Kosovo`s Policy on Foreign Investment

Kosovo`sPolicy on Foreign Investment

Tableof Contents

Introduction 2

Kosovo Regulatory System 2

Public-Private Sector Partnership 4

Right to Private Ownership and Establishment 5

Protection of Property Rights 6

Conversion and Transfer Policies 6

Performance Requirements and Incentives 7

Incentives policy 7

Conclusion 8

Works Cited 8

Introduction

Economicdevelopment in post war Kosovo started under conditions ofcentralized socialist system, which was adopted by the parent,Yugoslav Federation. During this era, the economy was mainly peggedon agriculture, which accounted for at least 70% of the country’stotal income, the remaining coming from the industrial sector(EconomicInitiative for Kosovo 5).Kosovo has managed to shake off the tribulation resulting from thewar, and that threatened to drive away foreign direct investors. Bythe end of the war in 1999 there were very few foreign firmsoperating in the country.

Nonetheless,in the period that has followed Kosovo has made tremendous political,economic and financial reforms and changes geared towards improvingbusiness environment to attract foreign investor. At the presentKosovo economy is heavily dependent on foreign sector (Loxhaand Rogova, 4).Generally Kosovo is a business-friendly destination and the centralgovernment of Kosovo has been very active in formulating policiesthat encourage foreign investment. The country is a secular statewith a populace that looks and desire to be a part of theEuro-Atlantic institution such as European Union and North AtlanticTrade Organization. In this respect many policies formulations andregulations have been written with European Union standards in mind.This paper shall focus on policies in Kosovo that shape foreigndirect investment.

KosovoRegulatory System

Asaforementioned, Kosovo economy is very dependent of foreign sectorand among the most noticeable international franchises and companiesinclude, Coca-Cola, Microsoft, Ford, Toyota, DHL, Hellenic BottlingCompany, FedEx, Deloitte and Booz Allen Hamilton. These multinationalfirms have operated in Kosovo form many years and have enjoyed Flat10 percent corporate tax and exemption on value added tax for a longperiod. It is important to note that American Chamber of Commerce incollaboration with Kosovo Chamber of Commerce are two of the mostimportant units directly involved in formulating policies that aregeared towards strengthening the business environment in Kosovo. Asexpected these two departments received government attention onbusiness issues. From 2001 the United Nations Interim AdministrativeMission in Kosovo, which has been responsible for governing the stateunder the United nations Security Council resolution has beenactively involved in passing legislation s that are purposely gearedtowards attracting foreign direct investment in Kosovo.

Underlocal legislation, foreign companies with business interest in Kosovoare accorded equal privilege as domestic firms, with the exceptionthat they are required not to hold more than 49 percent ownership offirms manufacturing or trading in military connected products.Nonetheless, the legal system is still a great bottleneck to business.The country has three legal frameworks that work concurrently thelaw offormer Yugoslavia and laws passed by The Kosovo assembly.Even though domestic courts recognize foreign arbitral awards,enforcement is often frail and disputes can take a long durationbefore resolution. In the same vein, even though primary legislationsof the market-oriented economy have been formulated, determiningproperty ownership is still a huge challenge (Loxhaand Rogova, 6).The salient legal qualms, poor execution of laws and contractenforcement and underdeveloped legal systems hamper foreign directinvestment and economic progress.

Kosovogovernment has passed legislations to open the country to foreigndirect investment. Most notably is the public private partnership lawwhich harmonized domestic policies with European Council regulations.This law creates separate definitions of concession and publicprivate partnership, implying that deals can be structured moreflexibly. The policy has also removed unsolicited proposal makingsure a competitive bidding process.

Kosovohas also undertaken frantic measures to improve it businessenvironment. The government has eliminated charter capitalrequirement for limited liability companies, business registrationsfees and work permit. Nonetheless, companies are required to acquiretwo mandatory financial records the value added tax number andfiscal number from the tax department. In addition to these twoformal records required by the government, at the local levelbusiness are required to acquire a business license from the localgovernment departments. Such fees are normally much higher for largecompanies and are subject to change depending on the goal and wish ofthe local government.

Determiningproperty ownership remains a staid challenge. In Kosovo formalproperty transfer requires appraisal by a court of law but more oftenthan not property transfer happens through informal arrangementsbetween the sellers and the buyers. It is also worth noting thatfinished business and habitable residential structures are subject toproperty tax, though such taxes for land are not present. Inaddition, construction activities are subject to high fees and otherarbitrary charges as local and central government may deem necessary.

Public-PrivateSector Partnership

Therampant corruption in the public sector has hampered effective andefficient policy choices. Kosovo’s current policy climate does notsupport the rational economic agents. Due to inherent difficultiesand inefficiencies of adhering to inefficient and outdate businesspolicies, economic actors –firms and mangers- search foralternatives. Corruption within the country public sector emanatesfrom numerous channels such as excessive costs, bureaucracy andinformality (Loxhaand Rogova, 5).

