Property Taxation in Bosnia and Herzegovina: Basic Characteristics
Samira Tanović and Nedžad Haračić shared with us experience on property taxation in Bosnia and Herzegovina.
Bosnia and Herzegovina is a complex state that consists of two entities – the Federation of Bosnia and Herzegovina and Republika Srpska – and Brčko district. In addition to that, the Federation of Bosnia and Herzegovina consists of ten cantons.
At the country level as well as at the Brčko district level, there is a legislative, judicial and executive authority.
The Tax Administration is organized on the basis of the structure of governance. At the country level, there is the Indirect Taxation Authority who is responsible for VAT collection. At the entity level, there are tax administrations whose jurisdiction includes “direct” taxes (corporation tax, income tax, property tax, personal income tax/social security contributions, real estate tax, etc.).
1. Property tax (houses, apartments, holiday houses, office space...)
In Bosnia and Herzegovina, there are more taxation bases/taxes related to fixed properties, including:
- Ownership of property – tax payment required
- Acquisition of property – VAT or sales tax (depending on whether the property is newly built or used)
- Property income – tax based on personal income
a) Taxation of property ownership – property tax
Property taxation, based on ownership, is regulated by cantonal property tax laws, with all ten cantons having their own laws. The laws define the properties that are subject to taxation, the tax rate and the means of payment. Tax payers are personal and legal subjects.
Fixed properties that are subject to property taxes are:
- Leased business properties
- Leased apartments or houses
- Holiday or recreational apartments or houses
- Garages not used for own purpose
The tax rate is determined at a flat rate per square meter, based on the decision of an authorized municipal office, for every municipality separately.
The property tax is assessed in advance, as a yearly amount for the properties identified in the ownership of the tax-payer, on 1 January of the year for which tax is assessed.
In Republika Srpska there is a property tax paid on a yearly basis. The tax rate is 0.20% of the estimated market value of the property as at 31 December of the previous year. The subjects of taxation are buildings (flats, houses, business premises and other objects) and land (construction sites, agricultural land, forestry, industrial, etc.).
b) Taxation of property acquisition — VAT and sales tax
VAT is regulated by the VAT Law which applies to the whole country of Bosnia and Herzegovina and constitutes 17% of the property’s value. VAT is levied and collected by the Indirect Taxation Authority.
The key fact to be determined during the acquisition of property is whether it is new or used. Based on that, either VAT or sales tax is paid. VAT is calculated and paid during the first transfer of ownership rights (i.e. purchase) of the newly built property. For used property, the sales tax is applied.
The taxation of property sales in the Federation is defined by cantonal laws on real estate transactions and transfer of ownership of properties. Real estate transactions include sale, exchange and other types of ownership transfer, except in case of inheritance and gift.
The tax is calculated on the basis of the market value as at the moment when the tax liability arises. Market value is assessed by an expert commission nominated by the municipal council where the property is located. The liability for taxation is assessed by an authorized tax office, based on the estimation of the expert commission.
According to the law, the sales tax rate on real estate transactions is 5%. The tax is paid once during sale, exchange or other type of ownership transfer.
c) Taxation of property income
The taxation of income from properties and property ownership rights is regulated by the Income Tax Law.
The income tax rate is 10%. Property income is income from the lease of fixed properties (buildings, land, etc.) and from the transfer of property ownership (sale, exchange or other type of ownership transfer that includes a fee).
The basis for taxation is the difference between realized income and expenses, recognized as a legally determined percentage.
According to the Income Tax Law, tax-payers are residents who earn income inside and outside the territory of the Federation of Bosnia and Herzegovina, and non-residents who earn income in the Federation of Bosnia and Herzegovina.
The income tax is assessed and paid annually, whereas the tax period may also be shorter in certain cases defined by the law.
2) Taxation of movable property
The taxation of movable property is regulated by cantonal property laws, and all ten cantons have their own laws, defining the movable properties that are subject to taxation, the taxation rate and the means of payment.
The subjects of taxation include passenger cars, motorcycles, buses and commercial motor vehicles, boats, casino tables, gambling and amusement machines. The tax amount is determined at a flat rate and paid annually.
Beside the income tax on moveable property, the law also regulates the taxation of income from the lease of equipment, transport vehicles and other movable assets in case the leased objects are not used for own business.
According to the Income Law, the tax rate applied to property income is 10%.
3) Tax administration’s experiences in the area of property taxation
The Tax Administration of Bosnia and Herzegovina has had different experiences in property taxation, since there are multiple bases for taxation related to properties.
The taxation based on acquiring property with reference to submitting tax forms by tax-payers is almost completely regular. It derives from the fact that the process of entering ownership transfer data in the books is conditioned with prior tax assessment and tax payment which directly influences accuracy of tax-payers.
The taxation of movable assets is another positive experience, because taxation at a flat rate at the time of annual registration helps prevent tax avoidance.
However, when it comes to reporting and paying taxes on property income as well as property taxation, the situation is different. Evidently, many tax-payers do not declare income from property nor pay the tax, even when they are obliged to do so by the law. In addition, some tax-payers knowingly report smaller amounts of income from property to pay less tax.
Furthermore, tax-payers have been found to avoid property taxes related to buildings or holiday and recreational objects by registering such property as their home and granting the property where they actually live to a close family member (spouse or children).
Yet another case is that the owners of leased housing avoid reporting and paying property and income taxes, exploiting legal procedures where the burden of proof lies with the Tax Administration. There is no law on the origin of property on the territory of the Federation of Bosnia and Herzegovina. Owners do not sign formal contracts with the tenants (citizens or foreigners), so the officials of the Tax Administration cannot obtain the personal data of the contractor or any other information regarding the contract, amount of payment, etc. Even if the Tax Administration succeeds in obtaining information about the contractors, they are usually given false information about the duration and costs of lease (in most cases it is stated that the tenant is allowed to stay in the property without a fee).
The Tax Administration conducts many activities by itself as well as cooperates with other departments and administrative services in order to collect information and identify tax-payers who avoid reporting and paying taxes.