On January 1 2008, the government of Bosnia and Herzegovina (BiH) will impose an essential part of the direct taxation system on the whole territory. Drafts of the new Corporate Income Tax (CIT) law and Personal Income Tax (PIT) law are already going through parliamentary procedures. It is expected that the government will implement them by the end of this year. If that happens, their application will begin on January 1 2008. The aim of these laws is to harmonise the Federation of Bosnia and Herzegovina's (FBiH) corporate and personal income taxation laws with the legislation of two other BiH entities, Republika Srpska (RS) and Brcko Distrikt (BD). The legislation should help to create a unified economic space and to eliminate differences between taxes in FBiH, RS and BD. This briefing analyses the new CIT law, looking in particular at the CIT rate. It also explores the tax exemption rights available to foreign investors under the CIT law, before new CIT law's official application.
The CIT rate in the FBiH is 30%. The new CIT law reduces this rate, which will drop to 10%. From the date of official application of the new CIT law, taxpayers in the FBiH shall pay the same CIT rate as taxpayers in RS and BD. Under CIT law now, a foreign investor that invests in more than 20% of the value of an FBiH registered company's current capital is entitled to receive a tax holiday of up to 100% (for the maximum amount of the foreign capital invested), for a period of up to five years. For example, companies that foreign investors have set up, and which are 100% foreign owned, pay no CIT for the first five years of their existence. The new CIT law does not regulate this type of exemption, which is also in line with the CIT legislation of RS and BD. The question is, what will happen to the tax exemption rights that foreign investors have already acquired under the CIT law? The new CIT law regulates this matter: the tax exemptions acquired on the basis of the previous CIT law shall apply until the expiry of the period for which they have been granted. From the tax liability perspective, this regulation is of interest both to foreign investors already established in the FBiH and to those that plan to establish a company there before the expected date of the new law's application. Given that the new CIT law is expected to apply from January 1 2008, foreign investors still have time to establish a company in the FBiH and exploit the benefits of the CIT law as it is.
Suvad Bakic and David Ayres