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

Openness to, and Restrictions Upon, Foreign Investment

For more than a decade after the end of the war in 1995, Croatia enjoyed steady growth in foreign investment, buoyed by a growing economy, low inflation, a stable exchange rate and developed infrastructure. Investment activity slowed substantially in 2009 and has not regained momentum, due partly to the global financial crisis and partly to structural problems that continue to plague the economy. The banking system weathered the financial crisis well, but a bloated and complex bureaucracy, underperforming state enterprises, corruption, and an inefficient judicial system have all contributed to a poor economic performance over the past four years. The present Government of Croatian (GOC) came into power in December 2011, and in early 2013 pledged to take urgent legislative and administrative steps to reduce barriers to investment and foster development in key sectors—particularly tourism, energy, infrastructure, and irrigation/environment.

The GOC concluded accession negotiations with the European Union in June 2011, and Croatia is scheduled to become an EU member in July 2013. As Croatia’s final accession date approaches, many global companies will look afresh at Croatia. Entry into the union should enhance stability and provide new opportunities for trade and investment. Nevertheless, investors still complain about high para-fiscal fees, rigid labor laws, and slow and complex permitting procedures.

Strong efforts at stamping out corruption have helped make Croatia a more attractive investment destination, and the scope of corruption prosecutions indicates that the GOC remains serious in its efforts to fight corruption. Investigations have targeted senior members of prior governments, including a former Prime Minister who was convicted in 2012 of taking bribes and sentenced to a ten-year prison term.

Croatia is open to foreign investment, and the Croatian government continues to prioritize attracting foreign investment. All investors, both foreign and domestic, are guaranteed equal treatment by law. However, bureaucratic and political barriers remain. The greatest of these continues to be the country’s inefficient and sometimes unpredictable legal system. The backlog of unresolved cases peaked at 1.6 million in 2004 and has slowly been reduced to 842,750 pending cases. However, because of the large number of pending cases, even the simplest matters can take years to resolve. Timely enforcement of contracts is a significant problem that has hindered investment. Other problem areas include inefficient bureaucracies, high para-fiscal fees, and the country’s relatively high labor costs in relation to other locations in Central and Eastern Europe.

The country continues to pursue privatizations through the Agency for Public Asset Management (AUDIO), formerly known as the Croatian Privatization Fund (HFP). All bidders, domestic or foreign, are treated equally according to law. While investors are not discriminated against directly, problems with bureaucracy and timely judicial remedies can significantly slow progress for projects.

Croatia’s legal framework accords equal treatment to foreign and domestic investors for all types of business. There are no reviewing or screening mechanisms to exclude foreign investment, nor are there any restrictions to foreign investment. The website of the Croatian Chamber of Economy (www.hgk.hr) provides a useful English-language guide, “How to Start Up an Enterprise in Croatia,” as well as sector-specific and general reports. The Zagreb Stock Exchange’s website (www.zse.hr) posts English-language translations of key laws.

The Investment Promotion and Competition Directorate, located in the Ministry of Economy, offers advice and legal expertise for helping with strategies for investment promotion and removing barriers to investment. The office also works on developing free trade zones and drafting measures that are intended to help increase both foreign and domestic investment. More information can be found at http://www.mingorp.hr/defaulteng.aspx?id=26

The Company Act legislation defines the forms of legal organization for domestic and foreign investors. The following entity formations are permitted for foreigners: general partnerships, limited partnerships, branches, limited liability companies, and joint stock companies. The Obligatory Relations Law regulates commercial contracts.

Croatia is included on the following lists and ranks per each as follows:

  • Transparency International Corruption Index: ranked 62 (out of 176) with a score of 46 out of a possible 100 corruption perception index.
  • Heritage Economic Freedom overall score: 61.3 (out of 100 points)
  • World Bank Doing Business “Ease of doing business” ranking: 80 (out of 183; down from 2011 ranking of 79)

Conversion and Transfer Policies

The Croatian constitution guarantees the free transfer and repatriation of profits and invested capital for foreign investments. Article VI of the U.S. Croatia Bilateral Investment Treaty (BIT) establishes protection for American investors from government exchange controls that limit current and capital account transfers, and limits on inward transfers made by screening authorities. The BIT obliges both countries to permit all transfers relating to a covered investment to be made freely and without delay into and out of each other’s territory. The Croatian Foreign Exchange Law permits foreigners to maintain foreign currency accounts and to make external payments.

The Foreign Exchange Law also defines foreign direct investment (FDI). For example, use of retained earnings for new investments/acquisitions is considered FDI, whereas investments made by institutional investors such as insurance, pension and investment funds are not considered FDI. The law also liberalizes foreign exchange transactions for Croatian entities and individuals, allowing them to invest abroad. Generally, this law liberalized foreign exchange transactions, but it also introduced criteria for the possible imposition of capital controls.

The U.S. Embassy in Zagreb has not received any complaints from American companies regarding transfers and remittances.

Expropriation and Compensation

There have been no cases of expropriation of foreign investments by the government since Croatia became independent in 1991. Article III of the BIT covers both direct and indirect expropriations. The BIT bars all 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 gives the government broad authority to expropriate property under various economic and security related circumstances. The law provides for an appellate mechanism to challenge expropriation decisions by means of a complaint to the Ministry of Justice within 15 days of the expropriation order. The law, however, does not describe the Ministry’s adjudication process and the fact that the Ministry of Justice represents the government, which initiates expropriations, is an area of potential concern for investors.

