Though it has been an independent country for only a short time, the Former Yugoslav Republic of Macedonia is working hard to improve economy, particularly through changes in the tax system, explains Elena Kostovska of Eurofast Global
Value added tax (VAT)
The standard value added tax rate in FYR Macedonia has been stable at 18% while the preferential rate has been set at 5% (applicable to a range of products/services including food products, certain agricultural products and machines, medical goods, software and hardware). With the VAT Law changes from July 2010, companies are obliged to register for VAT if their taxable turnover is more than MKD2 million (applicable from 2011, previously MKD1.3 million). Companies who meet this criterion in the course of a calendar year must register for VAT purposes by the 15th day of the month after the month in which they exceeded the threshold. Depending on the company's turnover, a company's VAT tax period can be the month, the quarter or the year. Taxpayers can opt to request that their VAT period is considered to be the calendar month (instead of quarter or year) if they demonstrate that they will perform investment related purchases of more than MKD100 million (excluding investments in vehicles, furniture, appliances, artwork or administrative investments) within the calendar year.
During the last year, the penalty amounts for VAT offences have been reduced by 50% and taxpayers have been given a slight extension in deadlines for filing VAT returns which are now due within 25 days after the end of each tax period (previously 15 days).
Corporate Income Tax
The FYR Macedonian corporate income (profit) tax rate has been stable at 10% since the introduction of the flat tax rate in 2008. All resident entities and the income derived in the republic by foreign legal entities are subject to this tax. The corporate tax on retained earnings has been abolished. Companies operating in technological industrial development zones (TIDZs) are entitled to corporate income tax breaks.
Certain changes were introduced in the Profit Tax Law in April 2011. These changes state that performing activities in FYR Macedonia for a period of 90 days in a 12 month period will be considered a permanent establishment (PE). Interruptions of up to seven days will be disregarded. The law also adds a provision whereby branches of companies will also be considered as PEs and together with other PEs will need to register as profit taxpayers before commencing their activities.
The tax base for calculating the profit tax for a given period is equal to the non-recognised (non-deductible) expenses plus the difference between the company's actual income and reported income. This amount is taxed, while the remaining income is only taxed if distributed to capital owners (after an offsetting against previous losses).
The April 2011 law changes also include a myriad of adjustments as to which expenses are considered non-recognised for tax purposes, many of which are newly defined, as well as introducing new categories of deductible expenses (for example, voluntary pension insurance). Investors are advised to seek guidance to determine the impact on their business.
As of July 2010, dividends distributed between FYR Macedonian resident companies are no longer subject to corporate income tax as an anti-crisis measure, effectively allowing for free transfer of profits between resident entities. Dividends distributed to individuals and to foreign resident companies or individuals continue to be taxed at 10%.
The corporate income tax also determines the general level of withholding tax on payments of income to non-residents. Such withholding tax is applied to income from dividends; interest; royalties; management/consulting/financial services fees; entertainment or sports activities' fees; insurance or reinsurance premiums on the territory of FYR Macedonia; rental of real estate located in FYR Macedonia, telecommunications services or R&D service fees to the non-resident founder. No withholding tax is due on the transfer of after-tax profits of a PE of a non-resident in FYR Macedonia.
(subject to double tax treaties)
||10% (given that tax has been levied on the income out of which the dividends have resulted)
Double tax treaties
The Double tax treaty network has been growing continuously in recent years, with more than 40 treaties signed. Many of the treaties provide for a 0% withholding tax imposed on dividends and interest payments to non-residents. Treaties with Slovakia and Germany (new treaty replacing the old one) have become effective in 2011, while treaties with Belgium, Norway and Kosovo have been signed in the last year.
As an anti-crisis measure, up to the end of 2011, the first sale of residential buildings before their first occupation and within five years of their completion is subject to the reduced VAT rate of 5% (instead of the standard rate of 18%). To be eligible for this reduced VAT rate, the building must be used for residential purposes. In the case of a mixed-purpose building, a proportional VAT application will be enforced – the portion of the building to be used for residential purposes will be levied with 5% VAT while the rest of the building will be levied with the standard 18% rate.
