Doing Business in Bosnia and Herzegovina

DOING BUSINESS IN BOSNIA AND HERZEGOVINA

CONTENTS 1 – Introduction 3 2 – Business environment 4 3 – Foreign Investment 11 4 – Setting up a Business 22 5 – Labour 27 6 – Taxation 29 7 – Accounting & reporting 32 8 – UHY Representation in Bosnia and Herzegovina 34

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 3

1 – INTRODUCTION

UHY is an international organisation providing accountancy, business management and consultancy services through financial business centres in around 100 countries worldwide.

Business partners work together through the network to conduct transnational operations for clients as well as offering specialist knowledge and experience within their own national borders. Global specialists in various industry and market sectors are also available for consultation.

This detailed report providing key issues and information for investors considering business operations in Bosnia and Herzegovina has been provided by the office of UHY representatives:

UHY REVIDENT D.O.O. MOSTAR Biskupa Cule bb Mostar 88000 Bosnia and Herzegovina

Phone +387 36 330 260 Website www.uhy-ba.com Email [email protected]

You are welcome to contact Matko Knezevic ([email protected]) or Antonio Vukoja ([email protected]) for any inquiries you may have.

Information in the following pages has been updated so that they are effective at the date shown, but inevitably they are both general and subject to change and should be used for guidance only. For specific matters, investors are strongly advised to obtain further information and take professional advice before making any decisions. This publication is current at August 2020.

We look forward to helping you do business in Bosnia and Herzegovina.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 4

2 – BUSINESS ENVIRONMENT

BACKGROUND Bosnia and Herzegovina, a heart-shaped country, is located in south-eastern Europe in the central part of the Balkan Peninsula. Throughout history, Eastern and Western civilizations have met, merged and enriched each other in this area. Bosnia and Herzegovina is a country with many nations, cultures and traditions, with diverse landscapes and centuries- old history, a place where for centuries people from all over the world have met, exchanged ideas and did business.

Bosnia and Herzegovina is very liberal and very open to economic cooperation with other countries, trade and foreign investment, and the profitability of doing business in BiH has been shown by many successful investments so far. The advantages for investing and doing business in Bosnia and Herzegovina are reflected primarily in the favourable geographical position, the extraordinary natural resources available to both educated and qualified labour.

Bosnia and Herzegovina has a very favourable geographical position - at the crossroads between West and East, Mediterranean and Continent, and two hours of flight away from European business centres. Bosnia and Herzegovina has extraordinary natural potentials and resources that may be of interest to foreign investors.

Bosnia and Herzegovina has an educated and motivated labour, with a long tradition of industrial production. Companies in BiH have a rich tradition of successful participation in international projects around the world. The Law on Foreign Direct Investments in BiH provides foreign investors with national treatment, i.e. foreign investors have the same rights and obligations as residents of Bosnia and Herzegovina. She is a full member of the World Bank and the International Monetary Fund. The BiH convertible mark (KM) is directly linked to the EURO and is one of the most stable national currencies in Southeast Europe. Inflation is under control and does not exceed the inflation rate in the European Union.

Bosnia and Herzegovina has a single value added tax (VAT) rate of 17%, which is the lowest in the region.

Bosnia and Herzegovina has a large number of available industrial zones, attractive locations and production facilities.

Bosnia and Herzegovina is a significant producer and the only exporter of electricity in the region with constant new investments in energy, especially renewable sources, wind farms and solar power plants.

Bosnia and Herzegovina has signed a number of regional and bilateral trade agreements that allow the placement of products from BiH duty-free on markets of over 50 million consumers under the Free Trade Agreement (CEFTA and EFTA), as well as an additional 80 million consumers under the Free Trade Agreement with Turkey (FTA).

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 5

Bosnia and Herzegovina has a clear prospect of joining the European Union, which in the long run means a further increase in its economic competitiveness. BiH has largely harmonized legislation with EU standards.

Bosnia and Herzegovina is an attractive tourist destination which, in addition to natural beauty, has a specific combination of different cultures and civilizations and due to the temperate climate is a pleasant place to stay and rest during the summer heat, and also during the winter offers various opportunities for recreation and winter sports. It borders with Serbia, Croatia, Montenegro and exits to the Adriatic Sea. For most of the 20th century, Bosnia and Herzegovina was part of a state called Yugoslavia, which had a communist system and social enterprises. Bosnia and Herzegovina became an independent state in 1991 when a democratic, multi-party political system was adopted and political and economic reforms were introduced.

Bosnia and Herzegovina is striving to become a candidate country and a member state of the European Union (EU).

Macroeconomic performance

Bosnia and Herzegovina is a regionally moderately positioned economy that has recorded slight fluctuations in most of the observed macroeconomic indicators in the period from its independence until today. If we take the period of the last five years from 2015-by 2019, we can see that the number of non-performing loans in the total mass of loans decreased significantly in this period, ensuring regional stability in the financial sector, with increased real growth of loans.

Bosnia and Herzegovina has recorded a 0,8% increase in loans since 2019, and a decrease in non-performing loans by 3,2%, which is also the smallest decrease in the region - but in the total mass of BiH loans, they are estimated at 10,8%, which represents a golden mean in the region, but also potential risks to stability if this number increases.

What is positive in the context of GDP growth is the growth of exports, where BiH ranks second in the region, excluding BiH as a member of the European Union, i.e. reducing the trade deficit and strengthening domestic industry. However, this improvement is highly dependent on legislation and market developments in the context of the demand for industrial goods that BiH can offer, as well as investments in strengthening infrastructure and helping industrial development.

GDP growth in this period, despite positive global economic trends - where the real GDP growth of the euro area is 2, 4% (which is 1, 2% more than the beginning of the period), recorded fluctuations. From a growth of 3.1% in 2019, the level dropped in 2019 to an equal 3%. This would prove the claim that BiH is not exclusively exposed to external risks, and that this reduction was mostly influenced by internal factors, such as non- implementation of structural and fiscal reforms as envisaged in the reform documents (deadlines and effects set by the Reform Agenda 2015-2019 and the arrangement with the International Monetary Fund), insufficient investment in infrastructure and industrial development, and an overall improvement in the business climate. According to most economic indicators, in the context of volume growth, BiH has been stagnating economically since 2019, which could not be said for the countries of the region.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 6

The economy has once again proved resilient to the slowdown in reforms and constant political uncertainty. GDP growth in 2018 came as a surprise upward, reaching 3, 6 percent, 0, 5 percentage points higher than the 2015-17average. Value added increased the most in the agricultural sector and electricity generation. Unemployment fell by two percentage points, but remains above 18 percent, especially among young people (close to 40 percent). In the first half of 2019, growth slowed to 2, 7 percent year-on-year, primarily due to a slowdown in exports and an increase in import growth.

Inflation has fallen. After rising from 0, 3 to 1, 8 percent compared to the full year in the first half of 2018, due to rising fuel prices and excise duties on cigarettes, inflation has stabilized around that level for the rest of the year. In 2019, it began to decline, declining to 0, 3 percent per year in September. The decline is primarily due to the slowdown in transport prices.

The consolidated budget remained in surplus for the fourth year in a row, also due to insufficient execution of capital expenditures. In 2018, government revenues were higher than expenditures by 2, 2 percent of GDP. Public debt has also been reduced, reaching 33, 6 percent of GDP since the end of June 2019. However, the quality of fiscal governance remains low. The country lacks medium-term fiscal planning and focuses strongly on maintaining current spending patterns, often at the cost of delaying much-needed public investment. Also, accumulated receivables in the public sector represent significant fiscal challenges. In the Republika Srpska, this mainly comes from the health sector, while most of the outstanding claims in the Federation of Bosnia and Herzegovina (FBIH) were collected by SOEs. Documentation and oversight of wage arrears are weak in both entities.

Further moderate growth is likely in the short term. GDP is expected to increase by 3, 0% per year in 2019 and 2020. The projected risks are forward-looking and mainly relate to uncertainty regarding reforms (i.e. improvements in the business climate and governance standards, as well as the improvement of the EU approach plan) and the slowdown in the main export market, the euro area.

Growth continued in 2018 amid political uncertainty, but slowed in 2019. In 2018 GDP increased by 3.6 percent. However, in the first half of 2019, it eased 2, 7 percent on an annual basis.

Delays in forming governments have blocked much-needed reforms. Entity and state-level government has not yet been established since the October 2018 elections, and the IMF program remains stalled.

