VZCZCXYZ0000
RR RUEHWEB

DE RUEHBW #1765/01 3000831
ZNR UUUUU ZZH
R 270831Z OCT 06
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 9634
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS BELGRADE 001765 
 
SIPDIS 
 
DEPT FOR EUR/SCE/DSCHROEDER AND CRIEHL AND EB/CBA 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: PREL PGOV EINV ECON SR
SUBJECT:  SERBIA OFFERS INCENTIVES TO FOREIGN INVESTORS 
 
REF:  Belgrade 531 
 
SUMMARY 
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¶1. (U) Attracting foreign direct investment is increasingly 
becoming a priority for the Serbian government.  The GOS is 
developing a range of incentives for investors, including 
cash grants to investments resulting in significant job 
creation, as well as tax incentives in the form of credits 
and reduced corporate tax rates.  Finance Minister Dinkic 
announced on October 21 that a British apparel manufacturer 
would be the first grant recipient, snaring a EUR 6 million 
subsidy for a plant in Vranje that will employ 3,000. A 
proposed Law on Foreign Investments is in parliamentary 
procedure, but its future is uncertain due to implementation 
concerns and opposition from the World Bank and the Serbian 
Investment and Export Promotion Agency (SIEPA). The GOS 
incentives are particularly aimed at stimulating greenfield 
investments.  END SUMMARY. 
 
¶2. (SBU) Greenfield investments in Serbia have been rare.  U.S. 
can manufacturer Ball Packaging was the first major project, 
and Slovenia's Gorenje on October 16 opened a EUR 20 million 
factory in Valjevo that will employ 330 (later, up to 1,000) 
in the manufacture of refrigerators and freezers.  Minister 
of International Economic Relations (MIER) Milan Parivodic 
announced at the factory that FDI will reach USD 3.5 billion 
by the end of the year.  Serbian economic policy-makers are 
finally focusing on the need for greenfield investment if the 
country is to achieve a significant reduction in 
unemployment, which now is near 21 percent. Several donors, 
including USAID and the EU (through a project directed by the 
World Bank's Multilateral Investment Guarantee Program), are 
working with Serbian agencies as they seek to modify the 
legal and physical infrastructure for investment. 
 
FINANCIAL INCENTIVES FOR JOB CREATION 
------------------------------------- 
¶3. (U) In order to provide further financial incentives for 
greenfield investments in specific industries, the GOS 
adopted a decree in late June 2006 to permit cash grants to 
investment projects in all areas, except for trade, tourism, 
hospitality and agriculture.  Eligible companies are those 
establishing new ventures in manufacturing, services 
activities that can be marketed internationally, and the 
research and development (R&D) sector.  For each of these 
areas, the incentives and conditions are as follows: 
 
Investments in manufacturing: 
--  Available funds: starting at EUR 2,000 up to EUR 5,000 
per every new employee, 
--  Minimum investment: between EUR 1 million and EUR 5 
million, depending on the unemployment rate in the 
municipality where the investment is made, 
--  Minimum number of new positions: 50. 
 
Investments in international services: 
--  Available funds: starting at EUR 2,000, up to EUR 10,000 
per every new employee, 
--  Minimum investment: EUR 1 million 
--  Minimum number of new positions: 10. 
 
Investments in the R&D sector: 
--  Available funds: starting at EUR 5,000 up to EUR 10,000 
per every new employee, 
--  Minimum investment: EUR 1 million, 
--  Minimum number of new positions: 10. 
 
¶4. (U) Investment projects will be reviewed and scored by 
Serbia's Investment and Export Promotion Agency (SIEPA), 
based on predetermined criteria.  Upon a successful 
evaluation by a five-member commission represented by the 
Deputy Prime Minister's office, Ministry of Economy, Ministry 
of International Economic Relations (MIER), Ministry of 
Finance, and SIEPA, the funds will be paid out in four 
increments over the project?s life: 
 
1st increment: after concluding the contract for sale or 
lease of land, 
2nd increment: after obtaining construction approval, 
3rd increment: after obtaining the right-to-use permit, 
4th increment: after achieving full employment envisaged by 
the investment project. 
 
¶5. (U) For example, UK-based Alena Ltd. recently announced 
plans to build an apparel factory in Vranje.  This greenfield 
investment is expected to generate 3,000 new jobs and produce 
100,000 garments weekly.  Alena submitted an application to 
receive a cash grant for the investment project, and on 
October 20, the GOS awarded the first installment of EUR 6 
million. Alena purchased one division of existing apparel 
manufacturer Yumco, and it also will lease space from Yumco 
during the construction phase. 
 
¶6. (U) The commission scores and evaluates projects based on 
the following criteria: 1) investor?s references, 2) 
participation of domestic suppliers in the final product and 
investment effect on local companies, 3) investment?s 
sustainability and viability, 4) effect related to R&D, 5) 
effect on human resources, 6) environmental impact, 7) 
international turnover of services for investments in this 
area, 8) effect on development of the local community, and 9) 
municipality support related to deduction of local fees.  The 
final cash grant will be based on the final score of the 
project. 
 
