Croatia

Bureau of Economic and Business Affairs
Report
June 29, 2017

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Executive SummaryShare    

Despite continuing challenges, Croatia welcomes foreign investment. The government is willing to meet at senior levels with interested investors and to assist in resolving problems. Strengths in the Croatian economy include low inflation, a stable exchange rate, developed infrastructure, and membership in the European Union (EU). Historically, the most promising sectors for investment in Croatia have been tourism, telecommunications, pharmaceuticals, and banking.

Following a decade of growth from the end of the war in 1995, investment activity in Croatia has slowed substantially since 2008 and has remained under historic levels despite the economy’s emergence from recession at the end of 2015 and relatively robust growth in 2016. The banking system weathered the global financial crisis well, but has been saddled recently with financial costs related to the government-mandated conversion of Swiss Franc loans into euros in 2015. Croatia continues to maintain a large government bureaucracy, a state-owned sector with underperforming state enterprises, low regulatory transparency, and an inefficient judicial system. These factors contribute to poor economic performance and low levels of foreign investment. Croatia became a member of the EU in 2013, which has enhanced stability and should eventually provide new opportunities for trade and investment. Croatia, however, has yet to access a substantial amount of available EU funds, so not all direct economic benefits of EU entry have been felt. Like many newer EU member states, Croatia has struggled to put in place the necessary mechanisms and projects to efficiently absorb EU funds that would spur economic development.

The current government of Croatia came to power in October 2016 and has pledged to take legislative and administrative steps to reduce barriers to investment, streamline bureaucracy and public administration, and program EU funds more efficiently. The new Prime Minister, a former member of the European Parliament, has signaled his commitment to wide-ranging structural reforms in line with recommendations from the EU and global financial institutions. The Finance Minister is a business professional and well-regarded former Finance Ministry official. In addition to cutting the 2016 budget deficit to below EU-recommended levels, the new government enacted a comprehensive tax reform plan targeted at increasing consumer spending and reducing the tax burden for small and medium-sized enterprises. The new government is committed to further structural reforms including continuing the privatization of state assets, reforming public administration, and fully implementing the new law on public procurement.

The government is also committed to address persistent investor complaints about high “para-fiscal” fees, rigid labor laws, slow and complex permitting procedures, and a slow, sometimes unpredictable legal system. Promised reforms to date, however, have been halting in the face of opposition from vested interests and key groups.

Table 1

Measure

Year

Index/Rank

Website Address

TI Corruption Perceptions Index

2016

55 of 176

http://www.transparency.org/
research/cpi/overview

World Bank’s Doing Business Report “Ease of Doing Business”

2017

43 of 190

doingbusiness.org/rankings

Global Innovation Index

2016

47 of 128

https://www.globalinnovationindex.org/
analysis-indicator

U.S. FDI in partner country ($M USD, stock positions)

2015

$110 million

Croatian National Bank statistics: http://www.hnb.hr/en/statistics/statistical-data/
rest-of-the-world/foreign-direct-investments

World Bank GNI per capita

2015

$12,700

http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign InvestmentShare    

Policies Toward Foreign Direct Investment

Croatia is open to foreign investment and the Croatian government continues to prioritize attracting foreign investors. All investors, both foreign and domestic, are guaranteed equal treatment by law. There are no laws or practices that discriminate against U.S. investors, however, bureaucratic and political barriers remain. Investors agree that an unpredictable regulatory framework, lack of transparency in administrative procedures, and lack of structural reforms weigh heavily upon the investment climate. The Strategic Investment Act, helps investors streamline large projects. Various business groups, to include the American Chamber of Commerce and the Croatian Employers’ Association, are in dialogue with the government about ways to make doing business easier and to maintain existing investments.

Limits on Foreign Control and Right to Private Ownership and Establishment

Croatian business legislation allows for all entities, foreign and domestic, to establish and own businesses and to engage in all forms of remunerative activities. The Croatian government places restrictions on foreign ownership or control of services for inland waterways transport, maritime transport, rail transport, air ground-handling, freight-forwarding, publishing, education, and ski instruction. Otherwise there is no sector-specific legislation that discriminates against market access, apart from certain typical professional (architect, auditor, engineer, lawyer, veterinarian) requirements. Over 90 percent of the banking sector is foreign-owned and there are no investment screening mechanisms for inbound foreign investment. Article 49 of the Constitution states all entrepreneurs have equal legal status.


Other Investment Policy Reviews

The World Bank Group published a "Doing Business" Economic Profile of Croatia in 2017.

Business Facilitation

The government’s e-government initiative “Hitro.hr” (www.hitro.hr) provides 24-hour on-line business registration, although registering on weekends and holidays can delay registration for several days. Hitro.hr offices are located in more than 60 Croatian cities and towns. In order to begin business activities, a company needs to register with the Commercial Court, Notary Public, Tax Administration, Health and Pension agencies, and the State Statistics Bureau to obtain a company identification number. The average time it takes to register a business is four days.

The Global Enterprise Agency Rated Croatia’s Business Registration Process 4 out of 10, while the World Bank doing Ease of Doing Business has Croatia as 95th out of 190 countries in the category of registering a business, an improvement of four spots from 2016.

Outward Investment

There is not a government-based mechanism for incentivizing outward investment. There are no restrictions on domestic investors who wish to invest abroad.

2. Bilateral Investment Agreements and Taxation TreatiesShare    

Croatia has signed investment protection treaties/agreements with the United States and the following other countries, but not all of the agreements have entered into force:

Albania, Argentina, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Cambodia, Canada, Chile, China, Cuba*, Czech Republic, Denmark, Egypt, Finland, France, Greece, Germany, Hungary, India, Indonesia*, Iran, Israel, Italy, Jordan, Kuwait, Latvia, Libya, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Moldova, Mongolia*, Morocco*, Netherlands, Oman*, Poland, Portugal, Qatar*, Romania, Russia*, San Marino, Serbia, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Thailand, Turkey, Ukraine, United Kingdom, Zimbabwe*. (* entered into, but not yet in force)

All forms of investment by American citizens are covered by the U.S.-Croatian Bilateral Investment Treaty (BIT), which entered into force in June 2001. The treaty fulfills the principal U.S. objectives for agreements of this type. For further information about BITs and for the text of the U.S.-Croatian BIT please see www.state.gov/e/eb/ifd/bit/117402.htm (under “Croatia”).