Dispute Settlement

There have been instances of investment disputes involving U.S. companies in Croatia. As a result of the very long timeframes involved in obtaining judgments in court, in addition to questionable transparency in some cases, companies often try to resolve disputes without seeking a judicial remedy. The GOC has generally been unresponsive to requests from U.S. companies to assist in resolution of long-standing disputes. Currently, according to the European Council for Efficiency of the Judicial System, civil litigation in Croatia lasts an average of 498 days, compared to the European average of 282 days. The government is currently working to reduce court backlogs and to encourage the use of alternative dispute settlement.

The Croatian constitution provides for an independent judiciary. The judicial system consists of courts of general and specialized jurisdictions, and its core structures are the Supreme Court, County Courts, Municipal Courts, and the Magistrate/Petty Crimes Courts. Specialized courts include the Administrative Court and High Commercial and Lower Commercial Courts. A Constitutional Court determines the constitutionality of laws and government actions and protects and enforces constitutional rights. Municipal courts exercise original jurisdiction over civil and juvenile/criminal cases. The High Commercial Court is located in Zagreb and has appellate review of lower commercial court decisions. Modification of lower court decisions by the High Commercial Court may be appealed to the Supreme Court.

The Administrative Court has jurisdiction over the decisions of administrative bodies of all levels of government. The Supreme Court, under certain circumstances, may review decisions. 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 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. Alternative dispute resolution has been implemented at the High Commercial Court, the Zagreb Commercial Court and six municipal courts throughout the country. An important move to lessen the backlog of cases is the on-going redistribution of non-disputed decisions to public notaries. During the past year, the number of pending cases remained at approximately 842,750, due to the inflow of new cases. There has been, however, a reduction in the backlog of enforcement cases and the enforcement of judgments, which make up over 10 percent of all pending cases. An amended Law on Enforcement came into effect on October 15, 2012, and serves to decrease the burden on the courts by passing collection of financial claims and seizures to the Financial Agency, which will be responsible for paying claims to claimants once the court has rendered a decision ordering enforcement. The Financial Agency will also have the authority to seize assets or directly settle the claim from the bank account of the physical or legal entity that owes the claim. More information on the Financial Agency can be found at www.fina.hr Article 19 of the Law on Enforcement states that foreign judgments may be executed only if the “judgment fulfills the conditions for recognition and execution as prescribed by an international agreement or the law.” The Ministry of Justice’s ongoing reform projects are available on its website at http://www.mprh.hr/Default.aspx?sec=464.

The Law on Bankruptcy 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. The law establishes timeframes for the initiation of bankruptcy proceedings. The Law was amended and new provisions went into effect in November 2012 in order to expedite proceedings that have traditionally been slow and inefficient in Croatia. One of the most important amendments allows for the accounts of a bankrupt firm to remain open during bankruptcy proceedings, thereby allowing the company to continue operations while working through the bankruptcy process. The World Bank has estimated that the recovery rate in Croatia is approximately 42.6 percent of the Organization for Economic Cooperation and Development (OECD) average. 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 the trustee, reviews creditor complaints, approves the settlement for creditors, and decides on the closing of proceedings. The bankruptcy judge supervises the trustee (who represents the debtor) and the operations of the creditors’ committee. A creditors’ committee is convened to protect the interests of all creditors during the proceedings, to oversee the trustee’s work and to report back to the creditors. The law establishes the priority of creditor claims, assigning higher priority to those related to taxes and revenues of state, local and administration budgets. The law 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.

Arbitration is available, although underutilized. Within the Croatian Chamber of Economy, there is a permanent arbitration court that has been in existence since 1965 (see www.hgk.hr/wps/portal/!ut/p/.cmd/cl/.l/hr). Arbitration is voluntary and conforms to UNCITRAL model procedures. The court received 50 new cases in 2012. 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 two years.

The English-language text of the Law on Arbitration can be found on the website of the Croatian Chamber of Economy (www.hgk.hr). The law covers domestic arbitration, recognition and enforcement of arbitration rulings, jurisdictional matters and procedures. Once a dispute has been arbitrated the decision is executed upon notice from the court to the obligatory party. If no payment is made by the established deadline, the party benefiting from the decision notifies the commercial court and the commercial court becomes responsible for enforcing compliance. Rulings of the arbitration court have the force of a final judgment, but can be appealed within three months.

Article X of the BIT sets forth several means for resolution of investment disputes, defined as any dispute arising out of or relating to an investment authorization, an investment agreement, or an alleged breach of rights conferred, created, or recognized by the BIT with respect to a covered investment. For more information on the BIT arbitration provisions, consult http://tcc.export.gov.

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 Washington Convention - the International Center for the Settlement of Investment Disputes (ICSID).

Performance Requirements/Incentives

Croatia’s World Trade Organization (WTO) Trade Related Investment Measures (TRIMs) agreement went into effect in 2000. Croatia has no trade-related investment measures in place at the present time, nor does the government intend to introduce any such measures in the future. Accordingly, Croatia did not seek to list any measures for elimination under the provisions of the WTO Agreement on TRIMs. Croatia committed to maintaining measures consistent with the TRIMs agreement and has applied the TRIMs agreement from the date of accession without recourse to any transition period.

Croatian law does not impose performance requirements on foreign or domestic investors. Article VII of the BIT prohibits mandating or enforcing specified performance requirements as a condition for the establishment, acquisition, expansion, management, conduct or operation of a covered investment. The list of prohibited requirements is exhaustive and covers domestic content requirements and domestic purchase preferences, the “balancing” of imports or sales in relation to exports or foreign exchange earnings, requirements to export products or services, technology transfer requirements and requirements relating to the conduct of research and development in the host country. Article VII makes clear, however, that a party may impose conditions for the receipt or continued receipt of benefits and incentives.

