Croatia
Investment in Croatia has been prepared as a guide to those interested in investing in or in doing business with Croatia. This publication is written by KPMG's Zagreb office, and forms part of KPMG's world-wide series of "Investment in" publications.
Much effort has been made to ensure that the information contained in this publication is accurate as at 1 May 2001. However, taxation and commercial legislation and regulations in Croatia are prone to frequent change. Accordingly, you should not act in reliance on the information contained in this publication without prior confirmation that no changes in relevant law or practice have been made. It should also be noted that statistics from government sources may not provide a true indication of actual figures due to out-dated methods of collecting data; however, efforts have been made to move fully towards internationally recognised methods.
It should be emphasised that whilst this publication is intended to provide general information in all relevant areas, it is not a comprehensive work and it does not provide the detailed information necessary to make investment decisions. Any entity or individual wishing to invest in Croatia should obtain additional advice from accountancy, legal, taxation and other appropriate professional advisers.
The Republic of Croatia is a relativey new country, having declared independence from the Socialist Federal Republic of Yugoslavia on 25 June 1991. Initially, Croatia applied many laws of the former Yugoslavia but has since undertaken the process of enacting new laws. Many laws and regulations related to investment have come into effect relatively recently. As with any new legislation, there are provisions which are open to interpretation and remain ambiguous. In addition, certain laws refer to supporting regulations, many of which are issued after the release of the laws.
General information
History
Located at the crossroads of Central, South and East Europe, Croatia has developed historically under many different cultures and political influences.
Croatia identified itself as having a separate national identity with the coronation of King Tomislav in 925. Croatia later joined Hungary and was governed by an appointee of the Hungarian kings until 1526 when Croatia sought help from the Austrian Habsburgs for protection from Ottoman expansion. The Austro-Hungarian influence lasted until 1918 when proponents of the "Yugoslav" ideology prevailed and Yugoslavia, a union of present day Slovenia, Croatia, Macedonia, Bosnia and Herzegovina, Serbia and Montenegro, was established.
At the end of the World War II the Socialist Federal Republic of Yugoslavia (SFRY) was established, and Croatia became one of the six constituent members of this federal union. Yugoslavia was governed by one party, the Communist Party, led by Josip Broz Tito, until his death in 1980.
After a decision made in September 1989 by the Central Committee of the League of Communists of the SFRY to legalise the creation of political parties, Croatia held its first political elections in May 1990, which were won by the Croatian Democratic Union (HDZ) led by Franjo Tudjman, the first President of the Republic of Croatia. A negotiation process with Communist leaders for secession from the rest of Yugoslavia and for reshaping the Yugoslav federation into a confederation followed, but was not successful in achieving the demands of the Croatian people. On 5 October 1991 the Croatian Parliament declared independence from the SFRY and the Republic of Croatia was created.
By autumn of 1991, the Federal Army of the SFRY had launched a war against Croatia. In the East of Croatia the city of Vukovar was besieged and fell. In the South of Croatia the city of Dubrovnik was shelled and the Federal Air Force of the SFRY attacked many cities and villages, while rebel Serbs occupied 35% of Croatia.
Meanwhile, Croatia was recognised by all the then existing 12 members of the European Community in January 1992 and by the United States of America in April 1992. On 22 May 1992, Croatia was admitted to the United Nations.
In order to achieve a cease-fire, UN peacekeepers known as United Nations Protection Force (UNPROFOR) were invited by the Government of Croatia in 1992 to observe the demarcation line between the Serb occupied areas and the rest of Croatia until a peaceful solution was found. Croatia finally reclaimed a significant portion of occupied territory in the Krajina region bordering Bosnia and Herzegovina in two military operations "Flash" in May 1995 and "Storm" in August 1995 while Eastern Slavonia remained under Serb occupation and was later peacefully reintegrated into Croatia under the auspices of the UN on 1 January 1998.
Internationally recognised elections were held for the first time in the newly reintegrated Eastern Slavonia region in the East of the Republic of Croatia in April 1998. The UN formally certified that elections were free and fair and that voting occurred without incident. Eastern Slavonia was then successfully reintegrated with the rest of the Republic of Croatia with the re-establishment of Croatian institutions and authority.
After the death of President Franjo Tudjman in late 1999, a six party centralist coalition won the parliamentary elections in January 2000 and formed a new government headed by Prime Minister Ivica Racan, a social democrat. At the same time, a moderate centralist, Stjepan Mesic, was elected President, thus ending ten years of HDZ rule.
Following this, Croatia was quickly integrated into global institutions. Croatia achieved World Trade Organisation (WTO) membership in November 2000. A Security and Association Agreement (SAA) with the European Union has been initiated and is expected to be signed by autumn 2001.
Political System
The Constitution was adopted by Parliament in December 1990 and amended in late 2000/early 2001. The Constitution establishes a multi-party democracy and an economy based on market principles and private ownership. The Constitution outlines a separation of power into legislative, executive and judicial branches.
According to the Croatian Constitution, political authority is vested in a democratically elected Government. The highest legislative authority is the Parliament. Parliamentary members are elected for a term of 4 years.
Parliament has the power to pass laws, amend the Constitution, adopt the State budget, exercise certain supervisory powers over the work of Government ministries and declare war.
The President is elected by popular vote, serves a five-year term and can only hold office twice consecutively. The President has the authority to appoint and dismiss the Prime Minister and is the Commander-in-Chief of the armed forces. The President promulgates laws validly enacted by Parliament and can refer them to the Constitutional Court on grounds of constitutionality.
Croatia's judicial system is three-tiered, consisting of municipal, county and supreme courts. There are also specialised courts which deal specifically with commercial and administrative law. The Constitutional Court, independent from all other courts, has jurisdiction over matters relating to the interpretation of the Constitution and the protection of human rights.
A listing of all Croatian Government ministries with their corresponding ministers current at 1 May 2001 may be found in Appendix A.
Geography and Climate
Croatia is located on the border of Central and Southern Europe and borders Slovenia to the North West, Hungary to the North, Bosnia and Herzegovina to the South, the Federal Republic of Yugoslavia to the South East and Italy to the West (sea border). Croatia's border is 2,028 kilometres long. Zagreb is Croatia's capital city and celebrated its 900th anniversary in 1994. A map of Croatia may be found in Appendix B.
Croatia has two characteristic climates: Semi-Continental and Mediterranean. The Semi-Continental region has winter temperatures below zero, typically with snow, while spring and autumn are pleasantly warm and summer is hot and humid. The Mediterranean climate, which spreads along the Adriatic coast and islands, is distinguished by a warm, dry summer, a mild winter and pleasant spring and autumn.
The following are key Croatian demographics:
Roads
Croatia has nearly 22,000 kilometres of hard-surfaced roads, including 352 kilometres of motorways.
The north and north-western regions of the country (the Istria and Zagorje regions) are well linked to the Croatian capital, Zagreb, and to both Eastern and Western Europe. The highway system in these parts of Croatia is well developed in comparison with the countries to the East and South. Roads are over-utilised in the summer and heavy traffic can be a problem for travellers.
The South Western portion of the country, encompassing the regions of Dalmatia and Lika (please see map in Appendix B), has a less developed road system than the rest of the country.
Croatia has ambitious plans for the extension of existing motorways and construction of new ones.
Mass transportation is the predominant mode of urban and interurban transport in Croatia and is regulated by the Government. Services are provided in Zagreb and other cities through tram systems and bus networks. The Croatian State Railway operates trains between Zagreb and other major cities and has 1,675 kilometres of rail track. Croatia is well linked internally through its railway. Zagreb is the hub for all train travel in Croatia. Most European capitals are easily accessible by railway from Zagreb.
Ports
Croatia's four main river ports provide direct access to the Rhine-Main-Danube system which links Western European and Baltic ports with those on the Black Sea coast.
On the Adriatic, the principal port, Rijeka, and a series of other ports (Pula, Zadar, Split, Sibenik and Ploce) which span the length of the coast are well equipped to service ocean vessels.
Airports
Croatia has seven airports for regular passenger traffic, including five which handle international air traffic (Zagreb - the national hub, Pula, Zadar, Split and Dubrovnik). Croatia also has a number of seasonal airports, most of which handle international air traffic. The national airline, Croatia Airlines, maintains regular connections to over 20 European countries.
Telecommunications Network
The fixed line telecommunications network in Croatia is operated by Croatian Telecom (HT) which is majority owned by the Government, with a 35% share held by Deutsche Telekom. Further privatisation is expected in 2001 or 2002. HT is responsible for telephone services, while mail services are provided by Croatian Post (HP), a wholly owned Government enterprise. The fixed line telephone service is modern and reliable. The postal system within Croatia is fast and dependable.
Croatia introduced a first GSM network "CRONET" in August 1995. CRONET is available to 84% of the population and covers 60% of the territory of the Republic of Croatia. A second privately owned GSM network, VIPnet (majority owned by Mobilkom from Austria), became operational in the summer of 1999. Currently, VIPnet covers around 94% of the country's population.
Language
The official language is Croatian, which is a Slavic language, using the Latin alphabet. There are three major dialects.
Croatians are well educated in foreign languages, with a significant portion of the population fluent in English. German and Italian are also common second languages in Croatia. The literacy rate is 97%.
Education system
Croatia has a well developed education system. Croatia's university programmes, especially those for science, medicine and engineering, meet the highest international standards. Zagreb has the highest number of university faculties but universities (various faculties) are also present in Osijek, Split, Rijeka and Dubrovnik. Higher level business management programmes have also recently been introduced.
Primary education
Primary education is compulsory for all children between the ages of 6 and 15 and lasts eight years.
Secondary education
Secondary education provides the foundation for either vocational work or higher education and lasts three to four years, depending on the subjects studied.
Higher education
There are different degree grades within the Croatian higher education system.
A degree from a vocational college is a non-university degree and is received after successfully completing a two year programme at a vocational college.
Bachelor degree programmes generally last four to six years. Master degrees can be attained after a Bachelor's degree and programmes usually last two to three years. A Doctoral degree can be obtained 2-3 years after attaining a Master's degree.
Labour regulations
A labour law was introduced effective from 1 January 1996 with supplements and changes effective from 16 February 2001. Croatian labour law is broadly in line with Western European legislation. The main clauses of this legislation are as follows:
Hours of work: Full time employment must not be longer than forty hours a week, inclusive of a half hour daily break.
Severance/redundancy: Where an employer ceases to require the skills of an employee, the employee may be made redundant. Termination payments are obligatory for employees with more than two years' service and are calculated on the basis of half of one month's salary for each full year of employment.
Other terminations: Employees may be summarily dismissed for gross misconduct.
