2013 Investment Climate Statement
Bureau of Economic and Business Affairs
April 2013
Report

Openness to Foreign Investment

Kosovo’s doing business climate is challenging, despite many investment opportunities and the lack of strong competition in certain sectors. The Government of Kosovo (Government), specifically the Ministry of Trade and Industry (MTI) and the Investment Promotion Agency of Kosovo (IPAK) actively promote foreign investment and welcome the expansion of the private sector. Nevertheless, public distrust of the private sector; opposition to the government’s policy of privatizing all Socially Owned Enterprises (SOEs) and many Publicly Owned Enterprises (POEs), rent-seeking behavior on the part of some government officials, and unreliable energy supply all increase the risk and cost of investment in Kosovo.

Kosovo is a secular, western-oriented country that desires to be part of Euro-Atlantic institutions, such as the European Union. Current legislation and regulations are purposely written with EU standards in mind. Perceptions of official corruption, the growing state bureaucracy, weak property rights protections, and the lack of universal recognition of Kosovo’s 2008 independence at times prove to be obstacles to attracting higher levels of foreign investment. These obstacles exist notwithstanding the government’s stated pro-business posture, the country’s strategic location, rich natural resources, low wages, and the entrepreneurial nature of its citizens. Kosovo has attracted foreign investment in certain fields, namely construction, infrastructure, and the privatization of state assets, especially in mining, telecom, and SOEs. Among the most visible foreign investment projects in Kosovo is Route 7 (the Ibrahim Rugova National Highway) currently being constructed by American-Turkish consortium, Bechtel-Enka, and the Turkish-French consortium, Limak-Aeroport de Lyon, which operates the Pristina International Airport concession. International firms and franchises, including Coca-Cola, RC Cola, FedEx, UPS, DHL, Deloitte, Booz Allen Hamilton, Hertz, and Microsoft either have an established presence or a local agent in Kosovo. A flat 10% corporate tax and temporary exemptions on paying Value Added Taxation (VAT) for new exporters help to attract foreign investors and businesses. Despite this, there are as yet no western-style franchises in the hotel or hospitality industries in Kosovo.

The American Chamber of Commerce (AmCham), the Kosovo Chamber of Commerce (KCC), and the Kosovo Business Alliance (KBA) are active and directly involved in strengthening the private sector business climate in Kosovo. At times, they appear to have the government’s ear on business matters, reflected in their seats on the government’s economic policy discussion body, the National Council for Economic Development (NCED); however, the government does not always act on their requests or proceed on resolving issues in a timely fashion. In October 2012, Kosovo’s President Atifete Jahjaga helped launch the Kosovo Women’s Chamber of Commerce. The purpose of the Chamber is to provide connections, mentoring, and support for women entrepreneurs and business leaders. Businesswomen in Kosovo typically are challenged by a lack of access to finance and cultural attitudes concerning the role of women in business.

Kosovo is a member of the International Monetary Fund (IMF) and the World Bank, and became a member of the European Bank for Reconstruction and Development (EBRD) in December 2012. EBRD Membership will enable the country to seek investment funds from the Bank, especially in the areas of energy, transport, and municipal services. In January 2013, Kosovo is scheduled to sign a framework agreement with the European Investment Bank (EIB).

Legal System

The legal system in Kosovo is complex, with three legal frameworks operating simultaneously: The Applicable Law includes a diminishing number of legal acts from the former Yugoslavia enacted until 1989; United Nations Interim Administrative Mission in Kosovo (UNMIK) Regulations; and laws passed by the Kosovo Assembly. The government is harmonizing the language among the various sources of law. While the legislative framework for a market-oriented economy is in place, poor implementation of law and contract enforcement, legal uncertainties regarding local recognition of foreign arbitral awards, and a nascent modern judiciary hinder economic growth and investment. To aid in this effort, the U.S. Government and the EU have substantial training and assistance programs in place to help improve judicial branch capacities.

The Kosovo Assembly and UNMIK, which governed Kosovo under UN Security Council Resolution 1244, have passed pro-business legislation that specifically seeks to attract foreign investment. Under domestic legislation, foreign firms operating in Kosovo are granted the same privileges as local businesses, except that foreign investors may not hold more than 49% ownership in a business producing or selling military-related products (Reg. No. 2001/3, Section 6). A new draft law on Foreign Investment is under consideration by the Assembly. If passed, the new law would further improve the legal infrastructure and help address inconsistencies in current legislation that unduly discourage foreign investment.

All major sectors of the Kosovo economy are open to foreign investment. In 2011, the Government took substantive steps to further open Kosovo to foreign investment through the passage of the Public Private Partnership (PPP) Law, no. 04 L-045 of 2011. The new PPP Law has been harmonized with the European Council regulations and the EU Acquis Communitaire. The law creates separate definitions for Concession and PPP, meaning that FDI transactions can be structured more flexibly. A provision for unsolicited proposals has been removed, ensuring that all procurements are the result of a competitive bidding process, while prior limits on the length of investment projects have been removed.

Kosovo’s commercial laws are available to the public in Albanian and Serbian, with English translations available, on the Kosovo Assembly's Website at www.assembly-kosova.org/?cid=2,191 and on the Government’s Official Gazette website at: http://www.gazetazyrtare.com/e-gov/index.php?lang=en. These documents are “as adopted” and a full understanding of a specific legal issue may require research into various legal acts and amendments. USAID is assisting the development of the first-ever legal information database, which is anticipated to include all governing normative acts. While national laws are generally available, access to municipal regulations is often difficult. USAID is similarly assisting with transparency in this regard, including encouraging municipalities to post municipal regulations on their websites.