Croatia and the U.S. do not have a bilateral taxation treaty. As a member of the European Union, Croatia implements avoidance of double taxation with the other 27 member states and has dual taxation agreements with the following countries:

Albania, Armenia, Azerbaijan, Belorussia, Bosnia Herzegovina, Montenegro, Chile, Georgia, India, Indonesia, Iran, Iceland, Israel, Jordan, South Africa, Canada, Qatar, China, South Korea, Kuwait, Macedonia, Malaysia, Morocco, Mauritius, Moldova, Russia, San Marino, Syria, Serbia, Switzerland, Turkmenistan, Turkey and Ukraine.

Recent changes to the tax regime reduced income and corporate taxes. The government has committed to simplifying the tax system in order to facilitate better business and more investment. The government introduced the binding tax opinion procedure in July 2015 which serves to eliminate last minute changes to tax legislation that could affect investment costs For detailed information see http://www.porezna-uprava.hr/bi/Stranice/Obvezuju%C4%87a-mi%C5%A1ljenja.aspx. There are a number of so-called non-tax “para-fiscal” fees or levies, which are an extra burden to business. The business community is currently working with the government to try to identify which of these fees will be eliminated.

3. Legal RegimeShare    

Transparency of the Regulatory System

All investors, foreign or domestic, are guaranteed equal treatment under all forms of market related legislation. Croatian legislation, which is harmonized with European Union legislation (acquis communautaire), affords transparent policies and fosters a climate in which all investors are treated equally. Croatia implements international accounting standards and abides by international practices through the implementation of the Accounting Act, which is applied to all accounting businesses. Nevertheless, bureaucracy and regulation can be complex and time consuming, although the government is actively removing unnecessary regulations. There are no informal regulatory processes and investors should rely solely on government issued legislation to conduct business.

The Croatian Parliament adopts all national legislation, which is implemented at every level of government throughout the country although local regulations vary from county to county.

New legislation and changes to existing legislation which could have a significant impact on citizens are made available for public debate. Once the government receives draft legislation, the full legislation is made available for public comment on the government website as part of their session agenda. Croatian courts are responsible for ensuring that laws are enforced correctly. If an investor believes that the law or an administrative procedure is not implemented correctly the investor may initiate a case against the government at the appropriate court. All legislation is published both on-line and in in the National Gazette, available at: www.nn.hr. The current government has pledged to implement regulatory reforms to ease business procedures, however, similar past announcements were never fully implemented.

Ministries develop regulations based on responsibilities. Working groups of subject matter experts draft laws for the Ministries, which then approve draft legislation which is sent to Parliament for final approval. Once Parliament approves an act, it becomes official per the date defined by Parliament.

Croatia has been a member of UNCTAD since 1992.

International Regulatory Considerations

Croatia, as an EU member, adopts all EU legislation. Domestic legislation is applied nationally and there is no locally based legislation that overrides national legislation. Local governments oversee zoning for construction and can therefore delay investment projects. International accounting, arbitration, financial and labor norms are incorporated into Croatia’s regulatory system.

Croatia has been a member of the World Trade Organization (WTO) since 2000 and maintains obligations to the WTO. There are no cases of dispute involving Croatia as complainant, respondent or third party.

Legal System and Judicial Independence

The legal system in Croatia is civil and provides for ownership of property and enforcement of legal contracts.

The Commercial Company Act defines the forms of legal organization for domestic and foreign investors. It covers general commercial partnerships, limited partnerships, joint stock companies, limited liability companies and economic interest grouping. The Obligatory Relations Act serves to enforce commercial contracts and includes the provision of goods and services in commercial agency contracts.

The Croatian constitution provides for an independent judiciary. The judicial system consists of courts of general and specialized jurisdictions. Core structures are the Supreme Court, County Courts, Municipal Courts, and Magistrate/Petty Crimes Courts. Specialized courts include the Administrative Court and High and Lower Commercial Courts. A Constitutional Court determines the constitutionality of laws and government actions and protects and enforces constitutional rights. Municipal courts are courts of first instance for civil and juvenile/criminal cases. The High Commercial Court is located in Zagreb and has appellate review of lower commercial court decisions. The Administrative Court has jurisdiction over the decisions of administrative bodies of all levels of government. The Supreme Court is the highest court in the country and, as such, enjoys jurisdiction over all civil and criminal cases. It hears appeals from the County, High Commercial, and Administrative Courts. The government continues efforts to reform the judiciary, including reducing the backlog of cases, reforming the land registry, training court officers and reducing the backlog and length of bankruptcy procedures.

Regulations and enforcement actions are appealable and adjudicated in the national court system.

Laws and Regulations on Foreign Direct Investment

There are no specific laws aimed at foreign investment. Both foreign and domestic market participants in Croatia are protected under the same legislation. The Company Act defines the forms of legal organization for domestic and foreign investors. The following entity types are permitted for foreigners: general partnerships; limited partnerships; branch offices; limited liability companies; and joint stock companies. The Obligatory Relations Act regulates commercial contracts.

The Agency for Investments and Competitiveness (www.aik-invest.hr/en) facilitates both foreign and domestic investment and is available to all interested investors for assistance. Their website offers relevant information on business and investment legislation and includes an investment guide.

Competition and Anti-Trust Laws

The Competition Act defines the rules and methods for promoting and protecting competition. In theory, competitive equality is the standard applied with respect to market access, credit and other business operations, such as licenses and supplies. In practice, however, state-owned enterprises and “strategic” firms may still be perceived to receive preferential treatment. The Croatian Competition Agency is the country’s competition watchdog, determining whether anti-competitive practices exist and punishing infringements. It has determined in the past that some subsidies to state-owned firms constituted unlawful state aid. Information on authorities of the Agency and past rulings can be found at www.aztn.hr. The website includes a “call to the public” inviting citizens to provide information on competition-related concerns.

Expropriation and Compensation

There have been no cases of expropriation of foreign investments by the government since Croatia’s independence in 1991. Article III of the U.S.-Croatia BIT covers both direct and indirect expropriations. The BIT protects against expropriations or nationalizations except those that are for a public purpose, carried out in a non-discriminatory manner, are in accordance with due process of law, and are subject to prompt, adequate and effective compensation.

