Macedonia I. Economic overview

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					                                            Southeast Europe Investment Guide 2006


I. Economic overview
1.1. General economic indicators

                             Indicators                                   2000               2001             2002             2003             2004e
1. GDP, USD bln                                                               3.89                    3.72           3.77         4.67               5.40
2. GDP per capita, USD                                                      1,924                 1,830             1,835        2,316              2,550
3. Real GDP growth rate, %                                                       4.5                  -4.5            0.9              2.8              2.9
4. Inflation (average), %                                                        5.8                   5.5            1.8              1.2           -0.4
5. Annual unemployment rate, %                                                32.1                    30.5           31.9         36.7               37.0
6. Budget balance (central budget and funds), % of GDP                           1.8                  -7.2           -5.7             -1.1              0.0
7. Current account balance, % of GDP                                             -2.1                 -7.1           -9.5             -3.3           -6.1
8. External debt, % of GDP                                                    39.9                    41.0           43.1         44.9               44.1
9. Foreign currency reserves, USD mln                                            714                  775            734              903               986
10. Exchange rate, end of year, MKD/EUR                                       60.8                    61.0           61.1         61.3               61.4

Source: National Bank, Ministry of Finance and State Statistical Office
Note: e Estimate

1.2. Foreign trade                                                          1.2.3. Exports and imports

1.2.1. Foreign trade regime and major regulations                           Over 85% of the foreign trade exchange of Macedonia is
                                                                            realised under preferential conditions in accordance with
Macedonia joined the World Trade Organisation (WTO) on                      the concluded bilateral and multilateral Free Trade
4 April 2003. Following the WTO principle to eliminate                      Agreements.
quantitative restrictions on trade, an extensive liberalisa-
tion of the trade regimes has been implemented.                              Trade volume, USD bln            2000      2001     2002        2003   2004

1.2.2. Customs regime, export and import quota and                          Exports                          1.32      1.15     1.11         1.36   1.65
license system, tariffs                                                     Imports                          2.01      1.69     1.99         2.30   2.85

With the adoption of the Trade Law (Official Gazette of RM                  Source: State Statistical Office
No. 16/04), the Republic of Macedonia made a complete
harmonization of the trade regime with WTO rules.                           1.2.4. Structure of foreign trade by regions
Pursuant to Articles XX and XXI of GATT 1994, the Law
stipulates import and export licenses related to environ-                   Exports by country groups (2004)
mental protection, protection of human health, protection of
                                                                                    European Union
animals and plants, protection of the historic heritage and                         (EU-15) 56.4 %
trade in arms. In the process of harmonisation of the WTO
                                                                            States of the former
sectoral agreements at the level of the highest tariff rate               SFR Yugoslavia 28.0%
and following the bilateral and multilateral negotiations with
                                                                                  Other developed
the WTO members, the average tariff rate after the transi-                         countries 8.1%
tional period of WTO accession will be about 8%.
                                                                                     CEE and CIS
                                                                                    countries 6.2%
The Law on Customs Tariff (Official Gazette of RM No.
23/03) provides for complete compliance with the                                        Others 1.3%
Harmonized system of the World Customs Organization
and the Combined Nomenclature of the European Union.                        Source: State Statistical Office

                                         Southeast Europe Investment Guide 2006


  Imports by country groups (2004)                                     Imports by commodities (2004)
        European Union                                                  Manufactured goods
         (EU-15) 47.2%                                                  classified by material
         CEE and CIS                                                        Machinery and
      countries 24.0%                                                 transport equipment
  States of the former                                             Mineral fuels, lubricants
SFR Yugoslavia 13.0%                                                 and related materials
       Other developed                                                Food, beverages and
        countries 7.0%                                                      tobacco 12.5%
             Developing                                               Chemicals and related
          countries 7.0%                                                   products 10.5%
                                                                      Miscellaneous manu-
           Others 1.8%                                               factured articles 5.9%

                                                                             Others 15.3%
  Source: State Statistical Office
                                                                       Source: State Statistical Office

  1.2.5. Major trade partners
                                                                       1.2.7. Free Trade Agreements (FTAs)
  Major export partners of the Republic of Macedonia (2004):
                                                                       The Republic of Macedonia implements eleven FTAs. Nine of
  Serbia and Montenegro (20.8% of total exports), Germany
                                                                       these have been implemented on a bilateral basis with the
  (18.9%), Greece (13.7%), Italy (8.0%), Croatia (4.8%),
                                                                       following countries: Albania, Bosnia and Herzegovina,
  France (4.6%), USA (4.3%), Turkey (3.2%), Bulgaria
                                                                       Bulgaria, Croatia, Moldova, Romania, Serbia and
  (3.1%), and Slovenia (1.6%).
                                                                       Montenegro, Turkey and Ukraine, while two of them are on a
                                                                       multilateral basis: the FTA with EFTA countries and the
  Major import partners of the Republic of Macedonia (2004):
                                                                       Stabilization and Association Agreement with the EU.
  Germany (12.6% of total imports), Greece (9.7 %), the
                                                                       Macedonia has submitted official application for CEFTA
  Russian Federation (8.7%), Serbia and Montenegro (8.4%),
                                                                       (Bulgaria, Croatia and Romania) membership as well.
  Bulgaria (7.2%), Italy (5.8%), Slovenia (4.8%), Turkey (3.3%),
  France (2.3%), and Croatia (2.2%).
                                                                       As of 1 January 2005, the Republic of Macedonia provides for
                                                                       100% trade liberalisation with industrial and agricultural prod-
  1.2.6. Structure of foreign trade by commodities
                                                                       ucts with Bosnia and Herzegovina. Also, since 1 January
                                                                       2005, the Republic of Macedonia has 100% trade liberalisa-
  Exports by commodities (2004)
                                                                       tion in the industrial sector with Bulgaria, Croatia and Serbia
          Miscellaneous                                                and Montenegro, and more than 90% with Albania, Moldova
   manufactured articles
                  34.0%                                                and Romania. The remaining 10% will be liberalised in 2008
 Manufactured goods                                                    with Romania and Albania, and in 2009 with Moldova.
 classified by material
                 32.6%                                                 Presently, only the most sensitive industrial products are sub-
     Food, beverages                                                   ject to customs duties.
   and tobacco 15.1%
          Machinery and                                                The FTAs with Turkey and EFTA countries provide for full liber-
     transport equipment                                               alization of Macedonian exports of industrial products to their
          Chemicals and                                                markets. Full liberalization of their exports to Macedonia will be
   related products 4.8%                                               reached in 2008 for Turkey and in 2011 for EFTA countries.
           Mineral fuels,
 lubricants and related
         materials 4.7%                                                The FTA between the Republic of Macedonia and Ukraine
                                                                       provides for full liberalization of Macedonia's exports of indus-
           Others 2.9%                                                 trial products in 2005, and for full liberalization of Ukraine's
                                                                       exports of sensitive industrial products in 2007, while for the
  Source: State Statistical Office
                                                                       most sensitive industrial products - in 2010.

                                                                       The trade with agricultural products is mostly in full customs
                                                                       duties, except for the products for which the countries have
                                                                       determined tariff quota systems on a mutual basis under prefer-
                                                                       ential conditions. This refers to all countries except for Albania,
                                                                       Bosnia and Herzegovina, Croatia, Serbia and Montenegro.