Privatizations

The government privatized energy distribution and supply in mid-2012, with Turkish consortium Limak/Çalik scheduled to assume control in May 2013. The government is preparing to issue a tender for a new coal-fired power plant, “New Kosovo,” in early 2013, for which there are four pre-qualified investors. The government is also considering options for privatizing an existing 2x330 MW lignite power plant. The privatization process for Kosovo’s publicly owned Post & Telecom of Kosovo (PTK) is underway. Five international investors have been prequalified to compete in the tender, for which the government has set a January 31 bid deadline. Private investment will also be sought for a new year-round tourism resort in Brezovica, near the border with Macedonia. The government also plans tenders for the maintenance and tolling of its new highway network: National Route 7, which is currently under construction, and the future Route 6, which will connect Pristina to the Macedonia border. The Privatization Agency of Kosovo (PAK), an independent agency, is legally mandated to handle the disposition of Kosovo’s numerous SOE assets. While the Kosovo Assembly adopted a law on liquidation of these assets in 2011, the government’s inability to appoint a new PAK board has set back the agency’s efforts in this regard over the last six months.

Business Registration

Kosovo has undertaken several reforms to improve its business environment, including elimination of charter capital requirements for Limited Liability Companies (LLCs), elimination of the business registration fee, and elimination of the work permit. The Government has drafted a new Law on Licenses and Permits that aims to streamline and simplify the system with a view toward further improving the business environment. These reforms helped lift Kosovo 19 places to 98/185 in the World Bank’s Doing Business Report for 2013.

Kosovo has an active business registration process. MTI reported registration of over 9,200 new businesses in 2012, indicating local enterprise development is growing. In 2012, however, more than 1,100 businesses failed for a variety of reasons, including poor business model planning and a lack of access to credit. Business registrations are processed by the MTI Agency for Business Registration through offices located in municipalities, and are normally issued within three business days; the process of completing all necessary steps, including secondary requirements, such as municipal business licenses or technical inspections, however, can take as long as two weeks.

Businesses are required to obtain two mandatory fiscal records: a fiscal number and a Value-Added Tax (VAT) number from the Tax Administration. Additional filings may be necessary for individual businesses. In addition to the national-level requirements, businesses are at times required to obtain a business license from the municipality in which they plan to operate. This practice is being phased out, with several larger municipalities, except for Pristina, recently adopting ordinances that reduce, suspend, or eliminate the business license fees.

Property Ownership and Taxation

Kosovo’s economy is based on a private property ownership model, with significant state and publicly owned assets, whose privatization is scheduled to be completed in the coming years. Determining private property ownership remains a challenge. Formal property transfers require a review by a court; however, property transfers often occur via informal agreements between buyers and sellers who frequently do not record them. While this practice is declining, it is still widespread. Finished commercial and habitable residential buildings are subject to property tax, while unimproved land is not. The government adopted a new Construction Law in 2012, which streamlined and simplified the process for obtaining construction permits, and requires that the calculation of construction permit fees be based on cost recovery principles. This and other business-minded reforms helped contribute to Kosovo’s significant improvement the World Bank’s Doing Business Index Report for 2013. The government is also moving forward with a comprehensive construction code based on European norms, as well as similar reforms in spatial planning/land use regulation and a program for legalization of existing construction that is expected to commence in 2013.

Kosovo’s rankings in select surveys are noted below where data are available:

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Transparency International Corruption Index

2012

105/176

World Bank Doing Business

2012*

98/185

MCC Government Effectiveness

2012

38%

MCC Rule of Law

2012

31%

MCC Control of Corruption

2012

38%

MCC Fiscal Policy

2012

73%

MCC Regulatory Quality

2012

90%

MCC Business Start Up

2012

33%

MCC Natural Resource Protection.

2012

32%

NOTE: For MCC data, figures run from 0% to 100% (the highest). See more at http://www.mcc.gov/documents/scorecards/score-fy13-kosovo.pdf. Kosovo’s lack of UN membership limits the availability of UN data for use in the MCC report card. The Heritage Foundation did not cover Kosovo in its Global Economic Freedom Report for 2012 but is expected to begin covering the country in 2013.

*For the prior year, the World Bank ranked Kosovo 117 out of 185 countries based on 2011 data. World Bank data are published at the end of the calendar year, e.g., 2012 data are found in the World Bank Report for 2013.

Conversion and Transfer Policies

The Foreign Investment Law, no. 2005/02-L33, guarantees unrestricted use of income from foreign investment after taxes and other liabilities are paid. This includes transfers to other foreign markets or foreign currency conversions. All currency conversions and transfers are processed in accordance with EU banking procedures. Conversions are made at the market rate of exchange. Foreign investors are permitted to open bank accounts in any currency.

Expropriation and Compensation

Article 8 of the Foreign Investment Law protects foreign investments from unreasonable expropriation, and guarantees due process and timely compensation payment for valid claims with fair market prices. In April 2005, UNMIK approved an eminent domain clause in order to prevent lawsuits deriving from property expropriations and sales occurring as part of the privatization process of SOEs.

Dispute Settlement

Legal Provisions and Resources

A new Law on Enforcement of Procedures came into force in January 2013. It permits claimants to utilize bailiffs licensed by the Ministry of Justice to execute court-ordered judgments. The Kosovo Assembly adopted several important laws in the area of commercial law in recent years. Of importance is the 2012 adoption of the Kosovo Law on Obligations, repealing the particular former Yugoslavia law in this area. This provides the basic framework law for contracts as well as torts. In addition, the government adopted Laws on Arbitration and Mediation in 2007. The Assembly has also adopted amendments to the Law on Contested Procedure, addressing its inconsistencies with the Law on Arbitration, thus dealing with one of the key impediments to enforcing arbitral awards.