Croatian Law on Expropriation and Compensation gives the government broad authority to expropriate real property under various economic and security-related circumstances, including eminent domain and strategic investments. However, it includes provisions that guarantee adequate compensation, in either the form of monetary compensation or real estate of equal value to the expropriated property in the same town or city. The law includes an appeals mechanism to challenge expropriation decisions by means of a complaint to the Ministry of Justice within 15 days of the expropriation order. The law does not describe the Ministry’s adjudication process, and the fact that the Ministry of Justice represents the government, which initiates expropriations, could be an area of potential concern. Parties not pleased with the outcome of the Ministry decision can take administrative action against the decision, but no appeal to the decision is allowed.

Dispute Settlement

ICSID Convention and New York Convention

There is no specific legislation that refers to the Washington Convention that established the Center for the Settlement of Investment Disputes (ICSID) ICSID, however Article 19 of the Act on Enforcement, states that judgments of foreign courts may be executed only if they “fulfill the conditions for recognition and execution as prescribed by an international agreement or the law,” and would be applied after an ICSID ruling.

Investor- State Dispute Settlement

Croatia is a signatory to the following international conventions regulating the mutual acceptance and enforcement of foreign arbitration: the 1923 Geneva Protocol on Arbitration Clauses; the 1927 Geneva Convention on the Execution of Foreign Arbitration Decisions; the 1958 New York Convention on the Acceptance and Execution of Foreign Arbitration Decisions; and the 1961 European Convention on International Business Arbitration. In 1998 Croatia ratified the ICSID Convention. The Croatian Law on Arbitration is implemented for both national and international proceedings in Croatia. Parties to arbitration cases are free to appoint arbitrators of any nationality or professional qualifications and Article 12 of the Law on Arbitration requires impartiality and independence of arbitrators. Croatia recognizes binding international arbitration, which may be defined in investment agreements as a means of dispute resolution. For example, the Croatian government has two open arbitration cases with a private investor in the national oil company. Article X of the U.S.-Croatia BIT provides for international arbitration of certain types of investment disputes.

International Commercial Arbitration and Foreign Courts

Alternative dispute resolution is implemented at the High Commercial Court, the Zagreb Commercial Court and six municipal courts around the country. In order to reduce backlog, non-disputed decisions are redistributed to public notaries. This reduces enforcement cases and the enforcement of judgments, over 10 percent of pending cases.

Although underutilized, both mediation and arbitration services are available through the Croatian Chamber of Economy. The Chamber’s permanent arbitration court has been in operation since 1965 Arbitration is voluntary and conforms to UNCITRAL model procedures. There are currently no arbitration matters involving U.S. companies, though one U.S-affiliated institution has been involved in an arbitration process for over three years. The Chamber’s Mediation Center has been operating since 2002 - see http://en.hgk.hr/about/mediation-centre. The Arbitration Act covers domestic arbitration, recognition and enforcement of arbitration rulings, jurisdictional matters and procedures. Once an arbitration decision has been reached, the judgment is executed by court order. If no payment is made by the established deadline, the party benefiting from the decision notifies the Commercial Court, which becomes responsible for enforcing compliance. Arbitration rulings have the force of a final judgment, but can be appealed within three months.

In regard to implementation of foreign arbitral awards, Article 19 of the Act on Enforcement states that judgments of foreign courts may be executed only if they “fulfill the conditions for recognition and execution as prescribed by an international agreement or the law.” The Act on Enforcement serves to decrease the burden on the courts by passing responsibility for the collection of financial claims and seizures to the Financial Agency (FINA), which is responsible for paying claimants once the court has rendered a decision ordering enforcement. FINA also has the authority to seize assets or directly settle the claim from the bank account of the person or legal entity that owes the claim. More information can be found at www.fina.hr. The Ministry of Justice is also pursuing a court reorganization plan that is intended to increase efficiency, and reduce the backlog of cases.

The World Bank Ease of Doing Business 2016 report commended Croatia for making enforcing contracts easier by introducing an electronic system to handle public sales of movable assets and by streamlining the enforcement process as a whole.

There are no major investment disputes currently underway involving SOEs other than the Croatian government vs. Hungarian oil company MOL in regard to disagreement over implementation of the purchase agreement of Croatian oil and gas company INA.

Bankruptcy Regulations

Croatia’s Bankruptcy Act is internationally harmonized and corresponds to the EU regulation on insolvency proceedings and United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. All stakeholders in the bankruptcy proceeding, foreign and domestic are treated equally in terms of the Bankruptcy Act. The World Bank Ease of Doing Business 2017 rating for Croatia in the category of resolving insolvency was 54, up three spots from the 2016 ranking of 57. Bankruptcy is not considered a criminal act.

The Financial Operations and Pre-Bankruptcy Settlement Act, help expedite proceedings and establish timeframes for the initiation of bankruptcy proceedings. One of the most important provisions of pre-bankruptcy is that it allows a firm that has been unable to pay all its bills to remain open during the proceedings, thereby allowing it to continue operations and generate cash under financial supervision in hopes that it can recover financial health and avoid closure.

The Commercial Court of the county in which a bankrupt company is headquartered has exclusive jurisdiction over bankruptcy matters. A bankruptcy tribunal decides on initiating formal bankruptcy proceedings, appoints a trustee, reviews creditor complaints, approves the settlement for creditors, and decides on the closing of proceedings. A bankruptcy judge supervises the trustee (who represents the debtor) and the operations of the creditors’ committee, which is convened to protect the interests of all creditors, oversee the trustee’s work and report back to creditors. The Act establishes the priority of creditor claims, assigning higher priority to those related to taxes and revenues of state, local and administration budgets. It also allows for a debtor or the trustee to petition to reorganize the firm, an alternative aimed at maximizing asset recovery and providing fair and equitable distribution among all creditors.

4. Industrial PoliciesShare    

Investment Incentives

The Investment Promotion Act (IPA), amended in 2015, offers incentives to investment projects in manufacturing and processing activities, development and innovation activities, business support activities and high added value services.

