INVESTMENT IN MACEDONIA The economic and tax environment 2007

Contents Introduction Introduction Business entry Business entry Tax and tax system Tax and tax system Profit Tax Profit Tax VAT VAT Personal income tax Personal income tax Conclusions Conclusions

INTRODUCTION- Republic of Macedonia Independent since 1991 Overcoming legacy of the socialist period Will for reforms Recognition- Macedonia 4 th best performer in the world (WB Doing Business Report)

Business entry Free and unrestricted access for foreign investors No additional requirement Free participation in all types of legal entities-existing or newly founded Free transfer of profit One-stop-shop system

Tax system Profit (corporate) tax Value Added Tax Personal Income Tax Property taxes

Profit tax Tax rate: 12% in 2007 and 10% afterwards  Lump-sum for micro-companies: EUR 300 for income up to EUR and EUR 700 for income from EUR Tax payers:  Macedonian entities- on world-wide income  Permanent establishment of foreign entities- on Macedonian source profit  Group taxation for Macedonian entities and their subsidiaries; valid for 5 years

Deductions Incomes from dividends from participation in equity of the Macedonian companies are not included in the tax base 30% of the capital gains from sale of securities, equity and real estate are not included in the tax base. Capital losses may be carried forward in the next three years Revenues earned on the basis of the funds that are strictly earmarked for performance of the activity of the legal entity – taxpayer (budgets, funds) are not included in the tax base for calculation of the profit tax

Corporate tax incentives Reduction of the tax base:  For the amount of re-invested profit in Republic of Macedonia Reduction of the tax payable  For procurement of up to ten fiscal devices, by the amount of their value Full tax exemption  Users of the free economic zones-10 years

Withholding tax Introduced 1 January, 2006 Tax rate: 12% (for 2007) and 10% after Subject to taxation:  Incomes from dividends  Incomes from interests  Incomes from royalties  Incomes from management, consulting and other types of services  Rents  Insurance premiums  Awards and prizes from entertainment and sport activities  Telecommunication services

Exception from withholding Transfer of a portion of the profit of a permanent establishment of a foreign legal entity in the Republic of Macedonia, to which tax profit has been previously paid; Income from interest from debt instruments issued and/or guaranteed by the Macedonian Government, the National Bank of the Republic of Macedonia, banks or other financial institutions acting as an agent of the Macedonian Government; Income from interest from deposits in a bank located in the Republic of Macedonia; and Income from intermediation or consulting with state securities on international financial market.

Withholding tax Double taxation treaties relief available Macedonia has concluded 25 DTT, among which with Slovenia, Serbia and Montenegro, Albania, Bulgaria Full tax exemption or lower tax rate Reporting obligation- By 15 February in current year domestic entities are obliged to report PRO for the tax withheld in the previous year

Value Added Tax (VAT) Introduced 1 April, 2000 General tax rate 18% and preferential 5% on certain products Registration  Voluntary  Mandatory-turnover ≥ MKD (EUR ) Tax period  Calendar month ≥EUR  Quarter < EUR  A year- voluntary registered tax payers Tax return- 15 days following the respective tax period Tax refund- theoretically within 30 days from the submission of the tax return Tax credit deduction available

Value Added Tax- exemptions Tax exemptions in the country  Without right to tax credit deduction (sale of residential buildings and apartments, except the first sale, postal, banking and financial services, insurance, culture, health services etc.)  With right to tax credit deduction (export of goods, sale of goods to the FEZ, custom zones; services connected to the import, export and transit etc) Tax exemption during import  Goods the sale of which is VAT exempt in the country  Goods in transit, re-export or temporary imported goods  Goods imported by foreign, diplomatic or consular representative missions for official needs, as well as by diplomatic personnel, for personal needs  Goods to be exhibited on fairs, which will be exported afterwards  Goods necessary for implementation of projects financed with funds from foreign donors

Personal Income Tax Tax rate: 12% (2007) 10% after Tax payers: Physical persons-residents and non-residents Tax return deadline: 15 March following year Subject to taxation:  Personal income  Income from agriculture  Income from independent activities  Income from property and property rights  Income from copyrights and industrial property rights  Capital revenues  Capital gains  Gains from games on chance  Other Incomes

Property taxes Property tax: from 0.10% to 0.20% of the market value of the real estate and the movable property; Tax on inheritance and gifts: it is free for the first order of successors, 2-3% tax rate in second order of succession and for the taxpayer in third order of succession or a taxpayer who is not related to the testator, it is paid at 4-5% tax rate, calculated on the market value of the inherited or the property received as a gift; Tax on sale of real estates and rights: 2-4% of the market value of the real estate.

Conclusions Improved business climate Attractive tax package Low taxes and flat tax rates = Attraction of foreign investments

Other competitive advantages  Member of CEFTA, WTO  Agreement for Stabilization and association and future EU Membership  One-stop-shop system for registration of new businesses  Low costs and simple procedure for starting-up a business  Free market access  E-government  Competitive cost of labor  Free Trade Agreements  Investment Protection Treaties  Additional incentives for the foreign investors (incentives in the free economic zones, double taxation treaties, equal treatment with the domestic entities, free transfer of profit etc.)

FDI- top priority in the Country