Transparency of the Regulatory System
Most regulations relevant for foreign businesses are adopted on the national, rather than local, level. The Government of Macedonia has attempted to simplify regulations and procedures for large foreign investors in special free economic zones. However, Macedonia’s overall regulatory environment lacks transparency and remains complex. Frequent regulatory and legislative changes and inconsistent interpretations of the rules create an unpredictable business environment that facilitates corruption and use of inspections for political purposes.
Businesses, the public, and NGOs play a limited role in the legislative and regulatory process. Under the last government, most laws were passed in Parliament in an expedited procedure without public consultation. The government seldom posted draft laws or regulations for public comment on the Unique National Electronic Register of Regulations (ENER), an online platform intended to facilitate public participation in policymaking. Even when the government made proposed legislation available on ENER, companies found the comment period too short for adequate review. Businesses and chambers of commerce reported the government censored (i.e., did not make public) certain comments submitted through ENER and did not respond to their feedback.
The new government has promised to regularly communicate and consult with the business community and other stakeholders before amending and adopting legislation. It has pledged to use ENER, increase the minimum comment period from 20 to 30 days, minimize the use of short parliamentary procedures in lawmaking, and include a phase-in period for legal changes to allow enterprises to adapt. Key institutions influencing the business climate will start publishing official and legally-binding instructions for implementation of laws pertaining to their area. They will be obliged to publish all relevant laws, by-laws, and internal procedures on their webpages. Inspection services will not be used as instruments of reprisal or political pressure. The government will establish a public registry of inspection controls carried out by state bodies.
The European Union’s November 2016 report on Macedonia notes the country needs to improve its capacity for evidence-based policy and legislative development. Government agencies are supposed to conduct regulatory impact assessments for proposed new laws and regulations; in practice these were of poor quality or nonexistent. Financial impact assessments were seldom prepared. The new government stated it will reform the regulatory impact assessment mechanism and ensure participation of the business community and other stakeholders.
Macedonia accepts International Accounting Standards, which are transparent and consistent with international norms. However, Macedonia has not yet aligned its national law with EU directives on corporate accounting and auditing.
International Regulatory Considerations
Macedonia is not a part of any regional economic block. As a candidate country for accession to the European Union, it should harmonize its legal and regulatory system with EU standards. As a member of the WTO, Macedonia regularly notifies the WTO Committee on Technical Barriers to Trade of proposed amendments to technical regulations concerning trade.
Legal System and Judicial Independence
Under the previous ruling party, numerous international reports cited the Government of Macedonia’s failure to fully respect the rule of law as well as the selective administration of justice. Political interference, inefficiency, favoritism toward well-placed persons, prolonged processes, and corruption characterized the country’s judicial system. Enforcing contracts and resolving commercial disputes in Macedonia’s court system was time-consuming, costly, and subject to political pressures. The new government formed on May 31, 2017, committed to promote the rule of law and establish independent, professional institutions that implement laws in an unbiased and non-discriminatory way. It will need time to reform the judiciary and remove the impacts of long-entrenched political pressure and influence that are deeply seated in Macedonia’s political culture.
Macedonia’s legal system is based on civil law. The country has written commercial law and contract law. There are specialized court departments which handle commercial and contractual disputes between legal entities. Contracts are legally enforced by civil and administrative court rulings. Enforcement actions are appealable and adjudicated in the national court system. Cases involving international elements may be taken for review before international arbitration.
In July 2015, Macedonia’s Parliament, without allowing public comment, introduced obligatory mediation in disputes between companies up to EUR 15,000 (USD $ 16,871) in value as a precondition for going to court. Companies complain the measure, which went into effect February 1, 2016, imposes additional costs and protracts enforcement of contracts.
Laws and Regulations on Foreign Direct Investment
The Constitution of the Republic of Macedonia guarantees an equal position for all entities in the market and provides for the free transfer and repatriation of investment capital and profits by foreign investors. Under Macedonia’s 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, nor a “one-stop-shop” website that provides all relevant laws, rules, procedures, and reporting requirements for investors. 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. An unofficial English language version of the consolidated Law on Technological Industrial Development Zones (free economic zones) is available at the following link: Law on Technological Industrial Development Zones .
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 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
The Law on Investment Funds 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 (USD $2,249,500). 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 to public health institutions, public companies, state-owned companies, companies owned by local governments, and other public sector institutions started January 1, 2016. Late payments by state entities to the private sector have contributed significantly to liquidity problems in the country.
Competition and Anti-Trust Laws
The Commission for Protection of Competition (CPC) is responsible for enforcing the Law on Protection of Competition. The CPC issues opinions on draft legislation that may impact competition. The CPC reviews the impact on competition of proposed mergers, and can prohibit a merger or approve it with or without conditions.
The CPC also reviews proposed state aid to private businesses, including foreign investors, under the Law on Control of State Aid (Official Gazette 145/10) and the Law on State Aid (Official Gazette 24/03). CPC determines whether the state aid gives economic advantage to the recipient, is selective, and adversely influences competition and trade. More information on the CPC’s activities is available at http://kzk.gov.mk/en/ .
Expropriation and Compensation
According to the Constitution of Macedonia and the Law on Expropriation (Official Gazette 95/12, 131/12, 24/13, and 27/14), property under 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 spatial arrangement, rational usage, and humanization of public areas, protection of the environment and nature by building objects and doing works of significance to the state and local governments stipulated by spatial planning acts. The law also lists in detail specific activities considered to be of public interest. There are instances of expropriation for reasons of public interest. The process is conducted according to the regulated procedure and claimants are compensated at the time of expropriation. 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 expropriation, interest will be paid.
ICSID Convention and New York Convention
Macedonia has either signed on to, or has inherited by means of succession from the former Yugoslavia, a number of bilateral and multilateral conventions on arbitration including the Convention Establishing the Multilateral Investment Guarantee Agency (MIGA); the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards; the Geneva Protocol on Arbitration Clauses from 1923; and the Geneva Convention on Enforcement of Foreign Arbitration Decisions. Macedonia is also a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the European Convention on International Commercial Arbitration.
Investor-State Dispute Settlement
Macedonia accepts binding international arbitration in disputes with foreign investors. So far, the country has been involved in three reported investor-state disputes brought in front of international arbitral panels. None of those cases involved U.S. citizens or companies. Local courts recognize and enforce foreign arbitral awards issued against the Government of Macedonia. The country does not have a history of extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
Macedonia accepts international arbitration on investment disputes. The country’s Law on International Commercial Arbitration is modeled on the United Nations Commission on International Trade Law (UNCITRAL) Model Law. Local courts recognize and enforce foreign arbitral awards and the judgments of foreign courts.
Alternative dispute resolution mechanisms are available for settling disputes between two private parties but seldom utilized. A Permanent Court of Arbitration, established in 1993 within the Economic Chamber of Macedonia (a non-government business association), has the authority to administer both domestic and international disputes. Since February 1, 2016 Macedonia has required mediation in disputes between companies up to EUR 15,000 (USD $16,871) in value before companies can go to court.
Macedonia’s bankruptcy law governs the settlement of creditors’ claims against insolvent debtors. Bankruptcy proceedings may be initiated over the property of a debtor, be it a legal entity, an individual, a deceased person, joint property of spouses, or business unions. Bankruptcy proceedings may not be implemented over a public legal entity or property owned by the Republic of Macedonia.
The World Bank’s Doing Business Report for 2017 ranks Macedonia 32nd out of 190 countries for ease of resolving insolvency.