In late 2004, the Ministries of Economy and Defense agreed to introduce offsets (a requirement for local sourcing of a portion of the contract) for defense procurements over 2 million euros. More information on the application and regulation of the offset program can be found at www.hgk.hr. The Investment Promotion Act (IPA) offers potentially significant incentives to investors, such as tax advantages (reduction of the statutory profit tax), tariff references, aid to cover eligible costs of the job creation linked to an investment, aid to cover eligible costs of training linked to an investment, incentive measures for the establishment and development of technology and innovation centers. The IPA also provides for strategic business support services and incentive measures for large investment projects of significant economic interest.

Tax incentives include substantially lower profit tax obligations. The incentives include: a 50 percent corporate tax reduction for a maximum period of ten years for companies that invest from 2.2 million to 11 million HRK (approximately US$440,000 - US$2.2 million) and create 10 new jobs; 65 percent corporate tax reduction for a maximum period of ten years for companies that invest from 11 million to 30 million HRK (approximately US$2.2 million to US$6 million) and create 30 new jobs; 85 percent corporate tax reduction for a maximum period of ten years for companies that invest 30 million to 58 million HRK (approximately US$6 million to US$11.6 million) and create 50 new jobs; and 100 percent corporate tax reduction for a maximum period of ten years for companies that invest over 60 million HRK (approximately US$11.6 million) and create at least 75 new jobs. Also, the government will allow duty-free import of capital equipment and machinery for investments meeting any of the foregoing criteria. Incentives for new job creation range from US$2,000 to US$5,000 depending on the investment activity and registered unemployment rate of the county.

The IPA refers to investment projects in the manufacturing sector, investments in technology and innovation activities as well as investment in strategic business support services. For projects in the manufacturing and processing sector, the minimum amount of investment that qualifies for incentives is 300,000 EUR (approximately US$400,000), under the condition that at least ten new jobs are created during a three year period. For investments in technology and innovation activities as well as strategic business support services, the minimum amount is 100,000 euros (approximately US$140,000) under the condition that at least five new jobs are created during a three year period.

In order to utilize the incentive measures, an investor must send an application to the Ministry of Economy prior to the commencement of investment operations.

The Government may also offer real estate, permits or infrastructure to an investor either cost-free or on a preferential basis. The Government likewise offers incentives for business activities carried out in areas of special state concern, mountain areas and the city of Vukovar. The laws governing business activities in the Areas of Special State Concern (rural areas that were affected by the 1991-1995 war through damage and de-population) have been harmonized with EU regulations on state aid.

All information regarding incentives for investing in Croatia can be found on the website of the Ministry of Economy, Directorate for Competition and Investments (www.mingo.hr). The web page also provides the text of the Act and Regulation on Investment Promotion, as well as other information on application forms and procedures. However, the website is currently under reconstruction and the information is not readily available in English.

Additionally, the GOC recently initiated the Agency for Investments and Competitiveness that will also serve to bolster investments for all interested investors. More information can be found at http://www.aik-invest.hr (although the website is currently under construction).

Although procedures for obtaining business visas are generally clear, they can be cumbersome and time-consuming. The Law on Foreigners was amended in October 2011; foreign investors should familiarize themselves with the law’s provisions. Questions relating to visas and work permits should be directed to the Croatian embassy or a consulate in the U.S. The U.S. Embassy in Zagreb also maintains a website with information on this subject at www.usembassy.hr.

The Right to Private Ownership and Establishment

Both foreign and domestic legal entities have the right to establish and own businesses and engage in remunerative activity. Foreign investors can acquire ownership and shares of joint stock companies. The lowest amount of initial capital for establishing a joint stock company is 200,000 HRK (US$40,000) and the nominal value per share cannot be less than 10 HRK (US$2). Minimum initial capital for establishment of a limited liability company is 20,000 HRK (US$4,000), while individual representation per investor cannot be less than 200 HRK (US$40). The Company Law was amended in the fall of 2012 to make it easier and less costly to establish small businesses. Most goods may be imported or exported for free. Quotas or protective levies may be introduced in accordance with WTO rules only as an exception if the balance of payments experiences a serious disruption. If the import of certain goods threatens to damage or damages domestic industry, import quotas may be introduced. Export quotas may also be set in order to protect national non-renewable natural resources, accompanied by restrictive measures that limit internal trade in these products.

Article 49 of the Constitution provides assurances that all entrepreneurs have equal legal status and that monopolies are forbidden. The Competition Act defines the rules and methods for promoting and protecting competition. This law and information about the Croatian Competition Agency can be found at www.aztn.hr. In theory, competitive equality is the standard applied to private enterprises in competition with public enterprises with respect to market access, credit and other business operations, such as licenses and supplies. In practice, however, state-owned enterprises and “strategic” firms continue to receive preferential treatment, including government bailouts and subsidies.

The government’s e-government initiative “Hitro” (www.hitro.hr) provides an on-line business registration component that reduces the time it takes to register a company to four days. Business registration is the first step in a plan to make more government services available on-line in coming years. Croatia’s land records are also available on-line (see www.pravosudje.hr and www.katastar.hr).

Protection of Property Rights

The right to ownership of private property is established in the Croatian Constitution. Numerous acts and regulations safeguard this right. A foreign physical or legal person incorporated under Croatian law is considered to be a Croatian legal person. The Law on Ownership and Property Rights establishes procedures for foreigners to acquire property by inheritance as well as legal transactions such as purchases, deeds, and trusts. While EU member state citizens 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 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; 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. Purchasing 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. Both Croatian and foreign citizens may mortgage property and pledge real and tangible property.

