Attitude toward Foreign Direct Investment
As a small, open economy, Macedonia’s government recognizes that it is heavily dependent on foreign direct investment (FDI) for job and export growth, and therefore continues to actively seek foreign investors who can provide jobs. The country has enacted legislation that not only provides roughly equal footing for foreign investors as compared to their domestic counterparts, but that also provides numerous incentives, such as tax breaks and subsidies, to attract FDI. Government incentive packages for foreign investors are not fully disclosed to Parliament or the public. Macedonia consistently provides national treatment to foreign investors, in fact many citizens believe large foreign investors receive better treatment than domestic companies. The country has concluded a number of bilateral investment protection treaties, but none with the United States. Macedonia has adopted other multilateral conventions that impose stricter standards of protection for foreign investors.
Macedonia does not have any regulatory or defensive measures directed against foreign investment. Similarly, there are no private or government efforts directed toward the restriction of foreign investment and participation in or control of domestic enterprises, consortia, or industrial organizations. On the contrary, since 2007 Macedonia has run an expansive campaign to attract foreign investors. This campaign includes the promotion of Macedonia in many of the world's leading newspapers, magazines, TV stations, and frequent government-led roadshows. In addition, after the 2014 early parliamentary elections, the number of ministers tasked with attracting foreign investments increased from three to five. The government agency Invest Macedonia also markets the country to foreign investors, serving as the “one-stop shop” main point of contact for operational matters and follow-up with investors. Invest Macedonia has about 25 resident economic promoters in foreign countries. Macedonia is in the process of harmonizing its legal and regulatory systems with international, primarily European Union (EU), standards.
The global economic crisis and the euro zone debt crisis caused a significant slowdown in FDI, which fell from USD 463 million in 2011 to USD 132 million in 2012, mainly due to the outflow of profits of foreign-owned companies and intercompany loans. However, in 2013 FDI surged to USD 334.7 million as the global economy recovered and continued to USD 349.1 million in 2014. The increase in FDI was primarily due to some new foreign investments in the TIDZ and additional investments by existing foreign investors. In recent years FDI has primarily flowed to the automotive parts industry. Activities in the TIDZ accounted for most of the increase of the country’s foreign trade, both on the export and the import side. Although the global economic crisis undoubtedly played a role in limiting funds available for investment, corruption, rule of law concerns, and stalled Euro-Atlantic integration have also limited Macedonia’s ability to attract more investment. FDI accounted for only 1.8 percent of GDP in 2015, 1.3 percentage points less than in 2014.
Other Investment Policy Reviews
The World Trade Organization (WTO) in November 2013 did the first, and so far the only, review of the trade policies and practices of Macedonia. The reports of the WTO Secretariat and Macedonia’s government are available at the following website: https://www.wto.org/english/tratop_e/tpr_e/tp390_e.htm. Macedonia has not undergone an OECD investment policy review. The most recent UNCTAD investment policy review on Macedonia, from March 2012, is available at the following website: http://unctad.org/en/PublicationsLibrary/diaepcb2011d3_en.pdf. In 2015, the government hired a consultant to assess its strategy for attracting FDI in response to increased public criticism of government concessions to foreign investors and doubts about the net benefits to the economy.
Laws/Regulations on Foreign Direct Investment
The Constitution of the Republic of Macedonia guarantees equal position for all entities in the market and provides for free transfer and repatriation of investment capital and profits for foreign investors. Under Macedonian law, foreign and domestic investors have equal opportunity to participate in the privatization of remaining state-owned assets. There is no single law regulating foreign investments. Rather, the legal framework is comprised of several laws including: the Trade Companies Law; the Securities Law; the Profit Tax Law; the Customs Law; the Value Added Tax (VAT) Law; the Law on Trade; the Law on Acquiring Shareholding Companies; the Foreign Exchange Operations Law; the Payment Operations Law; the Law on Foreign Loan Relations; the Law on Privatization of State-owned Capital; the Law on Investment Funds; the Banking Law; the Labor Law; and the Law on Financial Discipline. Laws governing business activity are frequently changed, often without consultation with the business community, and the legal changes retroactively applied.