In May 2019 The European Commission has adopted an Opinion on Bosnia and Herzegovina's application for EU membership. The opinion identified 14 key priorities in the areas of democracy, functionality, rule of law, fundamental rights and public administration reform that the country needs to meet in order to make progress towards the EU. Key priorities until 2020

Trends in the real sector in the countries of Southeast Europe

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 7

Table 1 contains information on the movement of real GDP in BiH and the region, as well as the Euro area in the period from 2019 to the projections of the expected GDP by 2019. The average GDP growth in the period 2015-2019 was 2, 7%, compared to the average growth of 1, 9% in the Euro zone. Observing a longer period of time, Bosnia and Herzegovina constantly records fluctuations in real GDP growth. From the realized growth of 4% in 2007, there is a decrease to -1, 1% in 2012. Due to natural disasters, growth slows down drastically in 2019, where BiH is declining from 1, 8% in 2013 to 1, 1% in 2019. For the same reason, a decline in the GDP rate was recorded in Serbia from 2, 5% in 2013 to -1, 8% in 2019 due to large-scale flood damage.2.

Table 1: Real GDP growth trends

Country 2015 2016 2017 2018 2019 Kosovo 1,2 4,1 4,1 4,4 4,8 Montenegro 1,8 3,4 2,9 4,3 2,8 Albania 1,8 2,2 3,4 3,8 3,6 BiH 1,1 3,0 3,1 3,0 3,2 Croatia -0,5 2,3 3,2 2,8 2,6 Serbia -1,8 0,8 2,8 1,9 3,0 Macedonia 3,6 3,9 2,9 0,0 2,3 Euroarea 1,2 2,1 1,8 2,4 2,1 Table 2: Real GDP growth trends

The highest growth in the 2015-2019 period. Serbia, Croatia and Kosovo achieved 3, 7%, 3, 3% and 3, 2% growth, respectively. The worst result was achieved by Macedonia with -3%, while the result of Bosnia and Herzegovina is a trend growth of 1, 8%, with a note of a decrease in growth of 0, 1% - from 3, 1% in 2019 to 3, 0% in 2019. According to a report on economic indicators in the Western Balkans, political instability in the region continues to slow significant growth, slowing both private and public investment. Smaller economies, such as Albania and Kosovo, remain at relatively high growth rates, leading the region's economic growth. According to the World Bank, GDP growth is projected to continue, driven by investment in infrastructure including both public and private investment in a number of industrial sectors, where - if projected, Bosnia and Herzegovina's GDP growth should reach 4% by 2020, and be the second largest in the region next to Serbia and Albania.

In the context of public spending, due to the trends of increasing tax revenues in the entire region, it is estimated that the achieved levels of fiscal stability would enable significant investment in the development of infrastructure and the economy. The fact that in 2019 the tax administrations of Bosnia and Herzegovina reported on the collection of the largest tax revenues so far also contributes to this.6. However, looking at Bosnia and Herzegovina, with a constant increase in external debt repayments, and a long-term budget deficit (shown in Table 6), this scenario is not feasible unless the volume of public spending on the largest administrative apparatus in the region is reduced on which salaries was set aside 11% of GDP in 2019, and the condition of maintaining external debt below 40% for quality management.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 8

The observed period was also marked by the implementation of reforms as part of strengthening the stability of the financial sector. Banking sector reforms have also had an impact on increasing lending activity in Montenegro, Serbia, Bosnia and Herzegovina and Kosovo, and significantly reducing the number of non-performing loans in all countries in the region.

Thus, the stability of the financial sector in the period from 2015 to 2019 brings positive trends. The foreign exchange reserves held by the Central Bank of BiH with other banks alone exceeded 11 billion Euros, which gives BiH the security and stability of the Convertible Mark currency.

Bosnia and Herzegovina achieved an increase in lending activity, to 4,9% of total GDP at the end of 2019, and a decrease in non-performing loans from 14% in 2019 to 10,8% in 2019 (shown in the table below), which provides support for further placement of credit funds, and ultimately to increase internal economic activity. The most significant decrease was recorded in Serbia with 9, 3% less non-performing loans, followed by Albania and Montenegro with 9, 2% and 8, 7% decrease.

Key priorities until 2020

• The business climate needs to be significantly improved.

The business environment remains one of the most precarious in Europe, with different regulations in the two entities and the Brčko District. The private sector would benefit greatly from harmonized regulations and reduced “bureaucratic” and parafiscal costs. • Inefficient state-owned enterprises (SOEs) need to be combated. SOEs impose a significant fiscal burden and have negative effects on other firms. They need to be depoliticised and restructured, and in some cases accompanied by renewed and credible pressure on privatization. • Public administration reform needs to be implemented. Bosnia and Herzegovina is known for its huge and inefficient public sector, which is a significant burden on taxpayers and adversely affects the business environment. Republika Srpska should also adopt the strategic framework for public administration reform for 2018-22 as soon as possible, and the country should embark on the development of a professional, depoliticized merit-based civil service.

The main development of structural reforms

The European Commission has adopted an Opinion on Bosnia and Herzegovina's application for EU membership. The country applied for EU membership in February 2016. In May 2019 The European Commission has issued an opinion on request. The opinion identifies 14 key priorities that a country must meet in order to be recommended for EU candidate status. These priorities lie in the areas of democracy and the functioning of institutions, the rule of law, fundamental rights and public administration reform. The Commission encouraged the authorities to agree and implement socio-economic reform measures, in line with economic reform policy guidelines, and to continue to engage in regional cooperation and strengthen bilateral relations with neighbouring countries.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 9

The business environment has remained unchanged over the last year. Bosnia and Herzegovina continues to lag behind its peers in the Western Balkans on global competitiveness lists. In 2019, the country is ranked 92nd among 141 economies in the World Economic Forum's Global Competitiveness Index, one place lower than in 2018, with several areas ranked above 100 (institutions, product and labour markets, business dynamics and ability to innovate).

Similarly, Bosnia and Herzegovina ranked 90th out of a total of 190 countries in the World Bank's Business Report 2020, losing one place from a year earlier because major reforms had not been implemented.

Although it ranked relatively well in cross-border trade and insolvency resolution (27th and 37th place), areas in need of a lot of pressure are doing business (184th), dealing with building permits (173rd) and paying taxes (141st).

Public administration reform has been stopped. Strategic frameworks for public administration reform for the 2018-22 period developed by the inter-institutional working groups appointed by the Council of Ministers of Bosnia and Herzegovina and the governments of the entities and the Brčko District in March 2018 are missing, as the Republika Srpska has not yet adopted it. The need for reform is urgent given that public administration in Bosnia and Herzegovina is complex and often has overlapping competencies, duplicate functions and a vague division of responsibilities at different levels of government. The poor quality of the institutional structure is reflected in the lowest rank of the country (111th) in Europe compared to the institutions in the Global Competitiveness Index of the World Economic Forum 2018

Little progress was made on privatization or restructuring of SOEs last year. Republika Srpska authorities have managed to sell (minority) stakes in three companies out of a total of 14 in the 2018 privatization plan. Three strategic companies were also included in the plan, but one of them went bankrupt in February 2019 (manufacturer of special diesel engines and engine spare parts for the Special Purpose Engine Factory), while the other two were not privatized. The entity railway company began financial, operational and organizational restructuring in 2018, and is scheduled to be completed in 2021. The process was supported by a World Bank loan (51.3m Euros) and technical assistance. The FBIH entity has not sold any of the four companies in the 2018 privatization plan, although they have long been planned for sale.

The state share in Bosnia and Herzegovina is large, with about 550 SOEs employing 80,000 people, or about 10 percent of the total workforce. These companies are usually characterized by poor transparency, accountability and performance, and suffer from political influence. Many of them are burdened with excess employment and debt and incur losses. As such, they pose a risk to macroeconomic efficiency, fiscal sustainability and competitiveness. One recent example is the indebted aluminium smelter Aluminium, which required government intervention in September 2018. In mid-June 2019, the company was disconnected from the electricity grid, following failed talks on a strategic partnership between the Federation entity government and the consortium. The entity government has given the company a deadline of late 2019 for restructuring. Failure to do so could lead to the bankruptcy and loss of employment for 900 workers in Aluminium and about 10 000 workers in the supply chain.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 10

The road network is slowly improving. Improvements are mainly focused on the Vc corridor highway, which connects the port of Ploče in Croatia and Budapest in Hungary. The motorway will be an important trade route to European markets. Last year, contracts were signed for several sections of highways in the FBIH, while work on the first part of the corridor in Republika Srpska began in June 2019 In general, the project is lagging behind (originally expected to be completed in 2012) and by September 2019, about one-third of the highway (or about 100 kilometres) had been completed. The EBRD supported the project in 2019 with a loan of up to 210 million Euros for a new part of the highway that will include a bypass for the city of Doboj. The project is expected to be completed by 2030 and will cost about 4 billion Euros. In addition, in December 2018, SDHS-CSI BiH of Republika Srpska and China signed a 33-year concession agreement on the construction of 42 kilometres of the Banja Luka-Prijedor highway.