In order to acquire property by means other than inheritance or as an incorporated Croatian legal entity, foreign investors require the approval of the Ministry of Justice. Approval often takes several months or longer owing to a lengthy interagency clearance process. When purchasing land for construction purposes, potential buyers should determine whether the property is classified as agricultural or construction land. The Arable Land Law allows for additional fees of up to 10 percent or more to be added to the initial cost of land that is to be converted from agricultural into construction land; as such, this law should be considered when purchasing land. However, this law may be amended in 2013 and new fees may apply. The Agricultural Land Agency, which came into existence on January 1, 2010, works with local governments to review potential agricultural land purchases. Concern exists that the mechanism could be used to exclude foreign investors under a governing provision that allows its board to decide to which potential buyer private land should be sold where multiple offers exist, irrespective of the seller’s wishes. That provision has been challenged in court and has been enjoined pending resolution of the case by the Constitutional Court. It is unclear when the case will be resolved.

Clarifying Croatia’s land registry system is an on-going process. Although Croatia continues progress through a backlog of cases, potential investors should seek a full explanation of land ownership rights before purchasing property. It is highly advisable to seek competent, independent legal advice in this area, as there are sometimes 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). The Law on Legalization of Buildings and Illegal Construction came into effect in August 2012 and should help to resolve ambiguities regarding ownership of real estate. The U.S. Embassy’s consular section can provide a list of English-speaking attorneys (see www.usembassy.hr). Inheritance laws have led to situations in which some properties can have dozens of legal owners, some of whom are deceased and others of whom emigrated and cannot be found. 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.

Some aspects of land ownership, as distinct from ownership of objects, are not clear. Investors interested in acquiring companies from the Agency for Public Asset Management (AUDIO) should seek legal advice to determine whether any deal also includes the right to ownership of the land on which an object is located, or merely the right to lease the land through a concession. The various Croatian laws on privatization are not clear on this point.

Inconsistent regulations and restrictions on coastal property ownership and construction have in the past provided challenges for foreign investors. Legislation restricts coastal construction and commercial use within 70 meters of the coastline.

Croatia has intellectual property rights (IPR) legislation, including the Patent Law, Trademark Law, Industrial Design Law, Law on the Geographical Indications of Products and Services, Law on the Protection of Layout Design of Integrated Circuits, and a Law on Copyrights and Related Rights. Although some areas of IPR protection remain problematic, Croatia is currently not on the U.S. Special 301 Watch List. Problem areas continue to be concentrated in piracy of digital media and counterfeiting.

As a full WTO member, Croatia is a party to the Uruguay Round Agreement on Trade-Related Intellectual Property Rights (TRIPS). A WTO/TRIPS Working Group in June 2001 accepted Croatia’s IPR legislation. Texts of these laws are available on the website of the State Intellectual Property Office: www.dziv.hr. 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.

Due to its geographical position, Croatia is also one of the transit routes for various contraband products bound for other countries in the region.

Transparency of the Regulatory System

Croatia’s commitments to adopt EU laws, norms, and practices provide steady pressure for reform. Nevertheless, bureaucracy and regulation continue to be overly complex and time consuming.

A new Law on Procurement came into effect in early 2012. The law was passed in order to make public procurement more transparent, as it entails stricter obligations for public disclosure of public procurement on the internet. The law is intended to make the procurement process easier for businesses bidding on public tenders by cutting the bureaucratic procedures involved in the process. The law requires the publication of all procurement procedures valued at more than 70,000 HRK (US$12,720). A website detailing all executed public procurement was launched by an NGO in November 2011 at http://nabava.vjetrenjaca.org, with the goal of drawing attention to the procurement procedure and possible controversies surrounding it. The Accounting Law includes reporting provisions according to which large companies must apply International Financial Reporting Standards while small and medium businesses apply Croatian Financial Reporting Standards. Progress, however, is still necessary in this area. New legislation or changes to existing legislation which could have a significant impact upon citizens are made available for public debate.

Croatia’s regulatory system does not specifically discriminate against foreign investors. However, transparency in developing legislation and regulation is often hampered by an inefficient public administration, a lack of intra-governmental coordination, and reliance on expert advice from national champions, sometimes giving the latter a privileged position in influencing new regulations.

The tax on corporate income is a flat 20 percent. There is a 15 percent tax on interest income and royalties. As of March 1, 2012, a 12 percent tax is charged on dividends and capital gains that exceed 12,000 HRK (US$2,000). For a detailed description of existing tax legislation, please consult the Tax Administration’s website at www.porezna-uprava.hr/en/index.asp. The Institute of Public Finance maintains a useful table of Croatian taxes at www.ijf.hr/eng/taxguide/08_05/taxtable.pdf. Croatia also maintains a 25 percent value-added tax (VAT). Some companies have had difficulty with the tax authorities due to differing understandings of how certain goods and services are affected by the VAT. Detailed information about customs can be found at www.carina.hr.

A valuable source of analysis is located on the website of the Croatian office of the World Bank, at www.worldbank.hr.

Efficient Capital Markets and Portfolio Investments

Croatia’s securities markets are open to both domestic and foreign investment equally. There are no restrictions that would disrupt foreign investment in the securities market and other markets in Croatia. Foreign residents may open non-resident accounts and may do business both domestically and abroad. 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 Articles 24, 25 and 27 of the Foreign Currency Act, which can be viewed on the Central Bank website (www.hnb.hr).