Specifically, the Act provides the following incentive measures: tax incentives for microenterprises, tax advantages for small, medium and large enterprises, incentives for eligible costs of new jobs linked to the investment project, incentives for eligible costs of training linked to the investment project, additional aid for development and innovation activities, business support activities and high value-added services, incentive measures for capital costs of the investment project, incentive measures for labor intensive investment projects and investment incentives for newly established enterprises in the minimum amount equivalent to $ 13.8 million provided that a minimum of 10 new university degree level jobs related to the investment project are created.

Incentive measures can be used by entrepreneurs - natural persons (craftsman) subject to income tax, or a company registered in the Republic of Croatia investing the minimum amount of $53,175 in fixed assets in addition to creating at least 3 new jobs for microenterprises (companies with up to 10 employees) and $160,000 in addition to creating at least 5 new jobs for small, medium and large enterprises.

Of particular interest are substantial available reductions in the tax rate on profits depending on the size of the investment and the number of new jobs created. A 50% reduction applies for a maximum of ten years for companies that invest up to $1.1 million ($53 thousand for microenterprises) and create at least five new jobs. This reduction increases to 75 percent for companies investing $1.1 -$3.2 million and creating at least 10 new jobs, and to 100 percent for companies that invest over $3.35 million and create at least 15 new jobs.

Incentives for new job creation range from to $1,276 to $9,571, depending on the investment. Nonreturnable financial support of 10% of expenses can be used to create new jobs, with support up to $3,190 per new position opening in counties with unemployment levels up to 10%. This support increases to 20% for opening new positions in counties with unemployment levels from 10 to 20%, with support up to $6,381. Non-returnable financial support of 30% is approved for expenses intended to create new positions, with support of $9,571 per new position opening in counties with unemployment levels above 20%.

There are also incentives for covering employee education and training connected to an investment project which can be used to cover up to 50% of the of education and training costs, or up to 60% if training is given to workers with disabilities or the aid is granted to medium sized enterprise or 70% if the aid is granted to small and microenterprises). All further information regarding these types of incentive can be found and calculated at http://www.aik-invest.hr/en/investment-guide/incentives-calculator/.

Additional incentives are also available for development and innovation activities that affect the development of new and significantly improving existing products, production series, manufacturing processes and / or production technologies; business support activities such as customer support, outsourced business activities centers or logistics and distribution centers which relate to investment projects in production and processing activities as well as programming and ICT centers; and high added value activities such as hospitality and tourism accommodation facilities categorized as four or five stars, heritage hotels and other types of accommodation created by renovation of cultural and historical structures, supporting services of the aforementioned types of accommodations and health tourism, congress tourism, nautical tourism, cultural tourism, entertainment and/or recreation centers and parks, ecological tourism projects and other innovative projects in tourism with high added value as well as management, consulting and education services, creative services and industrial engineering services.

Incentives for capital costs of investment projects are approved for investments over $5.3 million, generating 50 new positions within 3 years of the start of the investment. Incentives of 10% of the cost of new factory construction, production facility construction or purchase of new equipment (max amount up to $0.5 million) in counties where unemployment rate is from 10-20% are also available. This incentive increases to 20% of investment cost (max amount up to $1.1 million) in counties where the unemployment rate is above 20%, with the condition that at least 40 % of the investment is machines/equipment that at least 50% of those machines/ equipment are of high technology.

Incentives for labor-intensive investment projects apply to labor-intensive investments creating new jobs within three years from the start of the investment. An additional incentive in the amount of 25% of the amount of incentive granted for new jobs is approved for investment projects creating 100 and more positions. The amount of the incentive increases to 50% for creating 300 and more jobs and the incentive in the amount of 100% refers to creating 500 and more jobs.

There are also investment incentives for investment in newly established enterprises in the minimum amount of $13.8 million, provided that a minimum of 10 new university degree level positions related to the investment project are created.

All further information regarding the types of incentive offered by the Agency for Investments and Competitiveness can be found and calculated at http://www.aik-invest.hr/en/investment-guide/incentives-calculator/

The Act on Strategic Investment Projects of the Republic of Croatia went into effect in November 2013. This Act facilitates and accelerates procedures for projects deemed to be of strategic interest for Croatia based on 12 conditions listed in the Act. Strategic projects can include private, public-private or public investments in economy, energy, tourism, transport, infrastructure, electronic communication, postal services, environmental protection, public utilities, agriculture, forestry, water management, fishery, health care, culture, science, defense, judiciary, technology and education. Private investment projects refer to the investments in Production and Processing Activities, Development and Innovation Activities, Business Support Activities, Activities of High Added Value Services, Activities in Energy Sector, Infrastructure and Activities related to Agriculture and Fisheries. A project may be considered strategic if it contributes to the employment of a large number of people, improves manufacturing or service standards, implements or develops new technologies, offers sustainable growth, or helps advance the competitiveness of the economy.

The minimum amount for an investment to be considered strategic is approximately $21.5 million. All investments over this amount may be considered as strategic, and will be entitled to accelerated permitting and registration procedures. Investments may also be treated as strategic if they are valued at $2.9 million or more, and are implemented in the assisted areas, or in the units of local (regional) self-government of the 1st group or in the units of local self-government of the 1st and 2nd groups, in accordance with the act governing the regional development of the Republic of Croatia or if they are implemented on the islands or are in the agriculture and fisheries sector. If the project has the possibility to be co-financed from EU funds and programs, the minimum amount for investment can be $10.7 million.

