Tax Guide - Bosnia-Herzegovina

1
Business and Taxation Guide
Business and Taxation

Guide to
Bosnia and Herzegovina
Preface
This guide was prepared by LeitnerLeitner in Bosnia and Herzegovina in 2011.
LeitnerLeitner has offices in:
Vienna
Linz
Salzburg
Sarajevo
Zagreb
Budapest
Bucharest
Bratislava
Belgrade
Ljubljana.
Key contacts:
Developments in tax legislation are rapid. The information given in this guide reflects the tax
legislation as of December 2011. Before taking specific decisions, its recommended that
professional advice and guidance be sought.
This guide provides a brief overview. More detailed information on matters discussed in this
publication can be obtained from the persons responsible for the tax and advisory service areas
within LeitnerLeitner in Bosnia and Herzegovina:
Partner Pavo Djedovi - pavo.djedovic@leitnerleitner.com
Manager Ante Pavi - ante.pavic@leitnerleitner.com
Praxity 2011
This guide is intended as a general guide only and should not be acted upon without further advice.
Contents
Page
1.
General information
Regulation of foreign investment

Government incentives
8
9
Business organisations available to foreigners
10
Setting up and running business organisations
13
Corporate taxes and social charges
15
Personal taxation
19
2.
3.
4.
5.
6.
7.
1.1
1.2
1.3
1.4
1.5
1.6
Opportunities and possible obstacles for foreign investors

Area and population
Government and law
Key economic indicators
Financial status
Currency
3.1 Corporate Profit Tax incentives

3.2 Employment incentives
3.3 Double taxation treaties
4.1 Unlimited joint liability company Drutvo s neogranienomsolidarnomodgovornou

(d.n.s.o.)
4.2 Limited liability company Drutvo s ogranienomodgovornou (d.o.o.)
4.3 Limited partnership Komanditnodrutvo (KD)
4.4 Joint stock company Dionikodrutvo (d.d./a.d.)
4.5 Representative Office
5.1 Process for establishing a business
5.2 Accounting principles
5.3 Labour Act
6.1 Corporate profit tax

6.1.1 Taxpayers and residence
6.1.2 Determining the tax base
6.1.3 Carrying forward of losses
6.1.4 Tax rates and tax payments
6.2 Reorganisations
6.3 Withholding tax
6.4 Capital gains
6.5 Tax groupings
6.6 Social security and health insurance contributions
7.1 Resident employees
7.1.1 General employment relationships
8.
7.1.2 Tax base assessment

7.2 Tax rate, assessment and social security contributions
7.2.1 Tax rate and assessment
7.2.2 Non-resident employees
7.3 Inheritance and gift tax
Double taxation agreements
23

9.
10.
11.
12.
Sales and use taxes
24
Portfolio investment for foreigners
26
Trusts
Practical information
27
28
9.1 Value Added Tax

9.1.1 Taxable persons
9.1.2 Taxable transactions
9.2 VAT rates
9.3 VAT registration
9.4 VAT refund to foreign persons
10.1 Investment in real estate

10.1.1 Direct investment by an individual or entity (asset deal)
10.1.2 Indirect investment by an individual or entity (share deal)
12.1 Transport
12.2 Language
12.3 Time relative to Greenwich Mean Time (GMT)
12.4 Business hours
12.5 Public holidays
1. General information
1.1 Opportunities and possible obstacles for foreign investors
Bosnia and Herzegovina is a forward-moving country that has achieved significant progress in
improving the business climate. It lies in the very heart of South Eastern Europe and on the
crossroads between Europe, the Middle East and Northern Africa.
Bosnia and Herzegovina has become an ideal location to invest in, with numerous investment
opportunities in various sectors. Bosnia and Herzegovinas economy remains one of the fastest
growing in Europe. It offers potential investors significant opportunities to enter into a wider
regional market and run their business on the world scale, since Bosnia and Herzegovina is the
signatory of the Central European Free Trade Agreement (CEFTA), which provides free access to this
consumer market with 50 million people. Bosnia and Herzegovina also has free trade agreements
with Turkey, generalised system of preferences with the European Union, U.S., Switzerland, Norway,
Japan and New Zealand, as well as a preferential export regime with Iran.
Therefore, starting a business in Bosnia and Herzegovina provides the opportunity to export to a
market of over 600 million people without burdening any customs duties!
Bosnia and Herzegovina has achieved a satisfactory political stability that guarantees security for
businesses. The main goal of Bosnia and Herzegovina is EU membership; B&H is a potential
candidate country for EU accession. In this respect, it is worth mentioning that B&H has signed the
Stabilization and Association Agreement (SAA) with the EU, establishing formal contractual relations
between the EU and B&H. Until the ratification process of the SAA is completed by all the EU
member states, the Interim Trade Agreement with EU is in force.
Generally, Bosnia and Herzegovinas main investment advantages could be summarised as:
Strategic location
Available natural resources and beauties
Long tradition in different industry branches
Abundance of industrial zone, attractive sites and available production facilities
Favourable legal environment
Low tax rates
Highly educated and price competitive labour force
Stable domestic currency BAM pegged to EURO
Regional and bilateral Free Trade Agreements
EU membership perspective.
1.2 Area and population

Bosnia and Herzegovina lies in the very heart of South Eastern Europe and on the crossroads
between Europe, the Middle East and North Africa. It borders Croatia, Serbia and Montenegro. The
capital city of Bosnia and Herzegovina is Sarajevo.