                                                       Southeast Europe Investment Guide 2006


Since 2001, trade between the Republic of Macedonia and the                             The user of a FEZ who reinvests the profits in the capital
European Union has been regulated in accordance with the                                assets in the FEZ, is entitled to reduce the profit tax base for
Stabilization and Association Agreement. The Macedonian                                 the amounts invested in capital assets, after the expiration of
industrial and agricultural products have been exported duty                            a period of 10 years and 1 day after the commencement of
free since June 2001, except for three agricultural products                            activities.
(baby-beef, fish and wine), for which the EU determines annu-
al quotas. EU industrial products can be imported into the                              The free zone land may be leased to foreign investors for a
Republic of Macedonia following a gradual reduction of the                              period of fifty years, with a possibility of extension for anoth-
customs duties over a transitional period of 10 years, which                            er 25 years.
ends on 31 December 2010. On 1 January 2011 there will be
no customs duties for the export of industrial products on a                            The contractor awarded the right to develop a FEZ by the
mutual trading basis. EU's agricultural products can be import-                         FEZ Directorate is entitled to lease or sub-lease immovables
ed into the Republic of Macedonia following different rules                             within the FEZ and to transfer rights to the FEZ users.
depending on the product type: with zero-duty tariff; with zero-
duty tariff within specified tariff quotas and customs duties set                       The first Free Economic Zone in the Republic of Macedonia
at 70% of the Most Favoured Nation principle (MFN) as of 2003                           is "Feni-Industry" Kavadarci or the Nickel Valley, which was
for the quantities exceeding the tariff quotas; with customs                            established in 2000 with already existing industrial capacities.
duties set at 70% of MFN as of 2003 within specified tariff quo-                        It covers an area of 155 ha and is located in Kavadarci.
tas; and the remaining agricultural products with full MFN tariff.                      Presently, eight users operate in this zone.

The Republic of Macedonia has submitted an official applica-                            For the FEZ Bunardzik that covers an area of about 160 ha and
tion for EU membership on 22 March 2004 in Dublin.                                      is located 10 km east of Skopje, on the highway Skopje-
                                                                                        Kumanovo (E75) and 3 km away from the "Petrovec" airport, the
1.2.8. Free Economic Zones                                                              government is looking for a developer and users, respectively.

The Law on Free Economic Zones, enacted in 1999 (Official                               1.3. Privatisation
Gazette of RM No. 56/99, 41/00, 6/02), defines a Free
Economic Zone (FEZ) as part of the customs area of the                                  The process of privatisation began in 1989 with the Law on
Republic of Macedonia, separately fenced and marked as a                                Social Capital of the former Yugoslav Federation, but was
zone, in which economic activities are performed under spe-                             intensified after 1993 with the enactment of the Macedonian
cial conditions. The following activities can be performed in                           privatisation law - Law on Transformation of Enterprises with
the FEZ: manufacture, services intended for export, foreign                             Social Capital (Official Gazette of RM 38/93, 48/93, 21/98,
trade exchange, banking and other financial activities, prop-                           25/99, 39/99, 81/99, 49/00, 6/02, 31/03). Pursuant to this
erty and individual insurance and reinsurance, etc., except                             Law, the enterprises considered to be of high national inter-
those related to textile industry.                                                      est, the natural resources and all public sectors were exclud-
                                                                                        ed from privatisation. Subject to privatisation have only been
In 2000, the FEZ Directorate was established by the govern-                             the enterprises with social capital in the following sectors:
ment in order to carry out all activities regarding the develop-                        manufacturing, construction, trade, transport, financial servic-
ment, establishment and monitoring of the FEZ activities.                               es, crafts, catering and tourism. Later on, the agricultural
Furthermore, the Directorate is involved in attracting                                  companies and co-operatives, the lottery and insurance com-
investors in the FEZ and in managing long-term relations with                           panies joined the privatisation process as well.
both the domestic and foreign ones.
                                                                                        The institution responsible for organization, implementation
Advantages and incentives in the FEZ                                                    and control of the privatisation process of all these companies
                                                                                        (1,766) was the Macedonian Privatisation Agency (MPA).
        Monetary                     Commercial                      Employment
       advantages                    advantages                      advantages
                                                                                        Privatisation in Macedonia is almost complete, with more
 G   No VAT and Excise      G   Foreign companies can                                   than 95% of the socially-owned companies already priva-
     tax                        start their activities quickly   G   Companies can
 G   No income and          G   Companies active in the              easily recruit     tised. According to the Law, unsold assets will be transferred
     property tax for a         FEZ can be 100% local                Macedonian         to the Pension Fund, and the companies' assets (buildings,
     period of 10 years         companies, as well as                employees          machines and other equipment) owned by MPA will be trans-
 G   No customs duties          foreign or JV                    G   Available highly
     for goods, equip-      G   There is no prohibition              qualified          ferred to a public company for real estate management.
     ment and machin-           against selling from the             workers from
     ery in the free zone       FEZ to the domestic                  various            Restructuring and then privatisation of the following compa-
 G   No municipal fees          market                               professions
     for construction,      G   Companies can use the            G   Labour             nies in the public sector is pending: Macedonian Power Utility
     water connection,          FEZ as a re-export center            relations board    - Electro Stopanstvo na Makedonija (ESM), Public Enterprise
     sewerage, heating,     G   Bureaucracy in the FEZ                                  for Railways, companies from the healthcare sector.
     gas and electricity        is minimized

                                        Southeast Europe Investment Guide 2006


Privatisation of these companies is under the auspices of          FDI by sectors (2000-2004), USD mln
the respective ministries (i.e. Ministry of Transport and                                                                          Total,
Communications, Ministry of Economy and Ministry of                     Sector         2000       2001     2002    2003    2004    2000-
Health).                                                                                                                           2004
                                                                   Transport and
Privatisation of the banking system                                communica-              2.36 337.39     10.28   32.32   62.79 445.14
The banks have been transformed as part of a wider                 tions
financial sector reform. Their privatisation has been a            Financial
                                                                                  104.70           11.20   24.78   28.80   10.27 179.75
passive one depending on the privatisation of their found-         intermediation
ing enterprises. However, looking for full capitalization, a       Manufacturing       34.70      37.74    27.22   12.55   43.55 155.76
number of Macedonian banks have attracted foreign                  Construction        18.90      12.32     4.01    0.27    0.06 35.56
investors as the banking sector is now fully reformed. The         Trade and
share of foreign capital in the total banking sector equals                                3.50    5.15     6.97    4.73    8.02    28.37
47.2%, present in 16 banks, 8 of which are owned by for-           Business
eign shareholders.                                                 activities and          2.36    8.52     1.88    4.34    5.49    22.59
                                                                   real estate
Proceeds from FDI via privatisation                                Mining and
In total, USD 700 million, which represents the majority of FDI                            9.62    2.17     0.29    0.26    5.44    17.78
inflows in the country, were generated through the privatisa-      Hotels and
tion process. USD 200 million have been invested through                                   0.13    1.28     1.64    7.19    6.61    16.85
the MPA and USD 500 million have been invested through
post-privatisation transactions, privatisation of the telecom-                                -    2.31     0.42    1.59    6.05    10.37
                                                                   and fishing
munications and the banking sector.
                                                                   Others                  2.56   27.03     2.79    1.43    2.99     36.8
1.4. Foreign investment                                            Source: National Bank of the Republic of Macedonia