The banking sector is well capitalized, but non-performing loans remain increased. The capital adequacy ratio of the banking sector at the end of June 2019 was 17, 9 percent, which is significantly above the regulatory minimum of 12, 0 percent. However, some (primarily local) banks do not have sufficient capital and unfavourable loan portfolios. The NPL ratio in the banking sector at the end of June 2019 was 8, 0 percent (compared to 9, 3 percent a year ago). NPLs are concentrated in domestically owned banks and are largely an inherited problem. The new banking laws adopted in 2017 should support the stability of the banking sector, but supervision of the banking sector is hampered by fragmented competencies. In addition, the country has not yet adopted a deposit insurance law that would complete the bank resolution framework in line with EU directives.

A controversial coal-fired power plant could breach EU obligations and preserve polluting production capacity. In March 2019, the Energy Community opened a lawsuit against Bosnia and Herzegovina for state aid at the Tuzla 7 coal-fired power plant. The 450 MW expansion at the Tuzla thermal power plant is planned to be financed with a 614 million- euro loan from China's Exim Bank, which received a guarantee from the Federation in the spring of 2019 The new plant (along with other planned units) would continue to increase Bosnia and Herzegovina's reliance on highly polluting lignite electricity generation and would later result in costly stranded resources.

The entity governments supported a joint package of socio-economic reforms (2019-22). Under this package, which was approved in October 2019, governments will aim to improve the business environment and foster growth and competitiveness, as well as depoliticize SOEs, reform the health system and provide better opportunities for young people, women and other vulnerable groups.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 11

3 – FOREIGN INVESTMENT

INVESTMENT IN BiH

There is no difference between domestic and foreign investors regarding the legal status of foreign investment in BiH.

When foreign investors are found or participate in companies in BiH, they acquire rights and take responsibility under the same conditions and have the same status as domestic investors. Everything that refers to the relations between domestic investors also refers to foreigners when they invest capital.

Foreign legal entities in BiH are allowed to invest capital in a company, bank or insurance company, start an independent trader or craftsman and obtain a concession for the use of natural resources or other property of interest to BiH.

Foreign persons are allowed to acquire shares and stakes in existing public and private limited liability companies.

Bosnia and Herzegovina recognizes the importance of attracting foreign investors, appreciating the management, commercial knowledge and fresh capital they bring in. Therefore, foreign investors are entitled to additional guarantees that do not extend to domestic investors. For example, rights acquired through capital investments are not reduced by any law or other regulation.

FOREIGN DIRECT INVESTMENT ANALYSIS

Testimonies or "success stories" of foreign investors confirm that Bosnia and Herzegovina is a favourable destination for foreign investment and that it should be optimistic about FDI inflows in the coming period. Expectations for increasing the level of foreign investments are based on investment opportunities, the plan of privatization of strategic companies, the expressed interest of potential investors, as well as projects that are underway. Based on data published in the "Global LocationTrendsFacts&Figuresreport" for 2019, BiH is in sixth place in the world in terms of the number of jobs created under DSU projects per million inhabitants, and we are third in terms of export-oriented investments.

According to the data of the Central Bank of BiH from August 2019, the total balance of foreign direct investment (FDI), as of 12/ 31/ 2018, in BiH amounts to BAM 14,296 million or BAM 14,3 billion (7,309 million Euros or 7.3 billion Euros). Within the UNCTAD annual report on global DSU, and according to the total registered foreign direct investment, Bosnia and Herzegovina ranks second within the countries of Southeast Europe.

In 2018, foreign direct investment amounted to BAM 783.4 million or EUR 400.6 million, and maintained a positive trend with a slight increase of 0.4% compared to 2017. According to the revised data, foreign direct investment for 2017 amounted to BAM 780.6 million or 399.1 million Euros and increased by 26.2% compared to the amount in 2016. DSU in 2018, with modest growth compared to the previous year, indicate an increase in foreign investment by 20.4% compared to the five-year average (period 2015-2019).

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 12

Table 2: DSU amounts by years in Bosnia and Herzegovina, millions of BAM

Source: Central Bank of BiH (CBBH), August 2019

In 2007, Bosnia and Herzegovina had the largest recorded annual amount of DSU of BAM 2.6 billion, thanks to the privatization of large state-owned enterprises. In 2008, the inflow of DSU of BAM 1.3 billion was satisfactory, especially because it was realized without significant privatization and with a positive structure (investment in the manufacturing sector and a high share of greenfield investments).

The global economic crisis affected a significant reduction in investment in 2009. The increase in foreign direct investment was registered in 2010 and 2011, but unfortunately, despite promising estimates, DSU flows in 2012 and 2013 did not maintain a positive trend.

The amount of foreign direct investment in 2014 was the highest in the last five years. In 2014, BAM 811 million were registered, which is an increase of 99.2% compared to the previous year. According to the revised data of the Central Bank of BiH, DSU in 2015 amounted to BAM 637 million, which is a decrease of 21.5% compared to 2014, and foreign investments in 2016, with BAM 618 million, were lower by 2.9% in compared to 2015.

In 2017, with an increase in foreign investment of 26.2%, the negative trend stopped and, with modest growth in foreign investment in 2018, we hope that the positive trend will continue in the current and in the coming years.

Based on the first preliminary data for the period January - March 2019, within the balance of payments (with estimated retained earnings), DSU amounted to BAM 231 million or 118 million Euros.

Balance of foreign direct investments at the end of December 2018

On 12/ 31/ 2018, the total foreign investment in BiH of BAM 14,296 million (EUR 7,309 million) by components consists of ownership shares and retained earnings in the amount of BAM 11,004 million (EUR 5,623 million) and other capital in the amount of BAM 3,292 million (EUR 1,683 million).

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 13

According to the total investments from 1994 to December 2018, the country that invested the most is the Republic of Austria with BAM 2.7 billion (1.4 billion Euros), followed by Croatia, Serbia and Slovenia.

The most important investors in BiH in the period May 1994 - December 2019

Total investment amount BAM 14.3 billion (7.3 billion Euros)

Table 3: Total investment amount, millions of BAM

Other countries 2.339 Switzerland 479 Great Britain 523 Italy 639 Germany 686 Russia 705 Netherlands 871 Slovenia 1.076 Serbia 2.025 Croatia 2.293 Austria 2.660

0 500 1.000 1.500 2.000 2.500 3.000

Source: Central Bank of BiH (CBBH), August 2019;

Thanks to a good reputation and a long industrial tradition in BiH, the most significant amount of DSU was invested in the manufacturing sector (34%). The banking sector also has a significant share in the total inflow of foreign direct investment (25%).

Table 4: Situation of DSU by sectors (%) May 1994 - December 2019 2% 1% 1% 4% 5% 4% 34%

12%

25% Production Banking Telecommunications Shop Real estate brokerage Services Other financial services Turuzam Transport Other activities Source: Central Bank of BiH (CBBH), August 2020;

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 14

Foreign investments in Bosnia and Herzegovina

According to the official data of the CBBH, foreign direct investments in Bosnia and Herzegovina in 2019 amounted to BAM 783.4 million or 400.6 million Euros. In the structure of foreign direct investment, ownership shares accounted for BAM 547.7 million (or EUR 280.0 million), retained earnings amounted to BAM 383.0 million (EUR 195.8 million), while other capital was negative and amounted to BAM -147.3 million (-EUR 75.3 million). Registered ownership shares were higher compared to the previous year (BAM 350.6 million in 2017), retained earnings slightly lower (there were BAM 401.5 million in 2018), while other capital (unlike the previous year with BAM 28.6 million), recorded a significant negative amount (possible liabilities on the basis of indebtedness) and influenced the total DSU to be with a modest growth of 0.4%. Ownership shares accounted for 69.9% of total foreign direct investment in BiH in 2019.

The countries that have invested the most in Bosnia and Herzegovina in 2018 are: Russia with BAM 140 million, Croatia BAM 106 million and the Netherlands with BAM 94 million. The following countries registered significant capital increases (over BAM 20 million): Austria (BAM 87 million), Germany (84), the United Kingdom (81), Switzerland (40), Slovenia (33) and Italy (BAM 23 million).

In 2018, the activities within which most foreign investments were registered (over BAM20 million) are: Financial service activities other than insurance and pension funds with BAM 145.6 million, Production of coke and refined petroleum products with BAM 135.8 million, Wholesale, except trade in motor vehicles and motorcycles BAM 87.7 million, Production of base metals BAM 52.0 million, Production of motor vehicles, trailers and semi-trailers with BAM 39.0 million, Production and supply of el. energy, gas, steam and air conditioning BAM 36.8 million, Real Estate BAM 33.4 million, Production of chemicals and chemical products with BAM 32.8 million KM and Production of beverages BAM 30.7 million.

