MacedoniaOpenness to Foreign Investment As a small, relatively open economy, Macedonia continues to take steps to attract foreign direct investment (FDI). The country has enacted legislation that not only ensures an equal footing for foreign investors vis-à-vis their domestic counterparts, but also provides numerous incentives to attract such investment. Even before gaining full membership in the World Trade Organization (WTO) in April 2003, 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, and provides for free transfer and repatriation of investment capital and profits for foreign investors. Macedonia's privatization process is almost complete. Under Macedonian law, foreign and domestic investors have equal opportunities to participate in the privatization of remaining state-owned capital. There is no single 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 legal system in Macedonia is undergoing substantial reform. However, it is still often slow, inefficient, lacking in adequate resources, and sometimes subject to political pressures and corruption. Enforcement of the laws and the upholding of contracts are inconsistent and not always impartial. - The Trade Companies Law 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 participating 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 fixed assets and real estate. Foreign investors may also establish domestic companies that have the right to purchase land. Profit Tax Law Starting in January 2007, the profit tax was reduced from 15 percent to 12 percent, and it will be reduced to 10 percent in 2008. At the beginning of 2006, the GOM amended the Profit Tax Law and introduced a withholding tax on income for foreign legal entities. The withholding tax is applied to income from dividends, interest, management consulting, financial, technical, administrative, research and development services, leasing of assets, awards, insurance premiums, telecommunication services, authors fees, and sports and entertainment activities. Income from all of these activities is subject to a 15 percent withholding tax rate, except for income from interest and leasing of real estate, which are taxed at a 10 percent rate. This withholding tax does not apply to legal entities from countries which have signed an agreement for avoiding double taxation with Macedonia. The USA and Macedonia have not yet signed such an agreement. - Other Legal Considerations Foreign investment may be in the form of money, equipment, or raw materials. According to the law, foreign investors have the right to receive the full value of their investment in the case of nationalization. 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 Macedonia's national currency, the denar (MKD), while fully convertible within the domestic market, is not convertible on foreign exchange markets. Conversion of most foreign currencies is possible on the official foreign exchange market. In addition to banks and savings institutions, numerous authorized exchange offices also provide exchange services. The National Bank operates the foreign exchange market, but participates on an equal basis with other entities. Required foreign currency reserves are spelled out in the banking law. There are no restrictions on the purchase of foreign currency by residents. 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 standard of three working days. Expropriation and Compensation According to the Constitution of Macedonia and the Law on Expropriation (Official Gazette 33/95, amended Official Gazette 20/98, and 40/99), foreign ownership is exempt from expropriation except during instances of war or natural disaster, or for reasons of public interest. Public Interest, as defined by this Law, includes the following: - 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 confiscation 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. Claimants filed about 22,000 claims for denationalization by the 2005 deadline. Currently, about 15,000 claims have been resolved. However, the Government is considering reviving the process by providing another chance for claimants to file claims, as there were complaints that some claimants, especially those living outside Macedonia, were unable to meet the previous deadline. Dispute Settlement Under Macedonian law, arbitration of international disputes is distinct from that of domestic disputes. The parties involved in an international dispute may agree to settle through domestic litigation (Official Gazette Number 79/05; September 21, 2005), through mediation (Law on Mediation; Official Gazette 60/06; May 15, 2006), or foreign arbitration tribunal (Official Gazette Number 39/06; March 03, 2006). Ratified international agreements trump domestic legislation. 