Bosnia & Herzegovina: Lending & Secured Finance

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This country-specific Q&A provides an overview to lending and secured finance laws and regulations that may occur in Bosnia & Herzegovina.

This Q&A is part of the global guide to Lending & Secured Finance. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/lending-and-secured-finance/

  1. Do foreign lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?

    Foreign banks and other foreign lenders do not need a licence or regulatory approval to grant credits/loans on the territory of Bosnia and Herzegovina (“BH”)[1], to BH legal entities and BH natural persons, or to take the benefit of the security over assets located in BH.

    The only requirement is that the transaction is reported to the one of the following authorities: (1) Ministry of Finance of FBH, (2) Ministry of Finance of RS or (3) Administration Office for Finance of BD – depending on the registered seat of the legal entities or place of residence of natural persons, after its execution.

    [1] BH consists of two entities and one district, that is Federation of Bosnia and Herzegovina (“FBH”), Republic of Srpska (“RS”) and Brčko District (“BD”). Laws governing securitization and lending are at the level of entities, and thus different regulations apply throughout the territory of BH.

  2. Are there any laws or regulations limiting the amount of interest that can be charged by lenders?

    No, the law does not provide for regulations limiting the amount of interest.

  3. Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?

    Yes, Law on the Policy of Foreign Direct Investment of BH (available in English), Law on Foreign Exchange Operations of FBH (available in English), Law on Foreign Exchange Operations of RS (available only in local language), Law on Foreign Exchange Operations of BD (available only in local language).

  4. Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction. If so, what is the procedure – and can such security be created under a foreign law governed document?

    Yes, security can be taken over the noted types of assets. It is performed exclusively in accordance with the laws in BH.

  5. Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?

    Yes, it is in line with the law to grant security over future movable assets and future obligations. However, the collateral must be adequately determined and specified in the security documents in order to be identifiable in case any issues on its validity, priority or enforcement arise.

  6. Can a single security agreement be used to take security over all of a company’s assets or are separate agreements required in relation to each type of asset?

    No, a single security agreement is often not sufficient, depending on the type of the underlying collateral. In order to encumber real estate, the parties enter into mortgage agreements. Among other requirements, collateral over movable assets, receivables, bank accounts, stocks, shares and other assets is subject to conclusion of pledge agreements.

    In practice the parties enter in multiple security agreements, depending on the type of the underlying collateral.

  7. Are there any notarisation or legalisation requirements in your jurisdiction? If so, what is the process for execution?

    Yes, the laws provide for notarisation requirements for mortgage agreements, in both FBH and RS.

    However, on 6 March 2019 the Constitutional Court of FBH has issued a judgement (no. U-22/16) according to which requirement of notarization of mortgage agreements is not in line with the Constitution of FBH. The Parliament of FBH needs to adopt changes to the relevant laws within 6 months as of publication of the judgement in the Official Gazette.

    The process of notarization is relatively simple and straightforward and can be completed with power of attorney, i.e. without physical presence of the parties.

  8. Are there any security registration requirements in your jurisdiction?

    Yes, depending on type of security. The security needs to be registered at an authorised institution, i.e. registry of pledge (movable assets, bank accounts, receivables, inventory, etc.), securities registry (for shares of joint stock companies), land registry/cadastre (real estate), intellectual property rights (Institute for Intellectual Property).

  9. Are there any material costs that lenders should be aware of when structuring deals (for example, stamp duty on security, notarial fees, registration costs or any other charges or duties), either at the outset or upon enforcement? If so, what are the costs and what are the approaches lenders typically take in respect of such costs (e.g. upstamping)?

    There are no stamp duties on securities.

    Mortgage agreements need to be in form of the notarial deed, and the cost of the notarization is determined in accordance with the value of the real estate. For example, in FBH the cost of notarization is BAM[2] 350.00 for real estate valued between BAM 50,000.00 and BAM 100,000.00 and it increases according to the value of the real estate up to maximum BAM 2,000.00, while in RS the cost of notarization is BAM 325.00 for real estate valued between BAM 80,000.00 and BAM 100,000.00 and it increases according to the value of the real estate up to maximum BAM 2,000.00.

