VZCZCXRO2846
RR RUEHIK
DE RUEHVB #0045/01 0131253
ZNR UUUUU ZZH
R 131253Z JAN 06
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 5524
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPCIM/CIMS NTDB WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 14 ZAGREB 000045 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS TO EB/IFD/OIA 
USTR 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC
KTDB, USTR, HR 
SUBJECT: CROATIA: INVESTMENT CLIMATE STATEMENT 2006 
 
REF: 05 STATE 202943 
 
ZAGREB 00000045  001.2 OF 014 
 
 
¶1.  SUMMARY: Only in recent years has Croatia begun 
to emerge as an attractive destination for 
investment.   Croatia lagged behind many of the 
other countries of Central and Eastern Europe in 
attracting foreign investment following the fall of 
the Berlin Wall, partly as a result of the conflicts 
surrounding the break up of the former Yugoslavia, 
but also as a result of its slowness to embrace 
reform.  Since 2000, two successive governments have 
sought to address bureaucratic inertia, red tape and 
a dysfunctional legal system that have stymied 
investment and economic growth.  These efforts 
appear to be bearing fruit.  Croatia got a major 
boost when it opened negotiations for European Union 
accession in October 2005.  Coupled with recent 
initiatives to streamline government bureaucracy, 
facilitate property sales and ease a backlog of 
cases in the chronically inefficient legal system, 
Croatia has begun to take important steps to attract 
investment and boost economic growth. 
 
¶2.  However, significant problems still remain.  A 
lack of transparency in both business and government 
leads to allegations of insider deals and 
corruption.  Legislation is frequently changed with 
little or no consultation of affected industries. 
Government tenders are crafted in ways to produce 
pre-determined outcomes, winning contracts for 
favored companies or individuals.  Nevertheless, 
many of the mainly European investors who entered 
the Croatian market early have enjoyed steady growth 
over the years, despite the vagaries of doing 
business in a transitional economy.  With a 
developed transportation and communication 
infrastructure, a generally well-educated workforce 
and preferential access to EU markets, Croatia 
appears set to continue its recent economic growth, 
creating growing opportunities for investment as its 
economy begins to align itself with Europe.  END 
SUMMARY 
 
 
A.1  Openness to Foreign Investment 
 
¶3.  Croatia is open to foreign investment.  The 
Croatian government has set a goal of increasing 
foreign investment and has begun to undertake long 
overdue measures to improve the investment climate 
in the country, hoping to build on recent positive 
trends that include a stable macroeconomic 
environment and the prospect of EU membership. 
Generally, most of the problems faced by foreign 
investors also confront domestic companies, such as 
needlessly complex bureaucracy. 
 
¶4.  Despite recent progress, however, Croatia still 
poses challenges for foreign investors.  The legal 
system is often ineffective, government regulations 
opaque and needlessly complex and a lack of 
transparency creates an environment in which 
personal and political loyalty sometimes trumps 
economic merit in business and government.  Although 
there are laws that govern the sanctity of 
contracts, the current backlog of cases prevents 
effective enforcement, as cases can take several 
years just to come to court.  Judicial reform is 
underway, but the inability to obtain timely 
judicial remedy in a dispute has hindered investment 
in Croatia. 
 
¶5.  The government's e-government initiative "HITRO" 
(www.hitro.hr) became operational in 2005, with an 
on-line business registration component intended to 
reduce the time it takes to register a business to 
four days.  Business registration is the first step 
in a plan to make more government services available 
on-line in coming years.  Reform of the notoriously 
inefficient judicial system is also underway, as is 
reform of land registries, which includes the 
digitization of land records. 
 
¶6.  The Agency for Trade and Investment Promotion 
was given a new mandate in 2005 to assist potential 
investors in Croatia, with specialists available in 
 
ZAGREB 00000045  002.2 OF 014 
 
 
strategic planning, investment support and export 
support.  The Agency is also active in advising the 
government on how to make Croatia's regulatory 
environment more transparent and competitive. 
 
¶7.  Croatia's legal framework accords equal rights 
to foreign and domestic investors, although Croatia 
has no unified commercial code.  The Internet 
website of the Croatian Chamber of Economy 
(www.hgk.hr) provides a useful English-language 
guide, "How to Start Up an Enterprise in Croatia," 
as well as sector-specific and general reports.  The 
Zagreb Stock Exchange's website (www.zse.hr) posts 
English-language translations of key laws in force. 
 
¶8.  The Company Act defines the forms of legal 
organization for domestic and foreign investors. 
The following are permitted for foreigners: general 
partnerships, limited partnerships, branches, 
limited liability companies, and joint stock 
companies.  The Law on Ownership and Other Property 
Rights permits acquisition/ownership by foreigners 
with the approval of the Ministry of Foreign Affairs 
and Ministry of Justice and on the basis of 
reciprocity (reciprocity exists with the United 
States).  However, a foreign investor, incorporated 
as a Croatian legal entity, may acquire/own property 
without ministry approval.  Purchasing by any 
private party of certain types of land (principally 
land directly adjacent to the sea) or in certain 
geographically designated areas is restricted. 
 
¶9.  In privatization, especially of tourism assets 
along the coast, local governments have occasionally 
voiced opposition to foreign investment and thrown 
up barriers to block or limit development, 
particularly through the non-issuance of 
construction and use permits.  In other cases, 
offers from foreign firms for resorts and 
agricultural companies were disqualified without 
adequate explanation, leading to allegations of 
irregularities and speculation of insider influence 
to produce a favored outcome. 
 
