CEE Legal Matters

Category: Bosnia and Herzegovina

  • The Buzz in Bosnia and Herzegovina: Interview with Naida Custovic of Law Office Custovic in Cooperation with Wolf Theiss

    The Buzz in Bosnia and Herzegovina: Interview with Naida Custovic of Law Office Custovic in Cooperation with Wolf Theiss

    Among the biggest challenges in Bosnia and Herzegovina is attracting foreign investment, says Naida Custovic, Partner at Law Office Custovic in Cooperation with Wolf Theiss. “Our economy relies heavily on foreign investments,” she says. “Unfortunately our legal system and overall investment climate is not yet satisfactory.”

    Custovic explains that while the government, most political parties, and the business community identify foreign investment as an important tool for economic growth and as a source of employment and competition in the market, “there is a significant lack of political will to focus on this kind of legislation.” Still, she notes that local associations and agencies that promote foreign investments, such as the Foreign Investor Council, continue to push for legislative changes.

    In addition, Custovic reports, Bosnia & Herzegovina is continuing to harmonize its legislation with EU requirements, though the legal framework in the country, at the moment, remains unpredictable. In addition, burdensome bureaucracy, problems in debt collection and the judicial system, and problematic tax collection and customs procedures continue to complicate the environment for investors.

    The country’s upcoming October 7, 2018 general elections are not promising either, Custovic reports. “I think we are leaning towards a more pessimistic view, so there will not be many changes,” she says, though she concedes that, “however, it is very difficult to predict.” Indeed, she notes that despite the negative outlook, according to statistics the vast majority of investors intend to continue investing in the country. “So it is kind of a paradox,” she smiles.

    Of course, Custovic reports, Bosnia & Herzegovina is undergoing some positive changes as well – including changes to the banking laws in both the Federation of Bosnia and Herzegovina (FBiH) and Republika Srpska (RS) that came into force in 2017 and 2018 and more recent changes in implementation bylaws [adopted by the FBiH Banking Agency and the RS Banking Agency, as the competent regulatory bodies]. “I think this is one of the most important reforms to legislation that we have had within the last few years,” she says. According to her, the new regulations improved the overall banking sector, particularly by introducing a legal framework for the sale of non-performing loans. “This is something that we did not have before, so this was a completely unregulated kind of market,” she explains. “And now for the first time we have a substantially-regulated NPL market in the country.” She says that the new banking legislation also vastly improved the legal framework for restructuring and rescue of banks in distress.

    The Bosnian legal market is also about to change, she reports, as a new Advocacy Law has been drafted and circulated among members of the BiH Bar association for improvements. “We hope that many comments will be taken into consideration,” she says, emphasizing the importance of the amended law for law firm operations, and specifically for foreign firms, which currently face various restrictions in their ability to operate in the country. “This is kind of an issue in Bosnia,” she says. “I am hoping that the entire community of attorneys will loosen up and embrace competition that comes locally or from abroad, because anything that raises competition is good.” 

  • Public Private Partnership Projects in Bosnia and Herzegovina

    The constitutional and legislative structure of Bosnia and Herzegovina (BiH) is complex since it is composed of two entities – the Republic of Srpska (RS) and the Federation of Bosnia and Herzegovina (FBiH) – and Brcko District (BD) as a separate unit, and the legislation is adopted on the state level, entity level, and – in FBiH  – on the cantonal level. This means that in BiH as such there is no unified Law on PPP, but rather 12 laws on PPP. While the RS and BD adopted their PPP laws in 2013 and 2010, the FBiH drafted a Law on PPP in 2009 which remains in the adoption process. In addition, the cantons in the FBiH have their own set of PPP laws.

    The Current Status

    The current state of infrastructure project and investment needs pushes a multi-billion euro obligation on the state/entity/canton which they, with the current budget structure, simply cannot cope with. There are a number of infrastructure projects, including roads (most prominently the highway corridor Vc), water (the renewal of city water systems, or the regional “Blue Water” Project) and health care (a dialysis center) which depend on finding alternative finance sources. PPP’s are considered to be an option which could present a win-win situation for the public institutions, private investors, and the general population which would benefit from such projects. 