    The enforcement costs involve court fees depending on the value of the enforcement proposal (usually the value of the debt). The enforcement court fee is usually between BAM 20.00 up to BAM 10,000.00. There are at least two enforcement court fees to be paid (on the enforcement proposal and enforcement decision) during the enforcement proceedings.

    Other fees such as attorney fees, translation costs, administrative fees for verification of copies of documents and similar, may also apply. Also, registration costs with the Pledge Registry of BH and land registries/cadastre are reasonably low in general. The fees for registration of security over shares of the joint stock company with the securities registry depends on the nominal value of the security (0,1%).

    [2] EUR 1 equals BAM 1,95583.

  10. Can a company guarantee or secure the obligations of another group company; are there limitations in this regard?

    Another group company could be a guarantor or pledge assets as security for another group company.

  11. Are there any issues that lenders should be aware of when requesting guarantees (for example, financial assistance or lack of corporate benefit)?

    The lenders should be aware of the financial assistance rules and rules of corporate authorizations when requesting guarantees from local companies. Assistance by local experts is strongly recommended for all foreign lenders in structuring any guarantees or security in any form.

  12. Are there any restrictions against providing guarantees and/or security to support borrowings incurred for the purposes of acquiring directly or indirectly: (i) shares of the company; (ii) shares of any company which directly or indirectly owns shares in the company; or (iii) shares in a related company?

    The corporate laws in BH provide for financial assistance rules, according to which the company cannot provide guarantees, take loans, or provide other form of financial support for the purpose of purchase of its shares.

  13. Can lenders in a syndicate appoint a trustee or agent to (i) hold security on the syndicate’s behalf, (ii) enforce the syndicate’s rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate?

    Laws do not recognize the role of an agent or trustee. However, there have been cases in practice where a “security agent” has been appointed to hold security on the syndicate’s behalf.

  14. If your jurisdiction does not recognise the role of an agent or trustee, are there any other ways to achieve the same effect and avoid individual lenders having to enforce their security separately?

    There have been cases in practice where a “security agent” has been appointed to hold security on the syndicate’s behalf. In such cases the “security agent” concluded the security agreements as the secured creditor and was registered as such with the relevant institution.

  15. Does withholding tax arise on (i) payments of interest to domestic or foreign lenders, or (ii) the proceeds of enforcing security or claiming under a guarantee?

    Yes, withholding tax is levied on payments of interest to foreign lenders. However, withholding tax is not levied on the proceeds of enforcing security or claiming under a guarantee.

  16. If payments of interest to foreign lenders are generally subject to withholding tax, what is the standard rate and what is the minimum rate possible under double taxation treaties?

    The standard rate is 10% and may range from 0-10% depending on the Double Taxation Treaty. BH is a member of several Double Taxation Treaties, which are available at Agreements on avoidance of double taxation (English).

  17. Are there any other tax issues that foreign lenders should be aware of when lending into your jurisdiction (for example, will any income become taxable in your jurisdiction solely because of a loan to or guarantee and/or grant of security from a company in your jurisdiction)?

    In general, there are no additional taxes to be paid. However, the tax treatment of enforcement and any extra income from proceedings may apply, but it is highly dependent on the concrete case circumstances.

  18. Are there any tax incentives available for foreign lenders lending into your jurisdiction?

    No, there have not been any known cases of government tax incentives for foreign lenders.

  19. Is there a history in your jurisdiction of financing structures being challenged by tax authorities, and if so, can you give examples.

    To our knowledge, the cases challenged by tax authorities were mainly due to transfer pricing issues, in case when lender is related party to the borrower.

  20. Do the courts in your jurisdiction generally give effect to the choice of other laws (in particular, English law) to govern the terms of any agreement entered into by a company incorporated in your jurisdiction?

    Yes, the parties are allowed to stipulate applicable law in the loan agreements. However, the security documents are governed by the local law.

  21. Do the courts in your jurisdiction generally enforce the judgments of courts in other jurisdictions (in particular, English and US courts) and is your country a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (i.e. the New York Arbitration Convention)?