In 2011, the Kosovo Assembly passed three important laws pertaining to privatization matters: the Law on the Privatization Agency of Kosovo 04/L-034, the Law on the Reorganization of Certain Enterprises and their Assets 04/L-035 (the “Trepca Law”), and the Law on the Special Chamber of the Supreme Court of Kosovo. The Special Chamber is composed of eight international and twelve local judges who handle disputes and claims related to privatization and economic restructuring. The Special Chamber has primary jurisdiction over appeals against the decisions of the Privatization Agency of Kosovo (PAK), as well as creditor, ownership, and property claims brought against SOEs and POEs, and claims arising from the privatization and liquidation of SOEs. The procedures for claimants wishing to institute proceedings are detailed in PAK Law no. 04/L-034.

The National Assembly approved major overhauls in 2012 to the 2004 UNMIK-based Criminal Code and the Code of Criminal Procedure. The new Criminal Code and Criminal Procedure Codes entered into force on January 1, 2013, are fully compliant with the EU Convention on Human Rights, have modernized definitions and best practices, and are meant to reduce waste of judicial resources. The Law on Courts also entered into force on January 1, 2013 and significantly changes and simplifies the current structure of the courts. The new court structure will include Basic Courts, a Court of Appeals, and the Supreme Court. The Basic Courts and Court of Appeals will each have a Department for Commercial Matters, Department for Administrative Cases, a Department for Serious Crimes, a General Department, and a Department for Minors.

The new Law on Courts also changed the structure and jurisdiction of the Commercial Court. There will now be a Department for Commercial matters operating within the Basic Court of Pristina with jurisdiction for the entire territory of Kosovo. The jurisdiction of the Court changed to specifically include “disputes between domestic and foreign economic persons in their commercial affairs.” In addition, it includes reorganization, bankruptcy and liquidation of economic persons; disputes regarding impingement of competition; and protection of property rights and intellectual property. The Commercial Department now has jurisdiction over economic disputes between both legal and natural persons. Cases in the Commercial Court are resolved between six months to one year on average. Once a judgment is final, however, its execution has often been lengthy and problematic. Backlogs should be significantly reduced with the implementation of the 2013 Enforcement of Procedures law (see above) and its bailiff system, which has been successively used in a number of countries in the region. Foreign investors are litigants in about 10% of the cases and these are mainly trademark cases. The Court of Appeals also includes a Commercial Matters Department and deals with all appeals coming from the Pristina Basic Court’s Department for Commercial matters.

One of the main obstacles to dispute resolution is the backlog in the overall court system. A significant portion of this backlog consists of utility bills and loan collections. The Commercial Court is the primary institution responsible for resolving economic and commercial disputes between legal entities. To address the backlog, the Kosovo Judicial Council adopted a Backlog Reduction Strategy in 2010 and cooperation mechanisms (MOUs) with Post Telecom of Kosovo (PTK) and electricity utility Kosovo Energy Corporation (KEK). While some progress has been achieved, significant obstacles remain.

Kosovo’s judicial system, although improving, still suffers from many weaknesses. Although local courts recognize foreign arbitral awards, enforcement is weak and time-consuming. In addition, the lack of secondary legislation pertaining to bankruptcy hinders the work of the Kosovo Commercial Court in discharging bankruptcy cases.

Alternative Dispute Resolution

Chapter 4 of the Foreign Investment Law assigns jurisdiction for business dispute resolution to Kosovo courts. Foreign investors are free, however, to agree upon arbitration or another alternative dispute resolution mechanism. The American and Kosovo chambers of commerce operate alternative dispute resolution centers and an increasing number of businesses are stipulating use of these centers in their contracts. The results of arbitration are enforceable by local courts, since Kosovo has voluntarily accepted the International Center for Settlement of Investment Disputes (ICSID) Convention and enshrined it in local law. The Foreign Investment Law stipulates that investors select from the following standards for investment dispute arbitration:

a) The ICSID Convention, if both the foreign investor's country of citizenship and Kosovo are parties to said convention at the time of the request for arbitration;

b) The ICSID Additional Facility Rules, if the jurisdictional requirements for personal immunities per Article 25 of the ICSID Convention are not fulfilled at the time of the request for arbitration;

c) The United Nations Commission on International Trade Law Rules. In this case, the appointing authority referred to therein will be the Secretary General of ICSID; or

d) The International Chamber of Commerce Rules.

Since 2011, arbitration services are available at the Arbitration Tribunals within the Kosovo Chamber of Commerce and American Chamber of Kosovo. The Kosovo Arbitration Rules are a set of model rules that are based on the 2010 United Nations Commission on International Trade Law (UNCITRAL) Model Rules for Commercial Arbitration. They are consistent with international best practices. The Law on Foreign Investment also favors the use of arbitration. To use the arbitration option, the law requires that the disputed agreement/contract include an arbitration clause.

In addition, in accordance with the Law on Mediation, the Ministry of Justice has established a Mediation Commission which has adopted the necessary rules to create mediation services and has trained and certified several mediators.

Performance Requirements and Incentives

The Government does not specify performance requirements as a condition for establishing, maintaining or expanding investments in Kosovo. A 16% across-the-board value added tax (VAT) came into force in January 2009. Article 27 of the Law on Value Added Tax, no. 2009/03-L-146, provides exemptions for VAT on certain goods, which include medicines, medical services, pharmaceutical products, agricultural inputs and public education services. Reduced VAT rates of as low as 5% and enhanced rates up to 21% are also provided for certain goods and services; however, the Assembly has not acted to trigger these rates. To encourage investment, the government grants businesses certain VAT-related privileges: For companies importing capital goods, the government grants a six-month VAT deferment upon presentation of a bank guarantee. Suppliers may export goods and services without being required to collect VAT from foreign buyers. Suppliers may claim credit for taxes on inputs, either by offsetting those taxes against gross VAT liabilities or by claiming a refund. A 10% flat corporate tax is in force, helping to attract FDI.

