Attitude toward Foreign Direct Investment
Bosnia and Herzegovina struggles to attract foreign investment. Complex labor and pension laws, the lack of a single economic space, and inadequate judicial and regulatory protections deter investment.
Under the BiH constitution established through the Dayton Accords, Bosnia and Herzegovina is divided into two “entities,” the Federation of BiH (the Federation) and the Republika Srpska (RS). A third, smaller area, the Brcko District, operates under a separate administration. The Federation is further divided into ten cantons, each with its own government and responsibilities. Each entity also has municipalities for a total of 143 municipalities in BiH (63 in the RS and 80 in the Federation). As a result, BiH has a multi-tiered legal and regulatory framework that can be duplicative and contradictory, and is not very conducive to attracting foreign investors.
Employers bear a heavy burden toward governments. They must contribute 69 percent on top of wages in the Federation and 52 percent in the RS to the health and pension systems. The labor and pension laws are also deterrents to investment, though both are being reformed to decrease burdens on employers. While corporate income taxes in the two entities and Brcko District are now harmonized at ten percent, entity business registration requirements are not harmonized. The RS has its own registration requirements, which apply to the entire entity. Each of the Federation’s ten cantons has different business regulations and administrative procedures affecting companies. Simplifying and streamlining this framework is essential to improving the investment climate. The EU Reform Agenda targets changes that should improve the investment climate by clarifying and simplifying regulation and procedures while decreasing fees faced by businesses at the entity, canton and municipal levels.
Generally, BiH’s legal framework does not discriminate against foreign investors. However, given the high level of corruption, foreign investors can be at a significant disadvantage in relation to entrenched local companies, especially those with formal or informal backing by BiH’s various levels of government.
Other Investment Policy Reviews
In the past three years, the BiH government has not conducted an investment policy review through the Organization for Economic Cooperation and Development (OECD); the World Trade Organization (WTO); or the United Nations Conference on Trade and Development (UNCTAD).
Laws/Regulations on Foreign Direct Investment
The state-level Law on the Policy of Foreign Direct Investment accords foreign investors the same rights as domestic investors and guarantees foreign investors national treatment, protection against nationalization/expropriation, and the right to dispose of profits and transfer funds. With the exception of the defense industry and certain elements of the media sector (see below), where foreign control is limited to 49 percent of a single company, there are no restrictions on foreign investment. However, an Entity Government may decide that companies normally subject to this limitation are not subject to restrictions. According to the Law on the Policy of Foreign Direct Investment in BiH, it is stated that “the Entity Government may decide, if it deems justified, that the share of foreign entity for certain business companies referred to in paragraph (a) of this Article, except for companies dealing with public information, is not subject to restrictions set forth in paragraph (a) of this Article".
As a result of FDI Law amendments adopted in March 2015, foreign investors can now own more than 49 percent of capital business entities dealing with media activities, such as publishing newspapers, magazines and other journals, publishing of periodical publications, production and distribution of television programs, privately-owned broadcasting of radio and TV programs, and other forms of daily or periodic publications of edited produced program content through transfer of recordings, voice, sound or images. The new FDI Law maintains the restriction that foreign investors cannot own more than 49 percent of public television and radio services. The March 2015 amendments also set clear and precise conditions to enhance legal security and clarity for foreign direct investment flows.
The complex legal environment in BiH underlines the utility of local legal representation for foreign investors. The legal framework is sometimes contradictory or overlapping, creating confusion and uncertainty. Bosnian attorneys’ experience base is still limited with respect to legal questions and the issues that arise in a market-oriented economy. However, local lawyers are quickly gaining experience in working with international organizations and companies operating in BiH. Companies’ in-house legal counsel should be prepared to oversee their in-country counsel, with explicit explanations and directions regarding objectives. The U.S. Embassy maintains a list of local lawyers willing to represent U.S. citizens and companies in BiH. The list can be accessed at http://sarajevo.usembassy.gov/lawyers.html.
Establishing a business in BiH can be an extremely burdensome and time-consuming process for investors. The World Bank estimates there are an average of 11 procedures, taking a total of 37 days, to complete registration of a new business in the capital city of Sarajevo. In 2013, the RS established a one-stop shop for business registration in the entity. This dramatically reduced the time required to register a business in the RS, bringing time to register a company down to an average of 7 to 14 days. Registration in BiH can sometimes be expedited if companies retain a local lawyer to follow up at each step of the process. Investors in the Federation may register their business as a branch in the RS and vice versa.
The entity, cantonal, and municipal levels of government each establish their own laws and regulations on business operations, creating redundant and inconsistent procedures that encourage corruption. It is often difficult to understand all the laws and rules that might apply to certain business activities, given overlapping jurisdictions and the lack of a central information source. It is therefore critical that foreign investors obtain local assistance and advice.