1.4.1. FDI by years                                                Share of FDI by sectors (2000-2004), %
                                                                         Transport and
The FDI stock in the Republic of Macedonia has reached            communications 47.3%
over USD 1.2 billion by the end of 2004. In 2001,                             Financial
Macedonia marked the highest amount of FDI inflows as a           intermediation 18.4%
result of the sale of the Macedonian Telecom for 310 USD
million to the Hungarian Matav (60% owned by Deutsche             Manufacturing 16.7%
                                                                      Construction 3.8%
FDI in Macedonia by years, USD mln*
                                                                  Trade and repairs 3.0%
     Year        2000      2001      2002      2003     2004         Business activities
                                                                   and real estate 2.4%
FDI inflows       174.53    441.53     77.82    94.56 151.27
                                                                           Others 8.4%

Source: National Bank of the Republic of Macedonia                 Source: National Bank of the Republic of Macedonia
Note: *Total investments minus returned investment
                                                                   1.4.3. FDI by countries (2000-2004), USD mln
USD 52 million of FDI have been reported for the period
January-May 2005.                                                                                                                  Total,
                                                                      Country         2000        2001     2002    2003    2004    2000-
1.4.2. FDI by sectors                                                                                                              2004
                                                                    Greece           103.16       67.47    45.12    6.82   30.15 252.72
Besides the largest investments in the telecommunications           Netherlands            0.56    0.58     0.66   31.60   66.23    99.63
sector (privatisation of the Macedonian Telecom and invest-
                                                                    Switzerland            1.30    8.78     2.69   13.60    8.01    34.38
ment in the second mobile operator), the majority of FDI has
been attracted in manufacturing, ferrous metallurgy, cement         Slovenia           11.58       3.86     3.99    6.06    4.74    30.23
production, crude oil processing, food and beverages, tex-          Germany            11.28       4.75     0.63    4.87    6.56    28.09
tiles, banking and insurance.                                       USA                    3.47   15.14     4.28    3.46    1.06    27.41
                                                                    Bulgaria               0.06    0.43     4.96    9.26    4.95    19.66

                                         Southeast Europe Investment Guide 2006


Cyprus           4.77    3.92     7.54    0.15       1.67   18.05   Wine production has a long tradition in Macedonia. It is one
                                                                    of the most popular products with high quality and a signifi-
Italy            2.51    2.72     0.41    0.69       7.43   13.76
                                                                    cant export share. Annual production of grapes varies from
British Virgin                                                      200,000 to 240,000 t, out of which approximately 32,000 t are
                 0.53    2.17     1.73    5.85       1.07   11.35
                                                                    table grapes and 170,000-200,000 t - wine grapes. The pro-
Croatia          0.05    0.00     0.00    0.01       5.02    5.08   duction of wine is carried out in 20 wineries with a total capac-
Turkey           0.16    0.01     0.24    0.69       2.44    3.54   ity of 220 million litres. Macedonian wines are over 90%
                                                                    exported in the markets of Western Europe. The new Law on
Source: National Bank of the Republic of Macedonia                  Wine is in compliance with the EU standards.

1.4.4. Government institutions in the field of foreign              Tobacco growing and cigarettes production have been tradi-
investment                                                          tionally important sectors for the Macedonian economy due to
                                                                    the recognized quality of Macedonian tobacco. They have
The Agency for Foreign Investments of the Republic of               attracted foreign capital in the process of privatisation and post-
Macedonia (MacInvest) started its activities in January 2005        privatisation. There are three large cigarette factories in Prilep,
under a law adopted in June 2004. It is a state institution,        Skopje and Kumanovo and over 40 tobacco-processing stations.
mainly focused on providing information services and assis-         Capacities for annual production of tobacco are 30,000 t and
tance to investors.                                                 20,000 t for cigarettes. The new Law on Tobacco is in compli-
                                                                    ance with the EU standards. Trade in tobacco is a subject to the
MacInvest's activities:                                             FTA preferential trade regime on the import and export sides.
● FDI promotion and attraction according to best practices;
● High professional services to investors in pre-investment,        1.5.3. Chemical industry
  investment and reinvestment phases;
● Image building of the country as an investment destina-           The country has a large chemical industry, which accounts
  tion;                                                             for 8.6% of industrial output. There is a well-developed
● Promotion of the regions of the Republic of Macedonia             capacity for production of basic chemicals, synthetic fibers,
  and stimulation foreign investors to use products and serv-       polyvinyl chloride, as well as detergents, fertilizers,
  ices of Macedonian companies;                                     polyurethane foams and fibres, etc. Pharmaceutical and
● Identification of the sectors that offer best perspectives        cosmetics companies are well established. Over the past
  and their promotion;                                              ten years, in the chemical industry, in particular the pro-
● Development and implementation of innovative and proac-           cessing section, there has been a rise in the number of
  tive events on targeted markets;                                  small capacities for processing of plastic masses, deter-
● Analyses of the investment climate and proposals for leg-         gents, hygiene products, packaging, etc., which have
  islative changes aimed at its improvement;                        improved the results of the sector.
● Stimulation and assistance to green-field investments and
  technological parks.                                              1.5.4. Textile and leather industry

1.5. Investment opportunities by sectors                            Textile industry has a long tradition in Macedonia. It is of par-
                                                                    ticular importance for job creation and is the second largest
1.5.1. Agriculture                                                  export industry in the country. Cotton thread and fabric, wool
                                                                    yarn, fabric and knitted fabric are the main products. Export
The agribusiness (including agriculture and food processing)        potential is based on increased demand for ready-made
is of great significance for the economy, accounting for 15%        clothing in Europe and North America, and is based mainly on
of GDP. The agricultural sector remains a major employer,           outward processing. In the last few years more than 400 new
accounting for around 24% of the total workforce. Available         textile capacities and over 70 small capacities for shoes pro-
agricultural land is 1.3 million hectares, of which 43% are         duction have been opened.
arable and 4% are vineyards and orchards; the rest are
meadows and pastures.                                               1.5.5. Tourism

1.5.2. Food and beverages                                           The Republic of Macedonia is a veritable treasury of culture
                                                                    and art as numerous historical monuments can be found
Food and beverages processing is a well developed sector in         throughout the county. It abounds in natural beauties and rar-
Macedonia with companies producing canned and bottled               ities. The cultural heritage, combined with a temperate cli-
fruits and vegetables, wine and beer for export. The process-       mate and beautiful landscape, makes Macedonia an attrac-
ing capacities for fruit and vegetables range between 70,000        tive area, ambitious to become a preferred destination for for-
to 100,000 t of vegetables and 30,000 to 40,000 t of fruit.         eign visitors.

                                         Southeast Europe Investment Guide 2006


Summer and winter tourism: As a continental country with            ed in the first quarter of 2005. It provides for stable and con-
influence of the Mediteranean climate, the Republic of              sistent regulations adjusted to the EU legislation, which will
Macedonia has a great potential for development of both             lead to full liberalization of the market and attract foreign and
summer and winter tourism.                                          domestic investors to the fixed and mobile telephony market.