DOING BUSINESS 2020 - COMPARING BUSINESS REGULATION IN 190 ECONOMIES, WORLD BANK

In October 2019, the World Bank published the annual report on ease of doing business Doing Business 2020 - Comparing Business Regulation in 190 Economies.

Doing Business 2020 is a report that follows the regulations that affect the improvement of business activities, as well as those that limit them, and the data in the report refer to the period from June 2018 to May 2019.

This report presents results on ease of doing business in 190 world economies in twelve business regulatory areas, to assess the business environment in each economy. Ten indicators were used to assess the ease of doing business over 12 months, namely: starting a business, issuing building permits, obtaining an electricity connection, registering real estate, obtaining a loan, protecting minority investors, paying taxes, cross-border trade, executing contracts and solving problems insolvency. Doing Business also measures flexibility in employment regulation, as well as the efficiency, quality, transparency, accountability and integrity of the public procurement system, but these indicators are not included in the report.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 15

Until May 2019, 115 economies have implemented 294 regulatory reforms, and introduced significant improvements that facilitate business in all areas. The Middle East and North Africa are the leading regions in the total number of implemented regulatory changes (57) that facilitate business. The economies of Europe and Central Asia have accelerated the already strong momentum to improve the business climate and implemented 56 reforms (Georgia in 7th place and Northern Macedonia in 17th place). Despite the improvements, there are still significant differences between developed economies and developing countries in most indicators. Economies with improvement (implemented reforms) in most areas are: Bahrain (9), Saudi Arabia (8), China (8), and Kuwait (7).

The countries that are best in terms of ease of doing business are: New Zealand (with a score of 86.8 out of 100), Singapore, SAR Hong Kong, China, Denmark, the Republic of Korea, the United States, Georgia, the United Kingdom, Norway and Sweden. The worst ranked countries in terms of ease of doing business, as in previous years, are: the Republic of Yemen, Venezuela, Eritrea and Somalia. The best placed country in our region is still Northern Macedonia - in seventeenth place, while Slovenia is in 37th place. Of the countries in the region, Croatia (by 7 places and is now in 51st place), Serbia (an improvement of 4 places and now 44th) and Slovenia (by 3 places and now 37) achieved a better position compared to the previous report, while Montenegro maintained the same position (50th place), and Kosovo, compared to last year's report, worsened its position by thirteen places (from 44th to 57th place). Albania also fell behind in the global list (from 63rd to 82nd place).

Bosnia and Herzegovina has again worsened its ranking compared to last year's report and remains the weakest country in our region and Europe (along with San Marino it is on the 92nd position). With the achieved value of 65.4 points, it is clear that BiH is stagnating, and other countries are progressing faster, which from year to year increases the difference compared to other countries in the region and Europe. In relation to individual sets of indicators, the achieved results are similar to last year's. Out of ten sets of indicators, which are included in this year's ranking of Doing Business reports, BiH is the best placed within the cross-border trade indicators (27th position), where there was an improvement of ten places (compared to last year's position in 37th place). In the area of insolvency resolution, we maintained last year's 37th position, and in order to obtain a loan, BiH ranked 67th (in the previous report, it was ranked 60th out of 190 countries in the world). In areas that are very important for foreign investors, such as the protection of minority investors, BiH ranks 88th (previously 72nd), and in the field of contract enforcement, 93rd on the global list (previously 75th). Within the property registration, we are in the 96th position, with the required seven procedures and 35 days.

Bosnia and Herzegovina is the lowest ranked in the field of starting a business, where we are 184th and compared to the previous year we have worsened our position (we were 183rd in the world). To start a business in Bosnia and Herzegovina, it is necessary to conduct 13 procedures that last 80 days, and the costs are 13.7% of per capital income and the minimum capital is 10.2% of per capital income, which is far from the regional average. Bosnia and Herzegovina is also poorly placed in the field of obtaining building permits, where it ranks 173rd (and were 167th in the world). To obtain building permits, it is necessary to go through 17 procedures and wait 180 days, the costs are 20.3% of the value of the facility, and the quality control index of construction is 13.0 (which is a positive assessment given the index range of 0-15). BiH has achieved significant improvement in the category of electricity availability, where we are in 74th place (in the previous report -130th),

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 16

and it takes 5 procedures and 69 days to obtain electricity, with costs amounting to 289.0% of per capita income. For years, we have been poorly placed on the basis of tax payments, and according to the latest report, we are in 141st position. As many as 33 procedures are listed for paying taxes, and it is necessary to set aside 411 hours during the year.

In areas that are very important for foreign investors, such as the protection of minority investors, BiH ranks 88th (previously 72nd), and in the field of contract enforcement, 93rd on the global list (previously 75th). Within the property registration, we are in the 96th position, with the required seven procedures and 35 days. Bosnia and Herzegovina is the lowest ranked in the field of starting a business, where we are 184th and compared to the previous year we have worsened our position (we were 183rd in the world). To start a business in Bosnia and Herzegovina, it is necessary to conduct 13 procedures that last 80 days, and the costs are 13.7% of per capital income and the minimum capital is 10.2% of per capital income, which is far from the regional average. Bosnia and Herzegovina is also poorly placed in the field of obtaining building permits, where it ranks 173rd (and were 167th in the world). To obtain building permits, it is necessary to go through 17 procedures and wait 180 days, the costs are 20.3% of the value of the facility, and the quality control index of construction is 13.0 (which is a positive assessment given the index range of 0-15).

BiH has achieved significant improvement in the category of electricity availability, where we are in 74th place (in the previous report -130th), and it takes 5 procedures and 69 days to obtain electricity, with costs amounting to 289.0% of per capita income. For years, we have been poorly placed on the basis of tax payments, and according to the latest report, we are in 141st position. As many as 33 procedures are listed for paying taxes, and it is necessary to set aside 411 hours during the year.

The following is a graphical presentation of the ranking for Bosnia and Herzegovina and the countries of the region in the reports Doing Business 2018 - 2020, which refers to the period 2017 - 2019.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 17

Table 5: Doing Business 2020 Rang, World bank 2019

BiH

Albania

Kosovo

DB 2020 Montenegro DB 2019 Serbia DB 2018

Slovenia

North Macedonia

0 20 40 60 80 100

Source: www.doingbusiness.org;

INVESTMENT DATA The Law on Encouraging Investment and Improving the Investment Climate offers a wide range of tax incentives for foreign and domestic investors.

Tax aid for companies refers to capital investments and depends on the size, number of employees and/or location of the investment project. Tax credits cannot exceed the investment amount. Non-tax incentives are in the form of grants or interest subsidies and are given as the case may be, after detailed application.

To apply for investment incentives, the investment must relate to one of the following: • production and processing activities;

• development and innovation activities; • strategic business support activities; or • providing high value-added services.

Furthermore, the investment should ensure environmentally sound business activities and achieve at least one of the following goals:

Benefits for foreign investors

State level/BiH level

In accordance with the Law on Foreign Direct Investment Policy in BiH ("Official Gazette of BiH", no. 17/98, 13/03, 48/10 and 22/15) foreign investors are guaranteed the following: - National treatments of foreign investors, i.e. foreign investors have the same rights and obligations as residents of Bosnia and Herzegovina.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 18

- Foreign investors have the right, for the purpose of their investments, to open accounts with any commercial bank in the territory of Bosnia and Herzegovina in domestic or freely convertible currency. - Foreign investors will have the right to freely employ foreign nationals from abroad, unless otherwise provided by the laws in Bosnia and Herzegovina on labour and immigration. - Foreign investors are protected from nationalization, expropriation, requisition and measures with equal effect; such measures may be taken solely in the public interest, in accordance with applicable laws and regulations, with the payment of appropriate compensation. - Foreign investors have the same property rights as BiH legal entities. - Foreign investors have the right to make transfers abroad, freely and without delay, in a freely convertible currency, of the profits resulting from their investment in Bosnia and Herzegovina. • The rights and privileges granted to foreign investors and the obligations arising from the Law on Foreign Direct Investment Policy may not be revoked or annulled with the entry into force of subsequently enacted laws and bylaws. If such subsequently enacted laws and bylaws are more favourable to foreign investors, they have the right to choose the regime that will be applicable to their investment.