Minimum wage: There is no minimum wage prescribed by labour law although it is often determined by a collective agreement (especially in the public sector) which is applicable to all employers and employees within the industry sector.
Holidays: Employees have a right to a minimum 18 days of paid leave per annum.
Employees of a company which employs at least 20 people may set up an employees council. Operations of this council are regulated by the Labour Act and the council is empowered by law to appeal against certain decisions of the employer. Trade unions are also able, inter alia, to promote the interests of employees, to set minimum wages and to engage in collective bargaining.
The economy
Gross domestic product
Croatia has achieved a significant increase in GDP since its transition to a market economy. After a steep decline in economic activity in the early 1990's (as a consequence of war and the break up of Yugoslavia), real GDP grew for the first time in 1994 and continued at 2% in 1995, 4.5% in 1996 and 6.8% in 1997. Growth slowed to 2.5% in 1998 and turned negative (0.4%) in 1999. Preliminary figures indicate that growth resumed in 2000 amounting to approximately 3.5%. The GDP figures do not take into consideration the country's "grey" economy which some estimate may account for as much as 25% of all economic activity.
GDP in 2000 was at the level of approximately USD 18.9 billion, or USD 4,250 per capita (USD 7,100 at Purchasing Power Parity).
Inflation
The value of the Croatian kuna is kept within a tight range of the Deutschmark with the intention that Croatian inflation be comparable to that of German inflation. The Government has been successful in achieving low levels of inflation.
Hyperinflation of up to 1,000% per annum prevailed until the Government commenced its Stabilisation Programme in October 1993 and in May 1994 the new currency, the Croatian kuna, was introduced. The Government has few instruments with which to control inflation other than restricting the money supply. However difficult, the measures successfully reduced inflation with inflation rates of 3.0% in 1994, 3.7% in 1995, 3.4% in 1996, 3.6% in 1997, 5.7% in 1998, 4.2% in 1999 and 6.2% in 2000. Low levels of inflation are primarily attributable to the stable kuna exchange rate and a tight monetary policy.
Wages and employment
Real wages have risen significantly over the last few years. The average net monthly wage for 2000 was HRK 3,300 (USD 382). Average monthly net wages in Croatia have risen steadily in real and nominal terms, but remain low by international standards. Levels of taxation and compulsory social security contributions are high and overall salary costs are significantly higher than in other Central and Eastern European countries while gross costs for lower paid employees are equivalent to Western Europe.
Official statistics report unemployment at 22.6% in 2000. However, according to the standard International Labour Organisation (ILO) methodology used world-wide this figure is 15.1%. Unemployment is expected to drop as the tourism and construction sectors of the economy grow. These sectors are labour intensive and analysts believe that unemployment may fall below 15% (official method) by the year 2010.
Main industries
Agriculture, Forestry and Fishing
Agriculture accounts for 9.7% of GDP. Croatia is self-sufficient in major agricultural products such as grain, poultry, milk and pork. The Government has traditionally set pre-harvest guaranteed prices for agricultural products above world prices. Approximately 80% of all agricultural land is privately held. The remaining 20% is owned by the Government which leases the land to farmers. Of a total of 3 million hectares of agricultural land, 61.3% is cultivated and the rest is used for pasture.
Croatia has approximately 2 million hectares of forested land; wood is used in the manufacture of pulp, paper, furniture and sawn timber and is used extensively in construction. Forestry in Croatia accounts for approximately 3% of GDP. The wood produced is mainly oak, beech and pine. The regions most active in forestry are Gorski Kotar, Lika and Slavonia (please see map in Appendix B). Croatia's wood processing industry has approximately 40,000 employees and exports USD 350 million annually. A total of 75% of Croatia's forested land is state-owned.
Croatia had a small but thriving fishing industry prior to independence; presently saltwater and freshwater fishing are at half pre-war levels. Fisheries account for 2% of GDP. Dalmatia (South Croatia) is the most vital region in the fishing industry. About 4,300 people are employed in fisheries which accounts for approximately 0.5% of the total work force. Croatia is a net exporter of fish and fish products.
Construction
The war significantly disrupted construction activity. With the reintegration of previously occupied territories of Croatia, activity in this sector has increased as reconstruction and repair of war damage has begun. The construction industry in Croatia is divided into a large state-owned sector and smaller privately owned construction companies.
In 2000 the construction industry employed 53,037 employees in 6,295 companies. Although this is significantly lower than before the war there is still overcapacity. The value of construction contracts carried out abroad in 1999 amounted to more than USD 135 million, 95% of which was earned in Europe.
Energy
The energy industry is wholly Government owned. Energy sources are produced, imported and exported by INA dd and by Hrvatska Elektroprivreda dd or "HEP", both state-owned companies. Croatia is a substantial producer of energy: crude oil, liquid fuel, natural gas (produced, imported and exported by INA) and electricity (produced, imported and exported by HEP).
Currently, the Government is taking action to restructure and privatise parts of both INA and HEP.
Out of the primary sources of energy in Croatia, consumption in 2000, may be analysed into the following categories
Manufacturing and Mining
Manufacturing and mining generally account for approximately one-third of GDP and employ around one-third of the labour force. Industrial activity decreased substantially between 1990 and 2000 and the relative share of industry and mining as a percentage of total GDP has decreased. The largest sectors of industrial production have been electrical engineering, food products, chemicals, pharmaceuticals, textiles, wood processing and shipbuilding.
Tourism
Before the war, tourism was one of the most important sources of foreign currency earnings. In 1990 Croatia was visited by some five million foreign visitors who spent a total of 34 million overnight stays. Approximately 12% of GDP was generated from tourist consumption and 7% of GDP was generated as a result of services related to tourism such as catering, travel, transportation and other services. High levels of tourist revenue are unrecorded and form part of the country's "grey" economy. Consequently, the significance of tourism is greater than official statistics would suggest.
Opportunities for international investors
Overview
The Croatian Government has consistently pursued a tight monetary policy designed to stabilise inflation and the value of the domestic currency. Measures open to the Government to control inflation are restricted due to the limited capital market and the extent of the "grey" economy.
However, since the Government introduced its stabilisation programme in the last quarter of 1993, which succeeded in eliminating hyperinflation, the economy has been stable and moves toward a market economy are steady. The country is still in a transitional state but the Government is striving to ensure Croatia's admittance to the EU and other Western political, military and economic organisations.
Accordingly, the Government recognises the need to secure foreign investment to stimulate the economy and a number of multinationals are already established in the Croatian market. Although these companies are conservative in their entry strategy, often establishing a representative office or a joint venture with a domestic company, their presence is expected to become stronger as Croatia continues its transition to a free-market system. A selection of well-known companies follows:
Privatisation
Croatia commenced its privatisation programme in 1991 with the Law on the Transformation of Socially Owned Companies. The aim of the programme was to privatise approximately 3,000 state owned enterprises. The Croatian Privatisation Fund (CPF) was established to carry out the privatisation process. Company assets and equities have been sold both at public auctions and through invitations for bids.
Compared to the privatisation processes of other Central and Eastern European countries such as the Czech Republic, Hungary and Poland, Croatia has been relatively slow in carrying out market reforms which would result in the privatisation of state-owned and state-run industries. In particular, the Government has been slow to effect the significant restructuring which is required in the utilities and larger companies prior to privatisation.
The Government is keen on being accepted into Western economic and political structures and as a result intends to speed up the process of privatisation.
The Croatian banking and financial sector
Background
Croatia has a two tier banking system in which the Croatian National Bank (CNB) acts as the central bank.
The banking market
Croatia currently has 42 licensed commercial banks, 20 savings banks and 4 mortgage lending banks. In the beginning of the 1990's, there was a rapid increase in the establishment of local and regional private banks and in 1994 the first foreign bank entered the market. The most significant banks are Zagrebacka banka and Privredna banka which together have over 50% of total assets in the banking sector and are majority owned by foreign shareholders.
Banks may be established by foreign or domestic individuals or companies. The minimum equity capital for commercial banks is HRK 20 million. Commercial banks dealing in foreign exchange require a minimum of HRK 60 million equity capital. The minimum equity capital for savings banks is HRK 20 million. All banks must be licensed by the Croatian National Bank.
Foreign banks
Foreign banks are subject to the same regulatory requirements as Croatian banks. The following foreign banks have subsidiaries or branches in Croatia: Banca Intesa, Bayerische Landesbank, Dresdner Bank, Erste-Steiermärkische Bank, Hypo Alpe-Adria Bank, HypoVereinsbank/Bank Austria Creditanstalt, Raiffeisenbank, Unicredito and Volksbank. Other Croatian banks are owned by foreign institutions, such as Charlemagne Capital. Other foreign banks have set up representative offices in Croatia.
The Croatian National Bank
The Croatian National Bank became the central bank in December 1991.
The CNB operates as an independent institution and is solely responsible to Parliament, to which it submits at least two reports a year on its activities. The Governor of the CNB and members of the Board of Governors are appointed by Parliament for a six year term and can be removed by Parliament.
The main responsibility of the CNB is to ensure price stability through sound monetary policy. The CNB is specifically responsible for determining the money supply, the general liquidity of banks, maintaining general liquidity of payments abroad, issuing banknotes and coins, supervising banks, regulating, organising and adjusting the information system required for the normal functioning of the CNB, and maintaining gold and foreign currency reserves. Guidelines for monetary policy are established by the CNB in consultation with Parliament and in co-ordination with the Government, although the CNB has the authority to make final decisions on policy. The CNB is required to present Parliament with annual guidelines for monetary policy and with periodic reports on implementation. Exchange rates are also established by the CNB on the basis of market rates.
The CNB has recently initiated significant changes in the payment system moving from a central state owned payment clearing institution towards a system operated by the commercial banks. Obligatory reserves, previously the main monetary policy lever, have been eased and the CNB is moving more towards other monetary policy instruments such as open market operations.
Currency and borrowing regulations
Transactions between Croatian domestic entities must be made in Croatian kuna.
Payments from a foreign person or foreign legal entity (including payments from a foreign representative office located in Croatia) to domestic corporations may be made in foreign currency.
Similarly, payments made abroad for goods, services, dividends, interest and royalties may be made in foreign currency. Transactions between domestic legal entities and foreign legal entities can be denominated in foreign or local currency.
Presently, legislation only permits a Croatian company to maintain a foreign currency account abroad in very limited circumstances and approval of the CNB is required.
In general, companies are not able to take foreign currency loans from domestic banks; however, there are exemptions which make this possible.
Loans may be taken by a domestic person from a foreign person (either corporate or individual) but must be registered with the CNB.