 
A.2  Conversion and Transfer Policies 
 
¶10.  The Croatian constitution guarantees the free 
transfer and repatriation of profits and invested 
capital for foreign investments.  Article VI of the 
U.S. Croatia Bilateral Investment Treaty (BIT) 
establishes protection for American investors from 
government exchange controls that limit current and 
capital account transfers, and limits on inward 
transfers made by screening authorities.  The BIT 
obliges both countries to permit all transfers 
relating to a covered investment to be made freely 
and without delay into and out of each other's 
territory.  The Croatian Foreign Exchange Law 
permits foreigners to maintain foreign currency 
accounts and to make external payments. 
 
¶11.  The Foreign Exchange Law also defines foreign 
direct investment (FDI).  For example, use of 
retained earnings for new investments/acquisitions 
is considered FDI, whereas investments made by 
institutional investors such as insurance, pension 
and investment funds are not considered FDI.  The 
law also liberalizes foreign exchange transactions 
for Croatian entities and individuals allowing them 
to invest abroad.  Generally, this law liberalized 
foreign exchange transactions, but it also 
introduced criteria for the possible imposition of 
capital controls.  The full potential impact of this 
law and its consistency with investment protection 
treaties, including the U.S. BIT, is undetermined, 
and prospective investors should review the 
legislation carefully. 
 
¶12.  The U.S. Embassy has not received any 
complaints from American companies regarding 
transfers and remittances. 
 
 
A.3  Expropriation and Compensation 
 
 
ZAGREB 00000045  003.2 OF 014 
 
 
¶13.  There have been no cases of expropriation of 
foreign investments by the government since Croatia 
became independent.  Article III of the BIT covers 
both direct and indirect expropriations.  The BIT 
bars all expropriations or nationalizations except 
those that are for a public purpose, carried out in 
a non-discriminatory manner, are in accordance with 
due process of law, and are subject to prompt, 
adequate and effective compensation. 
 
¶14.  Croatian law gives the government broad 
authority to expropriate property under various 
economic and security related circumstances.  The 
law provides for an appellate mechanism to challenge 
expropriation decisions by means of a complaint to 
the Ministry of Justice within 15 days of the 
expropriation order.  The law, however, does not 
describe the Ministry's adjudication process and the 
fact that the Ministry of Justice represents the 
government, which initiates expropriations, is an 
area of potential concern for investors. 
 
 
A.4  Dispute Settlement 
 
¶15.  Partly because of the low level of U.S. 
investment in recent years (aside from portfolio 
investment), there have been few instances of 
investment disputes involving U.S. companies.  As a 
result of the very long timeframes involved in 
obtaining judgments in court, it is likely that 
companies try to resolve disputes informally, often 
attempting to use political or personal connections. 
The government is currently working to reduce court 
backlogs and to encourage the use of alternative 
dispute settlement. 
 
¶16.  The government has begun efforts to reform the 
judiciary, including reducing the backlog of cases, 
reforming the land registry, training court officers 
and reducing the backlog and length of bankruptcy 
procedures.  Twelve reform measures were announced 
for 2005, including digitizing land records, 
centralizing payment for court services, and 
limiting the number of times a county court can rule 
on a case.  An important move to lessen the backlog 
of cases was the redistribution of 26,000 cases from 
over-burdened courts to less burdened courts. 
However, the greatest cause of the backlog is the 
enforcement of judgments.  Enforcement and execution 
of judgments remain a problem for the courts. The 
Ministry of Justice's reform plan is available on 
its website under "e-pravosude" at 
www.pravosudje.hr. 
 
¶17.  The Law on Bankruptcy establishes deadlines 
that force companies to enter bankruptcy 
proceedings.  Bankruptcy and foreclosures have 
traditionally been slow and inefficient in Croatia. 
The Ministry of Justice announced in 2005 that 
streamlining bankruptcy procedures is a priority. 
The World Bank has estimated that the recovery rate 
in Croatia is approximately a third of the 
Organization for Economic Cooperation and 
Development (OECD) average, and somewhat worse than 
the regional average. 
 
¶18.  The Commercial Court has exclusive jurisdiction 
over bankruptcy matters.  A bankruptcy tribunal 
decides on initiating formal bankruptcy proceedings, 
appoints the trustee, reviews creditor complaints, 
approves the settlement for creditors, and decides 
on the closing of proceedings.  The bankruptcy judge 
supervises the trustee (who represents the debtor) 
and the operations of the creditors' committee.  A 
creditors' committee is convened to protect the 
interests of all creditors during the proceedings, 
to oversee the trustee's work and to report back to 
the creditors.  The law establishes the priority of 
creditor claims, assigning higher priority to those 
related to taxes and revenues of state, local and 
administration budgets.  The law also allows for a 
debtor or the trustee to petition to reorganize the 
firm, an alternative aimed at maximizing asset 
recovery and providing for fair and equitable 
distribution among all creditors. 
 
ZAGREB 00000045  004.2 OF 014 
 
 
 
¶19.  Arbitration is available, if underused.  Within 
the Croatian Chamber of Economy, there is a 
permanent arbitration court that has been in 
existence since 1965.  Arbitration is voluntary and 
conforms to United Nations Commission on 
International Trade Law (UNCITRAL) model procedures. 
The court reviews 30 to 40 cases per year, of which 
40% are international cases.  There have been five 
cases of a U.S. company submitting to arbitration in 
this venue. 
 
¶20.  The English-language text of the Law on 
Arbitration can be found on the website of the 
Croatian Chamber of Economy (www.hgk.hr).  The law 
covers domestic arbitration, recognition and 
enforcement of arbitration rulings, jurisdictional 
matters, and procedures.  Once a dispute has been 
arbitrated the decision is executed upon notice from 
the court to the obligatory party.  If no payment is 
made by the established deadline, then the party 
benefiting from the decision notifies the commercial 
court and the commercial court becomes responsible 
for enforcing compliance.  Rulings of the 
arbitration court have the force of a final 
judgment, but can be appealed within three months. 
 