In September 2000, the EU formally recognized Kosovo as an autonomous customs territory and amended its General Scheme of Preferences, eliminating quantitative restrictions for most industrial products from Kosovo. By June 2002, the EU granted preferential treatment to all imports from Kosovo, removing all remaining tariff ceilings for industrial products, including steel and textiles, and improving access to EU markets for agricultural products. Kosovo Customs continues to work to harmonize certificates of origin standards with EU Customs. In December 2008, the United States designated Kosovo a beneficiary developing country under the Generalized System of Preferences (GSP) program. While there are only a few companies that currently take advantage of this designation, the GSP program provides an incentive for investors to export products, such as light manufacturing and certain agricultural goods, in Kosovo and export them duty-free to the United States.

Customs of Kosovo issued an Internal Administrative Instruction (AI) that reduces the number of documents needed to export and import. This AI provides that only two documents are now required to export: a commercial invoice and a customs export declaration, and that only three documents are now required to import – a commercial invoice, a customs import declaration, and a certificate of origin.

Right to Private Ownership and Establishment

Government regulations and the Foreign Investment Law do not interfere with the establishment, acquisition, or sale of interests in enterprises by private entities. Private ownership rights can be extended to foreign investors. Foreign investment is not subject to approval by the Government of Kosovo, except when such approval would be required for similar domestic businesses. The following rights also apply:

a) Foreign investors may transfer property rights, including permits, to other legally qualified persons in the same manner and to the same extent as domestic investors;

b) Foreign investors have the right to purchase residential and non-residential property to the same extent as domestic entities;

c) Foreign investors with less than a majority stake in an investment are protected as domestic minority shareholders in accordance with applicable law;

d) Foreign investments are subject to the same tax obligations as domestic businesses; and

e) Foreign investors may establish subsidiary enterprises, branches, and representative offices in the same manner and to the same extent as domestic businesses.

Protection of Property Rights

Generally, Kosovo’s de jure property-related laws are well-structured and provide for security and transferability of rights. As a result of regime changes, confiscation and conflict, a complex legal and regulatory framework prevails. Although general agreement exists that many of the property laws in Kosovo reflect international best practice, there is also widespread agreement that this pluralistic legal environment would benefit from a harmonization exercise.

In general, the current institutional framework is not designed to resolve claims and challenges to property rights in an efficient and effective manner; government ministries, municipal authorities, and independent agencies often have overlapping jurisdictions to deal with property concerns. The court system is backlogged with property-related cases. The cadastral record, having been moved out of the country in 1999 (see below) and with many documents destroyed or lost, is slowly being rebuilt. The delay also limits the development of a formal property market needed for more stable economic growth. Concerns about restitution of property and the privatization of SOEs have not yet been fully resolved, while concerns related to the rights of minority communities exacerbate tensions between groups. Illegal construction in Kosovo abounds, and obstacles to women’s right to inherit land, maintain marital property, and protect their property rights claims in the court system are widespread. This piecemeal approach to reform over the past decade has left the country with a patchwork of uncertain property rights, which continues to undermine long-term growth and economic stability.

Resolution of residential, agricultural and commercial property claims remains a serious and contentious issue in Kosovo. Most property records were destroyed or removed to Serbia by the Serbian government during the 1998-1999 conflict, making determination of rightful ownership for the majority of properties complex. There have been cases of multiple ownership claims on a single property, each claimant presenting a variety of ownership documents as proof. As part of the EU-facilitated dialogue, Kosovo and Serbia agreed that Serbia would copy the cadastral records it removed from Kosovo in 1999. The EU would then transfer the copies to Kosovo, where a tripartite technical agency would compare and adjudicate any differences between the Serbian record and the records maintained in Kosovo. Copying of the cadastre in Serbia, estimated to take two years, is scheduled to begin in February 2013. Separately, the backlog of property cases in Kosovo's court system is significant. With respect to the 1998-1999 armed conflict, the Kosovo Property Agency (KPA), formerly the Housing and Property Directorate (HPD), has authority to receive, register, and resolve property claims on private immovable property, including agricultural and commercial property. Decisions taken by the Kosovo Property Claims Commission, within the KPA, are subject to a right of appeal only to the Supreme Court. KPA received 41,099 total claims of which 36,488 are for agricultural property. The KPA is also mandated to deal with a limited number of activities which formerly belonged to the HPD, established under UNMIK Regulation 2000/23, and is now mandated to implement Housing and Property Claims Commission (HPCC) decisions which were pending enforcement. Legislation pending in the National Assembly will transform the KPA into the Kosovo Property Verification and Compliance Agency with the additional mandate of implementing the EU dialogue agreement on the cadastre.

The Kosovo Assembly passed three laws in 2011 that relate to intellectual property rights (IPR): the Law on Patents, 04 L-029, the Law on Trademarks 04 L-026, and the Law on Industrial Design 04 L-028 which, together with UNMIK Regulation 2006/46 on Copyright and Related Rights, provide for stronger protection of intellectual property rights, authorizes enforcement of trademark, copyright and patent laws, and any related international conventions. MTI established the Industrial Property Rights Office (IPO) in 2007, which is tasked with IPR protection. The 1981 Yugoslav Law on Protection of Inventions, Technical Improvements and Distinctive Signs, and the 1991 Law on Authors Rights, are also considered applicable law in Kosovo's courts. These laws adhere to international treaties and conventions, such as: The Paris Convention, Madrid Protocol, Trade- Related Aspects of Intellectual Property Rights (TRIPS) Agreement, Budapest Treaty and several of the European Council Directives on protection of IPR. In order to increase the effectiveness in implementing IPR rights, the government has adopted the IPR Strategy and has established the National Intellectual Property Council following the IPO’s initiative. The Council aims to increase inter-agency coordination in implementing IPR and comprises IPO, the Copyright Office, Customs, Kosovo Police’s Department for Economic Crimes and Corruption, Market Inspectorate, the Judicial and Prosecutorial Council, Medicines Agency, Food and Veterinary Agency, and the Environmental Protection Agency. The presence of institutions notwithstanding, there is a general lack of capacity of the relevant staff engaged in IPR protection and the government needs to conduct more training and enforcement actions.

