Introduction

Bosnia and Herzegovina is an emerging European market presenting a unique combination of business opportunities and challenges. It is located in the heart of the Balkans and is well positioned at the east-west crossroads. As it works towards accelerating its economic development and EU integration process, the country is increasingly becoming an attractive destination for foreign investors.

Political and Legal Landscape

Bosnia and Herzegovina comprises the Federation of Bosnia and Herzegovina and the Republika Srpska, while the Brčko District enjoys a special status. This political structure was agreed upon in the 1995 Dayton Peace Accord. This composition created a complex legal environment, affecting processes across various levels of government. Furthermore, representatives of the three main ethnic groups share rights, which often slows down decision-making processes, which may affect the overall business climate. However, Bosnia and Herzegovina aims to accelerate its EU accession and harmonise its legal framework with the EU’s. The country received candidate status for membership in the EU and has implemented reforms to enhance governance and the rule of law, aiming to improve the investment climate. Bosnia and Herzegovina signed its Stabilisation and Association Agreement (SAA) with the EU in 2015, encouraging reforms.

On 21 March 2024, the European Council started accession negotiations with Bosnia and Herzegovina after granting the country candidate status on 12 October 2022. It invited the Commission to prepare the negotiating framework. The Council will adopt it once all relevant steps outlined in the Commission’s recommendation are taken.

Economic Overview and Trends

Bosnia and Herzegovina’s economy has developed unevenly in recent years. Although it has demonstrated significant resilience in global economic downturns, the economy has notable structural challenges, such as high unemployment, a significant informal sector, and inadequate infrastructure. Post-pandemic growth has been supported by international aid and increased domestic economic activity.

The average GDP growth rate has been around 3% in recent years. In 2023, the GDP growth rate was 1.6%, declining from 3.8% in 2022. This was primarily due to higher inflation on external demand and domestic private consumption. Exports increased by 16.5% in 2022 but declined by 3.5% in 2023. Expectations are that local demand, especially private consumption, will become a significant surge factor, supported by better wages, declining inflation, and improved employment figures. However, the political stalemates may persist. The GDP is expected to rise moderately in 2024 and 2025.

Several critical sectors of the economy are showing significant development potential. The manufacturing sector is expanding and increasingly becoming integrated into global supply chains. Bosnia and Herzegovina benefits from its geographic position, ideally located as a manufacturing hub for exports to the EU and neighbouring markets. Efforts to enhance export capacities, especially in automotive parts, textiles, and furniture industries, open new avenues for growth and international trade.

Traditionally a significant contributor to the economy, agriculture remains an area of considerable potential, offering opportunities in value-added segments, including organic and sustainable farming. Supported by agricultural production, food processing offers substantial opportunities as part of reindustrialisation efforts, catering both to domestic and export markets.

New economic trends are also gaining momentum. As new technologies impact diverse sectors, the digital revolution is quickly gaining pace in Bosnia and Herzegovina. These changes are most visible in banking, retail, and public services. The country also boasts a vibrant ICT start-up scene, supported by a growing network of technology hubs and incubators, which attract entrepreneurship and innovation in the sector. Demand for information technology services, including software development, cybersecurity, and digital marketing, is rising. E-commerce has seen remarkable growth, especially during and after the COVID-19 pandemic.

Renewable energy is another area showing significant potential, as the country is set to meet its green objectives as part of the EU accession process. Investments in solar power and wind energy, driven by local and international stakeholders, are rapidly developing. However, the country’s vast hydroelectric potential remains the most promising renewable energy source. Bosnia and Herzegovina’s abundant natural resources also make it attractive for investments in mining.

Investments in infrastructure are becoming increasingly important to sustain future economic development. Plans for critical projects, which include vital transport and energy infrastructure, are a clear opportunity for foreign investors, potentially through public-private partnerships on critical projects.

The services sector also shows excellent potential. Bosnia and Herzegovina is already seen as an evolving tourist destination. The country’s beautiful nature and intriguing cultural and historical heritage present opportunities in diverse niche offers, ranging from environmentally conscious to religious tourism.

Other niche financial services are on the rise. In recent years, Islamic financing in Bosnia and Herzegovina has emerged as an alternative, given the country’s religious diversity and strong economic ties with the Islamic world. Sharia-compliant products are appearing, including Murabaha (cost-plus financing), Mudarabah (profit-sharing), Musharakah (joint venture), and Ijara (leasing) products. The Central Bank of Bosnia and Herzegovina and other regulatory bodies are working on creating a favourable legal framework and business environment for expanding Islamic finance in Bosnia and Herzegovina.

Investment Environment

Bosnia and Herzegovina is an attractive investment destination, offering numerous opportunities for doing business. Its key advantages include well-educated and skilled employees, a long tradition in a rapidly reemerging secondary sector that benefits from abundant natural resources, and a growing services sector, mainly retail, transport, and tourism. Agriculture is also vital to the economy, as Bosnia and Herzegovina is a significant producer of wheat, corn, and fruits.

Bosnia and Herzegovina is keen on developing its economic co-operation with other countries, including trade and foreign investment. The Act on Foreign Direct Investments provides foreign investors with national treatment, ensuring they have the same rights and obligations as Bosnian residents. Many successful investments have shown that doing business in Bosnia and Herzegovina can be profitable.

Foreign direct investment in Bosnia and Herzegovina has grown despite recent challenges. According to UNCTAD’s World Investment Report 2023, FDIs amounted to USD661 million in 2022, up 12.6% year-on-year and above the levels recorded before the pandemic.

