Factoring: The Legal Framework Factoring is in its infancy in BiH. There is no Law on Factoring, but one can make out a legal framework for factoring in a number of different entity laws. The existence of official legal regulations does not guarantee business efficiency. When it comes to the legal environment for factoring, the execution of contracts and efficiency of the courts in dealing with claims are particularly important. It is especially important that contracts be completed or fulfilled in timely fashion, when companies start doing business with new customers. Domestic Legislation for Factoring As noted, BiH does not have a law on factoring. This does not mean that there is no legal framework. A number of entity laws, in combination, provide a legal framework within which factoring can be carried out: The Law on the Property of Legal Entities (1984/1992, Official Gazette of the RBH 2/92) The Law on Obligations adopted in 1978 (Official Gazette of the SFRJ 29/78 and others) The Law on Companies (Official Gazette of the FBiH 23/99, Official Gazette of the RS 127/08) The Law on Banks (Official Gazette of the FBiH 39/98 and 14/02, Official Gazette of the RS 44/03) - There is nothing in this law to prevent factoring being a separate industry The Law on Company Registration (Official Gazette of the FBiH 4/2000; Decision in the Official Gazette 12/00, 23/00) The Law on the Central Bank (Official Gazette of BiH 1/97). The Bankruptcy Law (Official Gazette of the RS 67/02, Official Gazette of the FBiH 29/03) The Law on Liquidation (Official Gazette of the FBiH 29/03, Official Gazette of the RS 64/02). Bankruptcy At the beginning of July 2003 the Bankruptcy Law was modified (Official Gazette of the FBiH 29/03, Official Gazette of the RS 67/02) after the German law. Most of these changes are favourable to factoring. The chapter on restructuring is important for factoring. The basic idea behind this regulation is that insolvent debtors do not have to be excluded from business or private life. In accordance with the ‘insolvency plan,' i.e. the restructuring plan, a number of business arrangements may be retained to keep an insolvent debtor in business. The factor may actively participate in them and retain either its or the client's rights in cases of insolvency. Liquidation The Liquidation Law was adopted at the same time as the bankruptcy regulations (Official Gazette of the FBiH 29/03, Official Gazette of the RS 64/02). What matters for factoring is that the new law retains control of the courts over liquidation processes and that creditors are directly protected by the liquidator. Law of Obligations The Law of Obligations contains general regulations on obligations, contracts and damages that apply to factors either directly or by interpretation. An amendment to the law (Official Gazette of the SFRJ 29/78, Official Gazette of the FBiH 29/03) contains the new assumption that interest on unpaid debt is assigned together with the principal. Contracts The Law on Obligations includes rules on how to make contracts (articles 26-83). It covers both contracts and optional contracts. Factors insist on written forms of contract. Assignment Assignment is the basic contractual instrument for transferring accounts receivable, which can be done independently or on the basis of assignment of the contract as a whole. Articles 436-445 of the Law on Obligations discuss assignment, requests relating to claims that cannot be assigned, or where the debtor has to be informed of the transfer. Contract of Guarantee Protection from failure to pay by the factor means that the client must be provided guarantees that accounts receivable will be paid, if not by the debtor then by the factor. So far as BiH law is concerned, there are two main ways of ensuring this: a contract of guarantee and a commission contract. Generally speaking, this regulation is favourable to factoring. Collection of Accounts Receivable Both BiH entities inherited the Law on Executive Procedure of the former Yugoslavia (Official Gazette of the FBiH 2/92, Official Gazette of the RS 17/93 and 14/94). It contains common and detailed provisions of continental law. In 2003, both entities adopted new laws on executive procedure (Official Gazette of the FBiH 32/03; Official Gazette of the RS 59/03). Factoring as a Service Article 23 of the BiH Law on Foreign Trade Policy (Official Gazette of BiH 7/98) and article 27 of the FBiH Law on Foreign Trade Business (Official Gazette of the FBiH 2/95) define factoring as a service. Regulations on Foreign Trade The main law governing foreign trade is the Law on Foreign Currency Business (Official Gazette of the FBiH 35/98). Law on Value-added Tax The BiH Law on Value-added Tax (VAT) was adopted in 2005. Article 25 (Official Gazette of BiH 09/05) lists the financial and monetary services that are exempt from VAT and does not include the payment of debts and factoring. This means that providers of factoring services (if they are taxpayers under the BiH Law on Value-added tax) should add 17% VAT to the price of their factoring services, making the overall cost of factoring higher. VAT is calculated on the factoring margin, which is on the difference between the amount paid by the factor for the debt and the amount collectible by him from the debtor. This margin includes VAT. Any additional factoring fee is also subject to VAT. The VAT is deductible by the original owner of the debt as input tax. In 2004, the Parliament of BiH passed the Law on the Export Credit Agency, creating an institutional framework for continuing the work of the Investment Guarantee Agency or IGA BiH. Article 8 of that law reads that all services of the IGA (including factoring) are exempt from VAT, thus giving it a competitive advantage over other factoring service providers. International Sources of Factoring Law BiH is not a member state of the UNIDROIT Convention on International Factoring, signed in Ottawa in May 1988. The international sources of factoring law are not incorporated within the international economic law of BiH in any systematic manner. In December 2001, the UN General Assembly adopted the Convention on the Assignment of Receivables in International Trade, the main goal being to promote the movement of goods and services across national borders by facilitating access to lower-cost credit. The Convention removes legal obstacles to certain international financing practices (such as factoring), unifies assignment law, provides law applicable to key issues (such as priority between competing claims) and facilitates the harmonization of domestic assignment laws. Two of the laws governing international economic law are particularly important: The Rulebook on the International Factoring Convention The Rulebook on the International Factoring Chain
