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24. septembra, 2020

BOSNIA and HERZEGOVINA: Loan agreement – legal and tax aspect

In cases of low liquidity, it often happens that loans are a new source of financing for companies, as they offer the possibility of bringing additional funds into the company without interest. Here you can read the aspect of loans in terms of different tax regulations in the FBiH.


Loan agreement – law of obligations

A loan agreement is an obligatory relationship between two parties – the lender and the borrower and it is regulated by the Law on Obligations (Official Gazette of RBiH No. 2/92, 13/93 and 13/94 and Official Gazette of FBiH No. 29/03 and 42/11).

According to the Article 557 of the Law, lender is obliged to hand over a certain amount of money or a certain amount of other exchangeable items to the borrower, and the borrower is obliged to return the same amount of money, ie. the same amount of items, of the same type and quality. The borrower may undertake to owe interest in addition to the principal, but this is not necessary.

Unlike loan agreement, which can only be given by a bank or other financial institution licensed by the FBiH Banking Agency, the borrowing agreement can be given by any domestic or foreign natural or legal person.

Loans from the aspect of the Law on Financial Operations and regulations on foreign exchange operations

Legal entities can make loans non-cash only, through a transaction account, since the Regulation on the conditions and manner of payment in cash does not provide possibility of making loans in cash. Pursuant to the Law on Foreign Exchange Operations (Article 20, paragraph 9), non-residents (legal and natural persons) may grant loans to domestic persons only in foreign currency. The same law stipulates the obligation to report any loan agreement in foreign relations to the Federal Ministry of Finance.

Loans from the aspect of tax regulations

Restrictions on loans

In accordance with Article 87 of the Regulation on the Application of the Income Tax, if a taxpayer makes loans in his records, it should have the following evidence (which must not be older than 15 days from the date of the loan):

  • confirmation or certificate from the Tax Administration on the status of outstanding liabilities based on taxes or contributions;
  • statement of the taxpayer that the due obligations towards employees have been duly settled;
  • confirmation or certificate from the Indirect Taxation Authority of Bosnia and Herzegovina on the status of outstanding liabilities based on public revenues.

Profit tax – in the context of application of regulations, it is very important to determine whether the parties are related parties or not, and if the loan does not calculate the market interest rate, it is necessary to make adjustments to the tax base through transfer prices through the tax balance.

Income tax – interests on loans given by individuals are subject of taxation as they represent income from capital investment. The income tax rate is 10% and is applied to the total interest collected. The interest payer makes the declaration of paid income tax by submitting the form PDN-1033.

If the employer approves a loan to his employee – interest-free or with an interest rate lower than the market rate, the employee realizes a taxable benefit from the employer, and the employer is obliged to calculate and pay income tax and contributions.

Deductible tax – is calculated on income generated by non-resident legal entities based on interest in accordance with the Agreements on Avoidance of Double Taxation. The tax return is filed on form POD-816. If it is an interest-free loan, there is no such income, and accordingly there is no obligation to deduct tax.

Value added tax – interest on loans is a fee for financial services, which are exempt from taxation according to Article 25 of the Law on VAT. If the loan is repaid in goods or services, it is necessary to calculate VAT in accordance with the regulations.