The legal treatment of foreign investors in Bosnia and Herzegovina is the same as that of domestic investors. When foreign investors establish or participate in companies in the market, they acquire rights, take liability under the same conditions, and enjoy the same status as domestic ones.

Foreign legal entities may invest their capital in a company, bank, or insurance company, start an independent trader or artisan, and obtain a concession for using natural resources or other property of interest to Bosnia and Herzegovina. Foreign investors can acquire shares and stakes in existing public and private limited liability companies.

Moreover, Bosnia and Herzegovina recognises the importance of attracting foreign investors, managerial and commercial knowledge and capital inflow. Therefore, foreign investors are entitled to guarantees not extended to local investors. This includes rights acquired through capital investments that are not reduced by any law or other regulation.

The Foreign Direct Investments Policy Act of Bosnia and Herzegovina ensures the freedom of foreign investors to employ foreign nationals, subject to the labour and immigration laws, to freely transfer abroad profits from their investment in Bosnia and Herzegovina; own real estate in the country and enjoy the same property rights as domestic investors. With a few exceptions, foreign investors are protected from nationalisation, expropriation, and requisition measures. The rights and obligations set forth by the Foreign Direct Investment Policy Act cannot be terminated by any regulations brought in later. If a subsequent regulation is more favourable for the foreign investor, they can opt for the regulation by which they prefer to be governed.

Bosnia and Herzegovina also seeks to attract more foreign investment through Free Trade Zones, allowing foreign entities to invest capital in specific areas, transfer their profits, and re-transfer capital. According to the Free Trade Zones Act of Bosnia and Herzegovina, the users of free trade zones are exempt from VAT and contributions, except those related to wages. Imports of manufacturing equipment are exempt from customs and tariffs in these zones. A Free Trade Zone may be established by one or more foreign and local natural or legal entities.

Bosnia and Herzegovina is also very interested in enhancing foreign trade relations and expanding its trade partnerships abroad. The country has a diversified trade portfolio, exporting goods like metals, machinery, and agricultural products. The European Union and other countries in the region are crucial trading partners.

In 2023, Croatia, Germany, and Serbia were the country’s main export partners, accounting for 14.9%, 14.8%, and 13.9% of total exports, followed by Austria (9.5%). Top import partners were Serbia (10.8%), Germany (10.5%), Croatia (9.9%), and China (8.1%). The EU is the biggest trading partner, accounting for 65.8% of total foreign trade.

Bosnia and Herzegovina has ratified double taxation treaties with 38 countries, while it enjoys bilateral investment treaties with 40 countries. Bosnia and Herzegovina is part of the Central European Free Trade Agreement (CEFTA), which provides free access to markets across the Western Balkans region. The country is also in the process of negotiating to join the World Trade Organization.

Labour Market

Foreign investors in Bosnia and Herzegovina benefit from a highly qualified and well-educated workforce, which gives the country a competitive edge. The education system has traditionally been widely acclaimed, making Bosnia and Herzegovina workers acknowledged and sought after, especially in fields such as engineering, medicine, IT, construction, and agriculture.

Although unemployment rates remain high, the labour market is consistently improving. However, a significant outflow of people seeking opportunities abroad has resulted in a shrinking workforce. The unemployment rate dropped to 11.8% in 2023, compared to 12.66% a year earlier. The main job-creating sectors were trade and tourism.

This combination of specific labour market conditions allows foreign investors to hire a qualified workforce for a competitive compensation package. Due to economic pressures abroad, global inflation, and improving economic conditions in the country, there has been a noticeable trend of employees returning to Bosnia and Herzegovina over the past two years. Consequently, many young people are starting their businesses, contributing to a shift in the local labour market dynamics.

Taxation

Bosnia and Herzegovina boasts a competitive and structured tax regime that significantly influences business operations nationwide. The critical elements of this tax system include VAT, corporate income tax, and personal income tax, each designed to facilitate straightforward financial planning and compliance.

VAT is set at 17%. Corporate income tax is remarkably low, pegged at 10%, encouraging business ventures and investments.

Personal income tax rates vary slightly between the two entities within Bosnia and Herzegovina. The Federation’s rate is 10%, while Republika Srpska is somewhat lower at 8%. This tax applies to all forms of income, including wages, business profits, capital gains, and other personal income. For residents, the personal income tax applies to income generated worldwide, while non-residents are liable only for income within Bosnia and Herzegovina.

Conclusion

Despite a complex political and regulatory environment. Bosnia and Herzegovina has developed various incentives at all levels to encourage foreign direct investment. These include the rights guaranteed to foreign investors according to the aforementioned Foreign Direct Investment Policy Act at the state level, the opportunity to establish or be a part of Free Trade Zones with further benefits, and exemption from customs duties on imported capital equipment. At the entity level, foreign investors may qualify for tax benefits, sector-specific incentives, employment-related benefits, loans, and loan guarantees. Another increasingly attractive option for foreign investors is public-private partnerships to support investment and develop much-needed infrastructure projects.

Other reforms and alignment with EU standards aim to refine the business climate. For instance, streamlined business registration processes, improved corporate governance, and updates to the bankruptcy legislation are designed to provide more efficient and transparent procedures for firm incorporation, operations, insolvency, and restructuring. Changes in labour laws focus on improving market flexibility and reducing unemployment, particularly among youth. Efforts are underway to reform the social security system, including pensions and health insurance, to ensure sustainability and fairness. Furthermore, ongoing efforts to improve infrastructure, digitalise government services, enhance the rule of law, and safeguard legal certainty further enhance the business environment. By leveraging its key opportunities and tackling the main challenges, Bosnia and Herzegovina can position itself as a competitive and attractive destination for investors in the regional market, who should engage with local partners and utilise available incentives.