Taking into consideration the favorable business climate, stable macroeconomic environment and the excellent opportunities across different business sectors, Kosovo is increasingly becoming a very attractive place for doing business.

 

As result, the interest of foreign investors has been increasing steadily during the past years and together with it also the inflow of FDI. Kosovo has so far attracted over 1 billion Euro of FDI. Apart from investment pioneers such as the Raiffeisen Bank and Procredit, which entered the Kosovar market at the beginning of the transition phase, there are many other foreign companies engaged in a wide range of business sectors.

According to the Business Registry data for 2007, there are 2,012 companies of foreign and mixed ownership that have already used the opportunity to invest in Kosovo. The large amount of foreign companies operating in Kosovo is a living proof of the opportunities and benefits that the country offers, and also represents a base of quality products and a sufficient service-providing community.
 

Trade policy

 
Kosovo has a liberal trade regime and derives three major benefits from trade liberalization, namely improved export possibilities, a better investment environment, and stable relations with its neighbors.

Committed to establishing principals for stable development of a pure market economy, since a very early stage of development, Kosovo’s government has been working towards establishing the free movement of goods and services throughout the country’s borders.

As a result, Kosovo currently enjoys a free trade within Central European Free Trade Agreement – CEFTA, enabling its producers to access the regional market comprising of 8 million consumers, free of any customs duties.

In addition, Kosovo benefits from nonreciprocal, customs-free access to the EU market based on the EU Autonomous Trade Preference (ATP) Regime (EU Council Resolution 2007/2000). Quantitative and qualitative restrictions remain in force only for a very limited number of goods.

Kosovo is still an import based economy. Imports have been increasing steadily in recent years (as the figure shows) reaching some 1.6 billion Euro at the end of 2007. Due to its geographical proximity, the main importing countries in Kosovo are CEFTA-members followed by the EU-countries. Even though local production is increasing steadily, Kosovo is still forced to import goods and raw materials that are not offered by the local market.

The main imports of commodity goods range therefore from minerals and prepared food stuffs to machinery and base metals.

Recognizing the opportunities that the local market is offering, and benefiting from various cross-sector incentives introduced by the Government, the local production has been growing
exponentially in recent years. Not only is the local demand continuously relying on the local production but furthermore Kosovo is increasingly exporting to its main trade partners, EU-countries and CEFTA-members.

At the end of 2007, exports reached 146.6 million Euros, comprising mainly of minerals and base metals that Kosovo has in sufficient quantities as well as vegetables and foodstuff. Estimations indicate that during 2008 exports will increase to 350 million Euros.

Given that the country has a very favorable business climate, a modern legal framework and cheap work force, and taking into consideration that there is still immense opportunity for local producers to fulfill market demand and also approach the regional market, local production as well as exports are expected to increase further in the future.
 

Investment climate and key economic indicators

 
The real development of the economy measured by the gross domestic product (GDP) has been favorable in the past years, showing a positive and continuously increasing trend. As donor support is decreasing, the private sector demand and investments are becoming the most important factors behind economic growth. They are mainly being driven by the fast
expanding financial sector. Moreover, the Kosovo Government runs a stable and forward-looking fiscal policy. The tax revenue base has been widened, thus enabling the government expenditures to increase and in turn support economic growth.

Apart from the favorable economic performance, Kosovo runs a very stable monetary policy. Kosovo is one of the few countries outside the EU-zone that has introduced the Euro as its official currency. The use of the Euro has provided the grounds for low inflation and a stable macroeconomic environment. By eliminating the exchange rate risk, transaction costs have been reduced, thus facilitating the promotion of trade and investment. Due to the absence of monetary instruments resulting from the use of the Euro, Kosovo does not run any monetary policy risk either. Prices are therefore expected to remain stable in the future.
 

Incentives policy

The existing legal framework in Kosovo allows incentives for foreign and local investors. They are contemporary and help the growth of the SME-Sector. Additional incentives that enable Kosovo to cope with developments in the region are in preparation and will be introduced soon.


Current incentives cover the following
issues:

7.1 Carrying forward of losses Based on the Regulation No. 2004/51 on Corporate Income Tax, the tax loss stated in the tax return can be carried forward and offset against future profits over a period of up to five years.

7.2 Special Allowances of new assets In accordance with the Corporate Income Tax Regulation No. 2004/51, special allowance of new assets can be reduced from the tax base (10 percent
of the cost of the acquisition of the asset).


7.3 Avoiding Double Taxation

Based on the Regulation No. 2004/51 on Corporate Income Tax, a resident taxpayer who receives income from business activities outside of Kosovo through a permanent establishment
outside of Kosovo, and who pays tax on that income to any State, shall be allowed a tax credit under this Regulation in an amount equal to the amount of tax paid to such State.

Any tax credit under the present section is limited to the amount of tax that would be paid under this Regulation on the income made in such State.

Any applicable bilateral agreement on the avoidance of double taxation shall supersede the provisions of the present section.

7.4 VAT Prolongation

According to § 15.1 related to § 18.2 of the Law on VAT of Administrative Direction No. 2001/01 for new imported machinery and equipment, a VAT prolongation period up to six months
can be granted.

7.5 Customs

In order to promote the local production, the new Kosovo customs code applies a reduced rate of zero percent customs duty on capital goods, raw materials and agricultural production
inputs.

7.6 Investment guarantees

• The Multilateral Investment Guarantee Agency MIGA (a member of the World Bank Group) guarantees investments in Kosovo in the value of 20mn Euro.
•  The US Overseas Private Investment Corporation (OPIC) also provides political risk insurance for foreign investors in Kosovo.
• For investment and credit guarantees from Austria please contact the Austrian Kontrollbank (OeKB) and for Germany the Euler Hermes Kreditversicherung.

 

 

This report is part of a series prepared by the Economic Initiative for Kosovo (ECIKS), an organization supporting the economic development and foreign investments in Kosovo.