Eco-tourism: The unpolluted air, soil and water are a great         1.5.7. Information technologies
precondition for eco tourism, which is on the top of the list of
offers of the world's most popular tour operators.                  The development of IT is a national priority. The IT market in
                                                                    Macedonia is estimated at approximately USD 80 million,
Culture tourism: with over 1,000 churches and monasteries,          growing by 15% annually. An IT cluster, supported by USAID
more then 4,200 archaeological sites, Macedonia has potential       and a few associations of IT companies are active in
to become one of the leaders in cultural tourism in Europe.         Macedonia, including the Macedonian Association for
                                                                    Information Technology (MASIT). It is a voluntary, non-profit
Macedonia can be divided into five main regions, each with          association, established in 2000. MASIT represents private
its own attributes and different tourist potentials.                companies registered in Macedonia that have primary busi-
                                                                    ness activities in the area of IT production, trade and servic-
Comparative ranking of the tourist and investment poten-            es. The Association's members (45) comprise 80% of the IT
tial of Macedonian regions                                          market in Macedonia. In May 2005, MASIT became member
                                                                    of the World Information Technology and Services Alliance -
             Investment Places for                  Adequate
            opportunities investment Infrastructure tourism         WITSA.
                          Sar planina                 Winter,
Northwest     Excellent                    Good                     The development of the IT industry indicates that the
                           Mavrovo                    Summer
                            Berovo      High-scale                  Macedonian market is in a process of continuous growth and
Northeast     Excellent    Pehcevo      investment                  use of the TRADO portal could open the prospects of world-
                             Stip         required                  wide co-operation of Macedonian companies. The employees
                            Struga                                  in this sector are highly qualified, well trained IT profession-
                             Ohrid                    Summer,
Southwest     Excellent                    Good                     als, educated in some of the three universities in Macedonia
                            Prespa                     Culture
                           Baba Mt.                                 offering education in ICT disciplines. Due to the excellent
                            Dojran      High-scale     Transit,     education, many of the graduated engineers have been
Southeast       Good       Gevgelija    investment      Spa,        employed abroad and are well positioned.
                           Banjsko        required     All year
                                        High-scale    Summer,
                            Krusevo     investment     Winter       1.5.8. Energy sector
Central       Excellent                   required
                             Skopje        Good
                                                     Conventional   At present Macedonia retains an installed power capacity of
                                                      All year      1,444 MW, of which 30% is hydropower, and provides for 6.5
                                                                    TWh of the annual production. The growing demand is met
1.5.6. Telecommunications                                           with more than 20% of imports. Roughly, 700,000 captive
                                                                    customers are connected to the distribution network, while
Macedonia has a well-developed communications network               19% of the electricity is consumed by the directly connected
with a tele-density of 26.7 lines per 100 inhabitants. The          industry customers.
country has direct fiber optic links to the European back-
bones. The exclusivity period for provision of fixed services       The vertically integrated, state owned power utility
has ended up 31 December 2004 and now theyare fully liber-          "Elektrostopanstvo na Makedonija" AD (ESM) provides for gen-
alised in telecommunications. The market for data communi-          eration, distribution and supply of electricity. It also operates the
cations including Internet access is also liberalised. The num-     mines used to supply the two lignite-fired plants, one of which
ber of users with access to Internet is over 130,000 and there      (Bitola) provides for 70% of the overall electricity production.
are 9 Internet providers.                                           The third thermal power plant is oil-fired and at present used
                                                                    mostly in the high season. The existing six main hydropower
Macedonian Telecommunications is in possession of the first         plants account for around 17% of the annual electricity produc-
GSM license in the country through its wholly owned sub-            tion. More than 40% of the hydro potentials are available for cur-
sidiary MobiMak. For further liberalization of the GSM net-         rent and future investment projects. Privatisation of the compa-
work, a second license for providing GSM services has been          ny ESM by a strategic investor, to be selected through a public
awarded to OTE (Greece), which started operations in June           tender, is planned before the end of 2005.
2003. Today, both companies have more than 800,000 sub-
scribers or 40% of the population.                                  The transmission system (400 kV) is interconnected to the
                                                                    systems of Greece and Serbia. In accordance with the Law
The new Law on Electronic Communications has been enact-            for Transformation of ESM, adopted in April 2004, starting

                                         Southeast Europe Investment Guide 2006


from 1 January 2005, the electricity transmission, dispatch        1.6. Foreign investment regime
and system control are performed by the newly registered
Transmission and System Operation company (MEPSO),                 1.6.1. Legal framework
which will remain in state ownership.
                                                                   The Government of the Republic of Macedonia has established
The gas sector's current operation is related to the main sup-     four fundamental principles in its foreign investment attraction
ply pipeline from Skopje to the Bulgarian border. The gas          policy: national treatment, complete protection of the owner-
exploitation (currently around 10% of the available capacity)      ship rights of foreign investors, stable and consistent legal
expands for the industry, while the wider commercial and           environment, and transparent functioning of the institutions.
household consumption is still in preparatory stages.
                                                                   The principal law regulating the position of foreign investors
One of the representative projects in the sector is the con-       in Macedonia is the Law on Trading Companies (2004). In
struction of a 190/150 MW gas fired co-generation thermal          general, a foreign person in the Republic of Macedonia may
power plant for electricity and heat (Te-To) in Skopje. Along      establish the same types of companies as the nationals of the
with the related domestic industry co-financing and the World      Republic of Macedonia without any restrictions. There are no
Bank support, a dominant foreign investor is welcome to build      limitations on the amount of a foreign person's investment in
and operate the plant as an IPP project.                           a Macedonian company, or on the repatriation of post-tax
                                                                   profits and dividends. There are no restrictions on the repa-
1.5.9. Programme for public investment for 2005-2007               triation of profit from a foreign investment.

The Public Investment Program of the Republic of Macedonia         The Republic of Macedonia has concluded Agreements on
(PIP) for the period 2005-2007 includes investment projects        Promotion and Protection of Investment with the following
which, in accordance with the government priorities, have a        countries: Albania, Austria, Bosnia and Herzegovina,
major contribution to the sector development. PIP consists of      Belarus, Belgium and Luxemburg, Bulgaria, People's
99 investment projects, whose total cost is estimated at EUR       Republic of China, Republic of China, Croatia, Czech
1,247.86 million. Some of the projects, amounting to EUR           Republic, Germany, Egypt, Finland, France, Hungary, Iran,
321.26 million, have been implemented by the end of 2004.          Italy, Republic of Korea, Malaysia, the Netherlands,
The fulfilment of certain investment activities, estimated at      Poland, Romania, Russia, Serbia and Montenegro,
EUR 174.63 millions, will be shifted beyond 2007. It is fore-      Slovenia, Switzerland, Sweden, Turkey, and Ukraine.
seen to utilise EUR 751.97 million during the period 2005-
2007, which is EUR 283.57 million in 2005 alone.                   1.6.2. Incentives