The Trade Companies Law
This is the primary law regulating business activity in Macedonia (http://www.mse.mk/Repository/UserFiles/File/Misev/Regulativa/Zakoni%20ENG/LL_CG_TradeCompanies_Dec_2004_E.pdf). It defines the types of companies allowed to operate in Macedonia, as well as procedures and regulations for their establishment and operation. All foreign investors are granted national treatment, and are entitled to establish and operate all types of private and 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
Foreign investors are guaranteed equal rights with domestic investors when bidding on shares of companies owned by the government. There are no legal 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 investments with the debtor 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
A revised Law on Investment Funds was adopted in 2009. The new 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 selecting a depository bank. The law does not discriminate against foreign investors in establishing open-ended or closed investment funds.
Law on Takeover of Shareholding Companies
This law regulates the conditions and procedures for purchasing more than 25 percent of the voting shares of a company. The company must be listed on an official stock market, have at least 25 employees, and have initial capital of EUR 2 million. This law does not apply to shares in companies owned by the Republic of Macedonia.
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, transfers of funds across borders, as well as all foreign exchange operations. All current transactions (e.g., all transactions that are eventually registered in the current account of the balance of payments, such as trade and private transfers) of foreign entities are allowed. There are no specific restrictions for non-residents wishing 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. Since 2008, foreign nationals have been permitted to own land in Macedonia, and may invest in or own fixed assets and real estate. Foreign investors may also establish companies of any kind.
Profit Tax Law
The corporate profit tax rate is 10 percent. At the beginning of 2006, the government amended the Profit Tax Law and introduced a withholding tax on income of 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, author 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 rent proceeds from the leasing of real estate, which are taxed at a 10 percent rate. This withholding tax does not apply to legal entities from countries that have signed an agreement to avoid double taxation with Macedonia. The United States does not have such an agreement with Macedonia.
All employments are regulated by this law and collective agreements signed between unions and employers. The Labor Law (http://www.lexadin.nl/wlg/legis/nofr/eur/arch/mac/laborlaw.pdf) regulates the implementation of rights, obligations, and responsibilities of the employee and employer pertaining to employment. A General Collective Agreement clarifies and often enhances the basic rights and benefits provided for in the Labor Law. In addition, there are collective agreements applicable in some industries or sectors, which further specify relations between employers and employees in those industries.
Law on Financial Discipline
Effective from May 1, 2014, this law aims at regulating timely payment of liabilities between private sector legal entities, and liabilities stemming from business relations between private sector and public sector legal entities (http://www.finance.gov.mk/files/u11/Zakon%20za%20finansiska%20disciplina_precisten_januari_2015.pdf). According to the legislation, private entities must settle payment liabilities within 60 days, and by exception only within 120 days of the day when the liability occurred. Failure to comply with the provisions of the law envisages high fines both for legal entities and for the responsible person. Application of the law for public health institutions, public companies, state-owned companies, companies owned by local governments, and other public sector institutions started from January 1, 2016. Late payments by state entities to the private sector have contributed significantly to liquidity problems in the country.
All legal entities in the country must register with the Central Registry of Macedonia (CRM). Foreign businesses may register a limited liability company, single-member limited liability company, joint venture, joint stock company, as well as branches and representative offices. Macedonia introduced a one-stop-shop system that enables investors to register their businesses within a day, by visiting one office, obtaining the information from a single place, and addressing one employee. In addition, all investors may register a company online using the secure system for electronic registration of all types of businesses in the Trade Registry and the Registry of Other Legal Entities, available at the following website: http://e-submit.crm.com.mk/eFiling/en/home.aspx. Applications must be submitted by an authorized registration agent.
