Business Environment in South-East Europe

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Written by VentureXchange

January 10, 2020

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In this article, we provide a briefing on the business environment in Croatia, Slovenia, Serbia, Bosnia and Herzegovina, Montenegro, Albania, North Macedonia, Bulgaria and Romania. Business environment in South-East Europe (SEE) countries had some economic hurdles. Therefore, in this article, we provide you with the business environment overview in SEE countries.

Croatia

The first country to cover from SEE countries is Croatia. One of the biggest challenges for Croatia is foreign investors. Croatia lags its neighbors in creating an appealing business environment, mainly due to inefficiencies in the judicial system. Besides, this creates uncertainty for investors and significant “unofficial” restrictions on foreign investment which add to the overall cost
of doing business.

Moreover, Croatia’s business environment in public services and the governance of state-owned enterprises should get modernised. The government needs to focus on state-owned enterprises (SOEs) which tie up a disproportionate amount of economic resources and privatise several large SOEs.

VAT rates were streamlined, making the system less regressive and eliminating several exemptions. As a result, revenues have risen by more than 4%. The highest
personal income tax rate is 40%, and the top corporate tax rate is 20%.

One of the main hurdles for the Croatian economy is 48.1% share of government spending in the GDP. At the same time, the share of the private sector in GDP is about 70%
– lower than for neighboring countries. The government has lowered Statutory
retirement ages for men and women back to 65 years, from 67 years, following
pressure from trade unions.

Slovenia

The Slovenian government plays a major role in the economy. Furthermore, the government is representing about 50% of GDP. The number of SOEs defined as “strategic” is significant. In other words, they will not be privatised. The government has introduced a gradual cut in the corporate tax rate and more generous investment and R&D allowances. Moreover, many taxes increases first intended to expire in 2016.

Later, the same tax increases did extend. To encourage investment, the government has dismantled some regulatory barriers and offers subsidies of up to 20% of the value. In other words, this recalls of some investments, conditional on location and value.

According to the European
Commission
, the informal economy represents 25% of Slovenian GDP, higher than the average for Central Europe.

Serbia

The Serbian government is beginning to relax some of the austerity measures imposed at the height of the fiscal crisis (e.g. Public wages and pensions were raised by 5-10% in 2018). Moreover, wage reform will also ensure that there is higher pay for sectors that deserve it most.

The EU plans to provide funding of about €80 million for public administration reform from 2016 through 2020. Similarly, the Government cut labour taxes in 2018 which could cause reform of tax administration to increase the efficiency of revenue. Finally, a strategy for the reduction in non-performing loans introduced in early 2018 and appears to be having positive results.

In total, over 50 state-owned enterprises successfully became privatised since 2014. The Smederevo steelworks became private, while the sale of Belgrade’s Airport could soon take place. Plans to privatise Komercijalna Banka and HIP-Petrohemija are underway. The IMF is urging officials to extend their efforts to restructure or liquidate other state companies to avoid accumulated losses.

According to the USAID, Serbian informal sector represents about 30% of GDP. Government officials believe the sector employs up to 600,000 unregistered workers and costs the government approximately €1.5 billion per year.

Consequently, due to tax evasion, it is estimated that Serbia is currently losing more than US$210 million per year. Hence, in October 2018 National Bank of Serbia launched an instant payments system to facilitate money transfers and lower their cost.

Bosnia and Herzegovina

Bosnia and Herzegovina have an oversized public sector, with one of the highest levels of public employment in Eastern Europe. That crowds out public infrastructure spending.

The passage of new banking laws in both entities, amendments to the corporate income tax and banking agency laws and the elimination of the solidarity contribution by the Republika Srpska are encouraging steps. To improve enforcement and reduce tax fraud, the country’s four tax agencies have agreed to share taxpayer information.

The government’s decision to increase excise taxes resulted in the release of IMF funding to finance high infrastructure investments. There was a progress in harmonising tax laws across the entities and improving corporate governance in the state-owned sector.

The informal sector is another significant problem for Bosnia and Herzegovina. It is estimated to account for nearly 40% of GDP in the Federation and more than 20% in the Republika Srpska. Also, many leaders in the government of the autonomous Republika Srpska continue to resist moves to strengthen national institutions.

Large differences in the regulatory practices of the Republika Srpska and the Federation make it difficult for businesses operating in both entities. A major constraint on the country’s economic development is corruption. Also, many leaders in the government of mostly autonomous Republika Srpska continue to resist progress to strengthen national institutions.

