A brief overview of value added tax and direct tax in Bosnia and Herzegovina, including specifics for direct tax in Federation of B&H, Republic of Srpska, and Brcko District of Bosnia and Herzegovina.
VALUE ADDED TAX (VAT)
The Value Added Tax Law provides for exemptions from paying VAT for certain transactions within specific activities listed in Articles 24 to 30 of the Law. Some of these include:
- Activities in the public interest.
- Insurance and reinsurance services, real estate transactions (excluding the first transfer of ownership or disposal rights of newly constructed real estate), leasing and subleasing of residential houses, apartments, and residential buildings for a period longer than 60 days, as well as leasing of agricultural and forest land registered in the land registers, financial services, stock trading, and management of investment funds.
- Final import of goods, where any subsequent transaction by the taxpayer would be exempt from VAT in Bosnia and Herzegovina, as well as goods exempt from customs duties, and services related to the import of goods.
It should be emphasized that this section of the Value Added Tax Law also includes taxation at a zero rate, for example, in terms of the export of goods from Bosnia and Herzegovina by or on behalf of the seller, the provision of services, including transportation and other ancillary services directly related to the export or import of goods.
According to the regulations in Bosnia and Herzegovina, a VAT taxpayer is entitled to deduct the VAT that they are required to pay or have paid when purchasing goods or services from another taxpayer or upon importation of goods, provided that they use those goods or services for the supply of goods and services subject to VAT payment.
The VAT rate in Bosnia and Herzegovina is uniform and amounts to 17%.
The taxpayer may exercise the right to deduct input tax for the supply of goods and services made abroad, provided that the right to deduct input tax would exist if such supply were made in Bosnia and Herzegovina.
The application of regulations on direct taxes in Bosnia and Herzegovina (income tax and profit tax) depends on the place of business activity. Accordingly, direct taxes in Bosnia and Herzegovina are regulated at three levels - the Federation of Bosnia and Herzegovina, the Republic of Srpska, and the Brcko District of Bosnia and Herzegovina. The tax rate for profit or income tax is 10%.
Federation of B&H
Article 36 of the Corporate Income Tax Law introduces the possibility of the following incentives:
The taxpayer has the right to a reduction of profit tax payment based on investments made, subject to specific conditions listed exhaustively in the following paragraphs.
- The taxpayer who invests from their own funds in production equipment worth more than 50% of the current tax period's profit is entitled to a 30% reduction of the calculated profit tax liability in the year of investment. Investing in production equipment refers to the purchase of fixed assets, including plants and equipment (excluding passenger vehicles), which the taxpayer purchases with their own funds for the purpose of conducting production activities.
- The taxpayer who, over a period of five consecutive years, invests from their own funds a total amount of 20 million KM, with an initial investment of 4 million KM in the first year, is entitled to a 50% reduction of the calculated profit tax liability in the years of investment. Investing refers to investments in fixed assets, including real estate, plants, and equipment (excluding residential units and passenger vehicles), which the taxpayer will use for the purpose of conducting production activities.
Furthermore, the Corporate Income Tax Law has provided that the taxpayer has the right to a tax-deductible expense in the amount of double the gross salary paid to newly hired employees.
Withholding tax is calculated and settled based on:
- dividends or profit distributions;
- interest or its functional equivalent on financial instruments and arrangements;
- royalties and other intellectual property rights;
- fees for managerial, technical, and educational services (including fees for research, market consulting, auditing, and consulting services);
- rental fees for movable and immovable property leasing;
- fees for entertainment and sports events;
- insurance premiums for insurance or reinsurance against risks in the Federation;
- fees for telecommunication services;
- other service fees, but only for non-residents from countries with which no double taxation agreement is signed.
The following are not subject to withholding tax:
- interest on loans provided by suppliers for the purchase of equipment for production activities;
- interest on government bonds;
- reinsurance premiums against risks in the Federation paid by a reinsurer authorized by the supervisory authority.