Bosnia and Herzegovina covers a land area of 51,209 square km, and has an estimated population of
3.84 million. Bosnians, Croats and Serbs constitute the majority of the population of B&H. The
official languages spoken are Bosnian, Serbian and Croatian.
It is a very hilly country, with the Dinaric Alps dominating the landscape. Thick forests cover almost
50% of the land. In the north, along the Sava River valley, a hilly, fertile plain stretches east to west.
The country has 20 km of coastline in the southwest of the country, providing access to the Adriatic
Sea.
Winters can be very cold with a lot of snow, especially in the hills and mountains. Summers are
generally warm and comfortable, with cooler temperatures in the higher elevations.
1.3 Government and law

Bosnia and Herzegovina (B&H) is established as a state, comprising two entities - the Federation of
Bosnia and Herzegovina (FBiH) and the Republic of Srpska (RS). There is also a neutral, self-governing
administrative unit, the Brko District (BD).
B&H is a parliamentary democracy with a bicameral parliament (House of Representatives and
House of Peoples), three-member rotating presidencies, Council of Ministers, and Constitutional
Court.
The Constitution of B&H defines B&H as a state with a decentralised political and administrative
structure, where the responsibility for the assessment and collection of certain taxes is allocated to
the unit level.
The FBiH is an entity that is divided into 10 cantons. All cantons have their own constitutions, based
on federal constitution, legislative and executive authority. Cantonal laws are published in the
official gazettes of each canton. The 10 cantons are:
Unskosanskikanton
Posavskikanton
Tuzlansko-podrinjskikanton
Zeniko-dobojskikanton
Bosansko-podrinjskikantonGorazde
Srednjobosanskikanton
Hercegovako - neretvanskikanton
Zapadnohercegovakikanton
Sarajevskikanton
Hercegbosanskikanton.
Entities and cantons have their own judiciary authorities.

The Republic of Srpska(RS) is a constitutional and legal entity that independently performs its
constitutional, legislative, executive and juridical functions. The National Assembly and the
Government of RS are based in Banja Luka.
Brko District is a special administrative unit. It is not part of the entities and it is subordinated only
to state Bosnia and Herzegovina. Laws of Brko District have to be aligned to the laws of the state.

Important to note: This guide contains an overview of the tax systems in the FBiH and RS. The tax
system and other regulations of the Brko District are not covered within this guide.
1.4 Key economic indicators

B&Hs accelerated Economic Reform Process has contributed to a greatly improved business climate.
As a result, B&H has recorded the fastest growth of business in all of South Eastern Europe. The aim
of B&H is to eliminate legal and administrative obstacles for doing business in B&H, creating an
attractive business environment.
B&Hs main goal is to gain EU membership. Bosnia and Herzegovina has signed the Stabilization and
Association Agreement with the European Union.
Gross Domestic Product (GDP) has been rising steadily in the last decade, with average real growth
rate of 5%. Negative effects of the global financial and economic crisis on B&H economy peaked in
2009. Slight progress was achieved in 2010, when the GDP growth rate was 0.7%. GDP for 2012 is an
estimated 12.5 billion. GDP growth for 2011 is projected to be 3% and a full economic recovery is
anticipated in 2012.
As Bosnia has rich natural resources, the economy is mainly governed by mining, forestry,
agriculture, and some sectors of light and heavy manufacturing. The main exports in B&H are
manufactured goods, crude materials (excluding fuels) and mineral fuels and lubricants.
Between 1994 and 2012, the main investors in B&H have been Austria, Serbia, Croatia, Slovenia,
Russia and Germany, followed by Switzerland, The Netherlands, Turkey and Italy. The manufacturing
sector received the highest amount of foreign direct investment. The biggest share of investment
has been in the production (34%) and banking (22%) sectors.
1.5 Financial status

Bosnia and Herzegovina has the most stable currency in South Eastern Europe, which is directly
linked to the Euro. The country also has the lowest inflation in the region and privatisation of the
banking sector is almost completed. 98% of the capital is privately owned, of which 83% is foreign
private capital.
1.6 Currency
The unit of currency is the Bosnia and Herzegovina convertible mark, represented by KM. The
International Standards Organization (ISO) currency code is BAM. The convertible mark has a fixed
exchange rate to the Euro - 1 EUR = 1.95583 BAM.
2. Regulation of foreign investment