In addition to the registration of all business activities as stipulated by the Trade Companies Law, some business activities must obtain additional working licenses or permits before starting their operations. For those, the registration process is followed by a licensing process with the relevant authorities covering the matter of licenses and/or permits. More information on business registration documentation and procedures is available at the CRM’s website: http://www.crm.com.mk.
Since 2004, Macedonia has accepted the EU Commission’s definition of micro, small and medium-sized enterprises (SMEs), which is based on three criteria: number of employees, turnover volume, and total assets. Macedonia has kept the same classification by number of employees but adjusted the other two parameters. By number of employees, companies with fewer than 10 are considered micro, companies between 11 and 50 are considered small, and companies between 51 and 250 employees are considered medium-sized. The government does not directly provide any special services or preferences to facilitate investment and business operations by micro and SMEs. However, it provides subsidies to foreign credit lines through the state-owned Macedonian Bank for Development Promotion to assist in the development of micro and SMEs.
Invest Macedonia is the primary government institution in charge of facilitating foreign investments in the country, and its services are available to all interested investors. In addition, Invest Macedonia promotes Macedonian companies in foreign markets to help them increase their exports. More information on their services is available at http://www.investinmacedonia.com.
Invest Macedonia’s 25 economic promoters residing in key markets in the world. Public information about investment opportunities in the country are disseminated via paid commercials in leading business newspapers, magazines, and TV channels. Government ministers in charge of attracting investors also disseminate information during road-shows to targeted markets. Invest Macedonia lists at its website (http://www.investinmacedonia.com) key sectors for investment opportunities: automotive components, information and communication technology, agribusiness, food processing, textiles, apparel, electronics, and pharmaceuticals.
Limits on Foreign Control and Right to Private Ownership and Establishment
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 subject to government approval. Investors in some sectors such as banking, financial services, and insurance must meet certain licensing requirements that apply equally to both domestic and foreign investors.
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, a provision that does not apply 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 finalize the privatization of remaining loss-making and bankrupt state companies, the government offered large discounts on the nominal value of the shares and did not impose employment and investment requirements. The telecom company Makedonski Telekom is the largest state-owned entity privatized to date.
Macedonia's privatization process is almost complete and private capital is dominant in the market. The government is trying to sell four remaining loss-making companies through international tenders. Foreign investors are allowed to participate in privatization through a public bidding process. There are about 15 state-owned companies, primarily public utilities. There are also public utility companies at the local level, which are governed by local governments. Neither the central government nor any local government has announced plans to sell shares in any of them.
Screening of FDI
The government institution in charge of attracting new foreign investments in country - Invest Macedonia – conducts a screening and due diligence review of foreign direct investments in a non-public procedure. Final approval of investment incentive packages is usually made by the government. So far U.S. businesses have not commented or complained that the screening mechanism was a barrier to investment. The main purpose of the screening mechanism is to ensure economic benefit for the country and national security. This screening process does not appear to disadvantage foreign investors. Details of the review are not shared publicly. More details regarding the review process including information on necessary documents for the screening process are available directly from Invest Macedonia or at website http://www.investinmacedonia.com.
The Law on Protection of Competition, adopted in January 2005 (Official Gazette of the Republic of Macedonia No. 04/05) is enforced by a Commission for Protection of Competition (http://www.kzk.gov.mk/eng/aboutus_C.asp). The basic competencies of the Commission for Protection of Competition include controlling proper implementation of the provisions stipulated in the Law on Protection of Competition, monitoring and analyzing the market conditions to the extent necessary for the development of free and efficient competition, initiating procedures in cases of law violations, and making decisions according to the provisions of the Law. The Commission is established as an independent body with the status of a legal entity, independent in its operations and decision making process within the authorities provided by the Law. The Commission consists of a President and four members appointed by the Parliament for a five-year mandate, with the right to reappointment. The Commission has not been very active, as there have not been major accusations of competition violations in the domestic market. Most recently, the Commission was involved in assessing the market concentration in the case of the intended merger between two big mobile operators in the domestic market, the Austrian-owned VIP with the Slovenian-owned One.