    So far, however, the few large scale PPP’s in BiH have occurred mostly in the RS, where, most prominently, the  International Dialysis Center and Fresenius Medical Care successfully implemented PPP projects in the health sector. The RS also entered into two PPP projects for the construction of thermal power plants: Stanari and Ugljevik 3. The FBiH has several times announced PPP models for the realization and construction of certain sections of the Vc corridor, but concerns about the bankability of the projects obviously blocked them from realization.  

    Contractual Issues in PPP’s in BiH

    Most projects from the PPP sphere are realized through concessions, as the law on concession is in place on every level. Through a concession contract the private partner provides services for a certain period of time to the users instead of the public partner. Other projects were implemented as institutional models, under which a joint venture between the public and private partner is established.

    Ultimately, all forms of PPPs require the conclusion of an adequate contract between the public and private partner. In this regard the private partner and public partner sometimes put too little effort in the creation of a contract adequately covering or specifying obligations and risk. So for example during the procurement of the PPP, the public partner will evaluate the experience and financial standing of the shareholders in the private partner. After the contract has been signed the public partner should take care to ensure that the identity of the shareholders cannot change to the detriment of the PPP. The contract therefore should foresee that the private partner has to obtain the public partner’s prior approval before any change is made to the private partner’s ownership structure.

    Furthermore, in almost all cases it is necessary to obtain additional approvals and consents. Certain milestones can therefore be determined and the parties can agree to which extent the public partner has to support the private partner. The PPP contract must, among other matters, regulate a subsequent inability to perform the contract, including details regarding changed circumstances that may lead to a complete inability to perform the contract.

    Operation and maintenance clauses specifying the individual responsibilities can be very different from sector to sector and project to project because many projects require the private partner to provide ancillary services to the public partner in addition to the on-going maintenance of the relevant asset(s) that were developed by the private partner. Therefore the parties should agree on aspects such as lifecycle maintenance, third party use, and demand risks.

    Future Outlook

    Several incentives and projects by international organizations and NGO’s are currently being realized involving attempts to foster PPP framework on all levels. This should also promote PPP’s and the possibility of realizing them in the future. 

    By Nihad Sijercic, attorney at law, Amina Dugum, attorney at law, Karanovic & Nikolic

    This Article was originally published in Issue 5.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

  • New Banking Law of the Federation of Bosnia and Herzegovina in Light of Corporate Governance

    The latest financial crisis revealed a number of weaknesses in the Bosnia and Herzegovina banking system, just as it did in most developed countries. In an attempt to preserve a sound banking system in the Federation of Bosnia and Herzegovina (‘FBiH’), both BiH Entities have adopted new Banking Laws.

    Although the major changes in the new FBiH Banking Law (the “Law”) affect corporate governance, capital adequacy, bank operations, protection of rights and interests of users of banking services, accounting, auditing, and reporting, as well as the supervision of banks, this article focuses on the new corporate governance system and the establishment of control functions in banks in the FBiH and extension of the powers vested in the Banking Agency (the “Agency”). 

    It has been established, particularly after the bankruptcy of the three banks in Republika Srpska (RS), that the existing mechanisms are neither sufficient nor adequate for tackling problematic banks, as they do not allow for a sufficiently quick and efficient intervention by the competent authorities and do not provide for maintenance of the bank’s key functions to the extent necessary, and thus fail to preserve financial stability. In this light, bank operations have been aligned with the requirements of the IMF and the World Bank, and partly with the relevant EU acquis sources and relevant Directives. Accordingly, changes to bank governance are the most significant that the banks have been required to introduce in order to comply with the newly adopted Law within nine months of its entry into force.

    Aiming to ensure greater importance of control functions, the provisions adopted will strengthen the role of Supervisory Boards and the Agency by expanding the competencies of the Supervisory Board and improving the definition of its composition (going forward, it must include at least two independent members, one of which must be proficient in one of the official languages of the FBiH and reside on the territory of the FBiH), and involving the Agency in the work of the Supervisory Board and the Assembly to strengthen their professionalism, independence, and objectivity.

    The bank’s bodies remain the same: the Assembly, the Supervisory Board, and the Management Board. Unlike under the former legal provisions, however, the position, rights, and responsibilities of the Secretary, Procurator and bank associations are defined. Furthermore, the Agency is entitled: to request that the Supervisory Board include certain issues of relevance to the compliance of the bank’s operations with regulations and regulatory requirements in the agenda of the Annual Assembly Meeting; to attend the meetings of the Assembly and the Supervisory Board; and to address the shareholders as necessary. Although representatives of the Agency do not have the right to vote in these bodies, their presence can raise the quality of decisions relevant to the bank’s operations. 