The Capital Market Act focuses on: (1) the regulation of establishment of activities, supervision and cessation of investment companies, market operators and operators of payment and settlement systems; (2) the offering of investment services and the performance of investment activities; (3) the rules of trading on the organized market; (4) the offering and quotation of securities on the organized market; (5) the reporting requirements in connection with securities quoted on the organized market; (6) market abuse; (7) the deposit of financial instruments and the settlement and payment of transactions with financial instruments; and (8) the authority and activities of the Croatian Financial Services Supervisory Agency (HANFA) in connection with implementation. The Act also makes clear the details of required disclosures and the consequences of a failure to disclose. It specifies who is responsible for information listed in a prospectus, and obligates the issuer to publish periodic financial reports as well as information about changes in corporate structure and voting rights.

Transactions on the Zagreb Stock Exchange in 2011 were 5.92 billion HRK (approximately US$0.90 billion). Additionally, 18.15 billion HRK (approximately US$3.20 billion) OTC transactions were reported to the ZSE. In 2012, transactions totaled 3.85 billion HRK (approximately US$0.67 billion) with 19.32 billion HRK (approximately US$3.37 billion) of OTC turnover. According to the Central Depository and Clearing Company statistics, 857,742 Croatian citizens own stocks.

The Investment Fund Law provides for the establishment of derivative funds, index funds and other funds in accordance with EU legislation. The private sector enjoys open access to credit instruments.

The Agency for Supervision of Financial Services (HANFA), headed by the Directorate for Supervision of Agencies, oversees the capital market in Croatia. See www.hanfa.hr for all legislation and information relative to capital markets. Only an authorized company (brokerage houses and banks) may deal in securities in Croatia. Such activity must be licensed by the Croatian Financial Services Supervisory Agency and entered in a court register.

A brokerage company may only be a private or public limited company based in the Republic of Croatia. Its only permitted activity is transactions in securities. The type of permitted activity depends on the amount of share capital. In accordance with national law, a brokerage company may establish a branch abroad in order to deal in securities in the respective country. Foreign brokerage companies authorized for transactions in securities may establish a branch in the Republic of Croatia, provided they obtain a license from HANFA.

The privatized and consolidated banking sector is highly developed and becoming more competitive. More than 90 percent of the total assets of the banking sector are foreign-owned. As of November 2012 there were 32 commercial banks and five savings banks, whose assets totaled 411.5 billion HRK (US$75 billion). The three largest banks, all foreign-owned are: Zagrebacka Bank, with 104.9billion HRK (US$19 billion) in assets, holding 25.5 percent of total bank assets in Croatia; Privredna Bank, with 67.2 billion HRK (US$12.2 billion), holding 16.3 percent of total bank assets in Croatia; and Erste Steirmarkische Bank, with 57.8 billion HRK (US$10.5 billion), holding 14.06 percent of total bank assets in Croatia.

The government uses the market to finance government expenditure. Government debt instruments must be bought through an intermediary such as a commercial bank, and are tradable on exchanges. All Croatian workers under age 40 are required to pay five percent of their gross salary into a pension fund of their choice. Additional voluntary savings with government matching of 25 percent has also been introduced.

Currently, securities are traded on the Zagreb Stock Exchange (ZSE), established in 1991. The OMX X-Stream trading system is used by the ZSE.

There are three tiers of securities traded on the ZSE. Companies must meet high disclosure and operating requirements to be fully listed (quotation I). A detailed explanation of all requirements is provided at www.zse.hr in English. The ZSE’s rules can be found at www.zse.hr.

The Securities Law requires that all companies with more than 100 shareholders and with share capital of at least HRK 30 million (approximately US$5.5 million) be listed on the newly established quotation for public stock companies (JDDs). The intention of this law was to increase transparency and encourage companies to obtain low cost equity financing, which would result in increased turnover and trade volumes.

Measures governing takeovers are prescribed by the Law on Takeovers of Joint Stock Companies. The Law on Takeovers has been harmonized with laws applicable to EU member states in anticipation of Croatia’s accession to the EU. The Law was amended in order to improve shareholders’ protection in the takeover process and to provide unambiguous rights and obligations of the acquirers. To date, there has only been one attempted hostile takeover, which failed.

The Croatian Chamber of Economy provides a useful summary of the capital markets in Croatia at www.hgk.hr.

Competition from State-Owned Enterprises (SOEs)

Legislation provides that private enterprises are allowed to compete with public enterprises under the same conditions with respect to access to markets, credit and other business operations. In practice, however, there are often accusations that political influence in the SOEs influences competition and tenders. The Law on State Property Management went into effect on January 1, 2011. This law establishes the work of the Agency for State Property Management. This agency is responsible for all of the SOEs and their activities in railways, electricity, shipbuilding and various tourism-related companies. The supervisory boards of SOEs are currently structured to include government figures, most often ministers. Due to allegations of corruption in various SOEs, the government has proposed to change the procedure of naming political appointees to the boards of SOEs. The newly elected government has stated that apolitical, professional persons will be appointed. Under current procedure, the SOE boards of management report directly to the government.

SOEs are required to submit annual reports and are also required to undergo independent audits.

Corporate Social Responsibility

The Croatian Business Council for Sustainable Development (www.hrpsor.hr) implements corporate social responsibility and is a member of CSR Europe’s Network of National Partner Organizations, Global Compact and the Global Reporting Initiative. The Croatian Chamber of Economy adopted a Code of Business Ethics in 2005 and founded the Community for Corporate Social Responsibility. The Chamber also grants an annual award to companies considered leaders in Corporate Social Responsibility.

The Croatian Business Council for Sustainable Development and the Croatian Chamber of Economy created a Socially Responsible Practices Index. The two organizations ask 1,500 small and medium enterprises annually to answer a questionnaire and then rate the companies’ socially responsible practices. The Index results for 2009 are public and are published on the organization’s website. There have been no recent surveys.