Foreign investors are protected against nationalisation, expropriation, requisition or measures of
similar effect. Such measures may take place only in the public interest in accordance with the
applicable laws and regulations and against the payment of an appropriate compensation, i.e.
compensation that is adequate, effective and prompt.
Foreign natural persons or legal entities that perform business activities in B&H enjoy the same
property rights in respect to real estate as B&H citizens and legal entities. This means they can own
the titles to business buildings, business offices, apartments and residential buildings, or own real
estate (pieces of land where the buildings have been, or will be, built).
Foreign investors are entitled to open accounts in any commercial bank, using domestic currency
and/or any freely convertible currency, in the territory of B&H. Foreign investors are entitled to
freely employ foreign nationals, subject to the labour and immigration laws in B&H.
There are no restrictions with regard to the management of companies with foreign capital. The
rights and benefits granted to foreign investors, and obligations imposed by the Law on the Policy of
Foreign Direct Investment, cannot be terminated or overruled by subsequent laws and regulations.
Should a subsequent law or regulation be more favourable to foreign investors, the investor has the
right to choose the regime by which the investment will be regulated.
Foreign investors are entitled to transfer abroad, freely and without delay, in convertible currency,
proceeds resulting from their investment in B&H. Investment capital is not subject to taxation in
B&H (except for the payment of customs duties and customs fees on investments). Also, profits
transferred from abroad are not taxed if they have been previously subject to taxation abroad.
Some restrictions on foreign direct investments are prescribed only by the Law on the Policy of
Foreign Direct Investment in Bosnia and Herzegovina. This law states that foreign equity ownership
of an enterprise engaged in the production and sale of arms, ammunition, explosives for military
use, military equipment and public information must not exceed 49% of the equity of the enterprise
without prior approval from the competent authority of the respective entity.
3. Government incentives
3.1 Corporate Profit Tax incentives
The PTA offers some exemptions from paying Corporate Profit Tax (CPT), depending on the value
and type of the investment and the number of employees with disabilities.
The FBiH's PTA exempts taxpayers from CPT payment for the fiscal year in which they have achieved
30% of their total income from exports. Furthermore, taxpayers who invest a minimum of BAM 20
million in production within five years of the first investment year, are exempt from CPT for these
five years. One of the conditions is that in the first year a minimum of BAM 4 million has to be
invested. If the taxpayer benefiting from this CPT tax incentive does not fulfil the above-mentioned
minimum investment requirements within the time period of five years, he or she has to repay
unpaid CPT plus statutory penalty interest.
The RS's CPT Law does not offer any tax incentives.
3.2 Employment incentives

In the FBiH, a taxpayer that employs more than 50% disabled persons or persons with special needs
for a period exceeding one year is exempt from CPT payment in that related tax year (the year that
50% of disabled persons or persons with special needs were employed).
3.3 Double taxation treaties

Bosnia and Herzegovina has concluded 38 tax treaties in relation to personal and corporate profit
taxation. In the majority of the treaties the exemption method applies, except for dividends, interest
and royalties.
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4. Business organisations available to

foreigners
Business activities in B&H are conducted either by sole entrepreneurs (individuals conducting
business activities) or by companies. The term company refers to legal entities. All companies are
registered in a court register in accordance with the Court Register Act. The rules regarding the
procedures for registration rest with the court registry. Bosnian law recognises the following types of
companies, which are commonly used for establishing a business in the FBiH and the RS:
Unlimited joint liability company Drutvo s neogranienomsolidarnomodgovornou

(d.n.s.o.)
Limited liability company Drutvo s ogranienomodgovornou (d.o.o.)
Limited partnership Komanditnodrutvo (KD)
Joint stock company Dionikodrutvo (d.d./a.d.)
4.1 Unlimited joint liability company Drutvo s

neogranienomsolidarnomodgovornou (d.n.s.o.)
An unlimited joint liability company in the FBiH is founded by establishing a contract between two or
more partners, domestic or foreign natural persons only. Founders are liable to invest all of their
assets, including personal property. There are no requirements for minimum or maximum capital
contributions.
A similar entity exists in the Republic of Srpska(RS),founded between two or more domestic/foreign
natural persons and/or legal partners. When establishing, partners commit to conduct certain
activities under the same company name. They also accept sole liability for company commitments.
There are no requirements for minimum or maximum capital contributions.
4.2 Limited liability company Drutvo s ogranienomodgovornou (d.o.o.)

In practice, limited liability companies are the most common company form in FBiH. Members of a
limited liability company assume ownership. This is proportionate to the value of each persons
stake in the company. Members are not personally liable for the obligations of the limited liability
company.
In the FBiH, limited liability companies are founded by the establishment act or establishment
contract between one or more domestic/foreign natural and/or legal entities, with initial capital
divided in parts. A member in a limited company is liable for the value of his or her personal
investment in that company. Minimum initial capital is BAM 2,000 (approximately 1,000).
In the RS, limited liability companies are founded by the establishment act of between one and 100
domestic/foreign natural persons and/or legal entities. A shareholder in a limited company in the RS
is not personally liable for any of the debts of the company, other than their initial capital
investment in that company. Minimum initial capital is BAM 2,000 (approximately 1,000).
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4.3 Limited partnership Komanditnodrutvo (KD)
In a partnership agreement, the type of participation and the degree of participation of the
unlimited partners and limited partners is specified. In the FBiH, a limited partnership is founded by
the establishment contract of two or more domestic/foreign natural and/or legal entities. There
must be at least one partner with full liability (including private property) and at least one partner
with limited liability, the liability being limited by the value of his or her personal share in that
company. There are no requirements for minimum or maximum initial capital.
The process for establishing a limited partnership is similar in the RS, where the company is founded
by the establishment act of two or more domestic/foreign natural and/or legal entities. At least one
person has unlimited liability for the company, and at least one person has liability to the amount of
his or her investment in the company. There are no requirements for minimum or maximum initial
capital.
4.4 Joint stock company Dionikodrutvo (d.d./a.d.)