    The introduction of new committees (Risk Management Committee, Remunerations Committee, Appointment Committee, Voting Committee, and other specialized committees) in addition to the Audit Committee, will further strengthen the control function. 

    Furthermore, provisions referring to bank Management Boards have been amended, and going forward, Management Boards will be composed of the president and at least three Management Board members, instead of directors and executive directors. Unless otherwise provided by the Statute, the Management Board members will jointly represent the bank in legal transactions. However, no Management Board member can be authorized to represent the bank individually within the overall scope of banking operations. 

    By adopting the Law, the legislator created a sound legal framework aimed at ensuring a stable financial sector by strengthening the role of the Supervisory Board and increasing the Agency’s authority in the area of control and prevention. However, a successful outcome of these amendments will largely depend on the readiness and capacities of banks as well as adequate education of bank employees to implement the Law, as well as the Agency’s role in this process. 

    By Sead Miljkovic, Attorney at Law, Law Office Miljkovic & Partners 

    This Article was originally published in Issue 5.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

  • Sajic Represents Pavgord Foca in Enforcement Procedure Against Clay Factory BIRAC

    Sajic Represents Pavgord Foca in Enforcement Procedure Against Clay Factory BIRAC

    Sajic has represented Pavgord d.o.o. Foca in an enforcement procedure against the Clay Factory BIRAC, whose shares are subject to the procedure.

    According to Sajic, the enforcement decision was made by the Court of General Jurisdiction Zvornik, which ordered that the shares of the companies Mehanika and Alumina be sold for the purpose of the settlement in the amount of EUR 65 million.

    The Sajic team was managed by Partner Natasa Krejic and included Managing Partner Aleksandar Sajic and Senior Associate Ognjen Bogdanic

     

  • Sajic Successful for Krajina Osiguranje in Court Proceedings

    Sajic Successful for Krajina Osiguranje in Court Proceedings

    Sajic has successfully represented the Krajina Osiguranje Banja Luka insurance company against a claim of unjust enrichment brought against the company by RK BOSKA Banja Luka worth EUR 3.2 million. 

    On April 4, 2018, the Banja Luka District Commercial Court rejected RK BOSKA Banja Luka’s arguments and found for Krajina Osiguranje Banja Luka.

    Sajic’s team was led by Partner Aleksandar Sajic.  

     

  • The Buzz in Bosnia & Herzegovina: Interview with Stevan Dimitrijevic of Dimitrijevic & Partners

    The Buzz in Bosnia & Herzegovina: Interview with Stevan Dimitrijevic of Dimitrijevic & Partners

    Lawyers in Bosnia and Herzegovina are especially busy, says Stevan Dimitrijevic, Managing Partner at Dimitrijevic & Partners of Banjaluka, benefitting, among other things, from the complicated decentralized nature of his country, which leads to a “lot work for lawyers.”  Dimitrijevic claims that, for clients, it is a “necessity to retain a good advisor to cut through the complexity,” whereas, “with good advisors, of legal and financial vocation, everything is much easier and quite predictable.”

    Dimitrijevic, a founding member of the Foreign Investors Council and member of the management board, a non-profit business association representing the interests of foreign businesses in the country, provides a mixed report, with some necessary steps for progress still needing to be made. “The atmosphere is definitely better than before in different areas: for example, the registration process for incoming companies has been sped up.” At the same time, he says, referring to levies for a specific purpose and paid to a lower level governments rather than the national tax authority, “parafiscal taxes still exist.”

    And while the country’s general legislative framework compares well with EU countries, Dimitrijevic reports, its implementation still needs to be improved. “Implementation is a core, and we would like to see it in better shape than it is right now,” he says. Improved implementation would lead to a more predictable and reliable regime, he explains, where “every investor would like to find himself or herself.” At the moment, BiH has a dynamic legal environment, where laws are changing. “This is not exactly a perfect thing,” Dimitrijevic explains, however we are tracking things regularly and provide up-to-date report to our clients. All good offices do the same.” Nevertheless, he believes the country’s natural resources, energy, inexpensive while skilled-work-force, and low taxes provide counterbalancing incentives for foreign investors.