Political Violence

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 the newest member of NATO. Croatia’s membership in the European Union is planned to begin in July 2013. Relations with neighboring countries are generally good and improving, although some disagreements regarding border demarcation and residual war-related issues persist.

There is little domestic anti-American sentiment. There have been no incidents involving politically motivated damage to American projects or installations in Croatia.

Corruption

Corruption in Croatia is perceived to be pervasive in major public companies, the health sector, universities, public procurement systems, the construction sector, and land registry offices.

Though corruption remains a serious problem in Croatia, the number of high profile corruption prosecutions has increased significantly following the 2009 adoption of a new Law on Criminal Procedure which granted prosecutors additional authorities to investigate crimes, including organized crime and corruption. Croatian prosecutors have secured corruption convictions of a number of high level GOC officials, including ministers, high ranking officials, and senior managers from several state owned companies. A former Croatian Prime Minister and former Deputy Prime Minister were both convicted on corruption charges in 2012. Prosecutors continue to pursue additional corruption related investigations against former senior government officials.

The State Prosecutor’s Office for Suppression of Corruption and Organized Crime (USKOK) is tasked with directing police investigations and prosecuting corruption and organized crime cases. USKOK is headquartered in Zagreb with offices in Split, Rijeka and Osijek. In addition, the National Police Office for Suppression of Corruption and Organized Crime (PN-USKOK) conducts corruption-related investigations and is based in the same cities as USKOK prosecutors. Specialized criminal judges are situated at 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, the Anti-Corruption Sector of the Ministry of Justice and the National Council for Monitoring the Implementation of the National Strategy for Suppression of Corruption all have a proactive role in combating and preventing corruption.

Croatia has laws, regulations and penalties to effectively combat corruption. Revisions to the Criminal Code and the Criminal Procedure Act in December 2008 strengthened USKOK and PN-USKOK and increased the tools available to authorities to fight corruption. The asset forfeiture provision of the 2008 criminal code broadened the possibility for asset seizure and forfeiture for USKOK cases. If a case falls under USKOK’s jurisdiction, 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. The pecuniary gain in such cases shall also be confiscated if it is in possession of a third party (e.g. spouse, relatives, or family members) and it has not been acquired in good faith.

The amended Criminal Procedure Act has increased both the number of high level corruption investigations and the speed with which investigations are completed. The Croatian criminal code covers such acts as trading in influence, abuse of official functions, bribery in the private sector, embezzlement of property in the private sector, money laundering, and concealment and obstruction of justice. In 2010, the legal framework to combat corruption was further improved. Amendments to the USKOK Act extended USKOK’s authority to prosecute tax fraud linked to organized crime and corruption cases.

Additional laws that deal with suppression of corruption include: the Act on the Office for the Suppression of Corruption and Organized crime (Law on USKOK); the states attorney’s office act; the public procurement act; the law 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 to information act; the act on public services; the code of conduct for public officials; and the code of conduct for judges. A revised Croatian Labor Act contains new whistleblower protections, but the changes are too new to determine effectiveness. Croatian laws and provisions regarding corruption apply equally for both domestic and foreign investors.

Croatia has not ratified the OECD Convention on Combating Bribery of Foreign Public Officials in International Business transactions, but it 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 one of three non-EU members of Eurojust, the EU’s Judicial Cooperation Unit. Croatia is also a signatory to the UN Convention Against Corruption.

A new Penal Code, harmonized with twenty European Union Conventions and Directives, entered into force on January 1, 2013.

Giving or accepting a bribe is a criminal act in Croatia. The new Croatian Penal Code, which entered into force on January 1, 2013, introduced increased penalties for giving and accepting a bribe (Articles 293, 294, and 253), which now range from six months to ten years imprisonment. Trading in influence (Article 295) is punishable by six months to five years imprisonment, and engaging in bribery related to trade in influence (Article 296) by one to eight years. Bribes by a local company to a foreign official are punishable under Croatian law. If it is established that a local company is the legal entity committing crimes, the company may also be banned from conducting operations, depending on the gravity of the crime. Transparency International Croatia is the main non-governmental watchdog organization in Croatia. In addition, GONG, a non-partisan citizens’ organization founded in 1997, monitors election processes, educates citizens about their rights and duties, encourages mutual communication between citizens and their elected representatives, promotes transparency of work within public services, manages public advocacy campaigns, and encourages and helps citizens in self-organizing initiatives. The Partnership for Social Development is another nongovernmental organization active in Croatia, dealing with the suppression of corruption.

Bilateral Investment Agreements

Croatia does not have a foreign investment law; foreigners receive national treatment under existing legislation. Investments 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. Notably:

  • All forms of U.S. investment in the territory of Croatia are covered;
  • Covered investments receive the more favorable option of national treatment or most-favored-nation (MFN) treatment, both while they are being established and thereafter, subject to certain specified exceptions;
  • Specified performance requirements may not be imposed upon or enforced against covered investments;
  • Expropriation is permitted only in accordance with customary international law standards;
  • Parties are obligated to permit the transfer, in a freely usable currency, of all funds related to a covered investment, subject to exceptions for specified purposes;
  • Investment disputes with the host government may be brought by investors, or by their covered investments, to binding international arbitration as an alternative to domestic courts.

For further information about BITs and for the text of the U.S.-Croatian BIT please see www.mac.doc.gov/Tcc/e-guides/eg_bits (under “Croatia”).

Croatia and the United States do not share a bilateral taxation treaty.