In the FBiH, joint stock companies are defined as legal entities founded by the establishment
contract of one or more domestic/foreign natural or legal shareholders with initial capital divided
into shares. There are several different types of joint stock companies:
An open joint-stock company is a legal entity, for example banks, insurance companies, or
companies with minimum initial capital of BAM 4 million (approximately 2 million), and
they have at least 40 shareholders. Shares may be publicly listed.
A closed joint-stock company is a legal entity whose shares are distributed among a limited
number of shareholders. The minimum initial capital is BAM 50,000 (approximately
25,000).
The RS defines joint stock companies as legal entities founded by the establishment contract of one
or more domestic/foreign natural and/or legal entities with initial capital divided into a defined
number of shares. As with the FBiH, the RS has both open and closed joint-stock companies:
An open joint-stock company in the RS is a legal entity whose shares may be publicly traded,
i.e. offers its shares for sale on the open market, and is listed on the stock exchange and
other public markets. Minimum initial capital is BAM 50,000 (approximately 25,000).
A closed joint-stock company in the RS is also a legal entity, but shares are distributed
among a limited number of shareholders. The maximum number of shareholders is 100.
Minimum initial capital is BAM 20,000 (approximately10,000).
4.5 Representative Office

Foreign person can establish a Representative Office in B&H, but only to perform market research,
informative and promotional activities, and for its own representation.
A Representative Office does not have the status of a legal entity. This means it cannot conclude
agreements in its founders name, with the exception of representative offices of foreign air
transportation companies. In accordance with bilateral agreements and international conventions
signed by Bosnia and Herzegovina, a representative office of a foreign air transportation company
can sell transportation documents.
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A Representative Office becomes operational after entering into the Register of Foreign
Representative Offices, which is kept by the Ministry of Foreign Trade and Economic Relation in
B&H.
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5. Setting up and running business

organisations
5.1 Process for establishing a business
The steps for establishing a business in B&H involves:
Establishment of contract, made by a notary

Payment of initial capital
Registration at the competent court
Issuing of a Company stamp
Opening a bank account in a commercial bank
Registration of the company and employees with the Tax Administration
Submitting a company statement to the competent inspection department.
The court procedure for establishing a business should legally take five days, although the complete
process, in practice, may take up to 30 to 45 days.
The costs are generally:
Administrative costs: circa. 500

Lawyer and notary costs: around 500 to 1,000.
5.2 Accounting principles

Business books are kept by applying double entry principle. A financial year is typically the same as
the calendar year. The Accounting Laws require that financial statements for all companies are
prepared for each financial year based on International Financial Reporting Standards (IFRS). Annual
financial statements have to be submitted to the relevant institutions by the end of February for the
previous financial year.
Accounting records must be maintained in a local language and in the local currency of BAM. The
general ledger must be kept for a period of 11 years in the FBiH (10 years in the RS). Sub-ledgers
must be kept for a minimum of seven years in the FBiH (five years in the RS). Payroll lists must be
retained permanently by the company.
Small companies prepare financial statements comprising a balance sheet and an income statement.
The classification of a small company is generally if the company, for the financial year in question,
meets any two of the following criteria:
1. Fewer than an average of 50 employees in the financial year;
2. Total assets up to BAM 1 million; and
3. Turnover up to BAM 2 million.
Companies are classified as medium if any of two of the following criteria is met, or if it exceeds the
upper limit of at least one of the following criteria, at the end of the financial period in question:
1. Average number of employees in a year between 50 and 250;
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2. Total assets between BAM 1 million and BAM 4 million;
3. Turnover between BAM 2 million and BAM 8 million.
If the upper limit exceeds any two of the criteria the company is classified as large company. Large
and medium companies are required, by law, to prepare financial statements for each financial year.
These must include a balance sheet, income statement, statement of changes in equity, cash flow
statement and notes.
5.3 Labour Act

The Labour Act provides the legal foundation for labour law policy. The rights and obligations
regarding employment agreements are regulated by the FBiH Labour Act and the RS Labour Act.
The Labour Act provides a basic framework for organising labour rights, relations between trade
unions or other representative bodies of employees, stating basic rules of employment. Some
sectors have general collective agreements which are applicable to all employers in that sector.
Full time working hours are restricted to 40 hours per week. The Labour Act prescribes the most
important aspects of labour relations as employment agreement, working hours, minimum wages,
employment conditions, holidays and termination of an employment agreement.
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6. Corporate taxes and social charges