    In general, yes, provided that the interested party applies for recognition of the foreign judgement before the competent court, prior to enforcement, under the condition that the foreign judgment is final. Certain exceptions to this rule are: (1) if the party against whom the judgment was made did not have the opportunity to engage in proceedings due to irregularities, (2) if BH court or other BH authority has exclusive jurisdiction regarding that legal matter, (3) if BH court or other BH authority already issued a final decision or commenced proceedings regarding that same legal matter, (4) if the enforcement of the decision would violate Constitution of BH and (5) if there is no reciprocity of recognition of foreign judgments between BH and the country where the judgment has been rendered.

    BH is a member of that Convention from 1 September 1993 -https://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXII1&chapter=22&clang=_en#2

  22. What (briefly) is the insolvency process in your jurisdiction?

    In general, opening and implementation of insolvency proceedings in FBH, RS and BD is regulated by the FBH Law on Insolvency Proceedings, RS Law on Insolvency and BD Law on Insolvency, Compulsory Enforcement and Liquidation.

    Insolvency process is generally initiated by a proposal in writing submitted to the competent court either by the company itself or company’s creditors who have a legal interest. The court will assess whether the proposal is well founded, and if it decides that insolvency proceedings will be initiated it can undertake actions to secure the assets of the company in insolvency, as well as appoint an insolvency administrator who will manage the company in insolvency in order to maximize eventual payments to creditors. Insolvency estate will be formed from the assets of the company which will be used for, repayment of creditors’ claims according to their insolvency ranking.

    Upon opening of the insolvency proceedings, creditors shall report their claims relating to the insolvency estate within 30/60 days. Exceptionally, creditors may report their claims after the expiry of such deadline, in specific situations explicitly stipulated in the relevant laws.

  23. What impact does the insolvency process have on the ability of a lender to enforce its rights as a secured party over the security?

    A lender has the ability to enforce its rights as a secured party over the security, including the principal claim, interest and other expenses.

  24. Please comment on transactions voidable upon insolvency.

    The FBH Law on Insolvency Proceedings, RS Law on Insolvency and BD Law on Insolvency, Compulsory Enforcement and Liquidation provide rules for challenging transactions taken by the insolvency debtor.

    In general, all transactions undertaken before the opening of the insolvency proceedings that undermine the equitable satisfaction of creditors (impair the creditors) or that place certain creditors in a more favorable position (prefer creditors) may be challenged. The laws provide for different hardening periods depending on applicable jurisdiction and circumstances of the specific cases, ranging up to five years in total.

  25. Is set off recognised on insolvency?

    Yes, set-off is possible if the creditor had prescribed right to set-off with the debtor stipulated in the agreement or in cases where set-off is enforced by the law.

    Insolvency laws provide for specific cases when set-off is not allowed by law. For example, in the FBH, the set-off of claims shall not be permissible if:

    • insolvency creditor has become indebted to the insolvency estate after the opening of the insolvency proceedings;
    • insolvency creditor acquired its claim from any other creditor after the opening of the proceedings;
    • insolvency creditor obtained the right to set-off through a disputable transaction;
    • creditor, whose claim must be satisfied from the assets of the insolvency debtor that are not part of the insolvency estate, is in debt to the insolvency estate;
    • the creditor is a related party, against whom the insolvency debtor has claim that arose or became due during six months before filing of the application for the opening of the insolvency proceedings, if the creditor fails to prove that it was unaware (at the time of the establishment of the set-off possibility) of the insolvency debtor’s imminent or current inability to pay its debts when due.
  26. Can you comment generally on the success of foreign creditors in enforcing their security and successfully recovering their outstandings on insolvency?

    The foreign creditors are entitled to the same level of protection as the domestic creditors. The success rate is dependable on the available assets of the debtor and its financial conditions and the provided security.

  27. Are there any impending reforms in your jurisdiction which will make lending into your jurisdiction easier or harder for foreign lenders?

    Yes, on 6 March 2019 the Constitutional Court of FBH issued a judgement according to which requirement of notarization for mortgage agreements is not in line with the Constitution of FBH. The Parliament of FBH needs to adopt changes to the relevant laws within 6 months, and it is expected that the reforms will simplify securitization in the FBH.

  28. What proportion of the lending provided to companies consists of traditional bank debt versus alternative credit providers (including credit funds) and/or capital markets, and do you see any trends emerging in your jurisdiction?

    Majority of funding is done through traditional banking. There is no official statistical data on the share of traditional banking lending in total corporate financing.