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

Albania, Argentina, Austria, Belgium**, Belarus**, Bulgaria, Bosnia and Herzegovina, Czech Republic*, Chile, Denmark, Egypt, Finland, France, Great Britain, Greece, Germany, India*, Indonesia**, Iran*, Italy, Israel*, Jordan, Kuwait, Cambodia*, Canada, Qatar**, China*, Cuba**, Latvia*, Libya**, Lithuania, Hungary, Macedonia**, Malaysia*, Malta**, Republic of Moldova**, Netherlands, Northern Ireland, Oman**, Poland, Portugal, Romania, Russia*, United States, Serbia Montenegro, Slovakia, Slovenia**, Spain, Sweden, Switzerland*, Thailand*, Turkey, Ukraine, Zimbabwe*.

* ratified, but not in force

** not ratified or in force

OPIC and Other Investment Insurance Programs

Croatia is eligible for financing and political risk insurance coverage from the U.S. Overseas Private Investment Corporation (OPIC). In 2004, OPIC provided US$250 million in political risk insurance to support financing for the construction of a major motorway. OPIC provided the insurance to the Private Export Funding Corporation (PEFCO) to support PEFCO’s financing of Croatian Motorways, ltd. for construction of a portion of the Zagreb-Split motorway, consisting of a tolled four-lane highway connecting Bregana and Zagreb, and Bosiljevo with Sveti Rok. For more information about OPIC, see www.opic.gov.

Croatia is a member country of the Multilateral Investment Guarantee Agency (MIGA). For more information see www.miga.org.

The estimated annual U.S. dollar value of local currency used by the U.S. Embassy in Croatia was approximately US$15.5 million for 2012. The Embassy currently purchases local currency from a local commercial bank at the market rate. A major devaluation is considered unlikely.

Labor

Croatia has an educated, highly-skilled, and relatively high cost labor force compared with the region. The estimated average cost to employers in Croatia was 7,890 HRK (approximately US$997) per month as of October 2012, and the average net wage was 5,487 HRK (US$1,001). The manner of calculating minimum wage is regulated by the Minimum Wage Act. The Act ensures a continuous minimum wage increase over a longer period of time. Minimum wage raises are calculated from the minimum-to-average-wage ratio from the previous year, increased by the percent equal to real GDP growth in the previous year. Certain suggested alternative calculations for various sectors are under review by the Constitutional Court.

Croatia’s labor laws are aimed at increasing labor market flexibility by shortening the mandatory notification period before dismissal and reducing generous severance package requirements. The GOC has recently passed a Law on Representation, which deals separately with collective bargaining, limiting the period that collective agreements remain in force once they have expired. Further liberalization of labor legislation has been controversial in Croatia, and labor unions come out strongly against any changes perceived to be against job security. Croatia still fares poorly in terms of time and expense in hiring and firing employees.

The Law on Labor regulates employee and employer relations through “employment contracts.” Fulltime employment must not amount to more than 40 hours per week, and employees are entitled to at least four weeks of paid annual leave and seven days of personal leave. The Law on Labor also provides special protections for workers in dangerous occupations, for work at night, and for work by minors between the ages of 15 and 18. The Law on Labor mandates that workers may work a maximum of eight overtime hours per week and requires a minimum of four weeks annual leave (not including holidays or personal days). The Law also regulates shift work, on-call work, and night hours; it provides strong protections for under-age employees and additional protections for the general safety and health of all employees.

Workers are entitled by law to form or join unions of their own choosing, and workers exercised this right in practice. In general, unions were independent of the government and political parties. The Labor Code prohibits anti-union discrimination and expressly allows unions to challenge firings in court; however, in general, attempts to seek redress through the legal system were seriously hampered by the inefficiency of the court system.

Chapter 7 of the Law on Foreigners covers the issuance of work permits for foreigners. While there are quotas (determined annually) for work permits for foreigners, there are no quotas for foreigners who execute key positions in companies or representative offices. Likewise, there are no quotas for business visas.

Foreign Trade Zones/Free Ports

Croatia has several Free Trade Zones (FTZs), some of which are in war-affected areas. Special incentives are offered to users of FTZs. Those eligible for use of FTZs may be the founder of the zone as well as domestic or foreign physical or legal entities. Both domestic and foreign legal entities may execute business in the zones if they are registered in the country for the business they intend to conduct in the zone.

The Law on Free Trade Zones allows a foreign-owned or domestic company in FTZs to engage in manufacturing, wholesale but not retail trade, foreign trade, banking and other financial activities. Articles 37a and 37b of the Law on Free Trade Zones define the payment structure for profit taxes through 2017. The Law on Profit Tax also covers business in FTZs. FTZ users are eligible for tariff waivers on imported products. FTZs are exempted from any Croatian emergency measures or other restrictions pertaining to foreign trade or hard currency transactions. Users of the zones may freely store their goods and production equipment in the zones. Goods that are not intended for trade on the Croatian market or for domestic consumption are fully exempt from custom duties or taxes, and the users of the zones enjoy simpler procedures. It should be noted that the tax and customs exemptions will cease to be valid once Croatia officially joins the European Union in 2013. Imported goods are taxed and assessed duties per the value of the production materials imported for the product, and not per the value of the finished product.

The following ten locations currently have FTZS: Osijek, Rijeka, Slavonski Brod, Split, Splitsko-Dalmatinska, Ploce, Pula, Varazdin, Zagreb, and Vukovar. EU accession will force the government to make changes in the free trade zone system and the incentives system associated with them.

Additional information on free zones can be found at www.croatianfreezones.org.