¶21.  Article X of the BIT sets forth several means 
for resolution of investment disputes, defined as 
any dispute arising out of or relating to an 
investment authorization, an investment agreement, 
or an alleged breach of rights conferred, created, 
or recognized by the BIT with respect to a covered 
investment.  For more information on the BIT 
arbitration provisions, see www.mac.doc.gov/Tcc/e- 
guides/eg_bits (under "Croatia"). 
 
¶22.  Croatia is a signatory to the following 
international conventions regulating the mutual 
acceptance and enforcement of foreign arbitration: 
the 1923 Geneva Protocol on Arbitration Clauses, the 
1927 Geneva Convention on the Execution of Foreign 
Arbitration Decisions, the 1958 New York Convention 
on the Acceptance and Execution of Foreign 
Arbitration Decisions, and the 1961 European 
Convention on International Business Arbitration. 
In 1998 Croatia ratified the Washington Convention - 
the International Center for the Settlement of 
Investment Disputes (ICSID), and it became effective 
on October 22, 1998. 
 
¶23.  The Croatian constitution provides for an 
independent judiciary.  The judicial system consists 
of courts of general and specialized jurisdictions, 
whose core structure is: Supreme Court, County 
Courts, Municipal Courts, and the Magistrate/Petty 
Crimes Courts.  Specialized courts include the 
Administrative Court and High Commercial and Lower 
Commercial Courts.  There is also a Constitutional 
Court which determines the constitutionality of laws 
and government actions and protects and enforces 
constitutional rights.   Municipal courts exercise 
original jurisdiction over civil and 
juvenile/criminal cases.  The High Commercial Court 
is located in Zagreb and has appellate review of 
lower commercial court decisions.  Modification of 
lower court decisions by the High Commercial Court 
may be appealed to the Supreme Court. 
 
¶24.  The Administrative Court has jurisdiction over 
the decisions of administrative bodies of all levels 
of government.  The Supreme Court, under certain 
circumstances, may review decisions.   The Supreme 
Court is the highest court in the country and as 
such enjoys jurisdiction over all civil and criminal 
cases.  It hears appeals from County, High 
Commercial, and Administrative Courts. 
 
¶25.  Because of the inefficiency and other 
weaknesses in the judiciary, execution of judgments 
remains problematic.  According to the provisions of 
the Law on Enforcement, a judgment made by a judge 
or panel of judges to order payment or direct 
actions to be taken or ceased must be executed 
immediately per such decision.  Current practice, 
however, delays enforcement until all appeals are 
 
ZAGREB 00000045  005.2 OF 014 
 
 
decided. The Ministry of Justice is working to 
strengthen implementation of the Law in order to 
decrease the current backlog of enforcement cases. 
Article 17 of the Law on Enforcement states that 
foreign judgments may be executed only if the 
"judgment fulfills the conditions for recognition 
and execution as prescribed by an international 
agreement or the law." 
 
 
A.5  Performance Requirements/Incentives 
 
¶26.  Croatian law does not impose performance 
requirements on foreign or domestic investors. 
Article VII of the BIT prohibits mandating or 
enforcing specified performance requirements as a 
condition for the establishment, acquisition, 
expansion, management, conduct, or operation of a 
covered investment.  The list of prohibited 
requirements is exhaustive and covers domestic 
content requirements and domestic purchase 
preferences, the "balancing" of imports or sales in 
relation to exports or foreign exchange earnings, 
requirements to export products or services, 
technology transfer requirements, and requirements 
relating to the conduct of research and development 
in the host country.  Article VII makes clear, 
however, that a party may impose conditions for the 
receipt or continued receipt of benefits and 
incentives. 
 
¶27.  In late 2004, the Ministries of Economy and 
Defense agreed to introduce offsets (a requirement 
for local sourcing of a portion of the contract) for 
defense procurements over 2 million euros, and the 
Ministry of Economy said it was looking at 
introducing offsets in other areas, however no such 
action has been undertaken. 
 
¶28.  The Investment Promotion Law offers potentially 
significant incentives to investors such as limited 
employee subsidies and assistance with re-training, 
as well as customs relief for capital equipment 
imports.  It provides for a number of incentives 
which apply only to investments in new companies, 
except if the investment is in the tourism sector, 
in which case already existing companies can make 
use of the incentives.  The law also offers 
investors access to government-owned real estate and 
construction rights on preferential terms.  The text 
of the law is available on the Croatian National 
Bank site (www.hnb.hr). 
 
¶29.  Article 26 of the Profit Tax Law also covers 
tax incentives for investment.  The law applies to 
both domestic and foreign investors if they meet 
certain criteria.  Incentives include: 10% corporate 
tax for ten years for companies that invest 4 
million HRK (approximately $655,000 and create 10 
new jobs; 7% corporate tax for ten years for 
companies that invest 10 million HRK (approximately 
$1.6 million) and create 30 new jobs; 3% corporate 
tax for ten years for companies that invest 20 
million HRK (approximately $3.2 million) and create 
50 new jobs; 0% corporate tax for ten years for 
companies that invest 60 million HRK (approximately 
$9.8 million) and create at least 75 new jobs. 
 
¶30.  Incentive measures refer to investment in the 
following: new equipment and modern technology, new 
production processes and new products, greater 
employment and education of workers, modernization 
and growth of business, development of production 
with a higher level processing, and an increase in 
exports. 
 
¶31.  The Investment Promotion Law also provides a 
one-time lump sum subsidy of 15,000 HRK 
(approximately $2,600) for each new employee hired 
as a result of new investment.  Investors may also 
be eligible to receive assistance from the 
government to offset costs of employee re-training. 
However, an apparent lack of implementing 
regulations has delayed implementation of this 
incentive.  The government may offer real estate (or 
permits or infrastructure) to an investment either 
 
ZAGREB 00000045  006.2 OF 014 
 
 
cost-free or on a preferential basis.  Finally, the 
government will allow the duty-free importation of 
capital equipment for the investment. 
 
