MacedoniaChapter 6: Investment Climate Openness to Foreign InvestmentConversion and Transfer Policies Even before gaining full membership to the World Trade Organization (WTO) in April 2004, Macedonia consistently provided national treatment to foreign investors. The country also concluded a number of bilateral investment protection treaties and other multilateral conventions that impose stricter protection standards for foreign investors. The Constitution of Macedonia, as the supreme law of the land, guarantees the equal position of all entities in the market, but provides free transfer and repatriation of investment capital and profits for foreign investors. There is no one law regulating foreign investments. Rather, the legal framework is comprised of several laws, including: the Trade Companies Law; Securities Law; Profit Tax Law; Customs Law; the VAT Law; Foreign Trade Law, the Law on Acquiring Shareholding Companies, the Foreign Exchange Operations Law; the Law on Foreign Loan Relations; the Law on Privatization of State-owned Capital; the Law on Investment Funds; and the Banking Law.
- The Trade Companies Law
A committee comprised of academics, experts, government officials, and businessmen replaced the old 1996 trade companies law with a more progressive one in May 2004. This is the primary law regulating business activity in Macedonia. It defines the types of companies allowed to operate in Macedonia, as well as procedures and regulations for their establishment and operation. As all foreign investors are granted national treatment, they are entitled to establish and operate all types of private or joint-stock companies. Foreign investors are not required to obtain special permission from state-authorized institutions other than what is customarily required by law.
- Law on Privatization of State-owned Capital
According to this law, foreign investors are guaranteed equal rights with domestic investors when bidding on tenders for company share packages owned by the government. There are no impediments to foreign investors to participate in the privatization process of domestic companies.
- Foreign Loan Relations Law
This law regulates the credit relations of domestic entities with those abroad. Specifically, it regulates the terms by which foreign investors can convert their claims into deposits, shares or equity investment with the debtor company or bank. The Foreign Loan Relations Law also enables rescheduled debt to be converted into foreign investment in certain sectors or in secondary capital markets.
- Law on Investment Funds
This law governs the conditions for incorporation of investment funds and investment fund management companies, the manner and supervisory control of their operations and the process of selection of a depository bank. The law does not discriminate against foreign investors in establishing open-ended or closed investment funds.
- Law on Foreign Exchange Operations
This law establishes the terms for further liberalization of capital transactions. It regulates current and capital transactions between residents and non-residents, the transfer of funds across borders, as well as all foreign exchange operations. All current transactions of foreign entities are allowed. There are no restrictions for non-residents to invest in Macedonia. Foreign investors may repatriate both profits and funds acquired by selling shares after paying regular taxes and social contributions. In case of expropriation, foreign investors have the right to choose their preferred form of reimbursement. While they cannot own land, foreign investors may invest in or own immovable assets and real estate.
- Other Legal Considerations
Foreign investment may be in the form of money, equipment, or raw materials. To guarantee that the investment will not be nationalized, the investor can reserve the right to withdraw the deposit in the form effectuated with the investment. This regulation offers an additional incentive to foreign investors, since it is not offered to national investors.
The privatization process is governed by the Law on Transformation of Enterprises with Social Capital (Official Gazette 38/93) and the Law on Privatization of State-owned Capital (Official Gazette 37/96). To quickly finish the privatization of its remaining shares in companies, the government has offered large discounts on the nominal value of the shares and no longer imposes stringent employment and investment requirements.
Foreign investors are allowed to invest directly in all industry and business sectors except those limited by law. Investment in the production of weaponry and narcotics is prohibited without government approval. Investors in some sectors, such as banking, financial services, and insurance, must meet certain licensing requirements that apply equally to domestic and foreign investors.
Conversion and Transfer Policies Parallel foreign exchange markets do not exist in Macedonia due to the long-term stability of the denar. The National Bank's strategy is to maintain a stable exchange rate by pegging the denar to the Euro, keeping inflation low.
The Constitution of Macedonia guarantees the free transfer and repatriation of investment capital and profits. By law, foreign investors are entitled to transfer profits and income without being subject to a transfer tax. Investment returns are generally remitted within the international standards of three working days.
Expropriation and Compensation - Construction of infrastructure; The beneficiary of expropriation is the state, especially when it allocates finances for public service, public enterprise, public funding and local government units. Under the Law on Expropriation, the state is obliged to pay market value for any property expropriated. If the payment is not made within 15 days of the decision brought for expropriation, default interest will be calculated.
There have been no expropriation measures taken since the 1950s, nor is there any reason to believe the government will take such action in the future. The government does not impose confiscatory taxes of any kind.
