Taxes are the most important instrument for the collection of revenues in the Bosnian and Herzegovinian economy and represent the largest portion of revenues for the country.
Bosnia and Herzegovina consists, of course, of two largely autonomous constitutional and legal entities: The Federation of Bosnia and Herzegovina and the Republic of Srpska. The tax system of the Republic of Srpska collects both direct taxes and indirect taxes. The former group includes: (a) an Income Tax (regulated by the Law on Income Tax of the Republic of Srpska); (b) a Profit Tax (regulated by the Law on Profit Tax of the Republic of Srpska); (c) a Real Estate Tax (regulated by the Law on Real Estate Taxes of the Republic of Srpska); and (d) a Tax on the Use, Holding, and Carrying of Goods (regulated by the Law on Tax on the Use, Holding and Carrying of Goods). These taxes are regulated at the entity level, as is their control and collection.
The indirect tax consists of a Value Added Tax, which is regulated by the Law on Value Added Tax of Bosnia and Herzegovina, and its collection falls within the jurisdiction of the Indirect Taxation Authority of Bosnia and Herzegovina.
Each of the laws regulating specific taxes prescribe the conditions for payment, including identifying those obliged to make it. Of course, this obligation is dependent on the prior fulfillment of specific conditions, and may fall upon both individuals and legal entities; i.e., the obligation applies to businesses.
As tax collection is to be performed “at the expense of” the economic power of a legal entity or an individual, it is important to know the tax system of the state and the obligations it imposes, as well as to know available tax exemptions and incentives.
In this respect, in the text below, we will focus on direct tax incentives and exemptions related to legal entities.
Although according to the Law on Income Tax the tax applies to incomes of individuals, legal entities in certain cases are required to pay as well. In particular, according to this law, individuals are personally taxed on income derived from personal income, independent activities, copyrights and rights related to copyright, industrial property rights, capital, capital gains, income from foreign sources and other incomes. However, employers (i.e., legal entities) are obliged to pay taxes on income made on the basis of work – i.e. on the basis of personal income/salary.
On the other hand, according to the Law on Profit Tax, the profit of domestic legal entities and foreign legal entities for profits earned in the Republic of Srpska is taxed. Exemptions apply to: (1) Companies established in accordance with the regulations on the employment of disabled persons and companies that perform that activity without the aim of making a profit; and (2) Public institutions and humanitarian organizations, unless they generate income that is acquired under the same conditions as other legal entities that do not have the character of public and humanitarian organizations.
The Law on Real Estate Tax obliges the property owner to pay property tax, and it applies to companies that own real estate as well. This law does not provide exemptions, but it provides a lower 0.10% tax rate for real estate in which production activities are carried out. Real estate in which production activities are carried out includes facilities for the production and storage of raw materials, semi-finished products, and finished products, if they make an organized unit.
By Natasa Krejic, Partner, Law Firm Sajic
This Article was originally published in Issue 4.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.