A guide and application materials for private investors interested in applying for status under the Act on Strategic Investment Projects of the Republic of Croatia can be found at http://www.aik-invest.hr/en/strategic-investment-projects/. A provisional translation of the Act is available at http://www.mingo.hr/public/documents/ZAKON%20O%20STRATE%C3%85%C2%A0KIM%20INVESTICIJSKIM%20PROJEKTIMA%20RH-ENG.docx, while the amendments are available at:

http://www.mingo.hr/public/investicije/ACT_ON_STRATEGIC_INVESTMENT_PROJECTS_29-1-15.doc

The Construction Act allows investors to secure permits through an e-licensing system, which is a novelty in an otherwise cumbersome permit acquisition procedure. The investor may obtain a license valid for three years, which will allow for a three percent change in the dimensions of the project from start to finish. The e-licensing system can be accessed at https://dozvola.mgipu.hr/ Interested investors looking for an available land for a greenfield investment may find useful Business-zones database operated by the Agency for Investments and Competitiveness at http://www.aik-invest.hr/en/zone/.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are currently 12 Free Zones operating in Croatia. Contact information for each of the Free Zones can be found at the following website under the Croatia category:

http://ec.europa.eu/taxation_customs/resources/documents/customs/procedural_aspects/imports/free_zones/list_freezones.pdf. Both domestic and foreign investors are afforded equal treatment in the trade zones. After Croatia entered the European Union in 2013, many of the Free Trade Zones that operated throughout Croatia were slowly substituted by Industrial/Business zones. Investment incentives are available in these zones. For more information regarding these zones go to http://www.aik-invest.hr/en/zone/

Performance and Data Localization Requirements

Croatian law does not impose performance requirements on or mandate employment requirements to foreign or domestic investors, nor are senior management or board of directors positions mandated in private companies.

Although procedures for obtaining business visas are generally clear, they can be cumbersome and time-consuming. Foreign investors should familiarize themselves with the provisions of the Act on Foreigners. Questions relating to visas and work permits should be directed to the Croatian embassy or a Croatian consulate in the United States. The U.S. Embassy in Zagreb maintains a website with information on this subject at zagreb.usembassy.gov/service/other/entry.html.

There are no government imposed conditions are permission to invset, nor are there “forced localization” policies for investors in terms of goods and technology. There are no performance requirements and therefore there are no enforcement procedures for performance requirements. Foreign IT providers are not required to turn over source code or give access to surveillance. There are no measurements that prevent companies from freely transmitting customer or other business related data outside the country’s territory. There are no requirements for investors to maintain or store data within the territory of Croatia.

5. Protection of Property RightsShare    

Real Property

The right to ownership of private property is established in the Croatian Constitution and in numerous acts and regulations. A foreign physical or legal person incorporated under Croatian law is considered to be a Croatian legal person and has the right to purchase property. The Ownership and Property Rights Act establishes procedures for foreigners to acquire property by inheritance as well as legal transactions such as purchases, deeds, and trusts. Croatia implements a standard banking system, which provides for mortgages, while courts and cadaster offices handle reliable property records.

In order to acquire property by means other than inheritance or as an incorporated Croatian legal entity, foreign citizens require the approval of the Ministry of Justice. Approval can be delayed , owing to a lengthy interagency clearance process. While citizens of EU member states are afforded the same rights as Croatian citizens in terms of purchasing property, the right of all other foreigners to acquire property in Croatia is based on reciprocity. Reciprocity exists on a state-by-state basis with the United States. Croatia’s Ministry of Foreign and European Affairs has confirmed the existence of reciprocity for real estate purchases for residents of the following states: Alabama, Arizona, Alaska, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Louisiana, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New York, North Carolina, North Dakota, Rhode Island, Tennessee, Texas, Virginia, Washington, West Virginia, as well as Iowa and Oklahoma (with a condition of permanent residence). Residents of other states could face longer waiting periods while the Ministry confirms that Croatian nationals can purchase real estate in those states without restrictions. However, a foreign investor, incorporated as a Croatian legal entity, may acquire and own property without ministry approval, with the caveat that the purchase by any private party of certain types of land (principally land directly adjacent to the sea or in certain geographically designated areas) can be restricted.

When purchasing land for construction purposes, potential buyers should determine whether the property is classified as agricultural or construction land. The Agricultural Land Act allows for additional fees of up to 50 percent of the value of the land to be diverted from agriculture due to construction; as such, this law should be considered when purchasing land. The Agricultural Land Agency works with local governments to review potential agricultural land purchases. However, the Agricultural Land Act no longer covers the sale of privately owned farmland, which is now treated solely as the subject of a sales agreement between the parties. However, buyers of this type of land should be aware of potential unresolved legacy issues with land ownership. Land in Croatia is either publicly or privately owned.

Clarifying Croatia’s land registry system is an ongoing process. Although Croatia continues to process a backlog of cases, potential investors should seek a full explanation of land ownership rights before purchasing property. Note that Croatia’s land records are available online (see www.pravosudje.hr and www.katastar.hr). Katastar,hr includes information on over 14 million pieces of land throughout the country. There can be ambiguous and conflicting claims to property, making it necessary to verify that the seller possesses clear title to both land and buildings (which can be titled and owned separately). Inheritance laws have led to situations in which some properties can have claims by dozens of legal owners, some of whom are deceased and others of whom emigrated and cannot be found. The ownership of legally purchased property, which remains unoccupied, cannot be reverted to any other physical or legal entity. The World Bank Ease of Doing Business 2017 report ranks Croatia as 62nd out of 190 countries on ease of registering property.

It is also important to verify the existence of necessary building permits, as some newer structures in coastal areas have been subject to destruction at the owner’s expense and without compensation for not conforming to local zoning regulations. Investors should be particularly wary of promises that structures built without permits will be regularized retroactively. The Act on Legalization of Buildings and Illegal Construction came into effect in August 2012 and should help to resolve ambiguities regarding ownership of real estate.

Land ownership is distinct from ownership of buildings or facilities on the land. Investors interested in acquiring companies from the Office for State Asset Management (DUUDI) should seek legal advice to determine whether any deal also includes the right to ownership of the land on which a business is located, or merely the right to lease the land through a concession.
Inconsistent regulations and restrictions on coastal property ownership and construction have also provided challenges for foreign investors in the past. Legislation restricts coastal construction and commercial use within 70 meters of the coastline.

For all these reasons, it is highly advisable to seek competent, independent legal advice in this area. The U.S. Embassy maintains a list of English-speaking attorneys (zagreb.usembassy.gov/service/special-consular-services.html).

Intellectual Property Rights

Croatian intellectual property rights (IPR) legislation includes a Patent Act, Trademark Act, Industrial Design Act, Act on the Geographical Indications of Products and Services, Act on the Protection of Layout Design of Integrated Circuits, and the Act on Copyrights and Related Rights. These acts define the process for protecting and enforcing IPR. Texts of these laws are available on the website of the State Intellectual Property Office (https://www.dziv.hr/en/ip-legislation/national-legislation/).