Protection of intellectual property is poor. A number of counterfeit consumer goods (notably CDs, DVDs, and clothing items) are available for sale and are openly traded.

Transparency of Procurement Regulatory System

The 2011 Law on Public Procurement, no. 04/L-042, devolves the power of procurement to the budgetary units (i.e. ministries, municipalities and independent agencies) except in the cases where the government authorizes the Central Procurement Agency within the Ministry of Finance to procure goods and/or services on behalf of the government. All tenders are advertised in Albanian and Serbian, as well as in English in cases of large tenders. The Public Procurement Regulatory Commission (PPRC) recently initiated procurement audits of the various Kosovo ministries, municipal authorities and agencies receiving funds from the Kosovo Consolidated Budget. The GoK is in the process of amending the Law on Public Procurement to ensure domestic products will have an advantage during purchase of goods through public contracts, as requested by the business associations.

All legal, regulatory and accounting systems in Kosovo were created to adhere to European Union standards and follow best international practices. Laws passed in the Assembly are generally business friendly. However, the practice of public procurement in Kosovo is an ongoing challenge. While the government seeks transparency in publishing the rules, regulations, and procedures of the tendering process on the Public Procurement Regulatory Commission (PPRC) website at: http://krpp.rks-gov.net/Default.aspx?LID=2, there have been numerous irregularities reported by international companies competing in high-value public procurements. Complaints to the Procurement Review Body (PRB) are often handled in a timely manner but are at times no more than formalizations of individual agency’s procurement decisions; in cases where the PRB has decided against the agency’s decision, the agency often has not complied with the PRB’s findings, leaving the complainant little recourse but to pursue a legal case in the Supreme Court.

Efficient Capital Markets and Portfolio Investment

The Central Bank of Kosovo (CBK) is an independent body responsible for fostering the development of competitive, sound, and transparent banking and financial sectors. This includes supervising and regulating Kosovo's banking sector, insurance industry, pension funds, and micro- finance institutions; and performing other normal central bank tasks, including cash management, transfers, clearing, management of funds deposited by the Ministry of Finance or other public institutions, collection of financial data, and management of a credit register. The CBK recently applied for a SWIFT code in order to fully ensure the safety of the Kosovo banking system. Kosovo’s lack of universal recognition stymied a prior attempt to obtain a code. The CBK is not authorized to grant loans to banks but successfully issued the first government securities in the form of 90-day Treasury bills at 3.5% on January 17, 2012. Only commercial banks were able to participate in the auction, as they met the criteria of primary bond traders per the Regulation on Treasury Bonds. A secondary market to allow banks and other clients to trade the securities is under development. The Government raised €74 million through Treasury bills last year and is planning to raise another €80 million through six month and one year Treasury bills in 2013. The Government hosted Standard and Poor’s in July to evaluate Kosovo for its first-ever international credit rating and the outcome is expected to be made public in early 2013.

Kosovo’s private banking sector remains well-capitalized and profitable. Difficult economic conditions generally, the lack of strong rule of law and contract enforcement processes, and a risk-averse posture have caused banks to be conservative in lending. This overall cautiousness in the banking sector is evident in its excess reserves, which are above the minimum level required by the Central Bank of Kosovo. Most deposits are demand deposits and total assets of the three largest banks, which are international banks, amount to 71.8% of the entire banking sector in Kosovo. As of June 2012, Kosovo’s banks increased loans at an annual rate of 6%; however, this was half the rate of the year before. Approximately 76% of all lending activity is to businesses. Despite positive trends, relatively little lending is directed to long-term investment activities. High interest rates (averaging approximately 14%) and collateral requirements act as disincentives to borrowers. The slow-down in lending is most notable in the northern part of Kosovo where a weak and ineffectual municipal court system and tension arising from protests and blockades following the government’s July 2011 action to take control of its northern border gates have also slowed commercial lending.

At the beginning of 2013, there were nine commercial banks, including the newly opened IS Bank of Turkey, and thirteen licensed insurance companies in Kosovo.

The official currency of Kosovo is the Euro although the country is not part of the eurozone. Given that the Central Bank of Kosovo does not have independent monetary policy, prices react heavily to market trends in the larger eurozone.

Corporate Social Responsibility

Now that Kosovo’s economy has reached a more mature stage of development, characterized by necessary legislation, institutions, and an improving business climate, the private sector is beginning to adopt and pursue international best practices on corporate social responsibility (CSR). Thanks to the efforts of the business community, CSR is becoming a more widely recognized concept. AmCham Kosovo, for example, has made raising funds for local charities, such as those supporting autistic children and organizations that promote employment of persons with disabilities, the main purpose of its annual gala dinner.

Political Violence

In the summer of 2011, a trade dispute with neighboring Serbia, one of Kosovo’s largest trading partners, led to a blockade of cross-border trade between the countries for approximately two months. Isolated incidents of inter-ethnic and politically-motivated violence, as well as sporadic political protests, have occurred since then, but none of these events adversely affected Kosovo's political stability or overall economic situation. The Kosovo Police, Kosovo Security Force, the European Union's Rule-of-Law Mission in Kosovo (EULEX), and the NATO Kosovo Security Force (KFOR) have responded to and investigated these events, according to their legal mandate. Kosovo’s judiciary is augmented by EULEX, which has a Monitoring, Mentoring, and Advising (MMA) role in rule of law matters.

