NATIONAL TREATMENT OF INTERNATIONAL … · 2 NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN ... as part of their reform agenda to ... INVESTMENT OPPORTUNITIES AND BARRIERS IN BULGARIA

OORRGGAANNIISSAATTIIOONN FFOORR EECCOONNOOMMIICC CCOO-OOPPEERRAATTIIOONN AANNDD DDEEVVEELLOOPPMMEENNTT

STABILITY PACT

SOUTH EAST EUROPE COMPACT FOR REFORM, INVESTMENT, INTEGRITY AND GROWTH

NATIONAL TREATMENT OF

INTERNATIONAL INVESTMENT IN SOUTH

EAST EUROPEAN COUNTRIES:

MEASURES PROVIDING EXCEPTIONS

OOCCTTOOBBEERR 22000033

National Treatment Couv.qxd 19/11/2003 11:49 Page 2

STABILITY PACT

SOUTH EAST EUROPE COMPACT FOR REFORM, INVESTMENT, INTEGRITY AND GROWTH

NATIONAL TREATMENT OF

INTERNATIONAL INVESTMENT IN SOUTH

EAST EUROPEAN COUNTRIES:

MEASURES PROVIDING EXCEPTIONS

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

TThhee SSttaabbiilliittyy PPaacctt ffoorr SSoouutthh EEaasstteerrnn EEuurrooppee is a political declaration and framework agreementadopted in June 1999 to encourage and strengthen co-operation among the countries of South EastEurope (SEE) and to facilitate, co-ordinate and streamline efforts to ensure stability and economicgrowth in the region. (see www.stabilitypact.org)

TThhee SSoouutthh EEaasstt EEuurrooppee CCoommppaacctt ffoorr RReeffoorrmm,, IInnvveessttmmeenntt,, IInntteeggrriittyy aanndd GGrroowwtthh ((““TThhee IInnvveessttmmeennttCCoommppaacctt””)) is a key component of the Stability Pact under Working Table II on EconomicReconstruction, Development and Co-operation. Private investment is essential to facilitate thetransition to market economy structures and to underpin social and economic development. TheInvestment Compact promotes and supports policy reforms that aim to improve the investment cli-mate in South East Europe and thereby encourage investment and the development of a strong pri-vate sector. The main objectives of the Investment Compact are to:

– Improve the climate for business and investment. – Attract and encourage private investment.– Ensure private sector involvement in the reform process.– Instigate and monitor the implementation of reform.

The participating SEE countries in the Investment Compact are: Albania, Bosnia and Herzegovina,Bulgaria, Croatia, former Yugoslav Republic of Macedonia (henceforth Republic of Macedonia or FY Republic of Macedonia), Moldova, Romania and Serbia and Montenegro. Building on the coreprinciple of the Investment Compact that “ownership” of reform rests within the region itself, theInvestment Compact seeks to share the long experience of OECD countries. It provides region-widepeer review and capacity building through dialogue on successful policy development and ensuresidentification of practical steps to implement reform and transition.

The work of the Investment Compact is actively supported and financed by seventeen OECDmember countries: AAuussttrriiaa,, BBeellggiiuumm,, CCzzeecchh RReeppuubblliicc,, FFiinnllaanndd,, FFrraannccee,, GGeerrmmaannyy,, GGrreeeeccee,, HHuunnggaarryy,,IIrreellaanndd,, IIttaallyy,, JJaappaann,, NNoorrwwaayy,, SSwweeddeenn,, SSwwiittzzeerrllaanndd,, TTuurrkkeeyy,, UUnniitteedd KKiinnggddoomm aanndd UUnniitteedd SSttaatteess.. (see www.investmentcompact.org)

22 NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES – © OECD 2003

FFOORREEWWOORRDD

National treatment is a key element of a favourable investment climate. It provides to non resident foreigninvestors and foreign controlled enterprises established in the country, treatment no less favourable than thataccorded to domestic enterprises in like circumstances. This principle is embodied in numerous bilateralinvestment treaties and the OECD Investment Instruments. The application of the national treatment principlein all countries of the Region represents a tangible medium-term goal for South East European (SEE) countriesas part of their reform agenda to create a high-quality investment environment. Success here will constitute astrong message to the investor community of the political will of the countries of the Region to matchrecognised international standards of investor treatment and to provide for equality of competitive conditions.

At their first meeting at ministerial level held in Vienna in July 2002, the Ministers of Economy and designatedMinisters dealing with business and investment in SEE countries called for the elimination of obstacles tonational treatment and invited the Investment Compact to survey any remaining deviations from this standard.In response, the Investment Compact has conducted national treatment reviews for all SEE countries the resultsof which are contained in this report. The report shows that the laws of most countries contain relatively fewdiscriminatory elements. However, a number of significant exceptions remain and the uneven implementationof formal non discriminatory rules still raise concern. Most of these barriers are the heritage of the past and havevery little economic justification.

The national treatment review was prepared by the OECD and a network of regional experts in cooperationwith the SEE Country Economic Teams. These reports were finalised through a process of questionnaires,individual meetings, dialogue and peer review in which all SEE countries and the private sector commentedon various drafts and included a drafting meeting hosted by Romania in Bucharest in June 2003. Theinformation contained in the report is current as at July 2003.

Earlier drafts of Chapters 1 (Regional Overview) and 2 (Summary of Most Significant National Measures) havebeen considered by the second meeting of the South East Europe Investment Compact at Ministerial level heldin Vienna in July 2003. The statement adopted by ministers on this occasion (see Appendix 1 to Chapter 1) drewsubstantially on the recommendations identified in this report. The summary of the most important deviationsfrom national treatment contained in Chapter 2 are discussed in greater detail in the individual country chapters(Chapters 3 to 10) which also provide a full assessment of laws and regulations faced by international investors.

Progress in applying national treatment throughout South East Europe will be regularly reviewed in theMonitoring Instruments of the Investment Compact and at the annual SEE Ministerial meeting to be held inVienna in July 2004. This report, including the Regional Overview as well as individual chapters for each SEEcountry, is published under the responsibility of the Investment Compact Project Team.

33NATIONAL TREATMENT OF INTERNATIONAL INVESTMENT IN SOUTH EAST EUROPEAN COUNTRIES – © OECD 2003

Cristian Diaconescu State Secretary Ministry of Foreign Affairs of Romania Co-Chair, Investment CompactProject Team

Manfred Schekulin Director, Export and InvestmentPolicy Department Federal Ministry for Economic Affairsand Labour of Austria Co-Chair, Investment Compact Project Team

Rainer Geiger Deputy Director Directorate for Financial Fiscaland Enterprise Affairs, OECDCo-Chair, Investment CompactProject Team

AACCKKNNOOWWLLEEDDGGEEMMEENNTTSS

This study has been undertaken by the Investment Compact Project Team co-chaired by Austria, OECD andRomania. The work has been led by Rainer Geiger (Deputy Director for Financial, Fiscal and Enterprise Affairs,OECD), Manfred Schekulin (Director for Export and Investment Policy, Austrian Ministry for Economic Affairsand Labour) and Cristian Diaconescu (State Secretary for Bilateral Affairs, Romanian Ministry of Foreign Affairs).

The research has benefited from the contributions of a team of expert consultants, mainly from the region.Slavica Penev (Economics Institute, Belgrade) and Matija Rojec (Faculty of Social Sciences, University ofLjubljana) organised and coordinated the work of the consultants and presentation of the draft report.

Input for individual country reports has been provided by Will Bartlett (School for Public Studies, Universityof Bristol), Fikret Cauševiƒ (Economics Institute, Sarajevo), Nevenka Cuckoviƒ (Institute for InternationalRelations, Zagreb), Ahmet Mancellari (Department of Economics, University of Tirana), Slavica Penev(Economics Institute, Belgrade), Matija Rojec (Faculty of Social Sciences, University of Ljubljana), Stoyan Totev(Institute of Economics, Bulgarian Academy of Sciences, Sofia) and Liviu Voinea (Academy of EconomicStudies, Bucharest).

Marie-France Houde, DAF/CMIS, OECD advised on the preparation of the questionnaire. The CountryEconomic Team Leaders of Albania, Bosnia and Herzegovina and Bulgaria provided information in response tothe ’Questionnaire on the Identification of Deviations from National Treatment for Incoming Investment and forActivities by Established Foreign-Controlled Enterprises'. The report has been reviewed and enhanced by theparticipants of the Drafting Session of the 2nd Ministerial Conference on Attracting Investment to South EastEurope: Removing Obstacles, held in Bucharest, 5-6 June 2003 (see Appendix 2 to Chapter 1).

The final report has been edited and prepared for publication by Declan Murphy (Programme Director),Deniz Eröcal (Administrator) and Georgiana Pop (Regional and Policy Reform Assistant), from the OECDInvestment Compact team.


TTAABBLLEE OOFF CCOONNTTEENNTTSS

PPAARRTT OONNEE:: SSYYNNTTHHEESSIISS ...................................................................................................................................... 9

Chapter 1.. RREEGGIIOONNAALL OOVVEERRVVIIEEWW .................................................................................................................... 11

1. INTRODUCTION .......................................................................................................................................... 11 2. CONCEPTS, METHODOLOGY AND STRUCTURE OF THE REPORT ........................................................................ 11 3. OVERVIEW OF MEASURES ............................................................................................................................ 13 4. GENERAL RECOMMENDATIONS .................................................................................................................... 16

Chapter 2. SSUUMMMMAARRYY OOFF MMOOSSTT SSIIGGNNIIFFIICCAANNTT NNAATTIIOONNAALL MMEEAASSUURREESS .................................................... 19

1. ALBANIA .................................................................................................................................................... 19 2. BOSNIA AND HERZEGOVINA ........................................................................................................................ 21 3. BULGARIA .................................................................................................................................................. 24 4. CROATIA .................................................................................................................................................... 26 5. FY REPUBLIC OF MACEDONIA ...................................................................................................................... 29 6. MOLDOVA .................................................................................................................................................. 30 7. ROMANIA .................................................................................................................................................. 32 8. SERBIA AND MONTENEGRO.......................................................................................................................... 34

A. SERBIA .................................................................................................................................................. 35 B. MONTENEGRO ........................................................................................................................................ 38

APPENDIX 1.. MMIINNIISSTTEERRIIAALL SSTTAATTEEMMEENNTT ...................................................................................................... 41

APPENDIX 2.. LLIISSTT OOFF PPAARRTTIICCIIPPAANNTTSS TTOO TTHHEE DDRRAAFFTTIINNGG SSEESSSSIIOONN ........................................................ 45

PPAARRTT TTWWOO:: CCOOUUNNTTRRYY RREEVVIIEEWWSS .................................................................................................................... 49

Chapter 3.. AALLBBAANNIIAA ............................................................................................................................................ 51

1. INTRODUCTION .............................................................................................................................................. 51 2. DETERMINANTS OF EXISTING AND FUTURE FDI INFLOWS IN ALBANIA .................................................................... 51 3. TRANSITION PROCESS IN ALBANIA, AND THE FDI REGULATORY FRAMEWORK AND POLICIES .................................... 53 4. THE LEGAL AND REGULATORY MEASURES FOR FDI IN ALBANIA: GENERAL MEASURES ............................................ 54 5. THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORIAL MEASURES ........................................................ 58 6. OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK .............................................................................................. 61

Chapter 4. BBOOSSNNIIAA AANNDD HHEERRZZEEGGOOVVIINNAA ........................................................................................................ 69

1. INTRODUCTION .............................................................................................................................................. 69 2. INVESTMENT OPPORTUNITIES AND BARRIERS IN BOSNIA AND HERZEGOVINA.......................................................... 69 3. THE CONSTITUTIONAL/LEGAL CONTEXT OF BOSNIA AND HERZEGOVINIA,

CURRENT STATUS OF THE TRANSITION PROCESS AND MAJOR FUTURE TASKS.......................................................... 70 4. THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES .............................................................. 72 5. THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES .......................................................... 77 6. OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK .............................................................................................. 80

Chapter 5. BBUULLGGAARRIIAA ........................................................................................................................................ 91

1. INTRODUCTION .............................................................................................................................................. 91 2. INVESTMENT OPPORTUNITIES AND BARRIERS IN BULGARIA .................................................................................. 91 3. TRANSITION PROCSS IN BULGARIA, AND FDI STRATEGY AND POLICIES .................................................................. 94 4. THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES .............................................................. 95 5. THE LEGAL AND REGULATORYFRAMEWORK FOR FDI: SECTORAL MEASURES ........................................................ 101 6. OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK ............................................................................................ 105


Chapter 6.. CCRROOAATTIIAA .......................................................................................................................................... 115

1. INTRODUCTION ............................................................................................................................................ 1152. THE DETERMINANTS OF FDI INFLOWS: INVESTMENT OPPORTUNITIES AND BARRIERS IN CROATIA............................ 1153. ECONOMIC TRANSITION IN CROATIA: THE DEVELOPMENT OF

THE REGULATORY FRAMEWORK AND FDI STRATEGY AND POLICIES ...................................................................... 1164. THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES ............................................................ 1175. THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES ........................................................ 1216. OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK ............................................................................................ 125

Chapter 7. FFYY RREEPPUUBBLLIICC OOFF MMAACCEEDDOONNIIAA .................................................................................................... 137

1. INTRODUCTION ............................................................................................................................................ 1372. DETERMINANTS OF EXISTING AND FUTURE FDI INFLOWS .................................................................................. 1373. THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES ............................................................ 1384. THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES ........................................................ 1405. OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK ............................................................................................ 141

Chapter 8.. MMOOLLDDOOVVAA ...................................................................................................................................... 149

1. INTRODUCTION ............................................................................................................................................ 1492. INVESTMENT OPPORTUNITIES AND BARRIERS IN MOLDOVA ................................................................................ 1493. TRANSITION PROCESS AND FDI STRATEGY/POLICY IN MOLDOVA .......................................................................... 1504. THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES ............................................................ 1515. THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES ........................................................ 1536. OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK ............................................................................................ 155

Chapter 9. RROOMMAANNIIAA ........................................................................................................................................ 161

1. INTRODUCTION ............................................................................................................................................ 1612. DETERMINANTS OF EXISTING AND FUTURE FDI INFLOWS IN ROMANIA ................................................................ 1613. TRANSITION PROCESS IN ROMANIA AND FDI STRATEGY AND POLICIES ................................................................ 1634. THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES ............................................................ 1665. THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES ........................................................ 1686. OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK ............................................................................................ 170ANNEX A. SCHEDULE OF CAPITAL ACCOUNT LIBERALISATION OF ROMANIA .............................................................. 181ANNEX B. INCENTIVES GRANTED BY THE LOCAL AUTHORITIES IN ROMANIA TO INVESTORS ........................................ 183

Chapter 10. SSEERRBBIIAA AANNDD MMOONNTTEENNEEGGRROO .................................................................................................... 185

NOTE ON RECENT CONSTITUTIONAL CHANGES...................................................................................................... 185

SSEERRBBIIAA .......................................................................................................................................................... 1861. INTRODUCTION ............................................................................................................................................ 1862. DETERMINANTS OF FDI INFLOWS .................................................................................................................... 1863. TRANSITION PROCESS IN SERBIA, AND FDI STRATEGY AND POLICIES.................................................................... 1874. THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES ............................................................ 1895. THE LEGAL AND REGULATORY MEASURES FOR FDI: SECTORAL MEASURES .......................................................... 1936. OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK ............................................................................................ 196

MMOONNTTEENNEEGGRROO ............................................................................................................................................ 2021. INTRODUCTION ............................................................................................................................................ 2022. DETERMINANTS OF EXISTING AND FUTURE FDI INFLOWS .................................................................................. 2023. THE DEVELOPMENT OF MONTENEGRO’S REGULATORY FRAMEWORK, STRATEGY AND POLICIES TOWARDS FDI .......... 2034. THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES ............................................................ 2045. THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES ........................................................ 2076. OTHER RELEVANT ELEMENTS .......................................................................................................................... 208

APPENDIX 3. PPRRIINNCCIIPPAALL CCOONNTTAACCTTSS OONN IINNVVEESSTTMMEENNTT IINN SSOOUUTTHH EEAASSTT EEUURROOPPEE ............................ 213

Table of Contents


PPAARRTT OONNEE

SSYYNNTTHHEESSIISS


Chapter 1.

RREEGGIIOONNAALL OOVVEERRVVIIEEWW

1. INTRODUCTION

The Ministers of Economy and designated ministers in charge of investment in South East European(SEE) countries held their first ministerial meeting in Vienna on 18 July 2002 where they adopted theMinisterial Declaration on “Attracting Investment to South East Europe: Common Principles and BestPractices.” One of the key principles of this Declaration relates to the importance of national treatment forforeign investors at both the pre and post establishment stage. SEE Ministers declared that exceptionsshould be clearly and precisely formulated and periodically reviewed with a view to phasing them out, inorder to ensure the fair and equitable treatment of domestic and foreign investments. To implement thisprinciple the Declaration called for improved notification and the publication of lists of national measuresproviding exceptions to national treatment and the rationale for maintaining these measures. This reportresponds to that request and was presented to the Second Ministerial meeting held in Vienna on 10-11July 2003. It provided background for the Ministerial Statement (see Appendix 1) and the renewedcommitment by SEE countries to extend national treatment. The explicit objective of the analysis is toidentify national measures providing deviations from national treatment for both incoming investment aswell as activities by already established foreign-controlled enterprises. The information contained in thereport is current as at July 2003.

NNaattiioonnaall ttrreeaattmmeenntt iiss tthhee ccoommmmiittmmeenntt ooff aa ccoouunnttrryy ttoo aaccccoorrdd ttoo ffoorreeiiggnn iinnvveessttoorrss aanndd ttoo ffoorreeiiggnn-ccoonnttrroolllleedd eenntteerrpprriisseess iinn iittss tteerrrriittoorryy ttrreeaattmmeenntt nnoo lleessss ffaavvoouurraabbllee tthhaann tthhaatt aaccccoorrddeedd iinn lliikkee ssiittuuaattiioonnss ttooddoommeessttiicc eenntteerrpprriisseess.. National treatment is the basic principle of the OECD liberalisation instruments,most notably of the OECD Declaration and Decisions on International Investment and MultinationalEnterprises and the Code of Liberalisation of Capital Movements. Therefore, national measures providingexceptions to national treatment represent a deviation from OECD principles and rules in the area offoreign direct investment. This holds for de jure as well as for de facto deviations from national treatment.While de jure measures mean explicitly formulated deviations from national treatment, de facto measuresmean deviations in the implementation of legal rules, which formally do not discriminate. In this sensethe latter measures can be an even more serious obstacle to foreign investors, since they are hidden and unpredictable.

2. CONCEPTS, METHODOLOGY AND STRUCTURE OF THE REPORT

FFoorreeiiggnn iinnvveessttoorrss in this report are defined as legal entities of one country (iinnvveessttiinngg oorr hhoommee ccoouunnttrryy)investing in another country (hhoosstt ccoouunnttrryy), while foreign-controlled enterprises are enterprises, whichoperate in the territory of a particular country and are owned or controlled directly or indirectly bynationals of other countries. The major concepts used in the report are as follows:

National treatment in pre-establishment is the commitment of a (host) country to accord to theinvestment by non-resident enterprises in its territory, including the right of establishment, treatment noless favourable than that accorded in like situations to resident enterprises. Deviations from nationaltreatment in pre-establishment includes any limitations on non-resident (as opposed to resident)investors affecting their operations and other requirements set at the time of entry or establishment; for

instance, prohibition of foreign investment in certain sectors, ceilings of foreign equity share, prohibitionof foreign acquisitions, prohibition of foreign investment in certain geographical areas, authorisationprocedures, specific corporate organisation requests, etc.

NNaattiioonnaall ttrreeaattmmeenntt iinn ppoosstt-eessttaabblliisshhmmeenntt is the commitment of a (host) country to accord to foreign-controlled enterprises operating in its territory treatment, under its laws, regulations and administrativepractices, no less favourable than that accorded in like situations to domestic enterprises. Deviationsfrom national treatment in post-establishment includes any limitations set on activities of alreadyestablished foreign-controlled (as opposed to domestic) enterprises; for instance, general authorisationor licensing requirements, limitations on acquisition or expansion of activities, ceilings on foreignownership, grants or financial assistance for specific activities, higher or special taxes, public work projectsreserved to local firms, etc.

EExxcceeppttiioonnss concern measures that do not conform to the national treatment principle because theytreat foreign controlled-enterprises different, i.e. less favourably than their domestic counterparts in likesituations. Measures, which qualify as exceptions include restrictions banning foreign investment incertain sectors, or requiring authorisation or licensing as prerequisites for investment, setting ceilings onforeign ownership, etc. For example, if authorisation for acquisition of a majority equity share in acompany is requested in general it is not an exception to national treatment, however, if this authorisationis requested only in the case when the acquirer is a foreign-controlled enterprise, this constitutes anexception to national treatment. In the report exceptions are classified into those related to:

a. Investment by foreign investors and by established foreign-controlled enterprises, with twosubgroups of measures related to: (i) approval and licensing/screening procedures and (ii) equityand other discriminatory measures on establishment and/or expansion.

b. Corporate organisation.c. Employment of foreigners and movement of key personnel.d. Privatisation.e. Government procurement.

TTrraannssppaarreennccyy iitteemmss concern measures that discriminate against foreign-controlled enterprises but aremotivated by reasons of public order and essential security interests, and other means that do notdiscriminate against foreign-controlled enterprises, but nevertheless represent an impediment to foreigninvestment. Transparency measures include restrictions on activities in areas covered by publicmonopolies and concessions, public aids and subsidies granted to government-owned enterprises by thestate as a shareholder in the enterprises concerned, and corporate organisation requirements concerningthe nationality of management or director positions in host countries. In the report transparency measuresare classified into those related to:

a. Security considerations, which relate to approvals, general/equity restrictions, location restrictions, etc.b. Public order considerations, which also relate to approvals, general/equity restrictions, location

restrictions, etc.c. Nationality of management.

Measures and transparency items are either trans-sectoral, being applied for all the sectors, orsectoral, being applied only in individual sectors .

The countries reviewed in the report are all the signatories of the Ministerial Declaration on “AttractingInvestment to South East Europe: Common Principles and Best Practices” (July 2002), i.e. Albania, Bosniaand Herzegovina, Bulgaria, Croatia, Republic of Macedonia (hereafter Macedonia), Moldova, Romania,Serbia and Montenegro. The report is based on the following sources: (i) field work of project teammembers, (ii) Questionnaire for the Identification of Deviations from National Treatment for IncomingInvestment and for Activities by Established Foreign-Controlled Enterprises prepared for the project and responded to by the Country Economic Team Leaders (Albania, Bosnia and Herzegovina, Bulgaria),

1. Regional Overview


(iii) available analysis, reports, guides, web pages, articles, etc., (iv) comments and suggestions of theparticipants of the Drafting Session of the 2nd Ministerial Conference Attracting Investment to South EastEurope: Removing Obstacles, held in Bucharest, 5-6 June 2003 (see Appendix 1).

The report contains two parts. This document is the first part and presents a Regional Overview ofnational measures providing exceptions to national treatment in South East European countries. The secondpart contains detailed presentations of national measures by individual countries. Recommendations forthe strengthening of national treatment principles and for the gradual phasing out of exceptions are givenon the general level for all the countries, as well as specifically for individual countries, in this second part.

3. OVERVIEW OF MEASURES

AA MMaattrriixx ooff NNaattiioonnaall MMeeaassuurreess PPrroovviiddiinngg EExxcceeppttiioonnss ttoo NNaattiioonnaall TTrreeaattmmeenntt aanndd ooff TTrraannssppaarreennccyyMMeeaassuurreess (see Table 1) provides an overall summary of exceptions and transparency measures inindividual SEE countries and in the region as a whole. The major intention of the matrix is to show thefrequency of individual country exceptions and transparency measures and in the region as a whole.

The analysis has revealed that eight SEE countries altogether have exceptions in 68 fields. Therespective number for transparency measures is 202. By far the most frequent type of exception measuresrelate to:

• Equity and other discriminatory measures on establishment and/or expansion (41 out of 68exceptions),

• Measures in the field of approval and licensing/screening procedures (17 out of 68 exceptions) • Corporate organisation measures (5). • Exceptions in the field of employment of foreigners and movement of key personnel, privatisation and

government procurement are very few.

Among the transparency measures, the most frequent are those related to: • Security considerations (12 out of 20 transparency measures), • Nationality of management requests (4) • Public order considerations (4).

3.1. Exceptions

Exceptions in the field of aauutthhoorriissaattiioonn aanndd lliicceennssiinngg//ssccrreeeenniinngg pprroocceedduurreess relate to various approval,authorisation, licensing/screening and registration procedures for foreign investors and foreign-controlledenterprises. Four countries (Bosnia and Herzegovina, Republic of Macedonia, Moldova and Montenegro)have trans-sectoral measures of this kind. They relate to the permission of each foreign investment,approval for the establishment of a branch, approval of larger foreign investments and specific registrationprocedures for foreign-controlled enterprises. The overwhelming trend in the world is the elimination oftrans-sectoral authorisations and licensing/screening procedures. It is broadly recognised that theyrepresent an unnecessary administrative barrier, which complicates life for foreign investors and makesthe investment climate of a host country less attractive and unpredictable.

Almost all the SEE countries also have authorisation and licensing/screening procedures in individualsectors. The sectors, which are subject to such procedures, are the banking sector, insurance, securitiesmarket, air transport, maritime transport, fishing, and mining and quarrying. Most of these procedures inbanking, insurance and securities market are in the context of prudential regulation.

The following are the main features of exceptions in the field of eeqquuiittyy aanndd ootthheerr ddiissccrriimmiinnaattoorryymmeeaassuurreess oonn eessttaabblliisshhmmeenntt aanndd//oorr eexxppaannssiioonn:

a. Six countries (Bosnia and Herzegovina, Bulgaria, Croatia, Moldova, Serbia, and Montenegro) havecertain types of ttrraannss-sseeccttoorraall mmeeaassuurreess which restrict the establishment and/or expansion of





Table 1. A Matrix of National Measures Providing Exceptions to National Treatment and of Transparency Measures4

Measures

EEXXCCEEPPTTIIOONNSS 68

11..IInnvveessttmmeenntt bbyy ffoorreeiiggnn iinnvveessttoorrss aanndd bbyy eessttaabblliisshheedd ffoorreeiiggnn-ccoonnttrroolllleedd eenntteerrpprriisseess 58

1.1. Approval and licensing/ screening procedures 17

Trans-sectoral X X X X 4

Banking X X 2

Insurance X X 2

Securities market and otherfinancial services X X 2

Air transport X X 2

Maritime transport X X 2

Mining and quarrying X 1

Fishing X X 2

1.2. Equity and other discriminatory measures on establishment and/or 41

Trans-sectoral X X X X X X 6

Banking X X 2

Insurance X X X X X 5

Telecommunications X 1

Air transport X 1

Maritime transport X X X X X 5

Mining and quarrying X 1

Fishing X X X X 4

Trade X 1

Other sectors X X X X X X 6

Real estate X X X X X X X X X 9

22.. CCoorrppoorraattee oorrggaanniissaattiioonn 3

Trans-sectoral X X X 1

Maritime transport X 1

Other sectors X 1

33.. EEmmppllooyymmeenntt ooff ffoorreeiiggnneerrss aanndd mmoovveemmeenntt ooff kkeeyy ppeerrssoonnnneell X X 2

44.. PPrriivvaattiissaattiioonn X X 2

55.. GGoovveerrnnmmeenntt pprrooccuurreemmeenntt X 1

TTRRAANNSSPPAARREENNCCYY MMEEAASSUURREESS 20

11.. SSeeccuurriittyy ccoonnssiiddeerraattiioonnss 12

Approval X 1

General/equity restriction X X X X X 5

Location restriction X X X X X 5

Other X 1

22.. PPuubblliicc oorrddeerr ccoonnssiiddeerraattiioonnss X X X X 4

33.. NNaattiioonnaalliittyy ooff mmaannaaggeemmeenntt 4

Banking X X 2

Energy X 1

Other sectors X 1

Source: Country reports.

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foreign-controlled enterprises in general. These trans-sectoral measures typically put forward thereciprocity condition. Denial of national treatment due to a reciprocity consideration conflicts withthe multilateral approach to international economic relations as embodied in the national treatmentinstrument of the OECD. A very important reason for allowing foreign-controlled enterprises toengage in business on the same basis as domestic firms is the benefit of that investment flow to thehost country regardless of whether the home country of that firm provides equal treatment to hostcountry firms . Also, it is very difficult to implement the reciprocity principle in practice, which is whyit may become a real obstacle for foreign investors.

b. The most numerous are exceptions related to ffoorreeiiggnn rreeaall eessttaattee oowwnneerrsshhiipp, which is restricted inone or the other way in all of the analysed countries. The real estate restrictions typically apply toagricultural land and/or residential ownership and/or request reciprocity, while foreign-controlledcompanies established under the national law are as a rule given the same rights as indigenousnatural and legal persons. Sometimes foreigners are permitted limited real estate rights (to buildand to use), ownership rights on buildings, or the ownership rights are linked to business purposes.It is a necessity to enable foreign investors and foreign-controlled enterprises normal access to realestate for the purpose of operating the investment. Long term leases, which may be subject toperiodical adjustment of lease payments are not an equivalent solution unless their duration is atleast 50 years.

c. SSeeccttoorraall rreessttrriiccttiioonnss are the most frequent in insurance (Bosnia and Herzegovina, Croatia, Republicof Macedonia, Serbia, Montenegro), maritime (cabotage) transport (Albania, Bulgaria, Croatia,Romania, Serbia) and fishing (Albania, Bulgaria, Croatia, Romania). Other sectors include banking,telecommunications, air transport, audit and legal services, gaming, trade and handicrafts. Typicalmeasures are restrictions on foreign equity or requests for local equity/partner participation andreciprocity requests. While air transport, maritime transport and fishing might be considered asbeing a specific case in many countries, restrictions in sectors like banking, telecommunications,trade and other business services oppose the basic development needs of SEE countries. Businessservices, being among the major promoters of modern economies, are relatively under representedin the whole region.

Exceptions in the field of business activities of foreign-controlled enterprises are relatively few andrelate to: (i) employment of foreign personnel, (ii) government procurement and (iii) privatisation.Privatisation related exceptions are in the context of mass privatisation schemes and are actually of atemporary nature. There is still reluctance in a number of countries to allow the employment of foreignskilled personnel and these restrictions can affect the viability and progress of the investment. Explicit orimplicit discrimination in government procurement should be considered not only a violation of nationaltreatment but also as a reduction of the level of competition on the local market and a sub-optimal useof government resources.

3.2. Transparency measures

Seven of the analysed countries (all except Albania and Romania) have some kind of transparencymeasures related to the security considerations and in four countries (Albania, Republic of Macedonia,Moldova, Romania) these measures relate to public order considerations. Typical mmeeaassuurreess rreellaatteedd ttoosseeccuurriittyy ccoonnssiiddeerraattiioonnss are foreign equity limitation and/or request for approval in the armamentsproduction and/or trade, and restrictions and/or approvals for foreign-controlled enterprises to locateand/or to acquire real estate in military zones and/or in border zones. Similarly, measures related topublic order considerations usually relate to foreign equity limitation and/or request for approval in thefield of medical treatment, production of narcotic, toxic material, acquisition of real estate of historicaland/or cultural relevance and/or in natural parks, the respecting of established social order and moralnorms, etc. In a number of the afore-mentioned activities, the national regulation requests licensing assuch and establishes specific supervision; in such context it is not clear why foreign investors or foreign-controlled companies should be treated specifically on the grounds of public order considerations. Four



of the analysed countries (Albania, Republic of Macedonia, Moldova, and Romania) also pose requestsrelated to local nnaattiioonnaalliittyy ooff mmaannaaggeemmeenntt. In two countries this request is of a trans-sectoral character,while most requirements are present in the banking, energy and gaming.

4. GENERAL RECOMMENDATIONS

The matrix gives information on the most common (typical) measures providing exceptions to nationaltreatment in SEE countries in general and in individual countries. As such it offers guidelines forindividual countries on where to concentrate efforts in strengthening the national treatment principle.Two considerations are important in this regard.

The first is that SEE countries face a number of major problems, such as economic and politicalinstability, transition process and underdevelopment. Furthermore, to varying degrees, they lack marketinstitutions and related regulatory framework, and have considerable difficulties in implementing existinglaws and regulations. These factors have served to reduce their attractiveness as investment location. Inthis broader overall business climate context, eelliimmiinnaattiioonn ooff mmeeaassuurreess pprroovviiddiinngg eexxcceeppttiioonnss ttoo nnaattiioonnaallttrreeaattmmeenntt sshhoouulldd bbee ccoonnssiiddeerreedd aammoonngg tthhee bbaassiicc pprreerreeqquuiissiitteess ffoorr ccrreeaattiinngg aa ffrriieennddllyy iinnvveessttmmeenntteennvviirroonnmmeenntt. Foreign investors do consider the exceptions to national treatment as important obstaclesand also as a reflection of host country governments’ attitude to foreign investors. Providing nationaltreatment to foreign investors is usually perceived internationally as an important indicator of thecountry’s willingness to welcome foreign investment.

The second consideration is that one should not expect SEE countries to move towards a generalelimination of exceptions and transparency measures. Some of these measures are also present in anumber of OECD countries as well and are of a quasi permanent nature, while others are of a rathertemporary nature (for instance those related to the privatisation processes) and will disappear in thetransition process. However, a thorough revision of existing exceptions and transparency measures shouldbe undertaken by each SEE country in order to define: (i) those which present a serious obstacle toforeign investors and foreign-controlled enterprises and whose elimination would obviously bringbenefits to host countries and (ii) those, which seem to be unnecessary from the host countries point ofview, and for which the motivation of their existence has not been clearly revealed or has vanished withthe process of political and economic transition.

In endeavouring to strengthen the national treatment principle, the SEE countries agree to take thefollowing key measures over the next year, taking into account the legal situation in each country:

• reduce licensing and approval procedures and special registration procedures, includingreciprocity requirement, for foreign investment, to the level necessary for normal company lawregistration

• take decisive steps with the view to allowing the acquisition of real estate by foreign investors forthe purpose of investment

• reduce reporting requirements of foreign investment for statistical purposes to a minimumnecessary

• establish transparent laws, regulations, procedures and practices regarding governmentprocurement with a view to ensuring full national treatment

• streamline measures relating to work and residence permits so as to allow the movement of keypersonnel for investment

• promote the development of an effective services sector, in particular by removing obstacles toforeign direct investment in the areas of financial and professional services

The country reports also reveal the existence of comprehensive transparency measures in the form ofmonopolies and state aids and subsidies practice in the analysed countries. These measures do notformally discriminate against foreign-controlled enterprises, but also affect domestic enterprises. In thisway, they can represent an impediment to investment, distort competition and prevent new entries in the



sectors. The issues of monopolies of state aids and subsidies are at the heart of the transition process ofSEE countries, because efficient market structures and institutions are the best guarantee for therestructuring of the SEE economies. Introduction of competition via liberalisation of public utilities andfinancial services, establishment of independent regulatory mechanisms/institutions and privatisation ofstate-owned enterprises are necessary to overcome the huge investment gap of SEE countries in theinfrastructural sector. Surveys of state aids and subsidies are necessary to provide reliable information onthe nature and cost/benefit of these measures. The present situation is such that countries do not alwaysknow how much state aid individuals or enterprises obtain from various sources. A survey would providecountries with better chances: (i) to ensure that public finance is used efficiently, (ii) to monitor the resultsof state aids and subsidies policy and (iii) to reduce them as far as possible.

The national treatment review of SEE countries also reveals quite frequent national managementrequirements in companies. These measures are usually based on perceived national security and publicorder considerations and are therefore classified under the transparency measures. SEE governmentsmay nevertheless consider the elimination of these requirements, since it is in their interest to attractmanagement skills to their country. The spread of modern management knowledge and techniques fromforeign to domestic managers and from foreign-controlled to domestic companies represents one of themost appreciated and beneficial spill-over effects of FDI. Any restrictions on foreign managementparticipation reduce the scope for this kind of spill-over effects and the full maximisation of the benefitsof FDI in the host country.





NNOOTTEESS

1. For detail on the subject see especially OECD. 1993. National Treatment for Foreign-Controlled Enterprises.Paris: Organisation for Economic Co-Operation and Development.

2. The actual number of exceptions and transparency measures is higher because individual countrieshave more than one measure in a particular category.

3. See especially OECD. 1993. National Treatment for Foreign-Controlled Enterprises. Paris: Organisation forEconomic Co-Operation and Development, p. 24.

4. Sign “X” in the matrix means that a particular category of exceptions/transparency measures exists ina country. A country might apply one or more measures in a particular category.


Chapter 2.

SSUUMMMMAARRYY OOFF MMOOSSTT SSIIGGNNIIFFIICCAANNTT NNAATTIIOONNAALL MMEEAASSUURREESS5

1. ALBANIA

FDI inflows in Albania have been relatively low. End-2002 FDI stock was US$ 945 million. Annual FDIinflows in 1997-1999 were US$ 47.5 million, US$ 45 million and US$ 41.2 million, respectively. This is aconsiderable decrease compared to 1996, when the inflow was roughly twice as high. The decline of FDIinflows since 1997 was due to the series of crises, which affected the country; starting with the 1997 civildisturbances that followed the collapse of the pyramid financial schemes; the coup attempt in September1998, and the Kosovo crisis in 1999. In the following years – 2000, 2001, and 2002 – FDI inflows increasedand were US$ 143 million, US$ 207 million USD, and around US$ 143 million, respectively (Bank ofAlbania). The increase is largely explained by the improvement in the overall investment climate in thecountry and by the role of the privatisation process. In 2002, the FDI inflow was much lower than in 2001due to the non-realisation of the privatisation programmes of some strategic state companies.

Out of 61,859 active enterprises in Albania at the end of 2001, 1,793 (2.9 percent) were partly foreign-owned companies (joint ventures) and 1,122 (1.8 percent) were wholly foreign-owned companies. In termsof numbers, 58.5 percent of all foreign-controlled companies is in trade and retailing, 21.2 percent inindustry, 9.7 percent in services, 5.9 percent in construction, 3.8 percent in transport, and only 0.9 percentin agriculture (INSTAT, end-2001 data). In terms of value, 27 percent of total FDI stock is in trade, 21.2percent in textile and leather manufacturing, 6.4 percent in food, beverages and tobacco, 6.2 percent inconstruction and 24.3 percent in other sectors. (Bank of Albania, end-2001 data). The only two relevantinvesting countries in Albania are Italy (48 percent of end-2001 FDI stock) and Greece (43 percent),followed by Republic of Macedonia and Turkey (2.2 percent each); the rest 6.8 percent is distributedamong other countries of Europe and USA. Foreign investments are mainly concentrated in the maindistricts of the country such as the capital of Tirana and Durres, which is the largest port handling most ofthe import-export activities. 67 percent of all foreign-controlled companies operate in these two locations.

1.1. General legislative framework for investment

Since the beginning of transition and the opening up process of the country, attracting FDI in Albaniahas been considered of critical importance for achieving the main growth, development and transitiongoals. The main piece of legislation related to FDI in Albania is the Law “On Foreign Investment” (No.7764, date 2.11.1993), which aims to ensure a favourable investment climate for foreign investors in thecountry. Subject to a limited number of exceptions, the investment conditions for foreigners are asfavourable as for local investors, i.e. national treatment principle is applied. Apart from extending thenational treatment, foreign investors are also given a number of guarantees, such as: (i) no priorauthorization is needed for foreign investments; (ii) there is no limitation on the percentage share offoreign participation in companies, 100 percent foreign ownership is possible; (iii) foreign investment maynot be expropriated or nationalised directly or indirectly, except for special cases, in the interest of thepublic use, defined by law. In the case of expropriation, an immediate, appropriate and effectivecompensation is provided; (iv) foreign investors have the right to expatriate all funds and contributionsin kind related to investments; (v) most favourable treatment according to international agreements is

also provided. The Republic of Albania has signed agreements with a number of countries for mutualprotection of investments and for avoiding the double taxation.

1.2. Exceptions

Investment by foreign investors and by established foreign-controlled enterprises

Banking – Authorisation. Foreign bank that proposes to own more than 10 percent of the authorisedcapital of a bank in Albania, should receive permission by the respective authority to engage in thebusiness of accepting and collecting money deposits or of other repayable funds in the country where itshead office is located. The foreign authority, which supervises the financial activity of the head office ofthe foreign bank, gives its written consent for granting such a licence. With the correct interpretation of“Regulation 45", the banking industry is well regulated and open to FDI.

Insurance – Authorisation. The conditions a foreign company must fulfil to get the authorisation from theAlbanian Insurance Supervisory Commission to perform insurance activities in Albania are: (i) to beauthorised for carrying out insurance activities according to the legislation of the home country and tohave at least 5 years experience in insurance activities; (ii) to establish a branch, which will carry outinsurance operations in Albania; (iii) to assume that this branch will keep and maintain special accountingand all documents related to its activity; (iv) to have in Albania assets at a value of at least ½ of minimumguarantee fund defined by one of the articles of the law and to deposit ¼ of this minimum fund as aguarantee, which will be reimbursed in case the authorisation is not issued; (v) to meet the solvencymargin; (vi) to submit a business programme.

Maritime Transport – Cabotage. Based on International Regulations but also on national legislation, onlyAlbanian ships flying Albanian flag are allowed to exercise activity in the inner maritime transport(cabotage). An Albanian register of ships does not yet exist.

Fishing. According to Article 19 of the Law “On Fishery and Aquaculture” (No. 7908, date on 5.4.1995),the Ministry of Agriculture and Food exclusively may issue licences for fishing, or other activities relatedto fishing, to foreign vessels or persons, (i) on the basis of international agreements in force with thecountry to which the foreign vessel or persons belong; or (ii) in cases when the issuing of licence isconsidered: a) necessary for the economy of the country and especially when the applicant undertakesbeneficial investments for the fishery sector in Republic of Albania in line with policies and strategiesformulated for the development of this sector; b) necessary for a sustainable use of resources,considering the national capacity for fishing and its development; c) in compliance with the policy of theRepublic of Albania regarding the foreign investments and especially with the future goals andobjectives of fishery and aquaculture administration plan. Article 20 of the Law says that the issuing oflicences is prohibited for foreign vessels applying for demersal fishing with trawls and fishing and/orcollection of bivalve molluscs.

Real estate – Land ownership. Albanian legislation contains limitation with regard to the right of foreignersto acquire land in Albania. Law “On the Land” (No. 7501, date 15.07.1991, amended in 1993, 1994, 1995),in Articles 3, 4, and 5, does not permit foreigners to buy land. According to this Law foreigners can onlylease the land they need. As for leasing, foreigners receive the same treatment as nationals. The rationalebehind this measure is to prevent speculation with land by foreigners, considering the weak financialpower of the Albanian citizens for the last decade.

Real estate – Land ownership. According to the Law “On Acquisition of Plots” (No. 7980, date 27 July 1995,amended in 1997), Article 5, foreign investors are entitled to buy state-owned non-agricultural landprovided that the value of investment is at least three times higher than the value of the land. From themoment of getting the construction permit until s/he gets the ownership of the plot, the foreign natural orlegal person pays the rent for using the plot. The rent is agreed in the contract. The price of eventual landacquisition is also predetermined in the contract as well as for how long this price is valuable. The Council

2. Summary of Most Significant National Measures


of Ministers determines the value of such land. (Article 8). The rationale behind this measure is thepromotion of investments and site developments.

Public health. According to the Order of Minister of Health “On Licence Granting for Health ProfessionalPractice in Free Private Activity", point 3/1 (No. 108, date 19.04.2002), the licensing of foreigners in the fieldof health care is possible only if they cooperate with an Albanian professional in the field of activity to bepractised. The purpose of introducing this measure is to ensure: (i) a better communication with thepatients; (ii) a better relationship with the Albanian government (for fiscal and administrative purposes).

Corporate organisation

Trans-sectoral – Registration fees. Costs related to the registration of the company are 1,500 Lekë when theshareholders are Albanian nationals or national companies, and 5,000 Lekë in case one of theshareholders is a foreign national/company.

Employment of foreigners and movement of key personnel

Trans-sectoral – Employment of foreigners. To be able to work in Albania a foreign national should obtain awork permit issued by the Ministry of Labour and Social Affairs. Among the documents, which shouldaccompany the application form for a work permit, is also the “written and proven confirmation from theemployer testifying that for each foreign employee, s/he has employed two Albanian citizens". Therationale of this condition is the promotion of employment of local workers and also the promotion ofemployment of qualified foreign personnel (Law “On Issuing of Work Permit to Foreigners", No. 8492, date27.05.1999 and accompanying by-laws).


Nationality of management

Banking. The branch of a foreign bank must employ at least two resident administrators foradministration of the branch of the foreign bank.

2. BOSNIA AND HERZEGOVINA

FDI inflows in Bosnia and Herzegovina (BiH) in 1994-2002 totalled US$ 848 million; 70 percent of that inthe last three years and as much as 35 percent in the last year (in 2000 US$ 147 million, in 2001 US$ 130million and in 2002 US$ 321 million). Most of FDI came in cash (60.1 percent), the rest being in the form oftangible and intangible assets (36.3 percent) and in the form of rights (3.6 percent). The major recipient ofFDI (1994-2002) has been manufacturing (55.5 percent), followed by banking (16.5 percent) and trade andservices (13 percent). The most important investing countries in BiH in 1994-2002 were Croatia (US$ 124million), Kuwait (US$ 117 million), Slovenia (US$ 99 million), Austria (US$ 92 million), Germany (US$ 92million), Serbia and Montenegro (US$ 69 million) and the Netherlands (US$ 62 million). Of the total FDI stock42 percent is allocated in 15 companies, the largest being Kuwait Consulting Investment Company with189.785 million of Convertible Marks (KM) (Ministry of Foreign Trade and Economic Relations, April 2003)



RREECCOOMMMMEENNDDAATTIIOONNSS

AAppaarrtt ffrroomm mmeeaassuurreess ttoo bbee ttaakkeenn ttoo ssttrreennggtthheenn tthhee nnaattiioonnaall ttrreeaattmmeenntt pprriinncciippllee aass pprrooppoosseedd iinn ““GGeenneerraallRReeccoommmmeennddaattiioonnss””,, tthhee aauutthhoorriittiieess ooff AAllbbaanniiaa sshhoouulldd ssppeecciiffiiccaallllyy ccoonnssiiddeerr tthhee eelliimmiinnaattiioonn ooff rreessttrriiccttiioonnssrreellaatteedd ttoo:: ((ii)) iissssuuiinngg ooff wwoorrkk ppeerrmmiittss ffoorr ffoorreeiiggnneerrss,, ((iiii)) tthhee lliicceennssiinngg ooff ffoorreeiiggnneerrss iinn tthhee ffiieelldd ooff hheeaalltthhccaarree oonnllyyiiff tthheeyy ccoo-ooppeerraattee wwiitthh aann AAllbbaanniiaann pprrooffeessssiioonnaall,, ((iiiiii)) tthhee rreeqquueesstt tthhaatt tthhee bbrraanncchh ooff aa ffoorreeiiggnn bbaannkk mmuusstt eemmppllooyyaatt lleeaasstt ttwwoo rreessiiddeenntt aaddmmiinniissttrraattoorrss..


The basic piece of legislation on FDI in BiH is the Law on the Policy of Foreign Direct Investment(Official Gazette of BiH 17/98). The Law was adopted as a framework law requiring enactment of furtherregulations at the level of the Entities (Federation of Bosnia and Herzegovina – FBiH – and RepublikaSrpska – RS). It is based on national treatment principle, the general rule being that foreign investorsare entitled to invest, and to reinvest profits of such investments into any and all sectors of theeconomy of BiH, and in the same form and under the same conditions as defined for the residents ofBiH under the applicable laws and regulations of BiH and the Entities. The national treatment forforeign investors includes the participation in the process of privatisation; foreign legal and naturalpersons have equal rights as domestic legal and natural persons in the privatisation of state ownedcapital both in FBiH and RS, with reciprocity conditions being applied in some cases. There are norestrictions regarding the legal status of foreign investor. Foreign persons may invest in the same formand under the same conditions as defined for the residents of BiH. This is also true for branch offices.Foreign investors may also open representative offices. Apart from the national treatment, the Law onthe Policy of Foreign Direct Investment in BiH specifically provides for the following rights andguarantees to foreign investors: non-discriminating corporate tax regimes, exemption from payment ofcustoms and customs duties, right to open bank accounts, right to profit and capital repatriation,property rights to real estate, right to employ foreign employees, protection against expropriation,guarantees against legal changes.

2.2. Exceptions


Trans-sectoral – Approval/Registration. According to the latest amendments of the Law on the Policy ofForeign Direct Investment in BiH (Official Gazette of BiH 1798) each foreign investment in BiH shouldreceive a permission of the competent body of the State (Ministry of Foreign Trade and Economicrelations of BiH). It is not necessary to be registered with the competent body of the respective Entity(amendments passed parliamentary procedure and it has to be published in Official Gazette to be inforce). This also applies on registration of foreign representative offices. The competent bodies of theState shall confirm the registration to foreign investors within a strict time limit. The registration of foreigninvestment is confirmed by the Registration Certificate, which is necessary for a foreign-controlledenterprise to be registered at court.

Insurance – Local equity articipation, approval.FBiH. Foreign persons can establish joint stock company for insurance in FBiH only together with

domestic persons. If foreign ownership in insurance company exceeds 50 percent of the share capital itrequires approval of the Ministry of Finance of FBiH (Law on Insurance of Property and Persons of FBiH –Official Gazette of FBiH 2/95, 7/95, 14/97, 6/98, 41/98).

RS. Foreign natural and legal persons can establish joint stock company for insurance in RS onlytogether with domestic persons (Law on Insurance of Property and Persons- Official Gazette of RS 14/00).

Air transport – Approval. To invest in air transport, foreign companies have to get approval from theGovernment of BiH.

Trade – Foreign ownership restriction. According to the Law on Trade of FBiH foreign natural persons cannotbe owners of shops (trade shops) in FBiH. There is a draft of a new Law that will allow foreign citizens tobe the owner of shops under condition of reciprocity.

Handicrafts – Reciprocity. The Law on Handicrafts of FBiH/Law on Handicrafts of RS stipulates that aforeign natural person can open handicraft shop in FBiH/RS under condition of reciprocity.



Audit and accounting – Local participation. The Law on Audits of FBiH (Official Gazette of FBiH 2/95)/Law onAccounting of RS (Official Gazette of RS 18/99) stipulate that foreign accounting firms and auditors canperform auditing only together with local accounting firms.

Real estate. According to Article 12 of the Law on the Policy of Foreign Direct Investment in BiH, foreigninvestors have the same property rights in respect to real estate as the citizens and legal entities of BiH.There are no corresponding provisions related to real estate in the foreign investment legislation ofeither FBiH or RS. It seems, however, that the wording of Article 12 is misleading, because it appears thatit is foreign-controlled enterprises and not foreign investors which have the same real estate rights asnatural and legal persons of BiH. Namely, in RS and in FBiH, foreign persons (whether residents or non-residents, whether legal entities or natural persons) cannot own property. Under the Law on the Policyof Foreign Direct Investment in BiH, a foreign-controlled enterprise is registered as a domestic legalentity. As a result, under the principle of national treatment, such an enterprise has the same rights as adomestically-owned enterprise or natural person of BiH citizenship, including rights of and ownership ofproperty in BiH.

Real estate – Reciprocity. Foreign investors have the same property rights in respect to real estate as thecitizens and legal entities of BiH. However, foreign investors, who are citizens of one of the successorstates to the former Socialist Federal Republic of Yugoslavia (SFRY), have such rights subject to investorsof BiH citizenship and legal entity status having like rights in a respective successor state (Article 12 of theLaw on the Policy of Foreign Direct Investment).


Trans-sectoral – Registration fee. According to FIAS (2001), the court registration fee for foreign-ownedcompanies in the RS is KM 1600 compared to KM 600 for other companies.

Privatisation

Approval.FBiH. If foreign ownership in a company for managing of privatisation investment funds in FBiH

exceeds 10 percent of the share capital it requires approval of the Securities Commission of FBiH.RS. Foreign natural and legal persons can possess more than 10 percent equity share in a privatisation

fund management company in RS only with the previous consent of the Commission for Securities of RS(Article 8 of the Law on Privatisation Investment Funds and Privatisation Fund Management Companiesof RS).

Reciprocity. Enterprises or enterprise assets in the privatisation process of FBiH can not be purchasedby foreign natural and legal entities from those countries where foreign ownership of domestic enterprisesis either limited or excluded by Law (Article 12 of the Law on Privatisation of Enterprises, Official Gazetteof FBiH 27/97, 8/99, 32/00, 45/00, 54/00, 61/01 and 27/02).

Reciprocity. A foreign citizen can purchase an apartment in FBiH under the conditions determined bythis Law only if it is possible for a citizen of BiH to purchase an apartment in the respective country (Article6 of the Law on Sale of Apartments with existing Tenancy Right, Official Gazette of FBiH 27/97).


Security considerations

Armaments – Approval. To register a foreign investment in the production and sale of arms, ammunitions,and explosives for military use, military equipment and public information a prior approval of thecompetent body of the respective Entity is necessary (Article 4 of the Law on the Policy of Foreign DirectInvestment in BiH).



Armaments – Foreign ownership restriction. Foreign participation may not exceed 49 percent of the equityof the company and foreign investors must receive a prior approval of the investment from a competentbody in the relevant entity, subject to strict time limits, in the production and sale of arms, ammunitions,and explosives for military use, military equipment and public information. Public information is definedas such that is contained in radio, television (excluding cable), electronic media (excluding Internet),newspapers and other publications produced primarily for the local market (Article 4 of the Law on thePolicy of Foreign Direct Investment).

Location restriction. In the FBiH, wholly foreign owned companies are forbidden to be located in amilitary zone. Wholly foreign-owned companies need confirmation from the Municipal Office of theFederation Ministry of Defence confirming that the business location is not in a military zone (FIAS 2001).The same rules are in practice in RS. Wholly foreign-owned companies are forbidden to be located in amilitary zone. Wholly foreign-owned companies need confirmation from the Ministry of Defence of the RSconfirming that the business location is not in a military zone.

3. BULGARIA

FDI inflows in Bulgaria in 1992-October 2002 totalled US$ 4,927 million, of which US$ 1,583 million (32percent) is in privatisation, and US$ 3,344 million in other FDI (greenfield, additional investment inforeign investment enterprises, reinvestment, joint ventures). Inflows have increased considerably since1997; the period from January 1999 to October 2002 accounted for almost 60 percent of all inflows . Since1998 greenfield FDI is far more substantial than FDI in privatisation (www.bfia.org). Most of the inflowswent to the manufacturing sector (43.4 percent), finance (18.1 percent), sale and repair (15.5 percent),communications (5.4 percent), hotels and restaurants (4.2 percent) etc. Most FDI has came from Germany(12.4 percent), Greece (11.9 percent), Italy (9.9 percent), Belgium (9.2 percent), Austria (7.7 percent), USA(6.1 percent), etc, (1992-2001 data, BFIA 2002).


The major piece of legislation on FDI in Bulgaria is the Foreign Investments Act (promulgated in 1997and amended in 1998, 1999 and 2002). The Bulgarian Constitution and the Foreign Investments Actprovide national treatment to foreign investors in pre- and post-establishment. Article 2 of the ForeignInvestments Act says that “a foreign person can make investments in the country by the order stipulatedfor Bulgarian citizens, having equal rights with them, inasmuch as this Act does not provide otherwise, andarticle 8 stipulates that “a company with foreign holding shall have all rights as a company without foreignholding, except in the cases stipulated by this Act". The amount and or the share of the foreign holding innewly founded or existing companies is not restricted. There are no minimum capital requirements. Thenational treatment principle covers the whole range of economic and legal forms of business. Foreignpersons can also register branches and open representative offices in Bulgaria. The national treatment forforeign investors includes the participation in the process of privatisation and acquisition of shares,




IInn oorrddeerr ttoo iimmpprroovvee tthhee iinnvveessttmmeenntt cclliimmaattee iinn tthhee ccoouunnttrryy,, tthhee aauutthhoorriittiieess ooff BBoossnniiaa aanndd HHeerrzzeeggoovviinnaasshhoouulldd ppaayy ssppeecciiaall aatttteennttiioonn ttoo ssttrreennggtthheenniinngg tthhee ccoohheerreennccee ooff tthhee lleeggaall ffrraammeewwoorrkk aanndd aaddmmiinniissttrraattiivveepprraaccttiiccee iinn bbootthh eennttiittiieess,, ttoo rreessoollvvee tthhee pprroobblleemm ooff mmuullttiippllee rreeggiissttrraattiioonnss,, aanndd ttoo iimmpprroovvee tthhee iimmppllee-mmeennttaattiioonn ccaappaacciittyy.. AAppaarrtt ffrroomm mmeeaassuurreess ttoo bbee ttaakkeenn ttoo ssttrreennggtthheenn tthhee nnaattiioonnaall ttrreeaattmmeenntt pprriinncciippllee aasspprrooppoosseedd iinn ““GGeenneerraall rreeccoommmmeennddaattiioonnss"",, tthhee aauutthhoorriittiieess ooff BBoossnniiaa aanndd HHeerrzzeeggoovviinnaa sshhoouulldd ssppeecciiffiiccaallllyyccoonnssiiddeerr tthhee eelliimmiinnaattiioonn ooff tthhee mmeeaassuurreess rreellaatteedd ttoo:: ((ii)) eeqquuiittyy lliimmiittaattiioonn ooff ffoorreeiiggnn iinnvveessttoorrss iinn iinnssuurraann-ccee ccoommppaanniieess aanndd iinn pprriivvaattiissaattiioonn iinnvveessttmmeenntt ffuunnddss,, ((iiii)) tthhee rreeqquueesstt tthhaatt ffoorreeiiggnn-ccoonnttrroolllleedd aaccccoouunnttaannccyyccoommppaanniieess ccaann ppeerrffoorrmm aauuddiittiinngg oonnllyy ttooggeetthheerr wwiitthh llooccaall aaccccoouunnttiinngg ffiirrmmss..

debentures, treasury bonds and other kind of securities. There are no restrictions regarding the legalstatus of foreign investors. Apart from the national treatment, Bulgarian legislation provides the followingguarantees to foreign investors: most favourite nation status, more favourable treatment according tointernational agreement, legal guarantees against adverse legislative changes, and protection againstexpropriation, profit and capital repatriation (BFIA 2002, Ivanov et al. 2002).

3.2. Exceptions


Trans-sectoral – Reciprocity. The provisions of the Foreign Investments Act do not apply entirely orpartially for the investments of foreigners from countries specified by the Council of Ministers where,discriminating measures are applied regarding Bulgarian companies or citizens (Article 3 of ForeignInvestments Act).

Securities market. Foreign persons, who have the permit for carrying out transactions with securities onthe territory of Bulgaria, are obliged to identify their clients and the transactions for their account beforethe Commission within 3 work days from the written request. The names of the foreign persons, who haveacquired securities in their names but for the account of other foreign persons, are entered in the registerof the Central Depository.

Maritime transport – Cabotage. Article 6 of the Merchant Shipping Code stipulates that the cabotagewithin Bulgaria (maritime cabotage) could be carried out by: (i) ships flying Bulgarian flag, (ii) ships flyinga flag of an EU Member State, when they comply with all the conditions for carrying out the cabotage, (iii)ships flying a flag of a third country if this is agreed in International Agreement, to which Bulgaria is a partyor a decision of the Council of Ministers ad hoc. In case of serious disturbances to the domestic market,resulting from market liberalisation, the Minister of Transport and Communications is entitled to notifythe competent EU bodies and bodies of countries with International Agreement of introduction ofderogations from their right to carry out cabotage for a term of up to 12 months.

Conditions for ships to fly the Bulgarian flag. The Bulgarian national flag could be flown by (i) Bulgarian ships,registered in Bulgarian register, (ii) ships, which are under the conditions of bareboat charter, (iii) ships,which are property of natural or legal persons from EU Member States, when they have authorisedBulgarian natural or legal persons to represent them (Article 27 of Merchant Shipping Code). Ship isBulgarian when it is: (i) property of the state, (ii) property of Bulgarian legal or natural person, (ii) morethan 50 percent of the property belongs to Bulgarian legal and natural person, (iv) under the conditionsof bareboat charter (Article 28 of Merchant Shipping Code). A vessel, entered on a foreign register ofvessels, may be entered on a Bulgarian register after having been struck off the foreign register (Article 37of Merchant Shipping Code). Vessels, hired under the terms of bareboat charter contracts, may beentered into the registers, provided the following conditions have been met: (i) hire by a Bulgarian naturalor legal person; (ii) entry on a compatible register; (iii) not being entered on other registers under theterms of a bareboat charter contract; (iv) submission of an excerpt from the principal registration of thevessel, containing a description of the vessel, data regarding the ship-owner and all registered mortgagesand other encumbrances, if any (Article 39a of Merchant Shipping Code).

Fishing. Only national flag vessels may fish in country’s territorial waters (The Executive Agency forFishing and Aquaculture and the Executive Agency “Maritime Administration” are responsible forregistration of fishing ships). Foreign vessel cannot perform industrial fishing in the Bulgarian extremeeconomic zone unless there is an agreement between Bulgaria and the country, under which flag the shipis sailing.

Real estate – Land ownership/Residential property rights. Foreign persons, including through a branch or as asole entrepreneur, cannot acquire ownership of land in Bulgaria. This restriction does not apply tocompanies with foreign participation, irrespective of the foreign equity share, incorporated under the



Bulgarian legislation. The same rule applies with regard to residential property rights (Article 23 of ForeignInvestments Act). Foreign persons may acquire ownership rights on buildings and limited ownershiprights (right to build and right to use) on real estate in Bulgaria (Article 3 of the Foreign Investments).

Residence. Long term residence permits cannot be obtained by foreign persons performing commercialactivity in Bulgaria and employing less than 10 Bulgarian citizens.



Real estate. Foreign persons, as well as Bulgarian companies with foreign equity participation need anadvance authorisation by the Council of Ministers to acquire ownership rights over buildings and limitedreal rights over real estates in border zones and in areas of importance for the national security, asdetermined by the Council of Ministers (Article 24 of the Foreign Investments Act).

4. CROATIA

The total FDI inflows in Croatia in the period from 1993-2002 reached over US$ 7.47 billion7. The FDIinflows remained rather modest throughout the 1990s (particularly when compared with front-runningtransition countries), due to the perception of high risk associated with the war-affected economy. The FDIstarted to pick up significantly since 1999 when the process of privatisation of the banking sector andpublic utilities begun on a larger scale and attracted quite a lot of strategic investors, particularly in thebanking sector that is now owned predominantly by foreigners. Croatia is since then, among first fivetransition countries with regard the FDI per capita and FDI share in the creation of GDP.

Most of FDI during the 1990s, but also in the 2000-2003 period have entered through the privatisationprocess, especially in the sectors such as banking and public utilities (telecommunications). Thestatistical data of Croatian National Bank (2003) show that foreign privatisations represent 69.5 percent ofthe total value of FDI in Croatia in the 1993-2003 period. The leading foreign investors are coming fromAustria (28.6 percent), Germany (22.8 percent) and USA (14.7 percent). The highest interest of foreigninvestors has been for the sectors such as telecommunications (26.3 percent); banking (21.4 percent) andpharmaceuticals (14 percent), cement industry (4.5 percent) and hotel and restaurants (3.3 percent).Foreign privatisations will most likely continue to represent a major inflow of FDI as the government plansto go on with privatising the most valuable assets in public utilities such as the oil industry and energyproduction sectors as well as the remaining state portfolios in the hotel industry, tourism and agro-combinates.


The foreign investments are regulated by the general company act: Law on Commercial Companiesenforced from January 1995 (NN 111/93 and subsequent amendments NN 34/99; NN 12/99; NN 52/00) andthere is no special act regulating foreign investments. The Law provides the same rights and equal footingto all investors, regardless of where they come from. According to that Law, the foreign investors have thesame legal status, rights and obligations as domestic enterprises and investors. Under the condition of




AAppaarrtt ffrroomm mmeeaassuurreess ttoo bbee ttaakkeenn ttoo ssttrreennggtthheenn tthhee nnaattiioonnaall ttrreeaattmmeenntt pprriinncciippllee aass pprrooppoosseedd iinn ““GGeenneerraallrreeccoommmmeennddaattiioonnss"",, tthhee aauutthhoorriittiieess ooff BBuullggaarriiaa sshhoouulldd ssppeecciiffiiccaallllyy ccoonnssiiddeerr tthhee eelliimmiinnaattiioonn ooff tthhee mmeeaassuurreessrreellaattiinngg ttoo lloonngg tteerrmm rreessiiddeennccee ppeerrmmiittss ffoorr ffoorreeiiggnn ppeerrssoonnss ppeerrffoorrmmiinngg ccoommmmeerrcciiaall aaccttiivviittyy iinn BBuullggaarriiaa..

reciprocity, which is presumed by this Law, a foreign investor may set up a company or take part in settingup companies in Croatia, as well as acquire rights and undertake obligations in companies under the sameconditions and having the same position as a domestic person. The foreign investors may consider to takepart in the following types of investment: (i) investment of capital on a contractual basis, (ii) investmentof capital in a company, (iii) investment of capital in a bank or insurance company, (iv) starting up abusiness as a sole trader or craftsman, (v) acquiring the right to exploit natural resources or other assetsof interest to Croatia, (vi) taking part in Built-Operate-Transfer (BOT) deal and (vii) participating in Built-Own-Operate-Transfer (BOOT) deals. The foreign investors have additional guarantees by theConstitution of Republic of Croatia with regard to the free repatriation of profits and capital. TheConstitution of the Republic of Croatia guarantees that the rights stemming from capital investmentscould not be withdrawn by any other law or legal act. The constitution also protects the right of ownershipof foreign investor (Article 48, paragraph 3) and also the right that all the entrepreneurs have the equallegal status at the market. The deviations from national treatment and some other requirements aremainly sector-specific and relate to the sectors that government considers strategic for the state’sinterests and security.

4.2. Exceptions


Trans-sectoral – Reciprocity. The reciprocity is requested in order to apply the national treatment toforeign investors. If the reciprocity condition is not fulfilled, the provisions related to national treatmentfor foreign investment do not apply entirely or partially.

Insurance – Foreign participation restriction in companies for mutual insurance. Companies for mutual insurancemay be set up by at least 250 exclusively domestic individuals and legal persons (Insurance Law).

Securities market and other financial services – Branch offices of foreign broker houses. In accordance with the Lawon the Securities Market (2002), the foreign legal person may issue securities through the public offeringsonly if represented by the broker house registered in Croatia. The foreign broker houses may establish abranch office in order to deal with securities transactions in Croatia provided they obtain approval by theCroatian Securities Commission – CROSEC (Article 50 of the Law on the Securities Market). The conditionsfor an approval are the following: (i) it should have a licence issued by its national legislation and (ii) itshould notify the national regulatory body on its intentions to establish a branch office in Croatia. If theapproval is granted the foreign broker would have equal rights and obligations as a domestic broker apartfrom the activities of custody of the securities (to have a right to do depository transactions of thesecurities issued in Croatia at the Croatian Central Depository Agency).

Telecommunications – Reciprocity. The Department of Telecommunications withholds the right to grant theconcession to foreign trading company, which is established as a foreign legal person, if the reciprocity toCroatian enterprises is not guaranteed by the legislation of the country they come from.

Air Transport – Restriction of foreign equity. The air traffic of passengers and goods is restricted forforeigners and by law is to be carried out by a domestic air transport company registered in the Republicof Croatia that should be in majority or complete ownership of domestic commercial company.

Maritime Transport – Cabotage reserved for ships flying national flag. The maritime cabotage could be carriedout only by the ships flying Croatian flag. Exceptionally, the Ministry of Transport and Communicationscould approve this to the ships registered under the foreign flags for: a) the transport of empty containers,provided that there is reciprocity for Croatian ships and b) if there is economic interest of Croatia formaritime transport carried out by foreign ships. The cabotage is defined as transport of goods andpassengers in the coastal transport between the Croatian harbours. The transport of persons by foreignyachts is not considered to be a cabotage by the Maritime Law. In the new draft of the Maritime Law (April2003), that is currently under discussion, this would also apply to the other non-commercial vessels.



Fishing – Reserved for ships flying national flag. Only national flag vessels are allowed to fish in the country’sterritorial waters. Vessels registered under foreign flags cannot fish for industrial purposes in theeconomic zone of Croatia. The national treatment applies if the vessel is registered in Croatia under thecurrent legislation. Ministry of Maritime Affairs, Transport and Communications and its agency CroatianRegistry of Ships and Vessels is in charge of registration of fishing and other vessels in Croatia.

Free zones. A Free Zone may be founded by domestic persons only. Domestic and foreign legal entitiesand natural persons may be the users of a Zone.

Real Estate – Reciprocity. Foreign legal and natural persons engaged in business activities in Croatia may,on the basis of reciprocity, freely acquire real estate in Croatia. A foreign person may also inheritimmovable property without restrictions, under assumption that reciprocity exists.

Real estate – Approval. The Law on Ownership and Other Property Rights (NN 91/96) include somelimitations for foreigners with regard to real estate ownership in Croatia. They have to acquire approvalfrom Ministry of Foreign Affairs and Ministry of Justice in order to own real estate. Foreign companiesregistered in Croatia are considered Croatian legal persons and, therefore, these limitations do not applyto them.

Real estate – Ownership of land. Ownership of land is restricted for foreigners (agriculture land, coastline,islands etc). However, the foreign investors can acquire a right of concession on such land. If the companyis incorporated as a Croatian legal person, regardless of the amount of foreign participation in the capital,this restriction does not apply.



Real estate. The ownership of real estate is prohibited to a foreign person if it is situated in territories,which are designated by the law to be important for protection of security interests of Republic of Croatia(borders, coastline, islands, forests, agriculture land). If a foreign person could not inherit real estatebecause it is on such territory, then it is entitled to reimbursement in accordance with regulations onexpropriation.

Other

Energy Sector – Discrimination of new entrants. The detailed procedures for regulating establishment andexpansion of the new entrants to the market have not yet been adopted by the government. The newentrants in the sector, be they foreign or domestic, are discriminated towards already existing enterprisesby granting the operating licence in the energy sector for the shortest possible period (3-5 years,depending on the type of activity, regulated by the Directives on the periods of operating licences, whileto those enterprises that already exist the operating licence is granted for 15 years) because the processof privatisation and de-monopolisation has not been completed yet and the state enterprises in thesector are still highly protected from the competition.

The restrictions towards other suppliers be they domestic or foreign apply with regard to the energydistribution in particular in supplying the consumers on the basis of regulated tariffs (the largest portionof the market). These restrictions do not apply for the so called privileged consumers (large factories, etc.)which may choose the supplier, however, the approval should be granted by the state monopoly HEPwhich retains dominant status in the area of transmission and distribution, thus this possibility remainsrather theoretical, as at the end the energy price is often not much lower for the consumer.



5. FY REPUBLIC OF MACEDONIA

Foreign investment inflows to the Republic of Macedonia have been low throughout the transition process.The total stock of foreign investment in Republic of Macedonia reached US$ 901 million in 2002 (Central Bankdata), mainly through privatisation transactions and post-privatisation transactions through the Macedonianstock exchange rather than through greenfield investment. Just over one half of the stock of FDI has beeninvested in mining and manufacturing industries, while almost two fifths has been in the banking sector.

The greatest amount of foreign investment was made in 2001, when inflows of FDI amounted to US$443.21 million, a relatively high figure mainly due to the privatisation of the telecom company in that year.However, the civil conflict in 2001 resulted in a drastic cutback in foreign investment inflows. By 2002 theinflow had fallen to just US$ 77.5 million.

The leading investors in the Republic of Macedonia have been Greek investors who accounted for31.4 percent of the FDI stock in 2000, followed by Cyprus (16.8 percent), Germany (10.3 percent), andAustria (5.9 percent). Altogether, the EU countries accounted for 61.1 percent of the FDI stock in Republicof Macedonia in 2000. The most important individual investors have been from a diverse group ofcountries, including Matav (Hungary), Balkan Brew Holding (Greece), Titan-Holderbank Financiere Glaris(Switzerland & Greece), Balcan Steel (Liechtenstein), Duferco Skop Investment (Liechtenstein), KnaufGmbH (Austria), Tobacna (Slovenia), QBE Ltd (Great Britain) and the National Bank of Greece (Greece).


