118     UMAR      IB revija  1-2/2006
This paper gives an overview of the current situation
and trends in direct taxation in Southeastern
Europe (SEE). Here, SEE refers to the countries
of the former Yugoslavia plus Albania, Bulgaria
and Romania. Some data on the Czech Republic,
Hungary, Poland and Slovakia is also included for
comparison. Although all of the countries of SEE
had some form of socialist government, there were
three distinct types: Albanian, Soviet and Yugoslav.
The countries that emerged from the former
Yugoslavia started with the same system. Clearly
some have changed more than others. Slovenia,
with by far the highest standard of living (Table
1), has now joined the European Union as will
Bulgaria and Romania soon. EU membership is a
real possibility for the other countries in the region
as well and all are moving towards modern
European tax systems.
The EU does not require the same level of
uniformity in direct taxes as it does for indirect
taxes. There have been several attempts by the EC
Commission to harmonize direct taxation, but so
far the main agreement has been a minimum level
of taxation for savings (European Commission,
2000). The desire of all these countries to join the
EU means that they are ready to adapt their tax
systems more quickly than might otherwise be the
case.
Section One will give a bit of background of the
region, par ticularly of the former Yugoslav
countries. Section Two will discuss the current
direct tax systems and recent changes. Section
Three will give some thoughts on the future
development.
1. Background
Much has changed in the region since the mostly
peaceful falling apart of the Soviet Union’s sphere
of influence and the violent breakup of Yugoslavia.
In socialist systems, taxes were more of a residual
resulting from government decisions as to
Jean Tesche*
Direct Taxation in Southeastern Europe
*Professor, Sarajevo Graduate School of Business, E-mail: jtesche@aol.com. Paper prepared for the “International Academic
Forum on Flat Tax Rate”, Center for Excellence in Finance, Bled, Slovenia, 3-4 February 2006
production, wages and prices than an explicit policy.
Albania had a more extreme form of this before
1990, with state control of virtually all of the
economy. In all three types of systems, any taxes
on wages were invisible to wage earners, who
received the net amount.
Yugoslavia started the period of transition from
Socialist systems towards the end of the 1980s with
a relatively high standard of living. The country
was fairly open and seemed to have found the
middle way between strict socialism and the
market. However, 15 years later, five of Yugosla-
via’s six republics are independent countries and
Kosovo, one of two autonomous provinces, is under
United Nations protection. The standard of living
in most of the former Republics is still below that
in the 1980s. One obvious reason for the drastic
economic deterioration was the series of internal
wars that devastated parts of former Yugoslavia in
the 1990s. The slow collapse of the Yugoslav self-
managed economy in the 1980s is a less obvious
reason.
Meanwhile, other former socialist countries have
developed rapidly and joined the European Union
(EU). Their standards of living far surpass that
in most former Yugoslav countries. Slovenia is
the exception. It has progressed rapidly economi-
cally and joined the EU. Table 1 gives recent
figures for population, GDP and GDP per capita
for the region from the EBRD Transition Report
(2005).
Of the former-Yugoslav republics, both Bosnia and
Herzegovina (BiH) and Serbia and Montenegro
(S&M) need some extra comment. The Dayton
Peace Accords which ended the conflict in Bosnia
and Herzegovina at the end of 1995 set up a
decentralized state with 2 Entities: the Federation
of BiH (Federation) and the Serb Republic
(Republika Srpska or RS). Taxes and custom
administration were set at the Entity level, with
only customs policy at the state level. A series of
laws as well as decrees from the Office of the High
Representative (OHR, set up by the UN to help
IB revija 1-2/2006       UMAR    119
implement the Dayton Peace Accords) beginning
in 2003 have moved indirect taxation to the State
level. The international community has played a
much bigger role in BiH than in other transition
countries, with the exception of Kosovo.
Serbia and Montenegro (called Yugoslavia, or rump
Yugoslavia until early 2003 when the name was
changed) is made up of two former republics plus
two autonomous provinces, Vojvodina and Kosovo.
Kosovo has been under UN protection since the
NATO bombing in 1999 and has its own tax system
set up by UN regulations. Montenegro is part of
the same country, but has a completely separate
system, including a separate currency and customs.
