The Government of the Federation of Bosnia and Herzegovina (FBiH) adopted the draft for the new Personal Income Tax Law ("PIT Law"), and its application is planned to begin from the 1st of January, 2018. The novelties include the introduction of a progressive tax rate, broadening of the tax base and, in particular, the introduction of the taxation of dividends, the introduction of electronic tax returns and prescription of a higher personal exemption amount.
This draft of the new PIT Law introduces a two-bracket progressive tax rate, instead of the current flat rate of 10%. A lower tax rate of 10% would apply to taxable income not exceeding KM 800 (approx. EUR 400) per month or KM 9,600 (approx. EUR 4,800) per year (the lower bracket). A higher tax rate of 20% applies to a part of the taxable income that exceeds KM 800 per month or KM 9,600 per year (the higher bracket). Implementation of the new PIT Law means a higher effective tax rate for higher incomes. However, with the broadening of the tax base by including more earnings into taxable income, such as dividends, it may be interpreted that the effective tax rate has risen both for higher and lower incomes, since a broader tax base means higher effective tax rates in general.
Under the amendments, the dividends received by an individual shareholder will be taxable. Furthermore, the tax base for employment income was broadened, and it now introduces new rules on the taxation of shares received from employers (stock option plans). Severance grants would be taxable, unless paid in case of retirement.
On the other hand, some earnings that are taxable under the current PIT Law, will be exempted - such as monetary aid made to scientists, payments made by NGO's, reimbursements financed from EU funds, and remunerations paid by UN and OHR to Federation residents pursuant to employment.
Taxation of personal income from property will be regulated in more detail, in particular the taxation of capital gains. The amendments explicitly prescribe that income from the sale of immovable property, as well as the sale of shares and investment units held in investment funds, will be taxable in the FBiH.
Employers with more than five employees will have to exclusively submit electronic tax returns. This should reduce the time necessary for the filing of tax returns, and it is expected that the details on the process of filing tax returns will be further elaborated in a new Rulebook on the application of the new PIT Law.
It is prescribed that individuals that have not settled their taxes will not be able to execute cash transfers, provide loans or transfer their property. This provision may have a positive impact on tax collection, but it remains to be seen how it will be implemented. It is also not clear what would be considered as unsettled tax due – the tax under dispute, or the tax determined in the final and binding act of the Tax Administration.
The new Rulebook on the implementation of PIT Law, expected to further elaborate new, more detailed, provisions of new PIT Law, is to be adopted 180 days after the day that the new PIT Law comes into force