Legislation pertaining to Intellectual Property Rights can be found at http://www.dziv.hr/en/ip-legislation/national-legislation/. No new legislation regarding intellectual property was enacted in 2016.

Croatian law enforcement officials keep public records of seized counterfeit goods. According to the latest available report from the Customs Office, in 2016, 102,595 counterfeit goods were seized, with 17 criminal proceedings initiated and 493 misdemeanors issued in relation to the seizures. Croatian customs officials and Ministry of Interior work together to locate and seize such goods.

Although some areas of IPR protection remain problematic, Croatia is currently not on the U.S. Special 301 Watch List nor is it listed in the notorious market report. Problem areas continue to be concentrated in piracy of digital media and counterfeiting. Due to its geographical position, Croatia is also one of the transit routes for various contraband products bound for other countries in the region. There have been no problems reported with regard to registration of intellectual property in Croatia by American companies. However, the American Chamber of Commerce in Croatia delivered to the Croatian government in May 2016 Recommendations for Improving the Enforcement of Intellectual Property Protection in Croatia based on discussions with their members in regard to treatment of intellectual property and can be found at http://www.amcham.hr/files/225/Recommendations%20for%20Improving%20the%20Enforcement%20of%20Intellectual%20Property%20Protection0.pdf.

As a WTO member, Croatia is a party to the Uruguay Round Agreement on Trade-Related Intellectual Property Rights (TRIPS). Croatia is also a member of the World Intellectual Property Organization (WIPO). For a list of international conventions to which Croatia is a signatory, consult the State Intellectual Property Office’s website at www.dziv.hr.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO's country profiles at http://www.wipo.int/directory/en/.

6. Financial SectorShare    

Capital Markets and Portfolio Investment

Croatia’s securities and financial markets are open equally to domestic and foreign investment. Foreign residents may open non-resident accounts and may do business both domestically and abroad. Specifically, Article 24 of the Foreign Currency Act states that non-residents may subscribe, pay in, purchase, or sell securities in the Republic of Croatia in accordance with regulations governing securities transactions. Non-residents and residents are afforded the same treatment in spending and borrowing. These and other non-resident financial activities regarding securities are covered by the Foreign Currency Act, available on the central bank website (www.hnb.hr).

Securities are traded on the Zagreb Stock Exchange (ZSE), established in 1991. Regulations that govern activity and participation in the ZSE can be found (in English) at: http://zse.hr/default.aspx?id=97. There are three tiers of securities traded on the ZSE. The Capital Markets Act regulates all aspects of securities and investment services, and defines the responsibilities of the Croatian Financial Services Supervisory Agency (HANFA). All legislation associated with the Capital Market act can be found (in English) at: http://www.hanfa.hr/regulations/capital-market/. There is sufficient liquidity in the markets to enter and exit sizeable positions. There are no policies that hinder the free flow of financial resources. No restrictions on payments and transfers for current international transfers exist in Croatia, and as such acts in accordance with IMF Article VIII. The private sector, both domestic and foreign owned, enjoys open access to credit and a variety of credit instruments on the local market on market terms.

Money and Banking System

The banking sector is now overwhelmingly privatized, consolidated, highly developed, competitive and increasing diversity of products to business (foreign and domestic) and consumers. French, German, Italian or Austrian companies own over 90 percent of banks, and in 2016 the first U.S. bank registered in Croatia (Addiko bank). The banking sector is healthy suffered no consequences during the last global banking crisis. More than 90 percent of total banking sector assets are foreign-owned. As of March 2017 there were 25 commercial banks and five savings banks, with assets totaling HRK 407 billion (USD 61.7 billion). The largest bank in Croatia is Zagrebacka Banka, with assets of HRK 124 billion (USD 18.8 billion), for a market share of 30.04 percent of total banking assets in Croatia. Second-largest is Privredna Banka Zagreb, with HRK 72 billion (USD 10.9 billion), or 17.06 percent of total banking assets. The third largest is the Erste Bank, with assets of HRK 56 billion (USD 8.5 billion), for a 13.76 percent market share in Croatia. The country has a central bank system and all information regarding the Croatian National Bank can be found at http://www.hnb.hr/ .

Non-residents are able to open bank accounts with no restrictions or delays.

Foreign Exchange and Remittances

Foreign Exchange

The Croatian Constitution guarantees the free transfer, conversion, and repatriation of profits and invested capital for foreign investments. Transfers of currency are additionally protected by Article VII of the International Monetary Fund (IMF) Articles of Agreement (http://www.imf.org/External/Pubs/FT/AA/index.htm#art7)

The Croatian Foreign Exchange Act permits foreigners to maintain foreign currency accounts and to make external payments. The Foreign Exchange Act also defines foreign direct investment (FDI) in a manner that includes use of retained earnings for new investments/acquisitions, but excludes financial investments made by institutional investors such as insurance, pension and investment funds. The law also allows Croatian entities and individuals to invest abroad. Funds associated with any form of investment can be freely converted into any world currency.

The exchange rate is determined by the Croatian National Bank. The National Bank intervenes in the forex market to ensure the Euro-Croatian kuna rate remains stable as an explicit and longstanding policy. However, the exchange rate of the Croatian kuna, while floating freely, is more tightly linked to the euro than the U.S. dollar. The risk of currency devaluation or significant depreciation is low.

Remittance Policies

There are not limitations, either temporal or by volume, on remittances. The government does not engage in currency manipulation. The U.S. Embassy in Zagreb has not received any complaints from American companies regarding transfers and remittances.

Sovereign Wealth Funds

The Republic of Croatia does not own any sovereign wealth funds.

7. State-Owned EnterprisesShare    

Performance of Croatian SOEs is uneven several large problem cases persist, including the state railway and highway companies, as well as Croatia’s largest fertilizer manufacturer. In fact, the GoC, according to the publicly available register of state-owned assets, shows state participation in companies ranging from food producers and cured meat producers to the textile companies. All of these companies are 100% state-owned and range in size from 30 to well over 5000 employees. Unlike many other former socialist states in Central Eastern Europe which undertook massive privatizations, Croatia, due mainly to its 1991 – 1995 war for independence, never sought deep and wide-ranging reforms to the state-owned sector, but instead nationalized 2,171 previously ‘socially-owned’ Yugoslav companies. The latest assessment has the Republic of Croatia owning shares in approximately 400 companies. The estimated value of the state’s holdings, per the latest available assessment in 2015 in these companies is $32 billion.