In 2002, under the Law on Denationalization, the government pursued an ambitious plan for returning or compensating nationalized property to claimants. Although many claims were resolved in 2002, much remains to be done as the new government continues its efforts at denationalization.
Dispute Settlement International arbitration is recognized and accepted as valid by government regulation. The government accepts binding international arbitration on investment disputes and has over 40 internationally-accredited arbiters on the country’s arbitration list. The arbitration court applies the appropriate law based on issues determined by the parties. In the event that the parties cannot agree on the issues involved in the case, the court then makes its own assessment of the merits of the case.
International sources of arbitration law consist of bilateral and multilateral conventions, which Macedonia has signed or inherited from the former Yugoslavia on the basis of succession. Macedonia has signed the Convention Establishing the Multilateral Investment Guarantee Agency (MIGA), the New York Convention of 1958 (governing the recognition and enforcement of foreign arbitral awards), and the Geneva Convention on the Execution of Foreign Arbitral Awards. Macedonia is also a party to the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States and the European Convention on International Commercial Arbitration.
Furthermore, Parliament has instituted legislative changes to administer laws related to foreign investment. With the 1995 enactment of the Law on Courts, the judicial body evolved into a three-tiered court system: the Basic Court (or Court of the First Instance), the Appellate Court and the Supreme Court.
Performance Requirements and Incentives In 2003, the government amended the profit tax law to allow a tax base deduction of one euro for each euro of investment in fixed assets up to 100,000 euros, and 0.30 euros for each euro of investment over 100,000. The Ministry of Finance will also introduce this year a new profit tax law addressing EU and Western business standards while offering enhanced incentives to both domestic businesses and foreign direct investment.
Companies with at least 20 percent foreign capital are exempt from customs duties for the first three years after registration.
Foreign investors are not required to purchase from local sources or to export.
There are also no requirements for the government to be a partner in the enterprise. Commercial agreements determine which entity retains control over the investment revenue. Further, there are no requirements for reducing foreign equity over time or for transferring technology.
Geography plays an important role in determining investment incentives. The government places an emphasis on building in underdeveloped regions, and offers tax deductions as an incentive to develop, for example, in mountainous territory, border zones or rural regions.
Macedonia’s government has no objections to accepting international monetary assistance or counsel from leading experts in sectors such as the economy, law, and education. When Macedonia receives foreign credit, the government is required to inform the parliament. Once informed, members of parliament decide whether the credit will be accepted. The government may, however, accept donations and irrevocable assistance without consulting with the parliament.
The Law on Residency of Foreign Citizens sets requirements for both working and resident visas. There are some non-discriminatory limitations on obtaining a visa. A foreign citizen working in Macedonia can be issued a multiple entry visa. An employer should apply to the Employment Bureau to obtain a work permit for any foreign employees working in Macedonia on a temporary or permanent basis.
There is no discriminatory export or import policy affecting foreign investors. Almost 96 percent of total trade (export/import) is unrestricted, with some exceptions for textile products. There are also quotas based on preferential agreements signed with the former Yugoslav countries. Current tariffs and other customs-related information are published on the Customs website,
Right to Private Ownership and Establishment At the end of 1999, the government introduced two new laws governing competition, a law on restricted competition and an anti-monopoly law. Macedonia still lacks a fair competition law however. Under current law, state enterprises enjoy special privileges vis-à-vis their private counterparts. This is a new area of concern for the country’s judicial system and it is not yet clear how Macedonia will address this issue.
In May 2004, Parliament enacted a new law for trade companies (see above) to establish a legal environment for the development of domestic commercial entities and to encourage foreign investment. Under the Law on Trade Companies, trade companies are formed as separate legal entities that operate independently and are distinct from their founders, shareholders and managers. Depending on the type, trade companies have their own rights, liabilities, names and managerial offices. Under this law, there are five forms of trade companies: public trade (general partnership), limited partnership, limited liability company, joint stock company and limited partnership by shares.
This law gives shareholders important rights, guarantees greater transparency in all operations of publicly-held companies, and attempts to reduce obstacles to registration and permitting.
Protection of Property Rights Macedonia joined the World Intellectual Property Organization (WIPO) in 1993, and in 1994 became a member of the Permanent Committee of Industrial Property Protection Information of WIPO. As a successor to the former Socialist Federal Republic of Yugoslavia, Macedonia has adhered to international conventions and agreements that govern these rights.