Tariff preferences

Foreign investment will be exempt from customs obligations, except for passenger cars, slot machines and games of chance. - Non-production equipment that is not produced in Bosnia and Herzegovina, which is imported for new or expansion of existing production, modernization of production, introduction of new or modernization of existing production technology, and which performs direct production activity, is exempt from payment of import duties. - Production means and other equipment belonging to a company that definitively ceases its activity in another state and is moved to the customs territory of Bosnia and Herzegovina for the purpose of performing a similar activity are exempt from the payment of import duties. - If the enterprise to be moved is an agricultural holding, the animals on it shall also be exempt from import duties.

In order to use the customs privilege for foreign investments, with a written request for exemption from import duties, the beneficiary of the privilege shall submit to the customs authority competent according to the place of residence of the beneficiary of the privilege: - contract or other appropriate investment act under which the equipment for which relief from import duties is sought is imported - proof of registration of a foreign deposit with the competent state authority - -specification of equipment according to tariff codes and names from the Customs Tariff of BiH, with -marking the quantity and individual and total value, certified by the beneficiary - investor statement that the equipment is not older than 10 years

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 19

- a certificate that the imported equipment meets the standards regarding the protection of the human environment and other standards in the field of occupational safety, issued by the institution or other body competent for the field of that activity. - The customs service shall make a decision within 15 days from the day of submitting the request.

Free zones

Free zones in BiH are part of the customs territory of Bosnia and Herzegovina and have the status of a legal entity. Pursuant to the Law on Free Zones of BiH, the founder of a free zone may be one or more domestic or foreign legal and natural persons registered in BiH. - Free zone users do not pay VAT and import duties on equipment that will be used for production. Investments in free zones, profit transfer and investment transfer are free. The establishment of a free zone is economically justified if on the basis of the attached study on the economic justification of the establishment of a free zone and other attached evidence it can be estimated that the value of goods exported from the free zone will exceed at least 50% of the total value of goods leaving the free zone in 12 months.

ENTITY LEVEL

Tax exemptions

In the Federation of BiH: According to the provisions of the FBiH Law on Profit Tax, foreign investors enjoy the following benefits: - A taxpayer who invests from his own funds in production equipment in the amount of more than 50% of the realized profit of the current tax period, the obligation of the calculated income tax is reduced by 30% of the amount in the year of investment. - A taxpayer who in the period of five consecutive years makes an investment from his own funds in the total amount of BAM 20 million, with the fact that in the first year he invests BAM 4 million, the liability of calculated income tax is reduced by 50% in the years of investment.

The taxpayer is entitled to a tax-deductible expense in the amount of twice the amount of gross salary paid to newly hired employees if he meets the following conditions: - the duration of the employment contract must be at least 12 months full-time and - the newly hired employee has not been employed by a taxpayer or related party in the previous five years.

In the Republika Srpska:

A taxpayer who invests in equipment and facilities on the territory of the Republika Srpska for the performance of a registered production activity has the right to reduce the tax base by the value of the investment made.

Brčko District - benefits

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 20

The Law on Incentives for Economic Development in the Brčko District provides the following: - Exemption from utility fees for prominent company name - Fee of court fees for registration of a business entity and entry of changes in the register for newly established companies and entrepreneurs - Reimbursement of connection costs to water supply and sewerage network - Fee of paid fees necessary to obtain the location, building permit and approval for the use of the facility - Reimbursement of costs in the amount of the difference between the price of electricity and water paid by companies and the price paid by households - Compensation of paid employment contributions in the total amount for newly employed persons - Salary compensation for maternity leave in the amount of 100% - Employer incentives in the amount of 50% of the total health insurance obligations of newly employed workers - Reimbursement of the amount of money invested in the purchase of fixed assets that are entered in the list of fixed assets, up to the amount of determined and paid income or income tax for the year in which the purchase of fixed assets, with the difference between profit or income and purchases made cannot be carried forward to the following year.

SECTOR LIMITATIONS

Investments in BiH are welcome and encouraged. However, some areas of investment are limited and subject to special conditions and approval procedures by the competent authorities. This includes areas of foreign ownership of real estate, especially agricultural land, forests and other protected areas of nature, as well as industries related to national defence and security. By the way, the regulatory framework for the establishment and operation of companies in BiH by investors is relatively simple and in line with basic EU standards.

Specific licenses or permits are required only for certain activities, such as banking, insurance, stock brokerage and similar financial services.

OWNERSHIP OF IMMOVABLE PROPERTY

The most complicated aspect of foreign investment in BiH is the purchase of land, registration and development of the site for various post-war deviant appearances of money laundering, terrorist financing and other negative appearances. After significant progress and regulation of this area at all levels, there has been great liberalization.

Only companies registered in BiH are considered domestic legal entities/residents/and can acquire property rights over real estate without any restrictions.

Foreign natural persons (non-EU citizens) may acquire property with the prior approval of the Ministry of Foreign Affairs, based on the opinion of the Ministry of Justice on the basis of reciprocity.

PROFIT AND CAPITAL AGAIN

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 21

There are no restrictions on the return on profits or capital investments.

There are no restrictions on the transfer of profits abroad after payment of tax liabilities, which includes 10% of both income tax and 5% withholding tax if foreign nationals, if applicable.

Tax losses can be carried forward for a maximum of five years.

Foreign investors can transfer abroad the profit from the capital invested in BiH or the income from the sale of shares or stakes after settling outstanding liabilities, and they can transfer the capital after the sale. The profit of a foreign contractor participating in capital projects in BiH can be transferred abroad.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 22

4 – SETTING UP A BUSINESS

Bosnia and Herzegovina has such a legal system that has two entities, the Federation of BiH and the Republika Srpska.

The legal system in investment provides for a number of entities common in other legal systems. There are no restrictions on the establishment of business entities by foreign investors.

The procedures for establishing, registering and operating companies in BiH are relatively simple. According to the Companies Act, four basic types of organizations are available: • Limited Liability Company • Joint stock company • Partnerships - limited, unlimited and quiet.

According to the law, companies are also recognized as business associations. Foreign investors can opt for a branch or representative office (possible only for non-EU investors) as the most efficient way of doing business in BiH.

COMPANY REGISTRATION PROCEDURE

Nowadays, a large number of unemployed people in Bosnia and Herzegovina are tempted to start their own business and take risks, or like everyone else to get a job with existing companies that have a stable market position and can provide us with a regular income.

All of the above has both advantages and disadvantages.

In this article, we will list the advantages and disadvantages of starting your own business, and what risks you should be willing to take as a future entrepreneur.

The benefits of starting your own business are great, from the pleasure of turning an idea into a realization, managing a company and a team of people (rather than being subordinate), flexible working hours, making a profit and contributing to society.

Disadvantages can be interpreted in several ways.

Some will not even view them as disadvantages because they are not afraid to take risks or responsibilities and are willing to sacrifice their private lives and take more time to invest in starting a business.

In order to help you with the decision to start your own business, we will outline what steps and activities should be taken during registration (in this case Ltd.), required time and resources.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 23

Prior to the registration of the company, it would be good for the founder to prepare a business plan in order to have an insight into all the advantages and disadvantages of starting a business, business development activities and the timeframe for the return on investment. In addition, there are several stages in the process of establishing and registering business in BiH.

This procedure includes: - Check company name availability - Notarization of documents - Determination of share capital - Company registration in the municipal court - Registration with the cantonal or entity statistical office - Opening a business account so that the initial capital can be transferred to the company account - Registration with the tax administration.

When establishing a limited liability company or a joint stock company, a foreign investor may invest money, goods and rights.

For the registration of a limited liability company, the basic item is a deposit of at least BAM 1.000,00, and for the director to obtain a Certificate of no public debt from the Tax Administration which costs BAM 20, 00 and a Certificate of outstanding financial obligations which should amount to BAM 0.00 and withdraw is with the Misdemeanour Court and costs BAM 15, 00. The required period for the listed documents is 2 days.

The steps and documentation required for company registration are:

Decision on establishment (founding act) - The decision on establishment is made by a notary and it is made when it comes to one owner, while the founding act is made when there are 2 or more owners, who must submit their ID cards to the notary for inspection. The founding act defines the owners of the company, the role, the appointment of the director, the rights and obligations of the founder as well as the director, and the activities that the company plans to engage in. Several activities can be listed, while the notary will emphasize those that require special consent from the competent institutions. The notary is also preparing the accompanying documentation, i.e. the completed form for the registration of the company, the forms for foreign trade activities, the decision on the appointment of the director as well as the advertisements for publication. The decision on establishment, i.e. the founding act is prepared in 3 copies (for the Court, the Bank and for the founder). The procedure lasts up to two days and costs BAM 450-500.

Payment of deposits (capital) - With the prepared decision on establishment for the bank, the founder pays the capital in one of the commercial banks, and keeps a copy of the payment slip for the Registration of the company.