Banking supervision
The CNB is responsible for banking supervision. Minimum capital adequacy requirements and maximum risk exposures are set and monitored. An adequate regulatory framework is in place and its effectiveness is gradually being improved. The CNB must approve all management board members of banks and grant permission for any shareholding over 10%.
Business presence
Types of business presence in Croatia
According the Croatian legal system the following types of business presence may be established
representative office;
branch office;
commercial company.
Branch offices and commercial companies must be registered with the Commercial Court; representative offices need only register with the Ministry of Economy.
Representative office
A representative office of a foreign company may be established in Croatia upon the official request of the foreign company. Representative offices are registered in the Register of Representative Offices in the Croatian Ministry of Economy.
A representative office can be founded for market research, promotion and to obtain business information for the founder; it must be non-profitable and is not permitted to generate income. A representative office, established by a foreign person, does not have the status of a legal entity and has no contractual status in its own right. In order to operate in Croatia, a representative office is allowed to open both foreign currency and kuna accounts in a domestic bank.
Branch office
Foreign companies and individual traders can establish branch offices in Croatia. A branch of a foreign entity can be established under the same conditions as a branch office of a Croatian entity.
A branch office should conduct business in accordance with Croatian law, although it is not a legal entity but instead is considered as a part of the company which established it.
A branch office must be registered in the commercial register at the Commercial Court, and persons entitled to represent the branch must have a Croatian residence permit and statistical identification number.
The rights and commitments connected with the business operations carried out by a branch office are considered as the rights and commitments of the company which established the branch office.
Commercial companies
Commercial companies as well as branch offices are regulated by the Companies Act.
Foreign persons are allowed to establish the following types of commercial company either as a 100% owned subsidiary or jointly with domestic entities:
joint stock company;
limited liability company;
general partnership;
limited partnership.
Joint Stock Company ("d.d.")
A joint stock company is registered in the Registration Department of the Commercial Court, and may be established by one or more physical persons or legal entities.
A joint stock company has share capital which is divided into shares. The minimum amount of initial share capital required to establish a joint stock company is the kuna equivalent of DEM 30,000. The nominal value of a share must satisfy the following:
a minimum nominal value of the kuna equivalent of DEM 10;
expressed in kuna, and divisible by 100.
Shareholders of a joint stock company are not personally liable for the obligations of the company.
General Assembly
The general assembly of shareholders is the ultimate corporate body. Powers are defined by company law and the company's own statute. The principal functions of the general assembly are:
Supervisory Board
A supervisory board must be elected at the general assembly. The supervisory board elects a president and vice-president. The supervisory board is responsible for supervising the management of the company.
Management Board
The supervisory board appoints a management board. If the management board consists of more than one person, one person must be appointed chairman. The management board is empowered to enter into transactions on behalf of the company. Members of the management board are appointed for a maximum term of five years, with the possibility of re-appointment.
Share capital
Before registration of a joint stock company, a proportion of the share capital must be paid into a Croatian bank account. At least one quarter of the nominal amount of each share must be paid before registration and if a share is issued for a higher amount than the nominal share amount, the entire amount exceeding the nominal amount must be paid.
In the case of contributions in kind, the investment must be contractually agreed prior to registration of the company in the commercial register. The market value of the consideration must be certified by a court approved auditor.
Shares in a joint stock company may be in registered or bearer form. For registered shares the amount of any part payment must be specified on the share certificate; bearer shares must be fully paid prior to issue.
Shares can be either ordinary or preference. Ordinary shares provide their holder with the following rights:
Preference shares may be issued with or without voting rights.
Take-over Law
Joint stock companies are subject to the provisions of the Take-over Law.
Securities and Exchange Commission
Joint stock companies have reporting obligations to the Securities and Exchange Commission.
Anti-Monopolies Commission
Activities of joint stock companies and changes of shareholders are subject to Anti-Monopolies Commission regulations.
Limited Liability Company ("d.o.o.")
A limited liability company is registered in the Registration Department of the Commercial Court, and may be established by one or more physical persons or legal entities.
Generally, limited liability companies require lower standards of corporate governance than joint stock companies. For example, there is no requirement for a supervisory board to be elected.
The minimum capital required when establishing a limited liability company is the kuna equivalent of DEM 5,000, while the minimum ownership stake is set at the kuna equivalent of DEM 200.
The amount of paid capital must amount to at least DEM 2,500 before the company may be registered in the Register of Companies.
Members of a limited liability company are not personally liable for the obligations of the company.
In order to establish a limited liability company the founder should prepare a deed of incorporation (in the case of a sole founder), or articles of association (in the case of more than one founder).
General Partnership ("j.t.d.")
A general partnership may be established by two or more legal entities or individuals.
The main characteristic of a general partnership is that all members are personally liable for all obligations of the general partnership.
At least one of the members of the general partnership must be a Croatian resident.
Limited Partnership ("k.d.")
A limited partnership may be established by two or more legal entities or individuals, of which at least one must be personally responsible for the obligations of the limited partnership (unlimited liability partner) and at least one will not be personally responsible for the obligations of the limited partnership (limited liability partner). At least one of the unlimited liability partners must be a Croatian resident.
Value Added Tax / Special Tax on Luxury goods / Property Transfer Tax / Gift and Inheritance Taxes
Overview
The previous sales tax system on products and goods was replaced by a VAT system on 1 January 1998. Other significant taxes include property transfer taxes and gift and inheritance taxes.
Value Added Tax
The Value Added Tax (VAT) legislation came into force on 1 January 1998, and replaced the then existing Law on Sales Tax on Goods and Services.
Entrepreneurs and legal entities performing business activities are liable for VAT, if they had taxable deliveries in excess of HRK 85,000 in the previous year. VAT is payable at the rate of 22% on the deliveries of goods and services performed in Croatia, personal consumption, new buildings, importation of goods.
Generally, VAT is accounted for monthly via monthly returns and any resulting VAT due is required to be paid by the 30th day of the following month.
An annual VAT return based on the calendar year is also required to be filed by 30 April of the following year.
On 1 November 1999 Croatia introduced a lower band rate of 0%. The zero rate applies to bread, milk, educational literature (specified), certain medical supplies and the service of movie projections.
Exports are zero rated. This includes the export of services and delivery of goods and processed goods, including transport and all delivery services, delivery of goods to tax-free sales outlets and specialised warehouses, delivery of goods and provision of services to diplomatic missions under the condition of reciprocity.
VAT exemptions in Croatia are as follows:
renting of residential property;
services performed by banks, savings institutions, savings and loan institutions, insurance and reinsurance companies;
medical services;
services and deliveries of goods performed by social welfare organisations, organisations for children, pupils and students, religious communities, or for cultural purposes.
As of 1 January 2001 services related to the stay of foreign tourists organised by a foreign tourist agency, or any other foreign legal entity, if paid from abroad, are subject to a zero rate of VAT.
Special Tax on Luxury Goods
This tax is levied on a limited range of domestically produced and imported luxury goods.
The tax rate is 30% and is based on the sale price of the good, exclusive of VAT.
A monthly return and payment is due 10 days from expiry of the month when the goods were delivered to customers or used in own consumption.
Property Transfer Tax
Property transfer tax at the rate of 5% of the market value of the immovable property (or value estimated by the Tax Authorities) is levied by the Tax Authorities and is payable by the purchaser.
Gift and Inheritance Tax
An inheritance and gift tax rate of 5% is levied on individuals and legal entities who inherit property situated in Croatia or receive it as a gift. The tax is levied at the time of transfer.
The decedents in the first line are exempt from both gift and inheritance tax.
Other taxes and imposts
Depending on business activities the following may also apply:
Chamber of Commerce contributions
All legal and physical persons performing business activities in Croatia are members of the Croatian Chamber of Commerce.
Fixed monthly membership contributions range from HRK 55 to HRK 5,500 depending on the size of the entity.
In addition, the variable annual contribution due for 2001 is calculated as 0.01% of the total turnover for the 1999 calendar year.
Tourist Tax
Catering, tourist and all companies directly related to tourism are subject to tourist tax at rates ranging from 0.08% to 0.25% of total turnover, depending on the company's activities and the place of its location and registration. Trading companies are subject to tourist tax at rates from 0.01% to 0.05% of total turnover, again depending on the company's activities and the place of its location and registration.
Tourist tax is paid monthly in advance on the basis of the turnover of the previous year. The final liability is assessed at the year end.
Forestry Tax
All legal persons that carry out economic activities in Croatia are subject to forestry tax at the rate of 0.07% of total turnover.
Tax advances are paid quarterly on the basis of the turnover of the previous year. The final liability is assessed at the year end.
Consumption tax
Legal and natural persons engaged in catering are subject to consumption tax.
The tax is levied on the retail price of alcoholic and non-alcoholic beverages sold in bars and restaurants at rates of up to 3% of the tax base for VAT.
This tax is reported and paid on a monthly basis.
Firm tax
Legal persons and individuals liable to corporate profit tax or personal income tax are subject to firm tax which is levied by local authorities. This tax is levied annually up to a maximum of the HRK equivalent of DEM 500.
Public utilities tax
Local authorities regulate the assessment and collection of the public utilities tax. The tax is assessed on the usage of public places (e.g. restaurants with tables in public places).
Advertising Tax
Legal persons and individuals who advertise on public places are subject to advertising tax.
Local authorities assess the amount of tax to be paid but it cannot exceed the HRK equivalent of DEM 200 for each advertisement.
Advertising tax is not levied on advertising in newspapers or any other public media.
Tax on games of chance
Taxes on games of chance are regulated as follows:
Law on games of chance
Natural persons who realise a gain are subject to 10% tax on gains over HRK 20,000. The organiser of the game of chance assesses and effects payment of this tax.
Law on games of chance and entertainment games
Natural persons who realise a gain are subject to 15% tax on gains in excess of three times the Croatian minimum monthly salary. The organiser of the game of chance assesses and effects payment of this tax.
Legal and natural persons organising games of chance and entertainment games are subject to lump sum profit tax. The tax is paid monthly and ranges from HRK 400 to HRK 12,000 (per machine or table) depending on the type of game of chance.
Tax on motor vehicles
Legal persons and individuals who are owners of registered cars and motorcycles are subject to this tax.
The tax is assessed annually according to the engine power and year of production of the vehicle and ranges from the HRK equivalent of DEM 30 to DEM 200 for motor vehicles and from the HRK equivalent of DEM 20 to DEM 100 for motor cycles.
Motor vehicles older than ten years and motorcycles older than five years are not subject to this tax.
Tax on boats
Legal persons and individuals who are owners of registered boats are subject to this tax.
The tax is assessed annually according to the boat's length, type and year of production.
Amounts vary from the HRK equivalent of DEM 30 to DEM 550 per annum.