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 Both the Law on Customs and Law on Profit Taxes offer incentives to foreign investors. Foreign investors are eligible for profit tax exemptions in four areas: -Profits generated during the first three years of operation, in proportion to the amount of foreign investment; At the end of 2006, the government amended the profit tax law to enter into force on January 1, 2007. The text of the law may be found at: http://www.finance.gov.mk/gb/laws/zakon_danok_dobivka_139_2006_en.pdf 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 all of their production. There are also no requirements for the government to be a partner in an enterprise. Commercial agreements determine which entity retains control over the investment revenue. Furthermore, 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. Current tariffs and other customs-related information are published on the Customs website, http://www.customs.gov.mk. Right to Private Ownership and Establishment Under Article 30 of the Constitution of Macedonia, the investor's right to own property is guaranteed. Foreign investors may acquire property rights for buildings and rights for other immovable assets to be used for their business activities. They may acquire residential property, but not ownership rights over construction land. Foreign investors are permitted to have only land-use rights, not land ownership rights. Foreign investors may establish a domestic company, which has the right to purchase land. Ownership of property requires preservation of specific rights that serve both the individual and the community. For example, no person may be deprived of his/her property or the rights deriving from it unless the use of that property affects the general welfare of the public. If the property is expropriated or restricted, rightful compensation based on its market value is guaranteed. 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; it is not yet clear how Macedonia will address this issue. Under Macedonian law, foreign and domestic private enterprises have the right to establish and own business enterprises, engage in all forms of business activity, and freely establish, acquire, and dispose of interests in business activities. Protection of Property Rights While the legal basis for protection of ownership of both movable and real property exists, implementation remains incomplete. The registration of real estate, through the Government cadastre system, is incomplete and poorly maintained. This creates the potential for legal disputes over real estate ownership. The Government is in the process of reforming the cadastre system and creating a systematic registration of real estate. Intellectual Property Rights are covered by the Law on Industrial Property, enacted in 2002 and amended in 2006; the Law for Authors and Common Rights, enacted in 1995 and amended in 2005; and the Law on Customs Measures for Protection of IPR, enacted in 2006. The State Institute for Industrial Property governs patents, trademarks, service marks, designs, models and samples. The protection of author's rights (music, film and television, books, software, etc.) is administered by the Inspection Service within the Ministry of Culture, established in 1999. In addition, the State Market Inspectorate is responsible for monitoring and controlling establishments that sell or rent counterfeited or pirated goods. The Ministry of Interior also enforces the sale of intellectual property, as it relates to significant organized crime cases. Under the Law on Customs Measures for Protection of IPR, which went into force on January 1, 2006, the Customs Administration has increased authority to investigate cases of counterfeit goods, and has the right to seize suspect goods. The penalties for IPR infringement depend on the seriousness of the violation. In order of severity, the penalties can include: 30 - 60 days closure of businesses caught selling counterfeited or pirated goods, monetary fines of up to 5,000 euros, or prison sentence up to 5 years. IPR cases are not handled by specialized courts. 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 is a party to international conventions and agreements that the former Yugoslavia signed prior to Macedonia's independence. 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. Over the past few years the Government has seized and destroyed some counterfeit items and taken some legal actions against those who produce and sell counterfeit goods. Nevertheless, overall enforcement remains weak, and counterfeit goods remain common in shops and markets in Macedonia. As an EU candidate country, Macedonia is obligated to harmonize its IPR laws and regulations with EU standards, and to demonstrate adequate enforcement of those laws. The Government's Secretariat for European Affairs is coordinating this effort. Transparency of Regulatory System In Macedonia, there are no laws, policies, or legal regulations that formally impede foreign investment. On the contrary, the government seeks to increase the level of foreign investment by enacting legal provisions (i.e. tax incentives) favorable to investors. Such provisions notwithstanding, excessive bureaucratic ‘red tape' still poses difficulties in all spheres of government administration, providing opportunities for corruption. In order to ease the regulatory burden, the Government is reviewing all business regulations with the intent to eliminate unnecessary and outdated regulations. A Commission for Regulatory Reforms will consult with the business community and non-governmental organizations during this "regulatory guillotine" process. The Government has a self-imposed deadline of September 2007 to create an electronic database of all remaining regulations, which will be accessible on the Government's internet site. Proposed laws and regulations are sometimes made available for public debate before adoption by the Government