6.1 Corporate profit tax
6.1.1 Taxpayers and residence
Corporate Profit Tax (CPT) is controlled and collected within the individual jurisdictions of the
Federation of BiH and the Republic of Srpska.
Taxpayers subject to CPT are defined as legal entities founded for the purpose of earning income
through business activities, plus other legal entities, such as societies, public institutions and
charitable organisations.
Residence is determined by the fixed establishment of legal entities. It is important to determine
whether a legal entity has a fixed establishment in the territory of the FBiH or in the territory of the
RS, because residence is determined based on this criterion.
A legal entitiy with its registered seat in one of the units (jurisdictions) of BiH is subject to unlimited
corporate income tax liability. This means legal entities are taxed on their worldwide income, if
registered in B&H.
6.1.2 Determining the tax base
Taxable income is calculated based on the accounting result. This is the difference between revenues
and expenditures before CPT, which is increased or decreased according to the provisions of the
Profit Tax Act (PTA). As a result of the adjustments, the taxable income of a company differs from its
accounting profits.
6.1.3 Carrying forward of losses
Ordinary losses occur when the deductible costs exceed the gross income that is subject to tax.
Losses may be carried forward for a maximum period of five years in the FBiH and the RS.
6.1.4 Tax rates and tax payments
Any profits derived by legal entities is subject to CPT at a flat rate of 10% regardless of whether the
profit is distributed to shareholders or is retained. This rate applies in both the FBiH and the RS.
16

6.2 Reorganisations
Reorganisations have no influence on taxation if continuity in taxation exists. Continuity in
taxation is deemed to exist if, upon merger or de-merger, there is no change in the underlying
values of assets and liabilities that are being transferred.
If continuity in taxation does not exist, where there is an increase in the value of assets being
transferred, the entity that will cease to exist after the merger will be subject to 10% CPT .
For tax purposes, reorganisations are governed by the general acounting provisions (CAL). As
prescribed by CAL, the accounting framework applicable in BiH are the International
Accounting Standards (IAS), which are published in the official gazette.
6.3 Withholding tax

In the FBiH, the taxpayer is obliged to calculate and withhold the tax on revenue earned by a nonresident in the territory of the FBiH. The withholding tax is paid at a rate of 10%, and for dividends at
a rate of 5%. It is calculated on the gross amount paid by a resident to a non-resident and applies to
the following income:
Dividends, interest, royalties and related intellectual property rights
Remuneration for the performance of market research services, tax consulting and auditing
services
Remuneration for entertainment and sporting activities
Insurance premiums for insurance or reinsurance from risk in the FBiH
Remuneration for telecommunication services between the FBiH and a foreign state
All other income received from services provided in the territory of the FBiH.
In the RS, the withholding tax is levied at a rate of 10% and applies to the following payments made
by a resident to a non-resident:
Interest or its functional equivalent through financial instruments and arrangements
Entertainment or sporting activities carried out in the RS, regardless of whether the revenue is
received by the entertainer, sportsperson, or an agent
For the performance of management, consulting, financial, technical or administrative services
if the revenue is from a resident, or if the revenue is paid by or included in the books and
records of a permanent establishment in the RS, and if such payment is deducted for the
purpose of determining the tax base
Insurance premiums for the insurance or reinsurance of risks in the RS
Telecommunication services between the RS and a foreign state
Royalties
Lease instalments for movable property
Performance of services - generally, if a foreign entrepreneur does not create a permanent
establishment for its business activity, as prescribed by the CTA, then any revenue earned
from providing services in the territory of the RS is taxable with withholding tax.
17

However, a valid tax treaty may reduce or eliminate any withholding tax liability if the foreign entity
is located in a jurisdiction with which BiH has concluded a tax treaty agreement.
6.4 Capital gains

Capital gains of a non-resident corporation (or individual) resulting in the alienation of participation
in corporation are not taxable in either the FBiH or the RS.
6.5 Tax groupings

In general, each corporate entity is regarded as a separate entity for CPT purposes in both the FBiH
and in the RS. Group taxation is valid only for related entities that have permanent establishments in
the territory of the state in which the tax return is submitted.
6.6 Social security and health insurance contributions

All legal entities are obliged to withhold social security contributions. This refers to all legal entities
incorporated in the the FBiH, as well as branch offices and representative offices.
The social security rates on net salary in the FBiH are as follows:
Insurance
Employer %
Employee %
Total
Pension insurance
6.00
17.00
23.00
Health insurance
4.00
12.50
16.50
Unemployment
0.50
1.50
2.00
Special Water Tax
0.50
0.00
0.50
Special tax for protection from

natural disasters and other
accidents
0.50
0.00
0.50
Total Percentage
10.50*
31.00**
41.50
*Paid in addition to salary

**Withheld from salary
The current social security rates on net salary in the RS are as follows. Employer does not have
any liability on this basis:
Category
Employees
share* (%)
Pension insurance
18.0
Health insurance
12.5
18

Unemployment
1.0
Child protection
1.5
Total
33.0
*Withheld from salary

Foreign residents employed in Bosnia and Herzegowina by a domestic corporate entity will generally
be required to contribute to the social security programme. If a foreigner is subject to mandatory
social security contributions in his or her home country, the requirement to contribute to the social
security system of Bosnia and Herzegowina may be waived, depending upon social security
agreements (i.e. totalisation agreements) and other considerations.
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7. Personal taxation
7.1 Resident employees
An employee is resident in the FBiH if:
He/she is domiciled in the territory of the FBiH;