Foreign Direct Investment Statistics

Privatization of strategic government-owned assets has been the main source of FDI since Croatian independence. Large state assets such as utilities and banks were sold by the government, usually through international tenders, and in some cases, through initial public offerings (IPOs). New or green-field investments have lagged in recent years. The Agency for State Property Management, the agency responsible for the sale of other assets, has shares and stock in 651 companies. The value of the state’s share of these companies is about 144 billion HRK (US$4.36 billion). Information regarding the Agency for State Property Management and division of assets can be found at www.audio.hr.

Only one major privatization of a state-owned entity took place in 2012; the GOC sold Brodosplit Shipyard to locally-owned firm DIV.

Foreign Direct Investment in Croatia between 1993 and the second quarter of 2012 totaled US$35.25 billion, with investments in the financial, retail and chemical sectors accounting for 50 percent of total investment. Croatian firms invested US$5.1 billion abroad between 1993 and the second quarter of 2012. It is estimated that both inflow and outflow FDI for the first two quarters of 2012 amounted to less than 1 percent of GDP. The amount of foreign direct investment is very low and the trend has been negative since 2009. The government has pledged to focus on increasing foreign investment as a priority for strengthening the economy.

According to official statistics from the Croatian National Bank, Austria is the largest source of foreign investment in Croatia, accounting for 25.3 percent of total FDI since 1993. The Netherlands is second with 15.5 percent of total FDI, followed by Germany with 11.5 percent and Hungary with 5.8 percent. Official GOC figures estimate that U.S. investment in Croatia from 1993 through the second quarter of 2011 measured roughly US$37 million. However, this figure nets out repatriated profits; American firms have invested billions of dollars in Croatia over the time period measured. In addition, because transactions are often executed through third countries, and because the Croatian National Bank records country of origin of the final transaction leading to the investment, misleading statistics are sometimes recorded. The leading destinations for total Croatian investment, from 1993 to the second quarter 2012, were the Netherlands with 34.8 percent of all outgoing investment, Bosnia-Herzegovina with 14.4 percent, and Serbia with 13.5 percent. In the first two quarters of 2011, Croatians invested approximately US$280 million abroad. Serbia was the lead investment destination for 2011, followed by Liberia and Bosnia Herzegovina.

The Croatian National Bank provides information about foreign investments in aggregate form on its website, at www.hnb.hr. The following includes some major (US$20 million and above) foreign investments in Croatia to date listed at investment value at the time of the transaction (current values are not available):

Foreign Investor: WP Carey, U.S. investment company
Purchase of 6 Konzum supermarkets
Value: US$64 million

Foreign Investor: Heitman Invesment Fund, U.S. investment company
Purchase of portion of Arena Shopping Center
Value: US$122 million (unofficial figures)

Foreign investor: GP&Partners (Dutch)
Corn starch factory
Value: US$103 million

Foreign investor: Barr Pharmaceuticals (U.S)
Pharmaceuticals (which was bought out by Israeli Teva in December 2008)
Croatian company: Pliva
Value: US$2.3 billion

Foreign investor: Deutsche Telekom (Germany)
Telecommunications
Croatian Company: Croatian Telecom (51 percent of shares)
Value: US$1.272 billion

Foreign investor: MOL (Hungary)
Oil Industry
Croatian Company: INA D.D. (26 percent of shares in 2003 plus additional 21.15 percent in 2008)
Value: US$505 million + US$1.3 billion

Foreign investor: Lactalis (France)
Dairy
Croatian company: Dukat
Value: US$400 million

Foreign investor: Banca Commerciale Italiana (Italy)
Banking/financial services
Privredna Banka (66.66 percent of shares in 1999 plus 10 percent in 2002)
Value: US$300 million + approximately US$50 million, according to media reports

Foreign investor: Unicredito Italiano (Italy)
Taken over by Bank Austria in 2007
Banking/financial services
Zagrebacka Banka (96 percent ownership)
Value: US$230 million (estimate)

Foreign investor: Erste und Steiermaerkische Bank (Austria)
Banking/financial services
Rijecka Banka (85 percent share)
Value: US$155 million

Foreign investor: Austria Creditanstalt Group (HVB Group) (Austria)
Taken over by Societe General in 2006
Banking/financial services
Splitska Banka (88 percent ownership)
Value: US$132 million

Foreign investor: Heineken N.V. (Netherlands)
Brewery
Karlovacka Pivovara company (94.42 percent)
Value: US$125 million

Foreign investor: Rockwool Group (Denmark)
Stone wool producers
Value: US$110 million

Foreign investor: Sutivan Investment and Excelsa Anstalt (Lichtenstein)
Hotels and tourism
Plava Laguna (81.5 percent)
Value: US$70 million

Foreign investor: CMC STEEL (U.S / Switzerland)
Sold to Italian Danieli in June 2012
Croatian company: Sisak Steel Company
Value: US$52 million

Foreign investor: Ericsson (Sweden)
Telecommunications
Tesla Company
Value: US$48 million

Foreign investor: Hofmann and Pankl Betelligungasse (Austria)
Minerals processing
Straza Company
Value: US$39 million

Foreign investor: Societe Suisse de Cemment Portland (Switzerland)
Cement
Tvornica Cementa Koromacno company
Value: US$38 million

Foreign investor: Applied Ceramics (U.S)
Semi-conductor components
Value: US$30 million

Foreign investor: Interbrew (Belgium)
Brewery
Zagrebacka Pivovara company
Value: US$27 million

Foreign investor: Coca Cola Amatil (Australia)
Non-alcoholic beverages
Croatian company: n/a
Value: US$20 million

Foreign investor: Hospira (U.S)
Specialty pharmaceutical company
Croatian company: n/a
Value: unknown

Foreign investor: L&P Technology (U.S.)
Plastic molding techniques
Croatian company: N/A
Value: Between US$15-20 million

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