Tax on the organisation of entertainment shows and sport games
Persons organising entertainment shows and events (such as movies, sport games, concerts, etc.) for which tickets of admission are sold are subject to this tax.
The tax is levied at the rate of 5% on the value of the tickets sold.
Organisers of theatre shows, museum exhibitions and other cultural events and organisers of trade fairs are not subject to this tax.
This tax is payable 7 days after the end of the event.
Tax on country cottages and rest centres
Legal persons and individuals who are owners of country cottages and rest centres are subject to this tax. The tax is assessed annually by the local authorities according to the available square metres of usable surface of the property at rates ranging from the HRK equivalent of DEM 1 to DEM 3 per square metre of usable surface.
Investment Incentives
Overview
The amended Corporate Profit Tax (CPT) Law, which came into effect on 1 January 2001, prescribes general and specific incentives.
General incentives
The partial or total write off of equipment and business buildings acquired in the tax period is considered to be a depreciation expense which is recognised for CPT purposes.
The taxable base may be additionally decreased for new employees' salaries (salaries and contributions) calculated for the tax period and paid prior to submission of the tax return.
New employees are considered to be employees hired for an indefinite period and their employment with the taxpayer was preceded by one month's registration with the Unemployment Agency, after forfeiting pension rights or first employment. Probationers, trainees, interns, etc. employed for a determined period are also considered to be new employees.
Specific incentives
Investment Promotion Law / CPT Law (no regulations)
According to the Investment Promotion Law published in 2000 and the amended CPT Law, newly established limited liability or joint stock companies investing in Croatia that fulfil certain criteria (introduction of new equipment and modern technologies, introduction of new production processes and products, employment and training of employees, modernisation and improvement of business operations, increase in exports, increase in production, development of new supply of services, adjustment of Croatian economy to European standards and similar) may be offered the following incentives:
Reductions of CPT rate are as follows:
CPT at the rate of 7% will be paid on profit achieved from investments amounting to at least HRK 10 million in the period of 10 years, from the year when the investment commenced, under the condition that at least 30 employees are hired in that period, starting after expiry of the first year of investment.
CPT at the rate of 3% will be paid on profit achieved from investments amounting to at least HRK 20 million in the period of 10 years, from the year when the investment commenced, under the condition that at least 50 employees are hired in that period, starting after expiry of the first year of investment.
CPT at the rate of 0% will be paid on profit achieved from investments amounting to at least HRK 60 million in the period of 10 years, from the year when the investment commenced, under the condition that at least 75 employees are hired in that period, starting in the first year of investment.
Free trade zones
Croatian legislation provides concessions for certain activities carried out in prescribed free trade zones.
Free trade zones are designated areas in which companies may establish their operations (such as the production of goods, refinement of goods, wholesale and mediation in trade, provision of services, banking and other financial operations, insurance and re-insurance of property and persons) on the basis of a contract with a founder of a zone.
There are currently seven free trade zones located at Zagreb, Rijeka, Ploce, Pula, Split, Zadar and Vukovar.
The main concessions are:
CPT concessions
Companies that establish their operations within a free trade zone are entitled to a 50% deduction of the prescribed corporate profit tax rate.
Companies that build or participate in the construction of infrastructure in a zone, where the value of the construction is in excess of HRK 1,000,000, are released from paying corporate profit tax in the first five years of operating in a zone.
Customs duty concessions
There is no customs duty payable on raw materials imported to the zone. However, if the finished products are to be sold in Croatia, import customs duty on finished products must be paid.
Special State Care Areas
The Government of the Republic of Croatia provides concessions for companies commencing operations in "special state care areas". Concessions apply to three categories of companies:
the first category of concessions apply to those companies located in areas which were occupied until 1995 and which are within 15 kilometres of the border;
the second category of concessions apply to those companies located in cities and other places not included in first category but which were also occupied until 1995;
the third category of concessions apply to those companies located in areas where Croatia borders Slovenia.
City of Vukovar
Exceptional concessions exist for companies investing in the City of Vukovar, in Eastern Croatia.
Visas, Work Permits and Residency
Legislative framework
The legal framework which regulates entry into Croatia comprises a number of laws and regulations:
Law of Entry and Residence of Foreigners;
Law of Employment of Foreigners;
Direction for issuance of work permits to foreigners;
Regulations dealing with the issuance of travel and identification documents and visas;
Regulations dealing with issuance of identification documents and visas; this also covers the required form of identification documents.
Visas
Visitors from all countries, except the following countries, are required to obtain either tourist visa or a business visa before entering Croatia:
Argentina, Finland, Luxembourg, Slovakia, Australia, France, Macedonia, Slovenia, Austria, Germany, Malta, Spain, Belgium, Greece , Monaco, Sweden, Bosnia and Herzegovina, Holland, New Zealand, Switzerland, Bulgaria, Ireland, Norway, Turkey, Canada, Israel, Poland, United Kingdom, Czech Republic, Italy, Portugal, United States, Chile, Japan, Romania, Uruguay, Denmark, Hungary, San marino, Vatican City, Ecuador, Liechtenstein.
Visitors from other countries require a tourist visa or a business visa, which entitles them to stay in Croatia for up to three months.
If during these three months the foreigner decides to stay in the Republic of Croatia for more than three months or if the foreigner's purpose of stay changes, an application for an extended stay is required.
Employment and business visas and work permits
All foreigners require an employment visa or a business visa in order to work in Croatia; this includes short visits relating to business trips, meetings or conferences. These visas entitle a foreigner to enter Croatia an unlimited number of times and establishes the purpose of the visit. In either case, a work permit is also required.
Employment visa
An employment visa is issued to an employee who is not part of the management of the Croatian company.
The Ministry of Internal Affairs grants approval for an employment visa after the application has been reviewed and accepted by an appropriate Ministry.
A request for an employment visa should be submitted to the Embassy or Consulate of the Republic of Croatia abroad. The foreigner should submit a request together with a letter from the company or organisation for which he or she will be working in Croatia stating the reason for his or her stay in Croatia.
Within 24 hours of entering Croatia, the foreigner must register his or her residence in Croatia at a local police station.
Whilst an employment visa entitles a foreigner to enter Croatia and establishes the purpose of the visit, a work permit must still be obtained.
If the duration of the visit is to be longer than three months, a visitor must apply for an extended stay, which is necessary to obtain a work permit.
Once an extended stay has been obtained, the Croatian employer should apply for a work permit at the State Employment Agency, which requires approximately 2-4 weeks.
Business visa
A business visa is issued by an Embassy or Consulate of the Republic of Croatia abroad at the request of a foreign citizen. A business visa is issued to a foreign citizen in the following cases:
for the performance of commercial, or other activities and foreign trade activities (with the approval of the Ministry of Economy);
to a visitor who performs professional activities determined in a contract on business co-operation, a contract on long-term co-operation in the production industry, a trade transfer contract or a contract on foreign investments (with the approval of the Ministry of Labour and Social Welfare) based on a contractual relationship between the visitor and a Croatian legal entity.
A visitor with a business visa can stay in Croatia for a period necessary to complete work up to a maximum of one year with an unlimited number of entries and exits, or up to the passport expiration date. A visitor with a business visa can apply for a residence permit.
The easiest way to obtain a business visa is to be registered as a member of the Supervisory Board or Management Board of a Croatian company.
Within 24 hours of entering Croatia, the foreigner must register his or her residence in Croatia at a local police station.
As with the employment visa, visitors are still required to apply for a work permit. However, as the business visa covers a period of extended stay for up to one year, there is no need to apply for extended stay within three months.
The foreigner should apply to the State Employment Agency to obtain a personal work permit. The application form should be accompanied by a certified copy of the business visa, a certified copy of the applicant's passport and an explanation from the Croatian employer on the need to employ a foreigner. The State Employment Agency will need approximately 10-15 days to issue a personal work permit.
Other visas
All visas may be issued for single entry/exit or multiple entry/exit purposes. However, visitors are advised to ensure that the visa obtained specifically permits re-entry and also exit from Croatia.
Transit Visas (entry/exit visas)
Transit visas or single entry/single exit visas can be issued for the following reasons: employment (e.g., employment visa and business visa), education, scientific research, or execution of certain professional services. These visas are approved by the Ministry of Internal Affairs.
Diplomatic visas
Diplomatic visas are issued to the holder of diplomatic passports. They are approved by the Ministry of Foreign Affairs. A diplomatic visa is typically issued for a period of three months to one year.
Official visas
Official visas are issued by Ministry of Internal Affairs and by diplomatic or consular offices abroad. An official visa is issued only to foreigners with official passports. An official visa is typically issued for a period of three months to one year.
Stay in Croatia
All foreign persons must register their stay in Croatia after entering the country. If a foreign person resides in a hotel, the hotel will arrange registration. Upon registration, "legal stay" status is obtained and a white card is issued. The Ministry of Internal Affairs (MUP) registers a stay in one of the following ways:
Temporary stay
Registration of a temporary stay is required to establish a legal short stay of a foreign person in Croatia; a foreigner with a transit visa (or single entry/single exit visa), employment/business visa or a tourist visa may register under this classification. A transit visa (single entry/single exit visa) is valid for seven days while a tourist visa is valid for three months.
Extended stay
Extended stay is required for stays not included under the temporary stay category. An extended stay is typically granted for purposes of education, scientific research, medical treatment, tourist visits, marriage with a Croatian citizen, or other important reasons. A person with a diplomatic visa or an official visa typically registers their stay under extended stay. Extended stay is usually granted for up to one year.
Refugee stay
Refugees who enter Croatia must immediately register at the nearest local police station.
Residency
Residency can be obtained by a foreigner who is married to a Croatian citizen for at least one year or married to a foreigner who has obtained Croatian residency
Much effort has been made to ensure that the information contained in this publication is accurate as at 1 May 2001. However, taxation and commercial legislation and regulations in Croatia are prone to frequent change. Accordingly, you should not act in reliance on the information contained in this publication without prior confirmation that no changes in relevant law or practice have been made. It should also be noted that statistics from government sources may not provide a true indication of actual figures due to out-dated methods of collecting data; however, efforts have been made to move fully towards internationally recognised methods.
It should be emphasised that whilst this publication is intended to provide general information in all relevant areas, it is not a comprehensive work and it does not provide the detailed information necessary to make investment decisions. Any entity or individual wishing to invest in Croatia should obtain additional advice from accountancy, legal, taxation and other appropriate professional advisers.
