As part of the Income Tax Act of 2002, Cyprus enacted a series of tax reforms. These reforms aimed to harmonize the tax laws of Cyprus with EU directives. The corporate tax rate in Cyprus is now between 10% and 15% depending on a company's chargeable income. These rates are among the lowest in the EU.
But Bosnian corporate tax rates better this. In 1997 the parliament of the Federation of Bosnia and Herzegovina (FBiH) adopted the Law on Corporate Income Tax (CIT), which is still in force. Companies established by foreign founders (100% foreign ownership) pay no CIT for the first five years of their existence.
Locally owned companies also benefit from a favourable corporate tax regime. A newly established corporation, for the first year of business, is 100% exempt from CIT; for the second year of business this drops to 70%; and for the third year of business to 30%. Companies established in designated free zones are 100% exempt for five years. Companies whose staff is made up by more than 50% of persons with disabilities are similarly exempt.
Regarding withholding tax, in Cyprus, dividends and royalties arising from the use of an asset outside Cyprus and interest payments to non-residents are exempt. Other types of payment to non-residents are subject to withholding tax at 10%, although there is no withholding if the payment relates to a right outside Cyprus. In FBiH, a 15% withholding tax is payable on dividends. Accordingly, strategic planning to reduce tax liabilities is required.
The tax regime is also favourable in Bosnia and Herzegovina's other entity, the Republika Srpska (RS), where a 10% CIT applies, although without the extensive exemptions. Observers anticipate that the FBiH and RS Ministries of Finance will introduce new CIT laws to harmonize the tax regime across Bosnia and Herzegovina. In FBiH a drafting group is unlikely to be established until well after the October elections and, based on previous form, negotiations between the entities and the international community on the draft law can be expected to last for some time. When the draft eventually reaches parliament, proceedings could take a further year.
Renuka Kukanesen and Azra Tabakovic
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