Information on selected assets for privatization can also be found at the website of the Agency for Investments and Competitiveness (www.aik-invest.hr/en). A list of State-owned property and assets can be found at http://registar-imovina.gov.hr/. The Ministry of State Owned Assets website includes detailed information on tenders, procurement, future plans and other items and is located at (in Croatian) at https://imovina.gov.hr/. SOEs are governed by state appointed management, although government, both current and past, have stated publicly that they intend to move away from state appointed management to hiring independent professionals.

SOEs do not receive favorable treatment nor enjoy non-market based advantages, in fact in terms of credit, they have faced the same high interest rates as all the other companies in Croatia.

Croatia is not an adherent to the OECD Guidelines for Multinational Enterprises, however, actively implements guidelines and cooperates with the OECD in a number of fields, to include June 2016 acceptance of Croatia’s Market Competition Protection Agency into the OECD Market Competition Board.

Privatization Program

The country continues to pursue privatizations through the Ministry of State Owned Assets, which replaced the Office for State Asset Management in late 2016. There are no restrictions against foreigners participating in privatization programs. The banking sector, telecommunications, and Croatia’s largest pharmaceutical company were purchased by foreign investors upon privatization. The bidding process is public and terms are clearly defined in tender documentation, however, problems with bureaucracy and timely judicial remedies can significantly slow progress for projects. There is no privatization timeline, however the government does view privatization as a means to reduce budget deficit and increase output, and is working to speed up privatization processes.The government intends to sell small share packages during 2017, approximately $20 million worth and has also published tenders for state owned real estate (apartments).

All tenders are published internationally and there are no restrictions on foreign investor participation in privatization. The bidding process is public. Tenders currently in Croatian, can be found at https://imovina.gov.hr/vijesti/8.

8. Responsible Business ConductShare    

There is a general awareness of expectations or standards for responsible business conduct which is regulated by law. The Croatian Financial Services Supervisory Agency established a Corporate Governance Code of Ethics required for all Zagreb Stock Exchange participants, while the Company Act, Audit Law, Accounting Law and Credit Institutions law are the sources for corporate governance provisions. Publicly listed companies are required to upload their annual corporate governance reports on the ZSE website. According to a 2016 European Bank for Reconstruction and Development report on corporate governance in Croatia, “institutional framework supporting good corporate governance is relatively sound.”

No high profile or controversial instances of private sector impact on human rights have occurred in Croatia. The government effectively implements domestic laws in order to maintain consumer and environmental protection and avoid infringement of human rights and labor rights. However, such protections are sometimes are in excess of European Union standards. There is no legislation that requires private companies to implement a code of ethics, however, Croatia implements all European Union legislation and as such includes responsible business conduct provisions throughout. Unions are considered watchdogs for responsible business conduct and as such will draw attention to issues that they find to be impeding on human rights in the business sector.

Although Croatia is not a member, Croatia encourages the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High Risk Areas and considers minerals from conflict affected areas to be illegal. Various legislation, including mining, forest and water management, concessions and environmental protection are implemented in all extractive and mining business in order to maintain high standards of both environmental and human rights protections. All procedures for mining or extraction tenders are publicly available and transparent.

9. CorruptionShare    

Croatia has adequate laws, regulations and penalties to effectively combat corruption. The Criminal Code and the Criminal Procedure Act define the tools available to the investigative authorities to fight corruption. The criminal code also provides for asset seizure and forfeiture. In terms of a corruption case, it is assumed that all of a defendant’s property was acquired through criminal offences unless the defendant can prove the legal origin of the assets in question. Pecuniary gain in such cases is also confiscated if it is in possession of a third party (e.g. spouse, relatives, or family members) and was not acquired in good faith. Croatian laws and provisions regarding corruption apply equally to domestic and foreign investors, to public officials, their family members and political parties. The Croatian Criminal Code covers such acts as trading in influence, abuse of official functions, bribery in the private sector, embezzlement of private property, money laundering, concealment and obstruction of justice. In 2010, the legal framework to combat corruption was further improved; the Act on the Office for the Suppression of Corruption and Organized crime provides broad authority to prosecute tax fraud linked to organized crime and corruption cases.

Additional laws for the suppression of corruption include: the State Attorney’s Office Act; the Public Procurement Act; the Act on Procedure for Forfeiture of Assets Attained Through Criminal Acts and Misdemeanors; the Budget Act; the Courts Act; the Conflict of Interest Prevention Act; the Corporate Criminal Liability Act; the Money Laundering Prevention Act; the Witness Protection Act; the Personal Data Protection Act; the Right to Access Information Act; the Act on Public Services; the Code of Conduct for Public Officials; and the Code of Conduct for Judges. The Labor Act contains whistleblower protections, but their effectiveness has yet to be proven.

Croatia is a member of the Group of States Against Corruption (GRECO), a peer monitoring organization that allows members to assess anticorruption efforts on a continuing basis. Croatia has been a member of INTERPOL since 1992. Croatia cooperates regionally through the Southeast European Co-operative Initiative (SECI), the Southeast Europe Police Chiefs Association (SEPCA), and the Regional Anti-Corruption Initiative (RAI). Croatia is a member of Eurojust, the EU’s Judicial Cooperation Unit, and is a signatory to the UN Convention Against Corruption.

Croatian legislation provides protection for NGOs involved in investigating or drawing attention to corruption. GONG, a non-partisan citizens’ organization founded in 1997, which also acts a government watchdog, monitors election processes, educates citizens about their rights and duties, encourages communication between citizens and their elected representatives, promotes transparency within public services, manages public advocacy campaigns, and assists citizens in self-organizing initiatives. The Partnership for Social Development is another nongovernmental organization active in Croatia dealing with the suppression of corruption.

Historically, the business community has identified corruption in healthcare, public procurement, and construction, but in recent years has not mentioned it as obstacle to FDI. During the years ahead of EU accession, Croatia invested considerable efforts in establishing a wide-ranging legal and institutional anti-corruption framework. It has since put in place a number of anti-corruption strategies, the most recent adopted by the Croatian Parliament in 2015. Croatian prosecutors have secured corruption convictions against a number of high-level former government officials, including a former prime minister, former ministers, other high-ranking officials, and senior managers from state-owned companies.