¶32.  The Croatian government also offers concessions 
for business activity carried out in "areas of 
special state concern" (those areas most affected by 
the 1991-95 war).  Activities in customs free zones 
are taxed at a lower corporate tax rate and 
concessions are awarded under the current Law on 
Free Zones.  Also, for a period of ten years from 
when the Profit Tax Act was enacted in October 2003, 
no profit tax will be paid for business operations 
in those FTZs located in the Vukovar and Srijem 
Counties. 
 
¶33.  The Trade and Investment Promotion Agency can 
be helpful in identifying and applying for 
investment incentives.  Also, the (separate) Office 
of Investment Promotion in the Ministry of Economy 
can be helpful in looking for incentive information. 
Further information can be found on their website at 
www.mingo.hr. 
 
¶34.  Croatia's WTO Trade Related Investment Measures 
(TRIMs) agreement went into effect in 2000.  Croatia 
has no trade-related investment measures in place at 
the present time, nor does the government intend to 
introduce any such measures in the future. 
Accordingly, Croatia did not seek to list any 
measures for elimination under the provisions of the 
WTO Agreement on TRIMs.  Croatia committed to 
maintaining measures consistent with the TRIMs 
agreement and has applied the TRIMs agreement from 
the date of accession without recourse to any 
transition period. 
 
¶35.  Foreign investors will find that the process of 
obtaining business visas is straightforward.  For 
information on obtaining business and work permits, 
please contact a Croatian embassy or consulate or 
visit Embassy Zagreb's website (www.usembassy.hr, 
see Consular Section, American Citizen Services). 
 
 
A.6  The Right to Private Ownership and 
Establishment 
 
¶36.  Both foreign and domestic legal entities have 
the right to establish and own businesses and engage 
in remunerative activity. 
 
¶37.  Article 49 of the Constitution provides 
assurances that all entrepreneurs have equal legal 
status and that monopolies are forbidden.  The 
Competition Act defines the rules and methods for 
promoting and protecting competition.  This law, and 
information about the Croatian Competition Agency 
can be found at www.crocompet.hr.  In theory, 
competitive equality is the standard applied to 
private enterprises in competition with public 
enterprises with respect to market access, credit 
and other business operations, such as licenses and 
supplies.  In practice, however, state-owned 
enterprises and "strategic" firms continue to 
receive preferential treatment, including government 
bailouts and subsidies. 
 
 
A.7  Protection of Property Rights 
 
¶38.  The right to ownership of private property is 
established in the Croatian Constitution and 
numerous acts and regulations safeguard this right. 
A foreign physical or legal person incorporated 
under Croatian law is considered to be a Croatian 
legal person.  The Law on Ownership and Property 
Rights establishes procedures for foreigners to 
acquire property by inheritance as well as legal 
transactions such as purchases, deeds, and trusts. 
The right of foreigners to acquire property in 
Croatia is based on reciprocity.  The U.S. and 
Croatia share reciprocity in this area.  Foreign 
investors, incorporated as a Croatian legal entity, 
may acquire and own property without restriction. 
Both Croatian and foreign citizens may mortgage 
 
ZAGREB 00000045  007.2 OF 014 
 
 
property and pledge real and tangible property. 
 
¶39.  In order to acquire property by means other 
than inheritance or as an incorporated Croatian 
legal entity, foreign investors require the approval 
of the Ministry of Foreign Affairs (MFA) and the 
Ministry of Justice.  Approval often takes several 
months owing to a lengthy interagency clearance 
process that requires advisory opinions from local 
authorities.  MFA approval is required before a 
foreign investor may be entered into the official 
land registry. 
 
¶40.  Clarifying Croatia's land registry system is an 
on-going process and while Croatia has made progress 
resolving a backlog of cases, potential investors 
should seek a full explanation of land ownership 
rights before purchasing property.  It is highly 
advisable to seek competent legal advice in this 
area (see www.usembassy.hr, Consular section for a 
list of English-speaking attorneys), as there are 
sometimes ambiguous and conflicting claims to 
property, making it necessary to verify that the 
seller possesses clear title before. 
 
¶41.  Some aspects of land ownership, as distinct 
from ownership of objects, are not clear.  Investors 
interested in acquiring companies from the Croatian 
Privatization Fund should seek expert legal advice 
to determine whether any deal also includes the 
right to ownership of the land on which an object is 
located, or merely the right to lease the land 
through a concession.  The various Croatian laws on 
privatization are not clear on this point. 
 
¶42.  Inconsistent regulations and restrictions on 
coastal property ownership and construction have in 
the past provided challenges for foreign investors. 
Legislation passed in 2004 restricts coastal 
construction and commercial use within 70 meters of 
the coastline. 
 
¶43.  Croatia has intellectual property rights 
legislation, including the Patent Law, Trademark 
Law, Industrial Design Law, Law on the Geographical 
Indications of Products and Services, Law on the 
Protection of Layout Design of Integrated Circuits, 
and Law on Copyrights and Related Rights.  The 
problems that exist, particularly in patent rights, 
arise out of weak enforcement or delays in companies 
receiving registration, thus reducing the value of 
their patents.  Also, the Agency for Medical 
Products, which is separate from the Patent Agency, 
does not require license seekers to submit 
information on existing patents.  Croatia is on the 
U.S. Special 301 Watch List for failing to protect 
U.S. intellectual property rights, principally 
through extremely long delays in marketing 
authorization for new drugs and weak enforcement of 
patent rights.  Problems also exist in the 
protection of trademarks and copyrights, but at a 
much lower level. 
 
