VZCZCXRO0348
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVB #0046/01 0171540
ZNR UUUUU ZZH
R 171540Z JAN 07
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 7136
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPCIM/CIMS NTDB WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 14 ZAGREB 000046 
 
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 2007 INVESTMENT CLIMATE STATEMENT 
 
REF: 06 STATE 178303 
 
¶1.  Summary: Croatia has enjoyed respectable 
economic growth over the last few years, accompanied 
by low inflation, a stable exchange rate and growth 
in the tourism sector.  At the same time, the 
government has undertaken several initiatives aimed 
at streamlining the bureaucracy in an effort to 
attract and facilitate foreign investment.  Although 
many challenges still remain, particularly in the 
legal system, land registries and distorting 
subsidies to state-owned industries, Croatia has 
made significant strides in recent years with 
foreign investors enjoying solid returns in this 
growing market.  Now a candidate for membership in 
the European Union, Croatia hopes to position itself 
as a gateway to the markets of South Eastern Europe, 
capitalizing on its developed infrastructure and 
favorable geographic position.  With the bulk of the 
countryQs USD 12 billion in foreign investment since 
1991 in the financial and retail sectors, the 
governmentQs greatest challenge is to attract 
greenfield investments, particularly export-oriented 
industries that could help narrow the countryQs 
substantial trade deficit.  END SUMMARY 
 
 
A.1  Openness to Foreign Investment 
 
¶2.  Croatia is open to foreign investment.  The 
Croatian government has set a goal of increasing 
foreign investment and continues to undertake 
measures to improve the investment climate in the 
country, hoping to build on recent positive trends 
that include a stable macroeconomic environment and 
future EU membership. The GoC passed a National 
Development Strategy that includes plans for 
economic reform.   In 2006, the GoC, with the 
assistance of USAID, began the Hitro.rez project, 
which has as its goal the elimination of thousands 
of laws and regulations that affect business in 
Croatia.  Its managers hope to eliminate 30-50% of 
existing provisions and simplify another 30-40%. 
The goal of the project is remove needlessly complex 
bureaucracy as an obstacle to investment. 
 
¶3.  Despite recent progress, however, Croatia still 
poses challenges for foreign investors.  Of these, 
the greatest is the countryQs dysfunctional legal 
system.  Although being reformed, the wheels of 
justice turn slowly in Croatia, with even the 
simplest cases taking years to resolve among a 
backlog of over 1 million pending cases.  Although 
there are laws that govern the sanctity of 
contracts, the current backlog of cases precludes 
effective enforcement.   The impossibility of 
obtaining timely judicial remedy in a dispute has 
hindered investment in Croatia. 
 
¶4.  The GovernmentQs e-government initiative ?HITRO? 
(www.hitro.hr) became operational in 2005, with an 
on-line business registration component that reduces 
the time it takes to register a company to four 
days.  Business registration is the first step in a 
plan to make more government services available on- 
line in coming years and includes the full 
digitization of CroatiaQs broken system of land 
records (see www.pravosudje.hr and www.kataster.hr 
to find digitized land records). 
 
¶5.  The Agency for Trade and Investment Promotion 
was given new leadership in 2006.  The Agency has a 
mandate to assist potential investors in Croatia, 
with specialists available in strategic planning, 
investment support and export support (see 
www.apiu.hr) and is actively seeking projects that 
it can promote to foreign investors.  The Agency is 
also active in advising the government on how to 
make CroatiaQs regulatory environment more 
transparent and competitive. 
 
¶6.  CroatiaQs legal framework accords national 
treatment to foreign and domestic investors.  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," 
 
ZAGREB 00000046  002 OF 014 
 
 
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. 
 
¶7.  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 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) can 
be restricted. 
 
¶8.  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. 
 
 
A.2  Conversion and Transfer Policies 
 
¶9.  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. 
 
¶10.  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. 
 
¶11.  The U.S. Embassy in Zagreb has not received any 
complaints from American companies regarding 
transfers and remittances. 
 
 
A.3  Expropriation and Compensation 
 
¶12.  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. 
 
¶13.  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 
 
ZAGREB 00000046  003 OF 014 
 
 
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 
 
¶14.  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. 
 