A referendum on independence is scheduled for
April of this year. Vojvodina is now an integral
part of Serbia.
2. Direct Taxes
Personal Income Taxes
For personal income taxes, the general movement
in the region has been towards fewer rates and a
decrease in the top marginal rate. Romania and
Slovakia have introduced flat taxes. Tables 2 and
3 summarize the current personal income tax
systems in SEE and some Central European
countries. We will start with the non-former
Yugoslav countries.
Albania, the poorest country in the region (Table
1) had and still has the highest number of rates,
with 6, ranging from 0-30%. This is a decrease from
7 in 2004. The highest, 30%, is reached at a
relatively low 4000.
Bulgaria has the second highest number of rates
with 5, ranging from 0-24%, also reached at a fairly
low threshold of around 3000. The top three rates
are quite close at 20, 22 and 24%. A top rate of
29% was added in 2004, but dropped again in 2005,
along with a 26% rate.
Romania introduced a single rate of 16% in June
2005. Previously there had been 5 rates ranging
from 18-40%.
In pre-war Yugoslavia, the six republics and two
provinces had a great deal of autonomy over direct
taxation. They had progressive income taxes
on total personal income, but it covered only
income greater than a multiple of average net
income. Most workers did not pay this tax. The
top marginal rate was as high as 80%. The Federal
level relied mainly on indirect taxes (Lydall,
1989).
The two Entities in Bosnia and Herzegovina, the
Federation and the RS, still have the closest to the
Yugoslav system, with its number of different taxes
and rates. Only rates have changed in the
Federation since new Entity laws were passed in
1996-7 to replace the pre-war Republic laws. In
the RS, however, a bold experiment in regressive
rates was introduced in 1998. Reform of the direct
tax system in both Entities is planned for 2006.
Wages are now taxed at a single rate in both
Entities: 5% in the Federation and 10% in the RS.
Other sources of income are taxed separately at
different rates in both: varying from 30-50% in the
Federation and 25-45% in the RS. In the
Federation, wage tax rates are down from 15% since
1996, changed to 10% after 2000. In the RS, a
regressive system was in place between 1998 and
2001 with rates ranging from 25 to 0% (see Tesche,
2005 for a more complete history of BiH taxes).
Croatia overhauled the inherited Yugoslav tax
system in1994. It now has 4 rates between 15-45%,
The top rate, which is reached at more than
35.000, was added after 2000. An additional
amount up to 18% can be levied on incomes by
municipalities.
Macedonia has two rates of 15% and 18%. The
number of rates has decreased and the rates have
been decreased from 23, 27 and 35% in 2003.
For most of the 1990s, (rump) Yugolavia had a
number of Federal level tax laws on the books.
These were basically ignored by both Serbia and

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IB revija 1-2/2006       UMAR    121
Montenegro, who pursued their own tax reforms.
Montenegro introduced a global income tax in
2002. It now has 4 rates, ranging from 0-23%, with
the highest reached at a low 4500. All rates were
decreased by 2% in 2003.
Serbia now has what looks closer to a single rate,
but is a hybrid. There is a single 14% rate on salaries,
agricultural and self employment income, plus an
additional 10% on annual incomes over 4 times
the average salary. Some other forms of income,
mostly capital income, are taxed at 20%. In
addition, up to another 3.5% can be levied on
salaries and wages by municipalities.  Serbia had
previously introduced a single rate of 20% on wage
income, which was decreased to 14% in 2003. Non-
wage income had been subject to progressive rates
of 24-40% with the citizen’s income tax since the
mid-1990s. This was changed to 20% for most types
of income in 2003, with 10% for agriculture and
self employment income (see Tesche, 2005). A
“synthetic” tax is planned for 2006, which would
tax all aggregated non-wage income at 10%.
The tax system in Kosovo has been put in place
via UN regulations. The personal income tax has
4 rates between 0-20%, with the maximum reached
at 5400.
Finally, Slovenia has 5 rates, from 16-50%, with the
highest reached at incomes more than  43.000.
The number of rates has been decreased from 6 in
2003, and most have been lowered slightly.
By comparison, the Central European countries
mostly have fewer rates. The Czech Republic has
the most with 4 rates, between 15 and 32%, with
the maximum reached at incomes of 11.000.