¶7. (U) In a press conference of the contract signing with 
Alena Ltd, Minister of Finance Mladjan Dinkic announced that 
the GOS is ready to offer EUR 20 million to 100 million from 
the National Investment Plan to a foreign company willing to 
open a new automobile factory in Kragujevac, home of the 
failing Zastava Automobile factory.  He said that just this 
week Serbia is the process of concluding five greenfield 
investments that will employ some 5,000 people in Vranje, 
Uzice, Valjevo, Indjija and Kragujevac. 
 
¶8. (U) In addition, the GOS has obligated EUR 45 million for 
municipalities to develop industrial parks where various 
companies could be concentrated in one location sharing the 
same infrastructure.  According to SIEPA, some 49 
municipalities have submitted industrial park proposals for 
funding consideration. 
 
TAX INCENTIVES 
-------------- 
¶9. (U) Serbia?s tax law has recently been amended to offer 
several tax incentives to new investors.  Corporate profit 
tax is levied under current law at the uniform rate of 10 
percent, with non-residents taxed only on income earned in 
Serbia.  Companies under the current law are exempt from 
corporate profit tax for up to 10 years, starting from the 
first year in which they realize profit, if: 1) they invest 
in fixed assets an amount exceeding 600 million dinars 
(approximately EUR 7.5 million) and 2) during the investment 
period employ at least 100 additional employees for an 
indefinite period. 
 
¶10. (U) Companies that do not meet the requirements for the 
10-year exemption still may utilize an investment tax credit 
that permits a reduction in tax due equal to 20 percent of 
the amount invested in fixed assets for the respective tax 
period.  This reduction may exceed 50 percent of the total 
tax liability.  If not used entirely in the course of one 
year, this tax credit can be carried forward for a maximum of 
10 years. 
 
¶11. (U) A number of sectors (agriculture, production of 
textile yarn and fabrics, garment manufacture, leather 
processing, production of base metals and standard metal 
products, production of any sort of machinery, electronic 
goods, medical instruments, or motor vehicles, recycling, and 
video production) may obtain a tax credit in the amount of 80 
percent of investments made in fixed assets, with the unused 
portion to be carried forward for up to 10 years.  Small 
enterprises outside of these sectors may receive tax credits 
equal to 40 percent of the amount invested in fixed assets in 
the current year (credit not to exceed 70 percent). 
 
¶12. (U) In addition, the tax law offers incentives for 
employing new workers.  A taxpayer who employs new workers is 
entitled to a tax reduction equal to 100 percent of the gross 
salaries.  This tax credit is recognized for two years from 
the day of employment of new workers, provided that the 
number of employees is not reduced during that period. 
 
¶13. (U) A taxpayer generating profit from a newly-established 
operating unit in an underdeveloped region (as designated by 
the GOS) will receive a tax credit for two years in an amount 
proportionate to the profit of that unit in the overall 
profit of the company. 
 
¶14. (U) The tax law also provides for accelerated 
depreciation of fixed assets, tax exemptions for concession- 
related investments, social insurance contribution 
exemptions, income tax credits, and customs duty exemptions 
for certain goods and equipment imports.  Drawback provisions 
of various kinds are also stipulated in the customs law, 
providing for a suspension of customs duties on certain 
imports inputs which will be processed and re-exported. 
 
¶15. (U) Recent modifications to the Law on Income Tax in July 
2006 provide additional, age-based tax incentives to 
employers.  For hiring new employees younger than 30 years of 
age or older than 50, employers are exempt from social 
contributions for three years.  For new employees ages 45 to 
50, employers pay only 20 percent of the required 
contributions for three years.  Currently, employers pay 73 
cents on the dollar in social contributions, but after 
January 1, 2007, the rate will be reduced to 61 cents on the 
dollar. 
 
UNCERTAIN FUTURE FOR PROPOSED LAW ON FOREIGN INVESTMENT 
--------------------------------------------- ---------- 
¶16. (U) On July 27, the GOS adopted the draft Law on Foreign 
Investments for submission to Parliament.  Minister Milan 
Parivodic of MIER personally drafted the proposed 
legislation, which would regulate foreign investments in 
Serbia and guarantee freedom of investment and investment 
rights to foreign investors.  The law also envisages the 
establishment of a special procedure for the purpose of 
"prompt and efficient implementation of foreign investment," 
the so-called "one-stop shop." 
 
¶17. (U) The draft law requires the creation of one-stop shops 
at the municipality level to facilitate and service the terms 
of investment agreements signed between the investor and the 
municipality.  These agreements would spell out the 
obligations of both parties during the investment process. 
 