¶44.  As a full WTO member, Croatia is a party to the 
Uruguay Round Agreement on Trade-Related 
Intellectual Property Rights (TRIPS).  A WTO/TRIPS 
Working Group in June 2001 accepted Croatia's IPR 
legislation.  Texts of these laws are available on 
the website of the State Intellectual Property 
Office: www.dziv.hr.  Croatia is also a member of 
the World Intellectual Property Organization (WIPO). 
For a list of international conventions to which 
Croatia is a signatory, consult the State 
Intellectual Property Office's website. 
 
 
A.8  Transparency of the Regulatory System 
 
¶45.  Together with Croatia's ineffective legal 
system, a lack of transparency in both business and 
government has presented one of the greatest 
challenges to investors. Croatia is under pressure 
to increase transparency and its commitments to 
adopt EU laws, norms, and practices, as well as the 
obligations of its IMF Stand-by Arrangement, World 
Bank structural adjustment loans, and WTO membership 
 
ZAGREB 00000045  008.2 OF 014 
 
 
provide steady pressure for reform. 
 
¶46.  Bureaucracy is also a major challenge for 
foreign investors, although the government has made 
progress in this area, particularly through the 
development of its e-government initiatives. 
Property registration, for example, has 
traditionally been notoriously inefficient, 
sometimes taking up to several years.  However, 
recent reforms and the digitization of the land 
registers are hopeful signs that this problem will 
be mitigated in the near future.  A valuable source 
of analysis is located on the website of the 
Croatian office of the World Bank, at 
www.worldbank.hr.  Click on the link for the "Doing 
Business in Croatia Forum." 
 
¶47.  While the regulatory system does not 
specifically discriminate against foreign investors, 
certain large national (and in some cases, foreign) 
companies often exert substantial influence over 
regulation to the detriment of new entrants. 
Transparency in developing legislation and 
regulation is hampered by an inefficient public 
administration, a lack of intra-governmental 
coordination, and reliance on expert advice from 
national champions, potentially giving the latter a 
privileged position in influencing new regulations. 
Legislation is generally crafted within the ruling 
party with little or no public debate beforehand.  A 
lack of coordination within the government 
frequently means laws and regulations are not 
debated or cleared through other ministries or 
agencies.  While foreign investors are seldom given 
a chance to comment on new regulations, neither are 
most Croatian investors.  This leads to confusing 
and badly drafted legislation or regulations, which 
are subject to frequent changes and delays in 
implementation, or no implementation. 
 
¶48.  Taxation in Croatia is relatively high but in 
line with norms for the region.  Reform priorities 
for 2005 included increasing fiscal transparency and 
reducing the direct tax burden.  For a detailed 
description of extant tax legislation, please 
consult the Tax Administration's website at 
www.pu.mfin.hr/en.  Detailed information about 
customs can be found at www.carina.hr. 
 
¶49.  As of December 2005, tax on corporate income is 
20%.  There is a 15% tax on interest revenue and 
royalties.   In 2005, tax on dividends was 
eliminated as a spur to investment.  The Institute 
of Public Finance maintains a useful table of 
Croatian taxes at www.ijf.hr/eng/taxguide/taxtable, 
and the Ministry of Finance maintains information at 
www.pu.mfin.hr/en. 
 
 
A.9  Efficient Capital Markets and Portfolio 
Investments 
 
¶50.  The capital markets in Croatia have been 
growing steadily since 1991.  Croatian firms tend to 
use more debt and less equity financing than 
comparable U.S. firms.  The growth of pension funds 
and further privatization, including through the 
stock exchanges, should further encourage the 
market. 
 
¶51.  In 2006, Parliament is expected to approve the 
amended Investment Fund Law which provides for the 
establishment of derivative funds, index funds and 
other funds in accordance with EU legislation. 
 
¶52.  On January 1, 2006, CROSEC (Croatian Securities 
and Exchange Commission) HAGENA (the Pension 
Insurance and Fund Supervising Agency), and the 
Directorate for Supervision of Insurance Agencies 
merged into one agency called the Agency for 
Supervision of Financial Services (ASFS), headed by 
the Directorate for Supervision of Agencies. 
 
¶53.  The privatized and consolidated banking sector 
is advanced and is becoming more competitive.  More 
than 90% of the total assets of the banking sector 
 
ZAGREB 00000045  009.2 OF 014 
 
 
are foreign owned.  By the end of September 2005, 
there were 34 commercial banks and four savings 
banks, whose assets totaled 246 billion HRK ($40 
billion).  Zagrebacka Bank (25%) and Privredna Bank 
(18%) are the two largest banks per percentage of 
total bank assets in Croatia. 
 
¶54.  Croatia's markets are open to both domestic and 
foreign investment equally.  There are no 
restrictions that would disrupt foreign investment 
in the securities market and other markets in 
Croatia.  Foreign residents may open non-resident 
accounts and may do business both domestically and 
abroad.  Article 24 of the Foreign Currency act 
states that non-residents may subscribe, pay in, 
purchase or sell securities in the Republic of 
Croatia in accordance with regulations governing 
securities transactions.  Non-residents and 
residents are afforded the same treatment in 
spending and borrowing.  These and other non- 
resident financial activities regarding securities 
are covered by Articles 24, 25 and 27 of the Foreign 
Currency Act, which can be viewed on the Central 
Bank website (www.hnb.hr). 
 
¶55.  The government uses the market to finance 
government expenditure.  Government debt instruments 
must be bought through an intermediary such as a 
commercial bank, and are tradable on exchanges. 
 