The right of foreign persons to make investments and to acquire property in the Republic ofMacedonia is set out in the Constitution, which also provides for the repatriation of invested capital andprofits. There is no specific law on foreign investment in the Republic of Macedonia, which is covered bythe provisions of many different laws affecting business operations. The principal law regulating theposition of foreign investors is the Company Law of 2000 (new law is in preparation). Foreign investmentin the Republic of Macedonia is treated on the same basis as domestic investment. In general, a foreignperson may establish the same types of companies in the country as a Macedonian citizen is entitled todo. Subject to some exceptions, there are no limitations on the amount of a foreign person’s investmentin a Macedonian company, or on the repatriation of post-tax profits and dividends.

5.2. Exceptions


Trans-sectoral – Registration. According to the new Foreign Exchange Law (Official Gazette 34/2001,49/2001, 103/2001) both inward and outward foreign investments are without restriction (previouslyMacedonian residents were not allowed to invest in real estate or portfolio investments abroad).However, both inward and outward direct investments must be registered at the Ministry of Economy. TheMinistry of Economy registers direct investments in and out of the Republic of Macedonia with the aim ofreporting and recording capital transactions and the changes in inward and outward direct investments,according to articles 7 and 8 of the above Law.




AAppaarrtt ffrroomm mmeeaassuurreess ttoo bbee ttaakkeenn ttoo ssttrreennggtthheenn tthhee nnaattiioonnaall ttrreeaattmmeenntt pprriinncciippllee aass pprrooppoosseedd iinn ““GGeenneerraallrreeccoommmmeennddaattiioonnss"",, tthhee aauutthhoorriittiieess ooff CCrrooaattiiaa sshhoouulldd ssppeecciiffiiccaallllyy ccoonnssiiddeerr tthhee eelliimmiinnaattiioonn ooff tthhee mmeeaassuurreessrreellaatteedd ttoo:: ((ii)) rreessttrriiccttiioonnss ooff ffoorreeiiggnn ppaarrttiicciippaattiioonn iinn ccoommppaanniieess ffoorr mmuuttuuaall iinnssuurraannccee,, ((iiii)) pprroohhiibbiittiinngg ffoorreeiiggnniinnvveessttoorrss ttoo bbee ffoouunnddeerrss ooff ffrreeee zzoonneess,, ((iiiiii)) ddiissccrriimmiinnaattiioonn ooff nneeww eennttrraannttss iinn tthhee eenneerrggyy sseeccttoorr..

Insurance – Foreign ownership restrictions. The Law on Insurance (Article 11, Official Gazette No. 49/97)asserts that the individual share of a legal entity or natural person in an insurance company can go up toonly 25 percent of the equity, a rule which applies to both foreign and domestic investors. In the case ofa foreign-controlled insurance company an individual shareholding may go up to 65 percent, and with aspecial approval of the Minister of Finance, up to 80 percent.

Gaming – Foreign ownership restriction. Foreign investors cannot independently organise games of chanceother than machine games in their own four or five star category hotels. They may organise games ofchance in conjunction with domestic legal or natural persons in their own hotel, if foreign equity share ishigher than 50 percent (Article 44, Article 54 and Article 60 of the Law on Games of Chance andEntertainment Games).

Real estate – Land ownership. A foreign company or a foreign sole proprietor cannot acquire ownership ofland. (Article 688, Law on Trading Companies of 1996). In agreement with the Law on Ownership and RealRights (Article 248) foreign persons can hire building land on the basis of a long term lease. Foreignpersons can become owners of apartments and apartment buildings but may not acquire ownership rightsover construction land. According to the Law on Agricultural Land (Official Gazette No. 25/98, 18/99),foreign and domestic legal entities may rent up to 15 percent of land from combines and other enterprisesthat operate on productive land, by public auction.



Production of and trade with armaments. There are restrictions on foreign investment in military industriesand arms trade (Article 55 Constitution of the Republic of Macedonia).

Public order considerations (including public health)

Real estate. There are restrictions on foreign investment designed to protect historical monuments andthe cultural assets of the country (Article 55 Constitution of the Republic of Macedonia).


Gaming. According to the Article 47 of the Law on Games of Chance and Entertainment Games, at leastthree quarters from those employed in the gaming house must be citizens of the Republic of Macedonia.

6. MOLDOVA

FDI inflows in Moldova have been modest in absolute volumes: US$ 71 million in 1997, US$ 88 millionin 1998, US$ 34 million in 1999, US$ 127 million in 2000, US$ 149 million in 2001 and US$ 95 million in 2002(IMF and EBRD combined data). The cumulative flows of US$ 564 million in 1997-2002 represent morethan one third of the country’s GDP, but this figure may be misleading, as many privatisation-driven FDIcame through debt-equity swaps.




AAppaarrtt ffrroomm mmeeaassuurreess ttoo bbee ttaakkeenn ttoo ssttrreennggtthheenn tthhee nnaattiioonnaall ttrreeaattmmeenntt pprriinncciippllee aass pprrooppoosseedd iinn ““GGeenneerraall rreeccoommmmeennddaattiioonnss"",, tthhee aauutthhoorriittiieess ooff tthhee RReeppuubblliicc ooff MMaacceeddoonniiaa sshhoouulldd ssppeecciiffiiccaallllyy ccoonnssiiddeerr tthheeeelliimmiinnaattiioonn ooff tthhee mmeeaassuurreess rreellaatteedd ttoo:: ((ii)) rreeggiissttrraattiioonn rreeqquuiirreemmeenntt ooff aallll iinnwwaarrdd aanndd oouuttwwaarrdd ddiirreeccttiinnvveessttmmeennttss,, aanndd ((iiii)) ffoorreeiiggnn oowwnneerrsshhiipp rreessttrriiccttiioonnss iinn iinnssuurraannccee..

FDI breakdown by sectors is the following: electricity, gas and water supply absorbed 50.9 percent,food processing 17.3 percent, wholesale and retail trade 10 percent, transport and communication7 percent, finance 4 percent, hotels and restaurants 2.3 percent, construction 2.2 percent, agriculture1.6 percent, real estate transactions 1.6 percent, exploitation of quarries 0.9 percent, and other activities2.2 percent. Major investing country is Russia, with 45 percent of total FDI in Moldova, followed at adistance by Spain and USA (Department of Statistics, 2002).


The principle of national treatment is not recognised in the current legislation. This aspect is, however,addressed in a new draft law for FDI. Subject to limitations set out in the legislation, foreigners can own100 percent stakes in a business registered in Moldova. Companies with foreign capital must register withthe State Registration Chamber. This is similar to the registration for domestic companies, except for anadditional number of documents required for the registration of the foreign capital company. Foreigninvestors’ rights to transfer after tax profits abroad is guaranteed. Discriminating measures hinderingforeign investments are forbidden, and appropriate compensation is secured in case of nationalisation orexpropriation. Foreign investors are also given guarantees against adverse legislative changes.

Foreign investments in Moldova can take the form of: hard currency or other accepted foreign currencypurchased by the banks of the Republic of Moldova and that meet the object of bank operations;machinery, equipment, including office equipment, raw materials and materials; property and non-property rights, including the right on intellectual (industrial) property. The material values that representcontributions to the share capital of a company with foreign capital are tax exempted, provided that theyare not used for other purposes. A foreign-controlled company is also exempted from customs duties forimported goods (raw materials, half-finished products, etc.) that are used for the manufacturing of goodsto be exported.

Most of the measures dealing with FDI in Moldova are in the area of approval/licensing requirements.Their extent seems to be excessive. Discrimination of foreign investors occurs primarily with respect tothe applicability of the anti-monopoly legislation, some aspects of the privatisation procedures, andsectoral restrictions. The Government of Moldova, by its Decision 234/ 2002, designed a new investmentstrategy for Moldova. Within a period of three years (by the end of 2005), a wide scale of measures aimingat attracting FDI by creating a more friendly and encouraging business environment is envisaged (for adetailed description of these measures, see section 3 of this report).

6.2. Exceptions


Trans-sectoral – National treatment principle. The principle of national treatment is not recognised in thecurrent legislation. This aspect is however addressed in a new draft law for FDI.

Trans-sectoral – Approval for big foreign-controlled companies. Companies with foreign equity exceeding US$ 5million must be approved by the Anti-Monopoly and Competition Department in the Ministry ofEconomy and Reforms.

Real estate – Agricultural land. Foreigners are permitted to buy real estate property and industrial land(land where industrial facilities are located) in Moldova, except for agricultural land.


Trans-sectoral – Request for part of equity in hard currency. In foreign-controlled enterprises, at least10 percent of foreign equity share should be in the form of hard currency. The reason behind this is in thefrequent debt-equity swaps in privatisation deals.



Privatisation

Trans-sectoral. Local investors acquiring companies in the process of privatisation can pay ininstalments, while this option is not open to foreign investors.


Security and public order considerations (including public health)

Only state-owned enterprises, not locally or foreign private-owned firms are allowed to participate in thefollowing activities: sale and production of narcotic, toxic, and poisonous substances; sale and production ofcombat and special military technical equipment; and some types of medical care and treatment.


Energy – Permanent residence of the manager. The manager of an enterprise holding an energy licence musthave permanent residence in Moldova.

7. ROMANIA

End 2002 FDI stock in Romania is US$ 9,175 million. FDI inflows increased substantially since 1998,when altogether US$ 5,204 million was invested from abroad (US$ 704 million in 1998, US$ 931 million in1999, US$ 865 million in 2000, US$ 1,371 million in 2001 and US$ 1,333 million in 2002) (National Office ofTrade Register within the Ministry of Justice data). FDI inflows were particularly strong in 2001 and 2002.This is due to the positive developments in the economy, the new regulations regarding FDI promotionin Romania and the setting up of the specialized governmental structure (known as “one-stop shop"),which all show the positive attitude of the authorities towards FDI. Foreign investors seem to have startedchanging their position towards Romania, perceiving it as a more friendly business environment andbecoming more confident in the Government’s investment policy.

Most of FDI is in industry (56 percent); followed by services (15.0 percent), wholesale trade (11 percent),transport (8 percent), retail trade (5 percent), construction (2 percent), tourism (2 percent) and agriculture(1 percent). Major investing countries in Romania are the Netherlands (17.29 percent), Germany (9.84percent), USA (7.98 percent), France (7.26 percent), Austria (6.22 percent), and Italy (6.11 percent). Data abovereflect shares in total FDI stock by the end of 2002 (The National Office of Trade Register – Ministry of Justice).

FDI penetration in the Romanian manufacturing industry surged in recent years. Foreign-controlledenterprises account for almost one third of the turnover (29.1 percent as of 2001) and for more than onethird of the share capital (34.8 percent in 2001), as compared to a rather modest levels only a few yearsago (4 percent of share capital and 4.9 percent of turnover in 1995; 10.3 percent of share capital and 11.5percent of turnover in 1998) (data computed using the National Registration Office database).

The following sectors record an above the average foreign capital penetration, as a share in theirturnover: food industry (32.1 percent); non-metallic mineral products (38.2 percent); metallurgy (38.3 percent




AAppaarrtt ffrroomm mmeeaassuurreess ttoo bbee ttaakkeenn ttoo ssttrreennggtthheenn tthhee nnaattiioonnaall ttrreeaattmmeenntt pprriinncciippllee aass pprrooppoosseedd iinn ““GGeenneerraallrreeccoommmmeennddaattiioonnss"",, tthhee aauutthhoorriittiieess ooff MMoollddoovvaa sshhoouulldd ssppeecciiffiiccaallllyy ccoonnssiiddeerr tthhee eelliimmiinnaattiioonn ooff tthhee mmeeaassuurreessrreellaatteedd ttoo:: ((ii)) wwiiddeesspprreeaadd aanndd mmuullttiippllee aapppprroovvaall pprroocceedduurreess ffoorr aallll kkiinnddss ooff FFDDII,,((iiii)) ssppeecciiaall aapppprroovvaallpprroocceedduurreess ffoorr bbiigg ffoorreeiiggnn-ccoonnttrroolllleedd eenntteerrpprriisseess..

in 2001, currently over 90 percent); machines and equipment (30.6 percent); electrical and opticalequipment (49.6 percent); means of transportation (49 percent). Not coincidentally, these are exactly theonly sectors that recorded relative productivity gains (sector’s productivity increase exceeding averageproductivity increase) in the period 1995-2001.


The Romanian legislation provides national treatment to foreign investors. Non-resident investorsbenefit from the same rights as any resident investor. There is no limit on the foreign participation incompanies; a foreign investor may establish or acquire a 100 percent enterprise in Romania. The capitalof a foreign investor can take many forms, including foreign currency, equipment, services, rights ofintellectual property, know-how and management expertise and the proceeds and profits from otherbusinesses in Romania. Romanian legislation also provides investment guarantees against measures ofnationalisation and expropriation, and other similar measures. Foreign investors have the right to convertand transfer abroad, without any restrictions, after payment of taxes and fees, the income derived fromtheir investment in Romania (Ivanov et al 2002). Generally, there is no discrimination between foreign-controlled enterprises and local investors with respect to establishment rights or scope of activity. Thereis no discrimination of foreign investors and/or foreign controlled enterprises per se. There are no ab initiorestrictions/ no ceilings/ no trans-sectoral performance requirements/ no prohibition (double tax treatiesand other similar agreements may provide in fact more favourable conditions). Also, when Romania is aparty to bilateral agreements for the mutual promotion and protection of investment with other countriesand the provisions of such agreements are more favourable than the Romanian investment legislation,investors from such countries benefit from the provisions of these agreements. Foreign investors in Romania can organise their businesses in Romania in the same organisational forms as domesticinvestors; besides, they can establish branches and open representative offices. The current frameworkalso offers specific incentives for investments, foreign and local alike, that are considered as having a “significant economic impact” (it refers to investments exceeding the equivalent of US$ 1 million,contributing to the development and modernization of the economic infrastructure, producing a positiveeffect on the economy and leading to the creation of new employment openings).

7.2. Exceptions


Maritime transport, fishing and exploration of marine resources – restriction of activities, approval. Within Romanianterritorial waters, the following activities can be undertaken solely by ships flying the Romanian flag:carriage to Romanian harbours; cabotage from one local harbour to another local harbour; assistance andrescue operations; removal of wreckages; fishing; works for realisation and continuation of hydro-technicalconstructions; resources’ exploration and exploitation. Ships registered under foreign flags can engage infishing, and in resources’ exploration and exploitation, provided that competent authorities issue anapproval. For other types of operations mentioned above, ships registered under foreign flags may beused, provided that Romanian ships are not available, or not technically fit for those operations.

Conditions for ships to carry the Romanian flag. Provided that technical standards required are fulfilled, theright to fly the Romanian flag is given to: ships owned by Romanian physical or legal persons; ships ownedby foreign physical or legal persons who have their residence, respectively their affiliate companyregistered in Romania; ships owned by foreign physical or legal persons, leased or rented in the bare-boat regime to Romanian physical or legal persons.

Legal services – restriction on foreign legal service providers. Foreign lawyers/law firms are not allowed tooperate independently. They may only operate in a joint venture with Romanian lawyers/law firms.

Real estate – Land ownership. Foreign natural and legal persons may not own land in Romania. They,however, may acquire other real rights over land, such as the right of use, obtained by way of concession.



By establishing a company in Romania and acquiring a status of a Romanian legal person, irrespective ofthe foreign equity share in the company, foreign investors can acquire ownership rights over real estate,including land. Also, persons with Romanian citizenship can buy land, even if they are not resident inRomania.

Government procurement

Reciprocity. Foreign companies (be they suppliers, subcontractors, main contractors) are treated onthe same footing as domestic enterprises, on the basis of reciprocity.



Banking. There is an existing requirement that at least one of the Board members of a commercial bankmust be a Romanian citizen. The National Bank of Romania wanted to secure in this way a better way ofcommunication/supervising the activity of banks. This requirement will be eliminated by new legislationcurrently under preparation.

8. SERBIA AND MONTENEGRO

FDI inflows in Serbia and Montenegro in the period 1992-2002 totalled US$ 1,700 million, out of whichUS$ 1,210 million in privatisation and US$ 490 million other FDI (greenfield and other FDI). During the1990s, due to economic sanctions against Federal Republic of Yugoslavia (FRY), there was only one FDIproject, i.e. in the privatisation of the Serbian Telecom (PTT). Although a considerable number of foreigninvestors have shown the interest to invest in Serbia and Montenegro, after the democratic changes inthe country, the inflow of FDI in 2001 was relatively modest (US$ 160 million), which can be explained bythe fact that the investment climate in the country was still very unfavourable. Fast progress in reformsand the intensification of privatisation process, with the important role of foreign strategic investors,resulted in a considerable increase in FDI inflows in 2002 (US$ 550 million), with good prospects forfurther increase in 2003.


A new constitution (Constitutional chapter) was adopted in February 2003 that changed the name ofthe federal state to the State Union of Serbia and Montenegro. According to the constitution, Serbia andMontenegro shall be a single subject of international law and a member of international, global andregional organisations, the membership of which is contingent on international personality.

This new constitution establishes the competencies of the two Republics of Serbia and Montenegroin a variety of areas, while maintaining crucial powers on state-level. According to the Article 40 of thenew Constitution, “The Minister of Foreign Affairs shall carry out and be responsible for the conduct ofthe foreign policy of Serbia and Montenegro, negotiate international treaties .... and co-ordinate theformulation of foreign policy with relevant bodies of the member states.” According to Article 41, “TheMinister of Defence shall co-ordinate and implement the defined defence policy and shall run the armed




AAppaarrtt ffrroomm mmeeaassuurreess ttoo bbee ttaakkeenn ttoo ssttrreennggtthheenn tthhee nnaattiioonnaall ttrreeaattmmeenntt pprriinncciippllee aass pprrooppoosseedd iinn ““GGeenneerraallrreeccoommmmeennddaattiioonnss"",, tthhee aauutthhoorriittiieess ooff RRoommaanniiaa sshhoouulldd ssppeecciiffiiccaallllyy ccoonnssiiddeerr tthhee eelliimmiinnaattiioonn ooff tthhee mmeeaassuurreerreellaatteedd ttoo tthhee rreessttrriiccttiioonn tthhaatt ffoorreeiiggnn llaawwyyeerrss//llaaww ffiirrmmss aarree nnoott aalllloowweedd ttoo ooppeerraattee iinnddeeppeennddeennttllyy..

forces in accordance with the law and the powers vested in the Supreme Defence Council....". Apart fromthat the Minister of International Economic Co-operation of the State Union shall be responsible fornegotiating and co-ordinating the implementation of international treaties, including treaty relationswith the EU and the co-ordination of the relations with international economic and financial institutions(Article 43), and the Minister for Internal Economic Co-operation shall be responsible for the co-ordination and harmonisation of the economic systems of the member states for the purpose of the establishment and unhindered operation of the common market, including a free movement of goods, services, people and capital (Article 44). This single market, i.e. a level playing-field foreconomic operators throughout the state, is clearly enshrined in the Constitutional Charter (Articles 12and 13). According to the new Constitution, the number of federal institutions and bodies will bereduced, and some responsibilities should be transferred to the Republics.

Laws established under the FRY should be automatically taken over by the new State Union, exceptin the parts that are contrary to the provisions of the Constitutional Charter.

Among the main goals of Serbia and Montenegro will be: (i) equality and the rule of law, integrationin European structures, the European Union in particular, (ii) harmonisation of its legislation andpractices with European and international standards, (iii) introduction of market economy based on freeenterprise, competition and social justice, and (iv) establishment and assurance of an unhinderedoperation of the common market on its territory through co-ordination and harmonisation of theeconomic systems of the member states in line with the principle and standards of the European Union.

It is important to note that the very existence of two largely separate regulatory regimes per se,especially on foreign investment, backfires on the proper functioning of the internal market of Serbia andMontenegro and thus on investors’ confidence and the overall attractiveness of the state for FDI.

A. SERBIA


The basic legislation referring to the foreign investments is the new Foreign Investments Law, whichcame into force on January 19, 2002. The Law regulates foreign investments in enterprises and otherforms of establishment engaged in profit generating activities in Serbia (and Montenegro). Creation of afriendly legal, political and economic climate, and encouragement of foreign investors are the main goalsof the new Law. One of the long-term goals is to create a legal system that is compatible with the EUlegislation. The law has equalised the rights and responsibilities of domestic and foreign investors.Foreign investors enjoy full legal security and legal protection in respect of rights acquired by virtue of the investment. According to this Law, foreign investment may be made by founding a new enterpriseor by expanding the capital of an existing domestic enterprise. The amount and or the share of theforeign holding in newly founded or existing companies is not restricted. Foreign persons can alsoregister branches in Serbia. There are no restrictions regarding the legal status of foreign investors. A foreign investor also has the right to: (i) control or take part in management of the enterprise s/he hasfounded or in which s/he has invested his/her capital; (ii) transfer the rights and obligations (set out inthe investment contract or the founding act) to other foreign or domestic persons; (iii) share and freelydispose the profit accruing from its investment; (iv) inspect the books and business operations of the enterprise in which s/he has invested; (v) audit the interim and annual financial statements eitherhimself or through an authorised representative. A foreign investor may, once commitments are met in accordance with domestic law, freely and without delay transfer abroad in a convertible currency all financial and other assets related to the foreign investment (profits, dividends, additional payments,property upon dissolution of the enterprise, etc.).



8.3. Exceptions


Trans-sectoral – Reciprocity. According to the Serbian Constitution, Enterprise Law and ForeignInvestment Law, a foreign natural person or legal entity may establish an enterprise in Serbia, providedthat the reciprocity principle is observed. The Foreign Investment Law indirectly defines the reciprocitycriteria by saying that the ministry in charge of foreign economic relations submits to the Registry Courtthe list of the states with which reciprocity does not exist, for each calendar year in advance (Evidence ofForeign Investment, Article 22 of the Foreign Investment Law).

Banking – Reciprocity. According to the Law on Banks and Other Financial Organisations, a foreign personmay found a bank, provided that the reciprocity principle is observed.

Banking – Greenfield versus investment in existing banks. The policy of the National Bank of Yugoslavia(Serbia) to encourage portfolio investment in the banking sector, instead of greenfield investment, mayhave a discriminatory effect on foreign investors wishing to invest in the founding of a new bank in Serbia.Even though this limitation was not given in a written form, but only as a recommendation of a governorof the National Bank of Serbia, foreign investors recognised it as a serious barrier to the founding of a newbank, considering that that limitation might influence the issuance of an approval, as any approval for thefounding of a new bank has to be issued by the National Bank of Serbia. This limitation is not applicableto domestic investors.

Insurance – Joint venture with a local person required/ Wholly foreign owned entity only for offshore activities.A foreign natural person or legal entity may form an insurance company only as a joint venture with a localnatural person or legal entity. As an exception a foreign legal entity may form a wholly owned captiveinsurance company for offshore activities only (Article 10 of the Law on Insurance of Property and Personsof Serbia and Montenegro, Official Gazette of the FRY, No. 55/1999).

Limitation of re-insurance activities abroad for insurance companies with foreign equity. An insurance company, in whichforeign capital has been invested, is not allowed to carry out re-insurance activities abroad (Article 10 of theLaw on Insurance of Property and Persons of Serbia and Montenegro, Official Gazette of the FRY, No. 55/1999).

Air Transport – Foreign-owned aircraft registration. An aircraft, whose owner or user is a foreign legal entityor natural person, may be registered in the Aircraft Register of the Federal Republic of Yugoslavia after aspecial permit has been granted by the federal ministry in charge of transport (Article 54 of the Law on AirTransport).

Maritime Transport – Approval for cabotage. Towing, which begins and ends in a Yugoslav sea or river port,that is, on the coastal sea or inland waterway of Serbia and Montenegro (cabotage), cannot be done by aforeign ship without the approval of the federal ministry in charge of transport (Article 686 of the Law onMaritime and Inland Navigation).

Maritime transport – Reciprocity. As for the use of a sea or river port being open for international publictransport and the payment of port dues, foreign ships enjoy the same treatment as domestic ones,subject to the reciprocity principle (Article 25 of the Law on Maritime and Inland Navigation).

Maritime transport – Foreign-owned ship registration. For the issuance of a permit for the registration of aforeign ship in the Yugoslav Register of Shipping, the ship-owner or ship operator is obliged to submit thedecision on the approval of a temporary import of a chartered ship and uniform customs clearance for atemporary or regular import of a ship (Article 211 of the Law on Maritime and Inland Navigation).

Gaming. According to the draft of a Law on games of chance, which is in a parliamentary procedure andis expected to be adopted soon, a foreign natural person or legal entity cannot invest in the gaming.



According to Article 5 of this law gaming is a state monopoly, but can be transferred to some domesticlegal entities located in Serbia.

Real estate – Business purposes and reciprocity conditions for foreign investors. Foreign natural and legal entitiescan acquire real estate property under two conditions: the property must be used for business operationsand there must be reciprocity in relations with the foreign country in question (Law on Basic OwnershipLegal Relations).

Real estate – Reciprocity condition for foreign natural persons. A foreign natural person, who does not performbusiness operations, may own some forms of real estate, such as an apartment or an apartment buildingin Serbia, subject to the reciprocity principle. It is not necessary to have permanent or temporaryresidence in Serbia. The Federal Ministry of Justice gives its opinion on the existence of reciprocity.

Real estate – Forests’ ownership. A foreign natural person or legal entity cannot buy a forest.

Employment of foreigners and movement of key personnel

Trans-sectoral. There are no general restrictions for the employment of foreigners, if they obtain thenecessary permits prescribed by law. No general restrictions when employment of key personnel is inquestion. But, there might be some discriminatory treatment prescribed by firm’s internal legislative acts,as the by-laws of the employer determine, pursuant to the law, the job positions in which foreign citizenscan be employed.



Production of and trade with armaments. A foreign natural person or legal entity cannot, either alone or withanother foreign investor, establish an enterprise in the field of production of and trade in armaments(Article 19 of Foreign Investment Act). A foreign investor may, together with a domestic entity, establish anenterprise in the above mentioned field, or invest his/her capital in it, but without acquiring a controllinginterest in such an enterprise, all this being subject to the approval of the Federal Ministry of Defence.

Location of investment. A foreign natural person or legal entity cannot, either alone or with another foreigninvestor, establish an enterprise in an area designated as a restricted zone (Article 19 of ForeignInvestment Act). A list of these zones is given in a Decision on Establishment of restricted Zones from1991. A foreign investor may, together with a domestic entity, establish an enterprise in the abovementioned area, or invest his/her capital in it, but without acquiring a controlling interest in such anenterprise, all this being subject to the approval of the Federal Ministry of Defence.

Real estate. Insofar as foreigners are concerned, there are certain limitations on their acquiring realestate property rights, which pertain to the location of the property (being in the vicinity of militaryinstallations, etc.).




TThhee ssppeecciiffiicc ccoonnssttiittuuttiioonnaall ssiittuuaattiioonn iinn SSeerrbbiiaa aanndd MMoonntteenneeggrroo ccaallllss ffoorr ccllaarriiffiiccaattiioonn ooff tthhee aapppplliiccaabbiilliittyy oofftthhee ddiiffffeerreenntt lleeggaall iinnssttrruummeennttss iinn eeaacchh RReeppuubblliicc.. TTrraannssppaarreennccyy aanndd ccoohheerreennccee ooff tthheessee rruulleess iiss aann iimmppoorrttaannttccoonncceerrnn.. AAppaarrtt ffrroomm mmeeaassuurreess ttoo bbee ttaakkeenn ttoo ssttrreennggtthheenn tthhee nnaattiioonnaall ttrreeaattmmeenntt pprriinncciippllee aass pprrooppoosseedd iinn““GGeenneerraall rreeccoommmmeennddaattiioonnss"",, tthhee aauutthhoorriittiieess ooff SSeerrbbiiaa sshhoouulldd ssppeecciiffiiccaallllyy ccoonnssiiddeerr tthhee eelliimmiinnaattiioonn ooff tthheemmeeaassuurreess rreellaatteedd ttoo:: ((ii)) rreessttrriiccttiioonnss ttoo nneeww iinnvveessttmmeennttss iinn tthhee bbaannkkiinngg sseeccttoorr,, ((iiii)) rreeqquueesstt ffoorr aa jjooiinntt vveennttuurreewwiitthh aa llooccaall ppeerrssoonn iinn iinnssuurraannccee,, ((iiiiii)) lliimmiittaattiioonn ooff rree-iinnssuurraannccee aaccttiivviittiieess aabbrrooaadd ffoorr iinnssuurraannccee ccoommppaanniieess wwiitthhffoorreeiiggnn eeqquuiittyy..

B. MONTENEGRO


The Foreign Investment Law (Official Gazette of the Republic of Montenegro, No. 52/2000) provides forthe equal treatment, full legal protection, and security of investment for foreign investors in Montenegro.The Foreign Investment Law guarantees national treatment for the investor who may found an enterpriseand invest in an enterprise in the territory of Montenegro in the manner and under the conditions set fordomestic persons unless otherwise provided for in the foreign investment law. A foreign investor maymake free transfers of profits and assets abroad after having settled all due liabilities. The ForeignInvestment Law (Article 29) guarantees the right of property. The Foreign Investment law (Articles 27, 28,29 and 30) gives additional guarantees to legal security, reimbursement and personal responsibility ofstate officials to the foreign investor. In cases where the state is a party to a contract on foreign investment,or where it is a partial owner of the investment, the Law stipulates that it shall have no greater rights thanany other party to the contract. A foreign investor who has suffered losses resulting from war or a state ofemergency is entitled to a reimbursement of no less than the amount granted by law to local nationals. Aforeign investor is entitled to a reimbursement for damages caused by illegal or irregular conduct by agovernment official or agency. If laws are changed after a contract is concluded which affect the value ofan investment, the investor may choose to operate under the original applicable law, if that is morefavourable than the new law. Security for non-commercial risks is guaranteed on the basis of bilateralconventions concluded with individual countries, and which covers the right to the transfer of profits,repatriation of invested capital, fair and equal treatment of investments excluding discrimination, andguaranteeing the same protection as offered to other foreign country nationals.

8.6. Exceptions


Trans-sectoral – Reciprocity for acquisition of assets and real estate. A foreign company or person may purchaseand own assets and real estate in Montenegro required for performing business activity provided thatreciprocal arrangements exist in that person’s own country.

Trans-sectoral – Registration and reporting. An enterprise with foreign investment must be registered withthe competent court. Any investment or founding contract or founding decision, any changes to the statusof an enterprise, as well as amendments and termination of contract or decision must be reported to theAgency for Restructuring and Foreign Investment. Foreign companies which establish a Foreign CompanyBranch within the Republic of Montenegro shall, within 30 days of the establishment of the first place ofbusiness register with the Central Registry of the Commercial Court. Before starting activities the companymust obtain approval and licences from the sanitary, market and labour inspection bodies.

Insurance – Reciprocity in establishment. The establishment of an insurance company is regulated by the Lawon Insurance of Property and Persons of Serbia and Montenegro (Official Gazette, 37/77, 6/78 and 23/87).Insurance companies have a statutory minimum of 2 founders and may be founded as joint stock companiesonly. Foreigners may be founders of insurance companies subject to reciprocity in their own countries.

Fishery. According to the provisions of the Sea Fishery Law (Official Gazette 26/92, 59/92) foreigninvestors are allowed to engage in sea fishery as long as they meet the requirements set out in theFederal Foreign Investment Law and the Law on Concessions.

Gaming – Limitation of foreign ownership. According to the Law on Games of Chance (Official Gazette 20/95)concessions for the staging of games of chance may not be granted to foreign individuals and legalentities. However, a foreign person may conclude an agreement to invest in a domestic enterprise thathas been granted the right of staging games of chance, so long as the foreign investor does not acquire amajority shareholding.



Real estate – Reciprocity for house or flat ownership. Any foreign person whether carrying on a businessactivity or not, may buy a house or flat in Montenegro provided reciprocity exists.


Maritime Transport – Foreign ship registration. Foreign legal entities and natural persons may register aship, yacht or aircraft under the Serbia and Montenegro flag, in conformity with the law. If a registered ship,yacht or aircraft is used for earning income, the foreign legal entity or natural person must establish acompany in accordance with the provision of the Law on Off-Shore Companies, and must pay a registrationtax varying between US$ 500 and US$ 4,000 depending on tonnage. For passenger ships the tax is set atUS$ 0.25 for each tonne weight. Yachts and aircraft are taxed at their own specific rates. The register ofships, yachts and aircraft is maintained by the Ministry of Maritime Trade and Transportation.


Security and public order considerations (including public health)

Production of and trade with armaments – Limitation of foreign ownership and approval. An approval from theresponsible ministry is required before the start of any negotiations over founding an enterprise in thatindustry, or investing in an enterprise in that industry. A foreign investor must receive approval from acompetent minister to make an investment in the armaments or military equipment industry. Theshareholdings of a foreign investor in the armaments industry is limited to 49 percent of the total shares.

Location of investment in specific areas – Limitation of foreign ownership and approval. A foreign investor mustreceive approval from a competent minister if the investment is in a restricted border zone or nationalpark. Foreign investor shareholding in companies in restricted areas such as border areas or in nationalparks are limited to 49 percent of the total shares.




AAss mmeennttiioonneedd aabboovvee ffoorr SSeerrbbiiaa,, tthhee aapppplliiccaabbiilliittyy ooff iinnssttrruummeenntt rreellaatteedd lleeggiissllaattiioonn iinn eeaacchh RReeppuubblliiccnneeeeddss ttoo bbee ccllaarriiffiieedd,, aanndd ttrraannssppaarreennccyy aanndd ccoohheerreennccee ooff aapppplliiccaabbllee lleeggaall mmeeaassuurreess sshhoouulldd bbeessttrreennggtthheenneedd.. TThhee aauutthhoorriittiieess ooff MMoonntteenneeggrroo sshhoouulldd ssppeecciiffiiccaallllyy ccoonnssiiddeerr tthhee eelliimmiinnaattiioonn ooff ssppeecciiaallrreeggiissttrraattiioonn rreeqquuiirreemmeennttss ffoorr eenntteerrpprriisseess wwiitthh ffoorreeiiggnn iinnvveessttmmeenntt..



NNOOTTEESS

5. The individual country chapters below (Chapters 3 to 10) provide a full assessment of laws andregulations faced by international investors, including the key exceptions to national treatmentreviewed in this chapter.

6. FDI inflows in 2002 were US$ 478.7 millions, distributed as follows: equity capital 69.6 percent, othercapital 19.4 percent and reinvested earnings 11.0 percent. US$ 333.0 million equity capital comesfrom US$ 135.6 million privatisation and US$ 197.4 million from reinvested earnings (NationalStatistical Institute, Bulgarian National Bank and other sources).

7. The Statistics on FDI, Croatian National Bank, 2003, http://www.hnb.hr/statistika/strana-ulaganja/.


Appendix 1.

22nndd MMeeeettiinngg ooff tthhee MMiinniisstteerrss ooff EEccoonnoommyy ffrroomm SSoouutthh EEaasstt EEuurrooppeeVViieennnnaa,, 1100 –– 1111 JJuullyy 22000033

MMIINNIISSTTEERRIIAALL SSTTAATTEEMMEENNTT

PUSHING AHEAD WITH REFORM:

REMOVING OBSTACLES TO FDI IN SOUTH EAST EUROPE

1. Ministers renew their commitment to the implementation of the Vienna Ministerial Declaration on“Attracting Investment to South East Europe: Common Principles and Best Practices” (July 2002) and agreeto continue to strengthen regional co-operation in the investment policy area. In particular, they confirmtheir commitment to actively participate in the Investment Compact Monitoring Process and endorse thevalue of regional co-operation, sharing regional experience and peer review.

2. Ministers welcome the assessment of policy reforms made in the two editions (September 2002 andApril 2003) of the Monitoring Instruments published since their last meeting. They note that, as indicatedby the Monitoring Instruments, significant steps have been made in the area of investment policies andpromotion, and that good progress has been made in other areas such as tax policy, regulatory reform,customs and SME support.

3. At the same time Ministers recognise the need to complete progress on priority reform targets, tobring the direct investment regulatory framework in line with best international practices and to improvethe investment climate throughout the region. Ministers call upon the Country Economic Teams toestablish new, performance-oriented, time-bound targets for reform in the context of the InvestmentCompact Monitoring Process.

4. Ministers value the contribution made by the international business community through theirstatement presented at the Ministerial conference. Ministers commend the valuable input provided bythe international investors’ organisations to the policy reform process at the national level in manycountries of the Region. In that context they also take note of the Belgrade Declaration of the Heads ofState and Governments of the South East Europe Co-operation Process made in April 2003 which invitesthe Business Advisory Council of South East Europe to provide concrete proposals to that co-operationprocess. In particular, Ministers appreciate the steps taken by investors in the region to establish aregional network of international investor organisations, which will further strengthen policy dialogue andfacilitate new investment.

5. Ministers recognise the value of regular and prior consultations with the business community,including representatives of the international business community, regarding policy priorities andeffective solutions to investment policy issues, both at country level and regional level. This shouldinclude mechanisms for effective and regular consultation on the evaluation of existing policies as well asthe introduction of new policy measures, and provide business feedback on the strategic direction ofagencies dealing with infrastructure and investment policy implementation, including the investmentpromotion agencies, export credit agencies, SME and development agencies.

6. Ministers welcome the national treatment country reports prepared by the Investment Compact andcall upon each participating State to follow the recommendations contained in these reports in thecontext of the Investment Compact Monitoring Process. In particular, they agree to take the following keymeasures over the next year, taking into account the legal situation in each country:

• reduce licensing and approval procedures and special registration procedures, including reciprocityrequirements for foreign investment to the level necessary for normal company law registration

• take decisive steps with the view to allowing the acquisition of real estate by foreign investors forthe purpose of investment

• reduce reporting requirements for foreign investment for statistical purposes to a minimum necessary• establish transparent laws, regulations, procedures and practices regarding government

procurement with a view to ensuring full national treatment• streamline measures relating to work and residence permits so as to allow the movement of key

personnel for investment• promote the development of an effective services sector, in particular by removing obstacles to

foreign direct investment in the areas of financial and professional services

7. Ministers confirm their resolve to implement the above-mentioned commitments and call upon theInvestment Compact Project Team to update the list of exceptions to national treatment, monitor progressachieved in removing or reducing them, and prepare a report for their 2004 meeting at ministerial level.

8. Ministers recognise the importance of achieving further significant progress in the areas of regulatoryreform, public and private governance, and combating corruption more effectively and encourage furtherwork in these policy areas taking into account recommendations by the Investment Compact ProjectTeam. Ministers agree that these areas should have a more central role in government policy and indicatethat their 2004 meeting at ministerial level will be devoted to review progress achieved in these areas.

9. Ministers recognise that inadequate physical infrastructure constitute a significant obstacle toinvestment in South East Europe and call upon the Stability Pact member countries and internationalinstitutions to accelerate the implementation of programmes for the improvement of regional infrastructure,using the capacities of business networks such as the Business Advisory Council for South East Europe, inclose co-operation with the Special Coordinator of the Stability Pact.

10. Ministers thank the co-chairs of the Investment Compact and the Stability Pact Special Co-ordinatorfor having promoted their 2003 meeting at ministerial level, and the Austrian Minister of Economic Affairsand Labour for having hosted it. Ministers express their appreciation for the leadership role played by theRegional co-chair, Romania, in the Investment Compact process. They also express their appreciation tothe representatives of the international business community for their valuable inputs. Ministers agree toreconvene in mid-2004.

ADOPTED in Vienna, on the 11th day of July in the year two thousand and three:

Arban MalajMinister of Economy of the Republic of Albania

Mila GadzicMinister for Foreign Trade and Economic Relations of Bosnia and Herzegovina

Nikolay VassilevDeputy Prime Minister and Minister of Economy of the Republic of Bulgaria

Krunoslav PlackoDeputy Minister of Economy of the Republic of Croatia

Appendix 1


Ilija FilipovskiMinister of Economy of the Republic of Macedonia

Veceslav AfanasievDeputy Minister of Economy of the Republic of Moldova

Mircea GeoanaMinister of Foreign Affairs of the Republic of Romania

Mihajlo KovacAmbassador, Ministry of Foreign Affairs of Serbia and Montenegro

Goran PiticMinister of International Economic Relations of the Republic of Serbia

Slavica MilacicMinister of Foreign Economic Relations and EU Integration of the Republic of Montenegro

Appendix 1



Appendix 2.

LLiisstt ooff PPaarrttiicciippaannttss ttoo tthhee DDrraaffttiinngg SSeessssiioonn ffoorr tthhee 22nndd MMiinniisstteerriiaall CCoonnffeerreenncceeoonn AAttttrraaccttiinngg IInnvveessttmmeenntt ttoo SSoouutthh EEaasstt EEuurrooppee:: RReemmoovviinngg OObbssttaacclleess

BBUUCCHHAARREESSTT,, 55-66 JJUUNNEE 22000033

COUNTRY REPRESENTATIVES

AAllbbaanniiaa Mrs. Nevila Lama Tel: +355 (4) 36 46 73Chief of SME and FDI Unit Fax: +355 (4) 36 46 58Ministry of Economy [email protected]

AAuussttrriiaa Mr. Manfred Schekulin Tel: +43 (1) 711 00 5180Co-Chair of Investment Director Fax: +43 (1) 711 00 15101Compact Project Team Export and Investment Policy [email protected]

Federal Ministry for Economic Affairs and Labour

Mr. Norbert Streitmayer Tel: +43 (1) 71100 5135Senior Counsellor Fax: +43 (1) 711 00 15101Federal Ministry for Economic [email protected] and Labour

BBuullggaarriiaa Ms. Delyana Tomova Tel: +359 (2) 985 5512Expert Fax: +359 (2) 980 1320Bulgarian Foreign Investment Agency [email protected]

CCrrooaattiiaa Mr. Zeljko KupresakAmbassadorEmbassy of Croatia in Romania

GGeerrmmaannyy Mr. Wolfgang Limbert Tel: +40 (21) 224 3753Program Coordinator Fax: +40 (21) 224 3273IBT-GTZ [email protected]

RReeppuubblliicc ooff MMaacceeddoonniiaa Mr. Jani Bogoevski Tel: +32 (2) 401 87 22Expert, Working Table II Fax: +32 (2) 401 8712Stability Pact for South Eastern Europe [email protected]

MMoollddoovvaa Mr. Alexandru Caraman Tel: +373 (2) 242 055Investment Advisor Fax: +373 (2) 224 310Moldovan Investment [email protected] Agency

RRoommaanniiaa Mr. Cristian Diaconescu Tel: +40 (21) 230 71 19Co-Chair of Investment State Secretary Fax: +40 (21) 230 67 04Compact Project Team Ministry of Foreign Affairs [email protected]

Mr. Florin Tudorie Tel: +40 (21) 231 01 68Director, Directorate for Relations Fax: +40 (21) 230 7370with International Organisations [email protected] for Foreign Affairs

Mr. Robert Uzuna Tel: +40 (21) 230 2160 , ext. 1177Expert, Directorate for Relations Fax: +40 (21) 230 7370with International Organisations [email protected]

Mr. Mihaela Goj Tel: +40 (21) 233 91 09General Director, Department of Foreign Fax: +40 (21) 233 91 04Investment Assistance [email protected] Agency for Foreign Investments

SSeerrbbiiaa aanndd MMoonntteenneeggrroo Mr. Zoran Popovic Tel: +40 (21) 211 9871Minister Counsellor Fax: +40 (21) 210 0175Embassy of Serbia and Montenegro

Ms. Slavica Penev Tel: +381 (11) 36 13 049Senior Research Fellow Fax: +381 (11) 36 13 467Economics Institute [email protected] to the Investment Compact on National Treatment Studies

MMoonntteenneeggrroo Mr. Zoran Vukcevic Tel: +381 (81) 234 466Director Fax: +381 (81) 234 462Agency for Development of Small [email protected] Medium-Sized Enterprises

SSlloovveenniiaa Mr. Matija Rojec, PhD Tel: +386 1 478 10 03Faculty of Social Sciences Fax: +386 1 478 10 70University of Ljubljana [email protected] to the Investment Compact on National Treatment Studies

Appendix 2


STABILITY PACT, INTERNATIONAL AND REGIONAL ORGANISATIONS

OOEECCDD Mr. Rainer Geiger Tel: +33 (1) 45 24 91 03 Co-Chair of Investment Deputy Director Fax: +33 (1) 45 24 91 51 Compact Project Team Directorate for Financial, Fiscal, [email protected]

Enterprise Affairs

Mr. Declan Murphy Tel: +33 (1) 45 24 97 01Programme Director Fax: +33 (1) 45 24 93 35Investment Compact for [email protected] East Europe

Mr. Deniz Eröcal Tel: +33 (1) 45 24 95 65Administrator Fax: +33 (1) 45 24 93 35Investment Compact for [email protected] East Europe

UUNNMMIIKK Ms. Judith Safar Tel: +381 (38) 504 604 3923Legal Counsel Fax: +381 (38) 504 604 4920UNMIK EU Pillar [email protected]

PRIVATE SECTOR REPRESENTATIVES

AA..TT.. KKeeaarrnneeyy Mr. Anthony O’Sullivan Tel: +33 (1) 56 62 55 55Manager [email protected]

BBuussiinneessss aanndd IInndduussttrryy Mr. Charles Kovacs Tel: +361 469 7619AAddvviissoorryy CCoommmmiitttteeee Vice Chairman Fax: +361 469 7622ttoo OOEECCDD ((BBIIAACC)) Committee on Non-Member Economies [email protected]

SSyynneerrggyy Mrs. Mirela Apostol Tel: +40 (21) 313 9779Director Fax: +40 (21) 313 9789

[email protected]

Appendix 2


PPAARRTT TTWWOO

CCOOUUNNTTRRYY RREEVVIIEEWWSS


Chapter 3.

AALLBBAANNIIAA

1. INTRODUCTION

FDI inflows in Albania have been relatively low. At the end-of 2002, FDI stock was US$ 945 million.Annual FDI inflows in 1997-1999 were US$ 47.5 million, US$ 45 million and US$ 41.2 million, respectively.This is a considerable decrease compared to 1996, when the inflow was close to double this amount. Thedecline of FDI inflows since 1997 was due to the series of crises which affected the country; the first beingthe 1997 civil disturbances that followed the collapse of the pyramid financial schemes; followed by thecoup attempt in September 1998 and the Kosovo crisis in 1999. In the following years – 2000, 2001, and2002 – FDI inflows increased and were US$ 143 million, US$ 207 million USD, and approximately US$ 143million respectively (Bank of Albania). This increase is largely explained by the improvement in theoverall investment climate in the country and by the role of the privatisation process. In 2002, FDI inflowwas much lower than in 2001, due to the non-realisation of the privatisation programmes of some strategicstate companies.

Out of 61,859 active enterprises in Albania at the end of 2001, 1,793 (2.9 percent) were partly foreign-owned companies (joint ventures) and 1,122 (1.8 percent) were wholly foreign-owned companies. In termsof activity, 58.5 percent of the all foreign-controlled companies are in trade and retailing, 21.2 percent inindustry, 9.7 percent in services, 5.9 percent in construction, 3.8 percent in transport, and only 0.9 percent inagriculture (INSTAT, end-2001 data). In terms of value, 27 percent of total FDI stock is in trade, 21.2 percentin textile and leather manufacturing, 6.4 percent in food, beverages and tobacco, 6.2 percent in constructionand 24.3 percent in other sectors. (Bank of Albania, end-2001 data). The two largest investing countries inAlbania are, by far, Italy (48 percent of end-2001 FDI stock) and Greece (43 percent), followed by theRepublic of Macedonia and Turkey (2.2 percent each); the rest, 6.8 percent, is distributed among othercountries of Europe and the US. Foreign investments are mainly concentrated in the main districts of thecountry such as the capital of Tirana and Durres, the latter being the largest port of Albania, handling mostof the import-export activities. 67 percent of all foreign-controlled companies operate in these two locations.

2. DETERMINANTS OF EXISTING AND FUTURE FDI INFLOWS IN ALBANIA

2.1. Motivation of foreign investors for investing in Albania and strategies of foreign investors

In investing in Albania, foreign investors take into consideration all the strengths and opportunities thecountry gives to them. Being asked about their motivation for investing in Albania, almost all of theinterviewed answered that they try to have a dynamic evaluation of the country’s advantages anddisadvantages. They think that the advantages of the country are becoming stronger. They believe thatthe process of stabilisation and association with Europe and implementation of free trade agreements willimprove the situation considerably.

2.2. Investment opportunities and comparative advantages of Albania as an investment location

From a dynamic, future oriented perspective, there are a number of things which can be consideredas attractive factors for FDI in Albania. Resource-seeking, efficiency-seeking as well as market-seeking

investors can all find good reasons to invest in Albania. Albania offers to foreign investors: (i) geographicalproximity to major regional and European markets, (ii) access to Adriatic and Mediterranean seas, (iii) richnatural and tourist attractions, with an ideal climate and a coastline which stretches for over 450 km, (iv)rich mineral resources endowment, (v) strong work-culture, with a high percentage of young population,(vi) investment permissive legal environment, (vii) low-cost and relatively skilled labour. The progress ofstructural reforms, the intensification of regional co-operation and integration, the steps ahead in theprocess of association and integration with EU, are all factors which increase the value of the above-mentioned factors.

2.3. Barriers to FDI

In spite of positive trends in FDI inflows in the last three years, the as yet low level of FDI inflows andstock in the country points to the fact that serious barriers to investment exist. Although important,barriers like the small size of the domestic market (compared to a number of countries in the region,Albania is not worse off in this regard) and backwardness inherited from the past or poor initial conditionsof the reforms, can not be considered as the main sources of problems for foreign investors. Also, Albanianlegislation does offer a permissive climate for investment. The main barriers to FDI in Albania relate toinsufficient progress made in the transition process and structural reforms as well as to the overall politicaland security developments in the country. The general investment climate has been improved at a fasterrate. While considerable improvements have been made in recent years, there are some administrativebarriers for doing business in Albania.

The Investor Targeting Strategy for Albania pointed out some of the directions to be focused on inorder to increase FDI levels in the country: (i) privatisation of strategic assets, such as: Albtelecom,Savings Bank, etc.; (ii) implementation of laws; (iii) low cost and efficient infrastructure for export orientedFDI and tourism; (iv) tax administration, especially related to income tax, value-added-tax (VAT) andcustoms; (v) development of the financial sector and availability of financial services to the private sectorresulting in high real interest rates, weak credit inter-mediation services (lack of long-term financing andleasing), high collateral requirements, poor payment and depository services; (vi) legal andadministrative framework to record and protect property rights and land use in urban areas for tourism,as well as commercial and industrial uses (Ministry of Economy 2002).

FIAS, based on views expressed by foreign investors and other sources, basically agrees with theabove findings and points to some other problems in the Albanian investment climate. In Albania,bureaucratic bottlenecks, compounded by weak law enforcement and strong corruption, are majorimpediments to the growth of private investments (FIAS 2001). Administrative barriers are a substantialimpediment to investors, but can be removed by a more aggressive government reform (FIAS 2003). Moreprecisely, the major problems related to weak governance and institutions are: (i) a serious lack ofimplementing regulations and operational guidelines, which leads to a lack of transparency inimplementation and allows for considerable room for discretionary decision-making in the administration;(ii) a systematic lack of effective institutional structures; (iii) legal and regulatory enforcement ischronically lacking; (iv) administration is further weakened by the lack of development of appropriatemindset and skills of officials at all levels; (v) in this context, corruption stands out as the most seriousfactor impeding reform efforts (FIAS 2003).

Four specific areas of administration barriers to investment in Albania stand out as the mostproblematic: (a) custom duties, specifically problems related to import and export procedures, customevaluation, appeals system, and poor dialogue with businesses; (b) tax administration, specifically in thearea of poor registration, auditing, calculation and prepayment of profit tax, extremely poor and unclearinternal appeals procedures, a VAT refund system which does not work, and taxpayer information; (c) landand construction permits, specifically in the area of pervasive land property conflicts unsettled, andpervasive illegal constructions; (d) sector licensing, specifically related to the “non-food licence"8 whichserves no valid purposes but deters potential foreign investors (FIAS 2003).

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2.4. Determinants of future FDI trends in Albania

Future FDI trends in Albania will to a great extent depend on the progress of the structural reforms,aiming at the creation of a friendly environment for business and investment. These trends will be relatedto the protection of ownership rights, enforcing contracts, reduction of the administration power over theprivate sector and its transparent use, and the reduction of the involvement of public administration ingeneral. Specifically, FDI will depend on the progress made in addressing the most persistentadministrative barriers, faced by private investors.

In the short term, an important possibility for increasing FDI in Albania will be the privatisation ofstate-owned companies in the strategic sectors. Involvement of foreign private investments in theprovision of infrastructure services is another potential source of FDI. On a medium to long term basis,Albanian resource endowments can be a particular attraction for foreign investors, providing that progressin structural and administrative reforms will be adequate.

3. TRANSITION PROCESS IN ALBANIA, AND THE FDI REGULATORY FRAMEWORK AND POLICIES

3.1. The current status of the transition process and major future transition tasks

Having passed through the turmoil of 1997, following the collapse of pyramid scheme, and beingadversely affected by the events in the region in the following years, Albania has achieved considerableprogress in many fields during the past 3-4 years., Most significantly, Albania has been able to developsound macroeconomic policies by further consolidating its macroeconomic stability. Throughout theduration of this period, GDP has grown at relatively high rates, inflation has been maintained at low levels,unemployment has been slightly decreasing, fiscal balance has shown an improvement tendency, andexchange rate has been stable. Nevertheless, Albania is still facing important macroeconomic challenges,such as the low level of GDP per capita, the as yet high level of budget deficit, the very high level of thecurrent account deficit, etc.

Structural reforms, which were interrupted in 1997, have shown some progress too. The privatisationof the strategic sectors started in 1998 and some strategic companies are already sold or are prepared tobe privatised. Some institutional reforms related to improving the business climate, promoting FDI,supporting small and medium sized enterprises and promoting exports are underway. Reform is going onin the financial market as well. The opening-up process of the country is continuing. Since 2000, Albaniahas been a member of the WTO and is trying to meet its commitments in due time. The trade regime isbecoming liberalised relatively quickly. There are no quantitative restrictions on imports nor on exports.The maximum tariff has been reduced to 15 percent.

During the last year a number of bilateral free trade agreements were signed with countries in theregion. At the beginning of this year Albania started the negotiations for the Stabilisation and AssociationAgreement with the EU. It is expected that this agreement will have a great impact in pushing all thestructural reforms ahead. The main directions of future transition reforms are: (i) fighting corruption,

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Table 2. Macroeconomic Indicators

11999977 11999988 11999999 22000000 22000011 22000022

GDP growth rate (%) -7.0 8.0 7.3 7.8 6.5 4.7

GDP per capita (US$) 672.9 842.1 1052.0 1128.0 1332.6 1521.0

Unemployment rate (%) 14.9 17.8 18.0 16.9 14.6 15.8

Inflation rate (%) 42.1 8.7 -1.0 4.2 3.5 2.1

Budgetary deficit (% of GDP ) -13.2 -11.3 -11.9 -9.1 -8.6 -6.2

Source: INSTAT, Ministry of Finance, Bank of Albania, IMF.

organised crime and illegal traffics; (ii) improving governance and further reforming the publicadministration; (iii) continuing privatisation, further institutionalisation of the market, improving thebusiness climate and attracting FDI; (iv) deepening the reform in the financial sector; (v) improvinginfrastructure and especially solving the electric power crises; (vi) reforming education and healthservices; (vii) maintaining high rates of GDP growth, increasing the competitiveness of the economy,promoting exports, further consolidating macroeconomic stability and alleviating poverty.

3.2. FDI strategy and policies

The best strategy for the country to attract FDI is to improve the business climate by, first of all,reducing the administrative barriers as described above. In this way the assets and strengths that Albaniapossesses will come to the forefront and will make the country more attractive. As the FIAS diagnosticstudy stresses, “focus should be placed on improving the investment climate (’the product’) before largeamounts of resources are dedicated to promoting FDI (marketing of ’product’). There is no point inpromoting a poor investment environment” (FIAS 2001).

The strategy should consider two phases. What can be done in the first phase is (i) promotingprivatisation, which is the most obvious potential for FDI in the short term; (ii) focusing on the servicingof existing and potential investors. Investor facilitation is the most basic, most important part of thepromotion and should always have a high priority. Existing investors are often the most important sourceof future FDI through project expansions and reinvestments and also through sending positive signals topotential investors abroad; (iii) policy advocacy focusing on successfully “marketing” Albania as aninvestment destination. Only in the second phase, once improvements are made in the investmentclimate, the investment promotion strategy should expand to include suitable image building (which istypically very costly) and more targeted investment promotion activities (FIAS 2001).

4. THE LEGAL AND REGULATORY MEASURES FOR FDI IN ALBANIA: GENERAL MEASURES

4.1. The existing regulatory framework for FDI in Albania

4.1.1. A general description of the regulatory framework

The most important law in the field of foreign investment in Albania is the “Law On ForeignInvestment” (No. 7764, date 2.11.1993). This Law aims to ensure a favourable investment climate forforeign investors in Albania. Under the Law, the investment conditions for foreigners are as favourable asfor the local investors. The national treatment is provided in Article 2 of the Law, which stipulates: “…It(foreign investment) is permitted and treated based on conditions not less favourable than those thatapply to domestic investments in similar circumstances, excluding ownership of land, which is regulatedby a special law". Foreign investment in Albania, according to the Law (Article 2), is not subject to priorauthorisation and no sector is closed to foreign investment.

According to the Law (Article 1, point 2), there is no restriction regarding the legal status of foreigninvestors. A foreign investor could be (1) every natural person that is a citizen of a foreign country, or (2)every natural person that is a citizen of the Republic of Albania but who has always resided outside thecountry, or (3) every legal entity founded according to the laws of a foreign country.

As expressed in the Law (Article 1, point 3), foreign investment is considered to be every investmentmade by a foreign investor, under its direct or indirect ownership, which consists of: (1) movable orimmovable assets, tangible or intangible assets, or any kind of possession; (2) a company, stock shares ina company and any form of participation in a company; (3) loans, financial obligations or obligations in anyactivity that has economic value and that is connected with an investment; (4) intellectual property,including literary, artistic, scientific, technological, audio-recording, invention, industrial design, know-how; (5) every right given by law or contract, and every licence or authorization given in accordance withthe laws.

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The Law also provides the following guarantees to foreign investors:

– Protection against expropriation. Article 4 of the Law says “Foreign investments will be expropriatedneither directly nor indirectly and will not be subject to any measure or similar action, except forpublic purposes determined by law". In cases of expropriation, a non-discriminatory, fair andeffective compensation based on the market value will take phase immediately (Article 5).

– Profit, other forms of revenues and capital repatriation. According to Article 7 of the Law, foreign investorshave the right to transfer out of the territory of the Republic of Albania all assets related to a foreigninvestment, including: (i) revenues; (ii) compensation; (iii) payments as a consequence of aninvestment disagreement; (iv) payment made under a contract, including loan and interestpayments according to a loan agreement; (v) revenues stemming from the sale or the payment ofany or all parts of an investment; (vi) return of shareholders equity, resulting from reduction ofcapital, when the company has decreased its capital according to Albanian legislation.

– More favourable treatment according to international agreements or treaties. To the extent that theinternational agreements or treaties ratified by the Parliament provide more extensive rights orprotection to a foreign investor than those provided by the Albanian legislation, the former prevail(see Article 9).

The main Albanian institution in the field of FDI is the Foreign Investment Promotion Agency,established at the beginning of 20039. Its function is to implement the government policy aimed atincreasing FDI. The Agency will serve as a “one stop servicing shop". The main objectives of the Agencyare: (i) improving the investment climate in Albania; (ii) facilitating the investment process; (iii) providingthe necessary information and investment procedures; (iv) policy advocacy.

In addition, the investment promotion network and stakeholders in Albania include the BusinessAdvisory Council (BAC), the Chamber of Commerce and Industry (CCI), the Regional DevelopmentAgencies (RDAs), the Albanian Guarantee Agency (AGA), and a number of business associations, includingthe Albanian Union of Business Associations (AUBA, or BOBSH), the Union of Investors in Albania (UIA)and the Foreign Investors Association of Albania (FIAA).

4.1.2. Approval and licensing/screening procedures

According to the Law “On Foreign Investment", no prior authorisation is required for a foreigninvestment. A foreign investment goes through the same procedures of registration and licensing (whenit applies) as any local investment.

4.2. Corporate organisation: regulations on company establishment and nationality of management

Corporate organisation in Albania is governed by the Law “On Commercial Companies” (Law No. 7638,of 19.11.1992). The four most common forms of Albanian businesses are: sole proprietorships,partnerships, limited liability companies and joint stock companies. Limited liability companies are themost common Albanian corporate form.

Procedures of company registration are based upon the Law “On the Commercial Register and theProcedures To Be Followed” (Law No. 7667, of 28.01.1993). According to the Law, upon establishment, acompany is required to register at the commercial register. In Albania, such register is held at the TiranaDistrict Court. The documents that should be attached to the request are: incorporation act; by-laws andbank deposit certificate for the start-up capital. The costs related to the registration of a company are1,500 Lekë, when the shareholders are Albanian nationals or national companies, and 5,000 Lekë if one ofthe shareholders is a foreign national/company.

For the registration of a branch of a foreign company the following documents are required:incorporation act of the parent company, by-laws of the parent company, the decision of the parentcompany for the opening of the branch, and the bank deposit certificate for the initial fund (the initial fund

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should be 100,000 Lekë10 in the case that parent company is a limited liability company, or 500,000 Lekëin the case that parent company is a joint stock company). Registration costs for a branch are 5,000 Lekë.

The overall perception is that the registration procedures a company must follow, prior to the start ofits activity, are lengthy. The opportunity costs are disproportionately high for small businesses. Some ofthe documents required are considered as redundant11. A “one stop shop” for data collection, with theaccompanying modernisation and centralisation of the data collection system providing for thesimultaneous registration of a company, would decrease the cost of company registration substantially.(Boga & Associate, 2002).

Many activities in Albania require licensing. Before engaging in an economic activity, a company mustenquire if a licence is required for the exercise of such activity. The procedures for getting a licence arethe same for national and foreign companies. The sector licensing area is reported on by FIAS as one ofthe four most problematic areas related to administrative barriers to investment in Albania. Based on theresults of an Administrative and Regulatory Cost Survey (ARCS) undertaken by a local NGO under theguidance of FIAS in summer 2002, FIAS recommended to the government limiting licences to areas of vital’public interest’12, by the adoption of a “negative list” concept. Referring to the “Non Food Industry”licence, FIAS recommended the elimination of this licence, considering it to be obsolete. In effect, thislicence appears to exist on the books only (FIAS 2003).

4.3. Employment of foreigners and movement of key personnel

The issuance of residence permits to foreigners is regulated by the Law “On Foreigners” (No. 8492, date27.05.1999) and also by a number of by-laws (DCM no. 439, date 04.08.2000 “On Procedures for Entering,Residence and Conditions of Foreigners in Republic of Albania"; DCM no. 532, date 24.09.2001 “On theamendments to DCM 439"; Instruction no. 2430, date 14.05.2001 of Ministry of Foreign Affairs; Instruction no.1460, date 21.05.2001 “On procedures for entrance, residence and conditions for foreigners in Albania). TheLaw “On Foreigners” complies with the provision of the Albanian Constitution, according to which “foreignershave the right of residence in the Republic of Albania according to the law” (Article 40). The Law recognisesand respects the general standards accepted by international acts (Article 3), such as the principle ofreciprocity, the principle of respect of human rights, as well as the interests of public and national security.

The Ministry of Public Order is the entity responsible for the issuance of residence permits toforeigners. The department in charge of the procedure within the ministry is the general directorate ofpolice. Foreigners who enter the territory of Albania through the border check points and who areequipped with a visa are eligible to apply for a residence permit. The permit is issued for a period ofminimum 3 months and maximum 5 years. It is possible to get a permanent residence permit, if it is thecase that the person has already received a 5-year permit and he/she can demonstrate that he/she has adurable and sustainable activity in the territory of the Republic of Albania. The tariff for a permit valid upto one year is 24,000 Lekë, while a permit that is valid for five years costs 60,000 Lekë.

To be able to work in Albania a foreign national should obtain a work permit issued by the Ministry ofLabour and Social Affairs. Work permits are regulated by the Law “On Issuing of Work Permit toForeigners” (No. 8492, date 27.05.1999) and by some by-laws (DCM no. 262, date 25.05.2000 “For ProvidingWork Permit to Foreigners"; Instruction no. 786, date 29.04.2001 “On Issuance of Work Permit toForeigners). Albanian legislation recognises four different types of work permits, namely for: employees(type A, B and C), self-employed persons (type D and E); students (type F), and employers (type G andH). A work permit is issued for a minimum period of six months (type A) and is limited in scope andgeographic area (types A, B and D). The maximum validity of the work permit is five years (types C, E andH); it can be issued without limitation in scope and is valid for the whole territory of Albania. The entityresponsible for the issuance of permits type A, B, D and F is the local employment office13. Work permitsof types C, E and H, which are valid for the whole territory of the country and unlimited in scope, fall underthe responsibility of the Migration Department at the Ministry of Labour and Social Affairs. Among thedocuments which should accompany the application form for a work permit is also the “written and proven

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confirmation from the employer testifying that for each foreign employee, s/he has employed twoAlbanian citizens". The rationale of this condition is the promotion of employment of local workers andalso the promotion of employment of qualified foreign personnel.

The issuance of a work permit can be refused on one or more of the following grounds: (i) the situationof the Albanian labour market does not allow it; (ii) the type of work and its performance according to thecontract is against Albanian legislation and international covenants; (iii) the required documentation isdeliberately left incomplete; (iv) the employer fails to properly advertise the vacancy; (v) the foreignemployee does not submit the request for renewal of the existing permit within the time limit set by thelaw; (vi) the applicant poses risks to the national security. (Boga & Associate, 2002)

According to the Albanian legislation, foreign citizens who work in Albania are provided with the rightto social insurance (Law No. 7703, date 11.5.1993 “On Social Insurance", Article 7, amended in 1995, 1996,1997), and health insurance (Law No. 7870, date 13.10.1994 “On Health Social Insurance", Article 4,amended in 1995),

According to the Law “On Civil Service” (No. 8095, date 21.3 1996, amended in 1998 and 1999), Article6, in special cases foreign citizens can also enter the civil service of the Republic of Albania n as civilservants. when that is “in conformity with the interest of the Albanian state” and derives frominternational obligations.

4.4. Real estate

Albanian legislation contains limitation with regard to the right of foreigners to acquire land in Albania.The Law “On the Land” (No. 7501 date 15.07.1991, amended in 1993, 1994, 1995), Articles 3, 4, and 5, doesnot permit foreigners to buy land. According to this law foreigners can only lease the land they require. Inthe area of leasing, foreigners receive the same treatment as nationals. The rational behind this measureis to prevent speculation with land by foreigners, considering the weak financial power of the Albaniancitizens for the last decade.

According to the Law “On Transferring the Rights of Ownership for Agricultural and Forestry Land,Meadows and Pastures” (No. 8337, date 30.4.1998), (Article 4), “The transferring of the ownership rights foragricultural and forestry land, meadows and pastures is not allowed to foreign natural and legal persons.Foreign natural and legal persons own the right to lease the land up to 99 years". The Ministry of Agricultureand Food is the responsible institution for the lease of state-owned agricultural land. According to the typeof activity the land will be used for, there are three types of lease contracts: (i) if the land is used foragricultural purposes, the lease is valid for a maximum of 10 years; (ii) if the land is used for dairyproduction, or the leased land is protected or is low forest, the lease is valid for a maximum of 30 years;(iii) for an activity in tourism, recreation, or if the land is high forest, the lease is offered for a maximum of99 years. Also in cases where the activity is sustained through investments, the lease for the first two typesof activities can be extended up to 99 years.

According to the Law “On Acquisition of Plots” (No. 7980, date 27 July 1995, amended in 1997), Article 5,foreign investors are entitled to buy state-owned non-agricultural land provided that the value of investmentis at least three times higher that the value of the land. From the moment of getting the construction permituntil s/he gets the ownership of the plot, the foreign natural or legal person pays the rent for using the plot.The rent is agreed in the contract. The price of eventual land acquisition is also predetermined in the contractas is the period of validity of the price. The Council of Ministers determines the value of such land. (Article 8). The rationale behind this measure is the promotion of investments and site developments.

4.5. Government procurement

Public procurement is regulated by the Law on Government Procurement (No. 7971, date 26.07.1995).The law aims at promoting efficiency in the use of public funds by ensuring that government procurement

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procedures are fair, transparent and non-discriminatory. The Government Procurement Agency is the stateagency in charge of co-ordination of the government procurement process. Public procurement contractsare awarded following a public tender procedure. The tender procedures can be open, restricted (in twophases), or direct. Foreigners are treated on the same footing and are subject to the same provisions asnationals in tenders. An “international open tender” may be launched to encourage foreign participation.Article 9 of the Law says that ’natural and legal persons cannot be excluded from participation in thegovernment procurement because of their citizenship".

5. THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORIAL MEASURES

5.1. Financial sector

Banking. Currently (April 2003), there are 15 commercial banks operating in Albania, of which only oneis still wholly state-owned (Savings Bank), two are in mixed ownership with a state equity, one is whollyprivate-owned by Albanian investors and the remaining 12 are wholly foreign-owned, operating either asaffiliates or branches of foreign banks. Another wholly locally-owned private bank, CREDINS Bank, is nowin place. The only remaining state-owned Savings Bank is under an intensive process of restructuring inorder to prepare itself for the privatisation process. The Bank of Albania is the institution eligible to grantlicences for local or foreign companies to operate as banks. The requirements and the process of licensingare regulated by the Law “On Banks in the Republic of Albania” (No. 8365, date 2.07.1999). Foreign banksare also allowed to open branches and representative offices in Albania.

A foreign bank that proposes to own more than 10 percent of the undersigned capital of a bank inAlbania should be authorised by the respective authority to engage in the business of accepting andcollecting money deposits or other repayable funds in the foreign country where its head office is located.The foreign authority, which supervises the financial activity of the head office of the foreign bank, givesits written consent for granting such a licence.

A foreign bank can open a branch in Albania. According to Article 10 of the Law, a licensed branch of aforeign bank cannot perform banking activity different to that of the parent bank. According to Article 9 ofthe Law, in order to obtain the licence for banking practice on the territory of Albania through a branch,the foreign bank should provide the Bank of Albania with a formal request accompanied by all thedocuments required for licensing a local bank, plus some additional documents, i.e.: (i) the bankingpermit given by the respective authorities in the country of residence; (ii) the establishment act and thebank statute, including information on the address of the bank, a description of the bank’s activity, theamount of capital, the management structure and its administrators; (iii) the balance sheet and the yearlyconsolidated report, and also the opinion of the authorised accountancy related to the control of theyearly balance sheet and consolidated balance sheet for the three last years; (iv) consent for the openingof the branch of the foreign bank, given by respective licensing and supervising authorities; (v) theamount of the initial capital gifted, quoted by the Bank of Albania. At least two administrators of a branchof the foreign bank must be residents in Albania. The term “resident” does not mean “national". Accordingto the Civil Code of the Republic of Albania, a resident is a person, foreigner or Albanian, who lives in theterritory of the Republic of Albania for more than 183 days within a year.

Insurance. According to the Law “On Insurance and Reinsurance Business” (No. 8081, dated 7.03.1996)and the Law “On Some Changes on Amendments of the Law No. 8081, date 7.03.1996 On activity ofinsurance and reinsurance changed by the Law No. 8458, date 11.02.1999” (No. 8606, date 27.04.2000),official authorisation is required to establish an insurance company, being locally or foreign owned. TheAlbanian Insurance Supervisory Commission is the eligible institution in granting such authorization.There are no limitations on foreign equity participation in insurance companies in Albania, neither thereare any reciprocity conditions. The Law also explicitly says (Article 28, amended in 2000) that foreignpersons, physical or juridical, can take part in the establishment of local insurance and/or reinsurancecompanies, or can buy an unlimited amount of shares in those companies.

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A foreign company has to carry out in the territory of the Republic of Albania, an insurance and/orreinsurance activity only through a branch14 located in the territory of the Republic of Albania. Theconditions a foreign company must fulfil to get the authorisation from the Albanian Insurance SupervisoryCommission to perform insurance activities in Albania are: (i) to be authorised for carrying out insuranceactivities according to the legislation of the home country and to have at least 5 years experience ininsurance activities; (ii) to establish a branch, which will carry out insurance operations in Albania; (iii) toassume that this branch will keep and maintain special accounting and all documents related to itsactivity; (iv) to have Albanian assets at a value of at least 50 percent of the minimum guarantee funddefined by one of the articles of the law, and to deposit 25 percent of this minimum fund as a guaranteewhich will be reimbursed in the case where the authorisation is not issued; (v) to meet the solvencymargin; (vi) to submit a business program.