    The general elections that are coming this Fall, Dimitrijevic reports, have resulted in the usual slowdown in new investments, although local governments — which have different election schedules — “are pretty active.” He is hopeful for the election’s aftermath. “If politicians do a good job afterwards, there will definitely be an increase in foreign investment,” he says, “I have no reason to be believe that this cannot happen.”

    In addition, amendments to the Law on Advocacy both in the Republic of Srpska and in Federation of Bosnia and Herzegovina are underway and expected to pass the parliamentary procedure towards the end of the year. According to Dimitrijevic, the new law will help “bring work up to the standards of EU countries.” He is part of the working group in the Republic of Srpska, and he reports that the new amendments in the entity will “allow for a corporate structure, the reorganization of services, tackle education, and support lawyers with generally upgraded legislation that everyone hopes will handle current open questions of the profession well and with lasting solutions.” In his opinion this will represent a step towards catching up with those neighboring countries that are already in the European Union.

     

  • Harrisons Assists EBRD with EUR 5 Million Loan to Addiko Bank Banja Luka

    Harrisons Assists EBRD with EUR 5 Million Loan to Addiko Bank Banja Luka

    Harrisons has advised the EBRD on matters of English law in relation to a loan of up to EUR 5 million to Addiko Bank Banja Luka to be on-lent to medium and small enterprises. The Law Office Stevanovic reportedly acted as the EBRD’s counsel for Bosnian and Herzegovinian law.

    Since the beginning of its operations in Bosnia and Herzegovina, the EBRD has invested more than EUR 2 billion in over 145 projects in the country. 

    The Harrisons team was led by Firm Principal Mark Harrison and Head of Finance Ines Matijevic-Papulin and assisted by Senior Associate Jovan Cirkovic.

    The Law Office Stevanovic did not reply to an inquiry on this deal. 

     

  • Tax Incentives and Tax Exemptions

    Taxes are the most important instrument for the collection of revenues in the Bosnian and Herzegovinian economy and represent the largest portion of revenues for the country.

    Bosnia and Herzegovina consists, of course, of two largely autonomous constitutional and legal entities: The Federation of Bosnia and Herzegovina and the Republic of Srpska. The tax system of the Republic of Srpska collects both direct taxes and indirect taxes. The former group includes: (a) an Income Tax (regulated by the Law on Income Tax of the Republic of Srpska); (b) a Profit Tax (regulated by the Law on Profit Tax of the Republic of Srpska); (c) a Real Estate Tax (regulated by the Law on Real Estate Taxes of the Republic of Srpska); and (d) a Tax on the Use, Holding, and Carrying of Goods (regulated by the Law on Tax on the Use, Holding and Carrying of Goods). These taxes are regulated at the entity level, as is their control and collection. 

    The indirect tax consists of a Value Added Tax, which is regulated by the Law on Value Added Tax of Bosnia and Herzegovina, and its collection falls within the jurisdiction of the Indirect Taxation Authority of Bosnia and Herzegovina.

    Each of the laws regulating specific taxes prescribe the conditions for payment, including identifying those obliged to make it. Of course, this obligation is dependent on the prior fulfillment of specific conditions, and may fall upon both individuals and legal entities; i.e., the obligation applies to businesses.

    As tax collection is to be performed “at the expense of” the economic power of a legal entity or an individual, it is important to know the tax system of the state and the obligations it imposes, as well as to know available tax exemptions and incentives.

    In this respect, in the text below, we will focus on direct tax incentives and exemptions related to legal entities.

    Although according to the Law on Income Tax the tax applies to incomes of individuals, legal entities in certain cases are required to pay as well. In particular, according to this law, individuals are personally taxed on income derived from personal income, independent activities, copyrights and rights related to copyright, industrial property rights, capital, capital gains, income from foreign sources and other incomes. However, employers (i.e., legal entities) are obliged to pay taxes on income made on the basis of work – i.e. on the basis of personal income/salary.

    On the other hand, according to the Law on Profit Tax, the profit of domestic legal entities and foreign legal entities for profits earned in the Republic of Srpska is taxed. Exemptions apply to: (1) Companies established in accordance with the regulations on the employment of disabled persons and companies that perform that activity without the aim of making a profit; and (2) Public institutions and humanitarian organizations, unless they generate income that is acquired under the same conditions as other legal entities that do not have the character of public and humanitarian organizations.