Cost by sectors, 2005-2007, EUR mln                                The foreign investment incentives in Macedonia include
                                                                   exemption from customs duties and tax breaks, as follows:
         Sector           2005      2006      2007      Total      ●  Foreign investors (where foreign capital comprises at least
Transport                   77.22     97.70    103.11    278.03       20% of the total invested capital) are entitled to a profit tax
Energy                      77.73     63.74     39.02    180.49       exemption for the period of the first three years, starting
Water                       27.59     28.81     22.67     79.07       from the year in which profit is realised.
Communal services and
                                                                   ●  The taxpayer who is a beneficiary of a free economic zone
                            53.93     17.96      5.26     77.15       is exempt from profit tax for a period of 10 years starting
                                                                      from the date of initial operation in the free economic zone,
Non-economic sectors        29.93     17.51     12.62     54.06
                                                                      under conditions and procedure stipulated by the Law on
Environment                  6.54     19.55      5.35     31.44       Free Economic Zones.
Other sectors of                                                   ●  The tax base is reduced up to the value of funds invested
                             4.70      4.76      4.81     14.27
economy                                                               for environmental and nature protection (the amount
Education and science        7.86      9.90      8.91     26.67       invested for this purpose is 100% acknowledged).
Health                       4.07      5.00      1.72     10.79    ●  The tax base of taxpayers, which have invested in eco-
Total                      283.57    264.93    203.47    751.97       nomically underdeveloped regions and in specific areas
                                                                      (hill-mountain regions, border regions and compact unde-
Source: Public Investment Programme of RM, 2005-2007, Ministry        veloped regions) is reduced with the value of invested
of Finance (February 2005)                                            funds, but for a maximum of 50% of the base.
                                                                   ●  In view of developing the stock exchange in the Republic
Under the Programme for the 2005-2007 period, EUR 660.45              of Macedonia, the estimated profit tax is reduced with 50%
million or 87.8% of the total foreseen investments will be allo-      for taxpayers, which are listed on the official market of the
cated for economic infrastructure development and EUR                 stock exchange, for three years after the start of the list-
91.52 million (12.2%) - for non-economic infrastructure devel-        ing. This tax reduction will be implemented until 31
opment.                                                               December 2005. Also, there is no capital gain tax for all

                                           Southeast Europe Investment Guide 2006


    securities transactions by the end of 2005 and securities          Eight business incubators operate successfully in the
    transactions are not taxed.                                        Republic of Macedonia where industrial and other enterpris-
●   The capital gains from the sale of securities, equipment           es are being supported.
    and immovables are included in the tax base in an amount
    of 70%. The capital gains from securities will not be sub-         II. Establishing business in Macedonia
    ject to taxation until 1 January 2006.
●   Imports of spare parts and equipment (except for cars and          2.1. Forms of business and corporate governance
    office furniture) are exempted from customs duties if the          Company        Legal framework: Law on Trading Companies
    foreign stake is at least 20% of the total investment.             regime         (Official Gazette of RM No. 28/2004).
    Furthermore, the person that will benefit from the exemp-           Types of      Sole proprietorship "Trgovec poedinec"; General part-
    tion must operate for at least 3 more years after the last         companies      nership "Javno Trgovsko Drustvo" (JTD); Limited part-
    year of the customs exemption. The purchase of shares                             nership "Komanditno drustvo" (KD); Limited liability
                                                                                      company "Drustvo so Ogranicena Odgovornost"
    can also be considered as a foreign stake                                         (DOO); Joint-stock company "Akcionersko Drustvo"
●   The taxpayer who makes technological modernisation or                             (AD); Limited partnership by shares "Komanditno drust-
    purchases assets for environmental and nature protection                          vo so Akcii" (KDA).
    has the right of accelerated depreciation of the fixed assets.     Partnerships Partners: Two or more - domestic or foreign legal
                                                                                    entities or individuals.
●   The tax base is reduced with the amount of investment in                        Characteristics: The general partnership is an asso-
    movable and immovable assets, up to EUR 100,000 in                              ciation of two or more legal entities or individuals who
    MKD counter value in the current year, excluding cars, fur-                     bear joint and unlimited liability by their entire prop-
                                                                                    erty towards the creditors.
    niture, carpets, works of art and other office decorations.                     In a limited partnership where two or more persons
●   The tax base is reduced up to 30%, but for not more than the                    are associated, at least one of them is liable for the
    remaining unused part of the investment, for investments in                     limited partnership's obligations by his entire proper-
                                                                                    ty (komplementar: general partner), while the other
    movable and immovable assets exceeding EUR 100,000 in                           partner(s) is(are) liable for the limited partnership's
    MKD counter value in the current year, excluding cars, furni-                   obligations to the amount of the entered/registered
    ture, carpets, works of art and other office decorations.                       investments in the limited partnership (komanditor:
                                                                                    limited partner). There are no citizenship require-
                                                                                    ments for the partners.
In cases when the taxpayer does not use the tax exemption
                                                                       Limited        Shareholders: From one to 50. If the whole capital
till the end of the current year, he has the right to transfer it to   Liability      belongs to only one shareholder, this is a single per-
the next period till its complete use.                                 Company        son limited liability company "Drustvo so Ogranicena
                                                                                      Odgovornost osnovano od Edno Lice" (DOOEL).
                                                                                      Minimum capital: MKD equivalence of EUR 5,000
1.7. Industrial and technology parks and incubators                                   Share and contribution requirements: The mini-
                                                                                      mum contribution of each member cannot be less
Industrial parks as instruments for support of technologically                        than the MKD equivalence of EUR 100. At registra-
                                                                                      tion, at least the MKD equivalence of EUR 2,500 of
innovative enterprises are merely in initiation, although they                        the capital and 1/3 of each shareholder's cash contri-
are planned in the "Programme of Measures and Activities on                           bution must be paid in. Contributions in kind must be
Entrepreneurship Promotion and Creation of Competitiveness                            fully contributed as of the time of registration.
                                                                                      Company management: The General Meeting of
of the Small and Medium- sized Businesses in the Republic of                          shareholders is the decision-making body of the
Macedonia."                                                                           company. It must be convened at least once per year.
                                                                                      The members vote proportionally to their contribution
                                                                                      unless otherwise agreed in the Articles of associa-
Activities for the creation of a Technology park in Bitola are in                     tion. One or more managing directors are appointed
the start-up phase, and are realised in close co-operation                            for a period stipulated in the Articles of association. If
with partners from Greece, the Faculty of Technical Sciences                          such a period is not determined, the managing direc-
                                                                                      tors are considered elected for a period of four years.
in Bitola and the Foundation for Small and Medium-sized                               There are no citizenship requirements for the man-
Enterprises. A feasibility study indicates that about EUR 1 mil-                      aging directors. The company may also appoint a
lion are needed for the construction of the Park.                                     supervisory board or a controller.
                                                                       Joint-Stock    Shareholders: One or more.
Within the Faculty of Mechanical Engineering in Skopje, a              Company        Minimum capital: MKD equivalence of EUR 25,000 for
                                                                                      companies incorporated simultaneously (without public
Center of Excellence in mechanical engineering systems                                call) and MKD equivalence of EUR 50,000 for compa-
(CIRKO) is functioning. It has been established as an invest-                         nies incorporated successively (through public call).
ment of Sun Microsystems, e-Biz, USAID and the Faculty of                             Share and contribution requirements: The nomi-
                                                                                      nal value of each share cannot be less than the MKD
Mechanical Engineering. These institutions offer services to                          equivalence of EUR 1. The shares are freely trans-
SMEs in advanced 3-D modeling, simulation and visualisation,                          ferable. At least 25% of the nominal amount of each
development of integrated industrial systems, JAVA interfaces,                        share must be contributed at the time of registration.
                                                                                      The total amount of all payments in cash should not
etc. Also, within the Faculty of Mechanical Engineering in the                        be less than EUR 12,500 or EUR 25,000, respec-
near future a project for the establishment of the Skopje                             tively. Multiple-vote shares are prohibited.
University Business Start-up Centre will be launched.                                 Convertible bonds and other securities and financial
                                                                                      derivatives may be issued.