The Republic of Croatia is a relativey new country, having declared independence from the Socialist Federal Republic of Yugoslavia on 25 June 1991. Initially, Croatia applied many laws of the former Yugoslavia but has since undertaken the process of enacting new laws. Many laws and regulations related to investment have come into effect relatively recently. As with any new legislation, there are provisions which are open to interpretation and remain ambiguous. In addition, certain laws refer to supporting regulations, many of which are issued after the release of the laws.
General information
History
Located at the crossroads of Central, South and East Europe, Croatia has developed historically under many different cultures and political influences.
Croatia identified itself as having a separate national identity with the coronation of King Tomislav in 925. Croatia later joined Hungary and was governed by an appointee of the Hungarian kings until 1526 when Croatia sought help from the Austrian Habsburgs for protection from Ottoman expansion. The Austro-Hungarian influence lasted until 1918 when proponents of the "Yugoslav" ideology prevailed and Yugoslavia, a union of present day Slovenia, Croatia, Macedonia, Bosnia and Herzegovina, Serbia and Montenegro, was established.
At the end of the World War II the Socialist Federal Republic of Yugoslavia (SFRY) was established, and Croatia became one of the six constituent members of this federal union. Yugoslavia was governed by one party, the Communist Party, led by Josip Broz Tito, until his death in 1980.
After a decision made in September 1989 by the Central Committee of the League of Communists of the SFRY to legalise the creation of political parties, Croatia held its first political elections in May 1990, which were won by the Croatian Democratic Union (HDZ) led by Franjo Tudjman, the first President of the Republic of Croatia. A negotiation process with Communist leaders for secession from the rest of Yugoslavia and for reshaping the Yugoslav federation into a confederation followed, but was not successful in achieving the demands of the Croatian people. On 5 October 1991 the Croatian Parliament declared independence from the SFRY and the Republic of Croatia was created.
By autumn of 1991, the Federal Army of the SFRY had launched a war against Croatia. In the East of Croatia the city of Vukovar was besieged and fell. In the South of Croatia the city of Dubrovnik was shelled and the Federal Air Force of the SFRY attacked many cities and villages, while rebel Serbs occupied 35% of Croatia.
Meanwhile, Croatia was recognised by all the then existing 12 members of the European Community in January 1992 and by the United States of America in April 1992. On 22 May 1992, Croatia was admitted to the United Nations.
In order to achieve a cease-fire, UN peacekeepers known as United Nations Protection Force (UNPROFOR) were invited by the Government of Croatia in 1992 to observe the demarcation line between the Serb occupied areas and the rest of Croatia until a peaceful solution was found. Croatia finally reclaimed a significant portion of occupied territory in the Krajina region bordering Bosnia and Herzegovina in two military operations "Flash" in May 1995 and "Storm" in August 1995 while Eastern Slavonia remained under Serb occupation and was later peacefully reintegrated into Croatia under the auspices of the UN on 1 January 1998.
Internationally recognised elections were held for the first time in the newly reintegrated Eastern Slavonia region in the East of the Republic of Croatia in April 1998. The UN formally certified that elections were free and fair and that voting occurred without incident. Eastern Slavonia was then successfully reintegrated with the rest of the Republic of Croatia with the re-establishment of Croatian institutions and authority.
After the death of President Franjo Tudjman in late 1999, a six party centralist coalition won the parliamentary elections in January 2000 and formed a new government headed by Prime Minister Ivica Racan, a social democrat. At the same time, a moderate centralist, Stjepan Mesic, was elected President, thus ending ten years of HDZ rule.
Following this, Croatia was quickly integrated into global institutions. Croatia achieved World Trade Organisation (WTO) membership in November 2000. A Security and Association Agreement (SAA) with the European Union has been initiated and is expected to be signed by autumn 2001.
Political System
The Constitution was adopted by Parliament in December 1990 and amended in late 2000/early 2001. The Constitution establishes a multi-party democracy and an economy based on market principles and private ownership. The Constitution outlines a separation of power into legislative, executive and judicial branches.
According to the Croatian Constitution, political authority is vested in a democratically elected Government. The highest legislative authority is the Parliament. Parliamentary members are elected for a term of 4 years.
Parliament has the power to pass laws, amend the Constitution, adopt the State budget, exercise certain supervisory powers over the work of Government ministries and declare war.
The President is elected by popular vote, serves a five-year term and can only hold office twice consecutively. The President has the authority to appoint and dismiss the Prime Minister and is the Commander-in-Chief of the armed forces. The President promulgates laws validly enacted by Parliament and can refer them to the Constitutional Court on grounds of constitutionality.
Croatia's judicial system is three-tiered, consisting of municipal, county and supreme courts. There are also specialised courts which deal specifically with commercial and administrative law. The Constitutional Court, independent from all other courts, has jurisdiction over matters relating to the interpretation of the Constitution and the protection of human rights.
A listing of all Croatian Government ministries with their corresponding ministers current at 1 May 2001 may be found in Appendix A.
Geography and Climate
Croatia is located on the border of Central and Southern Europe and borders Slovenia to the North West, Hungary to the North, Bosnia and Herzegovina to the South, the Federal Republic of Yugoslavia to the South East and Italy to the West (sea border). Croatia's border is 2,028 kilometres long. Zagreb is Croatia's capital city and celebrated its 900th anniversary in 1994. A map of Croatia may be found in Appendix B.
Croatia has two characteristic climates: Semi-Continental and Mediterranean. The Semi-Continental region has winter temperatures below zero, typically with snow, while spring and autumn are pleasantly warm and summer is hot and humid. The Mediterranean climate, which spreads along the Adriatic coast and islands, is distinguished by a warm, dry summer, a mild winter and pleasant spring and autumn.
The following are key Croatian demographics:
| Area | 56,538 square kilometres |
| Length of coastline | 1,778 km |
| Islands | 1,185 (66 inhabited) |
| Length of coastline on islands | 4,012 km |
| Population | 4.5 million |
| Capital city/population | Zagreb (780,000 inhabitants) |
The highest Croatian peak, Mount Dinara (1,831 metres above sea level), is located in the Southern part of the country, on the border with Bosnia and Herzegovina. The Sava is the largest and longest Croatian river. Croatia also has many lakes; the best known are in the UNESCO protected Plitvice Lakes National Park located in the South East of the country.
Roads
Croatia has nearly 22,000 kilometres of hard-surfaced roads, including 352 kilometres of motorways.
The north and north-western regions of the country (the Istria and Zagorje regions) are well linked to the Croatian capital, Zagreb, and to both Eastern and Western Europe. The highway system in these parts of Croatia is well developed in comparison with the countries to the East and South. Roads are over-utilised in the summer and heavy traffic can be a problem for travellers.
The South Western portion of the country, encompassing the regions of Dalmatia and Lika (please see map in Appendix B), has a less developed road system than the rest of the country.
Croatia has ambitious plans for the extension of existing motorways and construction of new ones.
Mass transportation is the predominant mode of urban and interurban transport in Croatia and is regulated by the Government. Services are provided in Zagreb and other cities through tram systems and bus networks. The Croatian State Railway operates trains between Zagreb and other major cities and has 1,675 kilometres of rail track. Croatia is well linked internally through its railway. Zagreb is the hub for all train travel in Croatia. Most European capitals are easily accessible by railway from Zagreb.
Ports
Croatia's four main river ports provide direct access to the Rhine-Main-Danube system which links Western European and Baltic ports with those on the Black Sea coast.
On the Adriatic, the principal port, Rijeka, and a series of other ports (Pula, Zadar, Split, Sibenik and Ploce) which span the length of the coast are well equipped to service ocean vessels.
Airports
Croatia has seven airports for regular passenger traffic, including five which handle international air traffic (Zagreb - the national hub, Pula, Zadar, Split and Dubrovnik). Croatia also has a number of seasonal airports, most of which handle international air traffic. The national airline, Croatia Airlines, maintains regular connections to over 20 European countries.
Telecommunications Network
The fixed line telecommunications network in Croatia is operated by Croatian Telecom (HT) which is majority owned by the Government, with a 35% share held by Deutsche Telekom. Further privatisation is expected in 2001 or 2002. HT is responsible for telephone services, while mail services are provided by Croatian Post (HP), a wholly owned Government enterprise. The fixed line telephone service is modern and reliable. The postal system within Croatia is fast and dependable.
Croatia introduced a first GSM network "CRONET" in August 1995. CRONET is available to 84% of the population and covers 60% of the territory of the Republic of Croatia. A second privately owned GSM network, VIPnet (majority owned by Mobilkom from Austria), became operational in the summer of 1999. Currently, VIPnet covers around 94% of the country's population.
Language
The official language is Croatian, which is a Slavic language, using the Latin alphabet. There are three major dialects.
Croatians are well educated in foreign languages, with a significant portion of the population fluent in English. German and Italian are also common second languages in Croatia. The literacy rate is 97%.
Education system
Croatia has a well developed education system. Croatia's university programmes, especially those for science, medicine and engineering, meet the highest international standards. Zagreb has the highest number of university faculties but universities (various faculties) are also present in Osijek, Split, Rijeka and Dubrovnik. Higher level business management programmes have also recently been introduced.
Primary education
Primary education is compulsory for all children between the ages of 6 and 15 and lasts eight years.
Secondary education
Secondary education provides the foundation for either vocational work or higher education and lasts three to four years, depending on the subjects studied.
Higher education
There are different degree grades within the Croatian higher education system.
A degree from a vocational college is a non-university degree and is received after successfully completing a two year programme at a vocational college.
Bachelor degree programmes generally last four to six years. Master degrees can be attained after a Bachelor's degree and programmes usually last two to three years. A Doctoral degree can be obtained 2-3 years after attaining a Master's degree.
Labour regulations
A labour law was introduced effective from 1 January 1996 with supplements and changes effective from 16 February 2001. Croatian labour law is broadly in line with Western European legislation. The main clauses of this legislation are as follows:
Hours of work: Full time employment must not be longer than forty hours a week, inclusive of a half hour daily break.
Severance/redundancy: Where an employer ceases to require the skills of an employee, the employee may be made redundant. Termination payments are obligatory for employees with more than two years' service and are calculated on the basis of half of one month's salary for each full year of employment.
Other terminations: Employees may be summarily dismissed for gross misconduct.
Minimum wage: There is no minimum wage prescribed by labour law although it is often determined by a collective agreement (especially in the public sector) which is applicable to all employers and employees within the industry sector.
Holidays: Employees have a right to a minimum 18 days of paid leave per annum.
Employees of a company which employs at least 20 people may set up an employees council. Operations of this council are regulated by the Labour Act and the council is empowered by law to appeal against certain decisions of the employer. Trade unions are also able, inter alia, to promote the interests of employees, to set minimum wages and to engage in collective bargaining.