¶18. (U) The draft law also stipulates criteria for 
categorizing certain investments as ?of general interest.? 
For these larger investments, MIER would be the responsible 
entity for the one-stop shop.  Article 46 of the law also 
provides for offering special incentives to these investors, 
such as lower real estate and rental prices, construction of 
infrastructure by the republic, grants for new jobs created, 
etc. 
 
¶19. (U) Although there is consensus that FDI is important to 
Serbia?s future economic development, many have expressed 
doubts that this law will produce the efficient investment 
facilitation it seeks to achieve.  Jasna Matic, director of 
the Serbian Investment and Export Promotion Agency (SIEPA), 
told econoffs that this law is too complex and may actually 
be counterproductive to foreign investment promotion. 
 
¶20. (U) Matic said that most municipalities and MIER lack the 
capacities to implement the one-stop shop.  She also 
complained that SIEPA was not consulted during the drafting 
of the law.  In fact, SIEPA is not mentioned once in the law, 
and it is unclear what role SIEPA would play in investment 
facilitation.  For continuity purposes, Matic advocates for 
one entity to support the investor from start to finish of a 
project. 
 
¶21. (SBU) Matic stated that the government?s role, MIER 
specifically, should be to create a level playing field for 
investors.  By subjecting investors to another layer of 
bureaucracy with project committees and investment agreements 
that explicitly state what both parties will do, she fears 
that this will send the wrong message to investors and that 
they will look elsewhere for ?easier? investments.  Matic 
told econoffs that she would ask the Speaker of Parliament to 
pull it from Parliament?s agenda.  (Note: Speaker Predrag 
Markovic, until recently, was a member of the G17 party, as 
is Matic.  Parivodic's position, on the other hand, is an 
appointment controlled by Prime Minister Kostunica's 
Democratic Party of Serbia; partisan politics may play a role 
in the strained relations between G17 and the Ministry.) 
 
¶22. (U) Carolyn Jungr, Director of the WB in Serbia, sent a 
letter to the GOS on August 17 expressing concerns over the 
the law on foreign investments.  The fact that the Ministry's 
law does not mention the government's investment promotion 
agency, SIEPA, sends an unfortunate signal to the investment 
community.  She said that the proposed law introduces a 
significant degree of uncertainty about the treatment of 
investors through discretionary authority for providing 
services and granting incentives, while potentially 
increasing the bureaucratic requirements under which 
investors may obtain such services.  She also voiced concerns 
over "codifying the unproven one-stop shop in a law," and 
stated that many of the concepts prescribed in the draft law 
are not in line with international best practice and could 
have a negative impact on investor perceptions of Serbia. 
 
¶23. (U) Jungr told econ chief that her primary concern at 
this point was not the foreign investment law, but a 
companion law on industrial parks.  In a letter to the GOS on 
August 25, she criticized a provision that appears to require 
private ownership of such parks, stating that this model 
would create complications, bureaucratic procedures and 
significant uncertainty for investors.  She raised several 
questions based on the current draft: Who would own the 
infrastructure at the parks?  If the infrastructure is 
privately owned, why would the Government provide a large 
share of the financing?  If the land is to be owned 
separately from the industrial park, how will the 
relationship between the land owner and the park owner be 
regulated?  Jungr also said that it would be more prudent for 
the GOS to develop a strategy first, then draft the law based 
on the strategy.  (Parivodic later told the Ambassador that 
it was not the intent of the law to prohibit the 
establishment of non-private industrial parks.) 
 
POLITICAL CLIMATE COULD DELAY LARGE PRIVATIZATIONS 
--------------------------------------------- -- 
¶24. (SBU) Considering that Parliament will meet only once 
between the referendum on the new constitution and the 
expected parliamentary elections, some 40 laws in procedure 
(including the draft Law on Foreign Investments) almost 
certainly will be adopted only after election of a new 
government.  In addition, Finance Minister Dinkic said on 
October 16 that the new government will finish the process of 
privatization, stating that the sale of Serbian Oil Company 
(NIS) would be delayed.  (However, sources at the Ministry of 
Economy told econ chief that the NIS tender would be delayed 
because of a technical error in the tender documentation, 
regarding the number of shares to be purchased by workers, 
and Dinkic's intervention was gamesmanship.  Other sources at 
the Agency for Privatization told us that the tender for 
copper mine RTB Bor would be delayed only because many would- 
be bidders needed more time.) 
 
 
COMMENT 
------- 
¶23. (SBU) The important story is not the debate over which 
mechanism to use in supporting foreign investors in Serbia. 
Rather, it is the increased GOS realization that FDI is 
essential to future economic development.  The GOS is taking 
steps towards removing administrative barriers while using 
FDI incentives to encourage job creation.  Recognizing a gap 
at the local level in facilitating foreign investment, the 
Embassy plans to work with economically active and important 
municipalities through USAID's Municipal Economic Growth 
Activity (MEGA) program to build the capacity of cities to 
attract and retain investments.  We expect to announce very 
soon an expansion in this aspect of the MEGA program from 10 
to 24 municipalities. 
 
POLT