                                             Southeast Europe Investment Guide 2006


                Company management: The governance of the                The employment and labour relations are regulated by the
                company may be carried our by a one-tier manage-         Labour Law (Official Gazette of the RM No. 62/05), the
                ment system including a general meeting of share-
                holders and a board of directors or two-tier system      Collective Agreements and other legal acts. The Labour Law
                comprising a general meeting of shareholders, a          regulates the implementation of rights, obligations and
                management board and a supervisory board. The            responsibilities of the employee and the employer.
                general meeting of shareholders takes decisions by a
                majority vote of the represented share capital, except
                in certain cases when higher majority is required.       The new Labour Law, prepared in accordance with the EU stan-
                Pursuant to the one-tier management system, the          dards, will increase the flexibility of the labour market by offering
                general meeting appoints a board of directors with 3
                to 15 members. The number of the non-executive           and promoting flexible and different employment contracts and
                members must be higher than the number of execu-         flexibility of working time. Also, scheduled reforms in this sphere
                tive members. Legal entities may only be non-execu-      will introduce many programmes for training, support of entre-
                tive members. The board of directors elects a presi-
                dent among the non-executive members. According          preneurship and improvement of business climate for compa-
                to the two-tier management system, the general           nies, and other programmes promoting flexible labour market.
                meeting appoints a supervisory board consisting of 3
                to 11 members. The supervisory board appoints the
                managing board with 3 to 11 members.                     Collective agreements regulate employment rights, obliga-
                Specific features: Bearer shares are not regulated       tions and responsibilities of the employees and employers,
                by the Macedonian legislation.                           and are concluded at national level. They can be concluded
Branches     Foreign companies existing in their home country for at     as branch agreements and agreements with employers at the
             least 2 years can establish branches in the Republic of     level of the Republic. The leading trade union organization of
             Macedonia. Branches have the right to carry out all
             forms of business and commercial operations and oper-       the employees concludes a general collective agreement per-
             ate under the same conditions as domestic companies,        taining to employees and employers.
             which carry out the same or related forms of business.
Representati Representative offices may be opened by foreign             2.2.2. Employment of foreign nationals
ve office    companies that are carrying out non-income gener-
             ating activities, such as advertising or market
             research on behalf of their parent company.                 The Law on Establishment of Employment Relations with
             Representative offices may not carry out commercial         Foreign Persons (National Gazette of SFRY No. 11/1978,
             operations or act on behalf of any company other
             than their parent company.                                  amended - 64/1989 and Official Gazette of RM 12/1993)
                                                                         regulates the employment of foreign persons in the Republic
Bankruptcy      Legal framework: Bankruptcy Law (Official Gazette
                of RM No. 55/1997, amended - 53/2000, 37/2002            of Macedonia. According to the provisions of the Law, foreign
                and 17/2004.)                                            persons, or persons without nationality, can be employed in
Anti-trust      Legal framework: Law Against Limiting Competition        the country upon obtaining a work permit. The Employment
rules           (Official Gazette of RM No. 80/1999)                     Bureau of the Republic of Macedonia issues the work permit
                                                                         upon employer's request.
2.2. Labour force and employment regulations
2.2.1. Labour availibaility and legal framework                          2.3. Foreign exchange regulations

In the first quarter of 2005, the total labour force was 832,818         The foreign exchange regime is regulated by the Foreign
people, of which 511,431 were employed and 321,387 unem-                 Exchange Law (Official Gazette of RM No. 34/2001, amend-
ployed. The activity rate in this period was 52.0% with a rate           ed - 49/2001, 103/2001, 54/2002, 51/2003) and accompany-
of unemployment of 38.6%.                                                ing regulations. According to the Law, payments to or from
                                                                         foreign countries are performed by banks authorised for
Population by economic activity and level of education (1Q 2005)
                                                                         undertaking foreign transactions by the National Bank of the
                          Total labour                                   Republic of Macedonia (NBRM).
  Level of education                    Employed Unemployed
Without education, %                0.8       0.6        1.2             All transactions that take place in Macedonia should be made
Incomplete primary                                                       in Macedonian Denars (MKD). Resident and non-resident
                                       4.3        4.3             4.2
education, %                                                             companies and individuals may keep accounts in commercial
Primary education, %                  24.1       20.2            30.3    banks in foreign exchange without restrictions. Profits and
3 years of secondary                                                     dividends from inward investments can be freely transferred
                                      14.2       12.6            16.8
education, %                                                             abroad, after all tax obligations have been met.
4 years of secondary
                                      41.0       41.4            40.4
education, %
                                                                         All non-residents may open foreign exchange and MKD
Higher education, %                    5.1        6.9             2.2    accounts with the domestic banks, which are authorised for
University level                                                         foreign exchange transactions upon proof of identity. Non-
                                      10.4       13.9             4.8
education, %
                                                                         residents may operate accounts without restrictions.
Total                              832,818   511,431         321,387     However, cash withdrawals are limited up to EUR 10,000 (or
Source: State Statistical Office                                         its MKD) per month; for cash deposits above EUR 2,000 a