or Parliament, although this practice is inconsistent. Efficient Capital Markets and Portfolio Investment There are no legal barriers to the free flow of financial resources and portfolio investments. Financial resources are almost entirely managed through the Macedonian banking system. At the end of the first half of 2006, foreign investors owned 53.6 percent of total banking assets, and foreign capital was present in 16 out of total of 20 banks. According to the Central Bank, at the end of June 2006 the percentage of non-performing loans in the total credit portfolio of the banking system was 9.9 percent. Supervisory monitoring has been strengthened, restoring depositors' confidence. Banks enjoy high liquidity but a relatively low intermediation rate. Credit is available on the local market and allocated on market terms. Retail interest rates further declined in 2006, ranging between 6 and 24 percent, depending on the type of loan. Weighted average lending rate of the banking system at the end of September 2006 was 11 percent, while the deposit rate was 4.6 percent. Domestic companies secure financing primarily from cash flow, due to lack of corporate bonds or securities as alternative credit instruments. Because of the scarcity of private financing, credit demand is high, affecting interest rates. Macedonia's securities markets are limited in turnover and capitalization. The establishment of a Stock Exchange in 1995 made it possible to regulate portfolio investments. On March 28, 1996, the commencement of trading operations created a central market place for securities trading. This was also the first organized stock exchange in the history of the country. Until recently, activity on the stock market was extremely limited, but the offer of shares from well-established companies in 2005 attracted both domestic and foreign investors. The Securities and Exchange Commission adopted legislation that regulates Macedonia's securities market. Only a handful of companies are listed on the First Market and a small number of shares are traded. Most of the activity takes place on the Second and Third Markets, where less transparency and disclosure are required. Government paper is present on the stock exchange in the form of denationalization bonds, frozen foreign currency bonds and a few special purpose bonds. In January 2004, the government started issuing treasury bills. Other government-issued bonds are for frozen foreign currency deposits and denationalization. Despite an open and fully convertible current account, there is little portfolio investment in the form of short-term capital inflows. Macedonia has no regulatory defense measures directed against foreign investment. Similarly, there are no private or government efforts directed toward restricting foreign entities from investment, participation, or control of domestic enterprises, consortia or industrial organizations. Macedonia is in the process of harmonizing its legal and regulatory systems with international, primarily European Union, standards. Political Violence Ethnic Albanian insurgents and government forces engaged in an armed conflict in 2001. The Ohrid Framework Agreement, signed in August 2001, ended the conflict by granting greater legal and political rights to Macedonia's ethnic Albanian and other minority communities. Since then, political violence has diminished dramatically, and the country has shifted its focus from security and stability to economic development and integration into the EU and NATO. Criminal violence in some areas remains a concern, although the crime rate in the country overall is relatively low. Citing political grievances, an armed ethnic-Albanian paramilitary/criminal group briefly occupied a village a few kilometers outside of Skopje in late 2004 and again in early 2005. The group lacked popular and political support, however, and the stand-off was resolved peacefully. During the 2006 parliamentary elections, there were some instances of pre-electoral violence related to the campaign, but the elections overall were calm and peaceful. There have been no instances of violence directed specifically at foreign businesspeople or investors. Corruption Like its Eastern and Central European neighbors, after the fall of communism, Macedonia inherited a government system rife with corruption. A series of laws have been adopted and amended to control crimes ranging from drug abuse to money laundering, and to create a legal firewall against corrupt practices, but enforcement has been anemic. In addition to the Law on Criminal Procedure which criminalizes acts of bribery and the abuse of official position, other major anti-corruption laws include the Law on Money Laundering Prevention and the Law on Corruption Prevention, which provide jail terms of up to 10 years for corruption and allow confiscation of illegally-obtained property. Macedonia has signed the Organization for Economic Cooperation and Development's (OECD) Convention on Combating Bribery. Macedonia has signed, but not ratified, the UN Convention Against Corruption, and has ratified the UN Convention against Transnational Organized Crime. Though most of the necessary laws are in place, enforcement is weak, and the public is skeptical of the government's willingness to prosecute corrupt officials within its ranks. The public generally views