5.2. Telecommunications

Foreign investors have been invited to acquire shares in telecommunications through open bids, withuniversal rules applying to all participants. Examples include the privatisation of AMC, the issue of thesecond GSM mobile licence, and the launch of the privatisation process of Albtelecom sh.a. In all of thesecases, the golden share has been offered to foreign investors and no special authorisation has beenrequired. 85 percent equity share of the first GSM mobile operator, “AMC sh.a.", has been bought throughan open international tender by Greek COSMOTE and Norwegian TELENOR (15 percent of the companyremains in the state ownership). Also the second GSM mobile licence has been sold through an openinternational tender to VODAFONE Group, now Vodafone Albania sh.a. There is no restriction onemploying foreigners in the foreign-owned telecommunication companies. For example, in AMC sh.a., theGeneral Manager, the Marketing Division Manager and the Finance Division Manager, are foreigners, whilethe Technical Division Manager is Albanian. The same situation exists in Vodafone Albania sh.a.

5.3. Transport (air transport, road transport, railroad transport, maritime transport)

Albanian law does not put any restrictions on foreign natural or legal person to exercise transportactivity in Albania. The licence issuance criteria are the same for nationals and foreigners.

For maritime transport there is no restriction if the foreigners are registered in Albania and fly theAlbanian flag. For foreign flag ships the International Regulations are applied. Based on InternationalRegulations but also on national legislation, only Albanian ships flying Albanian flag are allowed toexercise activity in inner maritime transport (cabotage). There is no legislation yet regarding theestablishment and operation of the yacht harbours facility (preparation of appropriate legislation isunderway), and regarding offshore activities in coastal waters (dredging and salvage). A free fiscal zone atDurres See Port is in the process of being established (Questionnaire).

There is no discrimination against foreign investors in the area of air transportation. The same licencecriteria are applied. Authorisation from the Ministry of Transport is required for commercial aviation forboth nationals and foreigners.

5.4. Energy

Electric energy. There are several laws related to the electric power sector: (i) Law “On the Concessionsand Participation of the Private Sector in Utilities and Infrastructure” (No. 7973, date 26/7/1995), and someamendments; (ii) a new Law “On the Electric Power Sector", which includes two old laws “On the ElectricPower” (No. 7962, date 13.7.1995) and law “On Regulation of the Electric Power Sector” (No. 7970, date20.07.1995). This new law has been approved by the Albanian Parliament and is waiting to enter in force;( (iii) Law “On Regulation of Electric Power Sector” (No. 7970, date 20.07.1995); (iv) Law “On Privatizationof Local Hydropower” (No. 8527, date 23.9.1999); (v) Law “On Creation of Facilitating the Construction ofthe New Resources of Production of Electric Power” (No. 8987, date 24.12.2002). According to the new Law“On the Electric Power Sector", a licence is needed for operation in the market of local and foreign

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operators. The licensee is the Energy Power Regulator Entity. According to the Law, an authorisation isrequired for investing in the production of electric power for both local and foreign investors. In the fieldof production there is no limitation for foreign participation (Law No. 8987, date 24.12.2002, On Creationof Facilitating the Construction of the New Resources of Production of Electric Power"). Distribution is stilla monopoly owned by the state (with the exception of three local companies with 30 percent privateownership).

Oil and Gas. According to the Petroleum Law (Exploration and Production) (No. 7746, date 28.07.1993),there is no limitation for foreign investors participation in the exploration and production of oil and gas inthe territory of the Republic of Albania. The licence is issued by the Ministry of Industry and Energy toany applicant, local or foreign legal person, which has the technical competency and financial resourcesto realise extraction and production of oil and gas. This activity is done based on an HidrocarbureAgreement, which reflects the licensing conditions formulated by the Ministry. The Agreement isapproved by the Government. The Ministry assists the applicant to take all the required permits for theactivity to be done. During the last 12 years, foreign companies have exercised activity in 11 explorationblocs and in one oil source by investing in total around US$ 350 million.

According to the Law “For Processing, Transportation and Trading of Oil, Gas and their By-products”(No. 8450, date 24.02.1999) and the related by-laws, the same treatment is provided to domestic andforeign-controlled enterprises and foreign investors. There are 11 companies with foreign capitaloperating in the market (out of a total of 80), of which 5 are in partial foreign ownership and 6 are whollyforeign-owned (Questionnaire).

5.5. Sectoral restrictions related to security and public order

The activities related to security and public order are subject to a licence regime.

5.6. Other sectors

Mining. According to the Law No. 7796, date 17.02.1994, there are no legal barriers for foreign investorsto obtain a mining licence; they are offered the same treatment as local companies. No authorisation fromthe government is needed for taking a licence. The foreign companies can invest directly, without anyneed for having local companies as partners. To date 19 foreign companies have been provided withmining exploitation licences. The existing mines (mostly of chrome and cooper), which have been part ofstrategic sectors, are governed by the Law on Concessions (No. 7973, date 26.07.1995). Two concessionshave been given until now in chrome mining, and one in cooper mining (Questionnaire).

Fishing. According to Article 19 of the Law “On Fishery and Aquaculture” (No. 7908, date on 5.4.1995),the Ministry of Agriculture and Food has the exclusive right to issue licences for fishing, or other activitiesrelated to fishing, to foreign vessels or persons, (i) on the basis of international agreements in force withthe country to which the foreign vessel or persons belong; or (ii) in cases when the issuing of the licenceis considered: a) necessary for the economy of the country and particularly when the applicant undertakesbeneficial investments for the fishery sector in Republic of Albania (only where the investments are in linewith policies and strategies formulated for the development of this sector); b) necessary for thesustainable use of resources, considering the national capacity for fishing and its development; c) incompliance with the policy of the Republic of Albania regarding foreign investments and especially withthe future goals and objectives of fishery and aquaculture administration plan. Article 20 of the Law saysthat the issuing of licences is prohibited for foreign vessels applying for demersal fishing with trawls andfishing and/or collection of bivalve molluscs.

According to Article 21 of the Law, every Albanian or foreign vessel, provided with a licence forprofessional fishing in the waters of the Republic of Albania, must return to an Albanian harbour afterfishing and before possible exporting of aquatic species caught, for provision of requirements stipulatedunder legislation in force (Questionnaire).

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Broadcasting – Radio and television. The law on “Public and Private Radio and Television in the Republicof Albania", (No. 8410 dated 30.09.1998) states that there is no discrimination against foreign investors. Inorder to obtain a broadcasting licence, the entity must be a joint stock company incorporated in Albania,dealing only with broadcasting. The joint stock company should have at least 3 shareholders and none ofthem can own more than 40 percent of the shares (Article 20). The body responsible for the issuance oflicences is the National Council on Radio and Television. Although the measure is not explicitlydifferentiating towards foreigners, indirectly it obliges them to establish a new legal person as a jointstock company in accordance with the Albanian legislation. So far, the National Council has issued onlythree country wide licences (Questionnaire).

Health sector. Albanian health legislation does not contain any legal measure that provides deviationfrom national treatment for both incoming investments and activities by already established foreign-controlled enterprises. The foreigners receive the same treatment as the national investors and they haveto consider and execute the same technical regulations. The only restriction relates to the Order ofMinister of Health “On licence granting for professional health practice in free private activity” (No 108,date 19.04.2002), point 3/1. According to this measure, the licensing to foreigners would be applicable onlyif they cooperate with an Albanian professional in the field of activity to be practiced. The purpose tointroduce this measure is to insure: (i) a better communication with the patients; (ii) a better relation withthe Albanian government (for fiscal and administrative purposes) (Questionnaire).

6. OTHER RELEVANT ELEMENTS OF FDI FRAMEWORK

6.1. Privatisation

The privatisation process of state owned enterprises in Albania started in 1991, based on the Law “On Sanctioning, Protection of Private Ownership, Free Enterprise, Independent Private Activities andPrivatisation” (No. 7512, date 10.8.1991, amended in 1992, 1993, 1995, 1998). Among other laws related tothe privatisation the Law “On the Strategy of Privatisation of Sectors of Special Importance” (No. 8306, date14.3.1998) is also very relevant. According to this law, all the state-owned companies in all sectors are opento privatisation. Article 3 of the Law “On Sanctioning, Protection of Private Ownership, Free Enterprise,Independent Private Activities and Privatisation” states that ’all the sectors of the economy are free to getprivatised and to exercise private activity’. Article 3 of the Law “On the Strategy of Privatisation of Sectorsof Special Importance” stipulates that ’state enterprises and commercial companies with state capital whichoperate in the sectors of a special importance are open to privatisation’. The privatisation process has beenconsidered as a way of attracting foreign investors, especially through the privatisation of strategiccompanies. According to Article 7 of the Law on the Strategy of Privatisation of Sectors of SpecialImportance, “the privatisation of strategic sectors will be realised with the participation of strategicinvestors, which are offered not less than 30 percent of the shares…"

At the beginning of the privatisation process, there were at least 2,434 state enterprises in Albania,belonging to 18 sectors of the economy. More than half of them were in the sectors of trade, services,agriculture and agro-processing (Ministry of Economy). In 1991, The National Agency of Privatisation (ANP)and The Preparatory Privatisation Committee were created as institutions to deal with the privatisationprocess. In the initial period of 1991-1992, the so-called small privatisation took place, by using the directsale method, mainly to the employees. The average value of transaction in those years was aroundUS$ 300. In 1995, based on the DCM “On privatisation of SMEs” (No. 203, date 03.05.1995), the method ofpublic tender came into use. The total value of the privatised objects by using the direct sale method andthe public tender method was 20,507.6 million Lekë (Ministry of Economy). During the period from 1995to the beginning of 1997 the Mass Privatisation Method (MPM) was applied, while the public tendermethod was still in use (this method is still in use today). With MPM 97 objects were sold with a total valueof 5,337.9 million Lekë.

Since 1998, the attention has been concentrated on the privatisation of strategic companies, although theprivatisation of non-strategic companies is still on-going. The privatisation of strategic sectors is based on

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the Law “On the Strategy of Privatisation of Sectors of Special Importance” (No. 8306, date 14.3.1998). Article4 of the Law considers as sectors of special importance (strategic sectors) electric power, oil and gas, mining,post and telecommunications, forests and waters, automobile roads and railroads, sea ports, airports, airand railway transport, as well as wholly stated-owned second tier banks, and wholly state owned insurancecompanies. Enterprises or sections of them, which have stopped their economic activity or have resulted infinancial losses for more than three consecutive years, are not included in the sectors of special importance.The institute responsible for the process is the Consultancy and Transparency Committee. According to theLaw, the form and the formula for the privatisation of each company belonging in the strategic sectors isdecided by a specific law. The main objectives of this phase of privatisation is to provide long-term growth,to improve economic efficiency, to increase the effectiveness of the market through the promotion ofcompetition and continued deregulation, and to attract foreign capital into the key sectors of the Albanianeconomy (i.e., oil and gas, banking, telecommunication, utilities, mining and transport).

In the short to medium-term, privatisation is considered to be responsible for the lion’s share of FDIinflows. Privatisation can also serve as an important signal to foreign investors through raisingexpectations of future positive developments in the investment climate. This is of particular significanceto the privatisation of infrastructure. Albania’s potential to attract greater levels of FDI throughprivatisation is demonstrated through the recent sales of state assets in mobile telecom and banking. AGreek-Norwegian consortium in September 2000 bought 85 percent of the country’s only mobiletelecommunication company (AMC), paying twice as much (US$ 82 million) as the total sum of FDI inflowin 1999. Now another private mobile telecom company, (with 10 percent foreign capital), VodafoneAlbania sh.a., is operating in Albania, having being granted its licence in the year 2000. In June 2000, theNational Commercial Bank was sold to foreign investors (Kentbank, Turkey), EBRD, and IFC, attractingnearly US$ 10 million.

The Savings Bank, Albtelecom, etc. are also under the process of preparation for privatisation. Thegovernment is working on the privatisation of Rinas Airport. The privatisation program is extended in allother strategic sectors, such as energy, mining, utilities, infrastructure and transport. In the electric energy,oil, water supply and mining sectors, concession agreements are being implemented.

6.2. Monopolies and concessions

6.2.1. Monopolies

Law “On Competition” No. 8044, dated 7.12.1995 aims to protect and promote competition in themarket. The entity responsible for applying the Law is the Directorate of Competition at the Ministry ofEconomy15. The Law considers as unacceptable the dominant position of a company. A dominant positionis defined as a position in which a firm or a group of firms has a market share of more than 40 percent(Article 4). When such a case occurs , the Competition Directorate decides to separate the company intoindependent entities (Article 5). According to the Law (Article 13) the Competition Directorate does notallow the merger of companies when such merger creates a dominant position in the market. The effectof this law in practice has not been considerable. A new draft is already prepared, waiting to enter intothe approval procedures. The new draft does not address the “dominant position” any longer.

Monopolies in the country are mainly considered to be public utilities, such as telecommunications,energy, oil and gas and water supply. Regulatory Entities are created and operate in each of these sectors.

6.2.2. Concessions

The legislative framework in the field of concessions is set out in the Law “On Concessions andParticipation of the Private Sector in the Public Services and Infrastructure” (No. 7973 26 July 1995,amended in 1996 and 1998). The fields where the Law applies are: (i) transport, including highways androads, engineering structures, railways and railway transport, channels, ports, airports, bridges andtunnels; (ii) production, transmission and distribution of electrical energy, according to the existing

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legislation; (iii) telecommunications; (iv) water supply including production, administration, purificationand distribution; (v) management, collection, transport, processing and elimination of solid and/ordangerous waste; (vi) industrial zones and parks, free zones and export zones; (vii) supplying of naturalgas, oil and oil by-products, including their transport, distribution, and storage; (viii) zones with tourismpriority; (ix) mineral sector.

According to the Law, relationships regarding public services and infrastructure projects are regulatedby contracts, which may take one of the following forms: (i) Concessions Contract; (ii) Rental Contract; (iii)Management Contract; (iv) BOO/BOT/ROT/BLT/BOOT Contracts; (v) Service Contract. Contracts may havea duration of up to 30 years. According to the fields applied, the contracts should be approved by theCouncil of Ministers or the local government. Disputes arising in the implementation and interpretationof the contracts are resolved by Albanian courts or by an arbitration court as agreed in the contract. Exceptfor the exclusivity in exercising the activity in the field, the contractor may be given other incentives asforeseen in the Law and agreed in the contract. By law, foreign investors are treated on equal footing. Inpractice, the policy aims at attracting foreign investors in concession contracts.

6.3. Investment incentives

Prior to 1999, a number of investment incentives were used in Albania, including tax holidays andreinvestment allowances. Under the original Law on Profit Tax, a tax holiday of 4 years was granted todomestic and foreign investors in the manufacturing sector, provided the investment was for a period of10 years or more. Investors in priority tourism development zones were given a 5-year tax holiday. Theholiday provisions were grandfathered (companies eligible for concessions were permitted to retainprivileges). A reinvestment allowance was also provided, claimed against profit tax, and earned at the rateof 60 percent on the portion of investment financed by retained earnings. An additional 40 percentreinvestment allowance was given to investors in priority tourism development zones. In 1999 the aboveinvestment incentives were phased out as they were deemed ineffective in attracting FDI in the country.

Currently, the Law “On Concessions” provides certain kinds of investment incentives, including fiscalones. Also, the Law “On Free Zones” (8636, date 6.07.2000) provides fiscal incentives. The NationalAuthority of Free Zones is in charge of administration of the free zones and licensing of natural or legalpersons, wishing to establish or carry out any activity within the free zone. To date, no free zone isestablished. Fiscal exemptions for doing business in the zones are foreseen in Article 18 of the Law.According to this Article, all goods brought in the free zone from the licensed persons and also servicesaccomplished within the zone related to these goods, are exempted from custom duties and VAT. Fiscalexemptions start from the moment of licensing.

Law No. 8987, date 24.12.2002, “On Creation of Facilitating the Construction of the New Resources ofProduction of Electric Power” contains fiscal incentives in Article 2 and 3. According to Article 2, every legalperson, Albanian or foreigner, who intend to establish facilities to produce electric power in Albania, isexempted from the payment of custom duties for machineries and equipment. Law No. 7665, date21.01.1993 “For the development of tourism zones” in Article 6, also provides certain fiscal incentives forthose persons engaged in tourism activities. This person can be every legal or physical person, Albanianor foreign, authorised to operate in a stimulating activity in the tourism sector.

6.4. Tax measures

The progress Albania has made towards a market economy has been accompanied by progress madealso in the tax system. The tax regime in Albania is applied at national and local (municipal) level. Localtaxes include, among others, garbage disposal and cleaning taxes, TV tax, advertisement tax, market tax,turnover tax for the catering business, domestic animals tax, parking tax, tax for new buildings, andhaunting tax. The national level is by far the most important one. The national tax system is composed oftwo main direct taxes (corporate income tax and personal income tax) and two main indirect taxes (VATand excise duties).

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The rate of corporate income tax is 25 percent, calculated on the basis of annual income. Residenttaxpayers are subject to corporate income tax for taxable income derived from all sources, within oroutside the territory of the Republic of Albania, while non-resident taxpayers are subject to this tax onlyfor the income derived from sources within the Republic of Albania. A number of expenses made by thecompany are considered by law as non-deductible expenses, including the cost of acquisition,improvement, renovation and reconstruction of depreciable assets, expenses for gifts and donations,representation expenses, etc. Depreciation of assets is calculated based on the straight line method, with5 percent for buildings and machinery incorporated in the building and 10 percent for intangible assets.The rate of depreciation is 25 percent for the information system and 20 percent for the other assets. Awithholding tax is applied for payment of dividends, interest, copyrights and royalty deriving fromintellectual properties, technical services and management, construction, instalment and assembling. Forforeigners the rate of the withholding tax is 15 percent, whereas for residents it is 10 percent. Forforeigners, the withholding tax rate may be reduced by treaty (up to 0 percent as in the case withholdingtax rate on interest for Hungarian residents). A number of treaties are in place. Personal income tax iscalculated based on progressive rates. The first 14,000 Lekë per month is exempt from tax and the toprate of 25 percent is payable on monthly income in excess of 150,000 Lekë.

The rate of Value Added Tax (VAT) is 20 percent. Businesses are subject to this tax if their annual turnoverexceeds the amount of 8 million Lekë. Reimbursements are made where the amount in question exceeds400,000 Lekë. Reimbursements to exporters are required to be made within 30 days of application. Thereare a number of VAT exemptions, including exports, goods supplied under the temporary regime for jobprocessing activities, services and supplies of goods related to financial activities, etc. Excise duties areapplied to a number of products, like alcohol, mineral oils, tobacco, coffee, perfumes, soft drinks, etc.Exports of all these products are excluded. Import duties are applied at four rates: 0 percent, 2 percent,10 percent, and 15 percent.

6.5. Free zones

The Law “On Free Zones", (No. 8636, date 6.7.2000), regulates the establishment of free zones andrelated matters. The Council of Ministers is responsible for determining the areas and boundaries of freezones on a case by case basis and approving the creation of economic activities to be performed in thezone. The National Authority of Free Zones is in charge of administration of the free zones and thegranting of licences to interested natural or legal persons, wishing to establish or carry out any activitywithin the free zone. To date no free zone is established. Fiscal exemptions for doing business in thezones are foreseen in Article 18 of the Law. According to this Article, all goods brought in the free zonefrom the licensed persons as well as services accomplished within the zone related to these goods, areexempted from custom duties and VAT. Fiscal exemption starts from the moment of licensing.

6.6. Foreign exchange controls

The use of foreign currency is allowed as a means of payment in the Republic of Albania. There areno constraints on trading with hard currency. Payments between private individuals and legal entities areconsidered to be a civil law relationship and are subject to the Civil Code (1994).

All the commercial banks licensed by the Bank of Albania may carry out foreign payments. The Bankof Albania, which is responsible for managing the reserves in foreign currency, is also active in performinginternational payments. Every local or foreign person may own an unlimited number of accounts in anycurrency, in any bank in the country. In the case of foreign investment, Albanian and foreigners can easilycarry out value transactions.

The transfer of capital outwards from Albania can be carried out on the basis of a formal preliminaryapproval by the Bank of Albania. There are some exceptions, specified in the regulations for “ForeignCurrency Activity” (No. 12, date 21.02.2001, Bank of Albania). Transfers and payments abroad can be affected by any commercial bank after the presentation of proper documentation. The transfer

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of capital into Albania can be carried out freely by the subjects, regardless of whether they areresidents or not.

Capital transfer in the country is allowed without limitations, capital transfer from the country isunlimited in the cases of foreign investment return and for non-residents but this is subject to satisfactorycompletion of certain documents. For Albanians, capital transfer from the country is allowed withoutauthorisation for amounts within a ceiling, but they have to demonstrate justification documents. For theamounts above this ceiling, authorisation from the Bank of Albania is requested (Bank of AlbaniaRegulation for Foreign Currency Activity", No. 12, date 21.02.2001 Articles 9, 10, and 11)

Every person can transfer outwards from Albania, only in one bank or branch, an amount of US$ 20,000or other foreign currency equivalent, for one transfer a year. Transfers of up to US$ 200,000, or the foreigncurrency equivalent, by the same individual, can be carried out after the presentation of specificinformation and documentation to the bank. Local and foreign natural persons, entering Albania, have todeclare the amount in cash and cheques over US$ 10,000 or their equivalent. Foreign persons can takeout of the country, in cash or cheques, amounts not exceeding the value declared at the moment of entry.Local persons can take out of the country in cash and travellers’ cheques, an amount up to US$ 10,000 orits equivalent in other currencies. Albanian businessmen can not take out of the country more than US$25,000 in cash or cheques. No one is allowed to physically take out of the country more then 100,000 Lekëper person. Only the Bank of Albania can allow such exceptions.

According to the Law “On Foreign Investment” there are no restrictions on the transfer of investmentrelated funds. Under the Law (Article 7), foreign investors have the right to transfer out of the territory ofthe Republic of Albania all assets related to a foreign investment, in any easily convertible currency,calculated according to the spot exchange rate of transactions on the day of transfer in the currency inwhich their investment will be transferred. According to the Law (Article 7, point 3), the transfer right canbe limited only through impartial and non-discriminatory application of laws of a general character,including those regarding the payment of taxes and fulfilment of duties and court decisions.

6.7. Investment protection, double taxation and trade agreements

Albania has taken important steps in opening up towards the regional and international markets. Theprocess of regional integration, which is considered as a step towards European integration of the country,is fully supported by the government. A number of Free Trade Agreements (FTA) with the countries in theregion have already been signed and ratified or are presently being finalised. Albania has already signedFTAs with the Republic of Macedonia, Croatia, Romania, Serbia and Montenegro, Bulgaria, and Bosnia-Herzegovina. An FTA with Moldova is under negotiation.

Albania has also signed Agreements of Mutual Protection and Promotion of Foreign Investment with30 countries (as at December 2002): Greece (August 1991), Italy (September 1991), Germany (October1991), China (February 1992), Turkey (June 1992), Switzerland (September 1992), Austria (March 1993),Croatia (May 1993), Poland (March 1993), Egypt (May 1993), Tunis (October 1993), Malaysia (January 1994),Great Britain (March 1994), Bulgaria (April 1994), Netherlands (April 1994), Romania (May 1994), Czech Republic (June 1994), Israel (January 1995), USA (January 1995), Sweden (March 1995), Russia (April1995), France (June 1995), Denmark (August 1995), Hungary (January 1996), Finland (June 1997), Slovenia (October 1997), Republic of Macedonia (December 1997), Portugal (September 1998), Belgium-Luxembourg (February 1999), Ukraine (October 2002).

Double taxation treaties have been signed and are already in force with 19 countries (as at April 2003):Poland (January 1995), Romania (January 1995), Malaysia (January 1995), Hungary (January 1996), Turkey(January 1997), Czech Republic (January 1997), Russian Federation (January 1998), Republic of Macedonia(January 1999), Croatia (January 1999), Bulgaria (January 2000), Italy (January 2000), Sweden (January 2000),Norway (January 2000), Greece (January 2001), Malta (January 2001), Switzerland (January 2001), Belgium(April 2003), France (April 2003), Moldavia (April 2003).

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RREEFFEERREENNCCEESS

Boga & Associates. 2002. Administrative Barriers to Investment in Albania, Initial Report.

Bulgaria Economic Forum, Sofia. Investment Guide for Southeast Europe 2003. Ivanov, Eugeniy, Iva Stoykova & Yordanka Palahanova.

European Commission. 2001. Albania, Country Strategy Paper 2002-2006. Brussels.

FIAS. 2001. Albania: Diagnostic Study. Washington, D.C.: Foreign Investment Advisory Service.

FIAS. 2003. Albania: Removing Administrative Barriers To Investment: A Critical Component Of The NationalDevelopment Strategy. Washington, D.C.: Foreign Investment Advisory Service.

Investment Compact (Stability Pact for South East Europe). 2002. Progress in Policy Reform in South EastEurope, Monitoring Instruments

Ministry of Economy (Republic of Albania), UNCTAD, UNDP. 2002. Investor Targeting Strategy for Albania.Tirana.

Questionnaire for the Identification of Deviations from National Treatment for Incoming Investment andfor Activities by Established Foreign-Controlled Enterprises responded by the Country EconomicTeam Leader for Albania, OECD, 2003.

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NNOOTTEESS

8. The “non-food industry” license is issued by the General Directorate of Industry, Ministry of Industryand Energy, for the purpose of regulating entry and operation in light manufacturing industries suchas shoes, clothing, leather, wood furniture, rubber and scrap metal. In practice, it is largely ignored bybusinesses. Because of the license’s continued existence, the potential exists for an official, at somepoint, to harass companies, on an ad hoc and highly discretionary basis. More importantly, potentialforeign investors considering Albania as a location start by reviewing the country’s laws andregulations and are likely to be deterred by the very existence of such an outdated legal regulatoryrequirement. (FIAS 2003).

9. The Albanian Agency for Foreign Investment Promotion was preceded by other agencies in the field:The first was the Foreign Investment Agency, established in 1991, which was replaced by the AlbanianCenter for Foreign Investment Promotion in 1993. The latter was replaced by The Albanian EconomicDevelopment Agency (AEDA) in 1998. AEDA’s mandate of activities was too wide to be an effectiveinvestment promotion agency. AEDA was replaced by the Albanian Foreign Investment PromotionAgency in 2003.

10. The current exchange rate of Lekë (the Albanian currency) to Euro is 140 Lekë for one Euro.

11. Registration and also license procedures create a burden for FDI and represent a possibility for a defacto discrimination. However, companies (including foreign ones) are most concerned about theoperational procedures such as customs and tax administration (FIAS 2003).

12. Such as public utilities, forests and mineral deposits, banking, privatisation, construction,pharmaceutical sector, defend related industries and mass communications.

13. There are 22 local employment offices located all over the country.

14. In the Law “On Insurance and Reinsurance Business", Article 2, by “branch” is understood (a) abranch, (b) an agency, and (c) a representative unit of a foreign company, through which the latterexercises insurance and/or reinsurance activity.

15. The Directory only since recently operates as such; until the beginning of 2003 it was just a divisionof a broader directory, covering trade policy as well.


Chapter 4.

BBOOSSNNIIAA AANNDD HHEERRZZEEGGOOVVIINNAA

1. INTRODUCTION

FDI inflows in Bosnia and Herzegovina (BiH) during the period from 1994-2002 totalled US$ 848 million;70 percent of that in the last three years and as much as 35 percent in the last year (in 2000 US$ 147million, in 2001 US$ 130 million and in 2002 US$ 321 million). Most of FDI came in cash (60.1 percent), therest being in the form of tangible and intangible assets (36.3 percent) and in the form of rights (3.6percent). The major recipient of FDI (1994-2002) has been manufacturing (55.5 percent), followed bybanking (16.5 percent) and trade and services (13 percent). The most important investment sources in BiHduring the period from 1994-2002 were Croatia (US$ 124 million), Kuwait (US$ 117 million), Slovenia (US$99 million), Austria (US$ 92 million), Germany (US$ 92 million), Serbia and Montenegro (US$ 69 million)and the Netherlands (US$ 62 million). Of the total FDI stock, 42 percent is attributable to 15 companies,the largest being Kuwait Consulting Investment Company with 189,785 million of Convertible Marks (KM)(Ministry of Foreign Trade and Economic Relations, April 2003)

2. INVESTMENT OPPORTUNITIES AND BARRIERS IN BIH

2.1. Investment opportunities and competitive advantages of BIH as an investment location

According to Foreign Investment Promotion Agency of BiH (FIPA), the motivations for investing in BiHare: (i) high economic growth potential, (ii) a diversified manufacturing sector and abundant naturalresources, (iii) growth opportunities for services and tourism sectors, (iv) competitive labour costs16, (v)an educated and qualified work force, (vi) attractive investment incentives including tax holidays,protection of foreign investment and free trade zones, (vii) currency convertibility with a currency linkedto EUR, (viii) an open economy looking towards EU. One may also add the ongoing privatisation processof state-owned companies in BiH. The majority of market leaders in the following industries are scheduledto be privatised: telecommunication, power and gas supply, steel, water supply and wood.


After the war BiH initiated a program of reforms to establish political stability and economicreconstruction – introduction of new currency (Convertible Mark – KM) and of a uniform trade and customspolicy across the two Entities, privatisation programmes, company law, labour law etc. Government hasalso made efforts to improve the environment for private investment. These efforts include the adoptionof the Law on the Policy of Foreign Direct Investment (Official Gazette of BiH 17/98). The results of reformsare mixed (FIAS 2001).

The most frequently quoted factors that inhibit FDI inflows in BiH are: (i) political instability, (ii)characteristics of an aid-driven economy; not profitable and attractive; (iii) complicated legal andadministrative structures reflecting the fact that the country is composed of two Entities (for instance,where a company needs to be registered in both Entities), (iv) incomplete legal system, (v) inconsistentsolution of property rights issues, (vi) legacy of self-management and employee rights and habitsacquired from that, (vii) the privatisation model, which extended the privatisation time and lead to a

dispersed ownership, (viii) high level of corruption, (ix) slow and complex process of companyestablishment and registration, (x) relatively expensive labour force (Stojanov 2002, Cicic 2002).

Investors in BiH face a difficult business environment with the complex legal and regulatory framework,the onerous and non-transparent public administration system and the weak judicial structure. FIASpoints to three fundamental issues that affect the environment for business in BiH: (i) lack of transparentand predictable legal and regulatory framework for business establishment and operation, (ii) lack ofconsistent business regulations and administrative procedures provides opportunities for corruption andfor the abuse of power by officials at various levels of government, (iii) lack of effective, efficient andadequately resourced administrative and judicial systems. These problems are aggravated by theexisting mindset of administrators with a noticeable absence of a service-oriented culture aimed atproviding prompt and efficient services to clients (further information is contained in FIAS 2001).

3. THE CONSTITUTIONAL/LEGAL CONTEXT OF BOSNIA AND HERZEGOVINA, CURRENT STATUS

OF THE TRANSITION PROCESS AND MAJOR FUTURE TASKS

3.1. Main features of Bosnia and Herzegovina’s constitutional situation

The Dayton Peace Agreement (GFAP) for Bosnia and Herzegovina (BiH) was signed on 21 November1995 and the Paris Peace Agreement on 14 December 1995. Immediately upon the signing of the ParisAgreement, BiH became a member of the International Monetary Fund (IMF) on 22 December 1995, andon 1 April 1996, a member of the World Bank. Specific characteristics of the political organisation andgovernance system resulting from the provisions of the GFAP consist of severely restricted State powersand a very strong economic and political position of the two entities: the Federation of Bosnia andHerzegovina (FBiH) and the Republika Srpska (RS).

The GFAP has empowered the state authorities to conduct foreign policy, foreign trade, uniform basesof customs policy and monetary policy. BiH is represented by the three-member Presidency, eachmember representing one constituent people of BiH. Segments of the economic policy falling under thecompetence of the state institutions are conducted by the Council of Ministers of BiH. At the end of 2000and beginning of 2001, the State Border Service started to function ending the paradox whereby the stateborder had been controlled by the entity government’s between1995 and 2000).

Despite the fact that the state authorities are responsible for the establishment of a uniform basis forcustoms policy, customs do not belong to the budget of the common institutions of BiH, but to thebudgets of the FBiH and the RS. Almost 85 percent of BiH Common Institutions budget consists oftransfers from the respective FBiH and RS budgets, implying that the State practically does not have fiscalsovereignty. On the other hand, the introduction of the convertible mark as BiH single currency, and theconduct of monetary policy were entrusted to the Central Bank of BiH (CBBiH). CBBiH was established, inaccordance with Article IV of the GFAP, in August 1997. During its first six years of operations it hasfunctioned as a currency board. This principle excludes the role of the CBBiH as a lender of the last resort.The only instrument that CBBiH uses to influence the level of liquid funds of commercial banks is the ratesof required reserves.

The sources of financing of the Entity budgets are different due to their different political andadministrative organisations. In addition to the Entity-level government, the FBiH has ten cantons, whichare entrusted with a significant economic and political role. In addition to the cantons, the FBiH has citiesand municipalities as forms of administrative and political organisations. The FBiH Budget collectscustoms, excises and corporate income tax of enterprises in the infrastructure sector, financial institutionsand gambling enterprises, as well as the administrative and court fees collected at the Federation level.The FBiH finances from its budget war invalids, families of deceased soldiers, the FBiH Army, theFederation police and civilian authorities at the Federation level. The most significant sources ofrevenues of canton budgets are sales tax, corporate income tax of all enterprises, with the exception ofthose mentioned with respect to the Federation budget, income tax and contributions to a health care

4. Bosnia and Herzegovina


fund. Canton authorities are responsible for the financing of education institutions at all three levels(primary, secondary and university), healthcare out of earmarked contributions, social care of thevulnerable groups of population in co-operation with municipal authorities, and the canton police andcivilian authorities.

The administrative and political organisation of RS is far simpler than that of the FBiH. There are twolevels of governance in RS: entity and municipalities. Major fiscal revenues of the RS budget are goodsand services sales tax, special tax for financing of the RS Army, payroll tax, income tax, profit tax, excisesand customs. The revenue structure of the RS budget reveals that, unlike in the FBiH, the revenuesbelonging to the cantons in RS are revenues of the RS budget. On the expenditure side, there is similaritybetween the respective entity budgets due to the fact that expenditures for the army and the protectionof soldiers and invalids are main items of the budget, while disparities lie in the absence of the cantongovernance structure in RS, meaning that expenditures for primary, secondary and higher education arecomponents of the RS budget. Financing of social care falls within the competence of RS in co-operationwith municipal authorities.

The GFAP did not resolve the status of the wider area of the Brcko Municipality. The internationalarbitration declared Brcko a District. The Brcko District has its own administrative and political authoritiesand autonomy, which must be compliant with the Constitution of BiH. Although this decision by thearbitration commission caused a negative response of both Entity governments, the fact is that the multi-ethnic government of the Brcko District, with the support of the international community, has managed toadvance both the political and economic position of that region of BiH.

3.2. The role and responsibilities of the Office of the High Representative in BiH

According to the GFAP the Office of the High Representative (the OHR) has been responsible for theimplementation of the civil aspects of the Dayton Agreement in BiH since December 1995. The HighRepresentative (HR) in BiH has the right to impose the laws and decisions if these laws and decisions arenecessary preconditions for the implementation of GFAP, and if they are not accepted in the entitiesparliaments because of different reasons (such as political obstructions).

Since 2000, the OHR has been undertaking serious economic and political reforms aimed atstrengthening capacities of the state level authorities in order for them to be able to fulfil the necessarypreconditions on the road to the association to the European Union. Since the beginning of 2002, the OHRhas been undertaking very serious preparations in the economic area. These measures have beenstreamlined towards reform in the fiscal system of BiH in order to reduce the scope for criminal activitiesand tax fraud. The most important OHR economic programmes under implementation in BiH are thefollowing: (i) creation of a business environment capable of attracting investment and generating jobs; (ii)programme of tax reform including the introduction of a single BiH value added tax which should replacethe current inefficient and ineffective sales tax regime; (iii) customs reform aimed at fundamental reformof custom administration to prevent opportunities for fraud and to provide for a single application andinterpretation of BiH state custom policy law; and (iv) improvement of the public corporation governancewith the emphasis on competitiveness, efficiency, and preparation for privatisation.

In order to accelerate and improve the BiH business environment the High Representative hasinitiated a commission consisting of business representatives and politicians, to develop proposals foreliminating the legal and administrative obstacles to doing business in BiH. The commission named“Bulldozer” was established in November 2002. The goal of the commission was to make 50 economicreforms in a period of 150 days. From December 2002 until the end of February 2003, Bulldozercommission proposed 50 amendments of state and entity laws which have been regarded as seriousobstacles for doing business in BiH. Currently, twenty of these legal changes are passing theparliamentary procedures. Fifty proposed measures are related to the following fields: businessregistration, environmental protection and forestry, tourism, financial services, trade, transportation, roleof the chambers of commerce, and labour market reform.



4. THE LEGAL AND REGULATORY MEASURES FOR FDI: GENERAL MEASURES

4.1. The existing regulatory framework for FDI

The basic piece of legislation on FDI in BiH is the Law on Foreign Direct Investment Policy (OfficialGazette of BiH 17/98). The Law was drafted with the assistance of FIAS and designed to promote FDI andto protect the rights of foreign investors seeking to establish business enterprises in BiH. It stipulates thatall provisions of laws and by-laws regulating foreign investment in BiH that are not in conformity with orare contrary to the Law are no longer valid. The Law was adopted as a framework law requiring enactmentof further regulations at the Entities’ level. FBiH has passed a law abrogating the Law on ForeignInvestment (Law on Cessation of the Law on Foreign Investment, Official Gazette of FBiH 32/00) and is inthe process of considering a new investment law. In RS, the law that is currently in effect is the 1996 Lawon Foreign Investment and Concessions (Official Gazette of RS 21/96), with its subsequent amendmentsfrom 1997 (Official Gazette of RS 1/97), and from 1999 (Official gazette of RS 5/99) (FIAS 2001).

The Law on Foreign Direct Investment Policy is based on the national treatment principle. Article 3 ofthe Law stipulates the general rule, which is that foreign investors are entitled to invest, and to reinvestprofits from such investments into any and all sectors of the economy of BiH, and in the same form andunder the same conditions as defined for the residents of BiH under the applicable laws and regulationsof BiH and the Entities. Article 8 further states that foreign investors have the same rights and obligationsas the residents of BiH, and that BiH and the Entities shall not discriminate with respect to foreigninvestors in any form, irrespective to their citizenship, residency, religion, or the investment state oforigin. In Article 9 of the Law, the national treatment also explicitly applies to corporate tax regimes.

There are no restrictions regarding the legal status of the foreign investor. Under Article 2 of the Lawon Foreign Direct Investment Policy, a foreign investor is defined as a natural person, who is not a residentof BiH and does not have his/her principal place of business in BiH or legal persons established inaccordance with a foreign law and having their registered office, central administration or principal placeof business in a foreign country.

In the context of the Law on Foreign Direct Investment Policy (Article 2), a foreign investment is anacquisition, creation or extension of any business enterprise, or any other activity which, alone or withothers, concurrently or consequently, has the effect of permitting one or several natural or legal personsto acquire or increase control over a company carrying out industrial, agricultural, commercial, financial,real estate, service or other activity, or to ensure expansion of such a company already under their control.Such investments may include any tangible or intangible property including, but not necessarily limitedto: freely convertible currency or local currency, loans, advances, receivable licences, leases andconventional rights including concessions, machinery, equipment, spare parts, raw materials, industrial orintellectual property rights or any financial facilities granted by a foreign natural or legal person underforeign control, except between parent companies and their subsidiaries if this does not result in anincrease of the foreign control over the domestic enterprises. Foreign control is defined as anyparticipation with more than 10 percent of the capital and/or voting rights held directly by foreigninvestors or (indirectly) by a domestic legal entity under such control.

According to the Law on Foreign Direct Investment Policy in BiH, foreign persons may invest in thesame form and under the same conditions as defined for the residents of BiH. This also applies to branchoffices. A company may have branch offices in other locations besides its head office. Branch offices donot have the status of a legal entity and may be open in the field of production, transport, economicservices, banking and insurance. No branch offices may be opened in armament or military field (FIPA 2002).

Establishment of representative offices in FBiH is regulated by the Decision on the Condition forEstablishment and Work of Foreign Persons’ Representation Offices in FBiH (Official Gazette of FBiH 7/95).Foreign persons may open representative offices in FBiH in the field of production, transport, economic



services, banking and insurance. Such offices are not legal persons and act on behalf of their founders. Norepresentative offices may be established in the field of armament, military equipment, safeguardmeasures and services. Establishment of foreign representative offices in RS is governed by the Decreeon Condition for Establishment and Work of Foreign Persons’ Representative Offices in RS (OfficialGazette of RS 9/93). As in the FBiH, foreign person in RS may open solely or together with domesticpersons representative offices in RS in the field of production, transport, economic services, banking andinsurance. Such offices are not legal persons and act on behalf of their founders. No representative officesmay be established in the field of armament and military equipment.

Apart from the national treatment, the Law on Foreign Direct Investment Policy in BiH specificallyprovides for the following rights and guarantees to foreign investors:

– Non-discriminatory corporate tax regimes. Taxation of foreign investors and foreign direct investmentshall be carried out in accordance with the tax legislation of the Entities. To encourage FDI, theEntities shall ensure that tax legislation contains such attractive features and rates. Tax regimesshould not discriminate between foreign and domestic investment and Entities recognise thatcompetition in granting incentives is undesirable and they are committed to avoiding suchcompetition (Article 9).

– Exemption from payment of customs and customs duties. Subject to the provisions of Customs Policy Law,or any future law replacing the Customs Policy Law, a foreign investment is exempted frompayment of customs duties and customs fees for investment, except those for customs registration(Article 10).

– Right to open bank accounts. Foreign investors have the right, for the purposes of their investment, toopen accounts on the territory of BiH, in any commercial bank denominated in the national or anyfreely convertible currency (Article 11). Local companies also have this right.

– Right to repatriate profits and capital. Foreign investors have the right to: (i) freely convert the nationalcurrency of BiH into any other freely convertible currency; (ii) transfer abroad, freely and withoutdelay, in freely convertible currency, proceeds resulting from their investment in BiH, including, butnot limited to income from investments received in the form of profit, dividends, interest, and otherforms of profit; funds received by investors after partial or full liquidation of their investments in BiH, or disposal of invested property or proprietary rights; and compensation (Article 11). A company realising dividends must pay a withholding tax of 15 percent before repatriatingdividends.

– Property rights. Foreign investors have the same property rights in respect to real estate as thecitizens and legal entities of BiH. Foreign investors, who are citizens of one of the successor statesto the former Socialist Federal Republic of Yugoslavia, have such rights subject to investors of BiHcitizenship and legal entity status having like rights in the respective successor state (Article 12).The reciprocity condition is thus applied for the successor states to the former Socialist FederalRepublic of Yugoslavia.

– Right to employ foreign employees. Foreign investors have a right to freely employ foreign nationals,subject to the labour and immigration laws in BiH (Article 14).

– Protection against expropriation. Foreign investment shall not be subject to any act of nationalisation,expropriation, requisition or measures which have similar effects, except in the public interest inaccordance with applicable laws and regulations, without any type of discrimination and against thepayment of appropriate compensation (Article 16).

– Guarantees against legal changes. Foreign investors are protected from changes in the laws andregulations pertaining to foreign investments that may decrease their current rights and obligations.According to Article 20, the rights and benefits of foreign investors granted and obligations imposedby the Law cannot be terminated or eliminated by the subsequently passed laws and regulations.If the subsequent laws and regulations have been more favourable to foreign investors, they havethe right to choose under which regime the respective foreign investment will be governed.

The main institution in the field of FDI in BiH is the Foreign Investment Promotion Agency (FIPA).FIPA was established in July 1999 as a government agency reporting to the Council of Ministers. It is



specialised in providing services to foreign investors, improving the country’s image regarding FDI andattracting new investors. The principle services of FIPA are: (i) general investment promotion, (ii)provision of macro-economic data, (iii) provision of links with local authorities and industry, (iv) pre- andafter-investment assistance, (v) assistance with choosing the most appropriate form of investment, (vi)assistance towards the creation of joint-ventures with state owned and private companies, (vii) provisionof profiles of companies offered for privatisation, (viii) detailed information on infrastructure investmentprojects, laws, regulations, taxes and duties. FIPA has close business relations with governmentinstitutions, entities’ governments and their institutions as well as with the business community in BiH(www.fipa.gov.ba).

There are a number of schemes designed to protect FDI in BiH. The Investment Guarantee Agency(IGA), an independent commercially based agency owned by the government of BiH, provides a LeverageInsurance Facility for Trade (LIFT). Lloyds of London, the international insurance syndicate, providesinsurance against non-commercial risks to entities outside BiH. The policy covers a wide range ofpolitical/government performance risks including the risk of war, civil disturbance and UN embargo. TheMultilateral Investment Guarantee Agency (MIGA) provides such services on a worldwide scale. Theseschemes effectively minimise political risk for potential foreign investors (FIPA 2002).


According to the Law on Foreign Direct Investment Policy in BiH (Article 5) each foreign investment inBiH should receive a permission by the competent body of the State (Ministry of Foreign Trade andEconomic Relations of BiH) and should simultaneously be registered with the competent body of therespective Entity (The Federation Ministry of Foreign Trade and The Ministry of Foreign EconomicRelations of the RS). Upon a proposal by the Bulldozer commission it will not be necessary to beregistered with a competent body of respective entity. This improvement in the law has already passedparliamentary procedure and will be published in the Official Gazette. The competent bodies of the Stateshall acknowledge the foreign investors within a strict time limit. Registration by the competent body ofthe State is deemed to have been confirmed if such a competent body has failed to act within the timelimit set. The registration of foreign investment is confirmed by the Registration Certificate. At the sametime it is necessary that a foreign-controlled enterprise be registered at a court.

To register a foreign investment in the production and sale of arms, ammunitions, and explosives formilitary use, military equipment and public information, a prior approval of the competent body of therespective Entity is necessary (Article 4 of The Law on Foreign Direct Investment Policy in BiH).

4.1.2. Other discriminatory measures on establishment and/or expansion

Under the Law on Foreign Direct Investment Policy, there are no sectoral limitations on the freeadmission of FDI in BiH, except for the production and sale of arms, ammunitions, and explosives formilitary use, military equipment and public information (Article 4 of the Law). Public information isdefined as information disseminated through radio, television (excluding cable), electronic media(excluding Internet), newspapers and other publications printed primarily for the local market. In thesecases, foreign participation cannot exceed 49 percent of the company equity and foreign investors mustreceive a prior approval for the investment from a competent body in the relevant entity, subject to stricttime limits. If a decision is not announced within the stipulated deadlines, the foreign investment isconsidered approved.

In the FBiH, it is forbidden to set the location of wholly foreign owned companies in a military zone.Such a company needs approval from the Municipal Office of the Federation Ministry of Defenceconfirming that the business location is not in a military zone (FIAS 2001).

Restrictions applicable to domestic investment on account of public order, public health andenvironmental protection are equally applied to foreign investment.



BiH also applies some reciprocity conditions in the area of real estate. Foreign investors have thesame property rights in respect to real estate as the citizens and legal entities of BiH. However, foreigninvestors who are citizens of one of the successor states to the former Socialist Federal Republic ofYugoslavia, have such rights subject to the investors of BiH citizenship and legal entity status having likerights in the respective successor state (Article 12 of The Law on Foreign Direct Investment Policy). Thereciprocity condition is thus applied for the successor states to the former Socialist Federal Republic ofYugoslavia.


In accordance with the Law on Foreign Direct Investment Policy in BiH, foreign investors are allowedto invest in BiH in the same form and under the same conditions as defined for the residents of BiH, underapplicable laws and regulations of BiH and the Entities (Article 3). This also means that a foreign investorcan establish any form of company stipulated in the appropriate Entities regulations about enterprises.In FBiH, forms of business and corporate organisation are regulated by the Corporate Law (Official Gazetteof FBiH 23/99) and in RS by Law on Enterprises (Official Gazette of RS 24/98).

Federation of BiH. Corporate Law stipulates that corporation is a legal person, which independentlyperforms business activity in order to gain profit, and can be founded by domestic and foreign legal andnatural persons. Types of companies in FBiH according to the Corporate Law are:

– Unlimited joint liability company founded by a contract between a minimum of two persons. Thecontract determines the amount of founding deposit, which is equal for all the founders.

– Limited partnership can be established with a minimum of one limited partner and one generalpartner. The limited partner is liable with all his/her property. The contract defines the amount ofthe founding deposit and relations with a partner.

– Limited liability company is founded by contract or by a decision on founding. If there are severalfounders (contract), the minimum capital is KM 10,000, whereas if there is only one founder(decision), the minimum is KM 2,000.

– Joint stock company is liable for its obligations with all its property. There can be one or severalfounders to this type of company. The minimum capital is KM 50,000.

Republika Srpska. Law on Enterprises regulates the status of enterprises that are not owned by the state.It provides for that an enterprise is a legal entity conducting activities in order to make profit. Foreignlegal and natural persons can found an enterprise in accordance with this law, as well as the law regulatingforeign investments. Types of companies in RS according to the Enterprises Law are:

– A general partnership can be established by a contract between a minimum of two persons. Theamount of founding deposit is equal for all the founders.

– A limited partnership is liable with all its property and is founded by minimum two persons (onelimited partner and one general partner). The contract regulates all relations with a partner.

– A limited liability company can be established by contract or decision. These companies can havea maximum of 30 members (there may be more than 30 members if the company employsadditional members). The registered capital of a limited liability company may not be less thanKM 5,000.

– A joint stock company can be established by a single person (decision) or several founders (contract).Minimum capital requirements are KM 10,000 for companies incorporated simultaneously and KM20,000 for companies incorporated successively.

Foreign persons may also establish branches and representative offices in BiH (for more informationrefer to section 4.1.).

Companies have to be registered in an authorized court register on the respective Entity’s territory. Aforeign investor can register a company at the court only after s/he has registered a foreign investment at



the competent body of the State and of the respective Entity, which is documented by the RegistrationCertificate. Apart from that, the registration procedure for foreign-controlled companies is the same as forlocally-controlled companies.

FIAS, however, claims that the court registration fee for foreign-owned companies in the RS is KM 1600compared to KM 600 for other companies, which “is not only disproportionate and high, but alsodiscriminatory” (FIAS 2001).

Once the business registration process has been completed in one Entity, it is legally permitted tooperate in both Entities. However, in practice, the registration of a branch in the second Entity is requiredto facilitate business operations. Legal advisers interviewed by FIAS have indicated that some businessactivities can be more difficult, or even impossible, if a company is not registered as a branch in thesecond Entity (FIAS 2001).

There are no citizenship or nationality limitations for partners or the members of the management andsupervisory boards in FBiH and RS (www.fipa.gov.ba).


According to Article 14 of the Law on Foreign Direct Investment Policy in BiH, foreign investors havethe right to freely employ foreign employees, subject to the labour and immigration laws in BiH.Conditions for such employment are that: (i) a foreigner must enter into a contract for employment, (ii) arequest for the issue of a work permit must be submitted by the employer to the BiH employmentservice. Employment of foreigners in FBiH is regulated by the Law on Employment of Foreign Persons(Official Gazette of FBiH 8/99), and in RS by the Regulation on Special Terms for Employment of ForeignCitizens and other Persons without Citizenship (Official Gazette of RS 15/97).

Foreigners wishing to stay in BiH longer than one month must apply for a residency permit. To obtainthe residency permit, applicants must submit, among other documents, a valid work permit if the stay isfor the purpose of pursuing employment and an employment contract if residence is pursuant to an offerof employment. If a foreigner is an investor establishing a company, s/he must submit, among other things,the company registration document. Residency permits are available for periods of 3, 6, and 12 months.If a residence permit is granted on the basis of an employment agreement, then the validity of the residence permit is directly linked to the work permit issued by the Ministry of Labour (FIPA 2002,FIAS 2001).

Foreigners seeking work with an established company in BiH are required to have a work permit. TheMinistry of Labour at the entity-level issues work permits. An employer must apply for the work permit onbehalf of the foreign worker. Applications must contain, among other things, an explanation of why aforeigner should fill the position and evidence that the foreigner has the required qualifications. The lawrequires all companies to post job vacancies with the Ministry of Labour to determine whether domesticworkers can fill the open position. The Ministry of Labour will permit the hiring of a foreign worker only ifan appropriately qualified BiH citizen cannot be identified to fill the vacancy. A work permit is issued fora period of one year. Foreigners having their permanent residence in BiH are eligible to obtain a workpermit for an unlimited period of time (FIAS 2001, Ivanov et al 2002).

4.4. Real estate

As indicated in 4.1. according to Article 12 of the Law on Foreign Direct Investment Policy in BiH,foreign investors have the same property rights in respect to real estate as the citizens and legal entitiesof BiH. Foreign investors, who are citizens of one of the successor states to the former Socialist FederalRepublic of Yugoslavia, have such rights subject to investors of BiH citizenship and legal entity statushaving like rights in the respective successor state. The reciprocity condition is thus applied for thesuccessor states to the former Socialist Federal Republic of Yugoslavia.



There are no corresponding provisions related to real estate in the foreign investment legislation ofeither FBiH or RS. It seems, however, that the wording of Article 12 is misleading, as it seems that it isforeign-controlled enterprises and not foreign investors who have the same real estate rights as naturaland legal persons of BiH. Namely, in RS and in FBiH, foreign persons (whether residents or non-residents, whether legal entities or natural persons) cannot own property. Under The Law on ForeignDirect Investment Policy in BiH, a foreign-controlled enterprise is registered as a domestic legal entity.As a result, under the principle of national treatment, such an enterprise has the same rights as adomestically-owned enterprise or a natural person of BiH citizenship, including rights of and ownershipof property in BiH.

4.5. Public procurement

In BiH, legislation in the field of government procurement is in the competence of the Entities. FBiHhas a Decree on Government Procurement (Official Gazette of FBiH 31/98), while RS has a Law onGovernment Procurement (Official Gazette of RS 20/01). This legislation does not contain anydiscrimination for foreigners. Foreign and domestic enterprises can participate in governmentprocurement in equal regime.

5. THE LEGAL AND REGULATORY FRAMEWORK FOR FDI: SECTORAL MEASURES


Banking

Federation of BiH. According to the Law on Banks of FBiH of October 15, 1998 (Official Gazette of FBiH39/98, 32/00, 48/01, 41/02, 58/02, 13/03) no natural or legal person, alone or acting in concert with one ormore other persons, may acquire significant voting rights in a bank, or increase the amount of his/herownership of the bank’s voting shares or capital in such a way that the thresholds of 20 percent, 33percent, or 50 percent are reached or exceeded, without obtaining the approval from the Agency forBanking of FBiH (Article 21). Status changes in a bank, mergers, amalgamations or divisions of a bankshall require the prior written authorisation of the Agency for Banking. The minimum amount of paid-inshare capital of the bank and the lowest amount of net capital, which the bank must keep shall not beless than the equivalent of KM 15 million (Article 20). The same conditions are valid for foreigners anddomestic investors.

A bank with headquarters outside FBiH is not permitted to receive cash deposits or to extend creditsfor its own account in FBiH other than through subsidiaries and branch offices authorized by the Agencyfor Banking (Article 5). A branch office is an organisational part of the bank with legal authorisation.

A bank with headquarters outside FBiH should be authorised by the Agency for Banking, to establishrepresentative offices in FBiH. A representative office is an organisational part of the bank where bankingbusiness is not conducted. Presentations, collection and provision of data are the operations of arepresentative office (Article 4).

Republika Srpska. The Law on Banks in RS (Official Gazette of RS 74/02) is harmonised with the Law onBanks in FBiH. The law consists of the same regulations, and the same limit regarding the minimum sharecapital and net capital paid is valid in RS as in FBiH (KM 15 million).

Insurance

Federation of BiH. According to the Law on Insurance of Property and Persons of FBiH (Official Gazetteof FBiH 2/95, 7/95, 14/97, 6/98, 41/98) foreign persons can establish joint stock company for insurance onlytogether with domestic persons. If foreign ownership in the insurance company exceeds 50 percent of theshare capital it requires approval of the Ministry of Finance of FBiH (Questionnaire).



Republika Srpska. According to the Law on Insurance of Property and Persons (Official Gazette of RS14/00) foreign natural and legal persons can establish a joint stock company for insurance only togetherwith domestic persons (Questionnaire).

Securities market and other financial services

Federation of BiH. If foreign ownership in a company for the management of privatisation investmentfunds exceeds 10 percent of the share capital, an approval by the Securities Commission of FBiH isrequired (Questionnaire).

Republika Srpska. Foreign natural and legal persons can possess more than 10 percent equity shares in a privatisation investment fund management company only with the prior consent of the Commissionfor Securities of RS (Law on Privatisation Investment Funds and Privatisation Fund ManagementCompanies of RS).


The Communication Regulatory Agency (CRA) is the only independent body in Bosnia and Herzegovinaresponsible for telecommunication issues17. CRA can issue licences to foreign persons if they are registeredaccording to relevant BiH legislation (Questionnaire).

The Law on Foreign Direct Investment Policy does not contain any restrictions for foreign investors in the field of telecommunications and it specifically stipulates that “the provisions of laws and regulations concerning foreign investment in BiH that are contrary to or inconsistent with this Law shallbecome null and void". According to the newly adopted laws on foreign investments in both entities (FBiH in 2001 and RS in 2002) there are no limits regarding the equity share of a foreigner in thetelecommunications sector.

5.3. Transport

The Law on Foreign Direct Investment Policy does not contain any restrictions for foreign investors inthe transport sector. To invest in air transport, foreign companies have to obtain approval from thegovernment of BiH (Questionnaire).

Foreign air transport companies can operate in BiH only if its country of origin is a member of ICAOand if there is a bilateral agreement regarding air transport between BiH and the country where companyis registered. If such an agreement does not exist, the BiH Department of Civil Aviation (BiH DCA) canissue approval on the request of a foreign company, under condition that both countries express interestfor air transport. Alternatively, the BiH DCA can issue approval for charter flights to foreign companies ona case by case basis (Questionnaire).

5.4. Energy

The Law on Foreign Direct Investment Policy does not contain any restrictions for foreign investors inthe energy sector. Nor are there any other discriminatory measures for foreign investors in the energysector (Questionnaire).


According to Article 4 of the Law on the Policy of Foreign Investment in BiH, foreign equity ownershipof an enterprise engaged in the production and sale of arms, ammunition, explosives for military use,military equipment and public information must not exceed 49 percent of the equity of the enterprise.Public information is defined as such that is contained in radio, television (excluding cable), electronicmedia (excluding Internet), newspapers and other publications produced primarily for the local market.



In the case of investment in the above mentioned sectors, foreign investors must receive prior approvalfrom the competent body of the respective Entity.

According to Article 15 of the Law on the Policy of Foreign Investment, restrictions applicable todomestic investment on account of public order, public health and the protection of the environmentshall equally apply to foreign investment.

In the FBiH, it is forbidden that wholly foreign owned companies be located in a military zone. Such acompany needs approval from the Municipal Office of the Federation Ministry of Defence confirming thatthe business location is not in a military zone (FIAS 2001). The same rule is in place in RS. Wholly foreignowned companies need confirmation from the Ministry of Defence of RS confirming that the business isnot situated in a military zone.

5.6. Other sectors

Mining and Quarrying. All companies, domestic or foreign, should obtain exploring or concession rightsfor exploitation of mineral resources.(Questionnaire).

Trade

Federation of BiH. According to the Law on Trade of FBiH foreign natural persons cannot be owners of shops (trade shops). There is however, a draft new Law that will allow foreign nationals to be owners ofshops under condition of reciprocity (Questionnaire).

Republika Srpska. According to the Law on Trade of RS there is no limitation for foreigners to open trade shops.

Foreign Trade

In both the Federation of BiH and the Republika Srpska if a company intends to engage in foreign trade ithas to apply for a customs number from the Customs of BiH. The applicant must be a company since soleproprietors are not permitted to conduct foreign trade (FIAS 2001).

Handicrafts

In both the Federation of BiH and the Republika Srpska the Law on Handicrafts of FBiH stipulates thatforeign natural person can open handicrafts shops under condition of reciprocity (Questionnaire).

Radio, Television and Publishing

According to Article 4 of the Law on Foreign Direct Investment Policy, foreign participation may notexceed 49 percent of the equity of a company in the field of public information, defined as informationdisseminated through radio, television (excluding cable), electronic media (excluding Internet),newspapers and other publications produced primarily for the local market. In the case of investment inthe aforementioned sectors, foreign investors must receive prior approval from the competent body ofthe respective Entity. The Communication Regulatory Agency (CRA) is responsible for issuing TV andradio station licences and for the monitoring of their work. The CRA can issue licences to foreign personsif they are registered according to the relevant BiH legislation (Questionnaire).

Water Works and District Heating

Federation of BiH. The Law on Foreign Investment in FBiH adopted in December 2001 (Official Gazetteof FBiH 61/01) does not impose any restrictions on the equity share of a foreign investor in the field ofwater works and district heating.



Republika Srpska. The Law on Foreign Direct Investment Policy does not contain any restrictions forforeign investors in the field of water works and district heating and it specifically stipulates that “theprovisions of laws and regulations concerning foreign investment in BiH that are contrary to orinconsistent with this Law shall become null and void.” New Law on the Foreign Investment of RS adoptedin 2002 (Official Gazette of RS 25/02) is fully in line with the State Law and does not impose any restrictionson the equity share of a foreigner in this field.

Audit and Accounting

Federation of BiH. The Law on Audits of FBiH (Official Gazette of FBiH 2/95) stipulates that foreignauditing companies and auditors can perform auditing only together with the local revision companies(www.fipa.gov.ba).

Republika Srpska. The Law on Accounting of RS (Official Gazette of RS 18/99) contains regulationsregarding auditing activities in RS. As in the FBiH, the Law stipulates that foreign auditing companies andauditors can perform auditing only together with the local companies.


6.1. Privatisation

The basic piece of privatisation legislation in BiH is the Framework Law on Privatisation of Enterprisesand Banks in BiH (Official Gazette of BiH 05/98). The Framework Law expressly recognises the right of theEntities to privatise non-privately owned enterprises and banks located on their territories, and requestsfrom Entities to adopt privatisation legislation, which is non-discriminatory and which ensures maximumtransparency and public accountability in the privatisation process. Entities shall establish privatisationlaws and regulations on a non-discriminatory basis, with BiH or foreign natural and legal persons havingthe right to acquire shares and property in the privatisation process. The Framework Law also requiresthat the Entity privatisation laws be harmonised with one-another. Although privatisation laws in bothEntities have basic common features – like methods of privatisation, broad participation of citizens viacertificate/voucher schemes, establishment of privatisation investment funds, equal treatment ofdomestic and foreign investors – they differ in a number of aspects and practical solutions and as suchaffect the speed of the privatisation process. The basic requirements of the laws are as follows:

Federation of BiH: (i) priority is given to the privatisation of state-owned enterprises, commercial banksand residential real estate. Banks with more than 50 percent state-owned capital are being privatised first;(ii) the programme recognised a wide range of claims by FBiH citizens in the privatisation process,including old (pre-war) foreign currency savings, earned but unpaid salaries of soldiers during the war,pension arrears and restitution. Any or all of the certificates received for these claims can be used underthe privatisation scheme; (iii) large-scale privatisation is to be achieved through the public offering ofshares or by tendering. In the event that privatisation can be achieved by these methods, the Law allowsfor direct sale negotiations, leasing or joint management with a potential buyer; (iv) small-scaleprivatisation includes businesses with less than 50 employees and with assets valued at less than EUR250,000. Businesses included are those whose predominant activities are trade, catering, services andtransport. Privatisation is to be achieved by auctioning or tender.

Republika Srpska: (i) privatisation encompasses state-owned businesses and those that have beenpartly privatised under the Markovic’s programme, launched in 1989 in the former Socialist FederalRepublic of Yugoslavia. Methods of payment are part in cash and part in vouchers. The latter werereceived by the citizens in exchange for the claims they have to the state on various grounds, i.e. frozenforeign exchange deposits, validated restitution claims and unpaid salaries during the war. A general fundis to be established for further distribution of shares to all citizens of RS; (ii) the privatisation method isdefined in the rules governing the programme. In large businesses with a state capital value of EUR150,000 or more, shares are offered according to the following formula: 55 percent as vouchers issued to



RS citizens, 5 percent to the restitution fund, 10 percent to the retirement fund and the balance of 30percent for cash; (iii) banks with a state capitalisation of more than 50 percent must prepare an openingbalance sheet and a privatisation plan. The bank privatisation programme is primarily driven by themotivation to inject fresh capital and know-how, rather than generating cash for the entity’s budget. Thereare no voucher offers in the bank privatisation programme (FIPA 2002).

Foreign legal and natural persons have equal rights as domestic legal and natural persons in theprivatisation of state owned capital both in FBiH and RS, with reciprocity conditions being applied insome cases. More precisely:

Federation of BiH:– Enterprises or enterprise assets in the privatisation process can be purchased by all domestic and

foreign natural and legal persons, with the exception of foreign natural and legal persons from thosecountries where foreign ownership of domestic enterprises is either limited or excluded by Law(Article 12 of the Law on Privatisation of Enterprises, Official Gazette of FBiH 27/97, 8/99, 32/00, 45/00,54/00, 61/01 and 27/02)

– If foreign ownership in a company for managing of privatisation investment funds exceeds10 percent of the share capital it requires approval of the Securities Commission of FBiH(Questionnaire).

– All domestic and foreign legal and natural persons can buy bank shares, in accordance with the law(Article 12 of the Law on Privatisation of Banks, Official Gazette of FBiH 12/98).

– A foreign citizen can purchase an apartment under the conditions determined by this Law only if itis possible for a citizen of BiH to purchase an apartment in the respective country (Article 6 of theLaw on Sale of Apartments with existing Tenancy Right, Official Gazette of FBiH 27/97).

Republika Srpska:– Domestic and foreign real persons and legal persons, including investment funds, can buy state

capital in enterprises in the course of privatisation (Article 13 of the Law on Privatisation of StateCapital in Enterprises, Official Gazette of RS 24/98 and 62/02).

– A Privatisation fund management company can be founded by domestic and foreign natural or legalpersons. However, foreign natural and legal persons can possess more than 10 percent of the sharesof a company only with the previous consent of the Commission for Securities (Article 8 of the Lawon Privatisation Investment Funds and Privatisation Fund Management Companies).

– The state capital in banks that are to be privatised shall be available for purchase by both domesticand foreign natural and legal persons (Article 13 of the Law on Privatisation of State Capital inBanks).

According to the Laws of FBiH and RS, only domestic natural persons, who received certificates/vouchers from the state prior to privatisation, can purchase and trade with them or use them in theprivatisation process (Questionnaire).

There are no specific restrictions applying to foreigners and foreign-controlled companies on resellingthe stakes bought in privatisation deals in FBiH. However, the contracts on acquisition of shares in theprivatisation process may limit the further selling of shares to third person for a certain period, i.e. untilthe fulfilment of guarantees/promises given by a buyer in the contract. This limitation is applicable forboth domestic and foreign persons. In RS, shares purchased in the privatisation process through auction,special auction, tender and direct negotiations can be freely traded. In the contract, the state as a sellercan retain the right for previous approval on further selling of shares (Questionnaire).

Results of privatisation in Federation of BiH. The total number of companies to be privatised in FBiH was 1,450, of which 322 were in small-scale privatisation and the rest in large-scale privatisation. Theprivatisation process was launched for 1,239 or 85.4 percent of companies: (i) 237 companies (73 percent)were privatised through small-scale privatisation, (ii) 250 (60.8 percent) companies by direct sale method,and (iii) 752 companies (72.9 percent) were partially or entirely privatised by public offering of shares.



Altogether, privatisation is concluded in 906 companies, representing 62.5 percent of all companies to beprivatised. Results in terms of the value of equity to be privatised are much worse. Total equity ofcompanies to be privatised in mass privatisation, as of the end of 1999, was KM 18.7 billion, of which KM1.4 was already private and KM 17.3 billion state-owned; of the latter KM 3.8 billion was to remain state-owned, while KM 7.1 billion was supposed to be privatised by direct sales and KM 6.4 billion to beprivatised by public offering of shares. The rate of realisation of these privatisation plans by the end of2002 was 56.5 percent in the case of public offering of shares (KM 3.6 billion) and only 17.1 percent in thecase of direct sales (KM 1.2 billion); overall 35.7 percent of equity to be privatised was actually privatised.Total privatisation incomes in FBiH are KM 8.8 billion, of which KM 8.5. billion are in certificates and onlyKM 327.0 million are in cash. KM 137.4 million (42.0 percent) of cash is due to 27 direct sales of companiesto foreign investors. These investors also committed to invest a further KM 370 million in the companiesacquired, which is 50.4 percent of all investment commitments in privatisations in BiH (Agencija zaprivatizaciju FBiH 2003).

Results of privatisation in Republika Srpska. The privatisation process in RS was also initially based onvoucher sales, but was differently organised, and took place at a more gradual rate. In RS, as in the FBiH,other forms of sale were used: auction, tender, and direct sale. Of 830 companies covered by voucherprivatisation, the state capital of 648 companies was sold by this method, whereas 594 held shareholdermeetings and carried out re-registration. The state-owned capital of 378 companies has so far beenprivatised by other methods; 128 companies where state-owned capital was less than 300,000 KM, mainlysold by auction (96) or direct offer (32), and 260 companies where state-owned capital exceeded300,000 KM, of which 223 were sold by auction, 3 by direct sale, and 9 by tender. Fifteen strategiccompanies have so far been privatised. Disregarding vouchers, privatisation receipts to date in RS are103 million KM (76 percent) in former foreign exchange deposits and 17 million KM (13 percent) in cash.Eleven percent of dues have not yet been settled (Direkcija za privatizaciju RS, December 2002)


6.2.1. Monopolies

The Law on Competition was adopted in 2001 (Official Gazette of BiH No. 30/01). The Law defines anti-competition practices of economic agents, which may affect the prevention, restriction or distortion ofcompetition, to be: (i) contracts, certain contractual clauses, explicit or implicit agreements, concertedpractices, decisions of associations of businessmen and other associations, (ii) monopolistic practices, (iii)concentration (Questionnaire).

The Article 5 of the Law on Competition of BiH stipulates that monopolistic practices are related to thefollowing deals: (i) direct or indirect imposition of unfair prices of goods and services or other unfair tradeconditions; (ii) imposition of barriers on production, markets or technical development at the expense ofcustomers; (iii) the use of different conditions for the same or similar kind of businesses on the otherbusiness entities by undermining the market position of these business entities; (iv) forming agreementsof which the goal is to impose conditions for the other contractual side that are not in line with goodcommercial codes and practices, and that are not directly linked with the subject of a contract.

6.2.2. Concessions

In BiH, concessions are in the competence of the State and the Entities. In both entities, a concessionmay be granted for the maximum duration of 30 years, and for investments requiring a longer period – forup to 50 years. A concession may be granted to local and foreign legal persons based on the publictendering procedure or an unsolicited proposal.

Federation of BiH. In FBiH, the legal situation related to concessions is more complicated than in RS. Inaccordance with the Constitution of FBiH, the concessions are in the competence of the Federation andof the Cantons (there are ten cantons in the FBiH). According to the Law on Concessions (Official Gazette



of FBiH 40/02), the Government of FBiH grants concessions for: construction and usage or usage of roads,railways, navigable channels and ports, and airports; exploitation of watercourses on territory of two ormore Cantons; construction of power plants with installed capacity of more than 5 MW; construction andusage of water accumulations on the territory of two or more Cantons; construction, exploitation andmanagement of pipeline transport of oil and gas and storage in pipelines and tanks; games of chance;exploitation of forest and forest areas; passenger and freight railway transportation; and areas andbuildings of natural and built heritage. Granting of concessions for other possible objects shall bestipulated by Cantonal laws. Cantons in FBiH have the legal authority to pass their own law onconcessions, which must be harmonised with the Law on Concessions in FBiH. Some cantons in FBiH haveofficial cantonal Laws on Concessions (Canton of Sarajevo). Cantons in FBiH can give a concession for theexploitation of natural resources that are situated exclusively on their territory (Questionnaire).