Stays permanently or temporarily in the FBiH for more than 183 days in any fiscal period;
Is domiciled outside of the FBiH, but generates receipts from employment outside the FBiH
from the Federations budget.
A taxpayer resident in the RS is an individual who has his/her residence in the territory of the RS and
stays in the RS for a period of at least 183 days, continually or with interruptions, for a period of 12
months (beginning and ending in the relevant year).
7.1.1 General employment relationships
For the purpose of ITA, an employee receiving income under an employment contract is deemed to
derive employment income. Employment income includes all remuneration, in cash or in kind,
derived by an employed person and paid by the employer, or by a third party.
7.1.2 Tax base assessment
The income tax base of a resident is the total amount of income earned by a resident in the FBiH and
abroad (the worldwide income principle), reduced by personal allowances. Income categories
include:
Employment
Self-employment
Property and property rights
Capital
Winnings from conventional games of chance (gambling).
The same principle is used to determine the income tax base of a resident in the RS. The income
categories are income from:
Employment
Self-employment
Royalties
Capital
Capital gains.
Residents are granted personal allowances which are increased by:
A certain percentage for each family member

Costs of interest for the purchase or construction of personal residential dwellings (applicable
in both the FBiH and the RS)
20

Actual costs of medical services in the FBiH for personal needs, providing that these expenses
are not paid from the basic, additional or private health insurance, or financed by donations
received for these respective purposes (applicable only in FBiH)
Life insurance premiums with the characteristics of savings, premiums of supplementary and
private health and premiums of voluntary retirement insurance paid in to domestic insurers
during a tax period (applicable only in FBiH)
Voluntary pension insurance contributions, up to a maximum of BAM 1,200 per year
(applicable only in SR).
7.2 Tax rate, assessment and social security contributions

7.2.1 Tax rate and assessment
The tax base and income tax liability for residents of the FBiH are calculated as follows:
+
1. Income from dependent (employment) activities
+/-
2. Income from business and independent

(professional) activities
+/-
3. Income from property and property rights
4. Income from capital
+/-
5. Income from games of chance
6. Income earned abroad (foreign income)

Total amount of income
Personal allowances of a resident/non-resident

Tax base
Tax rate 10%
Income tax liability
Tax credits
Annual tax liability
Wage tax paid in advance
Prepaid tax
Additional payment or refund
Please note that the FBiH Parliament is currently discussing amendments to the Law on IT and
contributions. This will change the current way that personal income taxation is calculated.
21

According to the proposed amendments, the tax rate should beincreased to 15% for the income
band of BAM 1500 to BAM 2,000, and 20% for income in excess of BAM 2,000. For income that does
not exceedthe amount of BAM 1500, the tax rate should remain the same (i.e. 10%).
The tax base and income tax liability for residents of the RS are calculated as follows:
+
1. Income from dependent (employment) activities
+/-
2. Income from business and independent

(professional) activities
+/-
3. Royalties
4. Income from capital
+/-
5. Income from capital gains
6. Income earned abroad (foreign income)

Total amount of income
Personal allowance of a resident

Tax base
Tax rate 10%
Income tax liability
Tax credits
Annual tax liability
Wage tax paid in advance
Prepaid tax
Additional payment or refund
Employers are legally required to deduct wage tax and social security contributions from salaries
paid to their employees. The wage tax constitutes a prepayment on the employees annual income
tax and is credited against his/her income tax liability. Any excess tax is refunded.
The monthly prepayment of tax on income from tradepeoples activities, from independent
professional occupations and from agriculture and forestry, must be in line with the ruling from the
Tax Administration. Accordingly, income tax is determined based on accounting books. Taxpayers
that have started business activities during the tax year do not make advance payments until they
submit their first tax return.
7.2.2 Non-resident employees
22

A non-resident is considered to be an individual who spends less than 183 days in the FBiH, i.e. is
resident in other country or unit, but receives income in the FBiH that is subject to taxation in
accordance with the ITA. The income tax base of a non-resident is determined as the total amount of
all income received by a non-resident in the FBiH or the RS (the domestic income principle), reduced
by personal allowances. In the case of a job secondment, the total salary and all benefits in-kind will
be considered to be taxable income (subject to tax residence rules and double tax treaty provisions).
7.3 Inheritance and gift tax

In the FBiH, the taxation of gifts is regulated at cantonal level according to the cantonal law on
inheritances. The tax is paid on the transfer of immovable and movable property if the market price
of the property unit exceeds a value of BAM 2,000. Tax rates range from between 2% and 10%.
In the RS, the inheritance tax rates applied to gifts are 3% for immovable property and 10% for
movable property. These are applied on the market value of the gifts or inheritances if their value/s
exceeds BAM 5,000. If the transfer of property is subject to VAT, then no inheritance and gift tax is
levied.
23
8. Double taxation agreements