The economy
Gross domestic product
Croatia has achieved a significant increase in GDP since its transition to a market economy. After a steep decline in economic activity in the early 1990's (as a consequence of war and the break up of Yugoslavia), real GDP grew for the first time in 1994 and continued at 2% in 1995, 4.5% in 1996 and 6.8% in 1997. Growth slowed to 2.5% in 1998 and turned negative (0.4%) in 1999. Preliminary figures indicate that growth resumed in 2000 amounting to approximately 3.5%. The GDP figures do not take into consideration the country's "grey" economy which some estimate may account for as much as 25% of all economic activity.
GDP in 2000 was at the level of approximately USD 18.9 billion, or USD 4,250 per capita (USD 7,100 at Purchasing Power Parity).
Inflation
The value of the Croatian kuna is kept within a tight range of the Deutschmark with the intention that Croatian inflation be comparable to that of German inflation. The Government has been successful in achieving low levels of inflation.
Hyperinflation of up to 1,000% per annum prevailed until the Government commenced its Stabilisation Programme in October 1993 and in May 1994 the new currency, the Croatian kuna, was introduced. The Government has few instruments with which to control inflation other than restricting the money supply. However difficult, the measures successfully reduced inflation with inflation rates of 3.0% in 1994, 3.7% in 1995, 3.4% in 1996, 3.6% in 1997, 5.7% in 1998, 4.2% in 1999 and 6.2% in 2000. Low levels of inflation are primarily attributable to the stable kuna exchange rate and a tight monetary policy.
Wages and employment
Real wages have risen significantly over the last few years. The average net monthly wage for 2000 was HRK 3,300 (USD 382). Average monthly net wages in Croatia have risen steadily in real and nominal terms, but remain low by international standards. Levels of taxation and compulsory social security contributions are high and overall salary costs are significantly higher than in other Central and Eastern European countries while gross costs for lower paid employees are equivalent to Western Europe.
Official statistics report unemployment at 22.6% in 2000. However, according to the standard International Labour Organisation (ILO) methodology used world-wide this figure is 15.1%. Unemployment is expected to drop as the tourism and construction sectors of the economy grow. These sectors are labour intensive and analysts believe that unemployment may fall below 15% (official method) by the year 2010.
Main industries
Agriculture, Forestry and Fishing
Agriculture accounts for 9.7% of GDP. Croatia is self-sufficient in major agricultural products such as grain, poultry, milk and pork. The Government has traditionally set pre-harvest guaranteed prices for agricultural products above world prices. Approximately 80% of all agricultural land is privately held. The remaining 20% is owned by the Government which leases the land to farmers. Of a total of 3 million hectares of agricultural land, 61.3% is cultivated and the rest is used for pasture.
Croatia has approximately 2 million hectares of forested land; wood is used in the manufacture of pulp, paper, furniture and sawn timber and is used extensively in construction. Forestry in Croatia accounts for approximately 3% of GDP. The wood produced is mainly oak, beech and pine. The regions most active in forestry are Gorski Kotar, Lika and Slavonia (please see map in Appendix B). Croatia's wood processing industry has approximately 40,000 employees and exports USD 350 million annually. A total of 75% of Croatia's forested land is state-owned.
Croatia had a small but thriving fishing industry prior to independence; presently saltwater and freshwater fishing are at half pre-war levels. Fisheries account for 2% of GDP. Dalmatia (South Croatia) is the most vital region in the fishing industry. About 4,300 people are employed in fisheries which accounts for approximately 0.5% of the total work force. Croatia is a net exporter of fish and fish products.
Construction
The war significantly disrupted construction activity. With the reintegration of previously occupied territories of Croatia, activity in this sector has increased as reconstruction and repair of war damage has begun. The construction industry in Croatia is divided into a large state-owned sector and smaller privately owned construction companies.
In 2000 the construction industry employed 53,037 employees in 6,295 companies. Although this is significantly lower than before the war there is still overcapacity. The value of construction contracts carried out abroad in 1999 amounted to more than USD 135 million, 95% of which was earned in Europe.
Energy
The energy industry is wholly Government owned. Energy sources are produced, imported and exported by INA dd and by Hrvatska Elektroprivreda dd or "HEP", both state-owned companies. Croatia is a substantial producer of energy: crude oil, liquid fuel, natural gas (produced, imported and exported by INA) and electricity (produced, imported and exported by HEP).
Currently, the Government is taking action to restructure and privatise parts of both INA and HEP.
Out of the primary sources of energy in Croatia, consumption in 2000, may be analysed into the following categories
Manufacturing and Mining
Manufacturing and mining generally account for approximately one-third of GDP and employ around one-third of the labour force. Industrial activity decreased substantially between 1990 and 2000 and the relative share of industry and mining as a percentage of total GDP has decreased. The largest sectors of industrial production have been electrical engineering, food products, chemicals, pharmaceuticals, textiles, wood processing and shipbuilding.
Tourism
Before the war, tourism was one of the most important sources of foreign currency earnings. In 1990 Croatia was visited by some five million foreign visitors who spent a total of 34 million overnight stays. Approximately 12% of GDP was generated from tourist consumption and 7% of GDP was generated as a result of services related to tourism such as catering, travel, transportation and other services. High levels of tourist revenue are unrecorded and form part of the country's "grey" economy. Consequently, the significance of tourism is greater than official statistics would suggest.
Opportunities for international investors
Overview
The Croatian Government has consistently pursued a tight monetary policy designed to stabilise inflation and the value of the domestic currency. Measures open to the Government to control inflation are restricted due to the limited capital market and the extent of the "grey" economy.
However, since the Government introduced its stabilisation programme in the last quarter of 1993, which succeeded in eliminating hyperinflation, the economy has been stable and moves toward a market economy are steady. The country is still in a transitional state but the Government is striving to ensure Croatia's admittance to the EU and other Western political, military and economic organisations.
Accordingly, the Government recognises the need to secure foreign investment to stimulate the economy and a number of multinationals are already established in the Croatian market. Although these companies are conservative in their entry strategy, often establishing a representative office or a joint venture with a domestic company, their presence is expected to become stronger as Croatia continues its transition to a free-market system. A selection of well-known companies follows:
| ABB | Dresdner Bank | Opel |
| Allianz | Ericsson | Oriflame |
| Allied Domecq | Euronet | Pepsi Co |
| Amway | Ford | Pfizer |
| Baloise | Hoechst | Philips |
| Banca Intesa | Hypo Vereinsbank | Procter & Gamble |
| BankAustriaCreditanstalt | IBM | Raiffeisenbank |
| Bayerische landesbank | Interbrew | Regent |
| Bechtel | Krupp | RMC Group |
| Billa | Linde | RWE Group |
| British Airways | Lloyd's Register | Siemens |
| Carlsberg | Lufthansa | Schering |
| Cisco | McDonalds | Shell |
| Coca Cola | Merck | UniCredito Italiano |
| Compaq | Metro | Unilever |
| Danfoss | Microsoft | Velux |
| Daimler Chrysler | Mobilkom | Volksbank |
| Deutsche Bank | Nestle | WalterBau |
| Deutsche Telekom | Electrolux | Wiener Staedtische |
Privatisation
Croatia commenced its privatisation programme in 1991 with the Law on the Transformation of Socially Owned Companies. The aim of the programme was to privatise approximately 3,000 state owned enterprises. The Croatian Privatisation Fund (CPF) was established to carry out the privatisation process. Company assets and equities have been sold both at public auctions and through invitations for bids.
Compared to the privatisation processes of other Central and Eastern European countries such as the Czech Republic, Hungary and Poland, Croatia has been relatively slow in carrying out market reforms which would result in the privatisation of state-owned and state-run industries. In particular, the Government has been slow to effect the significant restructuring which is required in the utilities and larger companies prior to privatisation.
The Government is keen on being accepted into Western economic and political structures and as a result intends to speed up the process of privatisation.
The Croatian banking and financial sector
Background
Croatia has a two tier banking system in which the Croatian National Bank (CNB) acts as the central bank.
The banking market
Croatia currently has 42 licensed commercial banks, 20 savings banks and 4 mortgage lending banks. In the beginning of the 1990's, there was a rapid increase in the establishment of local and regional private banks and in 1994 the first foreign bank entered the market. The most significant banks are Zagrebacka banka and Privredna banka which together have over 50% of total assets in the banking sector and are majority owned by foreign shareholders.
Banks may be established by foreign or domestic individuals or companies. The minimum equity capital for commercial banks is HRK 20 million. Commercial banks dealing in foreign exchange require a minimum of HRK 60 million equity capital. The minimum equity capital for savings banks is HRK 20 million. All banks must be licensed by the Croatian National Bank.
Foreign banks
Foreign banks are subject to the same regulatory requirements as Croatian banks. The following foreign banks have subsidiaries or branches in Croatia: Banca Intesa, Bayerische Landesbank, Dresdner Bank, Erste-Steiermärkische Bank, Hypo Alpe-Adria Bank, HypoVereinsbank/Bank Austria Creditanstalt, Raiffeisenbank, Unicredito and Volksbank. Other Croatian banks are owned by foreign institutions, such as Charlemagne Capital. Other foreign banks have set up representative offices in Croatia.
The Croatian National Bank
The Croatian National Bank became the central bank in December 1991.
The CNB operates as an independent institution and is solely responsible to Parliament, to which it submits at least two reports a year on its activities. The Governor of the CNB and members of the Board of Governors are appointed by Parliament for a six year term and can be removed by Parliament.
The main responsibility of the CNB is to ensure price stability through sound monetary policy. The CNB is specifically responsible for determining the money supply, the general liquidity of banks, maintaining general liquidity of payments abroad, issuing banknotes and coins, supervising banks, regulating, organising and adjusting the information system required for the normal functioning of the CNB, and maintaining gold and foreign currency reserves. Guidelines for monetary policy are established by the CNB in consultation with Parliament and in co-ordination with the Government, although the CNB has the authority to make final decisions on policy. The CNB is required to present Parliament with annual guidelines for monetary policy and with periodic reports on implementation. Exchange rates are also established by the CNB on the basis of market rates.
The CNB has recently initiated significant changes in the payment system moving from a central state owned payment clearing institution towards a system operated by the commercial banks. Obligatory reserves, previously the main monetary policy lever, have been eased and the CNB is moving more towards other monetary policy instruments such as open market operations.
Currency and borrowing regulations
Transactions between Croatian domestic entities must be made in Croatian kuna.
Payments from a foreign person or foreign legal entity (including payments from a foreign representative office located in Croatia) to domestic corporations may be made in foreign currency.
Similarly, payments made abroad for goods, services, dividends, interest and royalties may be made in foreign currency. Transactions between domestic legal entities and foreign legal entities can be denominated in foreign or local currency.