Republika Srpska. According to the RS Law on Concession (Official Gazette of RS 25/02), the decision togrant a concession is made by the Government of RS based on a prior procedure which is public,accessible to all and non-discriminatory. The Law specifies the public property sites of RS, for whichconcessions may be granted, to be: construction and usage or usage of roads, railways, navigable channelsand ports, and airports; exploitation of watercourses, construction of power plants and wateraccumulations, (except electricity transmission); exploration and/or exploitation of energy and othermineral raw materials, crude oil and natural gas; exploitation of forest and forest areas; hunting andfishing; usage of healing, thermal and mineral waters; utilisation of arable land, etc.


In principle, the application of national treatment in BiH rules out specific incentives for foreigninvestors. FDI related legislation of BiH, however, provides for some specific tax and non-tax incentivesfor foreign investors. Thus, The Law on Foreign Direct Investment Policy in Article 10 stipulates that,subject to the provisisons of the Law on Customs Policy, or any future Law replacing the Law on CustomsPolicy, a foreign investment shall be exempted from customs and customs duties – except for customsregistration18 – for equipment imported as fixed assets. This is confirmed by Article 162 of the Law onCustoms Policy (as amended in December 2000), stating that equipment released for free circulation(import) representing an investment by a foreign person, except for passenger vehicles, entertainmentand slot machines, shall be granted relief from payment of customs duty.

6.4. Tax regime

According to Article 9 of The Law on Foreign Direct Investment Policy, to encourage FDI, the Entitiesshall ensure that taxation of foreign investors and FDI contains attractive features and rates. The Entitiesshall jointly review, from time to time, such tax legislation to ensure that attractiveness has beenmaintained. The tax regimes in the two Entities shall be governed by the following principles: (i)corporate tax regimes should not discriminate between foreign and domestic investments; and (ii) theEntities recognise that competition in granting incentives is undesirable and that they are committed toavoiding such competition.

The basic taxation categories in BiH are corporate income tax, personal income tax, sales tax, excisetax, social security contributions, real property tax and customs duties. Taxation in BiH is in thecompetence of the Entities. Both, FBiH and RS have their own Laws which regulate taxes and tax rates.Tax rates are not harmonised between FBiH and RS (www.fipa.gov.ba).

Corporate Income Tax

Federation of BiH. Corporate income tax rate in FBiH is 30 percent. This may be reduced to 15 percent onfunds being set aside for the payment of dividends (FIPA 2002). The Law on Corporate Income Tax of FBiHprovides two types of tax incentives for all companies in FBiH: (i) if a company reinvests its taxable income,the tax liability is reduced by the invested amount (this is applicable for investments in direct production



only). If the company invests its taxable income in activities other than direct production, the corporateincome tax can be reduced up to 75 percent of the taxable income (FIPA 2001, FIAS 2001); (ii) a corporateincome tax exemption for newly established companies is granted at the level of 100 percent for the firstyear of operations, 70 percent for the second year and 30 percent for the third year (www.fipa.gov.ba). Apartfrom that, the Law provides a specific incentive for foreign-controlled companies. Namely, the corporateincome tax can be reduced for a period of five years equal to the percentage of foreign capital invested inthe assets of the company, provided that the foreign capital is greater than 20 percent of total capital. Thisincentive includes companies with 100 percent foreign capital investment (Questionnaire).

Republika Srpska. Corporate income tax rate provides a regressive rate of profit tax, the reason being tostimulate companies to declare profits. The Corporate Income Tax rates in RS, as specified under Article31 of the Law on Corporate Income Tax of RS are: 20 percent for income up to KM 100,000; 15 percent onincome between KM 100,000 and KM 300,000; 12 percent on income between KM 300,000 and KM 500,000and 10 percent on income of KM 500,000. The Law on Corporate Income Tax of RS provides for thefollowing reductions in the corporate income tax for all companies in RS: (i) newly established companiescan reduce their taxable profit by 100 percent for the first year of operation, 70 percent for the second yearand 30 percent for the third year; (ii) newly established companies in an under-developed region canreduce their taxable profit by 100 percent for the first three years of operation; (iii) companies in the freezones can reduce their taxable profit by 100 percent for the first five years of operation; (iv) companiescan reduce taxable profit by up to 15 percent if profit is reinvested into the company. The Law onCorporate Income Tax of RS (Official Gazette of RS 51/01) does not provide any specific incentive forforeign controlled enterprises. The Law provides an exemption for all companies in RS on payment ofcorporate income tax for reinvested profit (investment in assets, purchasing of shares and capital – ownor in other company). According to the Law, passenger cars (except taxi cars, cars for rental, cars for drivinglessons and special vehicles with medicine equipment), office furniture, carpets, arts and ornaments arenot considered as assets. Companies registered for training, professional rehabilitation and employmentof invalid persons are exempted from payment of corporate income tax.

Personal income tax system in BiH is characterised by the number and level of tax rates, the thresholds(e.g. amount of taxable income to which the highest individual tax crate applies), the rules of exemptionand rebates. All foreigners with permanent residence in FBiH and RS pay personal income tax onrevenues earned in an individual calendar year on BiH territory. Also, all non-resident foreigners, who areearning income in FBiH and RS are considered taxable entities. In the Federation of BiH personal incometaxes are regulated by cantonal laws, but salary and wages tax rate is regulated on the level of FBiH.Specifically, wages are treated differently from other income. Wages and salaries are taxed with 5 percent,and tax base is net salary (3.2 percent on a gross salary). Personal income tax rates range from 10 percentto 15 percent (there are the different rates in different cantons). A person is liable to pay this tax if theirtotal income is three times larger than the average annual salary in the respective canton. The tax rate isapplied to the amount by which the individual income exceeds the average annual salary three-fold(Ivanov et al 2002). In Republika Srpska personal taxation is regulated by the Law on Personal Income Taxof RS. Residents are subject to personal income tax on the aggregate income derived from varioussources. The general tax rate is 10 percent. For wages, the tax base is the net salary (www.fipa.gov.ba).

Social security contributions. Employees and employers are required to contribute to various social funds.In Federation of BiH employer’s contributions total 32 percent of a gross salary, and employee’scontributions 11.5 percent, altogether 43.5 percent of gross salary (63.5 percent of net salary). The totalfiscal burden of a net salary in the FBiH, together with the salary tax, is 46.9 percent of gross salary or 68.5percent of net salary. In Republika Srpska employer’s contributions total 42 percent and employee’scontributions 29.5 percent, altogether 71.5 percent of net salary. In the case of first employment forpersons registered at the Bureau of Employment, for the duration of a three year contract (except for retailand restaurant business), the employer has the following benefits of exemption from payment of socialsecurity contributions: (i) 100 percent for the period of the first six months, (ii) 70 percent for the periodfrom 7th to 10th month, (iii) 40 percent for the period until first year of employment expires (Ivanov et al 2000). This incentive does not hold for the FBiH.



Sales tax. BiH has not yet introduced the VAT. Instead a sales tax is in use. In FBiH as well as in RS,general and reduced sales tax rates are applied. The general rate is 20 percent in FBiH and 18 percent inRS, while the reduced rates are 10 percent and 8 percent respectively. For services, reduced sales taxrates are applied (Ivanov et al 2002).

6.5. Free zones

Establishment and operation of free zones in BiH is regulated by the Law on Free Zones in BiH (OfficialGazette of BiH 3/02). The Law on Custom Policy of BiH also applies. The relevant laws of Entities are Lawon Free Zones (Official Gazette of FBiH 2/95) of FBiH and Law on Free Zones (Official Gazette of RS 21/96)of RS (www.fipa.gov.ba, Ivanov et al 2002). There are eight free zones in BiH: Sarajevo, Vogošca, Visoko,Lukavac, Hercegovina-Mostar, Kiseljak, Orasje and Banja Luka (Ivanov et al 2002).

According to the Law on Free Zones in BiH, free zones are part of BiH customs territory managed bythe founder of the free zone. The free zone founders may be one or more domestic and foreign legalpersons (not natural persons) registered in BiH. The free zones users may be the founders of the zone andother domestic and foreign legal and natural persons. The Law on Free Zones has been amended(amendments have passed parliamentary procedure and must be published in Official Gazette to be inforce), the changes being:

– The trade and service activities can be performed solely within the free zone (not only withproduction activity as in previous law).

– The free zone establishment must be economically justified, meaning that, on the basis of thesubmitted feasibility study on justification of the establishment of the free zone and otheraccompanying proofs, it may be assessed that the value of goods exported from a free zone willexceed at least 50 percent (previous law stipulated 75 percent) within period of 12 months.

– New advantage for FDI: import of equipment into the free zone that will be used in production isexempted from payment of custom duties and custom fees.

Free zones have the status of legal persons. A free zone has to be located along either a highway, a railroad,an international airport, a seaport or a river-port. Within the territory of a free zone it is possible toperform: production, trade, and services (such as banking or other financial business, insurance andreinsurance, tourism) (www.fipa.gov.ba).

Advantages of FDI in free zones are the following: (i) free zone users are exempted from taxes andcontributions, except taxes and contributions related to salaries and wages (Article 22 of the Law on FreeZones of FBiH); (ii) investments in a free zone, transfer of profit and transfer of the investment are free ofcharge; (iii) payments and collection of payments within the free zone is free; (iv) customs and other tariffsare not paid for imports within the free zone; there are no special tariffs for imports of goods forproduction and consumption within the zone; (v) the customs export duties and taxes are not paid forexports from the free zone (Ivanov et al 2002). According to FIPA, other advantages of being located in thezone relate to (i) investment savings of approximately 20 percent (calculated by actual users),(ii) simplified customs clearance and (iii) permanent customs control and security services over free zonefenced area (www.fipa.gov.ba).


Since June 1998, the legal tender of BiH is the Convertible Mark (KM), now pegged to the EUR througha currency board system. The Central Bank or any other authority (Law on Central bank, Official gazette ofBiH 1/97) cannot impose any limitations on payments and international transactions. Commercial banksand financial institutions perform foreign exchange transactions on request, without limitations, fees,taxes and any other duties, with an exchange rate to EUR. In FBiH, foreign exchange transactions areregulated under the Foreign Exchange Law of FBiH (Official Gazette of FBiH 46/98). According to the Law,there are no restrictions on payments and transactions abroad. Residents and non-residents can keep



convertible currency accounts in the bank and they are free to use these accounts for payments abroad.Foreign exchange payments and transactions are carried out through the commercial banks. The importof foreign currency and other tenders in foreign currency to FBiH is free. The Ministry of Finance regulatesthe export of foreign currency and other tenders in foreign currency.

In RS, payments abroad and other foreign exchange transactions are regulated under the ForeignExchange Law (Official gazette RS 15/96). Foreign exchange transactions are carried out in foreign anddomestic currency. Payments under foreign transactions, as well as repayments of loans, are free.Domestic and foreign persons can keep foreign exchange accounts in any authorized commercial bank,and withdraw funds freely. The import of foreign currency in RS is free. Foreign individuals and domesticcitizens who temporarily work abroad can export foreign currency up to the amount they have importedin RS. Foreigners and nationals can transfer currency from their foreign exchange accounts (Ivanov et al 2002).

The Law on Foreign Direct Investment Policy in BiH gives foreign investors the right to: (i) freelyconvert the national currency of BiH into any other freely convertible currency; (ii) transfer abroad, freelyand without delay, in freely convertible currency, proceeds resulting from their investment in BiHincluding but not limited to income from investments received in the form of profit, dividends, interest,and other forms of profit; funds received by investors after partial or full liquidation of their investmentsin BiH, or disposal of invested property or proprietary rights; and compensation (Article 11).

Customs rates in BiH range from 0 percent to 15 percent, the average being 6 percent. According toCustoms Policy Law, the following goods are exempted from payment of custom duty: equipment beingimported as foreign investment, equipment for military and police forces of the Entities, equipment forthe projects of rehabilitation and reconstruction of BiH, fixed assets, industrial inventory and equipmentimported on the basis of transfer business activity from abroad in BiH, reproduction material to be usedfor manufacturing of goods for export, advertising material, samples, catalogues etc. in minor values andgoods for benevolent and humanitarian organisations. Special permits from competent ministries arerequired for the import of some goods that can be dangerous for human health as well as theenvironment. The importation of used tires, vehicles older than 7, respectively 10 years for heavy trucksand buses is also restricted by law (Questionnaire).


Trade agreements. BiH has an observer status at the WTO since July 1999. The foreign trade regime of BiHhas been largely adjusted to the concept and system of the WTO principles and the country follows WTOpolicies on customs protection (Ivanov et al 2002). BiH enjoys the preferential regime in trade with theEU, stipulating that all BiH goods (apart from a few exceptions such as live cattle and beef and some fishand wine) that fulfil EU technical-technological standards and conditions can be imported from BiH intothe EU without quota restrictions or duties until the end of 2005 (FIPA 2002).

BiH has ratified free trade agreements (FTAs) with Croatia, Republic of Macedonia, Serbia andMontenegro, Slovenia and Turkey. With regard to the Memorandum of Understanding for TradeLiberalisation and Facilitation in the area covering Albania, Bosnia and Herzegovina, Bulgaria, Croatia,Republic of Macedonia, Romania, and Serbia and Montenegro, signed in June 2001, BiH has alsonegotiated FTAs with Albania (to be signed in March 2003 and applied by July 2003), Bulgaria (to besigned in April 2003 and applied by July 2003) and Romania (to be signed in March 2003 and applied byJuly 2003). An FTA with Moldova was also signed and will be applied by April 2003 (Stability Pact forSouth East Europe 2003, Ivanov et al 2002). BiH also has bilateral trade agreements with China, CzechRepublic, Egypt, Hungary, Iran, Kuwait, Malaysia, Qatar, Pakistan, Switzerland, Turkey, Ukraine, Bulgaria,India, Indonesia, Romania and Slovenia (FIPA 2002).

Agreements on the Mutual Protection and Promotion of Foreign Investment. BiH has signed agreements on thepromotion and protection of investment with Austria, Egypt, Finland, Greece, the Netherlands, Croatia,





Iran, Italy, Qatar, Kuwait, Republic of Macedonia, Malaysia, Germany, Pakistan, Romania, USA, Slovenia,Sweden, Turkey, Czech Republic, Serbia and Montenegro, China, Hungary, Moldavia, OPEC FUND,Portugal, Spain, Ukraine and the United Kingdom. Similar agreements with Belgium, Luxembourg,Bulgaria, Denmark, Indonesia, Libya, Switzerland, and United Arab Emirates are in the process of beingfinalised.

Double Taxation Treaties. BiH has concluded a double taxation treaty with Iran. Ratifications of doubletaxation treaties with Austria, Czech Republic and United Arab Emirates are in the final phase.




Agencija za privatizaciju u Federaciji Bosne i Hercegovine (Agency for Privatization in Federation ofBosnia and Herzegovina). 2003. Izvještaj o toku, efektima i uo…enim problemima u provodenju procesa privatizaci-je u FBiH do 31.12.2002 godine (Report on the results, effects and problems of the privatization process in FBiH until31.12.2002). Sarajevo.

Bulgaria Economic Forum, Sofia. Investment Guide for Southeast Europe 2003, Ivanov, Eugeniy, Iva Stoykova & Yordanka Palahanova. 2002.

„ici…, Muris. 2002. Openness. In The Competitiveness Report of Bosnia and Herzegovina for the Year 2001, Vol. 1,No. 1. Sarajevo: Academy of Science and Arts of Bosnia and Herzegovina, Management and InformationTechnologies Center, pp. 95-105.

European Commission. 2003. The Western Balkans in Transition. Directorate General for Economic andFinancial Affairs Occasional Papers No. 1 (January).

FIAS. 2001. Bosnia and Herzegovina: Commercial legal Framework and Administrative Barriers to Investment.Washington, D.C.: Foreign Investment Advisory Service.

FIPA. 2002. Bosnia and Herzegovina Investor Guide. Sarajevo: Foreign Investment Promotion Agency of Bosniaand Herzegovina.

Papic, ðarko. 2002. Characteristics of the Country and the Government. In The Competitiveness Report of Bosnia andHerzegovina for the Year 2001, Vol. 1, No. 1. Sarajevo: Academy of Science and Arts of Bosnia andHerzegovina, Management and Information Technologies Center, pp. 27-35.

Stability Pact for South East Europe. 2003. Free Trade Agreements in SEE as of 4 March, 2003.

Stojanov, Dragoljub. 2002. Foreign Direct Investments – FDI in BiH. In The Competitiveness Report of Bosnia andHerzegovina for the Year 2001, Vol. 1, No. 1. Sarajevo: Academy of Science and Arts of Bosnia andHerzegovina, Management and Information Technologies Center, pp. 137-149.

Questionnaire for the Identification of Deviations from National Treatment for Incoming Investment andfor Activities by Established Foreign-Controlled Enterprises, OECD, 2003: Response by the CountryEconomic Team Leader for BiH and his Deputy.



NNOOTTEESS

16. Although one must note that net salaries in BiH are relatively high. Currently, net salaries in BiH arein the range of EUR 212 while, for instance, only about EUR 100 in Romania.

17. CRA is also responsible for issuing licences for TV and radio stations and monitoring their activity.

18. A fee of 1 percent of the value of the goods is imposed to cover the operating costs of the Customsadministration (FIAS 2001).


Chapter 5.

BBUULLGGAARRIIAA

1. INTRODUCTION

During the period from 1992-October 2002, FDI inflows in Bulgaria totalled US$ 4,927 million, of whichUS$ 1,583 million (32 percent) were derived from privatisation, and US$ 3,344 million accounted for byother types of FDI (greenfield, additional investment in FIEs, reinvestments, and joint ventures). Inflowshave increased considerably since 1997; the FDI inflows from 1999-October 2002 accounted for almost60 percent of all inflows19. Since 1998 greenfield FDI is by far more important than FDI in privatisation(www.bfia.org). Most of the inflows went to the manufacturing sector (43.4 percent), finance (18.1 percent),sale and repair (15.5 percent), communications (5.4 percent), and hotels and restaurants (4.2 percent).Most FDI has come from Germany (12.4 percent), Greece (11.9 percent), Italy (9.9 percent), Belgium(9.2 percent), Austria (7.7 percent), USA (6.1 percent), etc (1992-2001 data, BFIA 2002).

2. INVESTMENT OPPORTUNITIES AND BARRIERS IN BULGARIA

2.1. Investment opportunities and competitive advantages of Bulgaria as an investment location

The most frequently quoted elements of Bulgaria’s competitive edge are:

– High GDP growth prospects (approximately 5 percent annually);– Europe Agreement of Association and EU accession negotiations, as well as forthcoming NATO

membership;– Strategic geographical location, fast and reliable transport connections;– Free trade agreements with EFTA, Turkey, the Republic of Macedonia, Croatia, Israel, Estonia,

Lithuania, CEFTA membership (in addition to EU accession prospects); – Low labour costs (average net monthly salary was 130 EUR in 2001), well educated and high skilled

labour force;– Favourable tax regime for business; 23.5 percent corporate income tax rate, personal income tax rate

18-29 percent, 0 percent tax on capital gains, no restrictions on after-tax repatriation of profits, taxincentives for investment in regions with high unemployment;

– 50 agreements on mutual protection and promotion of foreign investment, 49 double taxationtreaties (BFIA 2002, www.bfia.org).

Foreign investors in Bulgaria may look for investment opportunities in the next phase of theprivatisation process, which is meant to privatise a number of companies in the financial, energy,infrastructure and telecommunication sectors (see section 6. Privatisation). Another guideline is thedecision of the Bulgarian Government to put an emphasis on developing five priority sectors, i.e.information and communication technologies, energy sector, transport, tourism and agriculture. Othersectors that are attractive to investors are food processing, textile and apparel industry, chemical industry(mainly pharmacy), trade, repairing activities (Ivanov et al. 2002, Totev 2002).

The increased activity of European firms, mostly Greek firms, in Bulgaria is also due to their interestto enter the markets of the former Soviet republics through Bulgaria. At the same time the Greek firms are

interested to expand their economic relations with Bulgaria as a member of CEFTA. By investing andproducing in Bulgaria they use the trade agreements that Bulgaria has with other countries. On the otherhand, the Russian firms seeking to establish economic relations with the EU countries are entering theBulgarian markets, as a country in a process of accession to the EU (Totev et al. 2002).

The evaluation of Bulgaria’s comparative advantages in foreign trade (based on the so-called RevealedComparative Advantages – RCA – method), which is another indicator of investment opportunities inBulgaria, points to two basic conclusions. The first is that the higher the value added in commodities, the less competitive are Bulgarian goods in EU and CEFTA markets. In the EU markets Bulgaria has highcompetitive advantages in beverages and tobacco, in raw materials (except fuels) and in miscellaneousmanufacturing articles. In CEFTA markets it has high competitive advantages only in beverages andtobacco. On the other hand, in the SEE market Bulgaria has high competitive advantages in almost all commodity groups. Here, Bulgaria compensates for lack of competitive position in other areas (BIBA 2001).


Following the collapse of the socialist socio-economic system, for some time Bulgaria wascharacterised by political instability, with insufficient political resolve to accomplish economic reforms.With the change of government in mid-1997 and the introduction of comprehensive economic reforms,foreign investors started to regain confidence in the country. Aided by strong privatisation efforts, FDIflows started to grow (FIAS 2000). But in spite of an obvious success in opening the economy, and creatinga stable macroeconomic environment and a welcoming environment for foreign investments, Bulgaria stillscores low as an investment location in many important indicators of competitiveness and attractiveness.Apart from the shortcomings shared by most transition countries (such as low GDP per capita,infrastructure bottlenecks, structural deficiencies etc.), especially those from SEE region, the lack ofsufficiently good investment climate seems to be a serious problem in Bulgaria. The problems arenumerous and vary from merely political negative factors to a lack of initiative regarding the speeding upof the structural reforms and the adjustment of the economy to the rules of international business withregard to the tax and legislative regulations (BIBA 2001). Investors seem particularly concerned about anunclear legal framework and a generally bureaucratic and burdensome administration. The gap betweenthe adoption of a new, more business friendly legislation and its implementation in practice is obvious.Many investors complain about inconsistency in the implementation of the legal framework regardinginvestment. For example, one survey conducted by KPMG in 2003 shows limited purchasing power oflocal customers, corruption, conflicting and unpredictable legal system, cumbersome bureaucracy andcrime as the top concerns for foreign investors. Similarly, a survey of German investors during the periodfrom 1996-98 registers bureaucratic and incompetent administration and unclear legal framework as thesecond and the third most important impediments to foreign investment, following limited purchasingpower as the first concern (FIAS 2000).

The problem of inconsistent implementation and interpretation of laws and regulations emerges inmany areas. “Such inconsistency, in turn, can give rise ... to discrimination between different types ofinvestors (foreign/domestic, large/small).... A firm that is treated more harshly by the tax authorities thananother firm faces obstacles and costs that the other firm avoids. A firm whose imports are held up at theborder is seriously disadvantaged relative to a rival whose imports clear customs expeditiously. A start-up enterprise whose construction permits are delayed may suffer if a competitor enjoys a head-start”(FIAS 2000, p. iv). This implementation gap could be considered as the de facto discrimination even if ina formal sense the same rule applies both to foreign and domestic investors.

Administrative barriers are substantial impediments to foreign investments and stand out as the mostproblematic. The investors have faced various issues that need to be addressed, such as:

– Lack of institutional capacity for the implementation of legislation.– Suspicious attitude towards the private sector, where investors experience a strong degree of

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suspicion in various administrations and the lack of a user friendly approach.– Employment regulations for foreigners, as well as for Bulgarian workers are rigid. The existing labour

legislation is one of the few cases where Bulgaria’s socialist past still seems to prevail.– The Government has undertaken strong efforts to streamline the company registration process, but

the process is at an early stage with tax registration still separate, and computer stations and linksto establish an efficient registration process missing.. Registration changes and tax reporting canalso be quite cumbersome.

– Physical establishment of an enterprise is not simple. The access to land is problematic as it isdifficult to establish ownership rights over plots. The entire process of site development is similarlyconvoluted, and obtaining utility connections could be time consuming and expensive.

– Customs is one area where legislative reforms still have to be implemented effectively. Civilservants seem to be insufficiently trained, and information materials on procedures and policies arerarely available.

– The enforcement of Bulgarian standards imposes a burden on the private sector, creating delays forthe import of goods (FIAS 2000).

The results of a survey in Bulgaria supported by USAID regional grants outlined the followingproblems, cited by foreign investors (problems are evaluated on a scale from 1 to 5, where 1 is “not aproblem at all” and 5 is “a very big problem” (ranking level of issues shown in brackets):

1. Unpredictability of laws and regulations (ranking level – 4.0);2. High corruption (ranking level – 3.9); 3. State bureaucracy (ranking level – 3.8); 4. Tax level (ranking level – 3.7); 5. Financing (ranking level – 3.6); 6. Unfair competition (ranking level – 3.5); 7. Crime and theft (ranking level – 3.4); 8. Internal market size (ranking level – 3.2); 9. Physical infrastructure (ranking level – 3.2); 10. Inflation (ranking level – 3.1 ); 11. Political stability (ranking level – 3); 12. Property registration (ranking level – 3.0); 13. Laws and regulations for foreign investment (ranking level – 2.9); 14. Problems with technology/production, etc. (ranking level – 2.9); 15. Laws and regulations for starting a business (ranking level – 2.6); 16. Qualified human resources (ranking level – 2.0), (Pasha et al. 2003).

In the opinion of the Bulgarian International Business Association (BIBA), whose 200 membercompanies represent the interests of international business in Bulgaria, the state should pay moreattention to the investment climate in the country and undertake further concrete measures to stimulateimprovement. BIBA points out the following urgent measures in this direction: (i) improvement of thecourts’ work, (ii) improvement in the activity of the customs authority, (iii) creation of an import-exportbank with the aim of encouraging exports, (iv) considerable increase of the efficiency of the taxadministration, (v) gradual decentralization of the budget for the benefit of municipalities (BIBA 2001).

One should also not forget the infrastructure bottlenecks in Bulgaria and in the region as a whole.”Policies aiming to improve the capacity and quality of transport infrastructure in the region are necessary,especially in the long term, when interaction will increase. It will be, however, wise for each country (in ourcase Bulgaria) to invest at the same time in ’soft’ infrastructure, that is, policies that will generate orimprove local mechanisms to support cross-border economic activities”. Since “…removing barriers(related with infrastructure) may not produce immediate positive results as firms are less concernedabout the quality of infrastructure and more concerned about the general or the financial conditionsprevailing in each country”, (Dimitrov et al, 2003).

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BFIA considers that the main recent Bulgarian achievements in the removal of the above mentionedproblems and barriers are (i) economic policy driven by business-minded professionals, (ii) the adoptionof the Law on administrative regulation, which provides fines and administrative sanctions for officials,which fail to carry out obligations in a timely manner; (iii) removal of 20 percent of licensing, permit andregistration regimes and simplification of another 33 percent of licences; (iv) adoption of InternationalAccounting Standards; (v) draft Law on investment stimulation, which provides specific incentives forinvestors (both national and foreign) in industrial zones.

3. TRANSITION PROCESS IN BULGARIA, AND FDI STRATEGY AND POLICIES

3.1. The current status of transition process and major future transition tasks

Since 1998 the economic environment in Bulgaria has considerably improved. The macro-economicframework is stable, the large-scale privatisation of “strategic” assets and the restitution of agricultural andforest land has been completed. The main part of the economic activities today is being performed by theprivate sector. Currently Bulgaria is in the second stage of transition, and the Government should re-directits efforts towards the creation of favourable conditions for speeding up economic development. Bulgaria’sfuture EU membership is linked to the essential problem of low productivity (and hence the low-incomepopulation). In the period prior to EU accession, and thereafter, Bulgaria should accelerate economicdevelopment to reduce large development gap to EU members and to the incoming members (BIBA 2001).

To achieve this objective, the economic and social policy of the country will be oriented towards thefollowing long-term priority directions: (i) harmonisation with European legislation; (ii) improvement ofthe competitiveness of the Bulgarian economy; (iii) rapid development and improvement of the qualityof the basic infrastructure and the environment; (iv) improvement of the quality of life and managementof human resources in accordance with new economic conditions and Euro-integration; (v) establishmentof well balanced and sustained growth at the regional level; (vi) increasing and improving opportunitiesfor and the potential of Bulgarian industrial enterprises and their personnel, to become competitive in EUand other markets; (vii) attracting investment and developing the existing company base in Bulgaria forthe production of goods and services (www.bfia.org).

3.2. FDI strategy and policy

The investment policy is an important aspect of Bulgaria’s economic growth model. The Government’seconomic strategy aims at attracting sizeable FDI averaging between US$ 1 and 1.2 billion each yearbetween 2002 and 2005. A declared commitment of the government is to create an environment that isfriendly to Bulgarian and foreign investors and to the balanced development of small, medium and largebusiness (ICT Development Agency 2002). The existing policy of improving the investment climate in thecountry focus on maintaining stable macro-economic conditions and creating market-enabling, stable,business friendly regulatory and policy environment. According to BIBA (2002), development of a generalmacro-framework is not enough for the improvement of the investment climate. Efforts should be alsodirected towards the creation of possibilities for starting and developing of business at the level of asingle enterprise. The state should also apply a differentiated approach towards the separate types ofinvestments. Specific programs developed for different types of investments are necessary,differentiating among small, average-scale projects and large-scale investments. More specifically, BIBA(2001) suggests the Government to promote:

– FDI friendly environment through appropriate measures, such as competitive taxation,– FDI and domestic investment in higher value-added manufacturing and processing activities

(downstream integration), especially finding ways and means to encourage existing foreigninvestors to invest in downstream production,

– Greenfield investments, enabling the investor to “start off” on the right foot,– Flexible labour laws, allowing industry to shed non-productive labour,– FDI in the SME sector,

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– Massive FDI in infrastructure projects, focusing especially on transport, energy andtelecommunications,

– Legal and regulatory stability,– Continued development of a market economy based on free trade (BIBA 2001).

One urgent policy implication is the modification of the national legislation in order to bring it in linewith EU legislation.


4.1. The existing regulatory framework for FDI in a country

The major piece of legislation on FDI in Bulgaria is the Foreign Investments Act (Prom. SG 97 1997; Corr. SG 99 1997; Suppl. SG 29 1998; Amend and Suppl. SG 153 1998; Amend and Suppl. SG 110 1999;Amend. SG 28 2002). The Bulgarian Constitution and the Foreign Investments Act provide nationaltreatment to foreign investors in pre- and post-establishment. Article 2 of the Foreign Investments Actsays that “a foreign person can make investments in the country by the order stipulated for Bulgariancitizens, having equal rights with them, inasmuch as this act does not provide otherwise, and article 8stipulates that “a company with foreign holding shall have all rights as a company without foreign holding,except in the cases stipulated by this act". The amount and/or the share of the foreign holding in newlyfounded or existing companies are not restricted. There are no minimum capital requirements. Thenational treatment principle covers the whole range of economic and legal forms of activities foraccomplishing entrepreneurial businesses. The national treatment for foreign investors includes theparticipation in the process of privatisation and acquisition of shares, debentures, treasury bonds andother kind of securities (Ivanov et al. 2002, BFIA 2002).

There are no restrictions regarding the legal status of foreign investors. Under the Foreign InvestmentsAct (Article 5) foreign investors are legal persons, which are not registered in Bulgaria, partnerships, whichare not legal persons and are registered abroad, individuals who are foreign citizens and have permanentresidence abroad. Bulgarian citizens with permanent residence abroad, who also have anothercitizenship, shall choose whether to use the statute of Bulgarian or foreign citizens.

In the context of the Foreign Investments Act (Article 12), foreign investment is every investmentmade by a foreign person or its branch in: (i) shares and stakes in commercial companies, (ii) ownershiptitle over buildings and limited ownership title over property, (iii) ownership title and limited ownershiptitle over movable property when considered long-term tangible assets, (iv) ownership title overenterprise, or detached parts thereof in accordance with the stipulations of the Privatisation and Post-Privatisation Control Act, (v) securities, including bonds and security bonds, as well as their derivativeinstruments, issued by the state, the municipalities or other Bulgarian legal persons with a remainingterm to maturity not shorter than 6 months, (vi) loans, including in the form of financial leasing, for aperiod not shorter than 12 months, (vii) intellectual property – subject of copyright and its related rights,patentable inventions, useful models, trade marks, service marks and industrial samples, (viii) rightsunder concession contracts and under contracts for the assignment of management. A foreign investmentalso includes the accretion of the value of the investment initially made. Bilateral treaties on promotionand mutual protection of foreign investment to which Bulgaria is a party may provide for a widerdefinition of foreign investment (BFIA 2002).

Foreign legal entities registered abroad, as well as foreign natural persons and entities, which are notlegal persons, can register branches in Bulgaria provided they are registered abroad with the right toengage in business activities under their national law. No authorized capital is needed to open a branch.

The branch is not a separate legal entity but is required to keep accounting records as an independentcompany and to prepare a balance sheet. The branch shall be entered in the commercial register of thecourt in whose region its headquarters is located (Article 7 of the Foreign Investments Act).

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Foreign persons who have the right to carry out commercial activity according to their nationallegislation can open trade representations in Bulgaria, which must be registered in the Bulgarian Chamberof Commerce and Industry. Representative offices are not considered legal persons and cannot engage ineconomic activities. They can only conduct activities related to marketing, client relations, establishingcontacts within Bulgaria and any other activities not considered economic or commercial by law (Article 6of the Foreign Investments Act).

Apart from the national treatment, the Bulgarian legislation provides the following guarantees toforeign investors:

Most-favoured nation (MFN) status. Bulgaria is signatory to a system of bilateral treaties on promotion andmutual protection of foreign investment which provide, further to the national treatment regime, for theMFN status of the investment made by entities and individuals from one of the contracting countries onthe territory of the other contracting country (BFIA 2002).

More favourable treatment according to international agreements. If an international agreement, to which theRepublic of Bulgaria is a party, stipulates more favourable conditions for carrying out economic activityby foreigners these terms have preference over local rules (Article 3 of the Foreign Investments Act). Thisprinciple finds expression in the treaties for the protection of foreign investment and especially in theagreements for the elimination of double taxation. The international treaties on mutual protection offoreign investment always include an extended concept of a FDI, and the application of this conceptshall have priority to the Bulgarian legislation (BFIA 2002).

Legal guarantees against adverse legislative changes. According to the Article 4 of the Foreign Investments Act,foreign investments made before the legislation, the legal provisions which have been effective at thetime of making the investment shall apply. In such a way foreign investors are protected againstunfavourable subsequent legal changes (Ivanov et al. 2002).

Protection against expropriation. The Bulgarian Constitution allows expropriation of property in the nameof the state or for municipal needs only if affected by virtue of a law provided that these needs cannototherwise be met, and after a fair compensation has been assured in advance. Article 26 of the ForeignInvestments Act provides additional protection to foreign investors. Foreign investments in Bulgaria maynot be expropriated except for exceptionally important state needs that cannot otherwise be met andare subject to prior and adequate compensation in the form of another immovable property in the samelocation, or, with the foreign investor’s explicit consent, in another location, or in cash if the foreigninvestor prefers so. Immovable property owned by foreign persons may not be expropriated formunicipal needs (Ivanov et al. 2002).

Profit and capital repatriation. According to Article 27 of the Foreign Investments Act, foreign investors canfreely purchase foreign currency and transfer it abroad upon presentation of receipts for paid taxes inthe following cases: (i) income generated through an investment, (ii) compensation for expropriation, (iii)repatriation of capital resulting from the termination of the investment, (iv) proceeds from the sale ofinvestment good, (v) sum received after the enforcement of a writ of execution.

The main Bulgarian institution in the field of FDI is the Bulgarian Foreign Investment Agency (BFIA),established in April 1995 as a one-stop-shop institution for encouraging, attracting and assisting foreigninvestments and priority investment projects in Bulgaria. It is a governmental body under the Councilof Ministers and is responsible for co-ordinating the activities of public and private institutions on foreign investments issues. A key function of the Agency is to provide top-quality customer servicesto investors and to assist companies in the investment process. Bulgaria also has an Advisory Councilon Foreign Investment and Financing established as a consultative body to the Prime Minister with the purpose of further improving the investment climate in the country. Members of the Councilare representatives of the largest foreign investors, consulting companies, banks and internationalorganisations. The Advisory Council discusses the policy for promotion and attraction of foreign

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investment and adopts measures for improving the investment environment in the country(www.bfia.org).


In Bulgaria, no prior permission for the investment or the registration of FDI with state authorities isrequired other than the normal registrations required for local investments (www.bfia.org). There are,however, certain requirements, which put foreign investors under the obligation of providing relevantdata to the Bulgarian National Bank and the National Institute of Statistics. This is a basis for maintainingregisters of FDI:

– According to the Article 4 of the Currency Act (Prom. SG 83 1999; Amend., SG 45 2002) all thetransactions between local and foreign persons with (i) foreign securities at the money marketissued by foreign persons, (ii) securities at the capital market issued by foreign persons, (iii) shareparticipation in partnerships that are foreign persons, (iv) all the derivatives of the investments initems (i)-(iii) are subject to registration at the Bulgarian National Bank before the implementation.However, the Act stipulates that no registration shall be necessary in the cases when the abovetransactions lead to FDI. Article 7 further requests the registry judge to report to the BulgarianNational Bank about the acquisition of immovable properties in the country by foreign persons.

– The Bulgarian National Bank shall then concede to the Ministry of Finance the information about (i) theFDIs of local persons abroad and of foreign persons in the country, and (ii) the investments inimmovable properties of local persons abroad and of foreign persons in the country which does notconstitute a commercial secret (Article 9 of the Currency Act). The Ministry of Finance, observing thecommercial secret and the requirements for protection of the classified information representing officialsecret, maintains (i) a register of the direct investments of local persons abroad and of foreign personsin the country, (ii) a register of the investments of the foreign persons in immovable properties in thecountry as well as of the investments of local persons in immovable properties abroad, (iii) a register ofthe financial liabilities of local persons to foreign persons. The Ministry of Finance exchangesinformation with the BFIA about the direct investments and the investments in immovable propertiesin the country by foreign persons observing the commercial and the official secret.

– Foreign persons and the branches of companies in which foreign persons have a participation,directly or through other companies with foreign holding, should also submit summarised FDIinformation to the National Institute of Statistics, in accordance with the law on statistics (Article 13of the Foreign Investments Act).

FIAS is rather critical of this extensive double-track reporting on FDI in Bulgaria (Bulgarian NationalBank, National Institute of Statistics), and recommends the Bulgarian authorities abstain from any formalregistration and reporting procedures, and instead use their information collected in BULSTAT. ThroughBULSTAT, the government already has a mechanism in place which could conveniently collect thisadditional information without forcing investors to go through another, separate reporting requirement.Any company that is being established, facing changes to its capital structure or is being dissolved, needsto go through the BULSTAT registration process. During this process, the BULSTAT offices could easilyrecord the presence of a foreign investment as well as the intended capital inflow for new investmentsand the change in the capital structure of existing ventures. This information could be collected monthlyand electronically forwarded to the BNB and the Ministry of Finance to evaluate the impact of FDI flowson the balance of payments (FIAS 2000).


The Foreign Investments Act does not contain any restrictions regarding FDI except in the field of realestate. A foreign person can acquire right of ownership and limited real rights over real estates, but:

– A foreign person, including through a branch or as sole entrepreneur, cannot acquire ownership ofland (Article 23)

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– A foreign person or a company with foreign holding must obtain a permit for acquiring right ofownership of buildings and limited real rights over real estates in the region of border zones and otherterritories determined by the Council of Ministers and related to the national security (Article 24).

Bulgaria also applies the reciprocity provisions. Article 3 of the Foreign Investments Act says that theprovisions of the Act shall not apply entirely or partially to the investments of foreigners from thecountries, specified by the Council of Ministers, where discriminating measures are applied againstBulgarian companies or citizens.

The Currency Act introduces, through the Additional Provisions, 20 percent of the number of votes inthe general meeting as a threshold for treating an acquisition of a commercial company as a directinvestment. This threshold is not mentioned in the Foreign Investments Act and is not in compliance withthe 10 percent foreign equity share threshold in the OECD benchmark definition of FDI.


The Commercial Act allows the establishment of the following types of companies: generalpartnership, limited partnership, limited liability company, joint stock company and partnership limitedby shares (Article 64)20. It also allows the establishment of branches (Article 17) and sole entrepreneur(Article 56). In addition, the Foreign Investments Act provides for the establishment of branches (Article7) and representative offices (Article 6) (see section 4.1), while the Co-operatives Act regulates theestablishment of co-operatives. FDI can take the form of any of these business organisations. There areno limitations as far as the share participation of foreign persons is concerned and so is the extent of theirinvestments. A foreign natural person must have a permit for permanent residence in the cases when, forcarrying out economic activity s/he is registered as sole entrepreneur, or s/he participates in a partnershipor a co-operative (Article 9 of the Foreign Investments Act).

The most widely used form of establishment of FDI in Bulgaria is the “single person” limited liabilitycompany, but other forms of limited liability and joint-stock companies are also frequently used (FIAS 2000):

– A limited liability company is founded or owned by one or more persons, including foreign naturalor legal persons, whose liability is limited to the amount of the capital they subscribed. Theminimum authorised capital is Bulgarian leva (BGN) 5,000. At least 70 percent of the capital must bepaid up before registration. Contributions to the foundation capital can be in cash or in kind.

– Joint-stock company is a company, the capital of which is divided into shares and is founded orowned by one or more persons, including foreign individuals or legal persons. The company isliable to the extent of its assets. The minimum capital of the company is BGN 50,000. A higherminimum capital is required for banks, insurance companies, investment companies, voluntaryhealth insurance and pension security companies. In general, contributions to the foundationcapital may be paid in cash or in kind. At least 25 percent of the value of each share must be paidup on foundation (BFIA 2002).

Special licences and/or authorisation are required for engaging in certain activities, for domestic aswell as for foreign-controlled enterprises. The activities requiring special licensing include: (i) bankingactivities and participation in banking companies (Banking Act), (ii) insurance activities and participationin insurance companies (Insurance Act), (iii) manufacture of or trade in weapons, ammunitions andmilitary equipment (Control of Explosives, Firearm and Ammunitions Act) (FIAS 2000).

There are no citizenship requirements or other restrictions to appointing foreign individuals asmanagers of companies established in Bulgaria. No employment contract is necessary for the manager-foreign individual to perform his/her duties (www.bfia.org).

The registration of FDI or the establishment of a foreign-controlled company is in principle subject tothe same conditions that apply to domestic legal entities. Within 7 days of establishing a company, the

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entity must apply to the respective local register (Article 4 of the Commercial Act), except ofrepresentative offices which are required to register with the Bulgarian Chamber of Commerce andIndustry (Article 6 of the Foreign Investments Act). The procedures for company registration are governedby the Commercial Act. Additional provisions can be found in the Civil Procedure Code, and for foreigninvestors in the Foreign Investments Act. In the case of limited liability and joint stock company, foreigncompanies must provide certificate of incorporation of the foreign company, if the founding shareholderis a foreign company (For Bulgarian companies the required document is the court decision for theregistration of the company in the Trade register or a certificate for a court registration). Additionally, aphotocopy of the passport of the Managing Director(s)/Executive Director(s), if the latter is not a Bulgariancitizen, must be provided. An additional general requirement applies to foreign investors. Foreignnationals must obtain a permanent residence permit if registering as a sole trader, participating in ageneral partnership, an unlimited liability or limited partnership, or in a limited partnership with shares(Article 9 of Foreign Investments Act) (FIAS 2000).

As with the Bulgarian entrepreneurs, foreign investors have to register their activities with: (i) local TaxAdministration Offices for taxation purposes, (ii) local Social Security Offices if foreign investors haveemployees on their pay-roll, (iii) the National Institute on Statistics under the registration system BULSTATfor statistical purposes, (iv) customs authorities when foreign trade operations are performed (BFIA 2002).


The basic legislation referring to the employment of foreigners in Bulgaria consists of the Promotion ofEmployment Act (published in State Gazette 112/2001, in force as of 1 January 2002) and accompanyingRegulation on the Conditions and Procedure for Issuance, Refusal and Depriving from Work Permits ofForeigners in the Republic of Bulgaria (adopted in 2002), Foreigners in Bulgaria Act and ForeignInvestments Act (Ivanov et al 2002). As a general rule, foreigners require entry visas, residence permits,and a work permit if they want to be employed in Bulgaria. According to FIAS (2000), visas and residencepermits can be relatively easily obtained without any undue requirements, but obtaining of work permitsis a more complicated process. However, putting together a workforce is more complicated. This has todo with Bulgaria’s desire to prioritise domestic unemployment.

Foreigners can obtain a long-term residence permit or a permanent resident permit in Bulgaria.Permanent residence permit is granted: (i) to a foreign investor who registers as a sole trader, is a memberof a corporation or is a partner in a partnership, (ii) automatically to foreign individuals investing at leastUS$ 250,000, (iii) automatically to expatriates who take on a directorship in a company as announcedthrough the company registration process (for detail, see Article 24 of Law on Foreigners in the Republicof Bulgaria). Long-term residence permits, which are valid for one year, can be obtained by: (i) directorsand managing executives of companies registered in Bulgaria, (ii) foreign persons that performcommercial activity in Bulgaria, which generate the employment of at least 10 Bulgarian citizens21, (iii)foreign persons that have an employment contract and a valid work permit (for detail, see Article 24 ofLaw on the Foreigners in the Republic of Bulgaria). The permit can be prolonged each year. Obtaining aresidence permit does not appear to be a significant impediment, but in some cases the process imposesrather inconvenient measures (FIAS 2000, BFIA 2002).

To be legally employed in Bulgaria, a foreigner must obtain a work permit. Only foreigners who havea permanent residence permit do not require a work permit. The work permit is also not required formanagers. The work permits are issued for a period of one year, with prolongation possibility within athree year period, upon the request by the employer. The work permit can be issued only if there is noBulgarian citizen suitable for the job, and if during the preceding 12 months the total number of foreignemployees did not exceed 10 percent of the average number of employees (BFIA 2002). FIAS reports ona number of difficulties in trying to obtain work permits for expatriate staff, one of the most frequent beingthe non-acceptance of specific degrees common abroad as well as professional experience by theBulgarian authorities (FIAS 2000). The most usual path to circumvent these problems was to developdirectorship or management positions. Special laws require Bulgarian citizenship for certain job

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categories (most of legal professions, civil servants, officers from land registry, customs officers etc.)(Ivanov et al 2002).

Labour relations of foreigners are stipulated by the Foreign Investments Act (Articles 29-32). Accordingto the Act, the legal terms of employing foreigners in a company with foreign holding as well as in a branchor representation of a foreign person, shall be settled through employment contracts. The employmentcontract cannot differ from the provisions of the Bulgarian employment legislation regarding: (i) thewritten form of the employment contract; (ii) the maximum duration of the working hours, the minimumduration of the rests and leaves; (iii) the minimum wages for Bulgaria; (iv) the minimum notice period attermination of the labour contract; (v) employer’s liability for work accidents of professional diseases; (vi)occupational health and safety conditions. For some categories of employees, due to the special natureof their work: (i) open-ended working hours may be established. The employees on open-ended workinghours shall, if necessary, perform their duties even after the expiry of the regular working hours; (ii) anobligation may be established to be on duty or to stand by at the disposal of the employer duringspecified hours in a 24-hour period.

4.4. Real estate

Bulgarian legislation differentiates between land and buildings as far as acquisition of ownership rightsby foreigners is concerned. Foreign persons may acquire ownership rights on buildings and limitedownership rights (right to build and right to use) on real estate in Bulgaria (Article 3 of the ForeignInvestments). The Constitution does not allow foreign nationals, operating either through a branch or asa sole entrepreneur, to acquire ownership of land in Bulgaria22. This restriction does not apply tocompanies with foreign participation, irrespective of the foreign equity share, incorporated under theBulgarian legislation. Thus foreign persons can acquire full land ownership rights, including ownershiprights on agricultural land by setting up or joining a company incorporated under the Bulgarian legislation.The same rule applies with regard to residential property rights (BFIA 2002, Ivanov et al 2002).

Foreign nationals, as well as Bulgarian companies with foreign participation need an advanceauthorisation by the Council of Ministers to acquire ownership rights over real estate in border zones andin areas of importance for the national security, as determined by the Council of Ministers (Article 24 ofthe Foreign Investments Act).

Upon request by an investor the Foreign Investment Agency may trigger a special mechanism forinstitutional support and propose to the competent authorities to transfer, in accordance with the StateProperty Act and Municipal Property Act, limited property rights (right to build and right to use) on realestate, state private or municipal property, with a view to implement priority investment projects (BFIA2002, Ivanov et al 2002).


Public procurement principles, conditions and procedures are regulated by the GovernmentProcurement Act (published in State Gazette 56/22 June 1999, last amended 04/02). Procedures forgovernment procurement with a value exceeding certain thresholds defined in Article 7 of the Act arecarried out according to the provisions of the Regulation on Government Procurement (State Gazette N36/2000, amend. 2001). Public procurement procedures shall be opened for construction works or forpurchase of goods or services by: (i) the state administration, municipalities, higher educationalestablishments, medical institutions, and NGOs, when funding is provided through the state budgetand/or through budgetary accounts and funds and municipal budgets, (ii) the National Health InsuranceFund and the National Social Insurance Institute, (iii) Bulgarian diplomatic missions abroad, (iv) soleproprietors, commercial companies or state enterprises if operating a concession or performing activitiessubject to a licensing regime. The Act does not apply to acquisitions related to the national defence andsecurity, nor to those financed through international agreements or by international organisations, wherethe specific regulations of these organisations or agreements shall apply.

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Public procurement procedures are accessible to all Bulgarian and foreign individuals or legalpersons, registered according to the Bulgarian Commercial Law (for Bulgarian participants) and accordingto its national legislation (for foreign participants), as well as associations of individuals and/or legalpersons. Participants in government procurement procedures can also be research institutes, andfreelance individuals (Questionnaire response, March 2003).

Public procurement contracts are awarded following several procedures, depending on the value andtype of acquisition. By law, government procurement procedures are: (i) open procedure, (ii) restrictedprocedure, (iii) negotiation procedure. Procedures for small-scale government procurements are: (i)open competition, (ii) restricted competition, (iii) competition for design, (iv) direct negotiations. Thecases where each procedure apply are defined by the Act and the Regulation. All governmentprocurement procedures shall be conducted in a manner ensuring the transparency of the procedure,fair competition, equal opportunities to all bidders, and the observance of business secrets of thebidders and their offers (Ivanov et al 2002).



Banking. By the end of 2000, 90 percent of Bulgarian banks had been privatised, 70 percent of themwith foreign participation/ownership (BIBA 2001). A written licence issued by the Central Bank isrequired for banking practice – both for foreign and local companies. The application is accompaniedby certain documents. For obtaining a licence for banking practice on the Bulgarian territory through abranch the foreign bank has to attach to the application some additional documents (such as, certifiedcopy of the act for registration of the bank and a document issued by the registration office withupdated data about the headquarters and address of management, the scope of activity, the amountof capital, management system and the persons who represent the bank, etc.). Local or foreign personsas well as connected bodies are not able, without preliminary written permission of the Central Bank,to acquire directly or indirectly stocks of local bank, which would provide them with a participation of10 percent or more of the stocks with voting rights. This rule does not apply if the stocks are acquiredwithout preliminary permission through public offering of stocks at the fund exchange or at anotherregulated (organised) securities market; the acquirers are not able to exercise the voting rights linkedto these stocks until they receive a written permission from the Central Bank (Questionnaire response,March 2003).

Insurance. National treatment regime applies to the licensing for insurance activities. Foreign insurercan carry out insurance and re-insurance activities on the Bulgarian territory only with the permit of theNational Insurance Council (Questionnaire response, March 2003).

Securities market and other financial services. According to the Public Offering of Securities Act, StateCommission for Securities issues permits for carrying out transactions with securities on the territory ofBulgaria through a branch of a foreign corporate body on condition that: (i) the body has the right,according to its national legislation, to carry out these transactions and activities, and (ii) the bodycontrolling the securities market in the country where the foreign body is registered exercises supervisionover it on a consolidated basis., The State Commission for Securities can acknowledge the permit forcarrying out these transactions issued to a foreign corporate body when an international agreement towhich Bulgaria is party stipulates accordingly. If the above mentioned conditions are fulfilled, the foreignbody shall have the same rights and obligations as a local investment broker.

Foreign persons, which:

– have the right, according to their national legislation, to carry out the following transactions: (i)transactions with securities on their own or another’s account, and mediation for conclusion of suchtransactions; (ii) issuing of securities; (iii) management of individual security portfolios and/or

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money, except of portfolios of investment companies and pension funds; (iv) holding securities andclients’ money in depository institutions (trustee activity), or

– have the permit for carrying out transactions with securities on the Bulgarian territory or, as clientsof a local investment broker, have acquired securities in their names, but on the account of otherforeign persons,

are obliged to identify their clients and the transactions made on their account before the Commissionwithin 3 working days from the written request. The names of the foreign persons, who have acquiredsecurities in their names but on the account of other foreign persons are registered at the CentralDepository (Questionnaire response, March 2003).


The Telecommunications Act, adopted in August 1998, provides for the regulations concerning thetelecommunications regime. The Act aims at liberalising the telecommunication services, setting up thefree market and preventing unfair competition. It provides for an equal treatment of the operators. TheAct defines the telecommunications activity as the performance of telecommunications throughestablishment, maintenance and utilisation of telecommunications networks and/or delivery oftelecommunications services. The telecommunications operators provide telecommunications servicesfor free or through licensing. A “licence” is the permission to use the radio frequency spectrum, foractivities on performing telecommunications services as well as for radio and television activities. Thereare individual and general licences. The individual licences are personal and can be issued without acompetition or a tender, whenever their object is an unlimited resource. The general licence shall bepublished in the State Gazette. Every person may perform an activity in telecommunications sector undera general licence after being registered with the State Commission on Telecommunications. The licencesare approved by the government (BFIA 2002).

Full liberalisation of the telecommunications market has been introduced in 2003, which covers thefixed voice system, the leased lines and the trans-border real-time voice transmission. The BulgarianTelecommunications Company (BTC) is the national telecommunications operator, wholly owned by thestate. It had exclusive rights for the provision of telephone services through fixed telephone networkuntil its privatisation that is expected to be completed in the first half of 2003. The company managesapproximately 2.9 million telephone lines; in the data transmission services it has 90 percent marketshare. BTC is also the leading player in the internet market (through its subsidiary BTC Net) and themain wholesale internet service provider (over 60 percent) in Bulgaria. The strategy for privatisationand abolition of the BTC monopoly has been approved by the National Assembly. There is a procedure(international tender) under way for the selection of a strategic buyer of BTC. It is envisaged that themajority stake be sold through a privatisation procedure and the minority stake at the stock exchange(Ivanov et al 2002). At present, one analogue mobile network and two digital GSM networks operate in Bulgaria. Options for granting the licence for the third GSM operator are also provided (Ivanov et al 2002).

5.3. Transport (air transport, road transport, railroad transport, maritime transport)

Much improvement of the existing Bulgarian logistical network is required in order to remaincompetitive internationally. The long-term sustainability of the transportation sector cannot be judged asadequate for the time being. BIBA’s priorities, as far as the transportation infrastructure is concerned, are:(i) for government and industry stakeholders, to establish a clear long-term vision and strategy for thetransportation sector, (ii) to restart the port privatisation/concession-granting process, (iii) to define along-term vision for the Bulgarian State Railways (by stopping cross-subsidisation, restarting privatisationand concessions, shutting-off economically non-viable railways branches or granting concessions toprivate operators who would be also responsible for track maintenance), (iv) striking an improved balancebetween road and railway subsidies, (v) implementing “user pays” approach for specific segments of roadinfrastructure, as in the proposed policy for rail infrastructure (i.e. toll-highways) (BIBA 2001).

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Maritime transport. Merchant shipping is freely carried out, in an environment of protection andpromotion of competition and free initiative in economic activity. Article 6 of the Merchant Shipping Codestipulates that the cabotage within Bulgaria (maritime cabotage) could be carried out by: (i) ships flyingBulgarian flag, (ii) ships flying a flag of an EU Member State, when they comply with all the conditions forcarrying out the cabotage, (iii) ships flying a flag of a third country if this is agreed through an InternationalAgreement to which Bulgaria is a party or with an ad hoc decision of the Council of Ministers. Cabotage isdefined as: (i) the carriage of passengers and cargoes and towage of vessels among the Bulgarian ports,and (ii) the carriage and any activities, related to hydrotechnical and underwater technical works,biological sea and river sources, prospecting and extraction of mineral and other inorganic resources,pilotage, bunkering, receipt of waste, water-and-oil mixtures and others, carried out using vessels ininternal sea waters, the territorial sea and inland waterways of Bulgaria. In case of serious disturbances ofthe domestic market, resulting from market liberalisation, the Minister of Transport and Communicationsis entitled to notify the competent EU bodies and bodies of countries which are parties of an InternationalAgreement about the introduction of derogations from their right to carry out cabotage for a term of up to12 months.

The following are entitled to fly the Bulgarian national flag: (i) Bulgarian ships, registered in theBulgarian register, (ii) ships, which are under the conditions of bareboat charter, (iii) ships which areproperty of natural or legal persons from the EU Member States, when they authorised Bulgarian naturalor legal persons to represent them (Article 27 of Merchant Shipping Code). A ship is considered Bulgarianwhen it is: (i) a state property, (ii) property of Bulgarian legal or natural person, (ii) more than 50 percentof the property belongs to Bulgarian legal and natural person, (iv) under the conditions of bareboatcharter (Article 28 of Merchant Shipping Code). A vessel, entered on a foreign register of vessels, may beentered on a Bulgarian register after having been struck off the foreign register. After the vessel is enteredon the Bulgarian register, all prior registrations of the same vessel in foreign registers shall be considerednull and void (Article 37 of Merchant Shipping Code). Vessels, hired under the terms of bareboat chartercontracts, may be entered into the registers, provided the following conditions have been met: (i) behired by a Bulgarian natural or legal person; (ii) be entered on a compatible register; (iii) not entered onother registers under the terms of a bareboat charter contract; (iv) an excerpt from the principalregistration of the vessel, containing a description of the vessel, data regarding the ship-owner and allregistered mortgages and other encumbrances, if any, be submitted (Article 39a of Merchant ShippingCode) (Questionnaire response, March 2003).

5.4. Energy

The Bulgarian government and its energy executive institution, the State Agency for Energy andEnergy Resources (SAEER), has a clear understanding of the strategic direction to be followed in order topromote the sustainable development of the energy sector. The aim is to transform the existing “singlebuyer” model (initially through partial liberalisation of the sector evolving into full liberalisation) in orderto achieve full compliance with EU energy market development directives. SAEER subsequently set upits energy policy priorities as: (i) development of a modern and competitive energy market, (ii)improvement of the related legal and regulatory framework to comply with EU requirements, (iii)attraction of further foreign investment in the energy sector, (iv) promotion of a philosophy of least costenergy supply and energy efficiency, (v) pursuing of integration of the Bulgarian energy system with theEuropean one, and (vi) guarantee of nuclear power safety management.

Along the lines of the above policy priorities, since 2000 fundamental changes have beenimplemented in the Bulgarian energy sector. In order to eliminate the monopoly of the National ElectricCompany (NEK), the power generation, transmission and distribution capacities have been separatedand the power generation companies are now offered for sale (Ivanov et al 2002). As of May 2000, NEK wasrestructured into seven power distribution companies, seven power generation companies and onetransmission company. NEK’s restructuring was complemented by two large-scale thermal power plantproject developments at the Maritsa “East” complex in cooperation with US-based companies. Inaddition, the restructuring of the electricity generation sector was complemented by the privatisation of

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twenty-two hydro power plants, privatised through the Privatisation Agency. Slower progress is noticeablein the regulatory framework preparation and implementation. In addition, a lack of transparency aspertains to new project development and negotiation procedures has heightened the “perceived projectrisk” and reduced foreign investor interests towards the energy sector. Thus far, only three of the globalpower groups (AES, Entergy and RWE) have opened permanent representation offices in Bulgaria. Thelack of European interest is of special concern. As pertains to the privatisation and restructuring of thenatural gas sector, the process of restructuring Bulgargaz (and the natural gas sector) remains extremelyslow and non-transparent.

Foreign investment in the Bulgarian energy sector is expected to be one of the main contributors tothe Bulgarian economic reform and the industrial competitiveness improvement. Foreign investors havealready been expressed interest towards the forthcoming privatisation of the electricity distributioncompanies and the gas sector. The new Bulgarian administration has pointed out energy sectorrestructuring as one of its top four strategic priorities (with hi-tech and communications, tourism andagriculture-food industries) (BIBA 2001).

Energy and the Power Efficiency Act (SG No. 64, of 16 July 1999) abolishes some provisions of theConcessions Act related to the activities in the energy sector. It substitutes the concessions regime by alicence regime. The licences are granted by the State Commission for Energy Regulation to a personregistered under the Bulgarian Commercial Code (Questionnaire response, March 2003). Only by tenderan investor is selected for the construction of (i) new generation capacities exceeding 25 MW, (ii) new heattransmission systems, (iii) new gas distribution networks, (iv) natural gas storage facilities. The tenderwinner shall be granted (i) a facility construction permit, (ii) electricity and/or heat generation licence ifrequested. The tender winner shall receive a contract with the transmission enterprise for the sale of theelectric power and/or heat to be generated for a period not shorter than 10 years (BFIA 2002).


Trade activities which have particular importance in respect to the national security, life and health ofpeople, animals and plants, environment and protection of cultural values are subject to licensing. Alicence is required for production and trade of spirits and alcoholic drinks; trade in plant protectionchemicals, trade in arms, trade in precious metals, production and trade in medicines, processing andtrade in tobacco and tobacco products, etc. (BFIA 2002).

The following activities are subject to a licensing regime to engage in: operation of facilities used forproduction, transmission or distribution of water, electricity, gas, heat energy; exploitation of crude oil,coal extracting sites; operation of ports, airports and other terminals; exploitation of public servicetransport network, when a monopolistic carrier; construction, maintenance and development of railwayinfrastructure; construction, maintenance and exploitation of telecommunication networks, except radioand TV transmission networks; postal services (Ivanov et al 2002).

5.6. Other sectors (mining, fishing, trade, radio, television and publishing, gambling, auditing etc.)

Mining and quarrying. Three types of permits are issued for search and survey of natural resources: for(i) search, (ii) survey, (iii) search and survey. Concessions are issued for extraction to Bulgarian or foreignperson or entity, registered as a merchant under the Bulgarian Commercial Code (see section 7.2.Concessions) (Questionnaire response, March 2003).

Agriculture, fishing and forestry. The Executive Agency for Fishing and Aquaculture and the ExecutiveAgency “Maritime Administration” are responsible for the registration of fishing ships. Only national flagvessels (see section 5.3. Transport) may fish in country ’s territorial waters. Foreign vessel cannot performindustrial fishing in the Bulgarian economic zone unless there is an agreement between Bulgaria and thecountry, under which flag the ship is sailing. National treatment regime applies when issuing fishingpermits (Questionnaire response, March 2003).

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6.1. Privatisation

The adoption of the Act on Transformation and Privatisation of State-Owned and Municipal OwnedEnterprises in 1992 started the privatisation process in Bulgaria. A decentralised approach to privatisationwas applied, with competencies being distributed among different institutions – the Privatisation Agencyand the branch ministries were responsible for the privatisation of the state-owned enterprises, while themunicipalities were charged with the privatisation of the municipal assets on their territory. Thedistribution of the enterprises between the Agency and the branch ministries was based on the balance-sheet value of the long-term assets of the enterprises to be privatised. The Privatisation Act wasaccompanied by a number of by-laws that established the conditions for participation of various types ofinvestors in the process, including management-employee buy-out teams.

By the end of 2002 about 53.5 percent of the assets of the state-owned enterprises, representing 81percent of the assets subject to privatisation, have been privatised. A total of 4,872 enterprises were sold,including 2,659 deals for sale of whole enterprises and 2,213 deals for sale of self-contained facilities. Outof the total number of privatisation transactions, 161 deals were signed with foreign investors representingthe most important weight in the financial results of the sales23. The overall financial effect of deals signedby the end of 2002 amounts to US$ 7,555 million, including US$ 3,024 million in payments agreed on deals,US$ 1,079 million dues committed or paid by the buyers, US$ 3,452 million in investment commitments.The sale of the large enterprises in the chemical industry, metallurgy, mechanical engineering, thedefence industry, and tourism is almost completed. By the end of 2000, 90 percent of Bulgarian banks hadbeen privatised, out of which 70 percent with foreign participation (BIBA 2001). The enterprises, which arestill not privatised, had until recently a monopoly status in infrastructure branches like energy,communications, railway transport (www.priv.government.bg).

Privatisation has resulted in the expansion and the strengthening of the private sector in Bulgaria. In2001 the private sector produced 63 percent of GDP and about 72 percent of the gross value added, andretained 73.4 percent of the employment.

In order to speed up the privatisation process, in 2002, the Government developed a programme forthe privatisation of further public sector stakes. To facilitate the realisation of priorities established bythe programme, in March 2002, the Act on Transformation and Privatisation of State-Owned andMunicipal Owned Enterprises was abolished and replaced by the Privatisation and Post-PrivatisationControl Act. The objective of the new Act is to create conditions for transparent, swift, and economicallyefficient privatisation, for all investors, natural or legal persons, and to place them on an equal footing.Another objective of this Act is to assure the economic growth and competitiveness of the privatisedcompanies. The new Act has brought the following major changes in the privatisation process: (i)enterprises which have not been privatised are now treated as enterprises for which a privatisationprocedure has been launched (in accordance with the former privatisation act, a special decision of the competent body was needed for starting a privatisation procedure), except for some monopoliesand key institutions listed in the Attachment to the Act; (ii) there is a major change in the privatisationmethods. The most common method: “negotiations with potential buyers” that was previouslyemployed is no longer in force, due to the fact that it was claimed to be a source of corruption.Privatisation methods under the new Act are public offering, public auction, publicly announced tender,centralised public auction and acceptance of tender offer as per article 149 of the Public OfferingSecurities Act. At the same time, the parties involved in privatisation through management buy-outshave no longer preferential rights, nor have the employees of privatised companies the right to buy 20 percent of the share capital at a preferential price; (iii) the Privatisation Agency is the onlycompetent body to sell state owned property, i.e. the overall set of activities related to privatisation are concentrated at the Privatisation Agency (in accordance with the former privatisation act, the ministries were also competent to represent the State in privatisation deals) and a separate agencyfor post-privatisation control was established. The Post-Privatisation Control Agency will supervise the

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fulfilment of the buyers’ obligations under the concluded privatisation deals (Ivanov et al 2002,www.priv.government.bg).

The restructuring and the privatisation of sections of infrastructure monopolies is the central objectiveof the new privatisation strategy:

– In the transport sector, privatisation of state-owned properties in the Ports of Varna and Bourgas ispending. The Government also intends to develop plans for selling assets in railway transport. Theprivatisation of the commercial fleet and the river fleet is expected in 2003.

– The privatisation in the energy sector includes mining companies, hydro-power plants, utilities andgas and electricity generation and distribution companies. The sale of 7 electricity distributioncompanies was launched at the end of 2002. The privatisation of 42 hydroelectric plants, autonomousunits of the National Electricity Company will start soon. The restructuring and privatisation of districtheating companies have also begun.

– In the telecommunications sector, the privatisation strategy of BTC has been approved by thenational Assembly. There is a procedure under way (international tender) for the selection of astrategic buyer for BTC. The majority stake is anticipated to be sold through privatisation and theminority stake to be launched at the stock exchange.

– The Government also intends to develop plans for the sale of assets in water supply and seweragesystems.

– The privatisation of “Bulgartabak", Balkancar Holding, and of the largest defence industry company“VMZ” is expected (www.priv.government.bg).

There are only a few companies that remain out of the scope of privatisation as scheduled by theexisting privatisation programs. The list provided by the Attachment to the new privatisation Act includesenterprises engaged in territorial land operations, water and sewerage utilities, airports and ports, thenational electricity transfer system and the company charged with the maintenance of the railway network,as well as some specialised hospital establishments and medical practices (www.priv.government.bg).


6.2.1. Monopolies

The Protection of Competition Act came into force on 12 May 1998. The Act provides protectionagainst: (i) agreements, decisions and coordinated practices, (ii) misuse of monopolistic and dominantposition on the market, (iii) concentration of economic activities and unfair competition, (iv) other actionswhich may result in prevention, restriction or breach of competition. The Act applies to all enterprises thatcarry out activities in Bulgaria, including the foreign-controlled enterprises. Pursuant to the Act an“enterprise” means any natural or legal person or entity pursuing activities on the relevant market,regardless of the particular legal form. The Commission for the Protection of Competition is the stateauthority that is responsible for the effective application of the Act.

Under the Act the monopolistic position of an enterprise confers exclusive rights to pursue a certaintype of economic activity. A monopolistic position may be granted to State only by law, in accordance withArticle 18, paragraph 4 of the Constitution. Paragraph 4 states: “a state monopoly over the railway transport,the national post and communication networks, the use of nuclear energy, the production of radioactiveproducts, weapons, detonating and biologically strongly acting products can only be established througha law". Any other granting of monopolistic position shall be considered null and void (BFIA 2002).

6.2.2. Concessions

The 1991 Bulgarian Constitution proclaims that concessions can be granted for objects which areexclusive state property or over which the state exercises its sovereign right or has established monopoly,under the conditions and by the procedure set forth in the 1995 Concessions Act. The Constitution

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guarantees municipalities’ ownership and its exercise to the benefit of the relevant municipality, by virtueof the local self-government principle. The Municipal Ownership Act regulates the granting of concessionsover objects, which are public municipal property.

The Concessions Act defines the objects that are public state property or property on which the Statehas sovereign rights24, for which concessions may be granted, and activities on which a state monopolyhas been established and may be subject to concession. Under the Act, concessions may be granted notonly over existing objects that are public state property, but also over objects, which shall be built andfunded by the concessionaire. The procedure for granting concessions include: (i) the adoption of adecision to grant a concession by the Council of Ministers upon minister’s proposal, (ii) a competition ora tender organised and carried out by the minister appointed in the above decision, (iii) the assignmentof the concessionaire, (iv) the conclusion of a concession agreement with the concessionaire. A few speciallaws provide for special requirements regarding concessions on some sites – the Waters Act (for watersites), the Underground Resources Act (for concessions for extraction of underground resources) and theRoads Act (for concessions on national roads).

Pursuant to the Municipal Ownership Act a concession represents the grant of a particular right to usean object, which is public municipal property with the purpose of permanently satisfying the public needsof municipal importance, and allowing that the activities be conducted by the municipality. The Actfurther defines the objects and activities for which concessions may be granted. The procedure forgranting concessions includes the following steps: (i) adoption of a decision to grant a concession by theMunicipal Council, (ii) carrying out of a competition or a tender, (iii) conclusion of the concession contract(BFIA 2002, Ivanov et al 2002).


The Foreign Investments Act allows special institutional help for priority investment projects:

– Upon request by the investor, the Bulgarian Foreign Investment Agency (BFIA) can propose to theCouncil of Ministers the establishment of an inter-ministerial group with representatives of theinterested ministries and administrative bodies in order to provide institutional support to theinvestment projects recognised by the Council of Ministers as priority (Article 21 of the ForeignInvestments Act)25. In this case the priority investment project benefits from specific preferences.

– Upon request by the investor, BFIA shall propose to the competent bodies to grant limited real rightson a real estate – private state or municipal property, in order to develop a priority investmentproject. The offered investment project shall be considered an integral part of the contract forinstituting a limited real right. In this case Article 57, para. 1 of the State Property Act and Article 40,para. 1 of the Municipal Property Act shall not apply (Article 22 of the Foreign Investments Act).

6.4. Tax regime

The Bulgarian tax regime is composed of two main types of direct taxation (corporate and personalincome tax) and two main types of indirect taxation (VAT, excise duties). The tax burden in Bulgaria hasconsiderably decreased in the last period. Corporate income tax went down to 23.5 percent, while thepersonal income tax rate went down from 38 percent to 29 percent, VAT rate on exports is zero and capitalgains tax on sales of shares and tradable rights on the Bulgarian Stock Exchange is also zero (ICTDevelopment Agency 2002). Nevertheless, BIBA’s 1998 White Paper on Investment cited a number ofpending issues regarding the tax administration in Bulgaria, namely long and complicated procedures forVAT refund, thin capitalisation rules, lack of clarity regarding the tax treatment of the income of foreignindividuals, a contradiction on the tax treatment of interest income, problems with the applicability of thedouble taxation treaties, lack of detail and clarity regarding foreign tax credits, lack of explicit rules for theprocedure on the application of double taxation treaties, lack of appropriate procedural rules, poorcommunication and coordination between the different levels of the tax administration, wording andimplementation of the tax legislation (www.biba.bg).