¶56.  Currently, securities are traded on the Zagreb 
Stock Exchange (ZSE), established in 1991, and to a 
lesser extent on the Varazdin Stock Exchange (VSE), 
which was established in 1993 as an over-the-counter 
(OTC) market and registered as a Stock Exchange on 
July 16, 2002. 
 
¶57.  The Securities Law requires that all companies 
with more than 100 shareholders and with share 
capital of at least HRK 30 million (approximately 
$4.9 million) list on the newly established 
quotation for public stock companies (JDD) on one of 
the two stock exchanges in-country, Zagreb or 
Varazdin.  The intention was to increase 
transparency and encourage companies to obtain low 
cost equity financing, which would result in 
increased turnover and traded volumes. 
 
¶58.  Croatia's mechanism for raising long-term 
capital received a big boost following the 
government's introduction of EU Pillar II pension 
reform on January 1, 2002.  All Croatian workers 
under age 40 are required to pay five percent of 
their gross salary into a pension fund of their 
choice.  EU Pillar III (additional voluntary savings 
with government matching of 25%) has also been 
introduced.  Croatian financial markets are 
benefiting from the infusion of capital. 
 
¶59.  Transactions on the Zagreb Stock Exchange in 
2004 were 23.8 billion HRK (approximately $3.8 
billion), of which 17.8 billion HRK (approximately 
$2.9 billion) was in institutional turnover.  As of 
December 2005, transactions totaled 32 billion HRK 
(approximately $5.2 billion) of which 23 billion HRK 
(approximately $3.7 billion) was institutional 
turnover.  In 2004, transactions on the Varazdin 
Stock Exchange totaled 1.3 billion HRK 
(approximately $200 million) and, as of December 
2005, 2.1 billion HRK (approximately $340 million). 
 
¶60.  There are three tiers of securities traded on 
the ZSE. Companies must meet high disclosure and 
operating requirements to be fully listed (quotation 
I).  A detailed explanation of all requirements is 
provided at www.zse.hr in English.  Only five 
companies are fully listed: 
Pliva (pharmaceuticals) 
Podravka (food processing) 
Croatia Osiguranje (insurance) 
Istraturist (tourism) 
Medika (medical equipment) 
 
¶61.  On the Varazdin Stock Exchange (www.vse.hr) 
Varteks d.o.o. is traded in quotation I, in addition 
to three Republic of Croatia bonds and one series of 
 
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City of Koprivnica bonds. 
 
¶62.  The Croatian Chamber of Economy provides a 
useful summary of the capital markets in Croatia at: 
www.hgk.hr. 
 
 
A.10  Political Violence 
 
¶63.  Political violence is low in Croatia.  In late 
e 
1995, the conclusion of the Erdut Agreement and the 
Dayton Peace Accords ended the wars on Croatian 
territory that followed the break-up of Yugoslavia. 
In May 2002, Croatia was accepted into NATO's 
Membership Action Plan, underscoring the improved 
relationship between Croatia and the international 
community.  Relations with neighbors have improved 
steadily in the last few years, and minority parties 
are represented in the current ruling coalition. 
 
¶64.  There is little domestic anti-American 
sentiment.  There have been no incidents involving 
politically motivated damage to American projects 
and/or installations in Croatia. 
 
 
A.11.a  Corruption 
 
¶65.  Although Croatia is not a uniquely corrupt 
country, corruption is still a problem and is 
perceived to be widespread.  In the 2005 Corruption 
Perception Index survey compiled by Transparency 
International (TI), an international watchdog 
organization for corruption, Croatia received an 
index score of 3.4 out of 10 (ten being "highly 
clean"), reflecting a slight decrease from the 
rating of 3.5 in 2004. 
 
¶66.  The Minister of Justice has made the battle 
against corruption a priority.  A new National 
Strategy for the Battle Against Corruption and 
Organized Crime was drafted in late 2005 and is 
awaiting parliamentary approval.  Most observers 
consider that corruption is a problem of opportunity 
and that continued reforms of the bureaucracy and 
judiciary, combined with pressure from the 
international business community and the EU, will 
result in greater transparency and accountability. 
 
¶67.  Croatia has ratified the Council of Europe 
Criminal Law Convention on Corruption, the Council 
of Europe Civil Law Convention on Corruption, the 
United Nations Convention Against Transnational 
Organized Crime and the United Nations Convention 
Against Corruption. 
 
¶68.  Croatia is a member of GRECO (the Group of 
States Against Corruption), a peer monitoring 
organization that allows members to assess 
anticorruption efforts on a continuing basis.  A 
recent evaluation of Croatia (Second Evaluation 
Round, Jan. 1, 2003 - Dec. 31, 2005), including 
suggestions and opinions on Croatia's progress in 
its fight against corruption, can be found on 
GRECO's website (www.greco.coe.int). 
 
¶69.  In 2001, the government set up the Office for 
the Prevention of Corruption and Organized Crime 
(USKOK).  Its investigative powers were strengthened 
to close gaps in its authority to manage criminal 
investigations.  However, Croatia's institutional 
ability to combat corruption remains unproven.  The 
failure of USKOK to secure more than a few 
indictments demonstrates the immaturity of the 
Croatian judicial system to handle corruption 
investigations, stemming in part from the lack of a 
common definition of what constitutes corruption. 
The U.S. and EU are working with Croatian 
authorities to build capacity to fight organized 
crime and corruption. 
 