                                         Southeast Europe Investment Guide 2006


certificate from the Customs authorities is required. Non-res-      ●   Financial services related to issue, sale, purchase or
idents - diplomatic representatives of the foreign countries or         transfer of securities or other financial instruments, bro-
international institutions may operate accounts without                 kerage services and services rendered by NBRM;
restrictions and without limitation.                                ●   Purchase, development, production or co-production of
                                                                        programme materials by radio or TV broadcasters and
Exports and imports of MKD are limited up to MKD 20,000.                for broadcasting period of TV and radio programs;
Residents can freely export foreign currency banknotes and          ●   Services for voice telephony, telex, radio telephony,
cheques up to EUR 2,000 and import up to EUR 10,000 with-               paging and satellite services;
out any documents. For the export of foreign currency ban-          ●   Employment mediation services;
knotes and cheques up to EUR 4,000, a document issued by            ●   R&D services, except in cases when the research is
an exchange bureau or a bank is needed. Export exceeding                used by the procurer for commercial purposes.
EUR 4,000 is not allowed. For import of foreign currency ban-
knotes and cheques exceeding EUR 10,000, the rules for pre-         A main principle of the law is providing fair competition,
venting money laundering apply.                                     equal and non-discriminatory position of bidders and trans-
                                                                    parency during public procurement. The procurer must not
Non-residents can freely export and import foreign currency         discriminate in the sense of the nationality of bidders, or
banknotes and cheques. For export and import of up to EUR           country of origin of goods.
2,000, no declaration is required. Import exceeding EUR 2,000
must be declared upon arival at the country to the Customs          A bidder can be any domestic or foreign legal entity or
authorities, and for export exceeding EUR 2,000 the document        physical person - supplier or provider of goods, services or
received upon arrival must be provided.                             works that submits a bid. Public procurement is performed
                                                                    via the following procedures:
2.4. Legislative framework of concessions                           ●  Open invitation for bids
                                                                    ●  Restricted invitation for bids
The concessions regime in general is regulated by the Law           ●  Negotiated procedure
on Concessions (Official Gazette of RM No. 25/2002).                ●  Design contest and
Additional conditions are regulated by the respective laws,         ●  Restricted invitation for consultant services.
such as: granting concessions for agricultural land is regulat-
ed by the Law on Agricultural Land, granting concessions for        2.6. Dispute resolution mechanisms
telephone networks operation is regulated by the Law on
Telecommunications, granting concessions for broadcasting           Domestic sources of the Macedonian Arbitrary Law include
activity is regulated by the Broadcasting Act, etc. According to    the Constitution of the Republic of Macedonia, the
the Law, concession may be given to domestic or foreign             Litigation Procedure Law (National Gazette of SFRY No.
legal entities and individuals registered in the Trade Register     4/1977), the Law on Settlement of Disputes (National
of the Republic of Macedonia.                                       Gazette of SFRY No. 43/1982) and the Law on Trading
                                                                    Companies. Within the Chamber of Commerce of
2.5. Legislative framework of public procurement                    Macedonia exists a permanently elected Arbitration Court.
                                                                    Since its establishment in 1993, there have been 24
The new Law on Public Procurement, adopted on 26 March              requests for arbitrary settlement of disputes, from which 3
2004 (Official Gazette of RM No. 19/2004), incorporates the         cases relate to domestic legal entities, while the remaining
European Union Directives in this respect. It regulates the man-    ones relate to disputes with an international element.
ner and procedure for carrying out public procurement in the
Republic of Macedonia and, at the same time, establishes a          The international sources consist of bilateral and multilateral
legal framework for the conduct of suppliers and bidders in pub-    conventions, which Macedonia has signed or inherited from
lic procurement. The implementation of the Law is monitored by      former Yugoslavia on the basis of succession. The Republic
the Ministry of Finance and the Public Procurement Bureau.          of Macedonia is a party to the New York Convention on
                                                                    Recognition and Enforcement of Foreign Arbitral Awards, as
The provisions of the Law do not apply to public procure-           well as to the Geneva Convention on Execution of Foreign
ment of items concerning state defense and security, and to         Arbitral Awards. Macedonia is also a party to the Washington
public procurement for which funds have been provided by            Convention on the Settlement of Investment Disputes and
international organizations (donors and lenders).                   the European Convention on International Commercial
                                                                    Arbitration. The ratified international agreements have pref-
In addition the provisions of the law do not refer to procure-      erence over the domestic legislation.
ment of:
●  Purchase or rental of land, buildings, or other real estate or   A new Law on International Commercial Arbitration is pre-
   rights deriving thereof, except when provisioning of funds       pared following the UNCITRAL model and is in Government
   for their purchase or rental is needed (credits and loans);      procedure. This Law regulates the arbitrary establishments

                                               Southeast Europe Investment Guide 2006


and the procedure in a more precise manner.                                                the depreciation.
                                                                                           The tax base shall also be reduced in the following
2.7. Operational costs (2005)                                                              G When the taxpayer has used its profit to invest in
                                                                                             economically underdeveloped regions and in spe-
Average net salary, EUR (May 2005)                           206                             cific regions (mountainous areas, border belts and
Office rent, EUR per sq. m/month                            5-35                             completely underdeveloped regions). The tax
                                                                                             base is reduced by the amount of investment. The
Office purchase price, EUR per sq. m                     500-4,000                           decrease must not exceed 50% of the tax base.
Price of agricultural land, EUR per sq. m                   0.5-1
                                                                                           G Another reduction of the tax base in an amount of
                                                                                             the funds invested in environment protection activ-
Price of industrial land, EUR per sq. m                     5-50                             ities is also possible.
Water charges for corporate clients, incl.                                  Tax            The taxpayer, resident of the Republic of Macedonia,
                                                            0.57            exemption      who has paid tax in a foreign country on the profit
sewage (VAT included), EUR/cubic m
                                                                                           earned through work abroad, is entitled to reduced tax-
Water charges for household use, incl.                                                     ation in the Macedonia, to the amount of the profit tax
                                                            0.24                           paid abroad, and not exceeding the anticipated tax by
sewage (VAT included), EUR/cubic m
                                                                                           application of the tax rate of 15%.
Telephone installation charge,                         PSTN line: 20
                                                                            Tax holidays The tax base for companies with foreign sharehold-
EUR (VAT not included)                                 ISDN line: 60        for foreign ers (with holdings of at least 20%) is reduced by the
                                                        PSTN line           investment proportion of the foreign investment, for the first three
                                                      Residential: 6.5                   years following that investment. For example, the tax
Monthly telephone subscription fee                                                       rate for a company with a foreign shareholder of 60%
                                                        PSTN line
(VAT not included), EUR                                                                  is 15x(100%-60%) = 6%. Therefore, 100% owned
                                                      Business: 11.5                     subsidiaries of foreign companies pay no tax during
                                                      ISDN line: 15.5                    the first three years of operation. There is no tax on
                                                          0.25 - 1                       the transferred profit.
International phone call from Macedonia
                                                     (depending on the      Capital        Capital gains realised from the sale of securities,
(VAT not included), EUR/min
                                                        tariff group)       gains and      equipment and real estate are included in the tax
Electricity prices (VAT included), EUR/kWh                                  tax losses     base in an amount of up to 70%. Capital gains
                                                                                           derived from securities will not be taxed by 1 January
Industrial use                                              0.07                           2006 in order to contribute to the development of the
                                                                                           securities market in the Republic of Macedonia.
Household use, 2 tariff reading                                                            Tax loses can be carried forward for up to 3 years.
   Expensive                                                0.04
                                                                            3.1.2. Personal income tax
   Cheap                                                    0.02
Source: Agency for Foreign Investments of the Republic of                   Legal         Personal Income Tax Law (1 January 1994)
                                                                            Taxpayer      Taxpayer is any individual who is a resident of the
                                                                                          Republic of Macedonia, for the income earned in the
III. Taxation                                                                             country and abroad. A resident is any individual who has
                                                                                          a permanent or usual place of residence on the territory
3.1. Direct taxation                                                                      of the Republic of Macedonia, or an individual who
                                                                                          resides continually on the territory of the Republic of
                                                                                          Macedonia for at least six months. A taxpayer is also a
3.1.1. Corporate income tax                                                               non-resident individual for the income earned on the ter-
                                                                                          ritory of the Republic of Macedonia.
Legal            Corporate Income Tax Law
framework                                                                   Tax base      The positive difference between the gross income of
                                                                                          the taxpayer and deductions provided with the
Taxpayer         Any legal entities performing registered activity in the                 Personal Income Tax Law, such as contributions for
                 country - residents of the Republic of Macedonia for the                 pension and disability insurance, health insurance
                 profit generated in the country or abroad and non-resi-                  and employment, contributions for voluntary pension
                 dents for profits earned in the country.                                 and disability insurances, personal allowances, etc.
Tax base         The profit determined in the tax balance, i.e. the dif-    Tax rate             Monthly salary                 Tax rate
                 ference between the total income and total expendi-
                 tures of the taxpayer in an amount determined by the                           up to MKD 30,000                  15%
                 accounting rules and standards.                                              from MKD 30,001 up to    MKD 4,500 + 18% on
Tax rate         15%                                                                               MKD 60,000         the income from 30,001
                                                                                                                         up to MKD 60,000
Investment       The tax base of the taxpayer shall be decreased by                         above MKD 60,000           MKD 9,900 + 24% on
relieves         the amount of its current investment in fixed assets                                                 the income above MKD
                 undertaken for broadening the scope of its activities.                                                        60,000
                 No such decrease occurs if funds are invested in
                 cars, furniture, carpets, arts and other decorative        Payroll con- Payroll contributions are payable by the employer
                 objects used to equip offices. The decrease must not       tributions   on the gross salary at the time of payment of the
                 exceed 25% of the tax base. The taxpayer is entitled                    payroll:
                 to an accelerated depreciation of fixed assets in                        21.2% - pension and disability insurance

                 cases of technological renovation or if it procures                      9.2% - health insurance

                 means for environmental protection, up to 25% over                       1.6% - employment.