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Corporate income tax. As of 1 January 2003 the corporate tax rate is 23.5 percent. Under the CorporateIncome Tax Act (CITA) all companies and partnerships (including non-incorporated partnerships), carryingout business in the country, are liable to corporate income tax. Bulgarian resident entities are taxed on aworldwide basis. Other entities are taxed on their Bulgarian-source income. Non-business organisations(including governmental) are taxed for their business activities. Entertainment and representativeexpenses and business gifts, that do not bear the trademark or the business name of the company, as wellas donations and sponsorships, which are accounted for as expenses, are subject to a final 20 percent tax.Social expenses representing fringe benefits, as well as expenses for maintenance, repair and exploitationof cars used for administrative purposes are subject to a final 20 percent tax.

On calculating the taxable base, the allowable tax size of the depreciation is deducted from thetaxable income, and the accounting depreciation is added-back. Companies are obliged to prepare adepreciation plan for tax purposes, which may differ from that used for accounting purposes. A definitionof an asset is introduced for tax purposes, i.e. a long-term asset of initial value BGN 500 unless theaccounting policy of the company provides for a lower material threshold. Depreciation is calculated bysystematically applying the straight-line depreciation method. For tax purposes the assets subject todepreciation are grouped into the following categories: category I – steady buildings, facilities,communication devices, electricity carriers, communication lines; category II – machinery, manufacturingequipment, apparatus; category III – transportation vehicles, excluding automobiles; coverage of roadsand aeroplane runways; category IV – computers, software and right of using software; category V –automobiles; category VI – all other depreciating assets.

As of 1 January 2003 the rules for the tax adjustment of the financial results substantially changed. Themajor amendments reflect aspects of the introduction of the international accounting standards. Thecompanies may deduct the following costs for tax purposes:

– Grants extended to Bulgarian educational, cultural, health-care and other institutions or non-profitentities as well as municipalities. Grants are made on the account of the reserves and undistributedprofit from previous tax periods and can not exceed 10 percent of the positive financial result beforetax adjustment.

– Promotional and advertisement costs.– Contributions made by employers for voluntary pension, health insurance, voluntary

unemployment insurance and/or “life” insurance in favour of the employees, if connected withinvestment fund, and if such contributions are up to BGN 40 per employee per month. The excessover BGN 40 is subject to the one-time tax at 20 percent.

– The remuneration as well as the social security and health care contribution to the account of theemployer paid for each employee, hired under a labour contract for no less than 12 months withinthe same tax year and if registered as unemployed for more than 1 year, or if over 50 years old, orhas reduced working ability. This tax allowance can be used in the year when the unemployedperson was hired.

Dividends. The following income originating in Bulgaria and payable to foreign entities is subject to a 15percent withholding tax: (i) dividends and liquidation proceeds, except dividends capitalised into shares(stock dividends), which are not subject to the withholding tax26 ; (ii) interest, including finance leaseagreements; (iii) royalties; (iv) technical services remuneration27; (v) rents; (vi) payments under operatinglease, franchising and factoring; (vii) capital gains on the sale of immovable property, stakes in a limitedliability companies capital, securities and financial assets. Capital gains from transactions with shares inpublic companies and tradable rights in such shares realised on a regulated Bulgarian stock market arenot subject to withholding tax (BFIA 2002, Ivanov et al 2002).

Personal income tax. Under Personal Income Tax Act tax liable persons are individuals and corporationsexplicitly enumerated therein. The law distinguishes between resident and non-resident taxpayers.Residents, irrespective of their citizenship, are deemed those persons who have their permanentdomicile in Bulgaria or reside in the country more than 183 days in any 365-day period. Resident

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taxpayers are taxed on their worldwide income. Non-residents are liable only for their income derivedfrom Bulgarian sources. The total annual income from various sources (employment income, capital gains,income received by civil contractors and freelancers, income received by managers and members ofboards of directors, income received by sole traders, rental income, etc.), after the respectiveadjustments are made, is taxed in accordance with an annual progressive scale. Personal income tax rateranges from 0 to 29 percent. The law provides for a number of deductions (various insurance schemes,statutory deductions applicable to non-employment donations) and exemptions (BFIA 2002).

Value added tax. The Bulgarian VAT legislation in many aspects follows the provisions of the Sixth VATDirective of the EC. Any person (legal or natural, resident or non-resident) with a taxable turnover of atleast BGN 50,000 during the preceding 12 months is obliged to register for VAT purposes. Such personsare subject to mandatory VAT registration. Non-residents register through an agent. Voluntaryregistration is possible for persons with taxable turnover under BGN 50,000. The VAT Act provides for tworates: (i) 20 percent applicable to taxable supplies, including import of goods and services, (ii) zero rateapplicable to exports28.

If an investment project has been approved by the Minister of Finance it is liable for a specialpreferential VAT regime for imports of goods (with exception of excise goods), i.e. exemption from VATpayment for the imports of goods, which are needed for the realisation of the investment project. To applyfor this preferential regime by the Ministry of Finance the investment project must fulfil the followingrequirements: (i) to be realised within a two year period; (ii) invest funds over BGN 10 million in a periodnot longer than two years; (iii) create more than 50 new jobs; (iv) ensure the possibility to finance theproject, as well as to construct and maintain sites providing its fulfilment (www.bfia.org)

If a VAT registered person makes both taxable (including zero-rated) and exempted supplies thefollowing rules apply: (i) the input VAT charged for goods or services entirely used for taxable (includingzero-rated) supplies is fully recoverable, (ii) the input VAT charged for goods or services entirely used forexempt supplies is not recoverable, (iii) the input VAT charged for goods or services used both for taxable(including zero-rated) and exempted supplies is partially recoverable. The amount of recoverable inputVAT is calculated by reference to the proportion of taxable supplies out of the exempted supplies(Questionnaire response, March 2003).

6.5. Free zones

There are six free zones in Bulgaria, located in strategic transport routes leading to the maininternational markets: the EU, the Central European and ex-Soviet countries, the Middle East andNorthern Africa, namely in Vidin, Rouse, Dragoman, Svilengrad, Plovdiv and Bourgas. All of them areinitiated and provided with land and infrastructure by the state. A purpose-set joint stock company or astate owned company manages each zone.

The regime of the free zones is governed by the Ordinance 2242 on the free zones and the Regulationson implementation of the Ordinance 2242, as well as the Structural Regulation of each free zone.According to the legislation, all types of production and trade activities and services may be performedin the free zones. Free zones are to be established as separate areas with check-in control at establishedentrances and exit points. Foreign goods may be kept in free zones: (i) under the “import” regime, (ii)without a special permission, being subject to operations designated to storage thereof, to improve theirtrade image and quality or processing for new delivery or sale, (iii) under customs regime of “activeimprovement", (iv) under customs regime “processing under customs control", (v) under customs regimeof “temporary import". Local goods, kept in free zones, may only be stored herein. Permission by thecustoms authorities is required for such operations. The local goods may be subject to other operationsbeyond storage, in case they have to be exported.

Standard features of the Bulgarian free-trade zones include: (i) the availability of convertible foreigncurrency, (ii) transfer abroad of revenues without any restrictions, (iii) administrative structure allowing

5. Bulgaria


direct contact with the local authorities, (iv) well-developed and convenient railway links, (v) productionand labour cost that are low, with highly qualified labour being available (Ivanov et al 2002, BFIA 2002).


Since the introduction of a Currency Board (1 July 1997), all constraints on the trade with hard currencywithin the country have been removed. In 1999, Bulgaria replaced its outdated and fragmented foreigncurrency legislation and liberalised the current international transactions in line with the obligations ofIMF article VIII. The foreign exchange regime is now based on the principle of freedom of concludingtransactions, actions and payments, and is governed by the Currency Act (prom. SG 83 1999; effective asof 1 January 2000, amend. SG 45 2002) accompanied by several regulations.

Bulgarian citizens and foreigners may take Bulgarian leva (BGN) and foreign currency of up to BGN5,000 or its foreign exchange equivalent out of the country without documentation. Amounts higher than5,000 BGN should be declared at the customs. Transfers above BGN 20,000 must have a prior approval ofthe Bulgarian National Bank. Foreigners are allowed to export as much currency over the foreign currencyequivalent of BGN 20,000 as they have imported in Bulgaria without prior approval. Each local or foreignperson may own un unlimited number of accounts in any currency, in any bank in Bulgaria.

Payments abroad made by businesses (or self-employed business people) can be executed onlythrough bank transfers. Transfers over BGN 20,000 for current international payments (imports of goodsand services, transportation, interest and principal payments, insurance, training, medical treatment andother purposes defined by Bulgarian regulations) must be supported by documentation showing theneed and purpose of such payments (Ivanov et al 2002). Of particular relevance for foreign investors is thepermit requirement for foreign loans. The permit serves more for a statistical purpose than as an actualpermission. The law prescribes an authorisation system rather than a registration procedure, including thegovernment’s right to reject an application for capital movement (FIAS 2000).

Under the Foreign Investments Act, there are no restrictions on the transfer of investment-relatedfunds. Foreign investors can freely purchase foreign currency and transfer it abroad upon presentation ofa receipt of paid due taxes in the following cases: (i) income generated through an investment, (ii)compensation in cases of expropriation of the investment for state needs, (iii) liquidation quota in caseof terminating the investment, (iv) proceeds from the sale of the investment, (v) the sum received afterthe enforcement of a writ of execution (Article 27 of the Foreign Investments Act).


Trade agreements. – WTO: Bulgaria is a member of the WTO since 1 December 1996– EU: In March 1993 Bulgaria signed the Europe Agreement of Association, which entered into force

on 1 February 1995.– EFTA: According to the Agreement between Bulgaria and EFTA in force since 1993, EFTA countries

are granted almost the same terms and conditions as those in EAA.– CEFTA: Bulgaria became the member of CEFTA in July 1998.– FTA with Turkey (since 1 January 1999) and Republic of Macedonia (since 1 January 2000).– Bulgaria also has FTAs with Croatia, Israel, Estonia, Lithuania and the FRY.

Agreements on the Mutual Protection and Promotion of Foreign Investment (as of March 2002). Bulgaria concludedAgreements on the Mutual protection and Promotion of Foreign Investment with the following countries:Albania, Argentina, Armenia, Austria, Belarus, Belgium, China, Croatia, Cuba, Cyprus, Czech Republic,Denmark, Egypt, Finland, France, Georgia, Germany, Greece, Hungary, India, Israel, Italy, Kazakhstan,Kuwait, Lebanon, Luxembourg, Republic of Macedonia, Malta, Morocco, Moldova, The Netherlands,Poland, Portugal, Romania, Spain, Slovakia, Slovenia, Sweden, Switzerland, Syria, Tunisia, Turkey, Ukraine,United Kingdom, USA, Uzbekistan, Vietnam, the FRY (www.bfia.org).

5. Bulgaria


Double Taxation Treaties (as of March 2002). Bulgaria concluded Double Taxation Treaties with thefollowing countries: Albania, Armenia, Austria, Belarus, Belgium, Canada, China, Croatia, Cyprus, CzechRepublic, Denmark, Finland, France, Georgia, Germany, Greece, Hungary, India, Indonesia, Republic ofIreland, Italy, Japan, Kazakhstan, Luxembourg, Republic of Macedonia, Malta, Morocco, Moldova, TheNetherlands, Norway, North Korea, Poland, Portugal, Romania, Russian Federation, Spain, Singapore,Slovakia, South Korea, Sweden, Switzerland, Thailand, Turkey, Ukraine, United Kingdom, Vietnam, theFRY, Zimbabwe (www.bfia.org).

5. Bulgaria


5. Bulgaria



BFIA. 2002. Bulgaria Business Guide: Legal, Tax and Accounting Aspects. Sofia: Bulgarian Foreign InvestmentAgency.

BIBA. 2001. White Paper on Foreign Investment in Bulgaria. Sofia: Bulgarian International Business Association.

BIBA. 2002. White Paper on Business Climate in Bulgaria. Sofia: Bulgarian International BusinessAssociation.

Bulgaria Economic Forum, Investment Guide for Southeast Europe, Ivanov, Eugeniy, Iva Stoykova & YordankaPalahanova. 2002.

Dimitrov Mitko, George Petrakos, Stoyan Totev & Maria Tsiapa. 2003. Cross-border cooperation in South-eastern Europe: A Survey of Enterprises in Border Regions, Eastern European Economics, submitted forpublication.

FIAS. 2000. Bulgaria: Administrative barriers to Investment. Washington, D.C.: Foreign Investment AdvisoryService.

ICT Development Agency. 2002. Information and Communication Technologies – Overview. Sofia: BulgarianForeign Investment Agency.

Pasha, Auron, Bukurie Dumani, Elton Babameto, Elisabeta Gjoni, Drini Salko, Anila Tanku & EnkelejdaDervishi. 2003. Determinants of Growth, Prepared by IDRA Team, Albania.

Questionnaire for the Identification of Deviations from National Treatment for Incoming Investment andfor Activities by Established Foreign-Controlled Enterprises, OECD, 2003, responded to by theBulgarian Country Economic Team Leader.

Totev, Stoyan. 2003 Analysis of the regional changes and divergence by main economic indicators on NUTS II level,Study elaborated under contracts with the Ministry of Regional Development and Public Utilities,Division “Strategic Planning” submitted for publication, Sofia (in Bulgarian).

Totev, Stoyan. 2002. Economic performance and structures in Southeast Europeans Countries, Albania,Bulgaria, FY Republic of Macedonia and Greece, Eastern European Economics, 40(6): 51-83.

Totev, Stoyan, Trajko Slaveski, Ilir Gedeshi, George Petrakos, Maria Boyadjieva. 2002. Economic Relations inSouth Eastern Europe: The Intra-regional FDI Point of View, Paper prepared in the framework of the PhareACE Project, Overcoming isolation: Strategies of development and policies of Cross-bordercooperation in South-eastern Europe, after “Agenda 2000", Coordinated by the Institute of Economics,Bulgarian Academy of Sciences, Sofia.

5. Bulgaria


NNOOTTEESS

19. FDI inflows in 2002 were US$ 478.7 millions, distributed as follows: equity capital 69.6 percent, othercapital 19.4 percent and reinvested earnings 11.0 percent. US$ 333 million equity capital come fromUS$ 135.6 million privatisation and US$ 197.4 million from reinvested earnings (National StatisticalInstitute, Bulgarian National Bank and other sources).

20. The Commercial Law recognises two distinct types of companies, i.e. partnerships and corporations.The legal differences between them concern the allocation of liability and the legal identity of theentity. Corporations (limited liability company, joint stock company) established by foreign partnerswith or without a Bulgarian partner are treated as Bulgarian corporations (local persons) and areentitled to all rights available to Bulgarian companies under the Commercial Law.

21. The threshold of 10 employees is motivated by national security concerns. BIBA proposes to resolvethis problem by waiving of headcount restrictions for EU and North American based SME foreigninvestors, on the assumption that citizenship status in these countries ought to relieve securityconcerns (BIBA 2001, p. 83).

22. If foreigners inherit land in the country, they are obliged to transfer the ownership of the land to localnatural or legal persons within three years after the inheritance becomes effective.

23. The total volume of FDI in Bulgaria in 1992-October 2002 period is estimated at US$ 4,927 million. Ofthat US$ 1,583 million, or 32 percent, represent investment inflows through privatisation.

24. Concessions may be granted for objects such as: (i) ores and minerals in connection with relevantextraction; (ii) the waterfront beach strip; (iii) the biological, mineral and energy resources of thecontinental shelf and in the exclusive economic zone, for the exploration, development, production,utilisation thereof; (iv) the republican roads, sites of the railway infrastructure, including the land onwhich they are constructed or designated for their construction, whole or technologically separatedparts of ports for public transport and civil aerodromes for public use, existing and/or to beconstructed with resources of the concessionaire, public state property; (v) the waters, includingmineral waters – sole state property; (vi) the aquaculture and the water supply facilities and systems,which are public state property; (vii) the plants for generating electric and thermal power, the electricpower transmission and distribution networks, the main pipelines and major deviations wherefromfor the transmission of power resources and products which are public state property; (viii) the forestsand parks of national significance; (ix) the natural and archaeological preserves.

25. This mechanism was recently used to coordinate the institutional support for the greenfieldinvestment project of Metro Group in Bulgaria (BFIA 2002).

26. Dividends received by local companies from other local companies are not subject to withholdingtax. Dividends payable by local companies to Bulgarian resident individuals are taxed with 15percent withholding tax.

27. Fees for management services are not considered technical services fees and are not subject towithholding tax.

28. Within the meaning of the VAT Act exports of goods is exportation abroad or to the free zones, freewarehouses and duty-free outlets. However, exports supply to customs warehouses does not qualifyfor exports. Processing of import goods that are further re-exported is also zero-rated (BFIA 2002,Ivanov et al 2002).


Chapter 6.

CCRROOAATTIIAA

1. INTRODUCTION

The total FDI inflows in Croatia during the period 1993-2002 reached US$ 7.47 billion29. FDI inflowsremained rather modest throughout the 1990s (particularly when compared with front-running transitioncountries), due to a perception of high risk associated with the war-affected economy. The FDI started topick up significantly since 1999, when the process of privatisation of the banking sector and public utilitiesbegan on a large scale and attracted a large number of strategic investors. The banking sector is nowlargely under foreign ownership. At present, Croatia is among the top five transition countries with regardto FDI inflows per capita or as a percentage of GDP.

Most of the FDI during the 1990s, but also in the 2000-2003 period has entered through theprivatisation process, especially in such sectors as banking and public utilities (especially,telecommunications). The statistical data of the Croatian National Bank (2003) show that privatisationsales to foreign investors represent 69.5 percent of total value of FDI in Croatia in the 1993-2003 period.The leading foreign investors are from Austria (28.6 percent), Germany (22.8 percent) and the USA (14.7percent). The sectors that attracted the highest interest from foreign investors were telecommunications(26.3 percent); banking (21.4 percent), pharmaceuticals (14 percent), cement (4.5 percent) and hotels andrestaurants (3.3 percent). Privatisation will more than likely continue to represent a major source of FDI,as the government plans to go on with privatising the most valuable assets in public utilities such as theoil industry and energy production sectors as well as the remaining state portfolios in the hotel industry,tourism and agro-industry.

2. THE DETERMINANTS OF FDI INFLOWS: INVESTMENT OPPORTUNITIES AND BARRIERS IN CROATIA

2.1. Investment opportunities and competitive advantages of Croatia as an investment location

The potential and prospects for FDI in Croatia are underpinned by: (i) a stable macroeconomicenvironment characterised by stable currency and low inflation rate (2-6 percent) for almost a decade (themajor achievement of the stabilisation programme introduced in 1993); (ii) a solid GDP growth in the 2000-2003 period (3-5 percent annually ); (iii) the Stabilization and Association Agreement with the EU (2001)and opening of the evaluation procedure for candidate countries by the EU (April 2003) shortly afterCroatia officially submitted its official application in February 2003; striving to comply with the remainingpreconditions for NATO membership; (iv) membership in CEFTA, EFTA and bilateral free tradeagreements with practically all its neighbours and most of other transition countries; (v) nationaltreatment for foreign investment and Investment Promotion Law for priority investment projects: (vi)stable, transparent and competitive tax regime, with a profit tax rate of 20 percent, which is among thelowest of all transition countries; a personal income tax rate between 15-45 percent, with no restrictionson after tax repatriation of the profits, as well as special tax incentives for new employment and in regionsof special state care (war affected regions); (vii) proactive government policy towards attracting foreigninvestment in the privatisation process of remaining state portfolios which include the major publicutilities, the insurance sector and the tourism and hotel industry; (viii) proactive government investment

promotion policy towards further development of entrepreneurship and the private sector in particularthrough small and medium sized enterprises based on greenfield investments and the creation of newfirms.


During most of the 1990s, and in particular up until the end of the War in 1995, Croatia was perceivedas a high-risk area for foreign investments. . The main reasons behind this were high business and politicalrisks associated with general domestic and regional political instability, weak institutional guarantees ofownership rights and the slow integration process into the EU. After the reintegration of war-torn regionsinto Croatia in 1995 the situation improved considerably. Foreign investments started to increasesignificantly after 1996, and this was mainly resulting from the acceleration of the privatisation process.The search for foreign strategic partners, or portfolio investors at the stock exchange became a priority ofthe privatisation process.

The improvement of the legislative framework, specifically in relation to the capital marketdevelopment, contract enforcement and property rights has also had a significant positive impact on thefurther increase of foreign investment inflows in Croatia. However, the main factor in the increase offoreign investment inflows in the second half of the 1990s was more related to the political stabilisationof the region as well as democratic consolidation of Croatian state. The country’s investment risk improvedin recent years, but they only reached a satisfactory level when HDZ left the political scene after beingdefeated at the general elections at the beginning of 2000.

However, political isolation and consequent exclusion from the mainstream integration processes withthe EU (as political conditions were not fully met) negatively affected the levels of the total foreigninvestments to the economy in this period. This was despite the fact that most of the legislative barrierswere already abolished during the Tudjman rule and the country opened and liberalised considerably itsinvestment regime. Nevertheless some of the barriers to FDI still remained and as the comprehensiveFIAS study (2002) has identified, they were mainly of an administrative nature and were connected withthe delay in administrative reform in Croatia. The administrative procedures, high fees and inertia ofbureaucratic apparatus are the main existent barriers that hinder the higher growth of foreign investmentsto Croatia. The other major area with administrative barriers is related to land cadastre and the transferof land ownership which prevent rapid issuance of building and construction permits, which is especiallyimportant for greenfield investment.

The FIAS study (2002) highlights in particular the following administrative barriers in Croatia: (i)although the company registration regulations are transparent and in line with EU practice, the process isstill slower and more costly than in most advanced transition countries accepted to join the EU. What isneeded is the establishment of an efficient registration process, which requires institutional capacitybuilding and reform in the judicial system; (ii) employment regulations for foreigners are still rather rigidand represent a time consuming process; (iii) the immigration and work permit processes arecharacterised by lack of coordination among the different ministries and agencies involved; (iv) landacquisition, transfer, registration and site development are the most complicated parts of the investmentprocess in Croatia. This is mainly due to the weak Land Registry Records that need modernisation andreform, which is only recently being dealt with by the government with the assistance of the World Bankand the European Commission30.

3. ECONOMIC TRANSITION IN CROATIA: THE DEVELOPMENT OF THE REGULATORY FRAMEWORK

AND FDI STRATEGY AND POLICIES

3.1. The current state of transition process and major tasks ahead

Since the beginning of 2000 when the political changes created a “window of opportunity” for fastergrowth and deeper integration into the European and world market structures, progress in the transition

6. Croatia


process has been much more tangible than during the 1990s. The general macroeconomic framework has remained stable and has been characterised by a low inflation rate and a stable exchange rate. Therehave been considerable improvements in the efficiency of the banking system and in the functioning ofthe fiscal system (reduction of fiscal deficit and the total levels of fiscal burden to the economy). Thevolume of international trade picked up following the signing of the Stabilisation and AssociationAgreement with the EU in the fall of 2000, accession to the WTO in November 2000 and the subsequentsigning of free trade agreements with neighbouring countries in South-East Europe, as well as with theCEFTA and EFTA countries.

Apart from improvements at the macroeconomic level, the government has directed moreconcentrated efforts towards microeconomic consolidation of the enterprise sector through privatisationof residual state portfolios and the development of the private sector principally through SMEs. of the GDP is now generated by the private sector. The efficiency of the enterprise sector was also improvedby the privatisation of the banking sector and start of privatisation in the public utilities(telecommunications, energy, etc.)

At the beginning 2003 Croatia has applied for candidate status for full accession to the EU. A lotremains to be done to achieve this objective and the government31 has singled out the following amongstthe most important long term objectives of economic development: (i) to become a member state of EUby the year 2007; (ii) harmonisation with standards and rules applied in the EU including the legislativeharmonisation within the next five years; (iii) improving the competitiveness of the Croatian economy inorder to cope with the competition coming from the EU market32; (iv) speeding up the privatisationprocess and private sector development through SMEs; (v) decreasing the fiscal burden on the economy.

3.2. FDI strategy, policies and regulatory framework

The present government policy and regulatory regime governing the activities of foreign investorsdoing business in Croatia is very liberal and provides national treatment to all investors, apart from alimited number of exceptions (Law on Commercial Companies, Narodne novine – NN /Official Gazette/111/93). Additionally, the government has deployed an extra effort to stimulate foreign investmentinflows, either through the privatisation process (banking and insurance, tourism, utilities, large scaleindustry etc.) or through attracting FDI in three strategic fields (tourism and hotel industry, agriculture andindustry). In the summer of 2000, the government adopted new measures to stimulate investment, inparticular foreign investment, and adopted the Investment Promotion Law (NN 73/00). With this lawspecial incentives are provided with regard to tax and customs treatment of potential investors.

4. THE LEGAL AND REULATORY MEASURES FOR FDI: GENERAL MEASURES

4.1. The existing regulatory framework for FDI in Croatia

The foreign investments are regulated by the general company law, which is the Law on CommercialCompanies in force since January 1995 (NN 111/93 and subsequent amendments NN 34/99; NN 12/99; NN52/00), and there is no special law regulating foreign investment. The Law provides the same rights to allinvestors, regardless of country of origin. According to the Law foreign investors have the same legalstatus, rights and obligations as domestic enterprises and investors, and they do not require any specialapproval or registration. The status of foreign investor is applicable equally to foreign individualmerchants and companies doing business on the Croatian territory.

Subject to reciprocity, which is presumed by this Law (this means that Croatian investors have thesame treatment abroad, namely in the countries from which the foreign investor comes, howeverreciprocity is not required for the WTO member countries), a foreign investor may set up a company ortake part in setting up companies in Croatia, as well as acquire rights and undertake obligations incompanies under the same conditions and having the same position as a domestic person. There are alsono restrictions with respect to foreign nationals being members of the corporate bodies and management

6. Croatia


of companies. The foreign investors may consider to take part in the following types of investment:investment of capital on a contractual basis; investment of capital in a company; investment of capital ina bank or insurance company; starting up a business as a sole trader or craftsman; acquiring the right toexploit natural resources or other assets of interest to Croatia; taking part in Built-Operate-Transfer (BOT)deals; and participating in Built-Own-Operate-Transfer deals.

The foreign investors are granted additional guarantees by the Constitution of the Republic of Croatiawith regard to the free repatriation of profits and capital. The Constitution of the Republic of Croatiaguarantees that the rights stemming from capital investments cannot be withdrawn by any other law orlegal act. The constitution also protects the right of ownership of the foreign investor (Article 48, paragraph3) and the equality of all entrepreneurs before law.

There is also a special Investment Promotion Law adopted in 2000 in order to stimulate the inflow offoreign investment, especially FDI into Croatia (see section 8.1 for details).


Foreign investments in Croatia do not require any particular approval or any kind of specialregistration that would make them different from domestic investors. Approvals for foreign as well as fordomestic investors exist in some specific cases and they are defined by the Law on CommercialCompanies (see section 4.2.).

4.1.2. Other discriminatory measures on establishment and expansion that depart from nationaltreatment

These types of measures are mainly related to the sectors singled out to be of strategic importanceand interest to the Republic of Croatia, such as the energy sector, telecommunications, air, rail andmaritime transportation, agriculture, securities market etc. (See section 5).

4.2. Corporate organisation: regulation on company establishment (company law, branches) and nationality of management

The Law on Commercial Companies (NN 111/93), enforced from January 1995, provides the same setof rules and conditions for both domestic and foreign investors that would like to establish a company inCroatia.

a/ If a domestic or a foreign person establishes a company in Croatia, it is considered to be adomestic legal entity, regardless of the origin of capital, and should be registered at the CentralCompany Registry at the Commercial Court.

b/ Foreign legal entities and individuals may participate in the establishment of all types ofpartnerships (general partnerships, limited partnerships, silent partnerships and economicinterest groupings) and corporations (joint stock companies, limited liability companies) in Croatiawithout any limitations. Other forms of company formation include the creation of: (i) a branchoffice, (ii) a representative office, (iii) an agency, (iv) a bank (subject to licence from the CroatianCentral Bank. Neither the branch, nor the representative offices, nor the agencies are consideredto be legal entities of the Croatian market.

c/ There are no capital restrictions for non-residents (free repatriation of profits and capital ondisinvestments).

d/ There are no restrictions with regard to foreign nationals being members of the corporate bodiesand management of the companies operating in Croatia.

Approvals for foreign as well as for domestic investors exist in some specific cases and they aredefined by the Law on Commercial Companies: (i) in the case of mergers where an approval from theAgency for Protection of Market Competition is required; (ii) in the case of acquisition of a certain

6. Croatia


percentage of shares in a domestic bank when it is necessary to obtain the approval of the CroatianNational Bank; (iii) in the case of the acquisition of ownership of shares of a joint stock insurance company,in which case it is obligatory to obtain the approval of Direction of Surveillance of Insurance Companies.


The employment of foreigners in Croatia is specifically regulated by the Law on Employment ofForeign Nationals (NN 19/92 with subsequent amendments, the last being NN 52/54) and Ordinance onIssuing Work Permits to Foreigners (NN 82/96) as well as Law on Labour Relations (NN 38/95 andsubsequent amendments, the last being NN 17/01). As in many other transition countries, the labourmarket is the most sensitive part of the market and therefore is extensively regulated and protected.Employment of foreigners in Croatia is allowed only if the worker has a valid work permit and fulfils thegeneral and specific conditions determined by the law. A foreigner can only qualify for obtaining a workpermit if he/she: (i) holds a permanent residence permit; (ii) intends to engage in specific economicactivities such as foreign investment; (iii) will perform professional activities as stipulated in atechnology transfer contract or in a contract for long-term production cooperation. The business visa isregulated by the Law on Entry and Residence of Foreigners (NN 53/91, 22/92 and 29/94) and is issued toforeign persons performing economic activities foreseen in regulations on foreign investment andforeign trade (Article 16, para. 2).

The residence of foreign nationals and visa requirements are regulated by the Law on the Movementand Residence of Foreign Nationals (Zakon o kretanju i boravku stranaca, Narodne novine /Official Gazette/, no53/91 and 22/92). For entry into Croatia, nationals of numerous countries do not need visas, and nationalsof some countries, mostly neighbouring, need only some form of personal identification. For nationals ofthose countries who need a visa to enter Croatia for purposes of transit, tourist visits or even for a businessvisit, a visa can also be issued by the border police station.

All foreign nationals need an entry or a business visa if they intend to work in Croatia or enrol in a schoolor university or for carrying out some professional activity. A business visa is issued if the foreign nationalintends to carry out a business activity connected with agreements on transfer of technology, cooperationor investments.

Foreign nationals acting as members of management or supervisory boards of Croatian companies donot need a work permit but do need a business visa if they are not employed by these companies and ifthey are only visiting to participate in the meetings of the respective bodies.

A new foreign investor is required to apply for a personal work permit that is issued on the basis of a validbusiness visa, and under the same terms and conditions as a business visa, as well as to foreign nationalshaving permanent residence in Croatia. However, this is mainly granted to foreigners whose skills are notlocally available. The authorization would be granted by Ministry of Labour on the basis of an approval ofthe application granted by the Croatian Employment Bureau (Hrvatski zavod za zaposljavanje). A workpermit is, as a rule, issued for a limited period of time, mostly related to the duration of specific businessactivities or professional work, for up to a period of two years. The business visa is issued for a maximumof one year, after which it can be renewed.

4.4. Real estate

The right on ownership is guaranteed by the Constitution (Article 48) and this provision is alsoapplicable to foreign persons. Foreign legal and natural persons engaged in business activities in Croatiamay on the basis of reciprocity, acquire real estate in Croatia freely.

The Law on Ownership and Other Property Rights (Zakon o vlasništvu i drugim stvarnim pravima, NN 91/96)includes some limitations for foreign nationals with regard to real estate ownership in Croatia. They haveto acquire approval from the Ministry of Foreign Affairs and the Ministry of Justice in order to own any real

6. Croatia


estate. But foreign-owned or controlled companies registered in Croatia are considered to be Croatianlegal entities and, therefore, these limitations do not apply to them. There are no restrictions on theownership of movable property for foreign nationals. A foreign national may also inherit immovableproperty without restrictions, under assumption that reciprocity exists.

Ownership of land by foreign nationals is restricted in some cases such as agricultural land, coastline,islands etc. These restrictions may change or be liberalised in the future as a result of the harmonisationof legislative framework within the Stabilisation and Association Agreement with the EU, in particularconcerning housing and agricultural land.

The ownership of real estate is also prohibited for a foreign person if it is situated in any territory whichis designated by law to be important for the protection of the interest and security of the Republic ofCroatia. If a foreign person cannot inherit real estate because it is on such territory, then they are entitledto compensation in accordance with expropriation regulations.

4.5. Government Procurement

Rules of procurement by public entities are regulated by the new Government Procurement Law inforce since January 2002 (Narodne novine /Official Gazette, no 117/01) which applies to all governmentprocurement with the value of over HRK 200,000. It is necessary for all of the following to comply with theprovisions of the Law (Article 4): All government offices as well as units of local administration; allcompanies that are owned by the state or in which the state has majority ownership; companies that useover 50 percent of state budget funds or state guarantees for capital investments; companies that operatein the sectors of water supply, energy production and distribution, transport and telecommunications.

The new Government Procurement Law has abolished “national preference” clauses that existed in theprevious Law and provides an equal treatment to both national and international legal entities andindividuals competing in the procedures of government procurement of goods, services and works. Itdoes not allow any sort of discrimination or restrictions on the basis of national origin of the supplier – noteven towards the competitors coming from the countries in which the Croatian competitors do not havean equal treatment, meaning that reciprocity principle is not required (Article 3, para 2 and 3).

The provisions of the new Government Procurement Law have taken into consideration the mostrelevant international regulations and standards applied in this area such as EC Directives, EuropeanDevelopment Fund’s rules and GATT rules. The basic method of government procurement is publictendering (Article 10) with a publicly announced call for competition in the tendering procedure.According to Article 9, tendering on invitation within the limited procurement procedure and directagreement within the negotiation procedure of procurement can also be applied. The conditions underwhich the limited procurement tendering process and direct agreements may be applied are specificallydefined (Article 11, Article 12).

All investors that must comply with the Procurement Law must establish a Commission forimplementation of the Procurement, and this commission shall be in charge of handling the procurementprocess (Article 15). The Government Procurement Law (Article 75) envisaged an establishment of theGovernment Procurement Office (PPO) by 31 December 2002. Pending the establishment of the PPO, theMinistry of Finance (Procurement Directorate) continues to be responsible for supervision of theprocurement process. The Ministry of Finance is also currently responsible for handling appeals againstdecisions on procurement. However, there is currently a new Law in the pipeline (currently in Governmentprocedure after which it will go to the Parliament) to set up the State Commission for Supervision of theGovernment Procurement Procedure, which will be a semi-court type of body.

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5.1. Financial sector (Banking, insurance, securities market, other financial services)

Banking. Both domestic and foreign investment in the banking sector are regulated by the Law onBanks (Zakon o bankama, NN 84/02). As of July 2003 there are 46 commercial banks including 5 branchesof foreign banks and a number of other financial institutions (savings cooperatives, building societies,leasing companies, etc.) in Croatia. More than 90 percent of the banking sector is now owned by foreigninvestors, which has resulted in significant improvement in service quality and the lowering of interestrates (see more on http://www.hnb.hr/). The law regulates in particular all aspects for which extra approvalis needed to provide services or invest in the banking sector. One set of rules regulates the authorisationfor the provision of banking and other financial services, while the other set of rules focuses on acquiringownership on bank’s shares.

To register a bank or a branch of a foreign bank in Croatia, an operating licence that is granted by theCroatian National Bank is required (Article 33). According to Article 52, para 3 of the Law, the CroatianCentral Bank could require, as a condition for issuing an operating licence to a branch of a foreign bank, adeposit of a specific monetary amount within Croatia (although the text of the law leaves thedetermination of the amount to the discretion of the CNB (Article 52, para 3). This amount is usually acertain percentage of the bank’s capital. Alternatively, the CNB could offer appropriate collateral(securities) for the settlement of liabilities arising from arrangements concluded within Croatia. A branchof a foreign bank shall not constitute a legal entity and any legal transactions with third parties would firsthave to be authorized by the founding bank The founding bank would also have implicit responsibilityfor all obligations arising from operations within the Republic of Croatia. The branch of a foreign bank isincluded in the deposit insurance scheme in the country in which the head office of the foreign bank islocated (Article 54).

A foreign bank may also open a office in Croatia for the purpose of representation and market research,but is not allowed to provide financial services as this is not considered a legal entity (Art 55).

The Law on Banks also stipulates the conditions for granting the approval for acquiring ownership ofshares of banks registered and operating in Croatia. By this Law (Article 19) there is a ban on the acquisitionof the shares of a bank in the case of “a bank or other financial institution in which another bank owns morethan 10 percent of the capital or voting rights” where it “may not acquire shares in the latter on the basis ofwhich it would own more than 10 percent of its capital or voting rights.” As for requirements of the previousapproval, under the conditions of that Law (Article 20) the acquisition of ownership in a bank’s capital (i.e.,qualified owner) is subject to prior approval by the Croatian National Bank. Article 20, para. 2 says: “Aqualified owner shall obtain a prior approval from the Croatian National Bank for each further acquisitionof the shares of a bank on the basis of which it acquires the participation of 20, 33, 55 or 75 percent of thevoting rights or capital of the bank, or on the basis of which it controls a bank."

The Croatian National Bank withholds the right not to issue the approvals in the cases of mergers andtakeovers of another bank when (i) this would result in a large concentration of the banking system thatmight limit freedom of market competition; or (ii) it could adversely influence the implementation ofmonetary and foreign exchange policy of the Republic of Croatia.

With an aim of harmonisation of legislation with those applied in the EU, the Law on Banks alsospecifically regulates the cooperation with supervisory authorities and bodies of the EU (Articles 57-80)as well as all the services provided by the banks of EU member states (Articles 47-50). The CroatianNational Bank shall notify the European commission of: (i) each approval given to a foreign bank branchoffice and (ii) each authorisation for the acquisition of ownership of shares issued to a bank. (Article 60).

Insurance sector. The establishment of an insurance company in Croatia is regulated both by the Law onCommercial Companies (1993) and by the Insurance Law and its amendments (Zakon o osiguranju, NN

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46/97 and 116/99). Insurance activities could be carried out by the following forms of companies: (i) jointstock companies for insurance, (ii) companies for mutual insurance, (iii) individual insurance companiesand (iv) insurance and reinsurance pools. All insurance companies are legal persons and must beregistered at the court register. The Company Law and Insurance Law regulate all the insurance companiesexcept those of mutual insurance that are regulated solely by Insurance Law.

A joint stock company for insurance may be set up by domestic and foreign natural and legal persons.Insurance Law prescribes the minimum share capital needed for setting up these insurance corporations,which ranges from HRK 6 to 14 million. A special Directorate for the Supervision of the InsuranceCompanies must give a prior approval for the operation of an insurance company. Companies for mutualinsurance may be set up by at least 250 exclusively domestic individuals and legal persons.

Securities market and other financial services. The main issues related to the public placing and trading ofsecurities are regulated by the Law on the Securities Market Act (Zakon o tr ištu vrijednosnih papira, NN84/02). The securities market is additionally regulated by the following acts: Law on Procedures ofTakeover of Joint Stock Companies (NN 84/02, and subsequent changes NN 87/02 and 120/02), Law onInvestment Funds (NN 107/95 and NN 12/96 with subsequent changes NN 114/01) and the PrivatisationInvestment Funds Law (NN 109/97 and changes and amendments NN 114/01).

The Croatian Securities Commission (CROSEC), established in 1997, is in charge of the implementationof the provisions of the Law on the Securities Market and controlling the activities of individuals and legalpersons involved in placing and trading in securities. The Commission is an independent agency solelyresponsible to the Parliament of the Republic of Croatia. The Central Depositary Agency (CDA) keepsdematerialised electronic records of all the securities and tracks the changes in their ownership. It startedits operation in 1999 and all the transactions involving securities and transfer of ownership or other rightsrelated to them should be recorded at the CDA. The shares of all joint stock companies in Croatia shouldbe deposited with the CDA by the year 2006.

The acquisition of more than 25 percent of shares in joint stock companies must be publiclyannounced and the CROSEC should be informed. The limit for banks is 10 percent of shares, while thethreshold applied to insurance companies is above 15 percent.

Companies authorised to deal with securities are investment companies, stock exchanges, regulatedopen markets, account operators, transfer agents, brokers, investment funds, banks and the CDA.Investment companies should be registered at the Commercial Court. A licence to legal persons dealingwith securities is required and issued by the Securities Commission (CROSEC), which keeps the registerof issued licences.

A foreign person could issue securities through the public offerings only if represented by the agenti.e. a broker house in Croatia (Article 30 of the Law on the Securities Market). Unless otherwise stated bythe Securities Law, the broker houses establishment is regulated by the Law on Commercial Companies.The foreign broker houses may establish a branch office in order to deal in securities in Croatia (Article50) provided they receive approval by the CROSEC. The conditions for an approval are the following: (i)the foreign broker house should have a licence issued by its national legislation to carry out transactionsand activities at the securities market; and (ii) that it notifies its national regulatory body about theintention to establish a branch office in Croatia.

If these conditions are fulfilled the foreign broker will have the same rights and obligations as the localinvestment broker and can carry out all the activities at the market apart from the custody of securities(Article 50, para 1). The activities include: (i) transactions with securities for their own and another’saccounts, (ii) speculative trade of securities, (iii) management of individual portfolios, (iv) special stockexchange transactions for permanent offerings of the securities, (v) undertaking the agent role in theissuance of securities, (vi) investment advisory services.

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The sector of telecommunications is considered to be a strategic sector in the interest of the Republicof Croatia and the participation of foreign persons in providing telecommunication services is strictlyregulated. The Law on Telecommunications (NN 76/99, NN 128/99; NN 68/01, 109/01)) and the Law onPrivatisation of Croatian Telecom (Hrvatski Telekom – HT) (NN 65/99 and changes 68/2001) regulate thestatus of both domestic and foreign investors in the sector. Foreign investment was welcomed in theprivatisation process of the state-owned monopoly Croatian Telecom. In fact Deutsche Telekom bought51 percent of shares of Croatian Telecom and is now a dominant owner. HT has so far introduced 3 mobiletelephone networks. VIP-Net GSM is a second GSM service provider. Presently, there are approximatelyover 1.9 million mobile subscribers in total. There are10 licensed Internet Service Providers in Croatiawith more than half a million users.

While preparing for the liberalisation of the market that will start by the end of 2004, the continuousrebalancing of tariff structure is in process. The competition of both domestic and foreign operators is notpossible in fixed telephony until the monopoly status expires at the end of 2004, while a regulatedcompetition is allowed in the mobile telephony market. The independent regulatory body for furtherregulation of new entrants, both domestic and foreign, is the Telecommunication Council responsible tothe Parliament of the Republic of Croatia. The Department of Post and Telecommunications at the Ministryof Transport, Maritime and Communications is in charge of the licensing of all the companies providingservices in this sector. These companies are required to be registered at the Court Registry in Croatia.

Concessions and monopoly status. The Telecommunications Council is also in charge of granting concessionsto all the interested investors and service providers in the area of telecommunications, (apart from radio andtelevision) as well as for regulating relations among the providers of telecommunication services. Thegranting of concessions in this area is rather heavily regulated by the Law on Telecommunications and itschanges (NN, no 68/2001). The public tendering is a procedure for collecting interests in obtaining a concessionfor providing telecommunications services. The decision on public tender is made by the Department ofTelecommunications at the Ministry of Maritime Affairs, Transport and Communications. The concessioncontract with the Department of Telecommunications of the Ministry is required for the construction andestablishment of the public telecommunication network and for granting the right of being provider/operatorof this network (Art 7, para 1 and 2, Law on Telecommunications.)

The concessions are granted to both foreign and domestic companies who can prove that they complywith all the conditions stipulated in the Law on Communications and subsequent bylaws. The concessionis granted for a maximum of 30 years (Article 30, para 2). The Department of Telecommunicationswithholds the right not to grant the concession to any foreign trading company which is established as aforeign legal person, if the reciprocity to Croatian enterprises is not guaranteed by the legislation of thecountry they come from. Apart from the general conditions stipulated by the Law, the granting ofconcessions may also be subject to additional requirements of the Council of Telecommunications,determined by the Croatian Law on Telecommunications and legislation applied in the EU, such asclauses regarding the start of service provision, the geographical coverage, the publication of prices,control of prices, auditing and accounting, cancellation of provision of services etc (Art 30, para 4).

The Council of Telecommunications is required by Law to promote competition and new entry to thetelecommunications market and prevent the misuse of the dominant position of HT on the market, as wellas ensuring the application of the principles of Open Network Provision, which is applied in the EU. Themonopoly of HT (Croatian Telecom) is due to expire on 31 December 2003 according to the Law (NN no68/2001, Art 32, para. 1 and 2).

5.3. Transport (air, road, rail and maritime)

Air transport is regulated by the Law on Air Transport (NN 132/1998), while the rights and conditions ofcompanies dealing with air transport are regulated by the Law on Obligatory Legal and Other Relations in

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Air Transport (NN 132/1998). The local public air traffic of passengers and goods is restricted for foreigners andis carried out by domestic air transport companies licensed for air transport and registered in theRepublic of Croatia, which should have majority or complete ownership of domestic commercialcompanies (Art 22. para 1. and 2).

Maritime transport is regulated by the Maritime Law (Narodne novine / Official Gazette no. 17/1994, thesubsequent changes of the Law NN 74/94 and NN no. 43/96.) and by numerous bylaws and directives thatare mainly related to the technical requirements and rules that should be respected when providingservices in maritime transport (for detailed list of directives and rules see the web page of department forMaritime Transport at the Ministry of Transport and Communications: http://www.pomorstvo.hr/). Themaritime transport sector is considered to be a sector of strategic importance and therefore there are certainrestrictions concerning foreign providers of such services, including maritime cabotage right (Maritime LawArticle 9.) being restricted to ships flying the Croatian flag. The Ministry of Transport and Communicationscan only approve this to ships registered under foreign flags for the following reasons: a) the transport ofempty containers, provided that there is reciprocity for Croatian ships, and b) if there is economic interestfor maritime transport by foreign ships. Cabotage is defined as the transport of goods and passengers incoastal transport between the Croatian harbours. The transport of persons by foreign yachts is notconsidered to be cabotage according to the Maritime Law. In the new draft of the Maritime Law (April 2003),which is currently under discussion, this would also apply to other types of non-commercial vessels.

5.4. Energy Sector

The process of liberalisation of investments in the energy sector has started relatively late, whencompared to the EU accession countries. The major legislation in this area was adopted at the beginningof the year 2000 with the aim of allowing limited competition and de-monopolisation of the sector as wellas privatisation of public monopolies in Croatia. The legislative changes also take into specialconsideration the EU principles and directives which regulate this sector. With this aim the governmentadopted the whole package of energy laws in July 2001 (published in NN 68/01 and 109/01), whichconsisted of: the Energy Law, the Law on Electricity Market, the Law on Gas Market, the Law on Oil andOil Derivates Market and the Law on the Regulation of Energy Activities.

Government authorisation is required for all investors, foreign as well as domestic, that have theintention to engage in energy production and/or distribution. The authorisation and licensing is grantedby the Croatian Energy Regulation Council (Vijece za regulaciju energetske djeltnosti), which is the independentregulatory body in charge for energy sector. The operating licence is required by both domestic andforeign investors engaging in the energy sector. The fees are between HRK 15,000 and HRK 250,000,depending on the type of activity the investor would like to be engaged in. The fees for operating licencesare regulated by the Directive on the financing of the activities of the Croatian Energy Regulation Council,NN/ 60/02).

The operating licences to new entrants, domestic as well as foreign, are granted for the shortestpossible period (3-5 years, depending on the type of activity) as determined by the Directive on thePeriods of Operating Licences (Uredba o razdoblju za koje se izdaje dozvola za obavljanje energetskih djelatnosti,NN 116/02). This is because the process of privatisation and de-monopolisation of the energy sector hasnot yet been completed and the state enterprises (particularly HEP) in the sector are still highly protectedfrom the competition, in particular from foreign competition. This measure in fact discriminates againstthe new entrants, as for the domestic companies which have been registered for at least 15 years foractivities in the energy sector, the operating licensee is granted for maximum 15 years. However, thedetailed procedures for regulating the establishment and expansion of new companies have not yet beendetermined and adopted, although the government was supposed to regulate them by 2002 in order tocomply with the requirements of the Interim Stabilization and Association Agreement.

Furthermore, there are restrictions with regard to the distribution of energy. Only the Croatian EnergyProduction and Distribution Company (HEP) has the right to supply the consumers on the basis of

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regulated tariffs. These restrictions, in theory, do not apply for the so called privileged consumers (big industries etc.), which participate with an 8 percent share in the energy market and which may choosethe supplier. In practice, it is HEP who gives approval to privileged consumers to choose other suppliers,and precise rules of operation of this provision have not yet been developed. This provides considerablescope for arbitrary decisions by the HEP, which retains a dominant market position in the area oftransmission and distribution. Indeed, even in the case when the possibility to choose the supplier exists,energy prices tend not to be significantly lower for the consumer.

5.5 Security and Public Order

Real estate in territories of national interests and security relevance

The ownership of real estate is prohibited for foreign persons if it is situated within a territory, whichis designated by the law to be important for the protection of the interest and security of the Republic ofCroatia (borders, coastline, islands, forests, agriculture land). If a foreign person can not inherit real estatebecause it is on such territory, then he/she is entitled to reimbursement in accordance with theregulations on expropriation.

Ownership rights or any other material rights are prohibited for what is considered as a maritime publicgood (as defined by the Maritime Law, Art 51). Economic use of maritime public goods is only allowedthrough concessions by the Government of the Republic of Croatia to a maximum of 33 years, while theParliament is in charge of concessions above 33 years.

5.6. Other Sectors (fishing, forestry, mining etc.)

Fishing. Only national flag vessels are allowed to fish in the country’s territorial waters. Vesselsregistered under foreign flags cannot fish for industrial purposes in the economic zone of Croatia. Thenational treatment applies only if the vessel is registered in Croatia under the current legislation. TheMinistry of Maritime Affairs, Transport and Communications and its agency Croatian Registry of Ships andVessels are in charge of the registration of fishing and other vessels in Croatia.

Non-commercial fishing in economic zones is allowed, but is subject to prior approval by the authorities.


6.1. Privatisation

At the end of October 2002, the remaining state portfolio consisted of 178 companies with majoritystate ownership. In addition, there are 726 enterprises where the State holds stakes of 25 percent or lessand 187 enterprises where the State owns between 25 and 50 percent of the shares. At the beginning ofthe process in 1991 there were more than 3,600 firms designated for privatisation.

Croatia was the first among the successor states of the former Yugoslavia to enact its own privatisationlegislation, as early as April 1991, after a short but intense debate on possible privatisation options33. The Law on Transformation of Socially Owned Enterprises (1991)34 has set the basic legal principles andmethods for acquiring new ownership rights on socially owned capital, and determined which maincategories of future private owners it sought to establish. Furthermore, it envisaged a complete abolitionof social ownership and its transformation into the legally transparent forms of ownership such as jointstock and limited liability companies, which normally exist in the functioning market economies. Theinitial law was dealing both with commercialisation of socially owned enterprises and their privatisation.In addition, the initial law also envisaged the return of property that was nationalized by the socialistregime after World War II to its original owners, and therefore, in accordance with the restitution claims, acertain portion of assets was reserved for these purposes. However, the actual compensation and physicalreturn of the property was regulated more precisely much later by a separate law (1996).

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With regard to the development of privatisation legislative framework, the process of privatisation inCroatia could be divided into three major stages. The first stage (1991-1996) based on the 1991 Law,encompassed mainly sale methods (case-by-case) but with preferential treatment and generous discounts(up to a 60 percent of nominal share value) given to presently and previously employed (former and retiredemployees). Namely, each employee had the right to an initial 20 percent of discount plus 1 percent for eachyear of employment. However, the value of equity to be bought on discount and on credit was limited to theequivalent of DEM 20,000 worth of shares. Such a concept was justified with the prevailing view thatemployees contributed the most to the creation of socially owned assets thus making them the “moralowners” of those assets. Therefore, the Law on transformation of socially owned enterprises (1991) had torespect these implicit property rights and take into account this specific self-management and legacy35. Forthis reason, the small shareholders (mainly insiders) were a necessarily central, targeted group of privateowners in the Croatian model of privatisation. That is why the first legislation on ownership transformation(1991) provided for their preferential treatment and included substantial discounts on the price of theassets. This measure was intended to secure broader public support for privatisation and to meet therequests for social fairness of the process. However, the employees could only purchase up to 50 percent ofthe shares of any company, which was a measure adopted later36 to prevent the emergence of the employeecontrolled companies on a larger scale and also to avoid discrimination against other domestic investors.

Apart from the preferential sale to insiders, the other privatisation modes envisaged by the ownershiptransformation law were: (i) direct sale, in particular for smaller industrial enterprises worth up to DEM5 million, (ii) auction sales and initial public offerings, (iii) acquiring stakes through investing additionalcapital into the company, (iv) public auctions for frozen foreign exchange deposits; (v) debt for equityswaps and (vi) transfer of unsold socially-owned assets to privatisation fund and pension funds.

The process was initially guided by two organizations in charge: the Agency for Restructuring andDevelopment and the Croatian Fund for Development. Later on, by the amendments of the Law onTransformation of Socially Owned Enterprises in January 1993, these two institutions were merged into theCroatian Privatisation Fund (CPF) that then became the central government agency in charge of theprocess. By the new amendments adopted in November 1994, the CPF has been subordinated to thenewly established Ministry of Privatisation and in addition to being in charge of privatisation, it was alsoin charge of the management of the assets held in state portfolio.

The second phase of the process (1996-2000) was marked by the adoption of the new Privatisation Law(NN 21/96, with amendments NN 71/97 and 73/00), which focused primarily on the genuine privatisationof remaining state assets and speeding up the process. With this new phase some new ideas in theconcept and methods of privatisation were introduced. There was a clear need for adopting newlegislative solutions for accelerating the privatisation process, as although the initial Law mostly fulfilledits primary “commercialisation” role, this did not necessarily mean privatisation at the same time.Therefore state ownership widely replaced social ownership, as all unsold assets were transferred to thestate portfolio. The new ideas refer mainly to allowing a limited ’give-away’ privatisation scheme (miniCzech-styled voucher privatisation37 for selected categories of population most hurt by the war) and alsoselling the shares from the CPF portfolio below their face value. The new law also opened the process ofprivatisation of public utilities38 (oil and gas company, energy production and distribution, rail and roadtransportation, water and forestry management etc.), which remained outside of the mainstream processon the basis of a governmental decree from 1991, by which they were nationalised (declared 100 percentstate-owned) due to their strategic importance. The new privatisation legislation aimed to speed up theprocess, which was rather limited in the first half of the 1990s due to adverse war effects on the overalleconomy, high risk and weak investor protection. Two initial public offerings of Pliva, a pharmaceuticalcompany and Zagrebacka banka, the largest domestic bank at the London and Zagreb stock exchanges in1996, benchmarked the privatisation through the capital market and made an important impact on thedevelopment and capitalisation of this market in Croatia.

However, the supporting legislative framework that consists of the other important laws creating theregulatory institutional environment underpinning privatisation, especially those regulating the financial

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and capital markets, was not in place until the second half of 1990s. This left an ample scope for manydisputable transactions accompanying the privatisation process in Croatia. Namely, the Law on theTakeover of Joint Stock Companies was adopted only in 1997, The Law on the Issuing and Trading inSecurities in 1995, the Law on Croatian Security Commission (CROSEC) in 1996, the Law on PrivatisationInvestment Funds in 1998, the Law on Protection of Market Competition in 1996 etc. Consequently, someof the really crucial institutions for development of the capital market and securities trading such as theCroatian Security Commission and the Central Depository Agency were not in full function till late 1990s(1997 and 1999 respectively). Lack of firm regulatory and institutional constraints and the absence of effective mechanisms of public control and judicial protection, that would ensure that the rules of the game are equally applied to all, made a space for substantial non-transparent and unregulated (not infrequently criminal) takeovers of privatised companies. Concentration of privatised ownershiptherefore mostly evolved outside the financial market and under a large influence of powerful politicalelites (as well as owners and managers related to them), which undermined the legitimacy of theprivatisation process to a great extent. The protection of minority shareholders was especially weak untilall this missing legislation was in place to enable enforceable investor protection regardless of the size of investment.

The third stage of the privatisation process started at the beginning of the year 2000 when the newsocial-liberal administration took office. The new government is focused on setting rules and regulativeframework for the unfinished privatisation agenda and offsetting of some of the unfavourable anddistorted privatisation effects from the previous era, primarily by attempting to review the privatisationtransactions and sanction irregular cases and behind-the-scene special deals. This process began in May2000, when the new government conducted a rather comprehensive inventory of assets in order todetermine the precise size of the residual state portfolio. Its first measure was to adopt a decree orderingthat all the assets which were dispersed in different state and quasi-state funds (namely CroatianPrivatisation Fund, State Agency for Bank Rehabilitation, Croatian Pension Insurance Fund, CroatianHealth Insurance Fund) should be, for the sake of larger transparency, consolidated and merged at oneplace and managed in future by the Croatian Privatisation Fund. This measure (May 2000), was passed inorder to enable better asset management of the residual stakes held by the state and also to provide aneasier privatisation process, especially to foreign investors. Dealing with only one state fund wouldconsiderably ease the procedures for investors, the stakes would be larger (and not fragmented in severalfunds) and the negotiation procedures less complicated which would eventually bring more favourableprivatisation deals, especially in terms of the price and revenues. Also, in order to accelerate the processof privatisation of the residual state portfolio, the government began to draft amendments to thePrivatisation Law of 1996. They aimed to introduce new privatisation methods that were not stipulated inthe previous law such as allowing the sale of assets at real instead of nominal value and other methodsof accelerated sale of assets (selling distressed firms for symbolic value, ESOP, etc). However, the law isin parliamentary procedure since the summer of 2000 and it is still not passed, but the CPF was allowedto proceed with the easier sale methods on the basis of the ministerial decree. One of the reasons for thefailure of the passing of this Law by now is that there are different views on the future privatisation agenda,even within the governing coalition parties, not to mention the opposition ones. This has meant that itwas hard to reach the necessary degree of parliamentary consensus on that matter. The stumbling blocksare the intentions for the divestiture state property quickly. Also, the problem is that it is offering onlycosmetic changes to the 1996 Privatisation Law, while most of the public and experts expected moreinnovative legislative changes.

The new government administration also had to deal with the rather heavy legacy of underminedlegitimacy and negative side effects (corruption, criminal activities, and the grey economy) of theprivatisation policy led during the HDZ rule. Namely, the widespread perception of the outcome of theprivatisation policy has been very negative throughout the 1990s (Privatization and public perception,1998). Because of pre-election promises, the government had the obligation to pass a Law on revision oftransformation and privatization (Zakon o reviziji pretvorbe i privatizacije, NN 44/2001), with the aim ofsanctioning the main actors of criminal privatisation activities in the previous period, and their public andjudicial de-legitimacy. The law, after a long discussion on whether all or certain cases of privatisation

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should be revised, under what criteria, who can initiate proceedings, what deadlines and how provedcases of misconduct should be judicially processed, as well as how long the revision procedure shouldlast and who would lead it, was finally passed in May 2001. According to the requests filed by the end ofthe deadline stipulated by the law (end of July 2001), the revision process encompassing 1,982 privatisedcompanies is underway. The process is in charge of State Office for Revision who recently submitted aReport to the Government and the Parliament on the first 100 enterprises. The Report documented that80 percent out of them have violated some of the legal norms at the time when passing through theprivatisation process. (State Office for Revision Report, May 2002).

As for the privatization of public utilities, the government adopted the modifications of the Law onPrivatisation of Croatian Telecom in 2001, thus allowing the majority stake for sale to the strategic foreigninvestor. They enabled for the selling of an additional 16 percent of the stake in 2001, thus allowing DeutscheTelecom to gain majority stake, after buying the first portion of 35 percent at the end of 1999. Also, after along preparations and discussions, the Parliament only recently (April 2002) passed the Law on privatisationof INA39, the state oil and gas monopoly (allowing the sale of the first 25 percent plus one share to a strategicforeign investor), and the Law on privatization of HEP40 (energy production and distribution), opting for salethrough the initial public offering. The portion to be sold on the stock exchange would be determined bythe government later. Both laws on the privatisation of INA and HEP have been prepared with the assistanceof foreign advisors, selected through international public tendering process.

The privatisation of public utilities requires the separate privatisation legislation approved by theParliament for each state monopoly. The participation of strategic foreign partners is precisely stipulatedby the legislation and the Government decides in principle about the level of participation of a foreignpartner in an ownership structure. The legislation also states that the state intends to hold a golden share(25 percent plus one share) in the ownership structure of public utilities designated for privatisation.

There are only a few companies for which the government so far did not schedule privatization in duetime, but there are no list of enterprises excluded from the process.

Most of FDI during the 1990s, but also in the 2000-2003 period, have entered through the privatisationprocess, especially in the sectors such as banking and public utilities (telecommunications). Thestatistical data of the Croatian National Bank (2003) shows that foreign privatisation represents 69.5percent of the total value of FDI in Croatia in the 1993-2003 period. Foreign privatisations will most likelycontinue to represent a major inflow of FDI as the government plans to go on with privatising the mostvaluable assets in public utilities such as the oil industry and energy production sectors as well as theremaining state portfolios in the hotel industry and tourism and agricombinates.


6.2.1. Monopolies

The market competition is regulated by the Law on Protection of Market Competition adopted in 1995,but enforced in 1996 (Zakon o zastiti trzisnog natjecanja, NN 48/95 and NN 52/97, and changes NN 89/98). Therules are under considerable influence of the EU competition rules. They prohibit any act of conductwhich amounts to limitation or exclusion of free competition on the Croatian market including, but notlimited to, contractual and other arrangements, concerted practices, monopolistic activities, mergers andacquisitions. The rules are applied for both domestic and foreign investors doing business in Croatia

The Agency for Protection of Market Competition, operational from 1997, is an independent regulatorybody that monitors concentration of market shares and mergers of companies in order to prevent theformation of monopolistic market structures. The rulings are binding and have legal authority. The Agencyis responsible to the Parliament of the Republic of Croatia. The Agency does not control the process ofprivatisation. There are three types of relationships that could be subject to an examination by theAgency and they do not represent the exception to National treatment rule:

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a/ Certain types of agreements. The Law prohibits the agreements that manipulate the prices anddivision of the market, force other parties to purchase goods and services, limit or control theproduction and sales, limit or exclude third parties from research or use of its results, or limits thecompetition of third parties on the certain markets.

b/ Dominant position and monopolistic behaviour. The Law prohibits the misuse of monopolistic anddominant positions on the market. A dominant position is if the market share exceeds 30 percentfor one entrepreneur, 50 percent for two, 60 percent for three, 75 percent for four and 80 percentfor five entrepreneurs.

c/ Mergers and acquisitions (concentrations). Concentration of ownership (mergers and acquisitionsof majority share and majority voting rights) are forbidden if they lead to the creation of themonopolistic or dominant position of the subjects involved, or if they improve their position thatthe free competition is limited or extinguished. The Rulebook of Concentrations (NN 30/97) servesas a guideline to the participants in the concentrations as to the requirements of the Agency inconsidering a particular concentration.

The present monopolies in Croatia include mostly the state owned enterprises in public utilities andnatural monopolies: Croatian Post (Hrvatske poste), Croatian Telecom (Hrvatski telekom); Croatian EnergyProduction and Distribution (HEP), Croatia Oil Industry (INA), Gas transmission Company PLINACRO, OilTransportation Company Adriatic Pipeline JANAF, Croatian Forests (Hrvatske sume); Croatian WaterUtilisation and Distribution (Hrvatske vode); Croatian Railways (Hrvatske zeljeznice); Croatian Roads(Hrvatske ceste); Croatian Airlines, Croatian Television (Hrvatska radio televizija); Croatian Lottery(Hrvatska lutrija); Croatian Tobacco Industry (Tvornica duhana Rovinj), Narodne novine (Official Gazetteand Documents Company). For those monopolies under privatisation (such as HT, HEP and INA), themonopolistic status will expire in foreseen period of time (they are regulated in the concluded contractswith strategic investors and are determined by the Laws on privatisation or/and government decisions),usually within the five years, and limited competition of new entrants to the market would be allowed.The independent regulatory bodies, such as those formed in the energy sector and telecommunicationswould regulate the rules of competition in the sector.

6.2.2. Concessions

The concessions in Croatia are granted under the same conditions to foreign and domestic legalpersons and individuals in accordance with the Concession Act (Zakon o koncesijama, NN 89/92). Concessionsmay be granted for: (i) economic exploitation of natural resources and other goods which by law aredesignated to be in the interest of the Republic of Croatia; (ii) carrying out activities that are in the interestof the Republic of Croatia; (iii) construction and utilization of facilities and plants necessary for theimplementation of these activities. The concession may be granted for a maximum of 99 years, and 40 yearsfor agricultural land. The Law explicitly stipulates that a concession may not be granted for the exploitationof forests and other resources that are property of the state, regulated by specific laws and statutes.

The decision for granting a concession is taken by the Croatian Parliament and on the proposal by theGovernment and it should be based on the public bid. The proposal should also be accompanied by theopinion of the municipality or county on whose territory the concession is granted. The Parliament cangive the Government permission to decide about the concession. The Concession Agreement betweentwo parties should be registered at the Concession Register at the Ministry of Finance.


During the 1990s there were no special legal incentives provided to foreign investors, although therewere many efforts to provide institutional support and a business environment that was conducive to thegrowth of the FDI as an important vehicle of economic growth and transition. Within this philosophy theCroatian Investment Promotion Agency (CIPA) was established in 1998. CIPA ceased its existence withinthe reorganisation and reduction of government administration measures at the beginning of the mandateof the new government in 2000. However, one of the high priorities of the new government was to increase

6. Croatia


levels of total investment in the economy as an attempt to achieve higher growth rates. In this context theInvestment Promotion Law (Zakon o poticanju investicija, NN 73/00) is effective from November 2000 andregulates different forms of incentives that could promote investments of both domestic and foreignpersons. Its prime task was to serve as a supporting measure in achieving the priority goals of theGovernment economic policy, which was aimed towards increasing international trade flows and exportsand strengthening the economic competitiveness of the Croatian economy.

In the summer of 2002 the Law was amended and the threshold for stimuli for potential investors waslowered down from HRK 4 to HRK 2 million. The new incentives are applicable to greenfield investments,domestic or foreign, which are above HRK 2 million and involve the creation of a new company. Oneexception to this provision could be an already established company in the tourism sector. The incentivemeasures cover leases, construction permits, the sale or concessions of real estate or infrastructureobjects on a commercial or special basis as well as subsidies for new employees, and their retraining andeducation. For those purposes two new Funds are envisaged: the Fund for Real Estate and the Fund forStimulating New Employment, from which portfolios the incentives would be paid out.

6.4. Tax regime

The tax system and tax policy in Croatia in principle is neutral and treats all the enterprises equallyregardless of size, which means that most tax legislation fully refers also to SMEs. However, during the lasttwo and a half years some extra incentives to stimulate private sector initiatives have been adopted (freezones, war affected regions, employment incentives etc). The current tax system that was enforced inJanuary 2001 brought amendments to some of the already existing tax laws and introduced some newones. The major tax categories in Croatia are profit tax, income tax, social contributions and VAT. Croatiaalso has excises tax and real estate tax.

Profit Tax. Croatia has one of the lowest profit tax rates among the transition economies. All joint stockcompanies and other legal persons who report profits have to pay a 20 percent profit tax rate. There aresome special exemptions, deductions and tax incentives such as: (i) at the regions of special state concern(regions heavily affected by the war consequences), the individual entrepreneurs and enterprises payonly ¼ to ¾ of the tax rate, depending in which category certain region is. For instance, those in Vukovarregion pay only one quarter of the 20 percent profit tax rate; (ii) those operating in free zones pay only 50 percent of the current profit tax rate, while those investing more than HRK 1 million in thedevelopment of a free zone are exempted from paying the profit tax for the period of 5 years; (iii) thetaxable base for profit tax is reduced by the amount of salaries and the social security contributions for the newly employed in the first year of their employment, while for newly employed disabled personsfor the period of 3 years41; (iv) in accordance to the new Investment Incentives Law, there have beenreductions of the profit tax rate to 7 percent or even 0 percent if the investments are in the range of HRK10-60 million (see Table 3). To qualify for tax incentives the new firms must be registered as Croatiancompanies, regardless of the origin of the capital.

6. Croatia


Table 3: Special profit tax incentives for larger investments

AAmmoouunntt ooff IInnvveessttmmeenntt PPrrooffiitt TTaaxx RRaattee PPeerriioodd ooff MMiinniimmaall nnuummbbeerr((HHRRKK mmiillll)) ttaaxx iinncceennttiivvee ooff eemmppllooyyeeeess

10-20 7% 10 years 30

20-60 3% 10 years 50

60 and more 0% 10 years 75

Source: Ministry of Crafts and Small and Medium Entrepreneurship, http://www.momsp.hr/.

Income Tax. Income tax rates are divided into three categories: (i) 15 percent income tax rate is beingpaid by those who earn less than two monthly personal income tax deductions (2 times HRK 1,50042); (ii)25 percent rate is applied to those who earn less than HRK 6,750; (iii) 35 percent income tax rate isapplied to those who earn less than HRK 21,000; (iv) 45 percent rate is applied for those who earn morethan HRK 21,000 per month. The personal tax deduction yearly amount is HRK 18,000.

On top of the amount of calculated income tax, for residents of cities with more than 40,000 inhabitants,there is an supplementary local income tax “prirez", ranging from 6.25 to 18 percent (the calculation baseis the amount of income tax).

The smaller craftsmen and other small business entities are mostly in the system of income tax if theydo not earn more than HRK 85,000 yearly. However, if they earn above that amount they could enter theVAT system, and have to do book-keeping like any other individual or legal entity regardless of size.

The following income tax deductions apply: (i) life insurance premium, additional health insurance,as well as voluntary pension insurance up to HRK 1,000 per month; (ii) donations up to 2 percent of thetotal revenues of the company in the previous year if given for the culture, education, science, health,humanitarian work, sport, religious or other purposes; (iii) for natural persons who reside in the regionsof special state care (ex war affected regions), the level of untaxed personal income is increased by thenumber of persons one supports; (iv) craftsmen and other entrepreneurs in the regions of special carehave a right to deductions of income tax on the income earned from self-employment of up to 75 percentfor a period of 5 years. In the heavily war affected city of Vukovar they are fully exempted if they employmore than 5 workers; (v) tax base for the income is also deducted for the amount of wages of each newlyemployed for one year; (vi) special deductions are available to persons working in art and culture, thedonations of up to HRK 20,000 are not taxed, while 25 percent of other income is exempted; (vii) also theincome of physical persons that was not made through employment, self-employment, assets orproperty rights.

Social Contributions. Employers and employees must make social insurance contributions such aspension, health and unemployment insurance. Employees pay 5.75 percent of gross wages and salariesfor pension insurance for the first PAYG pillar, and an additional 5 percent for the mandatory privatepension fund-second pillar. They pay also a 9 percent contribution for health insurance and 0.85 percentfor the unemployment fund. The total paid by the employee is 20.60 percent. The employer is obliged topay 8.75 percent contribution on the gross wage for pension insurance, 7.47 percent for health insuranceand 0.85 percent for unemployment insurance. The total paid by the employer is 17.07 percent.

Value added tax (VAT). The VAT rate in Croatia is 22 percent and it was introduced in January 1998. Thereis also a 0 percent rate for certain products such as bread, milk, books, pharmaceuticals (from the list ofthe Croatian Health Insurance Institute), human body implants, academic journals, public movieprojections and organized tourist visits paid by transfer from abroad. The entrepreneurs who earn morethan HRK 85,000 should register as VAT payers. The standard accounting periods are one calendar month,while for entrepreneurs who earn less than HRK 300,000 yearly it is 3 months. There are specialexemptions from VAT for exporters and importers of goods and services (with the right for return ofprepaid tax). There are also exemptions for residents, but without the right of return of prepaid tax suchas lease of business premises, services of banks, savings organizations, saving-credit cooperatives,insurance and reinsurance organizations, health and social services, educational services, cultural and artservices, lottery games etc. Some non-resident foreign entrepreneurs are also entitled to VAT return ifthey comply with certain listed conditions for providing their goods and services in Croatia.

