Navigating corporate tax laws can be challenging, particularly in regions with unique political and administrative structures like Bosnia and Herzegovina. The Federation of Bosnia and Herzegovina is composed of three separate jurisdictions, including two governing entities – the Federation of Bosnia and Herzegovina and the Republika Srpska, and an autonomous administrative unit – the Brčko District. The laws and taxation can vary depending on the jurisdiction. This article will provide an overview of corporate taxation in Bosnia and Herzegovina.
Residency for Tax Purposes in Bosnia and Herzegovina
The regulations for determining tax residency in Bosnia and Herzegovina are quite similar across the jurisdictions.
Within the Federation of Bosnia and Herzegovina, a legal entity is considered a tax resident if it is registered within the jurisdiction’s court registry or if the management and supervision of its business activities are situated within the territory of the jurisdiction.
Similarly, a legal entity is considered a resident for tax purposes in Republika Srpska upon its registration in the business entities registry of the jurisdiction or if the place of actual management and supervisory operations concerning the entity’s business undertakings is located within the jurisdiction.
Regarding Brčko District, a legal entity’s tax residency is determined by its registration within the district.
Rates and Obligation of Corporate Income Tax
Federation of Bosnia and Herzegovina
In the Federation of Bosnia and Herzegovina, companies and other legal entities engaged in continuous business activities, selling goods and services locally and internationally to make profits, must pay corporate income tax. Legal entities registered in Republika Srpska and Brčko District but generating income within the borders of the Federation of Bosnia and Herzegovina, must also comply with this obligation. The corporate income tax rate in the Federation of Bosnia and Herzegovina is 10%.
Republika Srpska
Resident legal entities in Republika Srpska are subject to taxation on their income from all sources, regardless of whether such income is generated within Republika Srpska, the Federation of Bosnia and Herzegovina, Brčko District, or from international activities. The corporate income tax rate that applies within Republika Srpska is 10%.
Brčko District
Legal entities that are tax residents of Brčko District are liable for corporate income tax on their earnings from any source, including both domestic sources within Bosnia and Herzegovina and international revenues. The corporate income tax rate in Brčko District is 10%.
Other Corporate Taxes
Value Added Tax (Vat) – The standard VAT is collected uniformly across the country at 17%, applying broadly to goods and services with notable exemptions, including residential leases over 60 days and specific services such as financial, educational, and postal, expressing a strategic combination of generating revenue and supporting specific sectors.
The VAT system is complemented by a nuanced excise duty framework targeting consumables like petroleum products, with rates ranging from BAM 0.3 to BAM 0.4 per litre, and tobacco products, which are taxed at 42% of the retail price plus an additional BAM 0.75 per pack. Additional duties apply to alcoholic beverages, non-alcoholic drinks, and coffee, showing an aim to influence consumption for both health and revenue purposes.
Personal income tax (PIT) – Across Bosnia and Herzegovina stands at a flat rate of 10%, supplemented by mandatory social security contributions for pensions, health, and unemployment insurance, differing by entity in rate and structure but unified in purpose to provide a safety net for employees.
For instance, social security contributions in the Federation of Bosnia and Herzegovina are split between employer and employee, encompassing pension and invalid insurance, health insurance, and contributions towards unemployment insurance, with rates thoughtfully designed to balance the burden between the employer and the employee.
Deductions
In the Federation of Bosnia and Herzegovina, Republika Srpska, and Brčko District, corporate tax deduction rules mainly permit businesses to deduct essential expenses that help generate profit and are well-documented. These can include most operational costs, asset depreciation (with specific rates and conditions for different types of assets), start-up expenses, interest costs under certain conditions, and provisions for bad debts.
Tax credits and incentives
In the Federation of Bosnia and Herzegovina, Republika Srpska, and Brčko District tax incentives are designed to encourage foreign investment, production investment, and employment.
Taxpayers who pay taxes on profits earned abroad can receive a credit for those taxes against their local tax liabilities.
Investment incentives offer tax relief to taxpayers who invest a significant portion of their profits into production equipment or meet specific investment thresholds, with varying conditions and benefits in each entity. Employment incentives provide tax deductions for the gross salaries of newly hired employees, encouraging businesses to create more jobs under certain conditions.
Each entity has its unique approach to these incentives, reflecting their efforts to stimulate economic growth, attract investment, and increase employment within their jurisdictions.
It is important for corporations, to be aware of the legal and financial procedures of taxes. Our firm can provide support when seeking professional tax consultancy services. Contact us, and we will be able to guide in the subject matter.