Company registration - In the competent Municipal Court, the founder, with the documentation prepared by the notary, submits a request for registration of the company. The applicant for registration also pays a fee of BAM 10.00. Registration lasts from 7 to 15 days.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 24

After registration, it is necessary to pay a fee of BAM 70, 00 for raising the Decision on registration. The total cost of registration is BAM 80, 00. It would not be bad if the Decision on registration is copied and certified in the Municipality in several copies.

Making a seal - After registration, and above all, it is necessary to make a stamp at an authorized stamp cutter. Making a stamp takes a day and costs 35-50, 00 KM, depending on the shape and size of the stamp. Business premises lease agreement - If the owner of the company rents the space, it is necessary to sign the business premises lease agreement on behalf of the company and to certify it. If the owner of the company performs the activity in its own spaces, it is necessary to obtain a land registry excerpt with the exact address of the business space. It would not be bad to copy and certify the lease agreement or the Land Registry excerpt in the Municipality in several copies.

ID number and statistics - Certified copy of the lease agreement or Land Register entry, certified copy of the Registration Decision, 2 completed POR-500 forms and Annexes A, B and C (application for registration of legal entities). The procedure is free and lasts from 7-10 days. After obtaining the ID number, it is necessary to submit an application for classification by activity of the business entity (RPS form) to the Statistical Office, which can also request certified copies of the Registration Decision and the Lease Agreement, as well as the ID Number Certificate for inspection. The procedure is free and lasts 2-3 days.

Request for dedicated consent - while the procedure of issuing the ID number and the certificate from Statistics is in progress, in the competent Municipality the founder submits a request for dedicated consent for the use of business premises, where the request is accompanied by a certified copy of the Registration Decision or Excerpt from the Register of Business Entities or space lease agreements. The procedure takes about 15 days and costs BAM 4 (may depend on the fee set by the Municipality).

Notice of commencement of work - It is necessary to submit to the competent Cantonal Inspectorate a notice of commencement of work (on the company's memorandum), as well as a statement that all legal requirements for performing the activity are met (P1 form) and a copy of the Registration Decision. The application is submitted 5 days after the start of the company and is free of charge.

Opening an account - A business account is opened with a commercial bank (where the owner of the company paid the capital). To open an account, it is necessary to issue a Registration Decision, Statute or Decision on Establishment, ID number, Classification from Statistics, ID card and CIPS application form (certified copies or original for inspection). The procedure is free, and the time limit depends on the bank.

Employee registration - if the company has more than 30 employees, it is necessary to adopt the Rulebook on work and systematization of jobs.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 25

Employee registration is done in the competent Tax Office of the municipality, and you need a completed JS3100 form for each employee (two copies), employee tax card and deregistration from the Employment Bureau if the employee was previously at the bureau. For personal records, the employer must also have Health Certificates for each employee. Sometimes the Tax Administration also requires a copy of the Registration Decision. The procedure is free and lasts a day.

Login to the VAT system - if the owner of the company estimates that by the end of the year it will realize a turnover higher than BAM 50.000,00, it is necessary to register the VAT system. For that, he needs to pay a fee for the application for registration and entry in the Unified Register of Indirect Taxpayers (BAM 10), a fee for issuing a decision on registration and entry in the Unified Register of Indirect Taxpayers (BAM 10) and a fee for issuing a certificate of registration/entry in the Unified Register of Indirect Taxpayers (BAM 20). In the ITA BiH you fill in the application (form ZR1), with which you enclose the following documentation: a certified copy of the entry in the court register, a certified copy of the registration certificate in the FBiH Tax Administration, a certified copy of the notification on classification of entities according to identity card of the director, a certified copy of the card of deposited signatures from the bank in which the transaction account is opened, a statement on import or export of goods by the company, a statement on the feasibility of the planned turnover and proof of turnover from concluded business contracts, a copy of the lease agreement space or proof of ownership in the form of an excerpt from the land register and personal documents of the responsible accountant. The procedure lasts 10-15 days and costs BAM 40.

Fiscalization - this is the last step in company registration. The founder of the company or the authorized representative enters into an agreement with the authorized distributor for the introduction of fiscal systems. It is necessary for the founder to fill in the ZIF document which can be downloaded from the Tax Administration website, and submit it to the authorized distributor, as well as the decision on company registration, Tax Registration Certificate (ID), VAT registration certificate and Classification Statistics Certificate. The authorized distributor carries out the fiscalization procedure, while the company is obliged to start recording sales data within 2 days after taking over the device, and in accordance with the Law. The procedure lasts up to 5 days and costs up to BAM 700, depending on the choice of cash register. These are the basic steps of registration of a limited liability company, it lasts a month and a half to two months, and it takes about BAM 2.500,00, of which BAM 1.000,00 is the capital available to the company upon transfer to a newly opened account. It is necessary to pass the Company's Articles of Association within 60 days from the day of registration, which must be certified by the Notary who drafted the founding act, and one copy must be submitted to the Court where the company was registered. Prospective employers should be ready to earn little or no income in the first months of work, and to invest maximum effort in advertising the company and attracting clients, which will require additional costs or investments, but with a good business plan, prepared work and propaganda activities, in a very short time. Within the term the employer will be able to return the invested funds and start making a profit.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 26

We hope that our instructions will help you make the decision to start your own business. All you need is good will, enthusiasm, perseverance and a willingness to take risks and responsibilities as a future employer.

If you want additional information and help when starting your own business, contact us, we are here to help you.

CONCESSIONS AND FREE ZONES

As foreign persons cannot become owners of certain types of real estate, the Law on Concession Rights regulates the rights to concessions.

Concessions may be granted for the use of natural resources and other resources, if such activities are considered to be in the interest of BiH or its entities or cantons if the concessions are at a lower level. There is also a difference in the number of years a local unit of a municipality, canton or federation can grant a concession

The concession can be granted for a period of up to 50 years (20 years for agricultural land).

Free zones can be established on the basis of a concession granted by the government. Domestic and foreign legal or foreign natural persons cannot find the zone, but they can be users of the zone. Based on the agreement concluded with the domestic founder of the zone, they can perform all activities within the zone (production and processing of goods, wholesale trade, trade intermediation, services, banking transactions, insurance services, etc.) except retail.

Working in a free zone provides the following advantages: All forms of foreign trade can be done within the zone and restrictions

The Trade Act and the Foreign Exchange Trade Act do not apply to such operations • Goods can be freely imported or exported, or remain within the zone indefinitely • No customs duties or taxes are charged on goods stored in the zone. • Zone users pay income tax reduced to 50% of the standard rate (i.e. 10%).

The provisions for free zones described in the VAT Act are in line with the provisions of European Council Directive 2006/112. Trade in goods and services within free zones is subject to VAT, except in cases where goods and services are purchased for future export outside the EU.

Due to the availability of skilled and productive workforce, modern infrastructure and excellent geographical position offered by the European Union market of 500 million consumers, many international companies from Italy, Germany, Austria, Switzerland and France have already established their free zones in BiH. In addition, BiH is a member of CEFTA, which gives it the possibility of duty-free exports to those countries.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 27

5 – LABOUR

EMPLOYMENT

Bosnia and Herzegovina has a highly qualified and well-educated workforce, which gives it a competitive advantage over some countries that also export labour. The world labour market is changing rapidly with the entry of new professionals who are well versed in foreign languages, especially English, German and Italian. The education system of the former Yugoslavia was very good, so that workers from BiH were sought after and appreciated all over the world, especially engineers, doctors, computer scientists, nurses, construction workers, but also miners, farmers and others.

Unemployment is relatively high and according to official sources in 2019 it amounted to 19, 1% of the workforce, but these data are not the most reliable due to the high rate of undeclared work. Despite the government’s efforts to encourage employment through various incentive programs for employers, the unemployment rate remains a significant social and economic burden.

EMPLOYMENT CONTRACTS

The Labour Law is the main instrument that regulates the relationship between employers and employees in BiH through employment contracts and a number of institutions that protect workers' rights. These laws are the responsibility of the entities.

Employment contracts must be concluded in writing, regardless of the duration of employment. The contract must contain the place of employment, job description, basic salary and additional income. The employer and the employee have the right to agree on conditions more favourable for the employee than those prescribed by law. The Labour Law defines full-time employment as a 40-hour week. Employees are entitled to a minimum of three weeks of paid annual leave. Vacation days must be approved by June 30 of the current year for the previous year. The holiday pay or salary paid during the annual leave must be half the average salary at least the average salary in the previous three months if the firm is not at a loss. Workers are entitled to paid retirement and health insurance, as well as compensation for religious holidays.