- Withholding tax is paid at a rate of 10%, unless a different amount is agreed upon in a double taxation agreement concluded between B&H and the relevant country.
Real estate transfer tax is paid at a rate of 5%.
Republic of Srpska
According to the Corporate Income Tax Law, a taxpayer who makes an investment in equipment and facilities for conducting registered production activities within the territory of Republic of Srpska is entitled to a reduction of the tax base by the value of the investment made.
Withholding tax is paid on the following income payments to non-residents:
- dividends and profit shares,
- remuneration for copyright and related rights, and intellectual property rights (rights to reproduce literary, artistic, scientific, and cinematographic works, patents, licenses, rights to use names, designs, models, trademarks, drafts, plans, and other similar rights),
- for performing entertainment, recreational, artistic, or sports programs in Republic of Srpska,
- for professional, scientific, technical, and educational services (market research, advertising and promotion, management, consulting, tax and business advisory, auditing, accounting, legal services, education, and other similar services),
- insurance premiums for insurance or reinsurance against risks in Republic of Srpska,
- for telecommunication services between Republic of Srpska and a foreign country, and
- for the lease of movable property.
Withholding tax is not paid on:
- Profits returned to a non-resident country related to their permanent establishment in Republika Srpska, where profits returned to the country refer to the remaining profit of the non-resident after paying the profit tax in Republika Srpska.
- Interest on loans and credits obtained from a legal entity in Republika Srpska and the permanent establishment of a non-resident in Republika Srpska for investments in equipment and facilities as defined in Article 26 of this law.
- Income in the form of interest or its functional equivalent on debt securities issued by Republika Srpska or a local self-government unit within its composition.
Withholding tax is paid at a rate of 10%, unless otherwise agreed upon in a double taxation avoidance agreement concluded between Bosnia and Herzegovina and the relevant country.
In Republic of Srpska, there is an obligation to pay property tax at a rate of 0.20%. However, an exception applies to properties where direct production activities are conducted, with a tax rate of up to 0.10%.
Brcko District of Bosnia and Herzegovina
The Brcko District of Bosnia and Herzegovina has its own tax system (excluding indirect taxes such as VAT at 17%) with the following specificities:
- There is no property transfer tax.
- The property tax rate is 0.05% of the assessed value and is paid annually.
- The corporate income tax rate is 10%.
Tax incentives for legal entities are provided in the Law on Corporate Income Tax and summarized in the following provisions:
- Tax exemption based on the share of export income in the total income. The taxpayer who has achieved a certain percentage of export income in the taxable year is exempt from paying corporate income tax on the base consisting of the determined profit, proportionally to the share of export income in the total income. This exemption applies cumulatively if the taxpayer is headquartered in the Brcko District of Bosnia and Herzegovina and is predominantly engaged in production (excluding profits derived from export of services and intangible assets).
- Deduction of the tax base, up to a maximum of 50% of the taxable base, for the amount of investment made in land, buildings, equipment, furniture, and transportation means for conducting own activities within the district.
- Deduction of the tax base in the amount of gross salaries paid to newly employed workers, as an incentive measure for employment by the taxpayer who has hired new permanent employees during the tax year.
- Possibility of submitting consolidated tax returns without time limitation.
In all three mentioned tax systems, there is a possibility of submitting a consolidated tax return, which entails submitting tax consolidation for the parent company and its subsidiary companies. In the consolidated tax balance sheet, the losses of one or more companies can be offset against the profits of other companies within the group. Once tax consolidation is approved, it is applied for a minimum of five years.
When determining the tax base, the calculated depreciation using the proportional method of depreciation is recognized for long-term assets and assets under the right of use. The tax-recognized depreciation rates for long-term assets are specifically listed in the Laws on Corporate Income Tax.
By Leila Salijevic, Attorney at Law, and Marija Plavsic, Business Development Manager, Ibrahimovic & Co