Poland follows with 3 rates between 19% and 49%,
with a much higher threshold of over  18.000 for
the highest rate. Hungary has only 2 rates, 18 and
38%. The higher rate is reached at a relatively low
level of around 6000. Finally Slovakia has
introduced a single 19% rate in 2004, replacing 5
rates ranging between 10-38%.
Note that three countries have a 0% rate: Albania,
Bulgaria and Montenegro. Of these, Albania and
Bulgaria allow no personal allowances or
deductions. All countries without a 0% bracket
have some type of personal allowance, deduction
or credit, as does Montenegro.
Social contributions in the region are fairly high.
The combined employer and employee
contributions are under 40% of wages only in
Croatia, Macedonia and Slovenia, as well as in
Poland. They are close to 50% in Romania, the
Czech Republic, Hungary and Slovakia. The others
fall somewhere in between 40-50% (Tables 2 and
3).
Corporate Income Taxes
Corporate taxes also vary widely. While the
statutory rate tells only a part of the story, the trend
has been downward in most cases. Rates are now
less than 20% in most of these countries. They are
9-10% in the RS, Montenegro and Serbia, and
between 10-20% in Bulgaria, Croatia, Kosovo,
Macedonia, and Romania. They are also between
10-20% in Hungary, Poland and Slovakia. The
highest rates are in Albania (23%), Slovenia (25%),
the Czech Republic (26%) and the Federation of
BiH (30%). Between 1998 and 2001 corporate tax
rates in the RS of BiH were regressive, with 4 rates
between 20-10%.
3. Future Developments
Most countries in the region have implemented
or are in the process of implementing modern
direct tax systems. Although this has usually meant
introducing a global income tax, there is some
movement away from a fully global tax in European
countries. Final withholding at a single rate on
some types of income, such as interest on savings
or capital gains is becoming more common. As
SEE countries join the EU, or at least prepare for

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122     UMAR      IB revija  1-2/2006
accession, they will continue to develop their tax
systems. There may be more moves toward harmo-
nization of direct tax regimes within the EU,
although any changes in the tax area require
unanimity.
As can be seen from the introduction of a single
flat rate of income tax, as well as in other areas
such as pension reform, some former socialist
countries are now at the forefront of change in the
tax area. It may be that the experiences in Romania
and Slovakia and the others implementing bold
reform will lead the way for “old” Europe.
Sources
European Bank for Reconstruction and Development,
“Transition Report 2005: Business in Transition”,
London, 2005.
European Commission, “Tax Policy in the European
Union:, EC Directorate-General for Taxation and
the Customs Union, Luxembourg, Office for Official
Publications of the EU Communities, 2000.
International Bureau of Fiscal Documentation,
“European Tax Handbook, 2004”, 2005.
Lydall, Harold, “Yugoslavia in Crisis”, 1989, Oxford
University Press, Oxford.
Ministry of Finance, Croatia, www.pu.mfin.hr.
Ministry of Finance, Federation of Bosnia and
Herzegovina, www.fmf.gov.ba.
Ministry of Finance, Macedonia, www.finance.gov.mk.
Ministry of Finance, Montenegro, www.ministarstvo-
finansija.cg.yu.
Ministry of Finance, Serb Republic, BiH,
www.vladara.net.en/min/mf/html.
Ministry of Finance, Serbia, www.mfin.sr.gov.yu.
Ministry of Finance, Slovenia, www2.gov.si/zak.
Ministry of Finance and Economy of Kosova,
www.mfe-ks.org.
PriceWaterhouseCoopers, “CEE-CIS Tax Notes”,
Issue 5/1, Annual, 2005.
Tesche, Jean, «Tax Reform in Bosnia and
Herzegovina and Serbia and Montenegro: Progress
and Problems», Proceedings of the Economics Faculty
(Zbornik Radova Ekonomskog Fakulteta), Vol. 23,
no. 2, 2005, University of Rijeka, Croatia.
Tesche, Jean, “Tax Harmonization or Competition:
Croatia and Neighboring Countries”, Paper prepared
for the 41st ERSA Conference, 29August-1
September 2001, Zagreb, Croatia.