 
A.11.b  Bilateral Investment Agreements 
 
¶70.  Croatia does not have a foreign investment law; 
 
ZAGREB 00000045  011.2 OF 014 
 
 
foreigners receive national treatment under existing 
legislation.  In addition, investments by American 
citizens are covered by the U.S. Croatian Bilateral 
Investment Treaty (BIT), which entered into force in 
June 2001.  The treaty fulfills the principal U.S. 
objectives for agreements of this type: 
 
--  All forms of U.S. investment in the territory of 
Croatia are covered; 
 
--  Covered investments receive the better of 
national treatment or most-favored-nation (MFN) 
treatment, both while they are being established and 
thereafter, subject to certain specified exceptions; 
 
--  Specified performance requirements may not be 
imposed upon or enforced against covered 
investments; 
 
--  Expropriation is permitted only in accordance 
with customary international law standards; 
 
--  Parties are obligated to permit the transfer, in 
a freely usable currency, of all funds related to a 
covered investment, subject to exceptions for 
specified purposes; 
 
--  Investment disputes with the host government may 
be brought by investors, or by their covered 
investments, to binding international arbitration as 
an alternative to domestic courts. 
 
¶71.  For further information about BITs and for the 
text of the U.S.-Croatian BIT please see 
www.mac.doc.gov/Tcc/e-guides/eg_bits (under 
"Croatia"). 
 
¶72.  Croatia has signed investment protection 
treaties/agreements with the following countries, 
however, not all have entered into force: 
 
Albania, Argentina, Austria, Belgium, Belarus**, 
Bulgaria, Bosnia and Herzegovina, Czech Republic*, 
Chile, Denmark, Egypt, Finland, France, Greece, 
Germany, India, Indonesia**, Iran*, Italy, Israel*, 
Jordan, Kuwait, Cambodia, Canada, Qatar*, China*, 
Cuba**, Latvia**, Libya**, Hungary, Macedonia*, 
Malaysia*, Malta, Republic of Moldova**, 
Netherlands, Oman**, Poland, Portugal, Romania, 
Russia*, United States, Serbia Montenegro, Slovakia, 
Slovenia**, Spain, Sweden, Switzerland*, Thailand*, 
Turkey United Kingdom, Ukraine, Zimbabwe*. 
(* = ratified, but not in force)   (** = not 
ratified or in force) 
 
 
A.11.c  OPIC and Other Investment Insurance Programs 
 
¶73.  Croatia is eligible for coverage from the U.S. 
Overseas Private Investment Corporation (OPIC).  For 
more information on OPIC's insurance activities, see 
www.opic.gov.  The OPIC-supported $200 million 
Bedminster Investment Capital Management Fund 
invested in the Croatian banking sector (as part of 
the consortium that purchased Dubrovacka Banka) and 
the Croatian communications sector (by investing in 
Digital City Media, a broadband cable TV network in 
Croatia).  Bedminster Capital Management also 
manages an OPIC-supported private equity fund -- 
Southeast Europe Private Equity II -- which targets 
investments in Croatia, among other countries. 
Croatia is a member country of the Multilateral 
Investment Guarantee Agency (MIGA), for more 
information see www.miga.org. 
 
¶74.  In the event that OPIC should pay an 
inconvertibility claim under its political risk 
coverage, the local currency accepted by OPIC in any 
subsequent recovery would be made available to the 
Embassy on a priority basis for U.S. Government 
expenses.  The estimated annual U.S. dollar value of 
local currency used by the Embassy is approximately 
$10.5 million.  The Embassy currently purchases 
local currency from a local commercial bank at the 
market rate.  A major devaluation is unlikely. 
 
 
ZAGREB 00000045  012.2 OF 014 
 
 
 
A.11.d  Labor 
 
¶75.  Croatia has an educated, highly-skilled, and 
relatively high cost labor force compared with the 
region.  The estimated average cost to employers in 
Croatia was 8,500 HRK (approximately $1,386) per 
month as of September 2005.  The average net wage in 
Croatia was about 4300 HRK (approximately $700) The 
Croatian government controls wage levels in 
government agencies/institutions and in the 
remaining state-owned enterprises, affecting around 
half of all workers.  The wages in privately owned 
companies are freely determined by contracts between 
employer and employee.  There are no restrictions, 
except for the minimum wage, which is about 1,800 
HRK net per month (approximately $260). 
 
¶76.  Croatia adopted new labor laws in mid-2003 
aimed at increasing labor market flexibility by 
shortening the mandatory notification period before 
dismissal and reducing generous severance package 
requirements.  However, Croatia still fares badly in 
terms of time and expense in hiring and firing 
employees.  Labor has generally been supportive of 
government efforts to boost competitiveness and 
welcomes foreign investment but remains concerned 
about any possible cuts in social spending. 
 
¶77.  The Law on Labor regulates employee and 
employer relations through "employment contracts." 
Fulltime employment must not amount to more than 40 
hours per week and employees are entitled to at 
least 18 working days of paid annual leave and seven 
days of personal leave. The Law on Labor also 
provides special protections for workers in 
dangerous occupations, work at night, and work by 
minors between the ages of 15 and 18. 
 
¶78.  Article 87 of the Law on Foreigners covers the 
issuance of work permits.  While there are quotas 
(determined annually) for work permits, there are no 
quotas for foreigners who execute key positions in 
companies or representative offices.  Likewise, 
there are no quotas for business visas. 
 
¶79.  Workers are entitled by law to form or join 
unions of their own choosing, and workers exercised 
this right in practice.  In general, unions were 
independent of the government and political parties. 
The Labor Code prohibits anti-union discrimination 
and expressly allows unions to challenge firings in 
court; however, in general, attempts to seek redress 
through the legal system were seriously hampered by 
the inefficiency of the court system. 
 
 
A.11.e  Foreign Trade Zones/Free Ports 
 
¶80.  Croatia has several Free Trade Zones (FTZs), 
some in war-affected areas.  Special incentives are 
offered to users of FTZs. 
 