6.5. Free Zones

The Croatian Free Zones Law (Zakon o slobodnim zonama, NN 44/96) regulates free zones formationin Croatia. Free Zones can be established in the area of a seaport, river port, along international roads andin other areas in which there are conditions for their operations. A Free Zone may be established on the

6. Croatia


basis of a concession granted by the Croatian Government. A concession to establish a Zone is grantedon the basis of a public tender or a public bid collection. Foreign natural or legal persons can set up a freezone if they are established and registered as a legal entity in Croatia. Domestic and foreign legal entitiesand natural persons may be the users of a Zone, who carry out an economic activity in a Zone on the basisof an agreement made with the founder of a Zone. All activities may be carried out within a Zone(production of goods, refinement of goods, wholesale trade, mediation in trade, banking transactions,services, insurance and re-insurance services etc.), except retail trade.

The Law stipulates the following for doing business in a free zone: (i) domestic and foreign persons maybe the users of a Zone under equal terms; (ii) all forms of foreign trade may be carried out within a Zone,and the limitations of the Trade Law and the Law on Foreign Exchange Operations do not apply to suchoperations; (iii) goods may be freely imported and exported; (iv) goods may remain within a Zone for anunlimited period of time; (v) no customs duties or taxes are levied and no other economic obligations areapplied for the goods stored in a Zone; (vi) the users of a zone pay a profit tax amounting to 50 percent ofthe prescribed rate (e.g. 10 percent); (vii) users who build or participate in the construction of infrastructurefacilities within a Zone, the value of which exceeds one million HRK, are exempted from paying profit taxin the first 5 years of doing business; (viii) free zone users are exempted from paying VAT.

There are 15 Free Zones established so far in Croatia: Krapina-Zagorje Free Zone, Krapina; Free ZoneKukuljanovo, Rijeka; Free Zone Osijek, Osijek; Free Zone Podi, Šibenik; Port of Rijeka Free Zone, Rijeka;Free Zone Zagreb, Zagreb; Free Zone Obrovac, Obrovac; Free Zone Split, Split; Splitsko-DalmatinskaCounty Free Zone; Free Zone Ploce, Ploce; Free Zone Pula, Pula; Free Zone Buje, Buje; Free Zone ÐuroÐakovic, Slavonski Brod; Free Zone Vara din, Vara din and Free Zone Vukovar, Vukovar.

6.6. Foreign Exchange Controls

Foreign exchange activities in Croatia are regulated by the Law on Foreign Exchange System, ForeignExchange Operations and Gold Transactions (NN 91A/93, 36/98 and 32/01). This Law regulates: (i) paymentoperations between persons in the Republic of Croatia and legal and natural persons abroad, and theacquisition of foreign exchange and management thereof in the country and abroad; (ii) the basicprovisions concerning the foreign exchange market in the Republic of Croatia and the rate of exchange ofthe domestic currency; (iii) exchange office operations as a particular form of foreign exchange operations;(iv) the position and authority of banks in foreign exchange operations; (v) foreign currency which may bebrought into, and taken out from, the Republic of Croatia; (vi) transactions in gold; and (vii) other mattersof importance for the regulation of the foreign exchange system in the Republic of Croatia.

Resident natural and legal persons may in principle open and operate foreign exchange accounts onlyin Croatia; however the Croatian National Bank may allow them to hold the accounts in other countries ifthey have business operations there. Non-residents may open foreign exchange accounts with fullylicensed banks in Croatia. As a measure against money laundering, non-resident persons may not creditthese accounts with foreign banknotes exceeding US$ 20,000 per month without special permission fromthe Croatian National Bank. Non-resident legal persons may withdraw up to the equivalent of HRK 15,000each month from their deposit accounts.

There are no restrictions on the repatriation of profits and invested capital by foreign investors. Non-resident natural persons may also conduct the capital transfers without being subjects to any restrictions.

Also the capital market has been liberalized so that the firms and banks are now allowed to take loansabroad, but a special approval is required which can be obtained from the Croatian National Bank.


Trade Agreements. The major multilateral and bilateral trade agreements that Croatia has concluded sofar are the following: (i) WTO, full membership, signed in October 2000, enforced since January 2001; (ii)

6. Croatia


EU – Stabilization and Association Agreement, signed in May 2001, ratified in December 2001, applicationfor full membership in the EU handed in February 2003; (iii) CEFTA, signed December 2002, enforced inMarch 2003; and (iv) EFTA (Iceland, Liechtenstein, Norway, Switzerland) , signed in June 2001. Croatia alsohas bilateral free trade agreements with the Republic of Macedonia (since 1997), Slovenia (signed in 1997,enforced since 1999), Bosnia and Herzegovina (signed in 2000, enforced in January 2001), Hungary (signedin 2001), Albania (signed in September 2002), Turkey (signed in March 2002; enforced in September 2002),Czech Republic (signed in November 2001, enforced in January 2002), Slovakia (signed in November 2001,enforced in January 2002), Poland (signed in November 2001, enforced in 2002), Bulgaria (signed in 2001),the FRY (draft agreement signed in 2002), Romania (signed in 2002), Lithuania (draft signed in 2002) andMoldova (in the process).

Agreements on Mutual Protection and Promotion of Foreign Investment. As of January 2002, Croatia hasAgreements on Mutual Protection and Promotion of Foreign Investment with: Albania, Argentina, Austria,Bosnia and Herzegovina, Bulgaria, Cambodia, Canada, Czech Republic, Chile, China, Egypt, France,Germany, Greece, Hungary, Italy, Ireland, Jordan, Kuwait, Republic of Macedonia, Malaysia, Netherlands,Poland, Portugal, Romania, Russian Federation, Slovak Republic, Spain, Sweden, Switzerland, Ukraine,UK, USA, Turkey.

Double Taxation Treaties. As of end 2002 Croatia has Double Taxation Treaties with: Albania, Austria,Bulgaria, Canada, China, Czech Republic, Greece, Hungary, Italy, Latvia, Lithuania, Republic of Macedonia,Malta, Netherlands, Poland, Romania, Russian Federation, Slovakia, South Africa, Switzerland, Turkey,Ukraine. In the way of succession, the following countries continue to adhere to agreements on avoidanceof double taxation concluded with former Yugoslavia: Belgium, Denmark, Finland, France, Germany,Norway, Sweden and the UK.

6. Croatia


6. Croatia



Boromisa, A. 2003. Energy in the European Union and in Croatia. In Ott, K. ed. Association Process of Croatiaand EU. Zagreb: Institute of Public Finance.

Bulgaria Economic Forum, Sofia, Investment Guide for Southeast Europe, Ivanov, Eugeniy, Iva Stoykova &Yordanka Palahanova. 2002.

Croatian Privatization Fund (CPF). 2001. Legal Framework for Doing Business in Croatia. Zagreb.

Croatian National Bank. 2003. The Statistics on FDI. http://www.hnb.hr/statistika/strana-ulaganja/.

Cuckovic, N. 2002. Privatisation and Restructuring of Enterprise Sector, Background study for World Bankstudy “Croatia: Country Economic Memorandum” (mimeo).

EBRD. 2002. Strategy for Croatia. Zagreb.

EBRD. 2002. Transition Report 2002. London.

European Commission. 2002. Benchmarking the Administration of Business Start-ups. Brussels.

European Commission. 2003. Croatia: Stabilization and Association Report. Brussels, March.

FIAS. 2002. Croatia: Administrative Barriers to Foreign Investment. Washington, D.C: Foreign InvestmentAdvisory Service.

Ministry of Economy. 2002. Croatia: Country Profile, Presentation in Japan for JICA/UNIDO JointProgramme. Zagreb.

Ministry of Economy of the Republic of Croatia. http://www.mingo.hr/

Ministry of Maritime Affairs, Transport and Communications, http://www.pomorstvo.hr/

Narodne novine (Official Gazette). Different numbers, http://www.nn.hr./

World Bank. 2002. Transition: The First Ten Years – Analysis and Lessons For Eastern Europe and Former SovietUnion. Washington D.C.: The World Bank.

World Bank. 2002. World Development Report, Chapter 1: Building Institutions, Complement, Innovate,Connect and Compete. Washington, D.C.: The World Bank; pp. 3-27.

World Bank. 2003. Croatia: Country Economic Memorandum, draft study. Washington, D.C.: The World Bank.

6. Croatia


NNOOTTEESS

29. The Statistics on FDI, Croatian National Bank, 2003, http://www.hnb.hr/statistika/strana-ulaganja/.

30. In September 2002 the World Bank approved a very favourable loan of US$ 25.7 million to theGovernment of Croatia to implement the reform of Land and Cadastre Registry and itsadministration. The European Commission also supported the project with US$ 4.9 million.

31. Developmental Priorities of the Republic of Croatia, 2002-2004, November 12, 2001 and laterdecisions of the government.

32. This is a major Copenhagen criteria imposed to each accession country candidate.

33. By passing its own privatisation law, the provisions of the Federal Law on Transformation of SocialCapital (1989) were abolished and Croatia determined its own path of transformation andprivatisation of socially-owned capital.

34. Zakon o pretvorbi drustvenih poduzeca /Law on Transformation of Socially Owned Enterprises/, NN19/91.

35. The other countries with self-management legacy such as Slovenia, Poland, and the Republic ofMacedonia have also respected it in their concepts of privatisation and have allowed such type ofpreferences through MEBO schemes and also through give away schemes. The outcome of suchschemes is likely domination of insiders in post-privatization ownership structure of many smallerindustrial enterprises.

36. By amendments to the Law on transformation of socially owned enterprises, adopted in February1993.

37. This means that technically the voucher privatization was done through the bidding process ofexchanging voucher points for the shares of the companies assigned to participate in the voucherprivatisation. The prices of the shares were formed based on the demand for certain shares. Also thePrivatisation Investment Funds were mediating the process between the voucher holders and firms.

38. However, a separate legislation should be passed in the Parliament for each public enterprise.

39. Zakon o privatizaciji INA – Industrija nafte d.d., NN 32/02.

40. Zakon o privatizaciji Hrvatske elektroprivrede d.d. (HEP), NN 32/02.

41. This privilege is also given to income tax payers.

42. On November 1, 2002, the Government adopted decision by which the income tax deduction basehas been increased from HRK 1,250 to HRK 1,500. Also new deductions up to HRK 12,000 on yearlybase have been introduced for those who pay mortgage loans as well as those who pay for additionalpension, life and health insurance.


Chapter 7.

FFYY RREEPPUUBBLLIICC OOFF MMAACCEEDDOONNIIAA

1. INTRODUCTION

Foreign investment inflows to the Republic of Macedonia have been low throughout the transitionprocess. The total stock of foreign investment in the Republic of Macedonia reached US$ 912 million in2002 (source: National Bank of the Republic of Macedonia), mainly through privatisation transactions andpost-privatisation transactions through the Macedonian Stock Exchange rather than through greenfieldinvestment. Just over one half of the stock of FDI has been invested in telecommunications, mining andmanufacturing industries, while almost two fifths has been in the banking sector.

The greatest amount of foreign investment was made in 2001, when inflows of FDI amounted to US$443.21 million, a relatively high figure mainly due to the privatisation of the telecom company in that year.However, the civil conflict in 2001 resulted in a drastic cutback in foreign investment inflows. By 2002 theinflow had fallen to just US$ 77,5 million.

The leading investors in the Republic of Macedonia have been Hungary with 35.4 percent (mainly throughprivatisation of Macedonian Telekom in 2001) and Greek investors who accounted for 24.9 percent of the FDIstock in 2002, followed by Cyprus (8.3 percent), Germany (5 percent), and Great Britain (4.4 percent).Altogether, the EU countries accounted more than a half of the FDI stock in the Republic of Macedonia in 2002.The most important individual investors have been from a diverse group of countries, including Matav(Hungary), National Bank of Greece (Greece), Balkan Brew Holding (Greece), Hellenic petroleum (Greece),Titan-Holderbank Financiere Glaris (Switzerland & Greece), Balcan Steel (Liechtenstein), QBE (Great Britain),Duferco Skop Investment (Liechtenstein), Knauf GmbH (Austria), Tobacna (Slovenia).

2. DETERMINANTS OF EXISTING AND FUTURE FDI INFLOWS

The Republic of Macedonia lies on some of the major north-south and east-west transit routes in theinthe South-Central part of South Eastern Europe. The 1994 stabilisation policy had a sustained effect inbringing inflation under control over the following two years. Inflation fell from 122 percent in 1994 to 16percent in 1995, and to 3 percent in 1996. Since then, the Republic of Macedonia has been a low inflationeconomy. Real GDP began to grow significantly in 1996 for the first time since the declaration ofindependence. The rate of GDP growth turned positive in 1996 when it was 0.8 percent, rising to 1.5 percentin 1997 and 2.9 percent in 1998.

Table 4: Basic Economic Indicators: Republic of Macedonia (1993-2002)

11999933 11999944 11999955 11999966 11999977 11999988 11999999 22000000 22000011 22000022

GDP/capita (US$) n/a n/a 1,705 1,709 1,732 1,781 1,848 1,925 1,830 1,835

Real GDP (% p.a.) -7.5 -1.8 -1.1 1.2 1.4 3.4 4.3 4.5 -4.5 0.7

Industrial output -16.0 -11.9 -11.0 4.0 4.9 4.5 -2.6 3.5 -3.1 -5.3growth (%)

Inflation (% p.a.) 349.8 121.8 15.9 3.0 4.4 0.8 -1.1 5.8 5.5 1.8

Sources: Ministry of Finance, Bulletin, (no. 4, 2003), National Bank of RM.

The Republic of Macedonia has largely completed its privatisation process and has made progress ina number of pro-market economic reforms, especially in internal and external liberalisation, bankingsector reform and enterprise reform. It has joined the WTO and signed a Stabilisation and AssociationAgreement with the EU. The Macedonian industrial sector has gone through a period of decline in somesectors, namely those associated with the transition process and the break-up of Yugoslavia, UN sanctionsagainst Serbia, embargoes form Greece, the Kosovo war and its own civil conflict in 2001. Nevertheless, itretains opportunities for foreign investment, especially in the labour intensive processing industries.Investment opportunities also exist in agriculture sector, food processing, tourism and other.

The Republic of Macedonia has a relatively skilled labour force, combined with low labour costs. Theinfrastructure resources are adequate and are being improved with the assistance of international donoragencies especially the European Agency for Reconstruction, the European Investment Bank and theWorld Bank.

The Republic of Macedonia signed a Stabilisation and Association Agreement with the EU in April 2001,replacing the 1998 Cooperation Agreement. It was the first country in the Western Balkan region to do so.This involved the elimination by the EU of all tariffs and quotas on Macedonian exports to the EU exceptin the case of a limited number of agricultural products. For its part the Republic of Macedonia has agreedto the phased reduction of import duties on products originating in the EU over a ten-year transitionperiod. In addition, the Republic of Macedonia is obliged to pursue a number of other measures such ascompetition laws, which will prohibit monopolisation or other restrictions of competition in the localmarket (important for example in the case of the oil refining industry) and will eventually involve theadoption and implementation of the EU’s acquis communautaire into Macedonian law.


3.1. FDI policy

Attracting foreign investment is one of the key features of the macroeconomic policy of thegovernment of the Republic of Macedonia. FDI is not only an additional source of capital important forthe fulfilment of the existing domestic savings-investment gap, but also helps speed up the transitionprocess, improve the quality of management and create new employment.

The government has established four fundamental principles to govern the policy of attractinginvestment: (i) the national treatment of foreign investors, (ii) the complete protection of foreigninvestors’ ownership rights; (iii) a stable and consistent legal and regulatory environment; and (iv) thetransparent functioning of institutions.

However, the strengthening of a favourable legal and regulatory environment and the transparentfunctioning institutions remain important challenges for the Macedonian government to improve theinvestment environment in the Republic of Macedonia and increase the inflow of FDI.

3.2. The existing regulatory framework for FDI in the Republic of Macedonia

There is no specific law on foreign investment in the Republic of Macedonia, which is covered by the provisions of the Constitution as well as various laws affecting business operations. The principal law regulating the position of foreign investors is the Law on Trading Companies43 of 1996. Foreigninvestment in the Republic of Macedonia is treated on the same basis as domestic investment. In general,a foreign person may establish the same types of companies in the country as a Macedonian citizen isentitled to do. There are no restrictions on foreign investment in the Republic of Macedonia, or upon thetype of business that a foreign company can engage in other than in military industries, the arms trade,trade in narcotics and restrictions designed to protect historical monuments and the cultural assets of thecountry. There are no limitations on the amount of a foreign person’s investment in a Macedoniancompany, or on the repatriation of post-tax profits and dividends.

7. FY Republic of Macedonia


In fact, the government is keen to attract foreign investment. The Programme for stimulatinginvestments was prepared in July 2003, and the new Agency for Investment Promotion will start with itsactivities in January 2004.

3.3. Approval and licensing/screening procedures

The right to make a foreign investment in the Republic of Macedonia is stipulated in the Constitution.Article 31 asserts that a foreign person may acquire property rights under conditions set down by the law.Article 59 guarantees a foreign investor the right to the free transfer of invested capital and profits. Theprincipal law regulating the position of foreign investors is the Law on Trade Companies of 1996.

Inward and outward direct investments must be registered with the Ministry of Economy. TheMinistry registers direct investments in and out of the Republic of Macedonia with the aim of reportingand recording capital transactions and the changes in inward and outward direct investments, accordingto articles 7 and 8 of the Foreign Exchange Law. The Ministry of Economy has adopted regulations for theregistration of inward and outward direct investments. The legal time period for acquiring directinvestment in the country or abroad is thirty days from the day on which capital transaction is concluded.According to the existing regulations, all data regarding changes or termination of direct investmentsshould be registered with the Ministry of Economy. All relevant information is submitted on a specificform, which constitutes the main part of the regulations. When submitting data for changes in an existingdirect investment, the non-resident fills only those entries on the form where changes have been maderegarding the original application form (the form with which the registration number was acquired). Eachfiling of foreign investment in the country or abroad, changes or termination of the same have to bedocumented in accordance with the Act; this documentation is the legal base of the investment. TheMinistry of Economy reaches a Decision regarding the entry of the investments into the relevant registerand it also manages the data. According to Article 56 of the Foreign Exchange Law, failure to file a direct foreign investment in the Republic of Macedonia is an offence, which can lead to a fine of up to250,000 / 300,000 denars. According to Article 57 of the same law, there also exists the possibility of apenalty in the form of a prohibition order; this involves the prevention of performing certain operationsfor a period of one to five years for a legal entity, and from six months to one year for an individual.

A foreign legal or real person has the right to transfer abroad in the same currency in which thecontribution was originally made her/his share of the company’s profit, the amount realised upontermination of the company or upon partial or total alienation of the share of the foreign entity or personupon his/her order without any approval, provided that such company has sufficient funds on its account(Article 28, Law on Trade Companies).

3.4. Corporate organisation: regulations on company establishment (company law, branches) and nationality of management

The Law on Trade Companies of 1996 Article 18, permits five types of enterprises including (i) limitedliability companies44, (ii) joint stock companies45, (iii) limited partnerships, (iv) general partnerships46, and (v) limited partnership joint stock companies. Sole Trader companies are also permitted. Foreigncontrolled companies can take any of these forms of companies.

Foreign companies can also establish branches as legal entities in the Republic of Macedonia. Thebranch has the status of a legal person, which takes the company type of a foreign parent company in the home country. If the company type does not exist in Macedonian law, then the branch takes the formof the most similar company form of Macedonian law. Branches have the right to carry out all forms ofbusiness and commercial operations and operate under the same conditions as domestic companies thatcarry out the same or related forms of business. In the case of certain industries, the company must obtainthe permission of the Ministry of Foreign Affairs in order to open a branch, and the branch must then beregistered at the appropriate Court (Law for Trade Companies, Article 553).



Representative offices can be opened by foreign companies that are carrying out non-incomegenerating activities, such as advertising or market research on behalf of their parent company.Representative offices cannot carry out commercial operations or act on behalf of any company other thantheir parent company. A representative office must be registered in a registry of the Ministry of Economy.The only taxes payable by a representative office are personal income tax and social contributions onbehalf of its employees. Representative offices are not required to keep accounting records.


According to the Law for Founding Employment Relations with Foreign Persons (Official Gazette ofthe FRY No. 11/78 and 68/89) a foreign person can sign an employment contract if he/she has permissionfor a temporary or permanent stay in the country or if he/she has an invitation from an employer andpermission from the Employment Bureau. In practice the administrative procedures can be onerous forprospective employers.

3.6. Real estate

Foreign persons may acquire ownership of buildings and other rights over immovable assets andproperty for business purposes. According to the Law on Trading Companies (Article 688), foreign personscan become owners of apartments and apartment buildings but may not acquire ownership rights overconstruction land. Moreover, a foreign company or a foreign sole proprietor cannot acquire ownership ofland. In agreement with the Law for Ownership and Real Rights (Article 248), foreign persons can rentbuilding land on a base of a long term lease.

There are restrictions on foreign investment designed to protect historical monuments and the culturalassets of the country (Art. 55 Constitution of the Republic of Macedonia).

According to the Law on Agricultural Land (Official Gazette No. 25/98, 18/99), foreign and domestic legalentities may rent up to 15 percent of land from combines and other enterprises that operate onproductive land, by public auction.


The Law on Government Procurement (Official Gazette of RM No.26/98, amended 50/01, 02/02),regulates the procedures for government procurement by central and local governments. The law requiresfull transparency and access to procurements as well as full equality of domestic and foreign legal and natural persons in the bidding process. Disputes are settled by law and under various bilateral and multilateral conventions to which the Republic of Macedonia is party. The Law was introduced in conformity with the conditions set out in the EU Stabilisation and Association Agreement. Thegovernment procurement sector is administered on a decentralised basis and the Ministry of Finance isresponsible for the supervision and implementation of the law. But there is no government procurementOffice or Agency to oversee the implementation of the law.


4.1. Financial sector (Banking, insurance, securities market, other financial services)

Banking. The banking system was severely affected by a loss of confidence due to the freezing offoreign currency accounts following the secession from Yugoslavia. The main banks were also disabledby the weight of non-performing loans attributable to the virtually bankrupt enterprise sector. Bankrehabilitation began in 1995, under the direction of the Bank Rehabilitation Agency and with theassistance of an US$ 85 million World Bank credit. All bad debts from the most seriously affected banks,including the frozen foreign currency accounts, were taken out of the banks’ balance sheets andtransferred to the Agency.



The banking system in the Republic of Macedonia is highly concentrated with the top three banksaccounting for 60 percent of banking assets. The largest bank, Stopanska banka, alone accounted for 38percent of bank assets in 2001. There are no restrictions imposed in regard to the participation of foreigninvestors in the banking sector. When Stopanska banka was privatised in 1999, the National Bank ofGreece bought 65 percent of the shares, while Alpha banka, also from Greece, bough 65 percent of theshares in Kreditna banka, the fourth largest bank.

The banking sector is now regulated by the Law on Banks (Official Gazette No. 63/00 amended in 2002and 2003), which is designed to encourage the participation of foreign banks in the banking sector.

According to the Law on Trade Companies of 1996 Article 18, only joint stock companies may beincorporated for the purpose of undertaking banking activities, trading securities and providing insuranceservices. As an exception to this, limited liability companies may be incorporated to undertake bankingactivities through saving houses and exchange offices, and to also undertake mutual insurance activities.

Insurance. With the latest changes in the legislative, there are no limitations for foreign investments ininsurance. The Law on Insurance (Official Gazette of RM No. 49/97, amended 79/99 and 13/01) and the Lawon Insurance Supervision (Official Gazette of RM No.27/02, 84/02 and 98/02) stipulate that in an insurancecompany the individual share of each shareholder (legal entity, individuals or linked entities/individuals)can go up to 25 percent of the equity with a right of management. If shareholders are banks or insurancecompanies there are no limitations to participation in the capital. To acquire, gradually or at a single time,stakes of 20, 33, 50 or 75 percent of the shares with a right of management it is necessary to obtain anapproval from the Minister of Finance. A foreign insurance company can open a branch in the Republic of Macedonia (according to the Agreement with WTO, from 1 January, 2008) after receiving permission from the Minister of Finance.


According to Article 89 of the Telecommunications Law, foreign legal entities and individualscontrolled or owned by foreign persons are permitted to acquire shares in, become directors, officers andemployees of, or participate in, the management of the existing public telecommunications operator. Theexisting public telecommunications company in the Republic of Macedonia is a monopoly with 51 percentof the shares owned by the Hungarian company Matav. The exclusivity period for fixed services will end on 31 December 2004.

4.3. Other sectors

Broadcasting. Previous restrictions on foreign participation in the share capital of broadcastingcompanies have been lifted. According to Article 10 of the Law on Radio Broadcasting (Official Gazette No.20/97), a foreign individual or legal entity may participate in the capital of a broadcasting company withup to 25 percent. The share of more than one foreign shareholder may not be higher than 49 percent.

Gambling. Foreign investors cannot independently organise gambling other than machine games intheir own four or five star category hotels. They may organise gambling in conjunction with domestic legalpersons or individuals in their own hotel, if the foreign equity share is higher than 50 percent (Article 44,Article 54 and Article 60 of the Law on Games of Chance and Entertainment Games).


5.1. Privatisation

Sixty-seven large and medium sized enterprises had been privatised under the provisions of theprivatisation law before the Republic of Macedonia became independent in 1991, and hundreds of othershad been partly privatised. A new privatisation law (the Law on the Transformation of Enterprises with Social



Capital) was introduced in 1993. Under this law, enterprises could initially opt for voluntary privatisation.Small and medium sized enterprises which did not begin this process by the end of 1994, and by June 1995in the case of large enterprises, were then subject to compulsory privatisation by the Privatisation Agency.Since few firms opted for voluntary privatisation the whole process did not take off until 1995.

Enterprises could select from a variety of methods of privatisation including employee and/ormanagement buy-out (provided at least 51 percent of assets are bought), leveraged buy-out (for aminimum of 20 percent of assets), commercial sale of the enterprise, issue of shares to outsiders (of atleast 30 percent of the shares), debt equity swaps, leasing, or liquidation and sale of assets. Foreigncompanies were free to participate without restriction in the privatisation process. In the case ofemployee buy-out, employees were offered discounts of 30 percent plus a further 1 percent for each yearof employment in the enterprise. The maximum amount that could be bought by any employee wasrestricted to DM 25,000. For ancillary units such as enterprise hotels and restaurants discounts of 50percent were made available. In addition, in every case 15 percent of the shares were transferred to thePension Fund. Remaining unsold shares were transferred to the Privatisation Agency, which was supposedto offer these shares to the public after a three-month period. The privatisation law has beensubsequently amended to give greater incentives to outsiders to purchase shares.

After a relatively late start, the privatisation programme was carried out quickly and was largelycompleted by the end of 1997, by which time over one thousand enterprises had been fully privatisedand only 234 remained in the privatisation process. The main methods of privatisation adopted weremanagement and employee buy-outs, with management buy-outs being the most prevalent in terms ofboth employment and the value of equity involved. Managers were required to put up only 10 percent ofthe purchase price with the remainder to be paid in instalments over ten years.

By the end of March 2003, 1,690 companies had completed their privatisation process. Thesecompanies employed 229,622 workers, and had assets worth EUR 2,330 million. By type of privatisation,394 companies with assets of EUR 77 million were privatised through an employee buy-out, 236companies with assets of EUR 707 million were privatised by management buy-out, while the rest of thecompanies were privatised through other methods. 155 companies with assets of EUR 104 million wereprivatised by sales to foreign owners.

According to the latest amendments to the Law on Transformation of the Enterprises with SocialCapital (Off. Gaz. 31/03), all the portfolio owned by the Privatisation Agency (EUR 453.7 million) has to besold through public auctions on the Macedonian Stock Exchange by the end of 2003. The exceptions arecompanies selected by the Government that will be sold through public tender for bids. The MacedonianPrivatisation Agency will be closed by 31 December 2003. The portfolio of shares and stakes that have notbeen sold through the Macedonian Stock Exchange by the end of 2003 will be transferred to the PensionFund of Macedonia (PIOM) and the assets (buildings, machines and other equipment transferred from thecompanies in ownership of the Agency) will be transferred to the Public company for management withbuildings and business premises.


5.2.1. Monopolies

A Monopoly Authority has been operating in the Republic of Macedonia since 2000. The Authority hasbeen established within the Ministry of Economy. Its mandate includes vetting mergers and acquisitions,taking action against abuses of dominant positions by enterprises, and evaluating practices andagreements that may restrict competition. During its first year of operation it dealt with six cases.

The state monopoly Macedonian Telecommunications (MT) was privatised in 2001. The new majorityshareholder is a Hungarian company (Matav), which is 60 percent owned by Deutsche Telecom. Theexclusivity period for fixed services will end on 31st December 2004. MT also had a monopoly of mobile



communications through its subsidiary MobiMak, until a second licence was awarded to OTE of Greece inNovember 2001. The second mobile operator is MTS. (ownership of OTE began on 15th June 2003).

The Greek owned petroleum company OKTA has a monopoly in the petroleum products productionin the Republic of Macedonia. The company is owned by Hellenic Petroleum. The contract conditions ofthe privatisation have not been revealed.

The State Electricity Utility (ESM) is an independent utility responsible for the generation,transmission and distribution of electricity. The government plans first to restructure the company andthen privatise it.

5.2.2. Concessions

The granting of concessions is regulated by the Law on Concessions (Official Gazette 25/02).Concessions may be given equally to foreign or domestic legal persons and natural persons in compliancewith the law. The Law on Agricultural Land (Official Gazette 25/98, 18/99) asserts that state-owned landmay be given out on concession to both foreign and domestic entities registered in the Trade Register ona long-term lease of between 5 and 40 years or on a short-term lease of up to 5 years. Concessions mayalso be granted for water resources and forest resources, on equal terms for domestic and foreigninvestors. For example, recently, the Czech company Hydropol Project & Management A.S. was granted aconcession for the rehabilitation of seven small hydro-power plants.

The Law on Telecommunications regulates the way in which concessions to operate telephonenetworks are provided. Both foreign and domestic investors may apply for such concessions (subject tothe time-limited exclusivity of the contract of the existing telecommunications monopoly – which is in anycase majority foreign owned).


Incentives for foreign investors in the Republic of Macedonia include exemption from customs dutiesas well as tax breaks, as follows:

– Foreign investors are entitled to a profit tax exemption for the profit generated during the first threeyears of operation, on condition that foreign capital represents at least 20 percent of the totalinvested capital.

– There are no taxes on profits that are reinvested in fixed operational assets or used forenvironmental protection.

– The profit tax may be reduced by up to 100 percent in regions designated as underdeveloped ifreinvested in fixed assets.

– Capital equipment of foreign investors can be imported without payment of customs duties.– A tax holiday on all investments on movable and immovable assets up to EUR 100,000. For

investments above EUR 100,000, the profit tax exemption will increase to 30 percent. Thisamendment applies retroactively to investments made from the 1 January 2003.

A very important incentive for foreign investors is the low corporate tax rate of 15 percent that appliesto all enterprises. Additional tax holidays may be granted by the Parliament on an ad hoc basis to largeforeign investors.

5.4. Free zones

The Law on Free Zones was passed in 1999. There is one Free Economic Zone in the Republic ofMacedonia, at Bunardzik, 10 km east of Skopje, covering 159 ha. The government is planning to constructfree economic zones in three other locations in the Republic of Macedonia. According to the Law on FreeEconomic Zones, companies based within the zone are exempt from (i) VAT on intermediate goods



produced within the zone (but not goods for final consumption), (ii) VAT on products imported into thezone for the production of goods for export and for other approved activities in the zone and (iii) serviceswithin the zone that support exporters, (iv) taxes regarding the transfer of ownership and rights betweenfounders and users in the zone and (v) taxes and other duties regarding the use of construction land, andconnection to water, sewerage, heating, gas and power supply networks. According to the latestinformation this Free Zone is not operational. But a Public Tender for selection of a Developer/Founderof the Free Zone Bunardzik will be announced in October 2003)

According to the Profits Tax Law (Article 32a), companies within the zone are exempt from property taxand profits tax for a period of ten years. Investments in capital assets in the zone can be offset against taxafter a period of ten years and one day from the commencement of business.

Land within the free zone may be leased to foreign investors for a period of 50 years with thepossibility of extending the lease for another 25 years.


According to the new Foreign Exchange Law (Official Gazette 34/2001, 49/2001, 103/2001) both inwardand outward foreign investments are without restriction (previously Macedonian residents were notallowed to invest in real estate or portfolio investments abroad). However, both inward and outwarddirect investments must be registered with the Ministry of Economy.

All transactions that take place in the Republic of Macedonia should be made in Macedonian denarsthrough authorised banks. Resident and non-resident companies and individuals may keep accounts incommercial banks in foreign exchange. The stipulations stated further refer only to the amount of moneyin cash. For the non cash transfers (through banks) there is no limitation. (Rulebook for the ways ofregistration, as well as the form, content, and the way of leading of the Register of Direct Investments ofnon-residuals in the Republic of Macedonia.) There are no restrictions on bringing money into theRepublic of Macedonia, although neither Macedonian nor foreign citizens are allowed to take out of thecountry more than their holdings in their foreign currency bank accounts, or amounts bought inauthorised exchange offices. Foreign citizens can additionally take out currency up to the amount thatthey brought with them when entering the country.

Until recently, foreign exchange earnings by a company based in the Republic of Macedonia had to beheld in a foreign exchange account for 180 days, after which time the foreign exchange had to be convertedto Macedonian denars, or else used to make payments abroad or sold to other companies, at a rate thatwas usually higher than the official exchange rate. This restriction has been removed by the new Law onForeign Trade Operations enacted in September 2002.

The Foreign Exchange Law (Official Gazette of RM No.34/02), the Decision of NBRM related to the transactions of non-residents with stocks in the Republic of Macedonia (Official Gazette of RMNo.53/02) and the Decision of NBRM related to the purchase of foreign exchange from NBRM (OfficialGazette of RM No.34/02), all introduce restrictions for foreign portfolio investors. There are two major stipulations of the above regulations. The first is the request that non-residents who trade with stocks inthe Republic of Macedonia should open custody accounts in an authorized bank. The second is that anysale of stocks by non-residents within a period of less than 12 months since the purchase of thoseparticular stocks, requires non-resident investors to pay a specific premium on the foreign exchange ratewhen repatriating the proceeds. According to the Decision of 28 March 2003 by the Governor of thepremium paid to NBRM amounts to 3.52 percent over the official exchange rate. The premium isdetermined quarterly. The intention behind this mechanism is to prevent potential negative impact ofspeculative flows of short term foreign capital in and out of the Republic of Macedonia. These kind ofrestrictions, however, do not only have a negative impact on foreign portfolio investment, but can alsohave a negative impact on FDI inflows.




Free trade. The Republic of Macedonia signed a Stabilisation and Association Agreement with the EUin April 2001. The Republic of Macedonia was also admitted to the World Trade Organisation (WTO) inSeptember 2002. Trade reforms carried out in 1996 liberalised the foreign trade regime, and reduced theaverage tariff rates on imports to 15 percent. Import and export quotas were abolished. Free tradeagreements were signed with Slovenia and the FRY in 1996 and with Bosnia and Croatia in 1997. A Tradeand Cooperation Agreement was signed with the EU and came into force at the beginning of 1998. TheCooperation agreement simplified customs clearance and provided for EU assistance for a road-buildingprogramme. Further bilateral free trade agreements have been signed with countries in the region in subsequent years: with Croatia in 1997, with Bulgaria in 2000, with Albania and Bosnia-Herzegovina in2002, and with Romania in 2003. The Republic of Macedonia has also signed free trade agreements withSlovenia, Turkey and Ukraine.

Following the basic WTO principle to eliminate quantitative restrictions on trade, an extensiveliberalisation of trade regimes has been implemented. Given the process of harmonisation of the WTOsectoral agreements on the level of the highest tariff rate, and the bilateral and multilateral negotiationwith the WTO members, it is estimated that the average tariff rate after the WTO accession of the Republicof Macedonia will be 8.1 percent.

Agreements on the Mutual Protection and Promotion of Foreign Investment have been signed with Albania,Bulgaria, Belgium, People’s Republic of China, Taiwan, Croatia, DPR Korea, Egypt, France, Serbia &Montenegro, Germany, Holland, Italy, Luxembourg, Malaysia, Poland, Russian federation, Slovenia, Spain,Sweden, Switzerland Turkey, Ukraine, and an Agreement on the Promotion of Investment with the USA.

The Government of the Republic of Macedonia has signed double taxation agreements with 23 countries,including Albania, Bulgaria, China, Croatia, Czech Republic, Denmark, Egypt, Finland France, Hungary,Iran, Italy, Netherlands, Poland, Romania, Russia, Serbia & Montenegro, Slovenia, Sweden, Switzerland,Taiwan and Turkey, and is negotiating a double taxation agreement with Germany.






Bank Austria CEE Report 1/2003.

Ernst & Young Doing Business in South East Europe.

Macedonian Business Resource Centre Investing in the Republic of Macedonia.

Macedonian Privatisation Agency Foreign Investment Guide.

Macedonian Chamber of Commerce website: http://www.mchamber.org.mk.

Ministry of Finance of the Republic of Macedonia, Bulletin, (no. 3, 2002).

UN ECE Economic Survey of Europe, 2/2002.



NNOOTTEESS

43. The Law on Trading Companies was passed in 1996. A new law is under preparation.

44. Which should be founded by at least 1 and at most 50 shareholders.

45. A minimum of two legal entities may incorporate a joint stock company.

46. An association of two or more legal entities that are personally and jointly liable without limit to thecreditors.


Chapter 8.

MMOOLLDDOOVVAA

1. INTRODUCTION

FDI inflows in Moldova have been rather modest in absolute volumes: US$ 71 million in 1997, US$ 88million in 1998, US$ 34 million in 1999, US$ 127 million in 2000, US$ 149 million in 2001 and US$ 95 millionin 2002 (IMF and EBRD combined data). The cumulative flows of US$ 564 million in 1997-2002 representmore than one third of country’s GDP, but this figure may be misleading, as many privatisation-driven FDIcame through debt-equity swaps.

FDI breakdown by sectors is the following: electricity, gas and water supply absorbed 50.9 percent,food processing 17.3 percent, wholesale and retail trade 10 percent, transport and communication 7percent, finance 4 percent, hotels and restaurants 2.3 percent, construction 2.2 percent, agriculture 1.6percent, real estate transactions 1.6 percent, exploitation of quarries 0.9 percent, and other activities 2.2percent. The major investing country is Russia, with 45 percent of total FDI in Moldova, followed at adistance by Spain and the United States (Department of Statistics, 2002).

2. INVESTMENT OPPORTUNITIES AND BARRIERS IN MOLDOVA

2.1. Investment opportunities and competitive advantages of Moldova as an investment location

Inexpensive labour represents one of the main competitive advantages of Moldova. However, onemust qualify this by the remark that about one third of the workforce, not unlikely the most qualified partof it, has left the country to work abroad.

Almost two thirds of exports are natural-resource-intensive, despite the country not being endowedwith strategic mineral resources. Also, the foreign trade data suggest low levels of intra-industry trade andconsequently of industrial specialisation (Voinea 2002). On the positive side, there are free tradeagreements with the CIS countries, Romania and Bosnia and Herzegovina. Enterprises producingtraditional products, such as wines and tobacco, have been recently put on the list of companies to beprivatised, and they could constitute an interesting target for foreign investors.


The business environment in Moldova is affected by the slow progress in the implementation ofmarket oriented legislation and reforms, and also by the existence of a number of state monopolies.

A survey undertaken on a representative sample of companies points to a series of bureaucraticobstacles to business development that can be particularly disturbing to foreign investors:

(i) administrative price controls; ceilings and price fixing can be imposed by state authorities.(ii) large-scale use of licensing requirements.(iii) lack of recognition of foreign standards (with respect to imported equipment).(iv) high frequency of inspections and large number of authorities, which perform inspections.

Many control authorities have quasi-judicial capacities that may limit, in the end, property rights(World Bank 2002b). By the Government Decision No. 395 from 01.04.2003, the number of fiscal controlsby the state authorities has been limited to 1 within 2 years and for other inspections (StateEnvironmental Protection Agency, etc) to no more than once a year. However feedback suggests that theselimits are circumvented through more frequent inspections under, inter alia, anti-corruption procedures.

3. TRANSITION PROCESS AND FDI STRATEGY/POLICY IN MOLDOVA

Moldova started the transition process from scratch; there were no foreign exchange reserves, nocentral bank, and no market mechanisms – but also no liabilities. After one decade of irregular economicreforms, Moldova is now reportedly the poorest country in Europe, and its economy features a large arrayof vulnerabilities. Net average wages do not exceed US$ 40 a month, one third of the labour force has leftthe country to work abroad, the shadow economy accounts for more than half of GDP (some expertcommentators suggest it may be as high as 70%+), and the country is heavily indebted.

Among the main vulnerabilities Moldova is facing are the significant inflationary pressures (alreadythreatening to become untamed this year), the persistence of huge trade deficits, the excessive foreignindebtedness. The economy definitely lacks the capacity to attract non-debt creating foreign financialsources. Foreign remittances are dominant as a source of foreign financing, while portfolio investmentbalance is negative and the FDI inflow is modest. It is, therefore, of utmost importance to promote anadequate strategy for increasing the country’s capacity to attract FDI. The World Bank’s Country AssistanceStrategy is a step in the right direction. It aims at creating an enabling business environment, byintroducing reforms that promote a level playing field and competition, protect property rights, tightenfinancial discipline, strengthen courts and ensure transparent regulation (World Bank 2002a).

Also, the Investment Compact itself identified in 2002 a number of “critical time-bound targets” to bereached by Moldova in terms of its legislative and regulatory framework: (i) A new foreign investment law(ii) the Civil Procedure Code. (The more market-oriented Civil Code was adopted by Parliament alreadyin June 2002 (Nr. 1107-XV/2002) but due to successive delays in the implementation of the Civil ProcedureCode it came into force only on 12 June 2003); (iii) the establishment of a Competition Agency. (The LawNr 1103-XIV/2000, creating the Competition Protection Agency was adopted by Parliament in 2000. Due todelays in procedural implementation it is not yet functional.). Progress with the targets proposed byMoldova under the Investment Compact has been slower in Moldova than in other SEE countries.

The Government of Moldova, by its Decision 234/ 2002, designed a new investment strategy forMoldova. Main actions envisaged within this strategy are:

a/ Creating a friendly business environment through: (i) harmonisation of Moldova’s legislation withthe EU acquis; (ii) elimination of artificial administrative barriers in the business environment,optimisation of the system of inspections; (iii) simplification and speeding up of the administrativeprocedures for foreigners involved in investment activities (including visa and residence permitprocedures).

b/ Promoting Moldova as an area open to investments through: (i) promoting the “made in Moldova”trademark; (ii) attracting FDI in the area of technological innovations; (iii) attracting FDI case bycase, by policy adaptation to the profile and specificity of interested investors; (iii) publishing an“Investment Guide”.

c/ Easing fiscal pressure, for foreign and domestic investors alike, through: (i) gradual cut on profit taxfrom 28 percent to 15 percent (even to 10 percent if the difference between 15 percent and 10percent is reinvested in production); (ii) unification of the VAT rate to a level of 18-16 percent; (iii)tax holidays for investments in areas identified as representing priorities; (iv) securing stability andtransparency of the fiscal legislation.

8. Moldova



4.1. The existing regulatory framework for FDI in the country

The main piece of the regulatory framework of Moldova related to FDI is the Law on ForeignInvestment No. 998-XII/1992, as amended by subsequent legislation: Law No. 92-XIII/1994, Law No. 197-XIII/1994, Law No. 321-XIII/1994, Law No. 802-XIII/1996 and Law No 1488-XIII/1998. Other relevant pieces oflegislation refer to those dealing with monopolistic activities, business and enterprise, tax code, financialinstitutions. Law on Foreign Investments regulates in a very broad and detailed manner theestablishment, operation etc. of foreign-controlled enterprises. The principle of national treatment is notrecognised in the current legislation. This aspect is, however, addressed now in a new draft law for FDI.Foreigners can own 100 percent stakes in a business registered in Moldova.

Foreign investors in the Republic of Moldova may be: foreign natural persons or legal persons, theirassociations registered in the country of their citizenship or place of residence (permanent place ofbeing), for conducting their entrepreneurial activity; foreign natural persons that are not registered forcarrying out entrepreneurship activity in the country of their residence; citizens of the Republic ofMoldova and persons without citizenship, permanently living outside the Republic and registered in thecountry of their permanent place of residence, for conducting their entrepreneurial activity; foreign states;international organisations.

Foreign investments can take the form of: hard currency or other accepted foreign currency purchasedby the banks of the Republic of Moldova and that make the object of bank operations; machinery,equipment, including office equipment, raw materials and materials; property and non-property rights,including the right on intellectual (industrial) property. Foreign investments in cash into the equity of theenterprise must be transferred to the account of the foreign investor opened with one of the banks ofthe Republic of Moldova or paid in cash. Foreign investments in a non-monetary form should be broughtinto the Republic or acquired on its territory for hard currency or any other foreign currency accepted bythe banks of Moldova.

According to the Law, it is forbidden to use discrimination measures hindering foreign investments,utilisation and liquidation of their objects, as well as export of invested values and values obtained as aresult of investments (income, products, work, services).

The law gives the following guarantees to foreign investors: (i) foreign investors have the right to repatriate after tax profits in hard currency; (ii) a foreign investment cannot be expropriated or nationalised other than through a law or based on the law and only with the purpose of securing the national interest. In case of nationalisation or expropriation an appropriate compensation should be secured; (iii) investors have the right to take outside the country products acquired on the internal market, without payment of taxes or fees and any special authorisation, as long as this does not contravene the legislation in force; (iv) foreign-controlled enterprises established before theadoption of new legislative acts, which change the business conditions for such enterprises, have the right to continue their operations according to the legislation that has been in force at the momentof their establishment, for a period of ten years after the new legislative acts have come into force(Ivanov et al 2002).

The former National Agency for Attracting Investment (NAAI), created through Government DecisionNo. 1172/ 1997, and defined as a permanent state non-commercial co-ordination and expertise service,was reorganised, and a new Investment Promotion Department within Moldovan Export PromotionOrganisation (MEPO) was created. Its objective is to improve investment climate in Moldova and isentitled to propose legal changes in that direction, and also to implement investment projects in thecountry. It also assists local and foreign investors to identify opportunities in Moldova, find reliablepartners for joint ventures, develop investment projects and match them with current interests. In effect,the Investment Promotion Department of MEPO provides the following services to investors:

8. Moldova


a/ Reliable information regarding: sectors and investment opportunities within sectors, companiesand foreign investments (statistics and company level information), government regulations onforeign investments, investment climate and legal issues.

b/ Assistance to investors: organising inward missions with site visits for foreigners, assisting localcompanies in developing investment projects, matching the interests of investors and investmentseekers, participating in negotiations between Moldovan and foreign parties.


Moldovan legislation requires considerable approval and licensing/screening procedures for foreigninvestors:

a/ Registration of a foreign-controlled enterprise. According to Law 1265-XIV/ 2000, companies with foreigncapital must register with the State Registration Chamber. This is similar with the registration fordomestic companies, except for an additional number of documents required for the registrationof the foreign capital company (see section 4.2. of this report). The confirmation of registration,respectively the permission from authorities above, or the justified refusal, must be given to theapplicant in a written form within 30 days from the day of presenting properly processeddocuments. Activity (on investments and construction or current) of a foreign-controlled enterpriseshould begin no later than 6 months from the day of its registration. Beyond that term the organthat registered this enterprise shall declare it insolvent.

b/ Approval for big foreign-controlled companies. Companies with foreign equity exceeding US$ 5 millionmust be approved by the Anti-Monopoly and Competition Department in the Ministry of Economyand Reforms.


FDI legislation does not contain any other specific trans-sectoral discriminatory measures, except forthe ban on buying of agricultural land. Foreign investment may be realised into all branches of theeconomy of the Republic of Moldova provided the following is not violated: state security interests; anti-monopoly legislation provisions; norms of environmental protection, public health, social order and moralnorms.


Foreign-controlled enterprises in the Republic of Moldova may be founded in any organisational form,not contradicting its legislation, as new enterprises or via reorganisation (re-registration) of previouslyformed enterprises. Company regime in Moldova is regulated by the Law on Enterprises andEntrepreneurship (No. 845-XII/1992) and the Law on Joint Stock Companies from 1997. Types ofcompanies allowed are general partnership, limited partnership, limited liability companies, joint stockcompanies and limited partnership by shares. A foreign company may also open a branch. In foreign-controlled enterprises, at least 10 percent of foreign equity share should be in the form of hard currency.

The Civil Code, the Registration Law (1265-XIV/2000) and subsequent regulations detail therequirements for incorporating a company with foreign capital. A foreign company wishing to open anaffiliate in Moldova must present, in addition to the documents required for locally-controlled firms, thefollowing documents: the registration certificate of the parent company abroad (if any); the constitutivedocuments of the foreign company abroad; an excerpt from the Trade Registry of the country of origin; acertificate of financial situation of the company registered abroad, issued by the foreign bank depositingits accounts. Those setting up an enterprise with foreign investments as well as local companies arerequired to obtain conclusions of experts on the technological safety of the venture from the state bodyon environmental protection, the sanitary-epidemiological service, in cases and in the order stipulatedby the legislation of the Republic of Moldova. The imported equipment, including the equipmentcontributed to the share capital, must obtain a certificate of conformity to the standards of Moldova; a

8. Moldova


standard recognition certificate issued by the authorities of the country of investments’ origin does notsuffice (see also section 4.1.1.). Companies with foreign participation are registered at the RegistrationChamber of the Ministry of Justice. The national bank of Moldova carries out the registration of banks withforeign participation and their branches.


Foreign citizens and persons without citizenship may hold management posts in foreign-controlledenterprises without any restrictions.

Foreign citizens have the right, to the extent it is important for their activity in a foreign-controlledenterprises, and if this is not against the interests of national security and order of the Republic ofMoldova, to receive an entrance visa and permission to stay in the country if necessary. This process isseen as considerably more controlled and bureaucratic than in other SEE countries.

4.4. Real estate

Foreigners are permitted to buy real estate property and industrial land (land where industrialfacilities are located) in Moldova, except for agricultural land. Domestic persons have been allowed tobuy agricultural land since 1997; more than one million locals currently own agricultural land.


The Law on Procurement of Goods, Works and Services for Public Needs sets out the legal frameworkfor procurement of goods, works and services by public entities. Suppliers of goods, works and servicesare admitted to participation in the procurement procedures regardless of their citizenship except for thecases where the procurement Agency, in the interest of the state and in accordance with effectivelegislation, takes a decision to restrict tenderers to domestic suppliers (Ivanov et al 2002).



The financial sector in Moldova is relatively underdeveloped. There is low monetisation in theeconomy, stock market capitalisation is only 0.1 percent of GDP, and the banking sector is veryconcentrated, the four largest banks owning 69 percent of total assets. Real interest rates remain high.High borrowing requirements from Government and, as a consequence, the attractiveness of t-bills, lowsupply of domestic savings, high operational costs, high systemic risk make bank intermediation ratherinefficient; in this context, the surge in bank crediting over the last period will likely prove to be of aninflationist nature in the end, as the problems mentioned above can not be solved overnight.

Banks shall be organised as joint stock companies under the Law on Enterprises and Entrepreneurship.Foreign banks are allowed to engage directly in a financial activity in the Republic of Moldova only througha local branch office or subsidiary for which a licence has been issued by the National Bank of Moldova.The granting of a licence by the National Bank of Moldova to branch offices and subsidiaries of foreignbanks is subject to the following requirements: the foreign bank must be authorised to engage in thebusiness of receiving money deposits or other repayable funds in the foreign country where its head officeis located; the competent foreign authorities that supervise the financial activities at the head office of theforeign bank concerned have given their written consent to the granting of such licence; the foreign bankis adequately supervised on a consolidated basis by such foreign authorities.

The licence issued to a foreign bank concerning its branch offices must be revoked by the NationalBank if the foreign bank has lost the authority to engage in the business of receiving money deposits orother repayable funds in the foreign country where its head office is located.

8. Moldova



The telecommunication sector is regulated by the recently established National Regulatory Agency inTelecommunications and Informatics. The agency grants licences for all types of telecommunicationservices. There is no discrimination with regard to the nationality of operators.

The national telecommunication company Moldtelecom is expected to retain its monopoly positionon fixed international communications until the end of 2003.

5.3. Transport

Freight road transport services are fully private, but operators face severe difficulties, especially asthere is only a limited number of permits available for transiting neighbouring countries and as it isimpossible to obtain permits for triangular routes (origin and destination in foreign countries).

Regarding civil air transport, the national airline carrier is partly privatised (40 percent) and the airportsare now legally separated from the national airline carrier. Other private airlines have also been licensedto operate.

The World Bank’s project on Trade and Transport Facilitation in Southeast Europe is aiming to remove,to a large extent, the administrative barriers especially regarding road and railway transport, and to helpimproving the related infrastructure.

5.4. Energy

The sector is regulated by the independent National Agency for Energy Regulation (Electricity Act 2002).The sector’s vertical monopolies were unbundled and budget subsidies for energy consumption have beenbrought in line with budget means and their targeting improved (Country Assistance Strategy, 2002).

Conditions to be an operator to obtain an energy licence in Moldova include registration as a locallegal person. And, the manager of an enterprise holding a licence must be a permanent resident inMoldova.

Union Fenosa, a Spanish investor, bought in 2001 a majority stake in three power distributioncompanies (out of total five such companies) in Moldova; yet, at the time of acquisition, a component ofthe privatisation deal was challenged by the Attorney General. Plans to privatise Termocom, heatingsupplier, were postponed because of another legal dispute.


Foreign investment in Moldova is allowed provided the following is not violated: state securityinterests; anti-monopoly legislation provisions; norms of environmental protection, health of the people,social order and moral norms (Article 4 of the Law on Foreign Investments).

Only state-owned enterprises, not locally or foreign private-owned firms, are allowed to participate inthe following activities: sale and production of narcotics, toxic, and poisonous substances; sale andproduction of combat and special military technical equipment; and some types of medical care andtreatment.

5.6. Other sectors

Licensing activities. There are 42 types of activities where both foreign and domestic private enterprisesmust obtain a state licence; six different levels of licence fees apply to them. The area covered by theactivities subject to licensing is very large; in practice, four out of five companies operating in Moldova

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need such licences (World Bank 2002b). The regime of licences is regulated by Law 45-XV / 2001 andOrdinance 9/05-g / 2002.

Import/export operations. Companies engaging in import and export operations are subject to a numberof restrictive practices. Ordinance 2/2000 introduces the inspection of goods prior to import for anytransaction in excess of US$ 3,000; the inspection fee is 0.8 percent of the CIP price of the goods. It isnoteworthy that this government decision was declared anti-constitutional by the Constitutional CourtDecision 35/2002. Export and import prices are subject to administrative controls. The CustomsDepartment calculates indicative prices for imports and exports that must followed. On average, anexport or an import operation needs 5 days to get customs clearance (World Bank 2002b).


6.1. Privatisation

Moldova has adopted several programs since the privatisation process has begun: (i) a voucher typeof privatisation (1994), through National Patrimonial Bonds (NPBs) in which foreigners were notpermitted to participate; (ii) the second programme (1995-1996), consisted of privatisation throughNPBs, for local persons only, and privatisation through cash transactions for both locals and foreigners;(iii) the third programme, in 1997-1998, extended later on, excluded NPBs. More recent amendmentsalso included a provision to sell bankrupt enterprises or unfinished construction items for the symbolicprice of one Moldovan lei.

According to the Law on Privatisation Programme 1997-1998 (extended up to 31 December 2005),privatisation of public property is carried out through: open outcry auctions with lowering or raising theinitial price; commercial or investment tenders; direct negotiations, when there is only one buyer, ifpreviously the object had been taken off the auction twice; sale of shares at the auction as a singlepacket or separate packets through the domestic or international public offer; compensations tocreditors. Moldovan as well as foreign natural and legal persons can bid in open auctions. Irrespectiveof the privatisation method chosen, foreign buyers must pay for the privatised company by a lump sum,while local buyers have the possibility to opt between lump sum and instalments. However, theprivatisation tenders that occurred during last years show that the Department of Privatisation usuallyprefers all bidders, both local and foreign, pay in lump sums to avoid further lawsuits. Benefits offeredto the buyer by the conditions of tender may not be re-negotiated and changed upon conclusion of thepurchase and sale contract. Given the fact that many of the privatisation deals involved a large numberof benefits, the most frequent one being the debt-equity swap, such a provision perpetuates benefitsgranted to the buyer, and may stimulate his/her anti-competitive behaviour.

Privatisation procedures vary significantly depending on the areas of activity to be privatised: agriculture,adjacent land of privatised companies, construction. Privatisation of the public property in the infrastructuresector of national significance (energy, transport and communications, certain public utilities, such as supplyof drinking water) is carried out based on the individual projects approved by the Parliament.

Privatisation in Moldova is in many cases undertaken in the form of debt-equity swaps. Somerelevant examples include: (i) Gazprom takeover of the majority stake in Moldovagaz in exchange for acut in energy arrears (the deal was evaluated at US$ 50 million; no tender took place); (ii) the Germancompany Mabanaft’s takeover of the majority stake in Tirex-Petrol (largest oil company) in exchange foroverdue energy debts (no tender took place); (iii) EBRD’s acceptance to transform a Euro 8 millioninvestment in Glass Container Company (part of the Wine Export Promotion Project) into equity. Thiskind of FDI projects are often a second best solution for foreign investors, which are somehow forced toswap their claims for equity and do not inject new capital in the troubled local companies.

On the other hand, the promotion of cash-based privatisations is hindered by the gloomy investmentclimate. The lack of strategic resources, the small size of the domestic economy, the widespread

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bureaucracy and corruption (EBRD 2001b) deter FDI. Hence, there is no surprise that 45 percent of all FDIin Moldova come from Russian investors; they are more accustomed with the local environment, and canbetter integrate their investments in regional networks of distribution, since Russia also accounts for alarge share of Moldova’s foreign trade.


6.2.1. Monopolies

According to the Law on Restrictions on Monopolistic Activity and Development of Competition906/1992, the Government is entitled to control the price formation of commodities of the monopolisticproduction and sale. Monopolistic extra profits received from two-fold profitability and higher than thelevel of profitability established by the Government are additionally taxed. The Law does not apply toactivities of enterprises and regulatory bodies whose economic activities are legally defined as statemonopolies. The Law establishes a Committee for Economic Reform (CER) in charge for the observanceand penalising the abuse of dominant position, the coordinated actions limiting competition, and therestrictive practices of the regulatory bodies. Unions and associations must also notify their establishmentto CER. A more recent law, Law 1103-XIV/ 2000 on the Protection of Competition, sets the institutionalframework for the National Agency for the Protection of Competition, who takes over the functions androles from CER. In practice, this agency is not yet fully operational.

To date, there are a number of state monopolies in operation. One of them, the nationaltelecommunication company Moldtelecom, was privatised in 2002 and will retain monopoly on fixedinternational communications until the end of 2003.

6.2.2. Concessions

Granting foreign investors concessions on exploration, extraction and developing of the naturalresources in the Republic of Moldova is an exceptional competence of the Government of the Republicof Moldova and is realised in accordance with its resolutions, the results of international tenders and theconcession agreements signed on their basis. The term of concessions for the exploitation of naturalresources cannot exceed 50 years.

Concession agreements, signed by authorised organs of state control, are necessary for grantingforeign investors the right to use existing objects or objects under construction being a state (municipal)property but not transmitted under economic jurisdiction to enterprises, institutions or organisations, aswell as the granting rights on construction, possession and utilisation of objects being transmitted to thestate (municipal) property upon termination of the co-ordinated term of their maintenance.


The material values that represent contributions to the share capital of a company with foreign capitalare tax exempted, provided that they are not used for other purposes. Foreign-controlled enterprises arealso exempted from customs duties for imported goods (raw materials, half-finished products, etc.) thatare used for the manufacturing of goods to be exported.

Government of Moldova can exchange revenues from local to foreign currency at a preferentialexchange rate for foreign-controlled enterprises, which produce especially important goods substitutingthe imported ones.

6.4. Tax regime

The Tax Code of the Republic of Moldova includes state and local taxes. The main state taxes areincome tax, VAT, excise tax, withholding taxes and customs duties. All legal entities carrying out a business

8. Moldova


activity in Moldova are liable to pay income tax on their taxable profits. For 2003 the standard income taxrate is 22 percent. According to the Action Plan of the Strategy of Economic and Social Development theincome tax rate will be subject to gradual reduction until it reaches 15 percent by the year 2005. This rateis also applied for foreign legal persons operating through a “permanent establishment” in Moldova(Ivanov et al 2002). The following tax exemptions are given to the enterprises:

– Enterprises with less than 20 employees and a turnover below 3 million MLD that operate in thefield of industrial production or services, are exempted from the profit tax, provided that at least80 percent of the sum exempted is reinvested.

– The tax liable income is reduced by 50 percent of the investments made for the purchase/lease orconstruction of fixed assets (except cars and office furniture), but which do not exceed the amountof the taxed income.

– Small enterprises, whose income originates from the sale of own goods or services are entitled to35 percent tax rate reduction for a two-year period.

– Commercial banks providing long-term loans for capital investment intended to finance definedkinds of development projects are exempted from tax on income received on these loans for up to3 years-term at a rate of 50 percent, an at a rate of 100 percent, provided that the loan has beengiven for more than three years.

– Entities with foreign investment after establishment of their authorised capital stock anddeclaration of first income shall be entitled to a 50 percent reduction on income tax for a period of5 years. This reduction in tax covers the entities whose share of foreign investment in theirauthorised capital stock exceed US$ 250,000 and more than 50 percent of their gross income isderived from sale of goods (works, services) of their own production.

– Entities with foreign equity exceeding US$ 1 million, after establishment of authorised capital stock inthe manner provided by the law and declaration of the first income, shall be exempt from income tax fora period of 3 years from the date of signing an agreement with the Ministry of Finance provided that atleast 80 percent of the income tax computed and unpaid to the budget is invested in the developmentof their own production or in governmental programmes and in branches of national economicdevelopment. This exemption is granted to investors who made investments before 1 January 2000.

Standard VAT rate is 20 percent. Other VAT rates are 8 percent, 5 percent and 0 percent. According tothe Action Plan of the Strategy of Economic and Social Development the VAT rate will be subject togradual reduction to reach 16 percent by the year 2005. The following supplies are exempted from VAT: (i)the sale, lease or hire of, or a grant of tenancy in residential premises, land and land with residentialpremises on it, except for commissions from transactions; (ii) the state property bought out inprivatisation deals; (iii) personnel training services and services related to the improvement ofprofessional skills; (iv) all types of licensing, registration and patent fees imposed by the government; (v)services in connection with patent and licensing transactions related to the industrial property (except forthose where a third party/mediator is involved), as well as to obtaining copyright; (vi) financial services;(vii) communal services for the population: water supply, drainage, heating, sanitation, escalatormaintenance charges, etc.; (viii) selected imported goods.

6.5. Free zones

To attract foreign investment and specialists to the sphere of management and production organisation,development of export and import-substituting goods, free production, technical-scientific, transit, bank,insurance and other types of free enterprise zones may be organized. Decisions on organising freeenterprise zones are made by the Parliament upon request of the Government and local self-administrationbodies, taking into account a feasibility report of each such zone. Free economic zones are parts of thecustoms territory of Moldova, separated economically, strictly bounded on the entire area, where certaintypes of entrepreneurial activities are allowed on preferential conditions to local and foreign investors.

In free enterprise zones favourable systems of registration, customs, import-export, tax, currency,credit-financial and other types of activity regulation of foreign-controlled enterprises are established.

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These systems may be extended to individuals and legal entities of the Republic of Moldova situated inthese zones. Types and sizes of privileges, conditions, order and terms of their granting are defined bythe Parliament of Moldova in each free enterprise zone.

According to Law 440-XV/ 2001 on free entrepreneurship zones, the following incentives are grantedwith the aim of attracting investors in the free zones: (i) the regime of contingency/licensing for export andimport is not enforced in these zones; (ii) the tax on profits from exports is 50 percent of the normal taximposed nationwide (11 percent in 2003); (iii) investors investing, respectively, US$ 1 million and US$3 million in a free zone are exempt from profit tax from exports for a period of, respectively, 3 and 5 years.


The liberalisation of foreign exchange operations in Moldova is based on the adopted stipulations ofArticle VIII, Sections 2, 3 and 4 of the IMF Agreement. The national currency Moldovan lei is nowconvertible and economic agents can freely buy and sell foreign currency for all international currencyoperations and for some capital operations.

After payment of taxes, customs and duties:

– Foreign investors and foreign-controlled enterprises have the guaranteed right to use the fundsobtained in local market for the acquisition of foreign currency in the domestic currency market.

– Foreign investors have the guaranteed right to remit abroad their funds in foreign currency obtainedas the result of investment, including: revenues in the form of dividends, interest, payments fortechnical assistance and technical servicing, licence, commission and other similar receipts; sumspaid to investors on the basis of their money orders, as well as other requirements having anyeconomic value; sums obtained by investors arising from the enterprise liquidation, sale,withdrawal of their investments and objects of investment. No other taxes or duties are imposed onthese transfers and they can be paid within six months period without any special authorisation.

– Foreign employees have the guaranteed right to remit abroad their unused wages (salaries) andother incomes in foreign currency obtained by them as the result of their working activity.

6.7. Investment protection and double taxation

Multilateral agreements. Moldova is a signatory to the International Convention on Intellectual Property,signed July 14, 1967 in Stockholm. Moldova signed an agreement of partnership and cooperation with EUin 1994 (entered into force in 1998). Moldova joined the World Trade Organization (WTO) in 2001.

Bilateral Free Trade Agreements. Moldova signed bilateral FTAs with all CIS countries, except Tajikistanand with Romania. It also signed the FTA with Bosnia and Herzegovina, initialled one with Serbia andMontenegro, and is negotiating FTAs with Albania and Croatia.

Investment protection. Moldova signed treaties for promotion and mutual protection of investments withthe following countries: Austria, Azerbaijan, Belarus, Belgium-Luxembourg Economic Community,Bulgaria, Czech Republic, Germany, Finland, France, Georgia, Greece, Hungary, Iran, Israel, Italy, Kuwait,Latvia, Lithuania, Netherlands, People’s Republic of China, Poland, Romania, Russian Federation,Switzerland, Turkey, Ukraine, United Kingdom, United States, Uzbekistan, Croatia, Kyrgyzstan and Tajikistan.

Double Taxation Treaties. Moldova signed treaties for avoidance of double taxation with following states:Azerbaijan, Belarus, Bulgaria, Czech Republic, Estonia, Hungary, Kazakhstan, Latvia, Lithuania, Poland,Netherlands, People’s Republic of China, Romania, Russian Federation, Switzerland, Turkey, Ukraine,Uzbekistan, Canada, Italy, Armenia, Tajikistan and Albania.

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8. Moldova



Center for Strategic Studies and Reform, Monthly Economic Surveys.

EBRD. 2001a. Transition Report 2001. London.

EBRD. 2001b. Strategy for Moldova. London.

IMF. 2002. Republic of Moldova, Staff Report for 2002Article IV Consultation. Washington, D.C.

Bulgaria Economic Forum, Sofia, Investment Guide for Southeast Europe, Ivanov, Eugeniy, Iva Stoykova &Yordanka Palahanova, 2002.

Lubarova, Larisa, Oleg Petrushin, Artur Radziwill. 2000. Is Moldova ready to grow? Assessment of post-crisis policies,CASE Studies and Analysis 220. Warsaw.

OECD and Stability Pact 2002. Progress in Policy Reform in SEE. Monitoring Instruments, SEE Compact forReform, Investment, Growth and Integrity. Paris.

World Bank. 2002a. Moldova, Country Assistance Strategy Performance Matrix. Washington, D.C.

World Bank. 2002b. Moldova, Country Study, Costs of Doing Business Survey. Washington, D.C.

World Bank. 2003. Moldova: Public Economic Management Review, Report 25423-MD. Washington, D.C.

Voinea, Liviu. 2002. Economic Evolution in Moldova: Too Little. But Too Late?, Romanian Academic Society andIDIS Foundation, Moldova Early Warning Report no.1

www.law-moldova.com


Chapter 9.

RROOMMAANNIIAA

1. INTRODUCTION

At the end of 2002, FDI stock in Romania amounted to US$ 9,175 million. FDI inflows increasedsubstantially since 1998, when a total of US$ 5,204 million was invested from abroad (US$ 704 million in1998, US$ 931 million in 1999, US$ 865 million in 2000, US$ 1,371 million in 2001 and US$ 1,333 million in2002) (National Office of Trade Register within the Ministry of Justice data). FDI inflows were particularlystrong in 2001 and 2002. This was due to the positive developments in the economy, privatisation(accounting for nearly half of the FDI stock) the new regulations regarding FDI promotion in Romania andthe setting up of the specialised governmental structure (known as the “one-stop shop"), which all showthe positive attitude of the authorities towards FDI. Foreign investors started to change their positiontowards Romania, perceiving it as a more friendly business environment and becoming more confident inthe Government’s investment policy.

Most of the FDI is in industry (56 percent); followed by services (15.0 percent), wholesale trade (11percent), transport (8 percent), retail trade (5 percent), construction (2 percent), tourism (2 percent) andagriculture (1 percent). Major investing countries in Romania are the Netherlands (17.29 percent),Germany (9.84 percent), USA (7.98 percent), France (7.26 percent), Austria (6.22 percent), and Italy (6.11percent). The above data reflects shares in total FDI stock by the end of 2002 (The National Office of TradeRegister – Ministry of Justice).

FDI penetration in the Romanian manufacturing industry has surged in recent years. Foreign-controlled enterprises account for almost one third of the turnover (29.1 percent as of 2001) and for morethan one third of the share capital (34.8 percent in 2001), as compared to rather modest levels only a fewyears ago (4 percent of share capital and 4.9 percent of turnover in 1995; 10.3 percent of share capital and11.5 percent of turnover in 1998) (data computed using the National Registration Office database).

The following sectors record an above average foreign capital penetration, as a share in their turnover:food industry (32.1 percent); non-metallic mineral products (38.2 percent); metallurgy (38.3 percent in 2001, currently over 90 percent); machines and equipment (30.6 percent); electrical and opticalequipment (49.6 percent); means of transportation (49 percent). Not coincidentally, it was precisely thesesectors that were the ones to record relative productivity gains (sector’s productivity increase exceedingaverage productivity increase) in the period 1995-2001 (Hunya 2002).

2. DETERMINANTS OF EXISTING AND FUTURE FDI INFLOWS IN ROMANIA

2.1. Investment opportunities and competitive advantages of Romania as an investment location

According to the Romanian Agency for Foreign Investments (ARIS), when considering Romania as apossible location for developing their businesses, the foreign investors take into account the advantagesoffered by Romania: (i) large local market (over 22 million inhabitants); (ii) attractive location with an easy access to the countries of the former USSR and at the junction of three prospective Europeantransportation corridors; (iii) well-developed networks of mobile telecommunications in GSM systems;

(iv) well educated, skilled and experienced labour force and relatively low wages47; (v) rich naturalresources, including fertile agricultural land, oil and gas; (vi) extensive maritime and river navigationfacilities; (vii) developed industrial infrastructure, including oil and petrochemicals; (viii) an importantpotential for tourism; (ix) investment legislation, based on free, non-discriminatory access to markets andeconomic sectors; (x) the presence of branch offices and representatives of various well-knowninternational banks; (xi) accession to European Union and NATO, (xii) Functional Market Economy Statusgranted by the US.

The large domestic market, skilled workforce and relatively cheap labour combined with the prospectof joining the EU are attracting to the country an increasing number of investors who are relocating theiractivities from more advanced (and more costly) transition economies.

A possibility to conclude case-by-case contracts with the Government might also have been a factor ofinvestment decision in a number of FDI projects, such as LNM Group, which acquired the largest steelmaker, SIDEX, or Renault, which acquired the largest car maker, Dacia, to mention only two of the mostsignificant deals in the manufacturing sector. In the short and medium run, investment opportunities ofthis kind may appear primarily in connection with the privatisation of energy producers and distributors,as well as with the privatisation of some national companies (e.g. national oil company) required by theagreements signed with the World Bank.