Presently, legislation only permits a Croatian company to maintain a foreign currency account abroad in very limited circumstances and approval of the CNB is required.
In general, companies are not able to take foreign currency loans from domestic banks; however, there are exemptions which make this possible.
Loans may be taken by a domestic person from a foreign person (either corporate or individual) but must be registered with the CNB.
Banking supervision
The CNB is responsible for banking supervision. Minimum capital adequacy requirements and maximum risk exposures are set and monitored. An adequate regulatory framework is in place and its effectiveness is gradually being improved. The CNB must approve all management board members of banks and grant permission for any shareholding over 10%.
Business presence
Types of business presence in Croatia
According the Croatian legal system the following types of business presence may be established
representative office;
branch office;
commercial company.
Branch offices and commercial companies must be registered with the Commercial Court; representative offices need only register with the Ministry of Economy.
Representative office
A representative office of a foreign company may be established in Croatia upon the official request of the foreign company. Representative offices are registered in the Register of Representative Offices in the Croatian Ministry of Economy.
A representative office can be founded for market research, promotion and to obtain business information for the founder; it must be non-profitable and is not permitted to generate income. A representative office, established by a foreign person, does not have the status of a legal entity and has no contractual status in its own right. In order to operate in Croatia, a representative office is allowed to open both foreign currency and kuna accounts in a domestic bank.
Branch office
Foreign companies and individual traders can establish branch offices in Croatia. A branch of a foreign entity can be established under the same conditions as a branch office of a Croatian entity.
A branch office should conduct business in accordance with Croatian law, although it is not a legal entity but instead is considered as a part of the company which established it.
A branch office must be registered in the commercial register at the Commercial Court, and persons entitled to represent the branch must have a Croatian residence permit and statistical identification number.
The rights and commitments connected with the business operations carried out by a branch office are considered as the rights and commitments of the company which established the branch office.
Commercial companies
Commercial companies as well as branch offices are regulated by the Companies Act.
Foreign persons are allowed to establish the following types of commercial company either as a 100% owned subsidiary or jointly with domestic entities:
joint stock company;
limited liability company;
general partnership;
limited partnership.
Joint Stock Company ("d.d.")
A joint stock company is registered in the Registration Department of the Commercial Court, and may be established by one or more physical persons or legal entities.
A joint stock company has share capital which is divided into shares. The minimum amount of initial share capital required to establish a joint stock company is the kuna equivalent of DEM 30,000. The nominal value of a share must satisfy the following:
a minimum nominal value of the kuna equivalent of DEM 10;
expressed in kuna, and divisible by 100.
Shareholders of a joint stock company are not personally liable for the obligations of the company.
General Assembly
The general assembly of shareholders is the ultimate corporate body. Powers are defined by company law and the company's own statute. The principal functions of the general assembly are:
Supervisory Board
A supervisory board must be elected at the general assembly. The supervisory board elects a president and vice-president. The supervisory board is responsible for supervising the management of the company.
Management Board
The supervisory board appoints a management board. If the management board consists of more than one person, one person must be appointed chairman. The management board is empowered to enter into transactions on behalf of the company. Members of the management board are appointed for a maximum term of five years, with the possibility of re-appointment.
Share capital
Before registration of a joint stock company, a proportion of the share capital must be paid into a Croatian bank account. At least one quarter of the nominal amount of each share must be paid before registration and if a share is issued for a higher amount than the nominal share amount, the entire amount exceeding the nominal amount must be paid.
In the case of contributions in kind, the investment must be contractually agreed prior to registration of the company in the commercial register. The market value of the consideration must be certified by a court approved auditor.
Shares in a joint stock company may be in registered or bearer form. For registered shares the amount of any part payment must be specified on the share certificate; bearer shares must be fully paid prior to issue.
Shares can be either ordinary or preference. Ordinary shares provide their holder with the following rights:
Preference shares may be issued with or without voting rights.
Take-over Law
Joint stock companies are subject to the provisions of the Take-over Law.
Securities and Exchange Commission
Joint stock companies have reporting obligations to the Securities and Exchange Commission.
Anti-Monopolies Commission
Activities of joint stock companies and changes of shareholders are subject to Anti-Monopolies Commission regulations.
Limited Liability Company ("d.o.o.")
A limited liability company is registered in the Registration Department of the Commercial Court, and may be established by one or more physical persons or legal entities.
Generally, limited liability companies require lower standards of corporate governance than joint stock companies. For example, there is no requirement for a supervisory board to be elected.
The minimum capital required when establishing a limited liability company is the kuna equivalent of DEM 5,000, while the minimum ownership stake is set at the kuna equivalent of DEM 200.
The amount of paid capital must amount to at least DEM 2,500 before the company may be registered in the Register of Companies.
Members of a limited liability company are not personally liable for the obligations of the company.
In order to establish a limited liability company the founder should prepare a deed of incorporation (in the case of a sole founder), or articles of association (in the case of more than one founder).
General Partnership ("j.t.d.")
A general partnership may be established by two or more legal entities or individuals.
The main characteristic of a general partnership is that all members are personally liable for all obligations of the general partnership.
At least one of the members of the general partnership must be a Croatian resident.
Limited Partnership ("k.d.")
A limited partnership may be established by two or more legal entities or individuals, of which at least one must be personally responsible for the obligations of the limited partnership (unlimited liability partner) and at least one will not be personally responsible for the obligations of the limited partnership (limited liability partner). At least one of the unlimited liability partners must be a Croatian resident.
Value Added Tax / Special Tax on Luxury goods / Property Transfer Tax / Gift and Inheritance Taxes
Overview
The previous sales tax system on products and goods was replaced by a VAT system on 1 January 1998. Other significant taxes include property transfer taxes and gift and inheritance taxes.
Value Added Tax
The Value Added Tax (VAT) legislation came into force on 1 January 1998, and replaced the then existing Law on Sales Tax on Goods and Services.
Entrepreneurs and legal entities performing business activities are liable for VAT, if they had taxable deliveries in excess of HRK 85,000 in the previous year. VAT is payable at the rate of 22% on the deliveries of goods and services performed in Croatia, personal consumption, new buildings, importation of goods.
Generally, VAT is accounted for monthly via monthly returns and any resulting VAT due is required to be paid by the 30th day of the following month.
An annual VAT return based on the calendar year is also required to be filed by 30 April of the following year.
On 1 November 1999 Croatia introduced a lower band rate of 0%. The zero rate applies to bread, milk, educational literature (specified), certain medical supplies and the service of movie projections.
Exports are zero rated. This includes the export of services and delivery of goods and processed goods, including transport and all delivery services, delivery of goods to tax-free sales outlets and specialised warehouses, delivery of goods and provision of services to diplomatic missions under the condition of reciprocity.
VAT exemptions in Croatia are as follows:
renting of residential property;
services performed by banks, savings institutions, savings and loan institutions, insurance and reinsurance companies;
medical services;
services and deliveries of goods performed by social welfare organisations, organisations for children, pupils and students, religious communities, or for cultural purposes.
As of 1 January 2001 services related to the stay of foreign tourists organised by a foreign tourist agency, or any other foreign legal entity, if paid from abroad, are subject to a zero rate of VAT.
Special Tax on Luxury Goods
This tax is levied on a limited range of domestically produced and imported luxury goods.
The tax rate is 30% and is based on the sale price of the good, exclusive of VAT.
A monthly return and payment is due 10 days from expiry of the month when the goods were delivered to customers or used in own consumption.
Property Transfer Tax
Property transfer tax at the rate of 5% of the market value of the immovable property (or value estimated by the Tax Authorities) is levied by the Tax Authorities and is payable by the purchaser.
Gift and Inheritance Tax
An inheritance and gift tax rate of 5% is levied on individuals and legal entities who inherit property situated in Croatia or receive it as a gift. The tax is levied at the time of transfer.
The decedents in the first line are exempt from both gift and inheritance tax.
Other taxes and imposts
Depending on business activities the following may also apply:
Chamber of Commerce contributions
All legal and physical persons performing business activities in Croatia are members of the Croatian Chamber of Commerce.
Fixed monthly membership contributions range from HRK 55 to HRK 5,500 depending on the size of the entity.
In addition, the variable annual contribution due for 2001 is calculated as 0.01% of the total turnover for the 1999 calendar year.
Tourist Tax
Catering, tourist and all companies directly related to tourism are subject to tourist tax at rates ranging from 0.08% to 0.25% of total turnover, depending on the company's activities and the place of its location and registration. Trading companies are subject to tourist tax at rates from 0.01% to 0.05% of total turnover, again depending on the company's activities and the place of its location and registration.
Tourist tax is paid monthly in advance on the basis of the turnover of the previous year. The final liability is assessed at the year end.
Forestry Tax
All legal persons that carry out economic activities in Croatia are subject to forestry tax at the rate of 0.07% of total turnover.
Tax advances are paid quarterly on the basis of the turnover of the previous year. The final liability is assessed at the year end.
Consumption tax
Legal and natural persons engaged in catering are subject to consumption tax.
The tax is levied on the retail price of alcoholic and non-alcoholic beverages sold in bars and restaurants at rates of up to 3% of the tax base for VAT.
This tax is reported and paid on a monthly basis.
Firm tax
Legal persons and individuals liable to corporate profit tax or personal income tax are subject to firm tax which is levied by local authorities. This tax is levied annually up to a maximum of the HRK equivalent of DEM 500.
Public utilities tax
Local authorities regulate the assessment and collection of the public utilities tax. The tax is assessed on the usage of public places (e.g. restaurants with tables in public places).
Advertising Tax
Legal persons and individuals who advertise on public places are subject to advertising tax.
Local authorities assess the amount of tax to be paid but it cannot exceed the HRK equivalent of DEM 200 for each advertisement.
Advertising tax is not levied on advertising in newspapers or any other public media.
Tax on games of chance
Taxes on games of chance are regulated as follows:
Law on games of chance
Natural persons who realise a gain are subject to 10% tax on gains over HRK 20,000. The organiser of the game of chance assesses and effects payment of this tax.
Law on games of chance and entertainment games
Natural persons who realise a gain are subject to 15% tax on gains in excess of three times the Croatian minimum monthly salary. The organiser of the game of chance assesses and effects payment of this tax.
Legal and natural persons organising games of chance and entertainment games are subject to lump sum profit tax. The tax is paid monthly and ranges from HRK 400 to HRK 12,000 (per machine or table) depending on the type of game of chance.
Tax on motor vehicles
Legal persons and individuals who are owners of registered cars and motorcycles are subject to this tax.