The most common U.S. business presence found in BiH are representative offices. A representative office is not considered to be a legal entity and its activities are limited to market research, contract or investment preparations, technical cooperation, and similar business facilitation activities. The BiH Law on Foreign Trade Policy governs the establishment of a representative office. To open a representative office, a company must register with the Registry of Representative Offices, maintained by the BiH Ministry of Foreign Trade and Economic Affairs (MoFTER) and the appropriate entity’s ministry of trade.
In BiH, the size of enterprises is defined by the number of employees and amount of revenue. Small enterprises are those with up to 50 employees and revenues of up to $1.3 million (KM 2 million); Medium enterprises are those with between 50 and 250 employees and revenues up to $5 million (KM 9 million). No special services or preferences are provided in facilitating investment and business operations by Small and Medium Enterprises.
Other forms of businesses in BiH include:
Unlimited Joint Liability Company
An Unlimited Joint Liability Company is a company of at least two persons who bear unlimited mutual liability of the company. The company is founded through a contract between two or more domestic or foreign legal entities. Each member has the right and obligation to manage the company. The company has no statute and no management bodies because members manage and represent it directly.
Limited Liability Company
A Limited Liability Company (LLC) is founded by an establishment act or establishment contract by one or more domestic or foreign legal entities with basic capital divided into parts. A member in a limited company is liable for the value of his investment in that company. Minimum basic capital is KM 2,000 (approx. $1,200).
A Limited Partnership is a company in which one or more members has unlimited solidarity liability for the liabilities of the company, including members’ private assets. Members’ risk is limited by the value of their shares in the company. A Limited Partnership is founded by a contract of two or more domestic or foreign legal entities. General partners manage and represent the company.
A Joint–Stock Company is founded by an establishment contract of one or more domestic or foreign shareholders with basic capital divided into shares. A Joint-Stock Company is not liable for the obligations of shareholders and can be established by one or more founders. Minimum basic capital is KM 50,000 (approximately $28,000).
Additional English-language information on the business registration process can be found at:
BiH Ministry of Foreign Trade & Economic Relations (MoFTER)
BiH Foreign Investment Promotion Agency (FIPA)
Ph: + 387 33 278 080
There are no specific government programs to attract foreign investment. Sporadically, high ranking government officials give media statements inviting foreign investments in the energy, transportation, and agriculture industries; however, the announcements are rarely supported by tangible, commercially-viable investment opportunities.
Limits on Foreign Control
With the exception of the defense industry and certain elements of the media sector, where foreign control is limited to 49 percent of a single company (see 1.3 above), there are no restrictions on investment.
Privatization offerings are scarce and often require unfavorable terms. Some formerly successful state-owned enterprises have accrued significant debts from unpaid health and pension contributions, and potential investors are required to assume these debts and maintain the existing workforce. Under the State-level FDI Law, foreign investors may bid on privatization tenders. International financial organizations, such as the European Bank for Reconstruction and Development are heavily engaged on privatization and restructuring efforts across the remaining portfolio of state owned enterprises.
The Federation government approved the privatization of 14 companies based on the Federation Agency for Privatization’s 2016 privatization plan. However, this decision is non-binding, and there is no enforcement mechanism. Some of the companies listed have posted losses and suffered significant decline in value, while others have only a small amount of public ownership. The 14 companies are Bosnalijek, Energopetrol, Energoinvest, Aluminij Mostar, Hidrogradnja, Remontni Zavod Travnik, Šipad export-import, Zenica Steel , KTK Visoko, Agrokomerc, Borac Confection Travnik, Tobacco Factory Mostar, Vitezit, and Holding Company Putevi BiH. Privatization process in the RS is carried out by the RS Investment Development Bank. Many prospective companies have been already privatized, and out of 163 not yet privatized companies, many are being liquidated or undergoing bankruptcy. The Defense industry and energy sector have not been slated for privatization. Although the RS National Assembly passed a decision that the entity has no plans to privatize the energy sector, the RS Government maintains the possibility of joint ventures in the energy sector.
Screening of FDI
The Bosnia and Herzegovina government does not screen or review foreign direct investments, except in the cases of privatization in order to ensure privatization contracts have been met. If privatization contract commitments are not fulfilled, the government retains the right to cancel the contract. Foreign investors have the right to appeal the review process.
BiH has a Competition Council, designed to be an independent public institution to enforce anti-trust laws, prevent monopolies, and enhance private sector competition. The Council reviews and approves foreign investments in cases of mergers and acquisitions of local companies by foreign companies. The Competition Council consists of six members appointed for six-year terms of office with the possibility of one reappointment. The BiH Council of Ministers appoints three Competition Council members, the Federation Government appoints two members, and the RS Government appoints one member. From the six-member Competition Council, the BiH Council of Ministers affirms a president of the Council for a one-year term without the possibility of reappointment.