                                           Southeast Europe Investment Guide 2006


Withholding   Individuals pay personal income tax (withholding tax)    movable property, such as cars with more than 1,800 cc,
taxes         on the following revenues:                               buses, trucks, tractors, etc., if the assets are not used for
              G Personal income from employment, pensions,             business purposes. Land and buildings are taxed on their
                income of the members of the management and
                supervisory boards of enterprises, and other types     market value at an annual rate of 0.10%, which is applica-
                of revenues;                                           ble to movable property as well.
              G Income from royalties and royalties from industrial
              G Income from property and property rights if the        The Law provides for exceptions depending on the type
                payer of the income is a legal entity;                 and the purpose of the property (e.g. agricultural land).
              G Gains from games of chances and other prize
              G Dividend distributed to individuals;                   Tax rate on the sale of property and property rights is 3%.
              G The income from interest on savings deposits, cur-     The tax on inheritance and gifts for taxpayers of relatives of
                rent accounts and sights deposits is tax free, while   direct lineage up to the second degree is 3%, while for tax-
                the interest on long-term savings deposits is tax
                free until 2006.                                       payers of relatives of direct lineage up to the third degree
                                                                       or ones, which are not in a relative correlation - 5%.
3.1.3. Withholding tax rates under Double Tax Treaties
of the Republic of Macedonia                                           3.2. Indirect taxation
                                                                       3.2.1. Value added tax
                     Direct   Portfolio
                                             Interest, Royalties,      Legal           Value Added Tax Law (1 April 2000)
    Country       dividends, dividends,
                                                %         %            framework
                       %          %
                                                                       Subject of      Turnover of goods and services, import of goods.
Albania               10           10           10           10        taxation
Bulgaria              5            15           10           10        Taxpayer   An individual who, permanently or temporarily, self-
China (Taiwan)        10           10           10           10                   performs a business activity, independent of the aims
                                                                                  and results of this activity.
Croatia               5            15           10           10
                                                                       Tax base   The total amount of compensation that is received, or
Czech Republic        5            15           0            10                   that should be received for the turnover, in which the
Denmark               5            15           0            10                   value added tax is not included. The tax base for
                                                                                  imported goods is the value of the imported goods,
Egypt                 10           10           10           10                   determined on the basis of customs provisions.
Finland               0            15           10           0         Tax        Exemptions from VAT without the right of deduction:
France                0            15           0            0         exemptions   Turnover with residential buildings and apartments

                                                                                    when used for residential purposes, with the excep-
Hungary               5            15           0            0                      tion of the first turnover that will be effected within the
Iran                  10           10           10           10                     period of five years after building or construction;
                                                                                    Rental of residential objects and apartments, if they

Italy                 5            15           10           0                      are used for residential purposes;
                                                                                    Banking and financial services;
Netherlands           15           15           0            0                      Insurance and re-insurance services, including the serv-

Poland                5            15           10           10                     ices of insurance brokers and agents related to them;
                                                                                    Lottery and entertainment games;

PR China              5            5            10           10                     Services of radio and television broadcasting sta-

Romania               5            5            10           10                     tions, except commercial activities,
                                                                                    International transport of passengers, etc.

Russia                10           10           10           10                   Exemptions from VAT with the right of deduction:
Slovenia              5            15           10           10                     Deliveries of goods that are transported or shipped

                                                                                    abroad by the tax payer, recipient of goods or a third
Sweden                0            15           10           0                      person, if the recipient of goods has a seat abroad;
Switzerland           5            15           10           0                      Turnover of goods that are transported or shipped

                                                                                    from Macedonia into free zones, customs zones or
Turkey                5            10           10           10                     customs warehouses;
Ukraine               5            15           10           10                     Services by brokers and other mediators that act on

                                                                                    behalf and for the account of another person;
Serbia and                                                                          Turnover of gold and other precious metals towards

                       5           15           10           10                     central banks;
                                                                                    International air transport of passengers. This tax

Treaties with Germany, Belarus and Spain are prepared but                           release is valid for airway companies with a seat
                                                                                    abroad, only if the principle of reciprocity is met, etc.
not ratified.                                                                     The following goods are exempted from VAT upon import:
                                                                                    Goods, the turnover of which is released from VAT in

                                                                                    Macedonia in compliance with the legal provisions;
3.1.4. Property tax                                                                 Transit goods;

                                                                                    Temporarily imported goods and goods for re-export;

The Property Tax Law covers tax issues related to the own-                          Goods that are imported from a foreign diplomatic or

                                                                                    consular representative office for business needs;
ership of property, the sale of property and property rights,                       Goods that are imported by international organisa-

inheritance and gifts. Liability to property tax arises from                        tions and their members, under conditions and
the ownership of non-agricultural land, buildings or flats,                         limits determined by international agreements;
                                                                                    Goods intended for exhibitions on fairs and trade

business premises, administrative buildings, garages, etc.,                         exhibitions that will afterwards be exported, etc.

                                      Southeast Europe Investment Guide 2006


3.2.2. Excise duties

Excise duties are regulated by the Excise Duty Law (1 July         The excise can be determined in percentage - proportional
2001). Currently, excise duties are levied on the consump-         excise, or in absolute amounts per measurement units (kilo-
tion of certain goods, such as oil derivatives, tobacco            gram, litre) - specific excise. For some goods (tobacco), a
products, alcohol drinks and motor cars. Excise commodi-           combined excise is applied (proportional and specific).
ties become subject to excise in three cases: by their pro-
duction on the territory of the Republic of Macedonia, their
import in the country and in cases when commodities are
under customs custody.

Useful links
                       Government of the Republic of Macedonia
                                           Ministry of Economy
                                            Ministry of Finance
               Ministry of Agriculture, Forestry and Water Supply
                        Ministry of Transport and Communication
                                     Ministry for Foreign Affairs
                  Ministry of Environment and Physical Planning
                              Ministry of Local Self-Governance
   Agency for Foreign Investments of the Republic of Macedonia
                               Macedonian Privatization Agency
                                   Agency for Entrepreneurship
                  Statistical Office of the Republic of Macedonia
                    National Bank of the Republic of Macedonia
                                Macedonian Economic Chamber
                                   Macedonian Stock Exchange
                                Macedonian Information Agency
                                   General information and links
                                           Business Catalogue
                                     The Macedonian Directory
                                        National Tourism Portal


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