Bosnia and Herzegovina has concluded 38 tax treaties in the area of personal and corporate profit
taxation. In most of the treaties the exemption method applies, except for dividends, interest and
royalties.
If the agreement on the avoidance of double taxation is concluded with the country where the
income recipient is domiciled, the provisions of such an agreement shall apply.
According to double taxation avoidance treaties, the right to tax a given income will belong to one
country. This is either the country in which the earnings originate, or the recipients country of
residence.
For the implementation of the provisions of the Agreement, the prescribe form must be certified by
the competent non-resident tax authority. For the specification and more information on the
applicable withholding tax rate, see section 6.3.
List of EffectiveDTTs
Albania*
Denmark
Italy
Pakistan
Spain
Algeria
Egypt
Jordan*
Poland
Sweden
Austria*
Finland
Kuwait*
Qatar*
Sri Lanka
Belgium
France
Malaysia
Republic of
Ireland*
Turkey
Romania
United Arab
Emirates
United Kingdom
and Northern
Ireland
China
Germany
Moldova
Croatia
Greece*
Montenegro
Serbia
Czech Republic
Hungary
Netherlands
Slovakia
Cyprus
Iran
Norway
Slovenia
*It is expected to be in force as of January 2012
24
9. Sales and use taxes

9.1 Value Added Tax
9.1.1 Taxable persons
Taxable persons are defined as legal entities or natural persons that independently conduct an
economic activity with the intention of acquiring income in Bosnia and Herzegovina. Government
bodies, central and local authorities and self-governing bodies, as well as legal persons that are
established for special purposes to perform public activities, are considered to be taxable persons
only when they perform business activities.
Taxpayers whose supplies did not exceed the amount of BAM 50,000 (approximately 26,000) in the
preceding calendar year are exempt from VAT.
9.1.2 Taxable transactions
Supply of goods and services
A supply of goods is defined as an event whereby an entrepreneur transfers the title of the supplied
goods to the recipient. However, the transfer of the right to dispose of the supplied goods does not
require the transfer of legal ownership (e.g. conditional sale). The term goods also includes water,
electrical power, gas, thermal energy, etc.
The term services for VAT purposes is delineated by means of a negative definition - according to
the ITA, supplies of services are deemed to be all supplies that do not qualify as a supply of goods. A
supply of services may consist of a positive action, in the abstaining from doing something and/or in
permission with respect to actions of another person.
Taxable transactions include the delivery of goods or provision of services ordered by a government
administrative body, as well as those supplied by a taxable person to employees or to members of
their immediate family under an employment contract.
Import
The transfer of goods from other countries to BiH is subject to import VAT. The import covers
movements of goods, irrespective of the economic background of that movement. The importer is
the person who is declared to be recipient of the goods and this person is considered to be a debtor
of the import VAT. The customs authorities levy import VAT.
The supply of services which have the place of supply outside of Bosnia and Herzegovina is not
subject to VAT.
The law provides, among other things, some exemptions with respect to temporary imported goods
or goods delivered to free zones or a customs warehouse.
25

9.2 VAT rates
The standard VAT rate is 17% (which applies to most deliveries of goods and services). Certain
transactions are exempt, including certain public services, health and medical services and financial
services. Other transactions (mainly export of goods) are zero rated.
VAT returns and payments are due by the end of the current month for the prior VAT period. A
taxable entity must also file an annual VAT return by the end of April in the year following the tax
year in question.
9.3 VAT registration

Registration, even for foreign persons, is compulsory if the annual value of deliveries exceeds BAM
50,000. A company may register voluntarily if the threshold is not met. Once entering into the VAT
system, a taxpayer cannot opt out for five years. A taxable person established abroad that performs
taxable economic activities in the BiH must register through a VAT representative. This VAT
representative has to guarantee the tax settlement and has to meet all technical requirements
regarding reporting of VAT liability to the tax office. The tax representative has to submit an
application to the tax authority, who grants approval to perform activities of a tax representative if
all of the criteria prescribed by the law are met.
9.4 VAT refund to foreign persons

Foreign persons that do not have established business activities and who do not perform the supply
of goods and services in BiH have the right to claim a VAT refund charged by a taxpayer in the
territory of BiH for goods that will be used for entrepreneurial activities abroad. The right to a tax
refund is granted providing domestic entrepreneurs also have the right to a VAT refund in the
country where the applicant resides.
26
10. Portfolio investment for foreigners

10.1 Investment in real estate
The general taxation principles of resident or non-resident individuals and corporate investors apply
also to real estate investors.
10.1.1 Direct investment by an individual or entity (asset deal)
Foreign investors may own real estate in the B&H and enjoy the same property rights with respect to
real estate as B&H citizens and legal entities.
A company resident in the FBiH can directly acquire real estate in Bosnia and Herzegovina. The
acquisition of real estate is subject to VAT or RETT. This tax is not recoverable and represents a final
tax for the real estate acquirer. Capital gains realised by a taxpayer subject to CPT from the sale of
real estate are subject to CPT at a rate of 10%.
10.1.2 Indirect investment by an individual or entity (share deal)
There are no provisions restricting a foreign investor from owning shares in the company that
exclusively owns real estate.
In accordance with the CPT Law of the RS, income earned through the disposal of shares in a
company exclusively owning real estate is taxable.
The FBiHs CPT Law does not include such a provision. Capital gains realised by a taxpayer subject to
CPT from the sale, exchange or other means of disposing shares in a company that owns real estate
are subject to CPT at a rate of 10%.A corporate investor is subject to CPT, including income from real
estate.
27
11. Trusts
A foundation/trust is a legal entity with no membership. Its main purpose is for the management of
certain property that serves a public interest, or for charitable purposes.
A Foundation may be established by one or more natural or legal entities(the founder), with the
exception of the State of Bosnia and Herzegovina, Entities, Cantons, Cities, Municipalities, local
communities, Governmental bodies, State enterprises and funds.
A Foundation must not be in conflict with the constitutional order of Bosnia and Herzegovina, or be
involved in the election campaign. The founders of a foundation do not have to be citizens of Bosnia
and Herzegovina or legal persons registered in Bosnia and Herzegovina. A foundation can be
established by a unilateral declaration of will, contract, testament, legacy or other appropriate legal
document.
The Ministry of Justice of Bosnia and Herzegovina is responsible for the registration of associations,
foundations, offices or representative offices of foreign and international associations and
foundations.
Registered associations or foundations, office or representative offices of international associations
and foundations can act throughout the entire territory of Bosnia and Herzegovina, regardless of
where it is headquartered.
In accordance with Article 3 of the FBiH CPT Law, foundations/trusts are not considered to be CPT
taxpayers. Similar provisions are included in CPT legislation of the RS.
28
12. Practical information