Resources to Report Corruption

The State Prosecutor’s Office for the Suppression of Corruption and Organized Crime (USKOK) is tasked with directing police investigations and prosecuting cases. USKOK is headquartered in Zagreb, with offices in Split, Rijeka and Osijek. In addition, the National Police Office for the Suppression of Corruption and Organized Crime (PN-USKOK) conducts corruption-related investigations and is based in the same cities. Specialized criminal judges are situated in the four largest county courts in Croatia, again in Zagreb, Rijeka, Split, and Osijek, and are responsible for adjudicating corruption and organized crime cases. The cases receive high priority in the justice system. The Ministry of Interior, the Office for Suppression of Money Laundering, the Tax Administration, and the Anti-Corruption Sector of the Ministry of Justice, all have a proactive role in combating and preventing corruption. GONG is a civil society organization founded in 1997 to encourage citizens to actively participate in the political process. Contact information below:

Office of the State Attorney of the Republic of Croatia

Gajeva 30, 10000 Zagreb, Republic of Croatia

+385 1 4591 888

tajnistvo.dorh@dorh.hr

Office for the Suppression of Corruption and Organized Crime

Gajeva 30a, 10000 Zagreb, Republic of Croatia

+385 1 4591 874

tajnistvo@uskok.dorh.hr

GONG

Trg Bana Josipa Jelacica 15/IV, 10000 Zagreb, Republic of Croatia

+385 1 4825 444

gong@gong.hr

10. Political and Security EnvironmentShare    

The risk of political violence in Croatia is low. Following the breakup of Yugoslavia and the subsequent wars in the region, Croatia has emerged as a stable, democratic country and is a member of NATO and the EU. Relations with neighboring countries are generally good and improving, although some disagreements regarding border demarcation and residual war-related issues persist.

11. Labor Policies and PracticesShare    

Croatia has an educated, highly skilled, and relatively high cost labor force compared to regional averages. Employment is regulated by the constitution, international conventions, treaties, labor law, collective agreements and employment agreements. The Labor Law is the main piece of legislation that governs employment and prescribes general labor regulations. Among other items, the Labor Law prohibits discrimination, defines various types of leave including maternity, and provides terms for striking, salaries and other labor related issues. Foreign or migrant workers do not play a significant role in any field. The World Bank estimates that the grey economy is estimated at 35% of GDP. Although unemployment rates are slowly falling, Croatia has the 5th highest unemployment rate in the EU. Official figures from January 2017, using International Labor Organization (ILO) methodology, showed an unemployment rate of 11.3%, while youth unemployment stands at 40%. However, the government has committed to increasing jobs, especially for youth, through various programs funded by the EU. Companies report that Croatia’s labor law makes it relatively expensive to hire and dismiss employees in comparison to the United States and other countries in Europe at the same level of development.

There are currently labor shortages reported in the construction and transportation sectors. Croatia continues to experience a brain drain, with an estimate 60,000 Croatians (mostly young and educated) leaving the country annually.

Croatian law does not require the hiring of Croatian nationals. Employers are bound by law to offer severance pay to individuals laid off due to restructuring or down-sizing. The labor law defines the conditions and amounts of severance pay, to include three items necessary to qualify for severance: 1) the employer must terminate the employee, 2) the termination must not be the result of behavioral issues, and 3) the employee must have been employed for two consecutive years. The Croatian Employment Agency provides unemployment payments for those laid off due economic reasons.

Labor laws are strictly implemented and not waived to retain or attract investment. Collective bargaining is a common tool, mostly implemented by unions, which overwhelmingly represent workers associated with government spending and state owned enterprises.

12. OPIC and Other Investment Insurance ProgramsShare    

As of December 31, 2016, OPIC's active projects have included $38 million in funding and insurance for construction and information services in Croatia. Croatia is a member country of the World Bank Group's Multilateral Investment Guarantee Agency (MIGA). For more information see www.miga.org.

13. Foreign Direct Investment and Foreign Portfolio Investment StatisticsShare    

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

 

Host Country Statistical Source*

USG or International Statistical Source

USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other

Economic Data

Year

Amount

Year

Amount

 

Host Country Gross Domestic Product (GDP) ($M USD)

2016

$50.42 billion

2015

$48.73 billion

www.worldbank.org/en/country

Foreign Direct Investment

Host Country Statistical Source*

USG or International Statistical Source

USG or international Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other

U.S. FDI in partner country ($M USD, stock positions)

2016

$110 million

2015

$97 million

BEA data available at http://bea.gov/international/direct_investment_
multinational_companies_comprehensive_data.htm

Host country’s FDI in the United States ($M USD, stock positions)

2016

$52 million

2015

$-7 million

BEA data available at http://bea.gov/international/direct_investment_
multinational_companies_comprehensive_data.htm

Total inbound stock of FDI as % host GDP

2016

66.36 %

N/A

N/A

N/A

*GDP at www.dzs.hr, FDI at www.hnb.hr Q1-Q3 2016 Note: World Bank and U.S. Bureau of Economic Analysis do not have GDP or FDI data available for 2016 at time of publishing.


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data

From Top Five Sources/To Top Five Destinations (US Dollars, Millions)

Inward Direct Investment

Outward Direct Investment

Total Inward

33,4600.00

100%

Total Outward

6,205

100%

The Netherlands

6,717

20%

The Netherlands

2,868

46.2%

Austria

5,801

17.3%

Bosnia Herzegovina

1,165

18.8%

Germany

3,179

9.5%

Slovenia

844

13.6%

Luxembourg

2,435

7.2%

Serbia

815

13.1%

Hungary

2,373

7.1%

Poland

177

2.9%

"0" reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

There is no IMF data for portfolio investment assets available for Croatia.

14. Contact for More InformationShare    

For more information on the investment climate in Croatia, you may contact:

Economic Section
U.S. Embassy Zagreb
Ulica Thomasa Jeffersona 2, 10010 Zagreb
Tel (+385 1) 661-2200
E-mail: InvestmentClimateCroatia@state.gov