the police, courts, customs agency and the healthcare sector as the most corrupt public institutions. Transparency International gave Macedonia a score of 2.7 (on a 1 to 10 scale where 10 is least corrupt) on the 2006 Corruption Perception Index. The Macedonian Government established an independent State Commission for Prevention of Corruption in 2004. Through USAID, the US Government is supporting the commission's development and implementation of a Program for Prevention and Repression of Corruption and an accompanying action plan. Bilateral Investment Agreements Macedonia has concluded an "Agreement For Promotion And Protection Of Foreign Direct Investments" with the following countries: Albania, Austria, Bosnia and Herzegovina, Bulgaria, Belarus, Belgium and Luxemburg, Germany, Arab Republic of Egypt, Iran, Italy, Serbia and Montenegro, People's Republic of China, Republic of Korea, Malaysia, Poland, Republic of Romania, Russia, Republic of China, Slovenia, Turkey, Ukraine, Hungary, Finland, France, Netherlands, Croatia, Czech Republic, Switzerland, and Sweden. 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 Financing and insurance for exports, investment and development projects are made possible through agencies such as the U.S. Trade and Development Agency (TDA); the U.S. Export-Import Bank (EX-IM); the Overseas Private Investment Corporation (OPIC); the European Bank for Reconstruction and Development (EBRD); the International Bank for Reconstruction and Development (World Bank); the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency (MIGA); and the Southeast Europe Equity Fund (SEEF). Most of the funding for major projects is achieved through co-financing agreements, especially in the transportation, telecommunications and energy infrastructure development fields. 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. Though its primary focus is investment assistance - including direct loans and capital guarantees aimed at the export of non-military items - EX-IM 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 Relations between employee and employer are regulated by an individual employment contract pursuant to Section II, Articles 13-21 of the Employment Relations Law. Both citizens of Macedonia and foreign nationals are subject to the law. The employment contract, which must be in writing and kept on the premises, should address the following provisions: description of the employee's duties, duration of the contract (finite or not), effective and termination date, location of the work place, hours of work, rest and vacation periods, qualifications and training, salary and payday. The law is relatively 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 20 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 encompasses about 14 separate unions organized by industry sector. The Confederation of Free Trade Unions mainly represents public sector workers. Trade unions are interest-based, autonomous labor organizations. Membership is voluntary and activities are financed by membership dues. Almost 75 percent of legally 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 chambers and the employer's associations, representing the employers. There are two main agreements for public and private sector on the national level, and separate contracts are negotiated by the branch unions, or at the industry or company level. The primary pressures that unions face are related to high levels of unemployment and the privatization of inefficient state companies. Foreign-Trade Zones/Free Ports There are three major designated Free Trade Zones in Macedonia: Bunardzik - an area north of Skopje; an area at the town of Gevgelija near the border with Greece; and an area between the town of Bitola and the border with Greece. Amended legislation (http://www.f.e.z.bunardzik.com.mk/law.asp) has been prepared for permitting and regulating such zones, and a Directorate for Technological Industrial Development Zones was established in order to conduct activities regarding the development, establishment and supervision of activities in the free economic zones. Until recently there had been no activity in the Free Trade Zones. However, the US company Johnson Controls in 2006 invested in a manufacturing plant in the Bunardzik FTZ near Skopje and operations are due to start by the end of 2007. Foreign Direct Investment Statistics 1. Net Annual Foreign Direct Investment by Year:
2. Foreign Direct Investment by Country ($ millions) (for selected countries):
3. Top Foreign Investments through Privatization and Post-Privatization
Web Resources National Bank of the Republic of Macedonia - http://www.nbrm.gov.mk European Bank for Reconstruction and Development - http://www.ebrd.com Organization for Economic Co-operation and Development - http://www.oecd.org Website of the Government of Macedonia - http://www.gov.mk Ministry of Economy - http://www.economy.gov.mk Ministry of Finance - http://www.finance.gov.mk Ministry of Culture - http://www.culture.in.mk Ministry of Internal Affairs - http://www.mvr.gov.mk Industrial Property Protection Office - http://www.ippo.gov.mk Free Trade Zone "Bunardzik" - http://www.bunardzik.com.mk Macedonian Customs Authority - http://www.customs.gov.mk Macedonian Statistical Office - http://www.stat.gov.mk |
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