¶15.  The government  continues efforts to reform the 
judiciary, including reducing the backlog of cases, 
reforming the land registry, training court officers 
and reducing the backlog and length of bankruptcy 
procedures.  An important move to lessen the backlog 
of cases is the on-going redistribution of non- 
disputed decisions to public notaries.  During the 
past year, the number of pending cases has decreased 
from 1.64 million to 1.23 million cases.  However, 
the  enforcement of judgments still makes up 25% of 
all pending cases.  Although there has been progress 
in reducing the number of cases, enforcement and 
execution of judgments remain 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 decided.  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."  The Ministry of JusticeQs reform plan is 
available on its website under ?e-pravosude? at 
www.pravosudje.hr. 
 
¶16.  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. 
 
¶17.  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. 
 
¶18.  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. 
 
ZAGREB 00000046  004 OF 014 
 
 
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. 
 
¶19.  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. 
 
¶20.  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"). 
 
¶21.  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. 
 
¶22.  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 that 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. 
 
¶23.  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. 
 
 
A.5  Performance Requirements/Incentives 
 
¶24.  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, 
 
ZAGREB 00000046  005 OF 014 
 
 
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. 
 
¶25.  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. 
 
¶26.  As of January 1, 2007, the  Investment 
Promotion Law offers potentially significant 
incentives (the amount of which is dependent upon 
the percentage of unemployment in the respective 
county) to investors, foreign and domestic, such as 
1500-3000 EUR incentive per new job position, 
assistance with retraining and tax incentives.  It 
provides for incentives that apply only to 
investments in production based businesses, 
technological development centers and strategic 
business support activities.  The minimum amount of 
investment that qualifies for incentives is 300,000 
EUR. Tax incentives include substantially lower 
profit tax obligations and customs relief.  The text 
of the law is available on the Croatian National 
Bank site (www.hnb.hr). 
 
¶27. Incentives include: 10% corporate tax for ten 
years for companies that invest from 2.2 million to 
11 million HRK (approximately $393,000 - $2 million) 
and create 10 new jobs; 7% corporate tax for ten 
years for companies that invest from 11 million to 
30 million HRK (approximately $2 million to $5.35 
million) and create 30 new jobs; 3% corporate tax 
for ten years for companies that invest 30 million 
to 58 million HRK (approximately $2  million to 
$10.4 million) and create 50 new jobs; 0% corporate 
tax for ten years for companies that invest over 60 
million HRK (approximately $10.7 million) and create 
at least 75 new jobs. 
 
¶28.  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, an increase in 
exports, increasing economic activity in regions of 
Croatia in which economic growth and employment 
levels lag behind national averages (in accordance 
with the map of regional areas of special state 
concern), development of new services, energy 
conservation, strengthening information technology, 
cooperation with foreign financial institutions, and 
harmonizing the Croatian economy with EU standards. 
 
¶29.  Investors may also be eligible to receive 
assistance from the government to offset costs of 
employee re-training.  The government may offer real 
estate (or permits or infrastructure) to an 
investment either cost-free or on a preferential 
basis.  Finally, the government will allow the duty- 
free importation of capital equipment for the 
investment. 
 
¶30.  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.  However, although still in effect, some 
of these incentives are not in compliance with EU 
standards.  The Government is currently studying how 
to bring them into compliance without reneging on 
previously-made commitments.  A decision on this is 
likely in 2007. 
 
ZAGREB 00000046  006 OF 014 
 
 
 
¶31.  The Trade and Investment Promotion Agency can 
be helpful in identifying and applying for 
investment incentives.  Also, the (separate) Office 
of Investment and Export Promotion in the Ministry 
of Economy can be helpful in looking for incentive 
information.  Further information can be found on 
their website at www.mingorp.hr. 
 
¶32.  CroatiaQs 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. 
 
¶33.  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 
 
¶34.  Both foreign and domestic legal entities have 
the right to establish and own businesses and engage 
in remunerative activity.  Foreign investors can 
acquire ownership and shares of joint stock 
companies. The lowest amount of initial capital for 
establishing a joint stock company is 200,000 HRK 
($36,300) and the nominal value per share cannot be 
less than 10 HRK ($1.78). Minimum initial capital 
for establishment of a limited liabilities company 
is 20,000 HRk ($3.571), while individual 
representation per investor cannot be less than 200 
HRK ($35.71) 
 
¶35.  Article 49 of the Constitution provides 
assurances that all entrepreneurs have equal legal 
status and that monopolies are forbidden.  The 
Competition Act defines the rules and methods for 
promoting and protecting competition.  This law, and 
information about the Croatian Competition Agency 
can be found at www.aztn.hr.  In theory, competitive 
equality is the standard applied to private 
enterprises in competition with public enterprises 
with respect to market access, credit and other 
business operations, such as licenses and supplies. 
In practice, however, state-owned enterprises and 
"strategic" firms continue to receive preferential 
treatment, including government bailouts and 
subsidies. 
 