Corruption

The World Bank’s “Doing Business” Report for 2013 ranks Kosovo 98 out of 185 economies, an improvement of 19 places in one year. Corruption, real and perceived, remains one of the most serious problems in attracting foreign investment in Kosovo. Transparency International’s 2012 “Corruption Perceptions Index” ranked Kosovo 105 out of 176 countries and territories surveyed, similar to the prior year’s results.

General Advice

It is important for U.S. companies, irrespective of their size, to assess the business climate in the relevant market in which they will be operating or investing, and to have an effective compliance program and measures to detect and prevent corruption, including foreign bribery. U.S. persons and firms operating or investing in foreign markets should become familiar with the relevant anti-corruption laws of both Kosovo and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.

The U.S. Government seeks to level the global playing field for U.S. businesses by encouraging other countries to take steps to criminalize their own companies’ acts of corruption, including bribery of foreign public officials, and requiring them to uphold their obligations under relevant international conventions. A U.S. firm that believes a competitor is seeking to use bribery of a foreign public official to secure a contract should bring this to the attention of appropriate U.S. agencies, as noted below.

Anti-Bribery Treaties and Conventions

U.S. Foreign Corrupt Practices Act: In 1977, the United States enacted the Foreign Corrupt Practices Act (FCPA), which makes it unlawful for a U.S. person, and certain foreign issuers of securities, to make a corrupt payment to foreign public officials for the purpose of obtaining or retaining business for or with, or directing business to, any person. The FCPA also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States.

Guidance on the U.S. FCPA: The Department of Justice’s (DOJ) FCPA Opinion Procedure enables U.S. firms and individuals to request a statement of the Justice Department’s present enforcement intentions under the anti-bribery provisions of the FCPA regarding any proposed business conduct. The details of the opinion procedure are available on DOJ’s Fraud Section Website at www.justice.gov/criminal/fraud/fcpa. Although the Department of Commerce has no enforcement role with respect to the FCPA, it supplies general guidance to U.S. exporters who have questions about the FCPA and about international developments concerning the FCPA. For further information, see the Office of the Chief Counsel for International Counsel, U.S. Department of Commerce, Website, at http://www.ogc.doc.gov/trans_anti_bribery.html. More general information on the FCPA is available at the Website listed below.

Exporters and investors should be aware that generally all countries prohibit the bribery of their public officials, and prohibit their officials from soliciting bribes under domestic laws. Most countries are required to criminalize such bribery and other acts of corruption by virtue of being parties to various international conventions discussed above.

Other Instruments: It is U.S. Government policy to promote good governance, including host country implementation and enforcement of anti-corruption laws and policies pursuant to their obligations under international agreements. Since enactment of the FCPA, the United States has been instrumental in the expansion of the international framework to fight corruption. Several significant components of this framework are the Organization of Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Anti-bribery Convention), the United Nations Convention against Corruption (UN Convention), the Inter-American Convention against Corruption (OAS Convention), the Council of Europe Criminal and Civil Law Conventions, and a growing list of U.S. free trade agreements. Kosovo is party to the OECD Anti-bribery Convention and the Council of Europe Convention at this time.

OECD Anti-bribery Convention: The OECD Anti-bribery Convention entered into force in February 1999. As of December 2009, there are 38 parties to the Convention including the United States (see http://www.oecd.org/dataoecd/59/13/40272933.pdf). Major exporters China, India, and Russia are not yet parties, although the U.S. Government strongly endorses their eventual accession to the Convention. The Convention obligates the Parties to criminalize bribery of foreign public officials in the conduct of international business. The United States meets its international obligations under the OECD Anti-bribery Convention through the U.S. FCPA.

UN Convention: The UN Anticorruption Convention entered into force on December 14, 2005, and there are 143 parties to it as of December 2009: http://www.unodc.org/unodc/en/treaties/CAC/signatories.html. The UN Convention is the first global comprehensive international anticorruption agreement and requires countries to establish criminal and other offences to cover a wide range of acts of corruption. The UN Convention goes beyond previous anticorruption instruments, covering a broad range of issues ranging from basic forms of corruption such as bribery and solicitation, embezzlement, trading in influence to the concealment and laundering of the proceeds of corruption. The Convention contains transnational business bribery provisions that are functionally similar to those in the OECD Anti-bribery Convention and contains provisions on private sector auditing and books and records requirements. Other provisions address matters such as prevention, international cooperation, and asset recovery. Kosovo is not currently a party to the UN Convention, but is a party via UNMIK Regulation 2001/3 to the OECD Convention (see above).

Council of Europe Criminal Law and Civil Law Conventions: Many European countries are parties to either the Council of Europe (CoE) Criminal Law Convention on Corruption, the Civil Law Convention, or both. The Criminal Law Convention requires criminalization of a wide range of national and transnational conduct, including bribery, money-laundering, and account offenses. It also incorporates provisions on liability of legal persons and witness protection. The Civil Law Convention includes provisions on compensation for damage relating to corrupt acts, whistleblower protection, and validity of contracts, inter alia. The Group of States against Corruption (GRECO) was established in 1999 by the CoE to monitor compliance with these and related anti-corruption standards. Currently, GRECO comprises 46 member States (45 European countries and the United States). As of December 2009, the Criminal Law Convention has 42 parties and the Civil Law Convention has 34 (see http://www.coe.int/greco).