In the early transition years, FDI was rather modest, being affected by a mix of negative factors:legislative instability (in 4 years there had been three laws issued regulating the FDI); lack ofpredictability, a high rate of inflation (three digits), , the state sector represented by the RegiesAutonomes accounting for more than 2/3 of entire economy (Foreign Investors Council).

Administrative bureaucracy, leading to corruption, and frequent changes in legislation makingbusiness plans unreliable, ranked highest among the barriers to FDI among foreign investors. In an effortto change the perception of the investors, the Government of Romania welcomed their suggestions aswell as those of various regional and international organisations including the EU, IMF and the World Bankfor the improvement of its investment climate. The existing legal framework is adapted to the EUrequirements and offers national treatment in many respects to foreign investors, with access to marketsand permission to participate in privatisations, but there are some problems with regard to the lawenforcement. Romania is increasingly improving its regulatory framework including its taxation and foreignexchange systems.

The Global Competitiveness Report 2002-2003 (World Economic Forum), which comprises a cross-countries survey addressing a statistically representative sample of firms (both foreign and domestic),considers that in Romania administrative regulations are burdensome, bureaucratic red tape is wide-spread, the legal framework is inefficient, the protection of intellectual property is still weak, and the taxsystem is highly complex and distortive to business decisions. However, recently there have beenimprovements in the process of starting-up a business as a result of the establishment of a “One-Stop-Office” for the registration of companies, thus reducing the bureaucracy. Progress can also be observedwith respect to the increased transparency of the decision-making process at the level of publicadministration; Romanian authorities, based on the “sunshine law” have begun discussions with therepresentatives of the investors, businessmen, unions and other players in the economic field beforeissuing a new enactment regarding the business environment.

Other barriers to FDI came from the weak enforcement of the competition policy. The GlobalCompetitiveness Report held that government subsidies kept dying industries artificially alive, theeffectiveness of the competition law being considered very limited. Taking into consideration all thesematters, the competent Romanian authority in charge, namely the Competition Council issued newprovisions in the field of state aid, in accordance with the specific EU legislation. (Order No. 16/2003,

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Order No. 252/2002, Regulations from 23/12/2002). The market power inducements associated with directsales also create market barriers, especially entry barriers for other potential FDI flows in the future.

The low level of transparency of the companies listed on the stock exchange, given that internationalaccounting standards are not yet wide-spread in practice, has incurred further entry, exit and mobilitybarriers to capital inflows aimed at the controlling stake in the listed companies. The situation has beenimproving recently, and increased transparency did lead to higher capital outflows in the first stage.

The Foreign Investors Council is of the opinion that, in order to increase FDI, Romania mustdemonstrate to potential investors that the Rule of Law will protect their investments and theircontractual relationships. Lately, the framework is more stable and the current issue is the area of lawenforcement (e.g. effective implementation of Bankruptcy Laws.) State owned loss-making companiesshould be closed down using bankruptcy laws. FIC members are concerned about unfair competition fromloss-making State enterprises that are being subsidised by the GOR, and by certain privileged privatecompanies, which have been able to reschedule and/or cancel significant debts to the State.

2.3. Determinants of future FDI trends

Future FDI inflows in Romania will basically depend on the speed and scope of the transition and EUintegration process. Taking into consideration investment opportunities offered by Romania, the constantimprovement of transition indicators and the institutional convergence with the EU, which will smooth outthe administrative barriers and transform the business environment to a more friendly, familiar one forforeign investors (especially for the EU-based FDI, which represent two thirds of FDI stock accumulatedin Romania), FDI will continue to be attracted.

Opportunities to strike case-by-case contracts with the authorities will continue to play a major role asan FDI trigger. Privatisations in the energy fields will be likely to offer such opportunities. Moreover, thereare still some “jewels of the crown” left to be privatised in manufacturing and services; worth mentioningare the national oil company, Petrom, and two large state owned banks, BCR and CEC.

3. TRANSITION PROCESS IN ROMANIA AND FDI STRATEGY AND POLICIES

3.1. Current status of transition process and major tasks

Romania started the transition process at a disadvantage compared to most of those countries that arenow in the “first wave” of accession. The resulting “path of dependency” was aggravated by stop-and-gopolicies. Nevertheless, the goal of EU accession has played the “anchor” role for the direction ofdevelopment of the Romanian economy. Romania was invited to start EU accession negotiation inDecember 1999, and intends to finalise these negotiations by the end of 2004. The “Roadmap foraccession” provided by the European Commission (www.eu.int) and received by Romania at theCopenhagen Summit in December 2002, supports Romania’s efforts to join the EU by 2007.

Romania has recently recorded significant progress in macroeconomic terms, with decreasing inflation,increasing foreign reserves, higher production levels, improved country risk and country debt ratings;efforts have also been taken towards a generally more friendly business climate. Nevertheless, manyreforms are still ahead. They are outlined in the above-mentioned “Roadmap for accession". Specificmeasures to comply with the reform objectives, convergence-driven, are described in the Government’s“Plan of Measures for Supporting the European Integration 2003-2004” (www.gov.ro).

As far as the investment climate is concerned, the former Ministry of Development and Prognosis hasagreed with the World Bank on a “Plan of Actions for the Removal of Administrative Barriers from theBusiness Environment", which is currently being implemented. The establishment of ARIS represented oneof the main provisions of this plan, and it was also mentioned as a critical time-bound target by themonitoring instruments of the South East Europe Compact for Reform, Investment, Integrity and Growth

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(Stability Pact, 2002). Consequently, ARIS was established as a specialised governmental body of the centralpublic administration responsible for implementing the Government’s policy of promoting and attractingforeign direct investments. Its mission is to attract and to retain the foreign capital in the Romanian economyas a result of a friendly and attractive business environment for developing investment projects. ARISprovides information on investment opportunities, legal advice, and assists potential foreign investors toidentify business partners and implement investment projects. One of the tasks undertaken by ARIS, to befinalised by end of 2003, is to identify the possibilities for improving the mechanism for recording FDI data.

Measures recently taken with the aim of removing administrative barriers from the businessenvironment include:

– Establishing a “One-Stop-Office” for the registration of companies, thus reducing the bureaucracyand administrative procedures for the registration and authorisation process for companies(Government Ordinance No. 76/2001 regarding the simplifying of some administrative proceduresfor the registration and authorisation of the companies)48.

– Simplification of the authorisation procedures for start-ups, replacing in most cases the ex-anteapprovals with declarations and ex-post controls (introduced by Law 370/2002 for the Approval ofthe Government Ordinance No. 76/2001 regarding the simplifying of some administrativeprocedures for the registration and authorisation of the companies).

– Extending the level of information and consultation with the business community in the process ofmaking legislative proposals and increasing the transparency of the decision-making process at thelevel of public administration (introduced by Government Decree 396/2002 and Law 52/2003regarding the decision-making transparency in public administration, known as the “sunshine law")49.

– A Committee of Mediation for litigations in the privatisation and post-privatisation phases wasestablished, comprising government and business representatives (introduced by Law 137/2002regarding some measures for the acceleration of the privatisation process)50.

– Removal of the administrative barriers, diminishing corruption, and the promotion of quality publicservices. The authorisation is considered granted if the administrative public authority does notreply to the applicant in the period of time provided by the law. (Government EmergencyOrdinance No. 27/2003 regarding Silent Approval Regulation).

– Fighting against corruption by establishing the Anti-Corruption National Prosecutor’s Office (Law No.503/2002 for the Approval of the Government Emergency Ordinance No. 43/2002 regarding the Anti-Corruption National Prosecutor’s Office).

– Anti-Corruption Package (Law No. 161/2003 regarding some measures for transparency in exercisingof the public dignities, public functions and business environment, preventing and sanctioning thecorruption).

– Issuance of the Government Emergency Ordinance No. 28/2002 approved by Law No. 525/2002 (asrevised) regarding the securities, financial investment services, and regulated markets.

Other measures foreseen to improve the business environment are:

– The elaboration of a unitary Fiscal Code and Fiscal Practices Code (including a set of norms ofconduct for the tax authorities) by the end of 2003.

– The elaboration of the norms referring to the enforcement of the corporate governance legislation.– The appropriate enforcement of the new Labour Code recently adopted and starting from

March 1, 2003, for providing the labour market flexibility.– The reform of the judicial system for providing an effective independent judicial system.

The Foreign Investors Council has a fairly clear view on how the developments in the above areasshould proceed in order to improve the business environment:

a/ The labour market flexibility. The new Labour Code is a comprehensive piece of legislation thathas a wide impact on virtually all Romanian companies. The Labour Code tends to be restrictiveand not well suited for companies operating in a market economy51.

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On this subject the major recommendations of the Foreign Investors Council include:

(i) Elimination of the provision of a wage guarantee fund.(ii) Consideration of the 48-hour workweek as an average within a one year period.(iii)Simplification of the documentation requirements associated with hiring new employees and

dismissing existing employees.(iv) Elimination of the requirement to pay a premium to employees who agree to a “non-competition

clause”.(v) Limitation of the role of trade unions in managerial decisions and leaving the management of the

business to the company itself.

b/ The Foreign Investors Council supports the recommendation on enforcing a unitary Fiscal Codeand Fiscal Practices Code by the end of 2003. The Council believes that the two Codes should beprepared in parallel and that the Fiscal Procedures Code should represent a Code of Conduct forthe Tax Authorities.

c/ The reform of the judicial system. The aim is to have in Romania an effective independent judicialsystem. Court decisions in Romania associated with commercial litigation lack consistency,timeliness and clear rulings based on sound legal argumentation. If the Romanian courts want toparticipate in the resolution of disputes, the government must develop a credible judicial systemthat meets the expectations of its trading partners. If the government does not develop thissystem, then justice will be “externalised” and a foreign arbitration clause will become common ininternational contracts, thus denying the opportunity for Romanian judges to take their place in theinternational community and help contribute to the creation of a level playing field.

Fighting corruption

Fighting corruption has been identified by both the government and the investor community as oneof the priorities for attracting FDI. Domestic corruption practices, lack of institutional capacity to properlyfight corruption and a weak enforcement record represent significant deterrents for foreign investors.Moreover, the perceived level of corruption among the enforcement institutions raises serious questionsas to the credibility and effectiveness of the efforts put in place to combat domestic corruption. The legalframework of anti-corruption in Romania, especially regarding prosecution, is still evolving, thus creatinguncertainties and sometimes, inconsistencies among different legal acts. However, there is a largeconsensus among Romanian officials, national and foreign business representatives and the donorcommunity that the main challenge of the fight against corruption currently is not as much in the existinglegal provisions, but rather in their implementation.

In response to wide-spread concerns of the business community and the population, the Romaniangovernment has developed a National Anti-Corruption Strategy which enjoys high-level political support.Comprehensive legal and institutional reforms and a consolidated action plan aiming to locate, preventand eradicate corruption have been defined. The results of their implementation are still to come and willtestify for the readiness of the government and the institutions to respond in a practical way to theexpectations of investors and the public at large. As mentioned earlier, a concrete outcome of the widelypublicised government efforts is the National Anti-Corruption Prosecution Office (NAPO), which wasestablished in 2002 in order to focus on implementation and address existing institutional weaknesses.NAPO together with other parts of the government are currently attempting to increase the financial andhuman resources at all levels of the fight against corruption, ensure the timely adoption of pending billsand streamline the mandates of the various institutions involved in the prevention and detection ofcorruption cases.

The Romanian authorities consider that the exchange of information and experience on national,regional and international developments and initiatives is important for fighting corruption effectively.Thus, Romania is a part of the main regional anti-corruption initiatives underway and benefits from anti-corruption programmes put in place in partnership with international and bilateral bodies. More

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concretely, the OECD has agreed to intensify its co-operation with Romania in fighting corruption, throughsustained OECD support to national initiatives, involving targeted participation and advice from officialsand practitioners from OECD countries. In that context a Joint Declaration on Co-operation in CombatingCorruption was signed on 17 March 2003 by the OECD Deputy Secretary-General and the RomanianMinister of Justice. Initiative and follow-on activity here by Romania is awaited.


A stable framework for FDI policy did not exist in Romania for much of the early transition period..Between 1991 and 2001 there were many different laws and government ordinances dealing directly withprivatisation and foreign investment issues. Positive discrimination has been associated with imposingconditions; administrative barriers have remained significant over a long period and fiscal incentiveshave varied a lot.

Macroeconomic conditions also played a role in policy adaptation. At the beginning of the process oftransition to the market economy, due to the disappointing economic performance and country rating,the Romanian authorities provided special incentives to FDI to compensate these disadvantages.Gradually, as the economy recovered, GDP increased and Romania became a more stable country, theincentives were reduced, bringing them more in line with the EU regulation in this area. Thus, during1997-1999, the laws on foreign investment with positive discrimination of foreign investors wereenforced. In 1999 the State decided unilaterally to cancel all investment incentives already granted. Thedecision damaged not only the future investment plans but also the confidence of the potentialinvestors and the international image of Romania at this time as a stable and an attractive place forinvestments (Foreign Investors Council).



The legal framework for foreign investment in Romania is provided by the following laws: commercialregister law (1990 as revised), commercial company law (1990 as revised), free trade zones law (1992), localtaxes (2002), petroleum law (1995 as revised), copyrights and neighbouring rights law (1996 as revised),competition law (1996 as revised), government ordinance on leasing (1997, as revised), bank privatisationlaw (1997, as revised); government ordinance on privatisation (1997 as revised), stimulation of directinvestments (1997 as revised), mines law (2003), stimulation of private SMEs (1999, as revised); valueadded tax law (2002); privatisation of tourism companies (2001); law concerning the promotion of directinvestments with significant impact on economy (2001), tax on profit law (2002), law on establishment andoperation of industrial parks (2002), law on government procurement (2001 as revised), law on public-private partnership (2002), regulations regarding state aid (2002).

The Romanian legislation provides national treatment to foreign investors, i.e. equal treatment – fair,equal and non-discriminatory – for Romanian or foreign investors, resident or non-resident in Romania.Non-resident investors thus benefit from the same rights as any resident investor. These rights andguarantees are: (i) the freedom of investment forms and methods, (ii) the possibility of investing in anyfield and under any juridical form provided by the law; (iii) the guarantees against nationalisation,expropriation or any other measures with similar effect; (iv) the right to benefit from customs and fiscalincentives set forth by the law; (v) the right to obtain assistance in filing administrative formalities; (vi) theright to own movable and immovable assets, excepting the land which may be acquired by Romaniannatural or legal persons; (vii) the right to elect the competent court or arbitration authorities to settlepotential investment-related disputes, etc.

Non-resident investors additionally benefit from: (i) the right to transfer abroad without any restriction,after paying the due legal rates and taxes, dividends, incomes and proceeds resulting from the activities

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in Romania, (ii) the right to receive the most favourable treatment provided either by the Romanianlegislation or agreement for mutual guarantee of investments, or another law.

Generally, there is equality between foreign-controlled enterprises and local investors with respect toestablishment rights or scope of activity. There is no discrimination against foreign investors and/orforeign controlled enterprises as such. However the rule of law, which is a fundamental aspect of afunctioning market economy, is not met, mostly due to the lack of a trustworthy legal system that providesequality before the law, and perhaps most importantly for Romania, the uniform enforcement of existinglaws. In Romania, there are no ab initio restrictions, no ceilings or trans-sectoral performance requirements.Nor is there any prohibition (double tax treaties and other similar agreements may provide in fact morefavourable conditions). Also, when Romania is party to bilateral agreements for the mutual promotion andprotection of investment with other countries and when the provisions of such agreements are morefavourable than the Romanian investment legislation, then investors from such countries benefit from theprovisions of these agreements.

Approval/licences must be obtained in some areas (e.g.: energy, oil, mining, banks, fishing) fromregulatory/supervising bodies, but they are equally applied to local firms and foreign-controlled enterprises.

Special measures are taken, quite rarely, on a case by case basis. In certain cases, specific Governmentdecisions may prevent foreign-controlled enterprises from gaining control over certain entities. Forexample, the electricity distribution privatisation will begin with the sale of a minority stake to a foreigninvestor and the foreign investor will be allowed to have the majority stake through a capital increase ata later stage. The same method was already used in the case of the national telecommunication company;this precedence was, however, not based on fulfilling some performance requirements. These twoexamples have in common the fact that the privatised companies are/were monopolies at the time thedeal was concluded. Such behaviour of a government when selling state-owned companies can, however,not be considered as having a discriminatory nature against foreign investors.


The types of corporate organisation defined by Romanian company law encompass general andlimited partnerships, limited liability companies and joint stock companies. Foreign investors inRomania can organise their businesses in Romania in the same organisational forms as domesticinvestors; in other words, they can establish branches and open representative offices. Branches areworking units with no legal personality, while representative offices cannot carry out commercialactivities on their own behalf.

In accordance with the new anti-corruption legislative package adopted by Law No. 161/2003, arequirement has been introduced for joint stock companies, irrespective of the structure of theirownership, to increase their share capital to a minimum of EUR 25,000 by the end of 2005.


Foreign citizens may carry out economic, social, cultural, sport and commercial activities in Romania ontheir own or in association. Furthermore, they may be employed by Romanian or foreign legal persons orindividuals (Government Emergency Ordinance No. 194/2002 regarding the Foreigners Status in Romania).

Foreigners in Romania can be employed on the basis of work permits issued by the Ministry of Labourand Social Solidarity. Foreign citizens doing business in Romania must prove that they meet theconditions to stay in Romania to obtain the residence permit52. This does not apply to EU citizens.

Romania has unilaterally abolished visa requirements for 21 OECD states, with five other OECD statesbilateral agreements are under negotiation, and there are proposals to eliminate visa requirements forthree remaining OECD countries (Australia, Mexico, New Zealand).

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4.4. Real estate

Foreign natural and legal persons may not own land in Romania. They may, however, acquire otherlegal rights over land, such as the right of use, obtained by way of concession (Romanian Constitution,Government Emergency Ordinance 92/1997, as amended by Law 241/1998). By establishing a company inRomania and acquiring the status of a Romanian legal person, irrespective of the foreign equity share inthe company, foreign investors can acquire ownership rights over real estate, including land. Also, aforeigner can buy land if s/he has Romanian citizenship, even if s/he does not live in Romania.


According to Law 212/2002, Government procurement in Romania is governed by the principles of freecompetition, efficient use of public funds, transparent procedures, equal treatment, and confidentiality.Foreign companies (including suppliers, subcontractors and main contractors) are treated on the samelevel as domestic enterprises provided that there is mutual treatment. .

The contracting authorities have the right to request to the main contractor that 30 percent of the totalcontracts undertaken be attributed to designated third parties. Given the potential for discriminationresulting from such a provision, thoughts are being given at Government level to amend it.



The Romanian financial system is based on the banking sector, which holds more than 95 percent ofthe total assets in the system. The banking sector witnessed a series of major failures during the lastdecade, which diminished its credibility. The banking system has been improved in recent years, but itsstrength will have to be tested over a longer period of time.

Compared to other transition economies, the Romanian financial sector is still under-performing,primarily in terms of financial intermediation (low monetisation – 23 percent of GDP, low domestic credit– 13 percent of GDP, low stock market capitalisation – 4 percent of GDP) and insufficient development ofnon-banking financial markets.

Foreign capital ownership in total banking capital rose to 58.7 percent by the end of 2002 versus 35.8percent at year-end 1998. Alongside the increased presence of foreign capital, the solvency ratio grew,and non-performing loans went down dramatically. The system is sounder today than it has ever beenduring the transition. Nevertheless, the size of the banking sector is small: bank assets representapproximately 30 percent of GDP. In the banking system, there are 32 commercial banks and 8 branchesof foreign banks. Banking concentration in Romania is fairly high: the five biggest banks held more than65 percent of total assets, 55.6 percent of loans and 79.4 percent of T-Bills portfolio (as of end of 2001).

Following the series of bank failures in the second half of the 1990’s, current prudential regulationsare based on best practice. The regulations in this field, though incomplete, do come into line with theEU norms.

Banking. To establish a bank or a branch of a foreign bank in Romania, an authorisation must beobtained from the National Bank of Romania; no distinction is made between local and foreign entities.The minimum share capital required to establish a bank is approximately EUR 8 million. Members of theBoard of a bank must be authorised by the National Bank of Romania. Existing Romanian bankinglegislation requires that at least one of the Board members of any commercial bank must be a Romaniancitizen. The National Bank of Romania wanted thereby to ensure more effective supervision of the activity of banks. This requirement will, however, be eliminated by new legislation currently under preparation.

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Insurance. An authorisation from the National Union of Insurance Companies, (an agency reporting tothe Ministry of Finance), is required to found an insurance company. No distinction is made between localand foreign entities.

Securities. Securities and other non-banking financial companies operating on the capital market mustbe authorised by the National Securities Commission, (an independent body reporting to Parliament)There is no distinction made between local and foreign entities. Prior authorisation, also from the NationalSecurities Commission, is required for public issues.


Romtelecom, the country’s national telecom company, was sold to a strategic foreign investor and theGovernment kept a golden share in the company. Afterwards, the telecom market was closed for fiveyears. Recently, the Government gave away the golden share, thereby liberalising the market, which isnow free for other operators who need to obtain a licence from a designated governmental body.

5.3. Transport

According to Law 412/2002 on civil maritime transport, free and non-discriminatory access ofinternational maritime and fluvial transport of goods and/or persons is permitted in Romanian harbours,irrespective of the nationality of the ship registration. Ships, irrespective of their flag, when findingthemselves within Romanian territorial waters, must comply with the dispositions of the RomanianMaritime Authority – a public agency in charge with the supervision, design and implementation ofmaritime regulations.

Provided that the required technical standards are fulfilled, the right to fly the Romanian flag is givento: ships owned by Romanian physical or legal persons; ships owned by foreign physical or legal personswho have their residence, respectively their affiliate company registered in Romania; ships owned by foreign physical or legal persons, leased or rented in the bare-boat regime to Romanian physical or legal persons.

Within Romanian territorial waters, the following activities can be undertaken solely by ships flying theRomanian flag: carriage to Romanian harbours; cabotage from one local harbour to another local harbour;assistance and rescue operations; removal of wreckages; fishing; works for realisation and continuation ofhydro technical constructions; resources’ exploration and exploitation. Nevertheless, ships registeredunder foreign flags can engage in fishing, and in resources’ exploration and exploitation, provided thatcompetent authorities issue an approval. For the other types of operations mentioned above, shipsregistered under foreign flags may be used, provided that Romanian ships are not available, or nottechnically fit for those operations.

Regarding civil air transport, approvals are needed from the Civil Aeronautic Authority to engage inair transport. There is no discrimination made between local and foreign entities in the approval grantingprocedure.

5.4. Energy

Approval procedures and restrictions exist in the energy sector, but they do not discriminate betweenlocal and foreign entities. The current degree of market openness is, depending on the type of energy,between 15 percent and 33 percent. The National Energy Strategy envisages the full privatisation of theproduction and distribution of thermal energy by the end of 2004, and gradual privatisation ofdistribution and production of electric energy. The first two major sales of energy-producing facilities arescheduled for 2003. Public announcement has already been made, with letters of intention beingreceived solely from large foreign companies .

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There is no different treatment of foreign and local investors in the field of security. In fact, themodernisation of army planes was jointly developed with a foreign firm. As Romania has been invited tojoin NATO, compliance with the alliance’s military standards will further enhance co-operation with foreigncompanies.

5.6. Other sectors

Mining and quarrying. Approval is needed from the government to engage in mining and quarrying butthere is no discrimination between local and foreign entities. Principles of transparency and competitionare applicable, irrespective of the origin of the capital. Exploring licences are granted for a 3 year period,subject to specific taxes.

Agriculture, fishing and forestry. Quotas are applied in forestry and fishing, but there is no discriminationbetween local and foreign entities. Nor is there discrimination between foreign and local investors in thegranting of subsidies.

Radio, TV, publishing. To engage in radio, TV or publishing a licence is required from the NationalAudiovisual Council and there is no discrimination between local and foreign entities. The largest twoprivate TV stations are majority owned by foreign-controlled enterprises.

Gaming, lotteries, lotto and casinos. Investing in gaming, lotteries, lotto and casinos requires approval fromthe Ministry of Finance and certification of standard compliance; there is no discrimination betweenforeign and local investors.

Legal services. Foreign lawyers/law firms are not allowed to operate independently. They may onlyoperate in joint ventures with Romanian lawyers/law firms. Accountants/ accounting firms are not subjectto any similar measures.

6. OTHER RELEVANT ELEMENTS OF THE FDI FRAMEWORK

6.1. Privatisation

Law 58/1991 set the framework for privatisation by creating two new institutional tools: (i) The StateOwnership Fund, a public institution administering the State’s stockholdings, representing 70 percent ofthe share capital of all companies subject to privatisation; (ii) five regional Private Ownership Funds,organised as joint stock companies, administering the remaining 30 percent of the share capital of allcompanies subject to privatisation; this 30 percent was to be freely distributed to the population, dividedinto millions of vouchers with an equal nominal value.

Despite numerous changes in privatisation-related legislation, these two institutions have made theirmark on the privatisation process. The State Ownership Fund, initially designed to function for no morethan seven years, prolonged its activity and was renamed in 2001 as the Agency for Privatisation andAdministration of State Stakeholdings (APAPS). From a portfolio of over 7,000 state companies in 1993,less than 400 of them were still to be privatised by the end of 2002. The Private Ownership Funds werelater (1996) transformed into Financial Investment Societies and currently represent major players on theBucharest Stock Exchange.

Privatisation has usually been seen as a cure for state-owned companies’ lack of efficiency, and for thecentral budget’s lack of funds. Privatisation creates better conditions for restructuring, frequently viaimproved corporate governance and capital inflows. Yet, as a number of cases in Romania show,privatisation is not a success story ipso facto, due to a number of reasons: unfriendly market conditions,unfair competition, union pressures, compensatory mechanisms unfamiliar to the new owners, or just

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because the new owner is unable to change the loss-making characteristics of the privatised company.Nevertheless, privatisation can be perceived as an indicator of the scale at which restructuring occurs inan economy, in the form of resource reallocation.

Historically, the main methods of privatisation employed were:

a/ MEBO – Management and Employees Buy Outs (prevailing between 1993-1996, with a peak in1994), the first serious privatisation effort pursued nation-wide, had a big shortcoming: it did notprovide for significant capital inflows. At the time of privatisation, this was somehow normal, giventhe scarcity of indigenous capital. This however, changed in the later stages, when the new owners(managers in most cases) tried to prevent employees from trading their shares. Intruders were keptat a distance – but so too were potential capital inflows. Even when it was possible to trade shares,the outsiders were reluctant to invest in companies with significant insider ownership that werealso operating in an environment with underdeveloped corporate law and disclosure rules.

b/ Vouchers – The Mass Privatisation Programme (mainly in 1995) was a voucher-type system of assetsdistribution. A problem appeared precisely from the “too little and too many” feature of theprogramme – lack of earnings for the government, and lack of incentive for the shareholders.Corporate governance problems appeared as a result of the diffusion of control within theprivatised companies. This, in turn stimulated trade with vouchers on the black market.

c/ Direct sales (predominant in the period 1996-1998; direct sales accounted for respectively 68.7percent of all privatisation deals in 1996 and 81.6 percent in 1997, and for 65.8 percent of largeprivatisation deals in 1998). The prevalence of direct sales in 1997 and 1998 was probably linkedto the “hunger” for foreign exchange that the country faced in those years. A large part of theprivatisation-related FDI stock was accumulated between 1997 and 1999, when direct sale was byfar the prevalent method. Foreign-controlled enterprises were the main beneficiaries of thismethod, as they had the best bargaining capacities due to their global reach.

Direct sales presuppose a phase of direct negotiation with a selected investor; in the process ofnegotiation, various market power inducements are likely to be granted by the state to the investor. Fearshave been expressed that inherent competition problems can appear in the post-privatisation stage,deterring potential capital inflows from other investors. Evidence of the existence of post-privatisationproblems can be seen by the fact that APAPS has taken investors to court in numerous privatisation files;3,885 cases (irrespective of the method of privatisation) were opened as of end of 2002.

The so-called “golden share” retained by the state has sometimes accompanied the direct salesmethod, but this practice is to be dropped, as it contravenes with the provisions of EC C220/1997. Thecontrolling golden shares will be transformed into normal shares.

d/ Auctions (used on a wider scale since 1998) were intended to eliminate disputes over theprivatisation price, as it had to be the best price offered, not the absolutely best price. However,the method runs the risk of receiving offers that may prove politically unacceptable. The lack of auniform method of evaluation also introduces the risk of subjectivity.

e/ Privatisation through capital market channels had relatively modest results, in line with the modestperformance of the Romanian capital market institutions. The slow privatisation prospects areindicated through the Bucharest Stock Exchange, for example in those cases where typical portfolioinvestors acquired the majority stake in a listed company, mainly in order to protect their initiallower investment either from poor management in the absence of privatisation, or from anotherinvestor that wouldn’t like strong minority stakeholders.

Out of the aggregated FDI stock in the Romanian economy, about half came as a result of privatisationdeals (49 percent, according to WIIW 2002). Privatisation revenues have dropped in recent years, as ashare in GDP (from 1.8 percent in 1998 to 0.2 percent in 2002). The reasons for this drop are a) thedecreasing number of deals concluded (from over 1,000 per year between 1997-1999 to slightly above 100per year in 2001 and 2002), and b) an expanding GDP. This does not mean that privatisation is no longer

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occurring; 47 percent of all assets in the economy are still under the administration of the regies autonomesand national companies; also, some large companies are under the administration of separate authoritiesother than APAPS.

According to the APAPS Report 2002, privatisation revenues in 2002 amounted to US$ 84.8 million, anda further US$ 250 million was committed to investments (only partly undertaken in the same year); mostbuyers were local investors. Considering an annual volume of FDI of around US$ 1 billion, it means thatalmost 9 out of 10 US$ in FDI in Romania over the last year resulted from greenfield investments. Earlierratios between privatisation and greenfield flows were much more balanced (between 50 and 60 percent,according to EBRD Report 2001 and WIIW 2001). While privatisation deals may attract foreign capital for anumber of various reasons (reselling, closure of a competitor, reactive behaviour, skipping theintermediate stages in the process of firm internationalisation, market power inducements granted inbargaining with state representatives, etc), in the case of greenfield investments there is no substitute foran attractive business environment.

2001 marked the success of privatising SIDEX (to the Indian-British LNM Group), the largest steel makerin SEE and also the largest black hole of the Romanian economy. A recent analysis of this privatisation(Voinea and Dancau 2003) suggests that such a success story cannot be replicated unless a mix of conditionsis met: a commodity-type of industry, or at least an industry with an appetite for consolidation, an existingdemand for the company’s products, and a global reach investor with a focus on emerging markets.

Law on Privatisation Speed Up No. 137/2002 allows for privatisations for the symbolic price of oneEuro; the precedence has not yet been created. The programmes concluded with the World Bank, PSAL Iand PSAL II, request the privatisation of some “black holes” of the economy, some energy units and of theremaining “jewels of the crown” (Romanian Commercial Bank – BCR, Petrom).


6.2.1. Monopolies

There are no monopolies imposed by law in Romania at this time, only natural monopolies exist. Theregulatory authority, the Competition Council, ensures by constant monitoring that the abuse of suchmonopolistic position does not occur. (This is based on the Competition Law 21/1996)

Examples of monopolies that have now been broken down can be found in the banking sector, wherea state monopoly from 1990 has been transformed to a 60 percent foreign owned sector today, or in thecement industry (a special case, as natural monopolies exist here given the fact that transportation costsoutside a certain limit are prohibitive), which is now 100 percent controlled by three foreign-controlledenterprises. The monopoly in fixed telecom (granted for five years to a foreign-controlled enterprise) wasalso eliminated as of January 1, 2003.

6.2.2. Concessions

The following are all subject to concessions in Romania: assets; activities and public services in thefields of public transportation infrastructure; facilities and infrastructure related to water and energyresources, public lands; free trade zones; exploitation of mineral resources and substances solid andfluid; exploitation of thermal resources; natural resources of the economic zone of maritime andcontinental plateau; sports grounds, entertainment places, specialised show establishments; medicalunits, sections and laboratories of those units, as well as auxiliary medical services; economic activitiesrelated to capitalising historical monuments and sites; gathering, storage and valuation of waste; anyother goods, activities or public services that are not prohibited by special laws.

Any Romanian or foreign individual or legal entity is eligible to benefit from concessions. (Ivanov2002). Consequently, there is no discrimination between foreign and local entities. Areas that can not besubject of concessions are (i) public goods and services that are not dealt with by regulating authorities

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(their approvals being compulsory with regard to prices and tariffs); (ii) public goods and services that areforbidden to operate under concession by specific laws.


Romania has a number of specific schemes for the promotion of investment. These schemes do notdiscriminate between foreign and local investors. In June 2001, Romania adopted the Law No. 332/2001dealing with the promotion of direct investments with significant impact on the economy. This refers tothose investments (i) with a value exceeding the equivalent of US$ 1 million, (ii) made in the forms andways provided by the present law (iii) that contribute to the development and modernisation of theRomanian economic infrastructure (iv), that determine a positive spin-off effect in the economy and (v)that create new jobs.

The following cumulative conditions must be met by a project in order for it to qualify as one withsignificant impact: (i) it must be initiated after the Law 332/2001 has entered into force, (ii) it is performedby local or foreign currency liquidities, (iii) it is completely finalised in 30 months at the latest in relationto their statistical registration with the Ministry of Development and Prognosis, (iv) it does not breach theenvironmental protection legislation, does not endanger national security, and does not violate publicorder, health or good morals. New direct investments with significant impact on the economy can be madein all economic sectors, except for the financial, banking, insurance and re-insurance sectors as well as thesectors regulated by special laws. Investors are bound to preserve their investment for at least 10 years;otherwise, tax arrears must be paid. Any qualifying project is eligible for the following incentives:

a/ Exemption from the payment of custom duties for: the technological machinery, installations,equipment, measuring and control apparatus, automation equipment and software productspurchased from Romania or abroad, necessary for achieving the investment. The latter must beaccording to the list approved by the joint Order of the Minister of Development and Prognosisand Minister of Public Finances These goods must also be new, i.e. they must have been produced1 year at most prior to their arrival in Romania and they must never have been utilised.

b/ Delay in the payment of value added tax, according to the regulations in force, respectively untilthe date of 25th of the following month after the start-up of the investment for the new goods,imported or Romanian, necessary to achieve the investment, until its putting into operation(reinforced according to the Law no. 345/2002 regarding the VAT).

c/ Deduction of 20 percent of the value of the new investments, made according to the provisions ofthe present Law, fiscally calculated in the month the investment is completed (valid untilDecember 31, 2004, according to the Law no. 414/2002 regarding tax on profit)

d/ Carrying forward the fiscal loss during the following 5 years from the taxable profit.e/ The use of accelerated depreciation, according to the specific legislation in force, with no

obligation for a prior approval from the local fiscal authorities (valid until December 31, 2004, afterthis date becoming a general incentive granted to all investors/investments according to the Lawno. 414/2002 regarding tax on profit).

The Law also provides that in the case that the investors are eligible to benefit from different schemes ofincentives, they have to choose only one regime of incentives (e.g. to choose to benefit from the incentivesprovided for investments with significant impact on the economy, or industrial parks or free zones, etc.).

Besides the above, Romania also applies incentive schemes for operating in disadvantaged zones andfor SMEs. These schemes combine fiscal and other measures:

a/ Disadvantaged zones. Disadvantaged zones must meet following criteria: local unemployment levelat least three times higher than the national level for the last three months before declaring itdisadvantaged; the region is isolated, lacking communication means and appropriateinfrastructure; the region is strictly defined in geographical limits, and has been established for aperiod of between 3 and 10 years.

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Incentives for investing in disadvantaged zones: (i) exemption from payment of custom duties for rawmaterials imported for investment activity in the area; (ii) exemption for the payment of charges leviedfor changing land destination or removing land from the agricultural circuit; (iii) postponement of VATpayment for new (produced maximum one year before, and never used) technological equipmentimported.

b/ SMEs. Incentives for SMEs include: (i) postponement of VAT payment until the 25th day of themonth following full investment for new, technological equipment imported (never used andproduced a maximum of one year before; (ii) the use of accelerated depreciation, according to thespecific legislation in force, for machines, installations, equipment and know-how, providing thatthe enterprise does not register losses.

Romania also provides a number of incentives for investors on the local level (see Annex B).

6.4. Tax measures

The Romanian Law on the Stimulation of FDI granted a number of customs and fiscal incentives toforeign investors. Legislation introduced in 2002 was aimed at levelling the playing field in the area oftaxation and increasing the tax base. VAT and profit tax incentives granted by prior legislation aretolerated in certain cases, for a limited period of time (until the ceasing of a disadvantaged zone, whichis the subject of negotiations with the EU, and for five years in the case of free trade zones). The few fiscalincentives still in place, detailed below as the main characteristics of the tax system in Romania aredescribed, make no discrimination on the origin of the capital; they equally apply to foreign and localinvestors.

a/ Corporate income tax. All legal persons doing business in Romania are liable to pay corporate incometax on their taxable profits. The actual profit tax rate is 25 percent, and is applicable to bothRomanian incorporated companies and to foreign legal persons operating through a “permanentestablishment” in Romania. A provision, reducing the tax rate on profits from export activities to 5percent only, has been modified; the profit tax rate on exports grew to 6 percent in 2002, 12.5percent in 2003 and will level to the 25 percent rate in 2004. According to law 414/2002, abrogatingall previous laws and regulations referring to the profit tax regime, a five year loss carry forwardperiod is allowed.

b/ Individual income tax is levied on the gross salary as well as on other salary related rights. The globalindividual tax rate is 40 percent for salaries exceeding approximately US$ 260 (11.600.000 Lei),according to the Ordinance No. 7/2001 and Law No. 493/2003 regarding the income tax. Foreigncitizens working on foreign employment agreements are required to calculate and pay income taxand register monthly income tax declarations with the Romanian tax authorities (Ivanov et al 2002).

c/ Social contributions. Employers have to pay various social contributions such as health insurance6.5 percent, pension 9.5 percent, unemployment 1 percent, etc. all calculated as a percentage ofthe gross salary. Foreign citizens working in Romania on a work permit and a labour contractregistered with the Labour Office are required to pay the Romanian social contributions (Ivanovet al 2002).

d/ VAT. A 19 percent VAT rate is applicable. Law 345/2002, abrogating all other previous laws andregulations referring to the VAT regime, stipulates: (i) VAT exemption for in-kind contributions tothe share capital of companies, (ii) zero VAT rate for export, (iii) for SMEs, disadvantaged zones and(under certain conditions) industrial parks: postponement of VAT payment until the 25th day of themonth following full investment for new (produced maximum one year before, and never used)technological equipment imported (see below), (iv) postponement of VAT payment, for a periodof up to 120 days, for technological equipment imported for the development of new investmentsor expansion of existing investments.

e/ Withholding taxes. Non-resident legal persons and individuals obtaining income from Romania aresubject to the following main withholding taxes, if not otherwise stipulated by internationaltreaties: (i) 10 percent on interest (bank deposit interest paid by Romanian banks is the exception,

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(ii) 15 percent on royalties, commissions, revenues obtained from technical assistance and mostother services if they are performed in Romania and revenues from international transportactivities, (iii) 10 percent on dividends.

The Foreign Investors Council calls attention to the existing differences in the treatment of varioustaxpayers. The best example in this respect is the lack of enforcement of tax collection. The Council arguesthat this will continue to be a problem if the government serves as a creditor to State-owned companiesor private companies. In addition, delayed payment of taxes is an attractive alternative for some privatecompanies, when the penalties for non-payment are less than the interest charged by banks. Accordingto the Council, the Romanian tax authorities also often have a very aggressive attitude and approach whendealing with foreign investors. In many cases, tax “controls” (or audits) are carried out over very longperiods of time and may lack specific objectives. When carrying out controls, the tax authorities oftenignore the substance of a transaction in favour of interpreting laws to the disadvantage of the taxpayer.Reportedly, tax collectors are paid salary bonuses for collecting additional taxes, which can lead tounsound tax claims that can consume large amounts of taxpayers’ time and resources to defend. A “codeof conduct” for the tax authorities should be embodied in the new Code of Fiscal Procedure to clarify therights and obligations of both taxpayers and tax inspectors. The code should include an arbitrationmechanism as an alternative to lengthy and costly court hearings.

6.5. Free zones and industrial parks

Free zones. The activities carried out in free zones benefit from the following incentives: (i) exemptionfrom payment of custom duties and other taxes for the imported transportation means, merchandise andother goods coming in or out from the free zones; (ii) exemption from payment of custom duties for theRomanian materials and accessories utilised for producing goods, coming into the free zones; (iii)exemption from payment of custom duties for the Romanian goods utilised in construction works,repairing and maintenance activities; (iv) exemption from payment of custom duties for carrying thegoods from one free zone to another; (v) all financial transactions carried out in hard currency for theactivities developed in the free zones.

According to Law 414/2002, taxpayers that operate based on licences in free trade zones can benefitby exemption from payment of profit tax for a 5-year period running from the date when the present lawcomes into force. This is on condition that they have made investments in the aforementioned zones intangible assets used in the processing industry, amounting to at least US$ 1 million, by the date that thepresent law comes in to force. This provision ceases to apply when changes occur in the shareholdingstructure of the taxpayer. As regards companies listed on the Stock Exchange, a change is deemed to haveoccurred in the shareholding structure if over 25 percent is modified during a calendar year.

Industrial parks. According to Law 490/2002, industrial parks are limited zones in the boundaries ofwhich economic, scientific research and/or technological development activities are performed by usingthe human and material potential available in the region. The industrial park licence may be grantedonly to companies acting solely in the industrial parks management business, referred to as managingcompanies; specific conditions should be met by the land on which the park is built. Incentives foroperating in industrial parks are: (i) exemption from payment of charges levied for changing landdestination or land removal from the agricultural circuit, applicable to the park managing company; (ii)a 20 percent deduction from the taxable profit of the value of the investment performed in the industrialpark. Such an exemption is applicable only to construction investment activity for transport anddistribution of electric and thermal power, natural gas and water. For accounting purposes deductionscan be calculated only for the month in which the investment was commissioned, by recording it in thetax statement under the deductible expenses of the company; (iii) postponement until the 25th day ofthe month following full investment of the VAT payment obligation, for materials and equipmentnecessary for the park’s connection to main roads or existing utilities networks or the providers of suchfacilities; (iv) the carrying forward of the fiscal loss from the taxable profit, during the following 5 years;(v) a delay in deduction of VAT until the month following the start-up of the industrial park for the

9. Romania


investing companies. To date, 11 industrial parks have been established, including one in Bucharest andanother one in Cluj-Napoca.


Romanian Lei (ROL) is fully convertible for business purposes. Foreign investors may freely repatriateprofits and dividends in hard currency. Proceeds from the sale of shares, bonds, or other securities, as wellas from the winding-up of an investment can also be repatriated. There is no limitation on the inflow oroutflow of funds for remittances of profits, debt service, capital gains, returns on intellectual property orimported inputs. Capital exports, although permitted by law, are generally discouraged.

The major characteristics of Romanian foreign exchange controls are: (i) Romanian legal persons areallowed to make payments on current account transactions from their hard currency accounts without anyprior approval, (ii) capital transactions between residents and non-residents may require a prior approvalor a notification to the National Bank of Romania, (iii) Romanian and foreign entities may freely buy andsell hard currency on the inter-bank foreign exchange market, though specific documentation is usuallyrequired (Ivanov et al 2002). In the context of the EU negotiations) Romania has adopted a detailedcapital account liberalisation programme (see Annex A).

6.7. Official aids and subsidies

In theory, there is no discrimination between types of firms as far as official aids and subsidies areconcerned but in practice, treatment varies from case to case. Granting procedures are not alwaystransparent, especially in privatisation contracts. The lack of transparency in granting various types ofmarket power inducements tends to lead to corruption allegations.

6.8. Investment protection and double taxation

Trade agreements. Romania is a member of the WTO, has concluded an Association Agreement with theEU, a Free Trade Agreement with EFTA countries, a CEFTA Agreement and Free Trade Agreements withIsrael, Moldova Lithuania, and Turkey.

Multilateral and regional instruments. Paris Convention for the Protection of Industrial Property of 20 March1883, as amended and revised; the New York Convention on the Recognition and Enforcement of ForeignArbitral Awards of 10 June 1958; the Convention on the Settlement of Investment Disputes between Statesand Nationals of Other States of 18 March 1965, signed on 24 Mars 1975, effective 1 June 1991;the ILOTripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, adopted on16 November 1977; the Set of Multilaterally Agreed Equitable Principles and Rules for the Control ofRestrictive Business Practices, adopted on 5 December 1980 by the General Assembly of the UnitedNations (resolution 35/63); the Convention Establishing the Multilateral Investment Guarantee Agency of11 October 1985, signed on 30 September 1996; the Declaration on International Investment andMultilateral Enterprises, adopted by the Council of the Organisation for Economic Co-operation andDevelopment on 21 June 1976, the Declaration and the Guidelines for Multinational Enterprises attachedto the Declaration were revised on several occasions (1979, 1984, 1991 and 2000); the Agreement onTrade-Related Aspects of Intellectual Property Rights, signed on 15 April 1994; in force on 1 January 1995;the General Agreement on Trade in Services, signed on 15 April 1994; in force on 1 January 1995(includingthe Fourth Protocol to the General Agreement on Trade in Services of 15 February 1997 and the FifthProtocol to the General Agreement on Trade in Services of 12 December 1997 and the Energy CharterTreaty of 17 December 1994, effective since 16 April 1998.

Bilateral investment treaties for the protection and promotion of investments: Sudan 1978, Gabon 1979, Cameroon1980, Senegal 1980, Sri Lanka 1981, Malaysia 1982, Bangladesh 1987, Tunisia 1987, Mauritania 1988, Ghana1989, Italy 1990, Republic of Korea 1990, Uruguay 1990, Cyprus 1991, Israel 1991, Kuwait 1991, Norway1991, Turkey 1991, Finland 1992, Jordan 1992, Republic of Moldova 1992, United States 1992, Argentina

9. Romania


9. Romania


1993, Australia 1993, Czech Republic 1993, Hungary 1993, Portugal 1993, Russian Federation 1993,Switzerland 1993, Thailand 1993, United Arab Emirates 1993, Algeria 1994, Armenia 1994, Bulgaria 1994,China 1994, Croatia 1994, Denmark 1994, Egypt 1994, Lebanon 1994 Lithuania 1994, Morocco 1994,Netherlands 1994, Paraguay 1994, Peru 1994, Philippines 1994, Poland 1994, Slovakia 1994, Turkmenistan1994, Vietnam 1994, Albania 1995, Belarus 1995, Bolivia 1995, Chile 1995, France 1995, Mongolia 1995,Pakistan 1995, Spain 1995, Tunisia 1995, Ukraine 1995, United Kingdom 1995, Serbia and Montenegro 1995,Austria 1996, Canada 1996, Cuba 1996, Ecuador 1996, Germany 1996, Kazakhstan 1996 Malaysia 1996, Qatar1996, Slovenia 1996, Belgium / Luxembourg 1996, Uzbekistan 1996, Georgia 1997, Greece 1997, India 1997,Indonesia 1997, Israel 1998, Democratic People’s Republic of Korea 1998, Yemen 1999, Republic ofMacedonia 2000, Mauritius 2000, Bosnia and Herzegovina 2001, Latvia 2001, Sweden 2002 and Azerbaijan2002.

Bilateral treaties for the avoidance of double taxation: with Germany 1973, United States 1973, France 1974,United Kingdom 1975, Austria 1976, Belgium 1999, Denmark 1976, Japan 1976, Sweden 1976, Finland 2000,Italy 1977, Canada 1978, Pakistan 2001, Egypt 1979, Netherlands 1999, Spain 1979, Norway 1980, Cyprus1981, Morocco 1981, Malaysia 1982, Jordan 1983, Sri Lanka 1984, Turkey 1986, Bangladesh 1987, India 1987,Tunisia 1987, China 1991, Greece 1991, Ecuador 1992, Kuwait 1992, Nigeria 1992, Syria 1992, CzechRepublic 1993, Hungary 1993, Luxembourg 1993, South Africa 1993, Switzerland 1993, Zambia 1993,Albania 1994, Algeria 1994, Poland 1994, Slovakia 1994, Malta 1995, Armenia 1996, Uzbekistan 1996, Serbiaand Montenegro 1996, Belarus 1997, Georgia 1997, Turkey 1997, Israel 1999, Bulgaria 1996, Russia 1996,Moldova 1997, Lebanon 1998, Philippines 1998, Indonesia 2001, Ireland 2001, Israel 1999, Portugal 2000,Kazakhstan 2001, Namibia 2001, Syria 1992, Thailand 1998, Ukraine 1998, Vietnam 1997, Australia 2002 andMexico 2002.

9. Romania



Bulgaria Economic Forum, Sofia, Investment Guide for Southeast Europe 2003, Ivanov, Eugeniy, Iva Stoykova &Yordanka Palahanova. 2002.

EBRD. 2001. Transition Report 2001. Energy in transition, London.

European Commission, Roadmap for accession of Bulgaria and Romania, (www.eu.int)

Government of Romania. 2002. Plan of Measures for Supporting the European Integration 2003-2004 (www.gov.ro)

Hunya, Gabor. 2002. Restructuring through FDI. The case of Romania. WIIW Working Paper 279. Vienna: WIIW.

Ministry of Development and Prognosis. Plan of Actions for Improving the Business Environment (www.mdp.ro)

Voinea, Liviu, Bogdan Dancau. 2003. The SIDEX case. Can others follow?, Policy Warning Report 1/2003.Buchures: Romanian Academic Society.

WIIW. 2002. Handbook of statistics, Vienna.

World Economic Forum. Global Competitiveness Report 2002-2003. Geneva.

Other sources (databases, direct communication, comments and suggestions)

Foreign Investors Council National Bank of RomaniaNational Office of Trade RegisterRomanian Agency for Foreign InvestmentsRomanian Chamber of Commerce

Questionnaire respondents:

Florin Tudorie, Ministry of Foreign Affairs, Director of Business EnvironmentRichard Florescu, World Bank (Romania)Business Environment Task ForceDorin Mantescu, Ministry of Finance, Adviser to the MinistryGheorghe Oprescu, Competition Council, Vice-PresidentBogdan Dancau, PricewaterhouseCoopers (Romania), Senior ConsultantDan Vladescu, Vladescu & Vladescu (law firm), Partner

9. Romania


NNOOTTEESS

47. According to the Foreign Investors Council, when considering labour costs, one should include notonly the wages but also the related taxes that represent 52 percent additional costs.

48. According to Foreign Investors Council, the one-stop-shop proved to be, from the practical point ofview, a very bureaucratic process which lengthened the registration period from one week before thesystem was implemented to three weeks at present.

49. Prior Consultation on Draft Legislation is one of the major concerns of the Foreign Investors Councilmembers. The consistent implementation of Government Ordinance 396/2002 and Law 52/2003,which require that draft legislation affecting the business environment be submitted for comment tointerested parties, will help ensure a transparent and predictable process of creating legislationbased on dialogue and consideration for all stakeholders’ interests. This process will lead tocomprehensive, clear and transparent laws, which may be implemented in a fair and equitablemanner for all players. At the momesnt despite the fact that the two above mentioned pieces oflegislation are enforced the implementation is still informal.

50. Foreign Investors Council is not aware of such Committee of Mediation. The Agency for Privatisationand Administration of State Stakeholdings (APAPS) developed a procedure for improving the post-privatization regime.

51. In 2003 the Romanian Government decided to amend the Labour Code (see also the SummaryConclusions of the Economic Retreat “Investment, Growth and Sustainable Development: Romania –The Way Ahead", Snagov, 14-15 June 2003)

52. The Government Emergency Ordinance No. 194/2002 asks foreigners who want to obtain a residencepermit to prove that they possess a minimum of EUR 100,000. The aim of this ordinance is to restrictimmigration from low income countries and it is a threshold for residence permits and not forinvestment purposes.


Annex A.

SScchheedduullee ooff CCaappiittaall AAccccoouunntt LLiibbeerraalliissaattiioonn ooff RRoommaanniiaa

TTyyppee ooff ccaappiittaall TTyyppee ooff ooppeerraattiioonnss SSttaattuuss ooff lliibbeerraalliissaattiioonnfflloowwss

BByy ccaappiittaall nnaattuurree ((mmaattuurriittyy))

Long term flows Direct investments, inward and outward* Free

Real estate investments, inward and outward* Free

Purchase of land by non-residents Subject of derogation after EU accession

Financial loans and credits, granted by residents to non-residents and by non-residents to residents, with maturity over 1 year Free

Sales and issue of bonds, shares and other securities dealt on the capital market, by residents, irrespective of maturity Free

Purchase of bonds, shares and other securities by non-residents, irrespective of maturity Free

Purchase of bonds, shares and other securities dealt on the capital market, by residents, irrespective of maturity Free from 1.01.2003

Sales and issue locally of bonds, shares and other securities dealt on the capital market, by non-residents, irrespective of maturity Free from 1.01.2004

Short term flows Financial loans and credits, granted by residents to non-residents Subject of NBR authorisation, and by non-residents to residents, with maturity less than 1 year except for banks, free from 1.01.2003

Commercial credits related to international commercial transactions, by residents to non-residents and by non-residents to residents Free

Guarantees by non-residents to residents Free

Guarantees by residents to non-residents Free from 1.01.2003


Purchase of bonds, shares and other securities by non-residents, irrespective of maturity Free


Sales and issue locally of bonds, shares and other securities dealt on the capital market, by non-residents, irrespective of maturity Free from 1.01.2004

Personal capital transfers** Free

Personal loans and credits granted by residents to non-residents Free from 1.01.2003

Transfers in performance of insurance contracts Free

Operations in Lei deposit accounts opened by non-residents Free from 1.01.2004

Operations in deposits abroad by residents No later than accession

Physical import and export of financial assets Free, except for cash; cash payments free from 1.01.2004

Sales, issue, purchase of securities and other instruments dealt on the money market, by residents and non-residents No later than accession

BByy ccaappiittaall ddeessttiinnaattiioonn

Capital inflows Inward direct and real investment* Free

Purchase of land by non-residents Subject of derogation after EU accession

Financial loans and credits granted by non-residents to residents, Freematurity more than 1 year

Financial loans and credits granted by non-residents to residents, Subject of NBR authorisation, exceptmaturity less than 1 year for banks, free from 1.01.2003

Commercial credits granted by non-residents to residents Free

Guarantees by non-residents to residents Free

Annex A.



Purchase of bonds, shares and other securities dealt on the capital market, by non-residents, irrespective of maturity Free

Personal capital transfers Free


Physical import of financial assets Free, except for cash; cash payments free from 1.01.2004

Purchase of securities and other instruments dealt on the money market, by non-residents No later than accession

Sales and issue of securities and other instruments dealt on the money market, by residents No later than accession

Capital outflows Outward direct and real estate investment Free

Financial loans and credits granted by residents to non-residents, maturity more than 1 year Free

Financial loans and credits granted by residents to non-residents, Subject of NBR authorisation, exceptmaturity less than 1 year for banks, free from 1.01.2003

Commercial credits granted by residents to non-residents Free

Guarantees by residents to non-residents Free from 1.01.2003


Sales and issue locally of bonds, shares and other securities dealton the capital market, by non-residents, irrespective of maturity Free from 1.01.2003

Personal capital transfers

Personal loans and credit granted by residents to non-residents Free


Physical exports of financial assets Free, except for cash; cash payments free from 1.01.2004

Operations in deposits abroad by residents No later than accession

Sale and issue of securities and other instruments dealt on the money market, by non-residents No later than accession

Purchase of securities and other instruments dealt on the money market, by residents No later than accession

TTyyppee ooff ccaappiittaall TTyyppee ooff ooppeerraattiioonnss SSttaattuuss ooff lliibbeerraalliissaattiioonnfflloowwss

BByy ccaappiittaall ddeessttiinnaattiioonn

Annex A.


Annex B.

IInncceennttiivveess GGrraanntteedd BByy tthhee LLooccaall AAuutthhoorriittiieess iinn RRoommaanniiaa ttoo IInnvveessttoorrss ((NNoo DDiissccrriimmiinnaattiioonn BBeettwweeeenn FFoorreeiiggnn aanndd LLooccaall CCaappiittaall))

Country Incentives

ALBA X X X X

ARGES X X X X X

BACAU X

BIHOR X X X

BISTRITA – NASAUD X X

BOTOSANI X X

BRASOV X X X X X

BRAILA X X X

BUZAU X X X X X

CARAS- SEVERIN X X X X X X X X

CALARASI X X X X

CLUJ X X X X X

COVASNA X X X X

DAMBOVITA X X X

GALATI X

GIURGIU X X X X X

GORJ X X X X X

HARGHITA X X X X X

HUNEDOARA X X X X X X

IALOMITA X X X X X

IASI X X X X X

MARAMURES X

MEHEDINTI X X X X X

MURES X X X X

NEAMT X X X X X

OLT X X X

PRAHOVA X X

SALAJ X X X X X X X X

SIBIU X X X X X

SUCEAVA X X X X

TELEORMAN X X X X X

TIMIS X X X X X

VASLUI X X X X X X

VRANCEA X X X X X

RReedd

uuccttiioonn// eexxeemmpp

ttiioonn ooffttaaxx pp

aayymmeennttss,, llooccaall ttaaxxeess//

ffoorr aa ttiimmee pp

eerriioodd ((11))

FFiieellddss iidd

eennttiiffiiccaattiioonn ffoorriinnvveessttmm

eennttss ((lloowweerr pp

rriiccee,,ttaaxxeess eexxcceepp

tt..,, ttaaxxeess,, ffoorr aanneeggoottiiaabb

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ttiilliittiieess ((ccoo

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SSee

lleeccttiioo

nn oo

ff hhuu

mmaann

rreessoo

uurrccee

ss ffoorr tthh

ee iinn

vveess-

ttoorrss ((qq

uuaalliiffiiccaattiioo

nnss

rreeqq

uuee

sstteedd

bbyy iinn

vveessttoo

rrss))

RReedd

uuccttiioonn wwiitthh 5500%%

ooffbb

uuiillddiinnggss ttaaxxeess// ffiieelldd

ss ––nneeww

iinnvveessttmmeennttss ((22))

CCoo

nnccee

ssssiioonn

// ffiieelldd

ss ssaallee//

bbuu

iillddiinn

ggss ooww

nnee

dd bb

yy LLoo

ccaallCC

oouu

nncciill ((33))

DDiissaadd

vvaannttaaggee

dd aarree

aass

OOtthh

eerrss ((44))

Reduction or exemption of tax payments and local taxes for a certain time period (1 – 3 years; 5 years;8 years; 10 years; reducing by 50 percent of local taxes; reducing / exception of tax payments until theproduction begin; tax exception for take out of the fields from the agricultural area).

Reducing with 50 percent of buildings taxes/fields for the new investments (10 years).

Concession / fields sale / buildings owned by local council patrimony (reducing with 50 percent of thefields concession taxes / buildings – first 5 years of functioning, for the manufacturing investments andservices; field concession without tax payments for the first 10 years of functioning; fields concession forinvestments until 49 years; exception of concession tax payments for a period of 5 years).

Negotiable incentives provided by local authorities, different by counties: (i) Services may bedetermined by agreement with the potential investor; (ii) Braila free zone – incentives granted accordingto the Law no. 4 / 1992; (iii) industrial park establishment by the Local Councils Ploiesti, Iasi, Timisoaraand Galati; (iv) Free logistic support for identification of fields and owners; (v) Supplementary incentivesbased on negotiations; (vi) Construction materials: sand, stone, etc; (vii) Fields for construction inprofitably conditions; (viii) Areas of Mina Ruschita (now closed) for investors; (ix) Reducing of land saleprice with around 50 percent in comparison with market price; (x) Improving fields before beginning of theinvestments; (xi) Business incubators and development centre for professional ability; (xii) Incentives toobtain the construction authorizations and permits, locally; (xiii) Free fields provided to those who investin the production, services; (xiv) Free assistance and consultancy for investors for establishment andregistration of the commercial company; (xv) Reducing of period to obtain the urban certificate,construction authorizations; (xvi) Provided with plans about urban utilities, by Geographic InformaticsSystem in Timis County.


Annex B.


Chapter 10.

SSEERRBBIIAA AANNDD MMOONNTTEENNEEGGRROO

NOTE ON RECENT CONSTITUTIONAL CHANGES

A new constitution (Constitutional chapter) was adopted in February 2003 that changed the name ofthe federal state to the State Union of Serbia and Montenegro. According to the constitution, Serbia andMontenegro shall be a single subject of international law and a member of international, global andregional organisations, the membership of which is contingent on international personality.

This new constitution establishes the competencies of the two Republics of Serbia and Montenegro ina variety of areas, while maintaining crucial powers on state-level. According to the Article 40 of the newConstitution, “The Minister of Foreign Affairs shall carry out and be responsible for the conduct of theforeign policy of Serbia and Montenegro, negotiate international treaties .... and co-ordinate theformulation of foreign policy with relevant bodies of the member states.” According to Article 41, “TheMinister of Defence shall co-ordinate and implement the defined defence policy and shall run the armedforces in accordance with the law and the powers vested in the Supreme Defence Council....". Apart fromthat the Minister of International Economic Co-operation of the State Union shall be responsible fornegotiating and co-ordinating the implementation of international treaties, including treaty relations withthe EU and the co-ordination of the relations with international economic and financial institutions (Article43), and the Minister for Internal Economic Co-operation shall be responsible for the co-ordination andharmonisation of the economic systems of the member states for the purpose of the establishment andunhindered operation of the common market, including a free movement of goods, services, people andcapital (Article 44). This single market, i.e. a level playing-field for economic operators throughout thestate, is clearly enshrined in the Constitutional Charter (Articles 12 and 13). According to the newConstitution, the number of federal institutions and bodies will be reduced, and some responsibilitiesshould be transferred to the Republics.

The specific legal situation in Serbia and Montenegro is in need of additional normative andimplementation clarity, transparency and coherence between the two states in order to provide a normallegal environment for foreign investors. On the political level, there is a climate of constitutional and legaluncertainty despite the recent constitutional agreement the State Union of Serbia and Montenegro. Thisnew constitution provides for a radical decentralisation of power to the republic level. But in practice,Serbia and Montenegro laws and policies are currently to a large degree implemented only in Serbia.

Laws established under the Federal Republic of Yugoslavia (FRY) should be automatically taken overby the new State Union, except where they contradict with the provisions of the Constitutional Charter.

The main goals of Serbia and Montenegro will include: (i) equality and the rule of law, integration inEuropean structures, the European Union in particular, (ii) harmonisation of its legislation and practiceswith European and international standards, (iii) introduction of a market economy based on freeenterprise, competition and social justice, and (iv) establishment and assurance of an unhinderedoperation of the common market on its territory through co-ordination and harmonisation of the economicsystems of the member states in line with the principle and standards of the European Union.

The individual national treatment reviews of Serbia and Montenegro are presented below.

SSEERRBBIIAA

1. INTRODUCTION

FDI inflows in Serbia in the period 1992-2002 totalled US$ 1,700 million, out of which US$ 1,210 millionin privatisation and US$ 490 million in other types of FDI (greenfield, etc.). During the 1990s, due toeconomic sanctions against Yugoslavia, there was only one FDI project, i.e. in the privatisation of theSerbian Telecom (PTT). Although a considerable number of foreign investors have shown the interest toinvest in Serbia after the democratic changes in the country, the inflow of FDI in 2001 was relativelymodest (US$ 160 million), which can be explained by the fact that the investment climate in the countrywas still very unfavourable. Fast progress in reforms and the intensification of privatisation process, withthe important role of foreign strategic investors, resulted in considerable increase in FDI inflows in 2002(US$ 550 million), with good prospects for further increase in 2003.

2. DETERMINANTS OF FDI INFLOWS

Although Serbia (as part of the former Yugoslavia) had a favourable experience with the inflow ofprivate foreign capital until the early 1990s, the situation changed significantly after the collapse of theformer Yugoslavia and the imposition of sanctions on the newly created Federal Republic of Yugoslavia(FRY). During the ten-year period of isolation, the inflow of this kind of foreign capital was almostsuspended, while international trade and financial flows were largely cut off. This has contributed to asharp fall in investment activity and erosion of existing capital stock.

During the past decade, due to economic sanctions against the FRY, there was only one FDI – in theprivatisation of the Serbian Telecom (PTT). However, this investment had no favourable developmenteffect as could be expected from the privatisation of telecommunications by a foreign private firm. And,the privatisation revenues were spent by the previous regime to cover current expenditures rather thanany type of investment.

After the establishment of the new, democratic government in the country, the process of reforms wasstarted to accelerate the process of transition to a market economy.

The inflow of FDI in 2001 was relatively modest, despite a frequent optimism of a part of the Serbianpublic, which could be explained by the fact that the investment climate in the country was still veryunfavourable. The adoption of a list of laws, important for the improvement of a legal environment forFDI in Serbia, (including The Foreign Investment Law and Privatisation Law as two most importantamong them) had positive effects on the inflow of FDI. The intensification of privatisation process withthe important role of foreign strategic investors, resulted in the increase of FDI in 2002, with goodprospects for a further increase in 2003.

10. Serbia and Montenegro


Table 5: FDI inflows in Serbia in 2001-2003, in EUR million

YYeeaarr:: 22000011 22000022 PPrroojjeeccttiioonnss ffoorr 22000033

TOTAL FDI FLOW, of which: 160 550 1,000

Privatisation FDI inflow 350 700*

Greenfield FDI inflow and Other 160 200 300

* This amount of privatisation related FDI is expected if the planned privatisation of Beopetrol, Telecom and Mobtel occurs.

Source: Official statistics of Serbia and Montenegro. The estimations for 2003 made by the Serbian Ministry of International EconomicRelations.

2.1. Investment opportunities and competitive advantages of Serbia as an investment location

The most frequently quoted elements of Serbia’s competitive edge are: (i) an improving macroeconomicstability and progress in reforms and transition, (ii) favourable geographic location at the heart of SouthEastern Europe, (iii) one of the biggest market in the region with growth potential and developed consumermentality, (iv) high quality of human capital both in the country and in the diaspora, (v) low labour costs, (vi)accelerated outsider oriented privatisation programme, (vii) high GDP growth prospects (5.5 percent in 2001,4 percent in 2002, and about 5 percent in 2003), (viii) low Corporate and Personal Income Tax rates.

Intensified outsider oriented privatisation process in Serbia, according to which all socially ownedcapital has to be privatised by June 2005, is an important potential opportunity for strategic foreigninvestors. Regarding the low labour costs, Serbia’s comparative advantages are mostly in labour intensiveindustries, especially in food processing, textile, wood, shoe production, mechanical engineering andconstruction materials industry. Investment opportunities can also be found in the forthcomingprivatisation of infrastructure, especially when re-privatisation of Telecom and privatisation of energysector are in question. Investment in information and telecommunication technologies and transport canbe potentially interesting sectors for FDI as well.


The most serious investment barriers which might discourage foreign investors in Serbia are: (i)political and economic risks of investment (including the unclear/uncertain relationship withMontenegro), (ii) lack of adequate infrastructure, (iii) underdeveloped financial market, (iv) improving butstill weak banking sector, (v) insufficient management culture, (vi) high bureaucracy, (vii) underdevelopedinstitutional infrastructure, (viii) high transportation costs and other service charges, (ix) extremelycomplicated and long procedures for issuing urban and building permits, as one of the most seriousobstacles for FDI in greenfield projects, (x) improving but still inappropriate legal environment (incl.constitutional issues)

Lack of adequate physical infrastructure in Serbia, as a result of permanent disinvestment in thissector during the 1990s, can be considered as serious barrier for FDI inflows as well. As governmentbudget cannot provide sufficient funding for the needed investment in this sector, elimination ofmonopolies and privatisation of this sector will result in more intensive investment and improvement ofthe quality of services in this area. This sector is still mainly under state control (except for SerbianTelecom which is partly privatised), but its privatisation can be expected to start in 2004.

Complicated administrative procedures required for enterprise start up in general, including specificproblems such as the difficulty of obtaining building permits, have discouraging effects on the inflows ofFDI. Improving, but still unfavourable legal and regulatory environment as a barrier to FDI inflow, is notonly a result of the non-existence of legislation which is harmonised with the market-economy standards,but also of an inadequate implementation of existing laws. Although significant progress was made inenacting the new, modern and liberal laws and the revision of certain existing ones, the non-implementation of laws as well as the lack of adequate institutional infrastructure still pose the mostserious obstacle to the creation of a favourable legal environment in Serbia.

3. TRANSITION PROCESS IN SERBIA, AND FDI STRATEGY AND POLICIES

Since October 2000 Serbia has made considerable progress in macroeconomic stabilisation, structuralreform and reintegration with the international community. New democratic authorities inherited theeconomy ruined by wars, ethnic conflicts and sanctions. Early 2001 a comprehensive programme has beenlaunched to transform Serbia into a democratic, peaceful and free market oriented nation. In last twoyears considerable progress has been achieved, and the Government of Serbia is determined in 2003 toproceed with reforms, which will provide further macroeconomic stability, speed up economic and socialreforms and sustainable economic growth of 4-5 percent annually.



3.1. The current status of transition process and major future transition tasks

The most important recent economic achievements are: (i) the restoration of macroeconomic stability;(ii) extensive price and trade liberalisation of the economy; (iii) accelerated privatisation, following theenactment of the new modern Privatisation Law in 2001; (iv) establishment of a hard budget constraintand elimination of quasi fiscal deficit; (v) stable and unified exchange rate and convertible currency; (vi)banking sector reform, including the enactment of a new Banking Law, the closure of many insolventbanks; establishment of several new foreign banks, which resulted in monetary stability and restoredconfidence in the financial sector; (vii) improving the legal framework. (The Serbian Parliament hasadopted a number of important laws in the last two years, and has dynamic agenda for changing existinglaws and passing new ones. It is also planned to harmonise the Serbian legal framework with the relevantEU acts); (viii) extensive fiscal reform program has modernised the tax system, shifting the burden fromdirect to indirect taxes and widening the tax base by eliminating numerous tax exemptions.

Priorities in 2003 and reform strategy. The basic aim of the Government of Serbia in 2003 is to maintainmacroeconomic stability, speed up economic and social reforms and ensure economic growth of 4-5 percent:

a/ The stabilisation programme includes:– Monetary reform (restrictive monetary policy and the strengthening of foreign exchangereserves), and banking reform (privatisation and liberalisation of the financial sector).– Restrictive fiscal policy: the budget deficit of the Republic of Serbia was reduced and is nowunder control and the system of public finances is being reformed.– Price liberalisation: abolition of administrative price control; only the prices of public monopoliesand municipal services are still under control.– Trade liberalisation: The re-creation of a single trade policy on state-level, i.e. includingMontenegro, is planned. Second, trade liberalisation as such must continue, both in view ofregional integration through a network of bilateral FTAs, in the context of the state’s WTOmembership bid and in relation to the EU. Import and export licences for the greatest number ofproducts have already been abolished; some tariff rates were reduced; import quotas were alsoabolished, except for the import of steel;. Institution- and capacity building in the field of customsand related law enforcement agencies remain vital.

b/ The economic restructuring programme includes:

– Privatisation, through sale of firms or their previous restructuring and the sale of smaller sociallyowned enterprises by auction.– Enhanced competitiveness, by encouraging FDI, entrepreneurship and the formation of newsmall and medium-sized enterprises.– Efficiency, by dismissing redundant workers, cost control, improved management and theimposition of hard budget constraint in enterprises (Ministry of International Economic Relations2003).

To ensure systemic implementation of macroeconomic stabilisation and reconstruction process, i.e.the creation of a stable and open market economy and the subsequent easier integration of the countryinto the EU, the reform implies: modernisation of legislation after the model of developed Europeancountries and the EU “acquis” and the establishment of an efficient institutional framework, coupled withthe strengthening of market institutions. Strengthening institutions and developing legislation, the rule oflaw and the fight against corruption are vital prerequisites for the success of the reforms.

Over a medium term, parallel to radical reforms in economy, it is necessary to carry out acomprehensive restructuring of infrastructure, which anticipates the development of the power supplysector, transport and telecommunications, water supply and sewage disposal systems, in addition to theprotection of natural resources and environmental protection.



The final aim of the transition process in Serbia is to establish a competitive economy, which will beable to generate sustained growth. In order to promote competitiveness, the Serbian NationalCompetitiveness Council has been formed. This Council should provide for a dialogue between the privatesector, the state and the civil society, and to define their roles in creating a more competitive economy. The starting points are that the state should not be the main strategist in defining what in the economy is competitive; this should be done by the private sector. The Foreign Investors Council is also included inthe work of this Council. The Foreign Investors Council is composed of a great number of foreign investorswho are present in Serbia. In the coming period, the work of the Serbian National Competitiveness Councilshould also result in the provision of elements for a national competitiveness strategy.