    The Law on Real Estate Tax obliges the property owner to pay property tax, and it applies to companies that own real estate as well. This law does not provide exemptions, but it provides a lower 0.10% tax rate for real estate in which production activities are carried out. Real estate in which production activities are carried out includes facilities for the production and storage of raw materials, semi-finished products, and finished products, if they make an organized unit.

    By Natasa Krejic, Partner, Law Firm Sajic 

    This Article was originally published in Issue 4.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

  • The Buzz in Bosnia & Herzegovina: Interview with Arela Jusufbasic-Goloman, Partner of Tkalcic-Dulic, Prebanic, Rizvic & Jusufbasic-Goloman

    The Buzz in Bosnia & Herzegovina: Interview with Arela Jusufbasic-Goloman, Partner of Tkalcic-Dulic, Prebanic, Rizvic & Jusufbasic-Goloman

    Tkalcic-Dulic, Prebanic, Rizvic & Jusufbasic-Goloman Partner, Arela Jusufbasic-Goloman, says that no significant laws or regulations have been passed in Bosnia & Herzegovina recently that could influence the work of lawyers or the business sector, although they are much needed.

    “We are still having problems with the political situation,” explains Jusufbasic-Goloman, “which hinders the adoption of new regulations that could allow easier business procedures for companies and foreign investors. We don’t have an elementary majority in the Federation, the work of the parliament is blocked – only the most necessary rules are passed and adopted – and the political parties are only concerned with pre-election activities, since next year we have elections in Bosnia-Herzegovina.”

    Jusufbasic-Goloman sas that it is unfortunate that the political class considers these pre-election activities so important right now, and not the fate of the business sector, or the passing of new laws that could encourage activity in it. “They are just concerned with how to promote their political parties and the groups that they represent, instead of focusing on the countries interests,” she says. “This would be even more important if we consider that there is a lot of interest from foreign investors in Bosnia’s energy sector, particularly in the construction of hydropower plants and thermal power stations.”

    According to Jusufbasic-Goloman, the main practical problem is that Bosnia & Herzegovina is divided into two entities and one district, with one of the entities divided into 10 cantons, and each of these administration areas has its own governments, ministers, and other officials. “It is very difficult for a foreigner to understand this huge administrative system, and know all the different rules and regulations in such a divided country. There are some administration areas that do not even recognize one another, or are not harmonized with each other,” she says, adding that this huge administrative system also produces slow administrative procedures with high costs when it comes to the issuance of permits, construction forms, investment papers, and so on.

    According to Jusufbasic-Goloman, clients often ask when the country will solve certain problems, and when it will adopt certain rules to help their activities in Bosnia. “We can see that they are concerned about doing business in Bosnia because of the above-mentioned political situation,” she sighs. “We have also noticed that this year the number of foreign investments was a bit lower than the last year. We definitely need further regulations and more relevant rules to make it easier for foreign investors to decide how and when to invest in a particular area.”

  • Dimitrijevic & Partners Advises AUKVIL on Restructuring of Interest in Banjalucka Pivara ad Banjaluka

    Dimitrijevic & Partners Advises AUKVIL on Restructuring of Interest in Banjalucka Pivara ad Banjaluka

    Dimitrijevic & Partners has advised Altima UK Value Investments Limited on the restructuring of its indirect shareholding interest in Banjalucka Pivara ad Banjaluka. 

    The transaction included the establishment of a daughter company for AUKVIL, a block trade transaction between AUKVIL’s subsidiaries, and a squeeze out of the minority shareholders of Banjalucka Pivara ad Banjaluka. 

    Dimitrijevic & Partners led the negotiations with AUKVIL’s banking facilities with lenders, drafted the transaction documents, and delivered the conditions precedent. The Resolution on the squeeze out was adopted at the Banjalucka Pivara’s Shareholders’ Assembly Meeting in June 2017, with Dimitrijevic & Partners reporting that it “assisted with the preparation for the session and the execution of the overall process that successfully completed at the beginning of August this year.”

    The firm’s team was led by Partner Stevan Dimitrijevic, assisted by Senior Associate Nina Vjestica, among others.