Free Trade Agreements: While it is U.S. Government policy to include anticorruption provisions in free trade agreements (FTAs) that it negotiates with its trading partners, the anticorruption provisions have evolved over time. The most recent FTAs negotiated now require trading partners to criminalize “active bribery” of public officials (offering bribes to any public official must be made a criminal offense, both domestically and trans-nationally) as well as domestic “passive bribery” (solicitation of a bribe by a domestic official). All U.S. FTAs may be found at the U.S. Trade Representative Website: http://www.ustr.gov/trade-agreements/free-trade-agreements. Kosovo does not currently have a FTA with the United States.

Local Laws: U.S. firms should familiarize themselves with local anticorruption laws, and, where appropriate, seek legal counsel. While the U.S. Department of Commerce cannot provide legal advice on local laws, the Department’s U.S. and Foreign Commercial Service can provide assistance with navigating the host country’s legal system and obtaining a list of local legal counsel.

Assistance for U.S. Businesses: The U.S. Department of Commerce offers several services to aid U.S. businesses seeking to address business-related corruption issues. For example, the U.S. and Foreign Commercial Service can provide services that may assist U.S. companies in conducting their due diligence as part of the company’s overarching compliance program when choosing business partners or agents overseas. The U.S. Foreign and Commercial Service can be reached directly through its offices in every major U.S. and foreign city, or through its Website at www.trade.gov/cs.

The Departments of Commerce and State provide worldwide support for qualified U.S. companies bidding on foreign government contracts through the Commerce Department’s Advocacy Center and State’s Office of Commercial and Business Affairs. Problems, including alleged corruption by foreign governments or competitors, encountered by U.S. companies in seeking such foreign business opportunities can be brought to the attention of appropriate U.S. government officials, including local embassy personnel and through the Department of Commerce Trade Compliance Center : See “Report a Trade Barrier” Website at tcc.export.gov/Report_a_Barrier/index.asp.

Local Information: Public sector corruption in government procurement tenders and privatization including bribery of public officials, and officials seeking payoffs, remains a major challenge for U.S. firms operating in Kosovo. Corruption also remains widespread in private industry, adversely affecting commercial development. The Law on the Suppression of Corruption was passed in May 2005, creating an Anti-Corruption Agency (ACA) to address this problem. This agency is tasked with, among other duties, preparing an anti-corruption strategy for Assembly approval, conducting administrative investigations of alleged corruption cases, and monitoring proper implementation of the Corruption Law. Citizens can report suspected corruption via a toll-free hotline number 044 082 82 or through the Anti-Corruption Agency's website at www.akk-ks.org. For 2011, Anti-Corruption Agency figures show an increase of reports received by ACA and of those that were forwarded for investigation and prosecution. There are several government institutions and agencies in Kosovo that combat corruption as are Investigation Units within Customs, Tax Administration, Kosovo Police, Prosecution, Financial Intelligence Unit, Public Review Body an agency adjudicating complaints on public tenders, and Office of Auditor General. Transparency International Kosovo has a presence in Kosovo through the Kosovo Democratic Institute, a local anti-corruption watchdog nongovernmental organization, and there are also several independent local NGOs that monitor and publish anti-corruption reports.

In 2008, the Kosovo government took additional legislative steps to combat corruption. Government officials are now required to disclose all gifts received, as stipulated by the Law on Suppression of Corruption. In June 2009, the Assembly passed the Law on Declaration, Origin and Control of Assets of Senior Public Officials requiring government officials to file asset declarations upon entry and exit from government service. ACA reports indicate that over 95% of all senior officers declared their assets; non-reporting officials were subject to court proceedings, with fines resulting in some cases. In January 2010, the Kosovo Assembly adopted a new Law on Anti-Corruption that brought a new approach to combating corruption. Kosovo’s Financial Intelligence Unit has the authority to conduct analysis in support of criminal investigations. Currently, the Assembly is considering amendments to the Law on the Prevention of Money Laundering and Terrorism Financing; when passed, the amended law will be largely compliant with the EU Acquis Communitaire.

There are frequent reports of irregularities in public tendering procedures. The recent revision of the Public Procurement Law and a significant increase in public audits from the Office of the Auditor General are important steps forward. The Public Procurement Law clearly defines the division between executive and regulatory functions, in accordance with EU practices. Tax evasion is high, and both local and foreign businesses are concerned about the professional ethics of some government officials, who reportedly accept bribes or extort firms in exchange for licenses, permits, movement of paperwork or even routine public services.

Anti-Corruption Resources: Additional resources for individuals and companies regarding the combating of corruption in global markets include the following:

  • Information about the U.S. Foreign Corrupt Practices Act (FCPA), including a “Lay-Person’s Guide to the FCPA” is available at the U.S. Department of Justice’s Website at: http://www.justice.gov/criminal/fraud/fcpa.
  • Information about the OECD Anti-bribery Convention including links to national implementing legislation and country monitoring reports is available at: http://www.oecd.org/department/0,3355,en_2649_34859_1_1_1_1_1,00.html. See also new Anti-bribery Recommendation and Good Practice Guidance Annex for companies: http://www.oecd.org/dataoecd/11/40/44176910.pdf.
  • General information about anticorruption initiatives, such as the OECD Convention and the FCPA, including translations of the statute into several languages, is available at the Department of Commerce Office of the Chief Counsel for International Commerce Website: http://www.ogc.doc.gov/trans_anti_bribery.html.
  • Transparency International (TI) publishes an annual Corruption Perceptions Index (CPI). The CPI measures the perceived level of public-sector corruption in countries and territories of the world. The CPI is available at: http://www.transparency.org/policy_research/surveys_indices/cpi/2009. TI also publishes an annual Global Corruption Report which provides a systematic evaluation of the state of corruption around the world. It includes an in-depth analysis of a focal theme, a series of country reports that document major corruption related events and developments from all continents and an overview of the latest research findings on anti-corruption diagnostics and tools. See http://www.transparency.org/research/gcr.
  • The World Bank Institute publishes Worldwide Governance Indicators (WGI). These indicators assess six dimensions of governance in 212 countries, including Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption. See http://info.worldbank.org/governance/wgi/sc_country.asp. The World Bank Business Environment and Enterprise Performance Surveys may also be of interest and are available at: http://go.worldbank.org/RQQXYJ6210.
  • The World Economic Forum publishes the Global Enabling Trade Report, which presents the rankings of the Enabling Trade Index, and includes an assessment of the transparency of border administration (focused on bribe payments and corruption) and a separate segment on corruption and the regulatory environment. See http://www.weforum.org/en/initiatives/gcp/GlobalEnablingTradeReport/index.htm.
  • Additional country information related to corruption can be found in the U.S. State Department’s annual Human Rights Report available at http://www.state.gov/g/drl/rls/hrrpt/.
  • Global Integrity, a nonprofit organization, publishes its annual Global Integrity Report, which provides indicators for 92 countries with respect to governance and anti-corruption. The report highlights the strengths and weaknesses of national level anti-corruption systems. The report is available at: http://report.globalintegrity.org.
  • World Bank’s Ease of Doing Business Report: http://www.doingbusiness.org/rankings.
  • Heritage Foundation: Please note the Heritage Foundation will begin covering Kosovo during 2013; general data for other countries can be found at: http://www.heritage.org/Index/Ranking.
  • For Millennium Challenge Corporation (MCC) Kosovo Rankings please go to: http://www.mcc.gov/documents/scorecards/score-fy13-kosovo.pdf.

Bilateral Investment Agreements

Albania was the first country to sign a Free Trade Agreement (FTA) with Kosovo in 2003, followed by Macedonia in 2005. The Kosovo-Macedonia FTA stipulates that Kosovo imports have complete duty-free access to the Macedonian market but in reality, Macedonia still imposes some duties at the border, particularly on agricultural imports. In 2006 Kosovo, under UNMIK representation, signed FTAs with Croatia and Bosnia-Herzegovina, and became a signatory to the Central European Free Trade Area (CEFTA) and EU Common Aviation Area. CEFTA came into force in July 2007 and by September 2007 all signatories ratified the agreement, including Serbia. As with the FTA with Macedonia, CEFTA signatories continue to charge various fees for Kosovo goods. Kosovo has signed an agreement with Turkey on avoidance of double-taxation and fiscal evasion related to income tax and is currently negotiating an FTA. Kosovo is also a member of the Athens Process on Energy for the Southeastern Europe Energy Community Treaty. This is a significant step for Kosovo toward achieving increased regional cooperation and securing alternate sources of energy.

OPIC and Other Investment Insurance Programs

The U.S. Overseas Private Investment Corporation (OPIC) has been involved in Kosovo since 2000, providing financing, political risk insurance and other investment vehicles to American investors. In June 2009, OPIC signed an investment agreement with Kosovo. With OPIC assistance, American investors are currently involved with projects in the energy and real estate development sectors. Kosovo is also a member of the World Bank, the Multilateral Investment Guarantee Agency, the International Monetary Fund, and the EBRD.

Labor

The Kosovo Assembly passed the Law on Labor no. 03/L-212 in 2010, which requires employers to observe all applicable employee protections. These include a 40-hour full-time work week, payment of overtime, adhering to occupational health and safety standards, respecting annual leave benefits and ensuring up to 12 months of maternity leave, which includes 6 months of paid leave at a reduced rate followed by six months of unpaid leave. The labor law calls for a minimum wage, which the Economic and Social Council of Kosovo decided would be € 130 per month in 2012. The Ministry of Labor and Social Welfare has created a compliance office that has the authority to inspect employer adherence to labor law requirements. Labor disputes are adjudicated in local courts. Labor disputes are formally adjudicated in local courts, but access to courts and predictability of judgment presents investor risk.

Kosovo requires businesses to pay a 5% social security contribution per employee, one of the lowest rates in Europe.

Foreign-Trade Zones/Free Ports

The Kosovo Customs and Excise Code is business-friendly, compliant with EU and World Customs Organization standards, and addresses topics such as bonded warehouses, inward and outward processing, transit of goods, and free trade zones, with the aim of facilitating trade and stimulating export growth. In addition to imported goods, some Kosovo-produced goods from designated industries can also be stored in bonded warehouses, when applicable legislation dictates these goods meet export criteria. Foreign firms are permitted to import production inputs without paying taxes or customs duties for the manufacture of export goods.

The Customs Code permits the establishment of zones for manufacturing and export purposes, but none have been established yet.

Foreign Direct Investment Statistics

Kosovo does not currently have a formalized system for collecting foreign direct investment data. The Investment Promotion Agency of Kosovo (IPAK) estimates over 2,800 foreign companies of all types and sizes are currently operating in Kosovo. Central Bank figures show the Euro zone crisis has had an impact on the level of FDI with €86.2 million invested in Kosovo in the first half of 2012, or about 50% less than in the same period of 2011. The top foreign investors by country for the first half of the previous year were: Turkey (€21.8 million), Switzerland (€20.1million), Germany (€19.8 million), UK (€10.6 million) Slovenia (€5.4 million) and USA (€3.7 million). Top sector investments for foreign businesses at the end of the second quarter include real estate (37%), construction (27%), financial services (9%), production (7%), transport and telecommunications (5%), trade services (3%), advisory services (3%) and other (9%).

Web Resources

[This is a mobile copy of Kosovo]