Asa result of lack of government departments to execute public policiesand poor design of policies, companies encounter numerous obstacles,commonly manifested in excusive costs and burden of regulations,which discourages compliance and supports informality. Kosovo hasextremely high compliance costs which significantly weakenproductivity and affect development and growth of enterprises thatopt to enter the market. As a result of the excessive regulation,many companies and business organizations in Kosovo are forced tospend many hours dealing with the requirement that emanate from suchregulations. For example, report by World Bank in 2009 indicated thatin Kosovo senior business managers as well as officials spend atleast 10% of their time each year dealing with government regulationsand business requirements. Another survey by WB Doing Business in2012 revealed that starting a business enterprise in Kosovo consumesa lot of time and is very costly (Opennessto Foreign Investment 1).The study also revealed that business organization has to spend atleast a third of their time, which translates to a half times higherthan the regions average dealing with government regulations andtaxes. This is what provides incentive for corrupt practices withinthe public sector and has significantly derailed foreign investment.

Rightto Private Ownership and Establishment

InKosovo foreign investment law and government regulations are the mainfactors that determine the playing ground for investment. At themoment they do not interfere with private ownership of property,acquisition and sale interest in business entities by privateinvestors. In additional foreign investment is not subject toauthorization by the central government unless when suchauthorization would be required for similar local business entities.The Following rights apply to foreign investment in Kosovo:

  • Foreign investors have a right to buy both nonresidential and residential property to a similar extent as local business entities.

  • Foreign investors have a right to establish branches, subsidiary venture and representative agencies to the same extent as local firms.

  • Investors have rights to transfer property rights to other entities just like domestic investors

  • Investor with minority stake in business entities in Kosovo are protected just like minority domestic shareholders in harmony with relevant laws.

Protectionof Property Rights

Kosovoproperty related laws are well structured and provide the frameworkfor security and transferability of rights. As a result ofadministration changes, conflicts and confiscation a complexregulatory and legal framework has proved very useful. Nonethelessthe Kosovo institutional framework is not well devised to amicablyaddress all the issues relating to property rights. Independentagencies, government departments and local authorities often haveoverlapping jurisdiction. The court system is full of backlog casesrelating to property rights and this has impacted negatively onproperty market in Kosovo.

Conversionand Transfer Policies

Theinvestment law put in place in 2005 has served to liberalize themarket and Kosovo’s economy. It guarantees unhindered use of incomefrom foreign investment after taxes and other liabilities. Thisencompasses even transfer to other international market. It alsoincludes foreign currency exchanges. All currency transfers andtransactions are processed in line with European Union banking andfinancial procedures. All transaction in the market are made at theprevailing market rate of exchange. In addition foreign investors areallowed to open bank accounts in any currency they want (Openness toForeign Investment 7).

PerformanceRequirements and Incentives

TheKosovo government does not specify performance requirement as aprovision for setting up, sustaining and expanding investments in thecounty. To attract investment the government grants specific businessenterprise producing certain goods such as pharmaceutical productsand agricultural inputs value added tax related privileges.Manufacturers are allowed to export their products without collectingvalue added tax from international buyers. Manufacturer may claimcredit for taxes on raw material by either claiming refund oroffsetting those taxes against gross value added tax (EconomicInitiative for Kosovo 8). Only a 10 percent corporate tax existswhich is a subject to any tax exempt income and allowable expenses.

Incentivespolicy

Theexisting legal structure in Kosovo permits incentives for bothdomestic and foreign investors. At the present the incentives coverthe following:

  • Avoiding double taxation

  • Investment guarantees

  • VAT Prolongation

  • Reduced customs duty on capital goods

  • Special allowances (Economic Initiative for Kosovo 10)

Conclusion

Fromthe above information, it is clear that, the economy of Kosovo,adopted from Yugoslav Federation mainly depends on foreign sector forsustainability. Therefore, Kosovo is a business-friendly destinationand the central government of Kosovo has been very active informulating policies that encourage foreign investment. The countryis a secular state with a populace that looks and desire to be a partof the Euro-Atlantic institution such as European Union and NorthAtlantic Trade Organization. The most noticeable internationalfranchises and companies include Coca-Cola, Microsoft, Ford andToyota among others.

Underlocal legislation, foreign companies with business interest in Kosovoare accorded equal privilege as domestic firms, with the exceptionthat they are required not to hold more than 49 percent ownership offirms manufacturing or trading in military connected products.Nonetheless, the legal system is still a great bottleneck tobusiness. Kosovogovernment has passed legislations to open the country to foreigndirect investment. Most notably is the public private partnership lawwhich harmonized domestic policies with European Council regulations.In order toattract investment the government grants specific business enterpriseproducing certain goods such as pharmaceutical products andagricultural inputs value added tax related privileges. Despite somedrawbacks such as rampant corruption, most of these factors have madethe country fit for foreign investments.

WorksCited

EconomicInitiative for Kosovo. ANew Deal for Kosovo Creating Sustainable Economic Growth.PositionPaper published on the occasion of the 10thanniversary of ECIKS, 2013. Available at

http://www.eciks.org/repository/docs/ECIKS-A-New-Deal-for-Kosovo_172553.pdf

LoxhaArbëresha and Rogova Artan. Businessenvironment in Kosovo: A view on the key policy implications.PolicyAnalysis. No. 06/2012. Retrieved from

https://dgap.org/sites/default/files/article_downloads/GLPS%20%28Pristina%29_Business%20environment%20in%20Kosovo_new.pdf

Opennessto Foreign Investment. Available athttp://photos.state.gov/libraries/kosovo/312585/pdf/kosovo_2013_investment_climate_statement.pdf