedaration of BiH, made for five consecutive
years, exceed BAM 20 million ($14.9 million). In such cases, an
exemption from the payment of corporate income tax is allowed for the
first five years. A minimum of BAM 4 million ($3 million) must be
invested. Where the minimum investment level is not reached within the
five year period, the right to tax exemption is withdrawn, and the
unpaid corporate income tax becomes due, including penalty interest.
In addition, the employment of disabled people or people with special
needs for a period exceeding one year, grants the company an exemption
from tax for the said year, in instances where such people account for
more than 50% of the employees of the company.
The above-mentioned tax incentives are also applicable on legal entities in RS and the District.
Reforms have promoted investment opportunities
Though the tax environment seems complicated, B&H has
accomplished a great amount of tax reforms to make the country more
attractive in the eyes of investors. Bosnia offers great potential to
investors based not only within the EU, but around the world.
Slobodan Mihajlovic (Director of Western Balkans) (slobodan.mihajlovic@eurofast.eu), Eurofast Taxand, Cyprus
Sead Salkovic (sead.salkovic@eurofast.eu), Eurofast Global, Banja Luka Office/B&H