Ownership of real estate in FYR Macedonia is taxed with a proportional property tax – a local tax collected in the municipality where the property is located. Municipal councils determine the applicable rate which ranges from 0.1% to 0.2% of the property's market value. Taxpayers (individuals) who live with their families in a residential building are entitled to a 50% reduction on the property tax payable. Certain types of land (for example, agricultural land) may be exempt from property tax payments; however, if agricultural land is found to not be used for agricultural purposes, the property tax may be increased to three to five times the usual rate.
Property Tax Law changes in April 2011 have increased the protection of taxpayers in property tax cases and streamlined certain decision-making procedures.
Tax on real estate transfer
The transfer of properties is subject to a proportional transfer tax which ranges from 2% to 4%. Transfer tax is imposed on the profits realised from the sale of property and respective rights. Capital gains from the sale of property are treated as income and subject to the relatively low income tax flat rate of 10% which is levied on 70% of the capital gains amount. However, capital gains arising from property that has been owned for three or more years are tax exempt.
20 years of independence
FYR Macedonia celebrates 20 years of independence from the Former Yugoslav Federation in 2011. This republic of two million inhabitants, while still coming out of a prolonged transitional period, is working on strengthening its economy and positioning itself as a preferred regional investment location. In its 2010 report, the World Bank ranked FYR Macedonia as the 3rd Reformer in the World. The tax system, including the numerous tax incentives available to investors, plays a major role in the country's attractiveness.
Though the global financial crisis has not passed FYR Macedonia by, certain large multinationals have already invested in this small Balkan republic, either through greenfield projects or through privatisation processes and public-private partnerships.
Foreign exchange & banking
The national currency in FYR Macedonia is the denar (MKD), a stable currency that has been pegged to the euro.
Authorised banks perform payments to and from foreign countries with no restrictions on the payments. Inbound investments' profits and dividends, after corporate income tax has been paid, can be transferred abroad. All transactions between foreign and resident entities are registered by the Central Bank which is the authority that can also, in certain cases, permit domestic entities the right to own accounts in foreign banks.
Non-residents can freely open non-resident accounts in Macedonian banks. A certificate from customs for cash deposits of more than €2,000 ($2,900) into non-resident foreign currency accounts is required. Cash withdrawals from domestic currency accounts made by non-residents may not exceed €10,000 per month.
While FYR Macedonia is still a relative newcomer in the real estate market, recent market changes have made the country's real estate more attractive, particularly since there is a steadily growing demand for residential and commercial properties.
Skopje, the capital, is the prime location in the country as its economic, political and cultural centre generates more than 50% of the GDP. A 2010 Global Property Guide study said that investments in Skopje exhibit the shortest time needed for a return on investment in residential real estates, estimated at 10 years. The annual rent of residential properties in Skopje is estimated at 9.91% of the total value (compared to the 4%-5% in most EU cities), ensuring a fast payout.
Foreign investors & property
Residents (citizens and legal entities) of EU and OECD member countries can directly acquire ownership of residential and commercial properties in FYR Macedonia, much like locals. Long-term leases (up to 99 years) and concessions of either private or state owned land are possible. Non-residents can only, however, obtain agricultural or forest areas under long-terms lease contracts and reciprocity terms. Non-EU and non-OECD country residents can acquire ownership under the terms of reciprocity, regulated by the Ministry of Justice.
State owned construction land
State owned construction land is alienated through public tender procedures, with minimum bidding prices determined by the Ministry of Transport and Communications in accordance with the Construction Land Price Determination. Foreign investors are granted equal rights with domestic investors in tender procedures.
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 by way of a gift or inheritance. Subject to this tax are also stocks, bonds and securities received by way of gift or inheritance, if the market value is higher than the average total annual salary in the country during the previous year. Foreign individuals and entities are also subject to this tax for properties in 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 this tax.
Elena Kostovska (email@example.com), EUROFAST GLOBAL, Skopje office, FYR Macedonia