The tax is assessed annually according to the engine power and year of production of the vehicle and ranges from the HRK equivalent of DEM 30 to DEM 200 for motor vehicles and from the HRK equivalent of DEM 20 to DEM 100 for motor cycles.
Motor vehicles older than ten years and motorcycles older than five years are not subject to this tax.
Tax on boats
Legal persons and individuals who are owners of registered boats are subject to this tax.
The tax is assessed annually according to the boat's length, type and year of production.
Amounts vary from the HRK equivalent of DEM 30 to DEM 550 per annum.
Tax on the organisation of entertainment shows and sport games
Persons organising entertainment shows and events (such as movies, sport games, concerts, etc.) for which tickets of admission are sold are subject to this tax.
The tax is levied at the rate of 5% on the value of the tickets sold.
Organisers of theatre shows, museum exhibitions and other cultural events and organisers of trade fairs are not subject to this tax.
This tax is payable 7 days after the end of the event.
Tax on country cottages and rest centres
Legal persons and individuals who are owners of country cottages and rest centres are subject to this tax. The tax is assessed annually by the local authorities according to the available square metres of usable surface of the property at rates ranging from the HRK equivalent of DEM 1 to DEM 3 per square metre of usable surface.
Investment Incentives
Overview
The amended Corporate Profit Tax (CPT) Law, which came into effect on 1 January 2001, prescribes general and specific incentives.
General incentives
The partial or total write off of equipment and business buildings acquired in the tax period is considered to be a depreciation expense which is recognised for CPT purposes.
The taxable base may be additionally decreased for new employees' salaries (salaries and contributions) calculated for the tax period and paid prior to submission of the tax return.
New employees are considered to be employees hired for an indefinite period and their employment with the taxpayer was preceded by one month's registration with the Unemployment Agency, after forfeiting pension rights or first employment. Probationers, trainees, interns, etc. employed for a determined period are also considered to be new employees.
Specific incentives
Investment Promotion Law / CPT Law (no regulations)
According to the Investment Promotion Law published in 2000 and the amended CPT Law, newly established limited liability or joint stock companies investing in Croatia that fulfil certain criteria (introduction of new equipment and modern technologies, introduction of new production processes and products, employment and training of employees, modernisation and improvement of business operations, increase in exports, increase in production, development of new supply of services, adjustment of Croatian economy to European standards and similar) may be offered the following incentives:
Reductions of CPT rate are as follows:
CPT at the rate of 7% will be paid on profit achieved from investments amounting to at least HRK 10 million in the period of 10 years, from the year when the investment commenced, under the condition that at least 30 employees are hired in that period, starting after expiry of the first year of investment.
CPT at the rate of 3% will be paid on profit achieved from investments amounting to at least HRK 20 million in the period of 10 years, from the year when the investment commenced, under the condition that at least 50 employees are hired in that period, starting after expiry of the first year of investment.
CPT at the rate of 0% will be paid on profit achieved from investments amounting to at least HRK 60 million in the period of 10 years, from the year when the investment commenced, under the condition that at least 75 employees are hired in that period, starting in the first year of investment.
Free trade zones
Croatian legislation provides concessions for certain activities carried out in prescribed free trade zones.
Free trade zones are designated areas in which companies may establish their operations (such as the production of goods, refinement of goods, wholesale and mediation in trade, provision of services, banking and other financial operations, insurance and re-insurance of property and persons) on the basis of a contract with a founder of a zone.
There are currently seven free trade zones located at Zagreb, Rijeka, Ploce, Pula, Split, Zadar and Vukovar.
The main concessions are:
CPT concessions
Companies that establish their operations within a free trade zone are entitled to a 50% deduction of the prescribed corporate profit tax rate.
Companies that build or participate in the construction of infrastructure in a zone, where the value of the construction is in excess of HRK 1,000,000, are released from paying corporate profit tax in the first five years of operating in a zone.
Customs duty concessions
There is no customs duty payable on raw materials imported to the zone. However, if the finished products are to be sold in Croatia, import customs duty on finished products must be paid.
Special State Care Areas
The Government of the Republic of Croatia provides concessions for companies commencing operations in "special state care areas". Concessions apply to three categories of companies:
the first category of concessions apply to those companies located in areas which were occupied until 1995 and which are within 15 kilometres of the border;
the second category of concessions apply to those companies located in cities and other places not included in first category but which were also occupied until 1995;
the third category of concessions apply to those companies located in areas where Croatia borders Slovenia.
City of Vukovar
Exceptional concessions exist for companies investing in the City of Vukovar, in Eastern Croatia.
Visas, Work Permits and Residency
Legislative framework
The legal framework which regulates entry into Croatia comprises a number of laws and regulations:
Law of Entry and Residence of Foreigners;
Law of Employment of Foreigners;
Direction for issuance of work permits to foreigners;
Regulations dealing with the issuance of travel and identification documents and visas;
Regulations dealing with issuance of identification documents and visas; this also covers the required form of identification documents.
Visas
Visitors from all countries, except the following countries, are required to obtain either tourist visa or a business visa before entering Croatia:
Argentina, Finland, Luxembourg, Slovakia, Australia, France, Macedonia, Slovenia, Austria, Germany, Malta, Spain, Belgium, Greece , Monaco, Sweden, Bosnia and Herzegovina, Holland, New Zealand, Switzerland, Bulgaria, Ireland, Norway, Turkey, Canada, Israel, Poland, United Kingdom, Czech Republic, Italy, Portugal, United States, Chile, Japan, Romania, Uruguay, Denmark, Hungary, San marino, Vatican City, Ecuador, Liechtenstein.
Visitors from other countries require a tourist visa or a business visa, which entitles them to stay in Croatia for up to three months.
If during these three months the foreigner decides to stay in the Republic of Croatia for more than three months or if the foreigner's purpose of stay changes, an application for an extended stay is required.
Employment and business visas and work permits
All foreigners require an employment visa or a business visa in order to work in Croatia; this includes short visits relating to business trips, meetings or conferences. These visas entitle a foreigner to enter Croatia an unlimited number of times and establishes the purpose of the visit. In either case, a work permit is also required.
Employment visa
An employment visa is issued to an employee who is not part of the management of the Croatian company.
The Ministry of Internal Affairs grants approval for an employment visa after the application has been reviewed and accepted by an appropriate Ministry.
A request for an employment visa should be submitted to the Embassy or Consulate of the Republic of Croatia abroad. The foreigner should submit a request together with a letter from the company or organisation for which he or she will be working in Croatia stating the reason for his or her stay in Croatia.
Within 24 hours of entering Croatia, the foreigner must register his or her residence in Croatia at a local police station.
Whilst an employment visa entitles a foreigner to enter Croatia and establishes the purpose of the visit, a work permit must still be obtained.
If the duration of the visit is to be longer than three months, a visitor must apply for an extended stay, which is necessary to obtain a work permit.
Once an extended stay has been obtained, the Croatian employer should apply for a work permit at the State Employment Agency, which requires approximately 2-4 weeks.
Business visa
A business visa is issued by an Embassy or Consulate of the Republic of Croatia abroad at the request of a foreign citizen. A business visa is issued to a foreign citizen in the following cases:
for the performance of commercial, or other activities and foreign trade activities (with the approval of the Ministry of Economy);
to a visitor who performs professional activities determined in a contract on business co-operation, a contract on long-term co-operation in the production industry, a trade transfer contract or a contract on foreign investments (with the approval of the Ministry of Labour and Social Welfare) based on a contractual relationship between the visitor and a Croatian legal entity.
A visitor with a business visa can stay in Croatia for a period necessary to complete work up to a maximum of one year with an unlimited number of entries and exits, or up to the passport expiration date. A visitor with a business visa can apply for a residence permit.
The easiest way to obtain a business visa is to be registered as a member of the Supervisory Board or Management Board of a Croatian company.
Within 24 hours of entering Croatia, the foreigner must register his or her residence in Croatia at a local police station.
As with the employment visa, visitors are still required to apply for a work permit. However, as the business visa covers a period of extended stay for up to one year, there is no need to apply for extended stay within three months.
The foreigner should apply to the State Employment Agency to obtain a personal work permit. The application form should be accompanied by a certified copy of the business visa, a certified copy of the applicant's passport and an explanation from the Croatian employer on the need to employ a foreigner. The State Employment Agency will need approximately 10-15 days to issue a personal work permit.
Other visas
All visas may be issued for single entry/exit or multiple entry/exit purposes. However, visitors are advised to ensure that the visa obtained specifically permits re-entry and also exit from Croatia.
Transit Visas (entry/exit visas)
Transit visas or single entry/single exit visas can be issued for the following reasons: employment (e.g., employment visa and business visa), education, scientific research, or execution of certain professional services. These visas are approved by the Ministry of Internal Affairs.
Diplomatic visas
Diplomatic visas are issued to the holder of diplomatic passports. They are approved by the Ministry of Foreign Affairs. A diplomatic visa is typically issued for a period of three months to one year.
Official visas
Official visas are issued by Ministry of Internal Affairs and by diplomatic or consular offices abroad. An official visa is issued only to foreigners with official passports. An official visa is typically issued for a period of three months to one year.
Stay in Croatia
All foreign persons must register their stay in Croatia after entering the country. If a foreign person resides in a hotel, the hotel will arrange registration. Upon registration, "legal stay" status is obtained and a white card is issued. The Ministry of Internal Affairs (MUP) registers a stay in one of the following ways:
Temporary stay
Registration of a temporary stay is required to establish a legal short stay of a foreign person in Croatia; a foreigner with a transit visa (or single entry/single exit visa), employment/business visa or a tourist visa may register under this classification. A transit visa (single entry/single exit visa) is valid for seven days while a tourist visa is valid for three months.
Extended stay
Extended stay is required for stays not included under the temporary stay category. An extended stay is typically granted for purposes of education, scientific research, medical treatment, tourist visits, marriage with a Croatian citizen, or other important reasons. A person with a diplomatic visa or an official visa typically registers their stay under extended stay. Extended stay is usually granted for up to one year.
Refugee stay
Refugees who enter Croatia must immediately register at the nearest local police station.
Residency
Residency can be obtained by a foreigner who is married to a Croatian citizen for at least one year or married to a foreigner who has obtained Croatian residency
Bjelovar Bilogora Co
Brod Posavina County
Dubrovnik Neretva Co
Istria County
Karlovac County
Koprivnica Križevci
Krapina Zagorje Coun
Lika Senj County
MeđImurje County
Osijek Baranja Count
Požega Slavonia Cou
Primorje Gorski Kota
Sisak Moslavina Coun
Split Dalmatia Count
Varaždin County
Virovitica Podravina
Vukovar Srijem Count
Zadar County
Zagreb County
ŠIbenik Knin County