DISMISSAL

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 28

Employment may be terminated by mutual agreement, retirement, dismissal, death of the employee or the expiration of the term for which the employment contract was concluded. The Labour Law prescribes notice periods depending on the length of employment. In general, a permanent employment contract cannot be terminated without sufficient justification, unless the employment contract is terminated due to the negligent behaviour of employee. Each severance pay is determined based on the duration of the employment relationship. The minimum severance pay is calculated as one third of the average monthly salary paid in the last three months before the dismissal, for each year of employment with a particular employer. In addition, there are certain protections for employees in cases where a company files for bankruptcy, such as a priority in salary benefits three months before the start of the process, holiday pay and severance pay. If the employee's contract is temporary, the employer may dismiss him only if such a contract of dismissal is included in the employment contract. When the employer and the employee terminate the employment by agreement, they are free to decide on the appropriate conditions.

SOCIAL SECURITY

The BiH social security system includes regulations related to pension, health insurance and unemployment insurance. Bosnia and Herzegovina introduced crucial changes to its pension system in 1998, enacting new laws.

Following international trends, Bosnia and Herzegovina has also increased the retirement age, which is 65 for men and 60 for women and a minimum of 20 years of employment. Health insurance in BiH includes basic health insurance. Basic health insurance is compulsory and consists of the right to health care and the right to cash benefits. Entitlement to various cash benefits includes sick pay (including maternity leave) and transport costs incurred through the use of health services. Supplementary and private health insurances are voluntary insurances with the user paying a monthly insurance premium.

EMPLOYMENT OF FOREIGNERS

Economic zone (meaning EU and EFTA) and third-country nationals (including Switzerland and Liechtenstein). However, citizens from European Union countries who have imposed restrictions on Croatian citizens (Malta, the Netherlands, Austria, the United Kingdom and Slovenia) in their labour market must go through the same procedure as third-country nationals.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 29

6 – TAXATION

Taxes in BiH

Basic tax categories: - Value added tax - Income tax - Income taxes - Property tax - Social security contributions paid by the employer and the employee, - Excise duties are a special type of tax paid on some of the products such as petroleum products, tobacco products, soft drinks, non-alcoholic beverages, beer, wine and coffee.

CATEGORIES OF TAX RATES

- Value added tax 17% (FBiH, RS, BD) - Income tax 10% (FBiH, RS, BD) - Income tax 10% (FBiH, RS, BD) - Value added tax (VAT)

Unique VAT rate 17%. The Indirect Taxation Authority is in charge of collecting value added tax and coordinating fiscal policy issues as a whole. This body is also responsible for collecting customs and excise duties throughout BiH.

VALUE ADDED TAX-VAT

Value added tax is a comprehensive consumption tax and is assessed on the basis of value added tax on goods and services. It is a direct tax that applies to all business activities including the production and distribution of goods and the provision of services. VAT is a consumer tax because the total amount of VAT is not paid by the company, but by the final consumer. It is evaluated as a percentage of the price of products or services.

The amount of tax is visible in all phases, from production to distribution. When paying the tax liability, the taxpayer will reduce the value added tax from the amount of tax he has already paid to other taxpayers at the time of purchase. This ensures tax neutrality regardless of the number of transactions involved.

PROFIT TAX

Income tax rate in BiH Federation of BiH - 10% Republika Srpska - 10% Brčko District - 10% Income transferred from abroad is not taxed in BiH. Profits transferred from abroad are not taxed if they are previously subject to taxation abroad.

Method of calculating income tax Profit is calculated in accordance with applicable laws, minus expenses from income. The tax base includes profit, income and capital gains, in accordance with accounting regulations. Expenditures must comply with accounting standards.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 30

Income tax rates

In FBiH - Income tax is 10% of net salary (according to the gross model). In RS - Income tax is 10% of net salary (according to the gross model).

FOREIGNERS AND TAXES IN BIH

All foreigners residing in the Federation of BiH and the Republika Srpska pay tax on income earned in a calendar year on the territory of BiH. Equally, all foreigners who do not reside in BiH, but who earn income in the Federation of BiH and the Republika Srpska are considered taxpayers.

In the Brčko District, foreigners are treated as taxpayers if they reside in the territory of the Brčko District for an uninterrupted period of at least 183 days.

TAX SYSTEM

The tax system is based on the principles of equality and fairness. The system of indirect taxes and customs is organized at the state level, while the system of direct taxes is organized at the levels of the entities and the Brčko District.

GENERAL TAX LAW

The General Tax Law prescribes tax processes and relations between taxpayers and tax authorities. The General Tax Law covers broad issues related to tax proceedings, in particular completion, payment, refund, deferral, forced payment, proof and dispute resolution. This law also defines the main tax principles, such as the principle of equal attention, the principle of inactive application of tax regulations, the principle of established factual facts, tax secrecy, the principle of dishonesty and the principle of economic substance. The provisions of this law define the rights of taxpayers, clearly defining the relationship of debtors, creditors and heirs in terms of payment, disbursement, guarantee, compensation and calculation of tax liabilities or claim procedure. It also clearly defines the relationship in the proceedings of pledge, assignment and capture of property or rights.

REAL ESTATE TRANSFER TAX

A taxpayer is a person or entity that acquires real estate (purchase and sale, exchange, inheritance, giving, merging or withdrawing property from a company, purchasing property in liquidation or bankruptcy proceedings and on the basis of a court decision). The acquisition of property on which VAT is paid is not considered a transaction subject to real estate transfer tax. This tax is paid by domestic and foreign legal and natural persons, unless otherwise stipulated by an international agreement. Real estate transfer tax is paid at the rate of 5%.

The tax base is calculated as the market value of the asset at the time of acquisition.

DOING BUSINESS IN BOSNIA AND HERZEGOVINA 31

The Real Estate Sales Tax Act provides for general tax relief, tax relief on contributions to society in the form of real estate and tax relief on inheritance, gifts and other real estate acquisitions free of charge. According to the Companies Act, real estate transfer tax is not paid if the property is contributed as the company's share capital.

INHERITANCE AND GIFT TAX

Inheritance tax is generally levied on inheritance of property located in BiH. The inheritance tax base is generally the market value of the property reduced by the costs and debts incurred on the property. Several inheritance tax exemptions are available. The tax rate is up to 5%.

Gift tax is paid if the gift of property is made to another person (i.e. the user). The taxable base of a gift is usually the net value of the gift. The gift tax rate is usually 4%. Again, depending on the circumstances of the gift, several gift tax exemptions are available.

SPECIAL TAXES

In BiH, special taxes (excise duties) are introduced on coffee, mineral oils, alcohol, beer, soft drinks, tobacco products, cars and other motor vehicles and luxury products. The persons required to pay excise duty are manufacturers and importers.

OTHER TAXES

There are other, less relevant taxes for companies. These include a tax on road motor vehicles, a tax on holiday homes and a tax on shared gaming and entertainment machines. DOING BUSINESS IN BOSNIA AND HERZEGOVINA 32

7 – ACCOUNTING & REPORTING

ACCOUNTING

Companies that exist and do their business in BiH are required to keep records and prepare annual financial statements in accordance with International Financial Reporting Standards (IFRS) issued by the International Financial Standards Board and certified by the State Accounting and Auditing Commission of BiH, which is a member of IFAC.

Large enterprises and public interest entities prepare annual financial statements in accordance with International Financial Reporting Standards (IFRS), while small and medium-sized enterprises prepare their reports according to the standards for small and medium-sized enterprises that are applied in BiH.

The size of the company is determined according to the criteria published in the Accounting and Auditing Act. The classification is based on the following criteria, i.e. meeting two of the following three criteria:

Size of enterprise Number of employees Asset value Total income LOW up to 50 up to 1 mil. KM up to 2 mil MEDIUM 50-250 1-4 BAM million 2-8 BAM million LARGE over 250 over 4 BAM million over BAM 8 mil.

+ banks, MCOs, insurance, leasing, funds, brokers...

Small legal entities: - they are not required to submit semi-annual accounts - only BS and BU submit for the annual calculation - are not liable to audit the financial statements

Large companies are those that cross the two boundaries mentioned above.

The external audit of financial statements is determined by the FBiH Law on Accounting and Auditing and the Law on Accounting and Auditing of the Republika Srpska. According to the Law on Accounting and Auditing, companies that are required to have an annual external audit are: • large and medium-sized companies • subjects of public interest • large and medium-sized groups • companies whose shares or securities are being prepared for listing on an organized securities market • companies involved in business combinations or divisions as takeovers or start- ups. DOING BUSINESS IN BOSNIA AND HERZEGOVINA 33

Auditors in BiH work according to International Standards on Auditing and International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS). Their main organization is the Bosnia and Herzegovina Chamber of Auditors in Sarajevo, and licenses and performance control are administered by the entity ministries of finance.