Macedonia’s accession to the WTO in April 2003 underscored the urgent need for the government to prevent copyright infringement. The first step in that direction was taken in 2002 when the Government reached an agreement with Microsoft to legalize all government software. Joint action taken by the Inspectors from the Ministry of Culture and Interior has shown some results in combating piracy in the production and sale of items such as CDs, DVDs, movies, and software.
Transparency of Regulatory System
Efficient Capital Markets and Portfolio Investment Domestic companies are financed primarily from cash flow, due to lack of bonds or securities as alternative credit instruments. Because of the scarcity of private financing, the need for financial assets creates increased credit demand. To obtain credit, applicants must generally fulfil the following criteria, which vary from bank to bank:
- Satisfactory business plan; Macedonia has no regulatory defense measures directed against foreign investment. Similarly, there are no private or governmental efforts directed toward restricting foreign entities from investment, participation, or control of domestic enterprises, consortia or industrial organizations. With the inflow of international aid, experts and projects, Macedonia is in the process of harmonizing its legal and regulatory systems with international standards.
The development of SMEs (Small and Medium Enterprises) is one of the government’s major priorities. Macedonia continues to develop programs in coordination with experts from USAID (US Agency for International Development), GTZ (German Technical Assistance) and EAR (European Agency for Reconstruction) in order to boost the SME sector. Credit lines for SMEs are available through the Macedonian Bank for Development Promotion. Other banks also offer such loans, but on rather stricter terms. Opportunities for micro-financing are available through the newly established ProCredit Bank, and also through the savings house “Moznosti”. Short-term purchase order and export financing are available through the USAID-supported SME Commercial Finance Fund. The main obstacles for companies attempting to secure loans include:
- A low level of domestic savings;
Political Violence Corruption Macedonia has signed the Organization for Economic Cooperation and Development's (OECD) Convention on Combating Bribery. Though all the necessary laws are in place, enforcement is weak, and the public is still skeptical of the government's willingness to prosecute corrupt officials within its ranks. The public generally views the police, courts and the healthcare sector as the most corrupt public institutions.
Bilateral Investment Agreements 1. Republic of Croatia Macedonia does not have a bilateral investment or taxation treaty with the U.S., nor have negotiations on such treaties begun.
OPIC and Other Investment Insurance Programs OPIC and MIGA are the country’s chief investment insurance providers. OPIC insurance and project financing have been available to investors in Macedonia since 1996. OPIC's three main activities are risk insurance, project finance and investment funding. MIGA provides investment guarantees against certain non-commercial risks (i.e., political risk insurance) to eligible foreign investors making qualified investments in developing member countries. MIGA covers investors against the risks of currency transfer restrictions, expropriation, breach of contract, and war or civil disturbance. MIGA and OPIC will continue to work together in the future.
Though its primary focus is investment assistance - including direct loans and capital guarantees aimed at the export of non-military items - EXIM also provides some insurance policies to protect against both political and commercial risks. TDA, SEEF, World Bank and EBRD focus more directly on financing agreements.
Labor The law is flexible with regard to working hours. Normal working hours for an employee are eight hours per day, five days per week. According to labor regulations, an employee is entitled to a minimum of 18 working days and a maximum of 26 working days paid annual leave during the course of a calendar year. Work permits are required for foreign nationals. There is, however, no limitation on the number of employed foreign nationals or the duration of their stay.
There are two main associations of trade unions. The Union of Trade Unions, the country’s largest, is comprised of independent unions, and encompasses about 14 separate unions organized by industry sector. The Alliance of Independent Trade Unions basically exists as an opposition group to the former. Trade unions have become interest-based, autonomous labor organizations. Membership is voluntary and activities are financed entirely by membership dues. Almost 75 percent of employed workers are dues-paying union members. Due to the difficult economic climate and political infighting, the unions as a rule have not exercised much leverage vis-à-vis employers in recent years.
National collective bargaining agreements are negotiated between the labor unions, representing the employees, the Ministry of Labor and Social Welfare, representing the Government, and the Economic Chamber, representing the employers. Contracts are also negotiated at the company level. The primary pressures that unions face are related to recession, unemployment and privatization.
Foreign-Trade Zones/Free Ports Foreign Direct Investment Statistics
(Source: National Bank of Macedonia.)
2. Foreign Direct Investment by Country ($ millions) (for selected countries):
(Source: National Bank of Macedonia; Telekom investment in 2001 split among individual countries in consortium.)
(Source: EBRD Investment Profile for Macedonia) Web Resources
European Bank for Reconstruction and Development - Website of the Government of Macedonia - Ministry of Economy - Ministry of Finance - Ministry of Internal Affairs - Ministry of Finance Macedonian Customs Authority - |
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