North Macedonia is preparing for far-reaching tax reforms, with updated rules on the profit tax, VAT, personal income tax, and social contributions, while dealing with the economic slowdown and increased prices, according to Lalicic & Boskoski Partner Vedran Lalicic.
"A general slowdown in the economy, increased prices, and a great deal of distress due to the energy crisis and war in Ukraine are all affecting North Macedonia," Lalicic notes. "In light of that, the biggest internal development potentially having an effect on a big part of our society and the business sector is the upcoming tax reform."
"In summer, the government adopted an updated strategy for the reform of the tax system," Lalicic notes. "This will change tax regulations in a number of areas, leading to an increased tax burden for businesses and citizens. While these upcoming changes have only recently been announced, the media and some government officials have reported that they should come into effect in January 2023."
According to Lalicic, among the introduced changes, the most important one is related to the profit tax. "The existing regulation allowing a tax exemption on reinvested profit has been abolished, which spells a negative trend for businesses," he notes. "I would also highlight additional conditions that will be stipulated for tax exemptions on dividends, for both domestic and foreign companies. Any investments in shares and profits arising thereof will be taxed, according to the new taxation strategy." Still, Lalicic says that "one positive sign related to the profit tax will be the gradual introduction of tax exemptions for part of the costs of investments in the green transition and digital transformation. It can kickstart investors and companies moving toward environmental initiatives and projects, to implement ESG criteria in North Macedonia as well."
"There will be some changes on VAT as well, Lalicic says, adding that "at this stage, the government is considering narrowing the list of goods and services for which a preferential 5% VAT tax is applied. For example, the accommodation industry might fall outside the 5% rule in the future, and pay the newly proposed preferential rate of 10%. We don’t have further information about specific industries just yet." Furthermore, he says that "the expansion of the list of goods and services for which VAT cannot be refunded is planned. Those industries where the VAT exemption does not apply and will fall under the regular VAT rules."
According to Lalicic, another change will apply to the personal income tax and social contributions. "The amendments will make it compulsory for businesses to pay mandatory social contributions arising from deed contracts," he says. "Those might lead to increased costs for companies. Additionally, the maximum legal limit for payment of social contributions is abolished – from now on they will be paid on the total amount of gross income and there will be no cap."
"Unfortunately, this will affect the business sector in multiple ways," Lalicic says. "The government is very strict about the announced changes. So far, only provisional meetings were organized with business associations, and it looks like the government will adopt the changes despite public opinion. Considering what the country is going through, the timing might not be great for implementing such wide-reaching reforms," he concludes.