REPORTING

The annual financial statements must contain these basic reports: • Statement of financial position (balance sheet) • Income statement (success sheet) • Cash Flow Statement • Statement of changes in capital • Notes with financial statements

According to the Law on Accounting and Auditing in the FBIH (Official Gazette 83/09), the fiscal year is equal to a calendar year. However, the same law allows a fiscal year to differ from a calendar year if this is regulated by other regulations or for the needs of entrepreneurs.

When the fiscal year is equal to a calendar year, income tax returns must be submitted to the tax authority no later than April 30 of the following year.

Income tax must be submitted to the tax administration no later than February 28 of the following year.

From 1 January 2016, for tax returns for 2015, the tax authority is authorized to independently calculate the annual liability/income tax return of taxpayers if it has all the data on the taxpayer's income in the tax period.

All companies are required to submit annual financial statements and auditor's report to the Financial Agency (FIA) for the purpose of public disclosure and control by 2/28 of current year for the previous year

The annual consolidated financial statements must be submitted by April 30 of the next year. UHY REPRESENTATION IN BOSNIA AND HERZEGOVINA

CONTACT DETAILS CONTACTS UHY Revident d.o.o. Mostar Liaison contact: Bozo Vukoja Biskupa Cule bb Position: Senior Partner Mostar Email: [email protected] Bosnia and Herzegovina Tel: +387 36 330 260 Liaison contact: Antonio Vukoja Fax: +387 36 330 260 Email: [email protected] www.uhy-ba.com Liaison contact: Matko Knezevic Email: [email protected]

SOCIAL MEDIA CONNECTIONS • Facebook: https://www.facebook.com/pages/uhy-ba.com • LinkedIn: http://www.linkedin.com/company/uhy- ba.com • YouTube: http://www.youtube.com/user/uhy-ba.com

Year established: 1997 Number of partners: 2 Total staff: 8

BRIEF DESCRIPTION OF FIRM Our company UHY REVIDENT DOO provides all services in the field of audit, tax, accounting and business consulting, valuation of tangible and intangible assets of all kinds of analysis, due diligence, analysis of merger separation and valuation, and bankruptcies and liquidations to all companies regardless of their size. The capital of the company amounts to BAM 35.000,00 and is fully paid up.

The ownership structure consists of prof.dr.sc. Božo Vukoja, certified auditor 51% and director dipl. oec. Antonio Vukoja 49%. The member of the Company is prof.dr.sc. Božo Vukoja, certified auditor. The Company is not a proprietor of UHY International Hacker Young Limited. The company is registered in the Register of Auditing Companies of the Audit Chamber FBiH 100001180.

The Company has offices with departments in Mostar Grude, Sarajevo and Banja Luka. Email: [email protected], UHY Revident doo Mostar, based in Mostar, Bosnia and Herzegovina, has six employees, all of whom have a university degree and an active knowledge of the English language. It has three certified auditors, five certified accountants, three internal and three forensic auditors. Grude has three certified auditors, three internal and three forensic auditors and five accountants. For now, Mostar covers Sarajevo and Grude covers Banja Luka.

UHY Revident d.o.o. provides services in the field of audit, tax, accounting and business consulting and agreed procedures to all companies regardless of their size. Our clients include manufacturers and companies, charities and non-profit organizations.

UHY Revident's expert team provides consulting services to clients' requirements, which helps them to improve their organizational structure, business processes, financial structure and tax treatment. This approach focuses on identifying and locating relevant business hotspots in order to enhance the client's ability to compete and thrive in a complex business environment. UHY REPRESENTATION IN BOSNIA AND HERZEGOVINA

Wide range of services provided by UHY Auditor in the field of audit and consulting services, Audit of companies in accordance with domestic regulations, international financial reporting standards and US GAAP standards, Forensic audit, Due diligence and valuation, Audit of increase and decrease of share capital of companies, Internal audit, Audit of other status changes of companies, and other related matters.

VISION Remain a leading domestic audit firm in the territory of Bosnia and Herzegovina, contributing to the development of the audit profession in Bosnia and Herzegovina and beyond.

MISSION Build long-term customer relationships for mutual satisfaction, backed by human resources, professional working methods and a wide range of services.

KREDO Corporate growth and diversity, which are a means of improving existing businesses and actively expanding into new areas of activity, and creating new opportunities and challenges for both individual professional development and for the advancement of society as a whole.

STRATEGY Continue to provide the best audit services, thus maintaining the trust and respect of clients and business partners, backed by a work environment where respect is universal, teamwork is routine, creativity is encouraged, learning is permanent, and ethics is beyond question.

HUMAN RESOURCES The UHY Revident team is made up of experienced and professional people with a high reputation in the business public. In addition to an educational approach aimed at further training of employees. Employees of the company Revident d.o.o. with their theoretical knowledge and audit practice are trained in the professional, consistent and independent application of an internationally recognized and well-known audit methodology, which ensures at the highest professional level the full implementation of the audit procedures set out in International Standards on Auditing and in accordance with the Audit Law.

UHY Revident d.o.o. provides auditing, tax, accounting and business consulting services and agreed upon procedures to all companies, regardless of their size. Our clients include manufacturers and companies, charities and non-profit organizations. UHY Revident's expert team provides consulting services to clients' requirements, which helps them to improve their organizational structure, business processes, financial structure and tax treatment. This approach focuses on identifying and locating relevant business hotspots in order to enhance the client's ability to compete and thrive in a complex business environment.

Both companies from both LRC and BISNODA have high AAA ratings for 2018 and 2019 and the Company has a high rating and ISO 9001-2015.

SERVICE AREAS • Audit and outsourcing services • Tax consultancy • Forensic accounting and litigation support • In depth analysis • Corporate Finance (Acquisitions, Sales, Fundraising and Flotation) Transfer Pricing UHY REPRESENTATION IN BOSNIA AND HERZEGOVINA

• Transfer pricing studies • Accounting • Bankruptcies

SPECIALIST SERVICE AREAS • Company evaluation

PRINCIPAL OPERATING SECTORS • Computers and peripherals • Electrical components and equipment • Hotels • Industrial products • Information technology (IT) and services • Textiles and clothing

LANGUAGES Croatian, English, German

CURRENT PRINCIPAL CLIENTS • Foreign Trade Chamber of BiH Sarajevo, • JP Brodanac d.o.o. Citluk, • JP Toplana Banovidi d.o.o. Banovidi, • JP Komunalno Banovidi d.o.o. Banovidi, • JP Vodovod i kanalizacija Banovidi d.o.o. • Promont d.o.o. Široki Brijeg, • Vecernji list d.o.o. Mostar, • Prevent Travnik d.o.o. Travnik, • PreventSafety d.o.o. Bugojno, • MI Rakitno d.o.o. Posušje, • More Screensd.o.o.Mostar, • Lagermax AED d.o.o. Sarajevo, • Elektroremont d.o.o. Banovidi, • Saniteks d.o.o. Velika Kladuša • Kristal d.o.o. Vitez, • Sport Plus d.o.o. Novi Travnik, • Alfe-MI d.o.o. Živinice, • ADK d.o.o. Novi Travnik, • Penava d.o.o. Posušje, • Prevent Step d.o.o. Goražde, • Bogner Edelstahl d.o.o. Vitez, • Željezara Ilijaš d.o.o. Ilijaš, • Grafotisak d.o.o. Grude, • Grafotrans d.o.o. Grude, • JP Komunalno Livno d.o.o. Livno, • JU Bolnica Nova Bila Travnik UHY REPRESENTATION IN BOSNIA AND HERZEGOVINA

BRIEF HISTORY OF FIRM The company was first registered in 2016 under the name SMART UP MOSTAR to receive a license from the FBiH Ministry of Finance in 2018 and began auditing. LET US HELP YOU ACHIEVE FURTHER BUSINESS SUCCESS To find out how UHY can assist your business, contact any of our member firms. You can visit us online atwww.uhy.com to find contact details for all of our offices, or email us [email protected] for further information.

UHY is an international network of legally independent accounting and consultancy firms whose administrative entity is Urbach Hacker Young International Limited, a UK company. UHY is the brand name for the UHY international network. Services to clients are provided by member firms and not by Urbach Hacker Young International Limited. Neither Urbach Hacker Young International Limited, the UHY network, nor any member of UHY has any liability for services provided by other members.

UHY Revident d.o.o. Mostar (the “Firm”) is a member of Urbach Hacker Young International Limited, a UK company, and forms part of the international UHY network of legally independent accounting and consulting firms. UHY is the brand name for the UHY international network. The services described herein are provided by the Firm and not by UHY or any other member firm of UHY. Neither UHY nor any member of UHY has any liability for services provided by other members.