12.1 Transport
A railway system connects Sarajevo with major towns to the north and with Zagreb (Croatia) and
Belgrade (Serbia). Another line runs south from Sarajevo to Mostar and on to Ploe on Croatias
Adriatic coast. However, few lines are direct, and as a result roads of variable quality have in many
cases been the preferred means of passenger and freight transportation. Scheduled air services
connect Sarajevo with other Balkan capitals, such as Belgrade and Zagreb, as well as with other
European and international destinations.
12.2 Language
Official languages are Bosnian, Croatian and Serbian. Bosnian and Croatian are written in Latin
alphabet, while Serbian is written in both Cyrillic and Latin alphabets.
12.3 Time relative to Greenwich Mean Time (GMT)

Bosnia and Herzegovina is in the Central European Tome Zone, which means it is one hour ahead of
GMT between the end of October and the end of March and two hours ahead between the end of
March and the end of October.
12.4 Business hours

In terms of employment contracts, the standard workday in manufacturing is eight hours, with a
minimum daily rest of 12-hours required by law. Theres a maximum overtime of 10 hours per week.
A 50-hour working week is allowed for two months a year to allow for seasonal increases in
production.
12.5 Public holidays

The holidays observed by most businesses and government offices are:
12 January - New Year (Nova godina)

7 January - Orthodox Christmas - PravoslavniBoi
9 January - Republic Day - Dan Republike (only Republika Srpska)
1 March - Independence day - Dan nezavisnosti (Only Federation of Bosnia and Herzegovina)
Good Friday (Friday before Easter Sunday)
Easter Monday (Monday after Easter Sunday)
1 May - Labour Day - Meunarodnipraznikrada
9 May - Victory Day (Eastern Europe) - Dan pobjedenafaizmom (only RepublikaSrpska)
21 November - Dayton Agreement Day - (only RepublikaSrpska)
25 November - Statehood Day - Dan dravnosti (only Federation of Bosnia and Herzegovina)
25 December - Christmas Day

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1

Business and Taxation Guide

Business and Taxation

Business and Taxation Guide

Business and Taxation Guide

Regulation of foreign investment

Business organisations available to foreigners

Setting up and running business organisations

Corporate taxes and social charges

Opportunities and possible obstacles for foreign investors

3.1 Corporate Profit Tax incentives

4.1 Unlimited joint liability company Drutvo s neogranienomsolidarnomodgovornou

6.1 Corporate profit tax

7.1.2 Tax base assessment

Double taxation agreements

Business and Taxation Guide

Sales and use taxes

Portfolio investment for foreigners

9.1 Value Added Tax

10.1 Investment in real estate

Business and Taxation Guide

1.2 Area and population

Business and Taxation Guide

1.3 Government and law

Entities and cantons have their own judiciary authorities.

Business and Taxation Guide

1.4 Key economic indicators

1.5 Financial status

Business and Taxation Guide

2. Regulation of foreign investment

Business and Taxation Guide

3.2 Employment incentives

3.3 Double taxation treaties

Business and Taxation Guide

4. Business organisations available to

Unlimited joint liability company Drutvo s neogranienomsolidarnomodgovornou

4.1 Unlimited joint liability company Drutvo s

4.2 Limited liability company Drutvo s ogranienomodgovornou (d.o.o.)

Business and Taxation Guide

4.4 Joint stock company Dionikodrutvo (d.d./a.d.)

4.5 Representative Office

Business and Taxation Guide

Business and Taxation Guide

5. Setting up and running business

Establishment of contract, made by a notary

Administrative costs: circa. 500

5.2 Accounting principles

Business and Taxation Guide

5.3 Labour Act

Business and Taxation Guide

6. Corporate taxes and social charges

Business and Taxation Guide

6.3 Withholding tax

Business and Taxation Guide

6.4 Capital gains

6.5 Tax groupings

6.6 Social security and health insurance contributions

Special Water Tax

Special tax for protection from

*Paid in addition to salary

Business and Taxation Guide

*Withheld from salary

Business and Taxation Guide

He/she is domiciled in the territory of the FBiH;