The majority of FDI in Serbia were privatisation related and oriented towards the local market, as suchforms of FDI are less sensitive when investment environment is in question, and can cope with higherrisks and higher transaction costs than export oriented greenfield FDI. However, intensification of theinflow of export oriented greenfield FDI is one of the main goals of Serbian investment strategy, as suchFDI will have positive development effects and will reduce the current account deficit.



The basic legislation is the new Foreign Investment Law which came into force on 19 January 2002. TheLaw regulates foreign investment in enterprises and other forms of establishment engaged in profit-generating activities in Serbia only, as it is not applied in Montenegro (leading to internal market issues).Foreign investments in insurance companies, banks, other financial institutions and free trade zones areregulated by other laws, i.e. in conformity with federal law governing their founding and legal status. Themain goal of the new Law is the creation of a business-friendly legal, political and economic climate, and encouragement of foreign investors. One of the long-term goals is to create a legal system that iscompatible with the EU legislation. The law has equalised the rights and responsibilities of domestic andforeign investors and provided them with an attractive environment for doing business.

According to this Law, foreign investment may be made by founding a new enterprise or by expandingthe capital of an existing domestic enterprise (Article 4). More precisely, a foreign investment is definedas: (i) investment in a Yugoslav enterprise granting the foreign investor stakes or shares in the initialcapital of that enterprise; (ii) acquisition of any other property right through which the business interestin the Federal Republic of Yugoslavia is being realised.

A foreign investor is: (i) foreign legal entity with residence in a foreign country; (foreign legal entityhaving its seat abroad), (ii) foreign individual; (foreign natural person) and (iii) Serbia and Montenegronational having his/her domicile or residence abroad for a period exceeding one year

A foreign investment can be in the form of: foreign convertible currency, goods, intellectual propertyrights, securities and local currency (the Yugoslav denar – YUD), which are transferable abroad under theforeign exchange regulations. A foreign investor may convert its established claim into a business shareor stake of the debtor company.

A foreign investor has the same status, rights and duties as a domestic legal entity and enjoys fulllegal security and legal protection in respect of rights acquired by virtue of the investment. A foreigninvestor also has the right to: (i) control or take part in management of the enterprise s/he has foundedor in which s/he has invested his/her capital; (ii) transfer the rights and obligations (set out in theinvestment contract or the founding act) to other foreign or domestic persons; (iii) share and freelydispose the profit accruing from its investment; (iv) inspect the books and business operations of theenterprise in which s/he has invested; (v) audit the interim and annual financial statements either



himself or through an authorised representative. A foreign investor may, once commitments are met inaccordance with domestic law, freely and without delay transfer abroad in a convertible currency allfinancial and other assets related to the foreign investment (profits, dividends, additional payments,property upon dissolution of the enterprise etc.).

The major Serbian institution in the field of FDI is Serbian Investment and Export Promotion Agency(SIEPA).

4.1.1. Approval and licensing/screening conditions

The Foreign Investment Law prescribes that a foreign investor may, together with a domestic entity,establish an enterprise in the in the field of production of and trade in armaments, or invest his/her capitalin it, but without acquiring a controlling interest in such an enterprise, all this being subject to theapproval of the Federal Ministry of Defence. (Article 19 of Foreign Investment Law)

For specific activities (banking, financial intermediation and telecommunication) during the process ofenterprise registration with commercial courts it is necessary to seek prior approval from the governmentauthorities.

4.1.2. Other discriminatory measures on establishment and expansion that depart from the nationaltreatment

Generally, there is no discrimination between foreign and domestic investors, as foreign investor hasthe same status, rights and duties as a domestic legal entity and natural person (national treatment) andenjoys full legal security and legal protection in respect of rights acquired by virtue of the investment.However, the legislation related to FDI applies the reciprocity condition. According to the SerbianConstitution, Enterprise Law and Foreign Investment Law, a foreign natural person or legal person mayestablish an enterprise in Serbia, provided that the reciprocity principle is observed. The ForeignInvestment Law indirectly defines the reciprocity criteria by stating that the ministry in charge of foreigneconomic relations submits to the Registry Court the list of the states with which reciprocity does notexist, for each calendar year in advance (Evidence of Foreign Investment, Article 22 of the ForeignInvestment Law).

Foreign Investment Law and some other sectoral laws also contain some discriminatory measures,which predominantly relate to security and public order considerations, as well as to strategicconsiderations (see section 5 for detail).


The Enterprise law allows for the establishment of the following forms of organisation: an economicassociation, a socially-owned enterprise and a public enterprise, but it is not possible to establish a newsocially-owned enterprise any more. An economic association may be established as an association ofindividuals or as an association of capital (company, corporation). An association of individuals may beformed as a general partnership (o.d.) or as a limited partnership (k.d.), while an association of capital maybe formed as a join-stock company (a.d.) or as a limited liability company (d.o.o.). The forms of acompanies or enterprises which can be established by foreign investors are: joint stock company (a.d.),limited liability company (d.o.o.), limited partnership (k.d.), general partnership (o.d.).

The most widely used form of establishment of FDI in Serbia is Limited Liability Company (d.o.o.). Itis a company established by individuals or legal entities, whose founders are not liable for thecompany’s obligations, but are liable for the business of the company up to the value of their stakes in the company. The minimal obligatory pecuniary part of the initial capital of a company shall not be less than the YUD equivalent of 5,000 USD, the limited liability company may have not more than30 members.



A foreign company can have a representative office in Serbia. It may be opened by: one or moreforeign individuals engaged in an economic or banking/financial activity and/or insurance, any national orinternational organisation whose members are foreign persons engaged in business operations, anynational or international organisation working towards the advancement of trade with Serbia. A representative office does not have the status of a legal entity.

The activities that might be performed by representative office are: surveying the market andperforming operations preliminary and preparatory to the execution of contracts on the import of foreignand/or export of Serbian goods and services; execution of contracts and imports contributing to advancement and expansion of Serbian manufacturing; execution of contracts relating to long-term co-production or commercial and technical cooperation; surveying the financial/banking market;establishing business terms with domestic insurance organisations or enterprises; and performing air-transport agency operations.

There are no specific restrictions on the type of business organisation, except that a foreign legal entityregistered abroad cannot register branch office as legal entity in Serbia.

There are no general trans-sectoral restrictions regarding the nationality of management.


The basic legislation referring to the employment of foreigners in Serbia consists of the Law on theConditions for the Employment of Foreign Citizens, Labour Law and the General Collective Agreement.There are no general restrictions for the employment of foreigners, if they obtain the necessary permitsprescribed by law. No general restrictions when employment of key personnel is in question. But, theremight be some discriminatory treatment prescribed by the firm’s internal legislative acts, as the by-lawsof the employer determine, pursuant to the law, the job positions in which foreign citizens can beemployed. This is not a frequent practice.

Foreigners require an entry (business) visa, a permanent or temporary residence permit, and a workpermit if they want to be employed in Serbia. The entry visa can be obtained at the diplomatic andconsular missions of Serbia and Montenegro. The procedure for granting visa is not complicated andgenerally there are no difficulties to obtain it.

Apart from visas, foreigners who intend to reside temporarily in Serbia need a temporary residencepermit, which might be issued for a minimum period of three months, and with the maximum validity ofone year. In case of the possession of a business visa, it is possible to grant a residence permit for morethat one year, which may be prolonged each year. The necessity to apply for temporary residence permiteven in the case when a foreigner already has business visa represents a kind of duplicated procedure,but this permit can be obtained relatively easily.

A labour relation can be established if the expatriate has obtained a temporary or permanentresidence permit and a work permit. A work permit based on temporary residence permit is issued for aperiod of at least three months, but not longer than twelve months. A work permit is not required forperforming skilled (expert) activities under a contract of business-technical co-operation. Upon obtaininga job, a foreign citizen must give a written declaration accepting the jurisdiction of the Yugoslav court oflaw in the case of a lawsuit with the employer.

4.4. Real estate

According to the Law on Basic Ownership Legal Relations, foreign natural or legal entities can acquirereal estate property just as domestic ones under two conditions: the property must be for business useand reciprocity must exist with the foreign country in question. The exceptions are: (i) that there arecertain limitations for foreigners on acquiring real estate property rights, which pertain to the location of



the property (being in the vicinity of military installations, etc.), (ii) that a foreign natural person or legalentity cannot buy a forest.

Urban construction land is still state-owned, implying that a foreign investor (as well as a domesticinvestor) may be given only the right to use it, for which s/he is charged, but as the same limitation relatesto domestic investors, there is no discrimination between foreign and domestic investors.

The law foresees that a foreign natural person who does not perform business operations, may ownsome forms of real estate such as an apartment or an apartment building in Serbia, subject to thereciprocity condition. It is not necessary to have permanent or temporary residence in Serbia. The FederalMinistry of Justice gives an opinion on the existence of the reciprocity.


Public procurement principles, conditions and procedures are regulated by the GovernmentProcurement Law adopted in mid 2002. The Law, which is based on the principles of free competition,efficient use of public funds and transparent procedures, lays down the conditions and regulates methodsand proceedings for the purchase of goods and services and the contracting of construction works andservices, in cases where the client is a government body, organisation or agency or a legal entity asstipulated by this Law. The Law regulates the method of recording contracts and other data concerningthe government procurement as well as the methods of protection of the rights of the bidders. It alsoforesees the establishment of the Government Procurement Agency as an organisation responsible for performing professional activities concerning the government procurement.

The Law does not apply to the following procurements: (i) those from organisations which pursuantto this Law are to be regarded as clients and are founded with an exclusive right to render services whichare the object of government procurement; (ii) those which are subject of international agreementscovering supplies of goods, contracting works or rendering services or public design contests which areintended for joint implementation or exploitation of a project by the countries or organisations whichconcluded such agreement; (ii) for ensuring fundamental conditions for life in cases of natural or otherdisasters, in line with the regulations on the protection against natural or other disasters; (iv) for thepurchase of armament or other procurement of confidential nature as prescribed by separate rules.

According to the Law government procurement procedures can be open or restricted. (i) An openprocedure is a procedure in which all interested suppliers may submit tenders prepared in accordancewith previously defined requirements of the client as prescribed in the tender documentation. (ii) A restricted procedure is a procedure in which in the first phase the client establishes qualification of bidders based on previously set qualification requirements, while in the second phase it invites all these candidates whose qualification had been established to submit the tender. The client mayapply a restricted procedure only where the object of government procurement are such goods, services or construction works which can be performed only by a limited number of bidders with adequatetechnical, human and financial resources.

The Law does not contain any discrimination between enterprises with domestic or foreign capitalorigin. The right to participate in a tender is recognised for any domestic or foreign legal or naturalperson, who: (i) has been registered to run an adequate business with a relevant state body in which ithas a registered office; (ii) is not a subject of any legal proceedings for forced settlement of debts orbankruptcy or liquidation and/or it has not ceased to operate due to a court order or any other boundingorder; (iii) has not been in the five years preceding the announcement of the government procurementtender punished by a legal decision of a judicial or administrative body for a criminal act, economicviolation and infraction or misdemeanour with relation to its business, (iv) has paid taxes, contributionsand other public duties in line with the regulations of the state in which it has a registered office, i.e. inline with the regulations of the Republic of Montenegro if it has the registered office in its territory; (v)has a valid licence issued by a relevant body for dealing in business which is the subject of government



procurement, and such licences are regulated by a separate regulation; (vi) has the necessary financialand operational resources; (vii) has the necessary technical resources.

5. THE LEGAL AND REGULATORY MEASURES FOR FDI: SECTORAL MEASURES


Banking. The banking sector in Serbia has radically improved since a number of troubled domesticbanks have been closed (including the four major state owned banks), the restructuring of the existingbanks continued and several foreign banks entered the Serbian market.

According to the Law on Banks and Other Financial Organisations (amended in 2002), a foreign personmay set up a bank in Serbia, provided that the reciprocity principle is observed. A bank should be set upby at least two parties, and its establishment is subject to the approval by the National Bank of Serbia.The National Bank of Serbia also determines minimal capital adequacy ratios and other obligatory ratios.The minimum capital requirement for a bank is US$ 5 million.

A foreign bank may have its subsidiary in Serbia. A subsidiary enjoys the status of a legal entity, andas such is entered in the Court Register. In practice, this implies that the subsidiary has its own sharecapital and a current account, and may hold accounts abroad, may enter into all types of legalarrangements, and is subject to possible legal procedures.

A foreign bank can set up its representative office on the territory of the FRY in order to perform thefollowing activities: (i) market research in the field of banking and financial transactions, (ii) preliminaryactions aimed at concluding banking operations, or (iii) preliminary actions aimed at concluding financialtransactions and contracts.

A representative office does not have a legal entity status. The conditions for opening the representativeoffice are regulated by the Law on Banks and Other Financial Institutions and by the Decision on Issuing the Licence for Opening of a Foreign Bank’s Representative Office on the Territory of the FRY.

A foreign bank may also establish its subsidiary in Serbia. According to Serbian regulations, theNational Bank of Serbia takes the decision on issuing or revoking of the operating licence of a foreign banksubsidiary with a legal entity status, and as such is entered in the Court Register. The conditions forobtaining the operating licence are the same as for issuing a Banking Licence.

A foreign bank can set up its representative office on the territory of Serbia, under the reciprocitycondition. To do that it needs to obtain the licence from the National Bank of Serbia. However, this licencedoes not permit business operations in Montenegro, for which a separate licence must be obtained fromthe Central Bank of Montenegro. A representative office can perform the following activities: (i) marketresearch in the field of banking and financial transactions, (ii) preliminary actions aimed at concludingbanking operations, or (iii) preliminary actions aimed at concluding financial transactions and contracts.Representative office does not have a legal entity status. The conditions for opening the representativeoffice are regulated by the Law on Banks and Other Financial Institutions and by the Decision on Issuingthe Licence for Opening of a Foreign Bank’s Representative Office on the Territory of the Serbia.

The policy of the National Bank of Serbia to encourage portfolio investment in the banking sector,instead of greenfield investment, may have a discriminatory effect on foreign investors wishing to investin the founding of a new bank in Serbia. Even this limitation was not given in a written form, but only as arecommendation of a governor of the National Bank of Serbia. Foreign investors rightly recognised it as aserious barrier to the founding of a new bank, considering that this limitation might influence the issuanceof an approval, as any approval for the founding of a new bank has to be issued by the National Bank ofSerbia. This limitation is not applicable to domestic investors.



Insurance. A foreign natural person or legal entity may form an insurance company only as a jointventure with a local natural person or legal entity. As an exception, a foreign legal entity may form a whollyowned captive insurance company for offshore activities only. An insurance company, in which foreigncapital has been invested, is not allowed to carry out re-insurance activities abroad. (Law on Insurance ofProperty and Persons of Serbia and Montenegro)

According to the Law on Insurance of Property and Persons of Serbia and Montenegro, a foreigninvestor may also establish its own insurance company for property and personal insurance of its foundersaboard. The initial fund of security has to be pecuniary in the YUD equivalent to between US$ 250,000 andUS$ 1,500,000 depending on the type of the insurance operation.

Securities Market and Other Financial Services. For the distribution of the securities of a foreign legal entityit is necessary to have the approval of the National Bank of Serbia. (Article 30 of the Law on the Securitiesand Other Financial Instruments Market, Official Gazette of the FRY No. 65/2002).


Until April 2003, when the new Telecommunications Law came into force, this area was regulated by the obsolete Serbian Law on Communications, which did not correspond to the basic elements of modern EU legislation. According to this Law, the public enterprise PTT Serbia held a monopoly on the provision of PTT services, including telecommunication and postal services, while the licences for telecommunication services in the area of mobile telephony were issued by the Serbian Government.

The new Telecommunications Law has been largely harmonised with the EU standards, and shouldthus create a basis for more significant reforms in this area. However, implementation on the groundneeds to be seen first before an overall assessment can be made. This Law provides for the formation ofan independent Telecommunications Agency, which will take on the management of telecommunications.Although this Law prevents a monopoly and monopolistic behaviour in the area of telecommunicationsand encourages competition and market development to a great extent, the inherited monopoly ofTelecom “Serbia” (arising from the sale of Telekom Srbja shares to foreign shareholders in 1997) over fixedtelephony has been incorporated into its concluding provisions. This monopoly will thus remain in forceuntil June 2005 (the contract on the sale of a part of the Telecom “Serbia” shares to foreign shareholderswas concluded in 1997). Although the Law stipulates that this monopoly may be broken up before 2005,it cannot be extended beyond that period.

The new Law clearly defines all telecommunication services that can be offered in the territory of Serbia. It also stipulates the issuance of two types of permits: (i) licences (individual permits), through public bidding, for specified telecommunication services (the Law does not specify thetelecommunication services that will require this type of permit, but we suppose that it will be valid forfixed and mobile telephony) and (ii) approvals (general licences) for telecommunication services, whichinclude the Internet services. There is no discrimination between foreign and domestic investors asregards obtaining these permits.

5.3. Transport (Air transport, road transport, railroad transport, maritime transport)

Maritime and inland water transport. Towing, which begins and ends in a Serbia and Montenegro sea orriver port, that is, on the coastal sea or inland waterway of Serbia and Montenegro (cabotage), cannot bedone by a foreign ship without the approval of the federal ministry in charge of transport (Article 686 ofthe Law on Maritime and Inland Navigation).

As for the use of a sea or river port being open for international public transport and the payment ofport dues, foreign ships enjoy the same treatment as Yugoslav ones, subject to the reciprocity principle(Article 25 of the Law on Maritime and Inland Navigation).



For the issuance of a permit for the registration of a foreign ship in the Serbia and Montenegro Registerof Shipping, the ship-owner or ship operator is obliged to submit the decision on the approval of atemporary import of a chartered ship and uniform customs clearance for a temporary or regular import ofa ship (Article 211 of the Law on Maritime and Inland Navigation).

Air transport. An aircraft, whose owner or user is a foreign legal entity or natural person, may beregistered in the Aircraft Register of the Federal Republic of Yugoslavia after a special permit has beengranted by the federal ministry in charge of transport (Article 54 of the Law on Air Transport).

5.4. Energy

At present, energy-related activities in Serbia are almost completely performed by monopolisticpublic enterprises at the republican or local level, which perform the activities of common interest.There are also a number of legal and organisational obstacles to private investment in the energy sector,which will be removed in large measure with the adoption of the new Energy Law, harmonised with theEU legislation.

According to the Draft of a new Energy Law, the energy permit can be issued if the construction of theenergy-related facility being the subject of the application is, according to its type and purpose, incompliance with the Strategy and the Program for the Implementation of the Strategy of Energy Sector ofthe Republic of Serbia. According to this Law, the energy permit can be issued to domestic and foreignpersons under the same conditions and with full respect for the non-discrimination principle (subject tothe reciprocity principle).

The adoption of a new Energy Law is also a prerequisite for the fulfilment of the obligation of Serbiaand Montenegro relating to regional cooperation in the energy sector, as defined by the Athens Charter,which was signed in November 2002 and which anticipates the formation and opening of the regionalelectric power market by 1 January 2005.


Serbian legislation contains the following sectoral restrictions to foreign investors related to securityand public order:

a/ Production of and trade with armaments. A foreign natural person or legal entity cannot, either alone orwith another foreign investor, establish an enterprise in the field of production of and trade inarmaments (Article 19 of Foreign Investment Act). A foreign investor may, together with a domesticentity, establish an enterprise in the above mentioned field, or invest his/her capital in it, butwithout acquiring a controlling interest in such an enterprise, all this being subject to the approvalof the Federal Ministry of Defence.

b/ Location of investment. A foreign natural person or legal entity cannot, either alone or with anotherforeign investor, establish an enterprise in an area designated as a restricted zone (Article 19 ofForeign Investment Act). A foreign investor may, together with a domestic entity, establish anenterprise in the above mentioned area, or invest his/her capital in it, but without acquiring acontrolling interest in such an enterprise, all this being subject to the approval of the FederalMinistry of Defence.

c/ Real estate. Insofar as foreigners are concerned, there are certain limitations on their acquiring realestate property rights, which pertain to the location of the property (being in the vicinity of militaryinstallations, etc.).



6. OTHER RELEVANT ELEMENTS OF THE FDI FRAMEWORK

6.1. Privatisation

The “old” Law on Ownership Transformation that was enacted in 1997 strongly favoured insiders’concept, meaning that the workers of the companies entering the process of privatisation could receiveup to 60 percent of company’s equity free of charge. The new and modern Privatisation Law was adoptedin June 2001, changing the method of privatisation from insider to outsider concept, and giving more roomfor strategic investors. After the enactment of this law, the process privatisation in Serbia has beenintensified. Several very successful privatisations were concluded in 2002 and early 2003. The companiesto be privatised are grouped into industry pools, ranging from pharmaceuticals to tobacco industry. It isexpected that in 2003, the total of some 50 large enterprises will be privatised by public tender method(tender transactions will be completed) and near 1,200 enterprises by public auction. In the third of theprivatisation routes, the corporate and financial restructuring will take place prior to privatisation. Newbankruptcy law, which will have an important role in the privatisation of highly indebted and inefficientdomestic enterprises, is also in the pipeline.

Privatisation process includes 4,500 state-owned or socially-owned companies in Serbia. Privatisationmay include sale of the whole property or only one part, as well as the sale of only one part of legal entitysubjected to privatisation. Natural resources, goods in common usage and goods of common interest arenot included in the privatisation (see section 7.1. Monopolies). The buyers of capital or land can bedomestic or foreign legal entities or individuals, and they have equal treatment. Privatisation processmay be initiated only by the enterprise, which is to be privatised, the Privatisation Agency or Ministryfor Economy and Privatisation. All the socially-owned enterprises are to be privatised by June 2005. If asocially-owned enterprise does not undergo privatisation by that time, the Privatisation Agency will bein charge of finishing the process. Privatisation models are: (i) sale of capital and (ii) transfer of capitalwithout compensation (transfer to the employees and citizens after sale). Out of total capital in theprivatisation process, 70 percent is on sale, while 30 percent was transferred without compensation. Incase that the buyer does not accept the offer of a 70 percent stake, a smaller stake will be sold, while incase of previous restructuring, the whole capital or land will be offered to sale.

The time in which state-owned companies should be privatised is not mandatory and the governmentwill decide on their privatisation. A number of those companies for which there is a public interest willremain in state ownership (especially the public companies).

Compared to the former Law, the new privatisation Law has two main advantages: (i) privatisation ismandatory and must be conducted within four years (according to the former law, privatisation had avoluntary character and no time limits were applied), (ii) privatisation will be based on the externalconcept (the former Law mainly referred to the insider concept). There will be several privatisationroutes with different models and techniques to be applied. For strategic enterprises that will bepredominantly privatised through public tenders, a majority of shares will go to strategic investors andthe remainder will be distributed free of charge to citizens and employees. The remaining (mostly smalland medium) companies will be privatised through auction and the majority shares will be offered tostrategic investors (up to 70 percent) and the remainder will be distributed free of charge to theemployees. Agency for privatisation envisages programme for restructuring for companies that will notsucceed to be sold. Following the restructuring process 100 percent of the shares is going to be sold bytender or auction.


6.2.1. Monopolies

In Serbia, monopolies in the area of public services are still present to a great extent. Some keysectors, such as: telecommunications, electric power generation and distribution, rail transport, utilities,



gas transport, etc. are characterised by a pure monopoly. So far, almost nothing has been done withrespect to the de-monopolisation of the public sector, except for the sale of a part of the Telecom sharesto foreign investors and their repurchase and the determination of the transitional period (up to June2005), when the monopoly of Telecom over fixed telephony will be broken up. The conditions forabolishing the monopolistic position of this sector have been created by adopting the newTelecommunications Law (see: 5.2 Telecommunications).

The current Anti-monopoly Law was adopted in June 1996, but was not implemented until September1998, when a special Anti-monopoly Commission was formed. The tasks of the Anti-monopoly Commissiontheoretically include the assessment, estimation and analysis of the activities having a monopolisticposition, as well as taking preventive measures against any manipulation with this monopolistic position.However, the current Anti-monopoly Law is practically inapplicable. At the moment, its functions aremostly confined to consumer protection on the market, while the relevant actions have so far been gearedmostly to price reductions and their keeping under government control. Neither is this law applied to thestate-controlled sectors. A new Competition Law, which should be compatible with the relevant EU acts, isstill only in its early preparation stage. After the adoption of the new Constitutional Charter of Serbia andMontenegro, the Anti-monopoly Commission was dissolved and some of the activities within itscompetence were transferred to the Republican Ministry of Trade and Tourism, meaning that there iscurrently no institutional structure to control and enforce competition policy in Serbia and Montenegro.

State monopolies, public enterprises and enterprises with special and exclusive rights pose anobstacle to the policy of free competition. According to EU legislation, special and exclusive rights maybe retained only to the extent being in public interest. This refers, for example, to public services. In orderto minimise monopolies in the Serbian economy, it is necessary to identify precisely the services(products), which are in public interest, while others should be governed by anti-monopoly regulations.At the same time, it is necessary to determine the transitional periods for a gradual introduction ofcompetition into these areas.

6.2.2. Concessions

The new Law on Concessions is adopted in May 2003. It creates favourable conditions for obtainingand utilising the concession licences, clarifying and simplifying the concession awarding process andgiving the possibility to grant concessions in many sectors. This law will facilitate foreign investments inthe oil-gas-mining-infrastructure sector to a maximum, with minimum transaction costs and maximumtransparency and legal clarity and security of title. It includes the concept of free and non-discriminatoryaccess to capital, reduction of the role of the state agencies acting as mandatory intermediaries betweenforeign investors and the national economy, stating precisely the organisation of the bidding process.

Basic principles of this Law are equal and fair treatment, market competition and proportionality in theprocedure of concession granting, as well as the principle of equality of the parties to a contract. The Lawprescribes the terms, method and procedure for granting concessions for using natural resources, assetsof general use which, by the law, have been designated as the property of the Republic of Serbia and forthe performance of the activities of common interest. This Law also determines the object of a concession,duration of a concession, method and procedure for granting concession, basic contents of the concessioncontract, the basic criteria for determining the concession fee, the methods of realising the concessionrights and obligations, establishment and operations of a concession company and other issuessignificant for the realisation of a concession (Article 1).

A concession, in respect to this Law, is the right to use natural resources, assets of general use or toperform activities of common interest, which a competent state body concedes for a determined timeperiod to a domestic or foreign person as defined in the law regulating foreign investment under speciallyprescribed terms and upon the payment of a determined fee. The objects of concession according to theConcession law are public state property or State has sovereign right to them, for which concession maybe granted. A concession shall be granted to the persons satisfying the requirements stipulated by the



concession enactment pursuant to this Law, the Act of Concession and the public tender (Art. 4). Aconcession cannot be granted to a foreign entity for the activities or on the territory where, in accordancewith the law that regulates foreign investment, a foreign entity cannot establish a company (Art. 5). Aconcession may be granted for a period of up to 30 years (Art. 6).

A special form of concession according to this Law is the concession in accordance with the BOT (built-operate-transfer) system, including all forms of this system, which is based on a construction orreconstruction and financing of an entire asset, facility or plant of common interest, its use and transfer tothe Republic of Serbia within the specified time period.

The procedure of granting a concession include: (i) adaptation of a decision to grant a concession bythe tender committee (pointed by the competent ministry of the Government of the Republic of Serbia)according to the competent ministry proposal (or a competent body of the autonomous province or acompetent body of the local self-government, on the territory of which the concession object is situated);(ii) a concession shall be granted by the means of the previously organised procedure of public tender,the tender committee decides by majority vote of the Committee members (Art.11), and The Governmentadopts concession enactment; (iii) assignment of the concessionaire; (iv) conclusion of a concessionagreement with the concessionaire. Exceptionally, if public tender could endanger the national defenceand security, it may be ruled out should the Government find it necessary (Art.11).

6.3. Fiscal incentives

Import of equipment, fixed assets and other materials which form the foreign contribution to the shareof capital of a newly established company are exempt from all customs duties, charges and the sale tax.In addition, new equipment constituting foreign investment in an existing company (except cars, furniture,carpets, works of fine and applied arts and other decorative items for office premise furnishing) is alsoexempted from customs duties, charges and sales tax. (Foreign Investment Law, Art.16)

Serbian tax system is regulated mostly at the level of the Republic of Serbia, except some basicprovisions relating to taxes regulated by federal law. Major types of tax are: corporate income tax, salestax, personal income tax and property tax.

Corporate income tax is regulated by the Corporate Income Tax Law, and some other regulations.Taxpayers of corporate income tax are all legal entities, Serbian residents and non-residents alike. Incomerealised by residents, both in the territory of Serbia and abroad, is subject to taxation. The status of aresident is acquired by any legal entity founded within the territory of the Republic of Serbia and anylegal entity with actual administrative and controlling seat in Serbia. As regards non-residents, onlyincome realised on the territory of the Republic of Serbia is subject to taxation. All the legal entities areobliged to pay the corporate profit tax on the generated profit at the uniform rate of 14 percent.

Sales tax on goods and services is regulated by the Sales tax Law, and is collected through sales tax ongoods, sales tax on services and excise.

Personal income tax is regulated by Personal Income Tax Law, and is payable by individuals on differentsources of income generated in the calendar year, including salaries, income from agriculture and forestry,income from self-employment, income from royalties and industrial property rights, income from capital,income from real estate and other income. The applicable rate is 14 percent for the salaries, while otherpersonal incomes are predominantly taxed at the rate of 20 percent.

Property tax regulates the taxation of real estate, and is regulated by the Property Tax Law. Real estateis taxed through immovable property tax, inheritance and gift tax and tax on transfer of absolute rights.

Tax incentives related to the corporate income tax, which do not make any distinction between foreignand domestically-controlled companies, may be divided into the following groups: carrying forward



losses, accelerated depreciation of certain fixed assets, tax exemption, tax credits and tax holidays. (Art.50, Corporate Income Tax Law)

6.4. Free Trade Zones

There are thirteen free trade zones in Serbia, located in Belgrade (with sub zones in Pancevo,Smederevo and Kovin), Šabac, Novi Sad, Sombor, Prahovo, Pirot, Lapovo, Sremska Mitrovica, Senta, Niš,Vladicin Han and Backa Palanka. The new law which will regulate this field is in a process of drafting, andwill regulate the framework for companies that operate from Free Trade zones.

Companies which operate in free trade zones are entitled to import and re-export products from thesezones without restrictions and without paying customs duties, charges or sales tax. A permit for openinga tax free zone is issued by the State Union Government. There is a restriction for carrying out activitiesin these zones which are directly related to citizen’s health, environment, creation of material goods andthe national defence.


The new Foreign Exchange Law from April 2002 significantly liberalises the foreign exchange marketand the foreign payment operations. It enables the convertibility of the YUD. A non-resident may freelymake transfer of proceeds of current international transactions from a foreign currency or YUD accountsafter meeting the obligations with regard to income or profit taxes due to the amount to be transferred.The new law enables firms to make advance payments for exports of goods and services and simplifiesforeign payment transactions, which will significantly reduce the banking costs.

According to the Foreign Investment Law, a foreign investor may, once commitments are met inaccordance with domestic law, freely and without delay transfer abroad in a convertible currency allfinancial and other assets related to the foreign investment (profits, dividends, additional payments,property upon dissolution of the enterprise etc.).


Free Trade Agreements. Serbia and Montenegro signed a number of Free trade agreements in the SEEregion under the auspices of the Stability Pact. However, the implementation of these treaties is seriouslyhampered by Montenegro’s refusal to abide by the international obligations undertaken by the state assuch. FTAs exist with the following countries: Albania (signed in March 2003), Bosnia and Herzegovina (inforce since 1 June 2002), Bulgaria (signed in March 2003), Croatia (signed on 12 December 2002), Republicof Macedonia (applied since 7 October 1996, under revision), Moldova (initialled on 12 February 2002)and Romania (signed in March 2003). Additionally, Serbia and Montenegro signed Free Trade Agreementwith the Russian Federation (Official Gazette – International Treaties, 1/2001), which is of a greatimportance, regarding to the size of Russian market and also the size of the market of Community ofIndependent States, but also includes some relatively unfavourable barter provisions. There are also freetrade agreements with Hungary and Belarus.

Agreements on the Mutual Protection and Promotion of Investments (As of September 2002). In order to supportand facilitate the inflow of FDI in the country, Serbia and Montenegro concluded agreements on themutual protection and promotion of investments, with the following countries: Russian Federation (1995),Romania (1995), Peoples Republic of China (1995), Slovakia (1996), Bulgaria (1996), Belarus (1996)Zimbabwe (1996), Republic of Macedonia (1996), Guinea (1996), Greece (1997), Czech Republic (1997),Korea (1998), Croatia (1998) , Italy (2000), Ukraine (2001), Turkey (2001), Hungary (2001), Austria (2001),USA (2001), Cuba (2000) and Spain (2002).

Double Taxation Treaties (As of September 2002). Serbia and Montenegro concluded double taxation treatieswith the following countries: Belgium, Belarus, Bulgaria, China, Cyprus, Czech Republic, Denmark, Egypt,



Finland, France, Republic of Macedonia, Germany, Hungary, Italy, Netherlands, Norway, Poland, Romania,Russia, Slovakia, Sri Lanka, Sweden and UK.

Countries with which Serbia and Montenegro has the reciprocity in the field of foreign investments are(As of September 2002: Austria, Albania, Belgium, Bulgaria, Yemen, Denmark, Liechtenstein, Armenia,Finland, France, Greece, Netherlands, Belize, Italy, Luxembourg, Hungary, Malta, Norway, Poland,Romania, Germany, for the Syria (only under the condition of the majority of the domestic capital51percent: 49 percent), Spain, Switzerland, Sweden, Great Britain, India, Iraq, Iran, Israel, Japan, Jordan,China (special conditions for trade, majority domestic capital 51 percent: 49 percent), Cyprus, Korea PDR,Kuwait, Lebanon, Nepal, Pakistan, Singapore, Myanmar, Turkey, United Arab Emirates, Taiwan (withinChina, only physical persons can be founders under the same conditions), Algeria, Angola, Ghana, Kenya,Kazakhstan, Libya, Morocco, Nigeria, Turks and Caicos Island, Zambia, Egypt, Canada, Cuba, Mexico,Panama, USA, Argentina, Chile, Peru, Uruguay, Venezuela, Bahamas, Ireland, NIUE, Australia, NewZealand, Island, Monaco, Portugal, Slovenia, South Africa, Ukraine, Slovakian Republic, Liberia, Andorra,British Virgin Islands, Macedonia, Russia, Marshal Island, Croatia, Saint Vincent, Vietnam, Czech Republic,Belarus, Man Island, Antigua, Lithuania, Seychelles, Tunisia, Moldavia, Sierra Leona, Gibraltar,Bangladesh, Republic of Srpska, Bosnia and Herzegovina, Bolivia, Botswana, Mauritius, Tahiti, and theCanary Islands.






Economics Institute. 2002. Deregulation and The Improvement of the Business Climate. Belgrade.FIAS. 2002. Republic of Serbia: The Climate for Foreign Direct Investment. 2002. Washington, D.C.: Foreign

Investment Advisory Service.Foreign Investors Council. 2003. White Book: Proposals for Improvement of the Investment Climate in Serbia.

Belgrade. Bulgaria Economic Forum, Sofia, Investment Guide for Southeast Europe, Ivanov, Eugeniy, Iva Stoykova &

Yordanka Palahanova. 2002. Ministry of International Economic Relations, Republic of Serbia. 2002. Removing Obstacles to Foreign

Investments in Serbia. Belgrade.Ministry of International Economic Relations. 2003. The Reform Agenda of the Republic of Serbia. Belgrade.Serbian Investment and Export Promotion Agency. 2001. Doing Business in Serbia. Belgrade:

MMOONNTTEENNEEGGRROO

1. INTRODUCTION

The investment policy review of Montenegro contains only those laws and other regulatory framework,which are practically enforced in Montenegro. Serbia and Montenegro laws which in principle hold inMontenegro but are not enforced in practice have not been taken into account. For resulting internalmarket issues, see the Note on Recent Constitutional Changes at the beginning of this chapter.

2. DETERMINANTS OF EXISTING AND FUTURE FDI INFLOWS

2.1. Investment opportunities and competitive advantages of Montenegro as an investment location

Montenegro is the second republic of the State Union of Serbia and Montenegro, with a relativelysmall population and market. According to the new Constitutional Charter of the State Union, a commonmarket exists on the whole territory of the State Union, which might have positive effects on market-oriented foreign investors. The competitive advantages of Montenegro can be found in some parts ofagriculture, forestry and tourism. Montenegro also has some mineral resources including mineral water,coal and aluminium. There is a large aluminium company which has already been sold to a foreigninvestor and which accounts for a large share of Montenegro’s exports.

Even if the greatest comparative advantage for Montenegro is in the tourism industry, this industry issuffering from years of under-investment. Many hotels remain in state ownership but the government isactively promoting them for sale to foreign investors through the Agency for Restructuring and ForeignInvestment. The tourism resources vary from summer-oriented tourism on the coast to winter-orientedtourism in the mountainous northern regions.

The government has adopted a liberal approach to its legal and regulatory environment for foreigninvestment and is taking active steps to encourage an inflow of foreign investment into all sectors of theeconomy except for the armaments industry and sensitive border areas and the national parks.

The inflation in Montenegro, at 16 percent per annum, although falling, is well above average levels inthe EU. The real GDP grew by around 4 percent in 2002. The average monthly wage is around EUR 200.Registered unemployment is high at around 27 percent although it is seasonal and falls substantiallyduring the summer tourist season. However there is a large grey economy and household surveys reporta much lower level of unemployment, which varies between 14 and 23 percent on a seasonal basis. Some27 percent of the population lives below the relative poverty line of EUR 45 per month. The adoption ofthe DM, and then the Euro as the national currency has reduced exchange rate risk and the transactionscosts for foreigners doing business in Montenegro.


There are few legal restrictions to the inflow of foreign investment into Montenegro. The main barriersto FDI include: (i) political and economic risks of investment (including the unclear future of the StateUnion), (ii) underdeveloped institutional infrastructure , (iii) the poor state of the infrastructure, especiallythe transport infrastructure and hotels, (iv) improving, but still relatively underdeveloped financialmarket, (v) the lack of information about available investment opportunities, (vi) poor implementation ofthe existing laws, (vii) administrative burdens, (viii) skill levels of employees.

A recent sample survey covering 400 enterprises enquired into entrepreneurs’ opinions on barriers todoing business in Montenegro (CEED 2002). Half of foreign-owned firms reported that “frequent changesin the legal and regulatory environment” caused serious problems for them. Most foreign ownedcompanies reported that “the current position of the economy is ’bad’’ and four-fifths believe that “it will



stay that way.” In assessing their own companies, two-thirds view their performance as “good", and four-fifths expect to earn increased future revenues and profits. Two-fifths of the foreign owned companies hadincreased employment in the six months prior to the survey whilst the rest had maintained employment.One half of them expected to increase employment in the future.

The survey found some differences in the barriers to doing business facing foreign owned firmscompared to domestic firms. For domestic firms, (i) high taxes, (ii) frequent changes in legislation and (iii)unfair competition were perceived as the main barriers. However, these were not nearly so problematicissues for the foreign-owned firms, with the exception of changes in legislation that were problematic forthem as well. The most important barriers facing foreign-owned firms were: (i) administrative burdens, (ii)inflation, (iii) political risks, (iv) corruption and (v) late payments, and (vi) the skill levels of employees.These featured have been listed as relatively more important for them compared to domestic firms.Overall, the least significant barriers for them were management skills, payments settlement, andcompetition.

The existence of unreformed laws and poor implementation of recently adopted laws creates anunfavourable legal environment in Montenegro. The unclear regulatory relationship with Serbia adds tothis climate of legal uncertainty. The existing unreformed labour law is a significant barrier for foreign-owned firms in Montenegro. One of the main difficulties faced by the potential foreign investors inprivatisation related FDI is the problem of highly restrictive regulations which affect labour dismissal andthe existence of a bloated labour force in many companies that are on the privatisation list.

3. THE DEVELOPMENT OF MONTENEGRO’S REGULATORY FRAMEWORK, STRATEGY AND POLICIES TOWARDS FDI

3.1. The current status of the transition process and the major future transition tasks

Transition in Montenegro has lagged behind that process in other transition countries, as a result ofthe isolation of the FRY during the period of sanctions and isolation. Even in the period of sanctionsagainst the FRY, some progress with economic reforms has been achieved in Montenegro. After theestablishment of a new democratic regime in Serbia, and removal of economic and political sanctionstowards the FRY, Montenegro continued with its reforms. It has adopted a very liberal macroeconomicpolicy, liberalising prices and the customs regimes, nevertheless recent political crisis regarding theunsolved problem of its status with Serbia, had a lot of negative effects.

Average tariffs in Montenegro have been reduced to 3 percent and over 80 percent of imports are freeof all tariffs and quotas. However, substantial non-tariff hurdles, including import and export contingents,licensing requirements and administrative procedures remain for strategic products, both agricultural andindustrial. Montenegro has now agreed to the harmonisation of its trade and customs policy in theframework of the State Union. This should lead to a fully integrated single trade policy over the next twoyears, thus enabling Serbia and Montenegro to advance on its track of international trade integration.Montenegro has reduced most subsidies to state owned companies. These companies were incorporatedin the early 1990s and transformed for the most part into majority state-owned public companies. Thegovernment is pursuing a programme designed to attract foreign investment into these companies as ameans to complete the privatisation process, since due to the low income levels of the population, thereare few domestic buyers. The government has established an Agency for Restructuring and ForeignInvestment and has begun to promote investment projects in specific companies to potential foreigninvestors. Another main policy priority of the government is the promotion of small and medium sizedenterprises (SMEs) and an Agency for the Development of Small and Medium Sized Enterprises has beenestablished. This agency provides advice and information services to SMEs throughout the country and anetwork of Local Business Centres has been established. Another key agency in the field of economicrestructuring and development is the Development Fund that is the owner of shares in the state ownedcompanies. Revenues from the sale of these shares is used by the Development Fund to provide long-term low-interest loans to existing SMEs who employ at least 10 workers, and whose project proposals are



accepted by the Fund on the basis of a number of criteria. These criteria include the employment impactof the project, its export content and its technology content in addition to standard profitability criteria.These criteria reflect old socialist principles rather than purely market principles. Part of the credit line ismanaged directly by the fund rather than through a commercial bank and another part is managedthrough selected commercial banks. There is no specific guarantee of equal treatment for foreign-ownedenterprises to access these funds.

On the political level, there is a climate of constitutional and legal uncertainty despite the recentconstitutional agreement the State Union of Serbia and Montenegro. This new constitution provides for aradical decentralisation of power to the republic level. But in practice, Serbia and Montenegro laws andpolicies are currently to a large degree implemented only in Serbia.

3.2. The development of the regulatory framework, strategy and policies towards FDI

The government of Montenegro has been active in developing a liberal regulatory framework forforeign direct investment. Its strategy is to promote foreign direct investment particularly in theprivatisation of the 15 large socially-owned companies.

An Agency for Reconstruction and Foreign Investment has been established whose purpose is tofacilitate the entry of foreign investment into Montenegro. The Agency provides assistance to foreigninvestors by providing them with information, advice and consultancy services. It also aims to promotespecific projects to foreign investors and has a publicity function in bringing such projects to the attentionof the international public.


Foreign investment in Serbia and Montenegro is governed by the federal Law on Foreign Investmentsfrom January 2002, and the Law on Amendments of the Foreign Investment Law from January 2003.However, in Montenegro, special legislation and decrees have been introduced which elaborate the lawgoverning foreign investments made in Montenegro.

4.1. The existing regulatory framework for FDI in Montenegro

The Foreign Investment Law (Official Gazette of the Republic of Montenegro, No. 52/2000) provides forthe equal treatment, full legal protection, and security of investment for foreign investors in Montenegro.

A foreign investor is considered to be a legal entity with headquarters abroad, a foreign natural personand a Montenegrin citizen whose permanent residence or temporary stay abroad is longer than one year,a company that was established in the Republic by a foreign person and a company the foreign equity ofwhich exceeds 25 percent.

The Foreign Investment Law guarantees national treatment for the investor who may found anenterprise and invest in an enterprise in the territory of Montenegro in the manner and under theconditions set for domestic persons unless otherwise provided for in the foreign investment law. A foreigninvestor may make free transfers of profits and assets abroad after having settled all due liabilities.

The Foreign Investment Law (Article 29) guarantees the right of property: “The property of a foreigninvestor cannot be expropriated, except for a compelling public purpose established by law or on thebasis of the law and should be accompanied by a compensation to the foreign investor that may not beless than the market value of the assets appropriated. In addition to the compensation as defined underitem 1 of this Article, an interest at one-year LIBOR rate shall be paid to the foreign investor for the periodbetween the date of expropriation and the date of payment of the compensation."



The Foreign Investment Law (Articles 27, 28, 29 and 30) gives additional guarantees to legal security,reimbursement and personal responsibility of state officials to the foreign investor. In cases where thestate is a party to a contract on foreign investment, or where it is a partial owner of the investment, theLaw stipulates that it shall have no greater rights than any other party to the contract.

The Foreign Investment Law does not bring together into one place all the laws that relate to foreigninvestment. The other relevant Laws and instruments are: Constitution of the Republic of Montenegro,Constitutional Charter of the State Union of Serbia and Montenegro, Decree on investment of foreignpersons’ assets in companies that produce arms and military equipment, Bilateral conventions on theprotection of investments that have been concluded with individual states (Egypt, France, theNetherlands, Canada, USA, Sweden). And regulations that settle the status of companies: The Law onBusiness Companies, The Law on the Insolvency of Business Companies. Other relevant laws include: Lawon Foreign Currency operations, Law on Foreign Trade Operations, Law on securities, Law on CreditRelations with foreign Countries, Law on Accounting and Auditing, Law on Financial Operations, CustomsLaw, Law on the Monetary and Capital Markets, Law on Property, Law on Conditions of Employment ofForeign Citizens, Law on Companies that are established and Operate on Special terms (Off-ShoreCompanies), Law on Fiduciary Transfer of Property, Law on Expropriation (Agency of Montenegro forEconomic Restructuring and Foreign Investments 2002).

A foreign investor who has suffered losses resulting from war or a state of emergency is entitled to a reimbursement of no less than the amount granted by law to local nationals. A foreign investor is entitled to a reimbursement for damages caused by illegal or irregular conduct by a governmentofficial or agency.

If laws are changed after a contract is concluded which affect the value of an investment, the investormay choose to operate under the original applicable law, if that is more favourable than the new law.

The security for non-commercial risks is guaranteed on the basis of bilateral conventions concludedwith individual countries, and which covers the right to transfer profits, repatriation of invested capital, fairand equal treatment of investments without discrimination, and guaranteeing the same protection asoffered to other foreign country nationals


A foreign investor must receive approval from a competent minister if the investment is in thearmaments or military equipment industry or in a restricted border zone or national park. An enterprisefounded using foreign investors’ assets must be registered with the competent court.

Any investment or founding contract or founding decision (if the enterprise is being founded by oneforeign person) any changes to the status of an enterprise, as well as amendments (reinvestment of profit,additional investment, transfer of foreign share from one person to another) and termination of contractor decision must be reported to the Agency for Restructuring and Foreign Investment.

4.1.2. Other discriminatory measures on establishment and expansion

There are presently few deviations from national treatment facing foreign investors in Montenegro.Among these, the most prominent are restrictions on foreign investors from involvement in thearmaments or military equipment industries, in restricted border zones or in national parks, althoughthese are not outright prohibitions. Some rights granted to foreign investors are conditional on the existence of reciprocal treatment in the foreign investors’ home country, for example in relation to the purchase of real estate and dwellings. Foreign investors must also report certain of their activities(such as founding an enterprise, changing its status, termination of contracts and so on) to the Agency for Restructuring and Foreign Investments. The liberal orientation of Montenegro towardsforeigninvestment is shown by the fact that in some circumstances the deviations from national treatment are



more favourable to the foreign investor than to the domestic investors. This is especially apparent in thecase of offshore companies. These companies, which can only be established by foreign investors,subject to the granting of a licence by the Ministry of Finance, attract special tax concessions, and benefitfrom the advantage of anonymous registration on a register of the Ministry of Finance. A foreign investormay import new equipment for use in production on a duty-free basis.

4.2. Corporate organisation: regulations on company establishment (company law, branches) andnationality of management

A foreign person may establish a company and invest in a company in Montenegro on the same termsand conditions as local nationals. Foreign investors can take advantage of a variety of different forms ofestablishing their foreign investment venture. These include:

a/ Joint Venture through: investment in an existing company, founding of a new company, founding ofa mixed company.

b/ Founding of a foreign investor’s own company. Companies can be established under conditionsidentical to those that apply to local nationals. They can be established as greenfield investment,through purchase of shares through public tender and auction, on the stock exchange, or purchaseof shares in companies offered for sale by the Republican Funds such as the Development Fund.

c/ Concession. A foreign investor can obtain a concession for the use of certain natural resources orproperty of common concern from the competent state authority on the basis of a previouslyimplemented public announcement procedure (e.g. tender, auction), a concluded contract and adecision of the competent authority, in conformity with the law.

d/ Build Operate Transfer (BOT.). A foreign investor can build, operate and transfer a facility, plant orproduction line, or infrastructure in compliance with the law. The procedure for obtaining the rightto a BOT scheme is the same as the procedure for a concession.

e/ Other Forms of Company Formation. In addition the following types of company formation can becarried out: founding of a branch office, founding of a representative office, founding of an agency,founding of a bank (subject to a licence from the Central Bank).


Foreign citizens may be employed in Montenegro if they hold a residence permit and an employmentlicence, or without a licence if the employment relates to the performance of professional activities set bya contract of business or technical cooperation, or on foreign investment. Foreign citizens do not requirea visa to stay in Montenegro. Foreigners do require a visa to travel through the Serbian parts of the StateUnion of Serbia and Montenegro. However the visa of the State Union is not recognised withinMontenegro. This situation is likely to create some confusion for foreign investors.

4.4. Real estate

A foreign company or person may purchase and own assets and real estate in Montenegro required forperforming business activity (provided that reciprocal arrangements exist in that person’s own country).

Any foreign person whether carrying on a business activity or not, may buy a house or flat inMontenegro (provided reciprocity exists).

Property ownership is in some cases difficult to establish however, especially since the issue ofproperty restitution has not yet been finally resolved. The Montenegrin Parliament adopted a RestitutionAct in June 2002 but this is being challenged in the Constitutional Court in a case lodged, oddly, by thegovernment itself.




A Law on Government Procurement was introduced in Montenegro in 2001. The law does notdiscriminate against foreign operators, and covers all public bodies awarding contracts and all sectors.



Banking. Banks may be founded by at least two domestic or foreign physical persons and legal entities(Law on Banks, Nos. 52/2000 and 53/2000). At present there are ten licensed banks in Montenegro andthree branches of Serbian banks. In 2002, two domestic banks and three Serbian branch offices wereplaced in bankruptcy. The government took over the largest of these, Montenegro Bank, and plans toprivatise it in 2003. After the sale of that bank and the 65 percent state-owned Podgorica Bank, aroundnine-tenths of the banking sector will be in private ownership.

The bank law allows foreign banks to open branch offices with the status of legal entities. The CentralBank of Montenegro is authorised to issue operation permits to foreign bank branches under conditionsset for the foundation of the bank if the parent bank has the minimum capital prescribed for thefoundation (Centre for Banking, Finance, and International Economics 2002). A foreign bank may also openits representative offices in Montenegro, but may not engage in banking operations.

Foreigners in Montenegro, subject to a licence issued by the Ministry of Finance, may establishoffshore banks. The regulations are even more liberal than in the case of a normal foreign investment.Offshore banks are regulated by the provisions of the Law on Companies Which Are Established andOperate on Special Terms (Off-shore Companies). It provides for the secret registration of the companiesin a special register of the Ministry of Finance, and exemption for almost all taxes, except for a profits taxat the rate of 2.5 percent. All employees are required to pay the wage tax at a rate 5 percent, andMontenegrin (and Serbian) residents are required to pay pension contributions at 6 percent, and healthcontributions at 4 percent. Registration is a simple procedure that takes at a maximum of fifteen days forbanks. If the registration is not completed in fifteen days, the company becomes automatically registered.Only a registered office at a registered attorney licensed in Montenegro is required. The minimum capitalfor founding an offshore bank is US$ 1,000 for an offshore limited liability company and US$ 10,000 for ajoint stock offshore company. Non-domestic residents (foreign nationals) are entitled to the followingexemptions:

– Duty free importation of vehicles, yachts, consumer durables for family use, but these may not bedisposed of or their ownership rights transferred to domestic nationals for five years.

– Exemption from real-estate taxes on owner-occupied housing.– Exemption form gift and inheritance tax and capital gains tax for gains made from offshore

operations in Montenegro.– Exemption from administrative and residency levies and municipal duties.

In addition offshore banks may freely transact in any currency of their choice without any limitations oradministrative requirements. Secrecy is guaranteed with regard to the request for establishment,licences, bank deposits, founding and operations of an offshore bank.

Insurance. The establishment of an insurance company is regulated by the Serbia and Montenegro Lawon Insurance of Property and Persons (Official Gazette, 55/1999). According to this law, a foreign naturalperson or legal entity may form an insurance company only as a joint venture with a local natural personor legal entity. As an exception, a foreign legal entity may form a wholly owned captive insurance companyfor offshore activities only. An insurance company, in which foreign capital has been invested, is notallowed to carry out re-insurance activities abroad.



According the Law on Insurance of Property and Persons, a foreign investor may also establish its owninsurance company for property and personal insurance of its founders aboard.


According to the “Regulation Strategy of the Infrastructure Sectors in Montenegro” an independentregulatory body is to be established in Montenegro, which will have separate sections for the regulationof telecommunications. Similar bodies will also cover energy supply, water supply and utility services.

5.3. Maritime transport

The Maritime Public Property Law (Official Gazette 14/94) lists everything included in the notion ofmaritime public property and seashore and provides that any such property is state-owned and in publicuse and shall be managed by a public enterprise.

Foreign legal entities and natural persons may register a ship, yacht or aircraft under the Serbia andMontenegro flag, in conformity with the law. If a registered ship, yacht or aircraft is used for earningincome, the foreign legal entity or natural person must establish a company in accordance with theprovision of the Law on Off-Shore Companies, and must pay a registration tax varying between US$ 500and US$ 4,000 depending on tonnage. For passenger ships the tax is set at US$ 0.25 for each tonne weight.Yachts and aircraft are taxed at their own specific rates. The register of ships, yachts and aircraft ismaintained by the Ministry of Maritime Trade and Transportation.


The shareholdings of a foreign investor in Montenegrin companies in the armaments industry and theproduction of military equipment are limited to 49 percent of the total shares. An approval from theresponsible ministry is required before the start of any negotiations over founding an enterprise in thatindustry or investing in an enterprise in that industry. Montenegrin citizens involved in such negotiationsshould not reveal any information about the negotiations without the approval of the relevant ministry.

Foreign investor stakes in Montenegrin companies in restricted areas such as border areas or innational parks are limited to 49 percent of the total shares.

5.5. Other sectors

According to the provisions of the Sea Fishery Law (Official Gazette 26/92, 59/92) foreign investors areallowed to engage in sea fishery as long as they meet the requirements set out in the Federal ForeignInvestment Law and the Law on Concessions.

6. OTHER RELEVANT ELEMENTS

6.1. Privatisation

In 1992 Montenegro introduced an Act on Property and Management Transformation that abolishedsocial property and required all previously socially owned companies to become incorporated bybecoming public limited liability companies and issuing shares representing ownership. All employeesreceived free shares, but only up to 10 percent of the value of enterprise assets. Up to a further 30 percentof assets could be bought at a discount. The rest of the shares (60 percent) were transferred to theDevelopment Fund (60 percent), the pension Fund (30 percent) and the Employment Fund (10 percent).Altogether 299 companies worth 4.5 billion DM were transformed, of which 2.6 billion German marks wentto the three Funds. Nearly 80 percent of enterprises underwent “ownership transformation” under thisprogramme. Many of the formerly socially owned companies which were transformed into shareholdingcompanies under the privatisation process ended up under majority ownership of the Development Fund.



A new Privatisation Law was introduced in Montenegro in 1996 (Privatisation Law, Official Gazette ofMontenegro, 23/96) under which state funds were to sell their shares in enterprises to the public or toforeign investors. Prominent among sales to foreign investors was the takeover of the indebted aluminiumcompany Kombinat Aluminijuma Podgorica (KAP) by the Swiss-based Glencore. This was a controversialsale which occurred under conditions of secrecy and without an open tender. The plant accounts for morethan half of Montenegro’s foreign exchange earnings. Altogether the funds sold majority shares in 96enterprises, a controlling share in 86 companies and a managing share in 12 companies. At the end of thisprocess, more than two thirds of enterprise capital still remained in state ownership in the various funds.

A Privatisation Council was established in 1998 to oversee the complete privatisation of the stateowned shareholdings. Amendments to the Privatisation law were introduced in 1999 (Privatisation Law,Official Gazette of Montenegro, 6/99) obliging all remaining state owned companies to draw up aprivatisation plan. A mass voucher privatisation (MVP) process was initiated in 2001, which distributedvouchers free to the public who then had an opportunity to exchange the vouchers for shares eitherdirectly or through Privatisation Investment Funds in 190 companies covered by the programme.However, many of these so-called MVP companies have closed down or are operating a significantlyreduced level of capacity. Most still have many employees on the books who represent a hiddenunemployment, do not turn up for work, and either do not receive salaries or receive very much reducedsalaries. They also have a claim to back-pay and back-social contributions. This legacy deters foreigninvestors. Even after the completion of the voucher privatisation, it is estimated that 45 percent ofindustry, including the 17 largest companies, is still not privatised.

Nevertheless sales of state owned companies are proceeding. In October 2002 one of the biggestMontenegrin companies, Jugopetrol Kotor was sold to a Greek company for EUR 65 million.

The government announced a Decision on the Privatisation Plan for 2003 on 27 February whichenvisages the privatisation the remaining 15 large companies that have not yet been privatised. A keyelement in the privatisation plan is to attract foreign investors to enter as strategic partners in thesecompanies. To this end the Plan envisages the development of the institutional framework for attractingforeign investors. This involves several elements including (i) creating conditions for the legalisation ofthe grey economy, (ii) improvement of the statistical and accounting systems, accompanied by free accessto data collected by the statistical services about companies, the state and NGOs, (iii) ensuring thatchanges to existing laws do not worsen the position of foreign investors, and (iv) ensuring thatharmonisation of the laws of Serbia and Montenegro does not worsen the position of existing investors inMontenegro.

6.2. Concessions

Montenegro introduced a Law on Concessions in 1991 (Official Gazette 13/91) amended in 1997.

According to the Law on Games of Chance (Official Gazette 20/95) concessions for the staging of gamesof chance may not be granted to foreign individuals and legal entities. However, a foreign person mayconclude an agreement to invest in a domestic enterprise that has been granted the right of staginggames of chance, so long as the foreign investor does not acquire a majority shareholding.

6.3. Fiscal incentives

The Serbia and Montenegro Law on Foreign Investments includes some non-tax incentives that are notcontained in the Montenegrin law. Under this law a foreign investor is allowed to freely import equipment,other fixed assets and materials for construction of facilities. Imports of new equipment as a form offoreign investment, apart from motorcars and slot machines, is free of import duties.

A foreign investor may use the services of the Agency of Montenegro for Economic Restructuring andForeign Investment. The agency carries out activities of filing, financial and legal consulting, promotional



activities in the field of foreign investment, offers professional assistance in programme direction andestablishing companies in Montenegro. It offers assistance in concluding contracts on concession withforeign investors. It assists in converting foreign debt to joint ventures (debt-equity swap). It collectsoffers of foreign investors in domestic companies, and projects of domestic companies to foreigninvestors. It provides information to potential investors on the movement of goods, capital and labour onthe domestic and foreign market, and on the regime of the Customs Zone in Bar.

A foreign investor in Montenegro shall not be taxed in a manner less favourable than domestic legalentities. The profits tax law provides for reduced rates for companies with long-term foreign investments.The profits tax law provides for the following tax incentives:

– The possibility of reduced rates for companies with long-term foreign investments in fixed capitalunder conditions and for the duration specified by the laws.

– A company that carries out a production activity in an economically underdeveloped municipalityis exempt from corporate profits tax for the first three years of operation, on the profits made withinthe municipality.

– Profit tax is reduced for investors in fixed assets in a company by 25 percent of the investmentmade, but this reduction may not exceed 30 percent of the investor’s total tax liability.

Offshore companies established under the 1996 Law on Companies Which are Established andConduct Business on Special Terms (see 8.4. below) are subject to profits tax at a special rate of 2.5percent.

6.4. Free Zones

Free Zones can be established in areas that encompass international airports, sea or river ports, or arenear an international road (Law on Free Zones, Official Gazette of the FRY, 81/94). Free zones can beestablished by domestic or foreign persons, but the share of foreign capital in the zone cannot exceed 49percent. Free zones are managed by companies founded by domestic or foreign entities, subject to alicence obtained from the Union Finance Ministry in Belgrade. Exports and imports of commodities andservices to and from the Free Zone are free of taxes and duties. A Free Zone must export at least 30percent of the total value of goods produced within it.

The regulations for companies that operate in Free Zones are even more liberal than in the case of anormal foreign investment. Companies established as offshore companies are regulated by the provisionsof the Law on Companies Which Are Established and Operate on Special Terms (Law on OffshoreCompanies, 1996). It provides for the anonymous registration of the companies in a special register of theMinistry of Finance, and exemption for almost all taxes, except for a profits tax at the rate of 2.5 percent.Such companies should be established for the purpose of carrying out international trade, exportingdomestic products and services, rendering financial and non-financial services, management andconsulting services, or activities in information technology, real estate, audio-visual products, andactivities carried out in international business centres. Registration is a simple procedure that takes amaximum of ten days. If the registration is not completed in ten days, the company becomesautomatically registered.


A foreign investor may open a foreign currency account at an authorised bank. Since 1999, the DM andthen in 2002 the Euro, has been the official currency in Montenegro, and foreign exchange controls havebeen abandoned.

6.6. Investment Protection and Double Taxation

(See section 6.6. of ”NATIONAL TREATMENT REVIEW OF SERBIA")






Agency of Montenegro for Economic Restructuring and Foreign Investments. 2002. Foreign InvestmentPossibilities in Montenegro (Legal Aspects). Podgorica.

CEED(Centre for Entrepreneurship and Economic Development). 2002. Barriers to Doing Business inMontenegro. Podgorica.s

Centre for Banking, Finance, and International Economics. 2002. Business in Montenegro: A Business Tax Guide.Podgorica.

Bulgaria Economic Forum, Sofia, Investment Guide for Southeast Europe, Ivanov, Eugeniy, Iva Stoykova &Yordanka Palahanova. 2002.


Appendix 3.

PPRRIINNCCIIPPAALL CCOONNTTAACCTTSS OONN IINNVVEESSTTMMEENNTT IINN SSOOUUTTHH EEAASSTT EEUURROOPPEE

IINNVVEESSTTMMEENNTT PPRROOMMOOTTIIOONN

MMEEMMBBEERR OORRGGAANNIISSAATTIIOONNSS OOFF TTHHEE RREEGGIIOONNAALL RROOUUNNDDTTAABBLLEE FFOORR IINNVVEESSTTMMEENNTTPPRROOMMOOTTIIOONN ((RRRRTT))

(RRT is a partnership of national organisations active in the field of investment promotion in South EastEurope. It includes investment promotion agencies, government ministries, private sector and other non-governmental organisations. RRT runs a programme of actions aiming at policy development andinstitutional capacity building for investment promotion agencies and raising awareness of the SEERegion as a business environment with opportunities for strategic investments.)

AAllbbaanniiaann FFoorreeiiggnn IInnvveessttmmeenntt PPrroommoottiioonn AAggeennccyyMs. Estela Dashi, Chief Executivec/o Ministry of Economy3, Blvd. Zhan D’Ark, Tirana, AlbaniaTel: +355 69 20 95 125www.mbet.gov.al

FFoorreeiiggnn IInnvveessttmmeenntt PPrroommoottiioonn AAggeennccyy ooff BBoossnniiaa aanndd HHeerrzzeeggoovviinnaaMr. Mirza Hajric, General DirectorBranilaca Sarajeva 21/III, 71000 Sarajevo, BiHTel: +387 33 278 080; Fax: +387 33 278 081www.fipa.gov.ba

BBuullggaarriiaann FFoorreeiiggnn IInnvveessttmmeenntt AAggeennccyyMr. Pavel Ezekiev, President31 Aksakov Street,1000 Sofia, BulgariaTel: +359 2 985 55 00/980 09 18Fax: +359 2 980 13 20/987 42 11www.bfia.org

BBuullggaarriiaa EEccoonnoommiicc FFoorruummMr. George Tabakov, President86 Vitosha Blvd, 1463 Sofia, BulgariaTel: +359 2 951 52 59; 57 59Fax: + 359 2 953 29 24www.biforum.org

TTrraaddee aanndd IInnvveessttmmeenntt PPrroommoottiioonn AAggeennccyy ooff CCrrooaattiiaaMr. Igor Maricic, Managing Director78 Ulica grada Vukovara, 10000 Zagreb, CroatiaTel: +385 1 6106 994; Fax: +385 1 61 09 120www.mingo.hr

MMiinniissttrryy ooff EEccoonnoommyyDDeeppaarrttmmeenntt ffoorr SSuuppppoorrttiinngg FFoorreeiiggnn DDiirreeccttIInnvveessttmmeennttMr. Bosko Stefanovski, Chief Executive7 Nikola Vapcarov Street, Macedonia1000 Skopje, MacedoniaTel: + 389 (2) 3126 059; Fax: +389 (2) 3126 022www.mpa.org.mk

MMoollddoovvaann EExxppoorrtt PPrroommoottiioonn OOrrggaanniissaattiioonn //MMoollddoovvaann IInnvveessttmmeenntt DDeevveellooppmmeenntt AAggeennccyyMr. Valeriu Canna, General Director65 A. Mateevici Street,MD- 2009 Chisinau, MoldovaTel: + 373 2 24 20 55/23 24 84Fax: +373 2 22 43 10/23 31 97www.mepo.net

IINNVVEESSTTMMEENNTT PPOOLLIICCYY

CCOOUUNNTTRRYY EECCOONNOOMMIICC TTEEAAMM LLEEAADDEERRSS

(Country Economic Teams (CET) in each South East European country guide their country’s participationin the Investment Compact. CET leaders are listed below.)


Appendix 3.

RRoommaanniiaann AAggeennccyy ffoorr FFoorreeiiggnn IInnvveessttmmeennttssMr. Marian Florian Saniuta, President22 Blvd. Primaverii,Bucharest, RomaniaTel: +4021 233 91 03Fax: + 4021 223 91 04www.arisinvest.ro

CChhaammbbeerr ooff CCoommmmeerrccee aanndd IInndduussttrryy ooffRRoommaanniiaa aanndd BBuucchhaarreesstt MMuunniicciippaalliittyyMr. George Cojocaru, President 2 Blvd. Octavian Goga,742441 Bucharest, RomaniaTel: +4021 322 95 35Fax: +4021 322 95 42www.ccir.ro

SSeerrbbiiaann IInnvveessttmmeenntt aanndd EExxppoorrtt PPrroommoottiioonnAAggeennccyyMr. Zlatan Milosevic, Director3. Terazije 23 Street, BelgradeTel: +381 11 3248 040Fax: +381 11 3248 227www.siepa.sr.gov.yu

AAggeennccyy ooff MMoonntteenneeggrroo ffoorr EEccoonnoommiiccRReessttrruuccttuurriinngg aanndd FFoorreeiiggnn IInnvveessttmmeennttMr. Branko Vujovic, Directorul. Jovana Tomasevica bb81000 PodgoricaTel: +381 81 243 475/242 640/242 457Fax: +381 81 245 746www.agencijacg.org

AAllbbaanniiaaMr. Bashkim SykjaHead of SME and FDI UnitMinistry of EconomyTel.: (355 4) 36 46 73Fax: (355 4) 22 26 [email protected]

BBuullggaarriiaaMr. Pavel EzekievPresident Bulgarian Foreign Investment AgencyTel.: (359 2) 980 03 26Fax: (359 2) 980 13 [email protected]

FFoorrmmeerr YYuuggoossllaavv RReeppuubblliicc ooff MMaacceeddoonniiaaMr. Ilija FilipovskiMinister, Ministry of EconomyTel.: (389 2) 393 404Fax: (389 2) 393 [email protected]

RRoommaanniiaaMr. Cristian DiaconescuState Secretary for Bilateral AffairsMinistry of Foreign AffairsTel.: (40 21) 230 71 19Fax: (40 21) 230 67 [email protected]

MMoonntteenneeggrrooMs. Slavica MilacicMinister, Ministry of Foreign Economic Relationsand EU IntegrationTel.: (381 81) 225 568 Fax: (381 81) 225 [email protected]

BBoossnniiaa aanndd HHeerrzzeeggoovviinnaaMr. Dragisa MekicAssistant MinisterSector for Foreign Trade Policy and ForeignInvestmentsMinistry of Foreign Trade and EconomicRelations Tel/Fax: (387 33) 220 [email protected]

SSTTAABBIILLIITTYY PPAACCTT FFOORR SSOOUUTTHH EEAASSTT EEUURROOPPEE

JJOOIINNTT SSTTAABBIILLIITTYY PPAACCTT-SSEECCII BBUUSSIINNEESSSS AADDVVIISSOORRYY CCOOUUNNCCIILL

CCOO-CCHHAAIIRRSS OOFF TTHHEE IINNVVEESSTTMMEENNTT CCOOMMPPAACCTT PPRROOJJEECCTT TTEEAAMM


Appendix 3.

CCrrooaattiiaaMr. Krunoslav PlackoAssistant Minister, Investment FacilitatingDivisionMinistry of EconomyTel.: (385 1) 6106 835Fax: (385 1) 6109 [email protected]

MMoollddoovvaaMr. Marian LupuMinister, Ministry of EconomyTel.: (373 2) 23 46 28Fax: (373 2) 23 74 [email protected]

SSeerrbbiiaa aanndd MMoonntteenneeggrrooMs. Jelica MinicAssistant Federal MinisterFederal Ministry of Foreign AffairsTel.: (381 11) 361 80 78Fax: (381 11) 361 22 [email protected]

SSeerrbbiiaaMr. Goran PiticMinisterMinistry of International Economic RelationsTel.: (381 11) 361 76 28Fax: (381 11) 301 55 [email protected]

DDrr.. EErrhhaarrdd BBuusseekkSpecial Coordinator of the Stability PactTel.: (32 2) 401 8701Fax: (32 2) 401 8712

MMrr.. BBeerrnnaarrdd SSnnooyyDirector, Working Table IITel.: (32 2) 401 8715Fax: (32 2) 401 [email protected]

Mr. Pierre DaurèsExecutive Vice President, Bouygues GroupTel. : (33 1) 30 60 50 20Fax : (33 1) 30 60 33 [email protected]

Mr. Nikos EfthymiadisSindos Industrial Area of ThessalonikiTel.: (30 231) 798 226; 798 403 Fax: (30 231) 797 376; 796 [email protected]

Mr. Rahmi KoçKoç Holding ASTel.: (90 216) 343 1940 41Fax: (90 216) 492 [email protected]

Mr. Manfred NussbaumerChairman of the Board, Ed. Zueblin AG Tel.: (49 711) 7883 616Fax: (49 711) 7883 [email protected]

AAuussttrriiaaMr. Manfred SchekulinDirector, Export and Investment Policy DepartmentFederal Ministry for Economic Affairs and LabourTel.: (43 1) 711 00 5180Fax: (43 1) 711 00 [email protected]

OOEECCDDMr. Rainer GeigerDeputy Director, Directorate for Financial, Fiscaland Enterprise AffairsTel.: (33 1) 45 24 91 03Fax: (33 1) 45 24 91 [email protected]

RRoommaanniiaaMr. Cristian DiaconescuState Secretary for Bilateral AffairsMinistry of Foreign AffairsTel.: (40 21) 230 71 19Fax: (40 21) 230 67 [email protected]

OOEECCDDMr. Declan MurphyProgramme DirectorInvestment Compact for South East EuropeTel.: (33 1) 45 24 97 01Fax: (33 1) 45 24 93 [email protected]