¶81.  The Law on Free Trade Zones allows a foreign- 
owned or domestic company in FTZs to engage in 
manufacturing, wholesale but not retail trade, 
foreign trade, banking and other financial 
activities.  The Law on Profit Tax also covers 
business in FTZs.  FTZ users are eligible for tariff 
waivers on imported products. FTZ users who 
construct or participate in construction of 
infrastructure projects worth 1 million HRK (about 
$164,000) or more in the zone, are exempted from 
paying corporate tax during the first five years of 
operation in the zone.  Other users in the zone pay 
corporate tax in the amount of 50% of the regular 
rate (i.e., 10% instead of 20%). 
 
¶82.  FTZs are exempted from any Croatian emergency 
measures or other restrictions pertaining to foreign 
trade or hard currency transactions.  Users of the 
zones may freely store their goods and production 
equipment in the zones.  Goods that are not intended 
for trade on the Croatian market or for domestic 
consumption are fully exempt from custom duties or 
taxes.  Imported goods will be taxed and assessed 
 
ZAGREB 00000045  013.2 OF 014 
 
 
duties per the value of the production materials 
imported for the product and not per the value of 
the finished product. 
 
¶83.  The following fifteen counties currently have 
FTZS: Buje, Krapina-Zagorje, Osijek, Rijeka, 
Slavonski Brod, Split, Splitsko-Dalmatinska County, 
Obrovac, Ploce, Pula, Kukuljanovo, Varazdin, Zagreb, 
Vukovar,, and Ribnik counties. 
 
 
A.11.f  Foreign Direct Investment Statistics 
 
¶84.  Compared to other advanced transitional 
economies in the region, Croatia is in the middle 
group in terms of foreign direct investment (FDI). 
New or green-field investments have seen 
particularly slow growth.  According to the Trade 
and Investment Promotion Agency, there were 19 
foreign investment projects initiated this year. 
Privatization of strategic government-owned assets 
has been the main source of FDI since Croatian 
independence.  Large state assets such as utilities, 
the state insurance company and banks, are being 
sold by the government, usually through 
international tenders, and in some cases, with 
specific laws regulating the sale of each enterprise 
(e.g., the oil company and the electric company). 
The Croatian Privatization Fund, the agency 
responsible for the sale of other assets, has shares 
and stock in 1014 (mostly non-performing) companies. 
These include hotels, integrated agricultural 
companies, an aluminum plant, two steel plants, 
shipyards and other companies.  The state's share of 
the equity base value of these companies is about 
11.6 billion HRK ($1.9 billion).  Information 
regarding the Croatian Privatization Fund, including 
information on companies currently for sale, can be 
found on its website, www.hfp.hr. 
 
¶85.  Foreign Direct Investment between 1993 and the 
second quarter of 2005 totaled $11.9 billion, with 
investments in the financial and telecommunications 
sectors accounting for nearly 40% of the total.  FDI 
in Croatia has shown steady growth in recent years, 
with early 2005 statistics indicating a strong rise 
over 2004. 
 
¶86.  Austria is the largest source of foreign 
investment in Croatia, accounting for 26% of total 
FDI since 1993.  Germany is second with 18% of total 
FDI, followed by the United States with 12% (this is 
due to large earnings re-investment). Croatian firms 
invested $1.6 billion abroad between 1993 and the 
second quarter of 2005.  The leading destinations 
for Croatian investment were Switzerland, Bosnia and 
Herzegovina, Poland and Serbia and Montenegro.  In 
the first two quarters of 2005, Croatians invested 
$99.5 million abroad: approximately 21% in Hungary, 
20% in Bosnia-Hercegovina, 18% in the British Virgin 
Islands, 14% in Austria, and 9% in Serbia and 
Montenegro. 
 
¶87.  The Croatian National Bank provides information 
about foreign investments in aggregate form which 
can be found on their website at www.hnb.hr.  The 
following is a list of some of the major ($20 
million and above) foreign investments in Croatia to 
date: 
 
Foreign investor:  Deutsche Telekom (Germany) 
Sector:  telecommunications 
Croatian Company:  Croatian Telecom (51% of shares) 
Value:  $1.272 billion 
 
Foreign investor: MOL (Hungary) 
Sector: Oil Industry 
Croatian Company: INA d.d. (26% of shares) 
Value: $505 million 
 
Banca Commerciale Italiana (Italy) 
Banking/financial services 
Privredna Banka (66.66% of shares in 1999 plus 10% 
in 2002) 
Value:  $300 million + approximately $50 million, 
according to media reports 
 
ZAGREB 00000045  014.2 OF 014 
 
 
 
Unicredito Italiano (Italy) 
Banking/financial services 
Zagrebacka Banka (96% ownership) 
Value:  $230 million (estimate) 
 
Erste und Steiermarkische Bank (Austria) 
Banking/financial services 
Rijecka Banka (85% share) 
Value:  $155 million 
 
Austria Creditanstalt Group (HVB Group) (Austria) 
Banking/financial services 
Splitska Banka (88% ownership) 
Value:  $132 million 
 
Heineken N.V. (Netherlands) 
Brewery 
Karlovacka Pivovara company (94.42%) 
Value:  $125 million 
 
Sutivan Investment and Excelsa Anstalt 
(Lichtenstein) 
Hotels and tourism 
Plava Laguna (81.5%) 
Value: $70 million 
 
Ericsson (Sweden) 
Telecommunications 
Tesla Company 
$48 million 
 
Hofmann and Pankl Betelligungasse (Austria) 
Minerals processing 
Straza Company 
$39 million 
 
Societe Suisse de Cemment Portland (Switzerland) 
Cement 
Tvornica Cementa Koromacno company 
$38 million 
 
Interbrew (Belgium) 
Brewery 
Zagrebacka Pivovara company 
$27 million 
 
Coca Cola Amatil (Australia) 
Non-alcoholic beverages 
Croatian company:  n/a 
$20 million 
 
DELAWIE