Montenegro

Montenegro is introducing a broad-based change in VAT rates. The increase in excludes food products that are taxed at the lower VAT rate but includes excises on cigarettes, alcohol, sugary drinks, and coal.

The banking sector, telecommunications, and oil import and distribution in Montenegro are 100% privately owned. Nepotism is another problem that handicaps the judiciary.

Business environment in this SEE country is affected by a maze of excessive
regulations.

Nonetheless, the government has passed new legislation which will improve the environment for business development, investment and economic growth. Spending cuts, including a reduction in the public sector wage bill and outlays for various social projects, are planned.

Pension preforms are gradually increasing the age of retirement. The informal economy is estimated to generate as much as 25% of the workforce. In other words, suggesting labour markets are too rigid and provide little incentive to join the formal sector.

Albania

New company laws and legal reforms have improved transparency in Albania. The privatisation agenda is gaining momentum with almost all small and medium enterprises that sold off. All commercial banks have placed under private management. In other fields, however, progress has remained limited.

The authorities are undertaking reforms to make the electricity sector and pension system sustainable. A large portion of the central government’s arrears remained cleared.

To achieve its fiscal objectives the government raised various excise taxes. The taxes include tax for interest, rent, dividends, and capital gains from 10% to 15%.

The government introduced in 2017 a valuation-based property tax.

Tax authorities are working on broadening the tax base and improving tax compliance. Further, in 2015 the government introduced policies to reduce tax evasion and noncompliance.

Weaknesses in the institutional framework mean that the rule of law is limited, and corruption is widespread. EU-inspired reforms to the judicial system are underway.

Macedonia

North Macedonia’s officials have introduced several reforms but there are lingering constraints on the private sector. The clearance of payment arrears provides businesses with more liquidity. However, lending to private companies is
limited. The pension deficit, which exceeds 4% of GDP, is projected to more
than double by 2030 without further reforms.

In 2019 changes in personal income taxation will increase the tax rate on capital income. Also, it will rebalance the labour tax burden between the highest and lowest income segments.

Proposed pension reforms should reduce the pension deficit in the medium term. Other reforms introduced in recent years include an overhaul of the business registration system.

Furthermore, the simplification of licensing procedures and privatisation of electricity distribution. The government has slashed taxes and red tape over a 10-year period to attract investors.

Many investors pay virtually no corporate or income tax in North Macedonia. The reason for that is that special economic zones provided for greenfield projects. People also benefit from generous state subsidies. Despite all these efforts, foreign investment targets have not met yet. EU accession is the driving force behind most reforms and national legislation to be realigned to meet the EU specifications.

Bulgaria

The Bulgarian government has simplified company registration and expanded one-stop shops.

Therefore, the government goal is to reduce the administrative burden on companies by 20%. Officials are also working to accelerate the procedures for issuing permits and licences to investors. In regions of high unemployment,
investors enjoy tax breaks on reinvested profits and subsidies.

Officials hope to hold public expenditures to less than 40% of GDP in the future. Improvements in tax collection and revenue-enhancing measures such as increases
in rates of excise duties help to boost government revenues. Efforts to improve
tax collection are also underway. The poor performance of SOEs, particularly in the energy and transport sectors, poses financial risks.

Problems involving the independence of the judiciary and security of property rights are significant weaknesses in the business environment. On the contrary, new measures include efforts to enhance the independence and operation of the
Supreme Judicial Council (SJC). In other words, to strengthen the effectiveness
of the Prosecutor’s Office to step up the fight against corruption. Bulgaria’s
corporate tax is only 10% bribes, which represent a ‘quasi-tax’, take a much
larger portion of many companies’ revenue.

Romania

While other ex-communist countries saw a wave of privatisation in the 1990s, Romania was a laggard. The reason is partially due to its complex political transition. However, hopes for a wave in privatisations have risen after the government created a sovereign fund to speed up sales.

There were several measures planned to improve tax collection and increase tax compliance.

In December 2018, new measures introduced money market lending rates, including a tax on banks’ assets, taxes on energy and telecommunications. Despite these efforts, Romania has the largest Value-Added Tax compliance gap in the EU.

The flat personal income tax rate was cut from 16% to 10% in 2018. Several excise duties were abolished in 2017 and reintroduced in 2018. In 2017, the minimum wage raised by 16% and in 2018 another increase of 9% entered the economy. Further, in 2019, the minimum wage increased to nearly 8% more. A reduction in social security contribution rates and a simplification of the tax code is in plan.

Corruption is an essential concern. Romania also has one of the largest informal economies of any EU member, valued at more than 30% of GDP.

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