 
A.7  Protection of Property Rights 
 
¶36.  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 
property and pledge real and tangible property. 
 
¶37.  In order to acquire property by means other 
than inheritance or as an incorporated Croatian 
legal entity, foreign investors require the approval 
of the Ministry of Justice.  Approval often takes 
 
ZAGREB 00000046  007 OF 014 
 
 
several months or longer owing to a lengthy 
interagency clearance process that requires advisory 
opinions from local authorities.  All requests that 
were awaiting Ministry of Foreign Affairs approval 
were transferred to the Ministry of Justice as of 
July 25, 2006 when the Ministry of Foreign Affairs 
was removed from the approval process. 
 
¶38.  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, independent 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 to both land 
and buildings, which can be titled and owned 
separately.  Inheritance laws have led to a 
situation in which some properties can have dozens 
of legal owners, some of whom are long since 
deceased and others of whom emigrated and cannot be 
found.  It is also important to verify the existence 
of necessary building permits, as some newer 
structures in coastal areas have been subject to 
destruction at ownerQs expense and without 
compensation for not conforming with local zoning 
regulations.  Investors should be particularly wary 
of promises that structures built without permits 
will be regularized retroactively. 
 
¶39.  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. 
 
¶40.  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. 
 
¶41.  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.  Croatia 
is on the U.S. Special 301 Watch List for failing to 
protect U.S. intellectual property rights.  The 
Agency for Medical Products, which is separate from 
the Patent Agency, does not require license seekers 
to submit information on existing patents, which has 
resulted in the past in marketing authorization 
being given to products that are protected by valid 
Croatian patents.  Problems also exist in the 
protection of trademarks and copyrights, but at a 
much lower level. 
 
¶42.  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 
 
¶43.  Together with CroatiaQs 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 
 
ZAGREB 00000046  008 OF 014 
 
 
to increase transparency and its commitments to 
adopt EU laws, norms, and practices,  provide steady 
pressure for reform.  However, much more progress is 
needed on this front. 
 
¶44.  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 (see 
paragraph 2).  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 (see paragraph 4). 
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.? 
 
¶45. The regulatory system does not specifically 
discriminate against foreign investors.  However, 
transparency in developing legislation and 
regulation is often hampered by an inefficient 
public administration, a lack of intra-governmental 
coordination, and reliance on expert advice from 
national champions, sometimes giving the latter a 
privileged position in influencing new regulations. 
 
¶46.  Tax on corporate income is a flat 20%.  There 
is a 15% tax on interest revenue and royalties.   In 
2005, tax on dividends was eliminated as a spur to 
investment.  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. 
 
¶47.  The Institute of Public Finance maintains a 
useful table of Croatian taxes at 
http://www.ijf.hr/eng/taxguide/08_05/taxtable .pdf, 
and the Ministry of Finance maintains information at 
www.pu.mfin.hr/en.  Croatia also maintains a 22 
percent value-added tax (VAT).  Some companies have 
had difficulty with the tax authorities due to 
differing understandings of how certain goods and 
services are affected by the VAT. 
 
 
A.9  Efficient Capital Markets and Portfolio 
Investments 
 
¶48.  CroatiaQs capital markets grew strongly in 
2006, fueled by the sale of the GovernmentQs stakes 
in Pliva Pharmaceuticals and the national oil 
company, INA.  Typically, Croatian firms have used 
more debt and less equity financing than comparable 
U.S. firms. 
 
¶49.  In 2006, the amended Investment Fund Law went 
into force, which provides for the establishment of 
derivative funds, index funds and other funds in 
accordance with EU legislation. 
 
¶50.  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 ( HANFA), headed 
by the Directorate for Supervision of Agencies. See 
www.hanfa.hr for all legislation and information 
relative to capital markets. 
 
¶51.  The privatized and consolidated banking sector 
is advanced and is becoming more competitive.  More 
than 90% of the total assets of the banking sector 
are foreign owned.  By the end of September 2006, 
there were 34 commercial banks and five savings 
banks, whose assets totaled 285 billion HRK ($51 
billion).  Italian-owned Zagrebacka Bank (23.11%) 
and Privredna Bank (17.93%) are the two largest 
banks per percentage of total bank assets in 
Croatia. 
 
¶52.  Croatia's markets are open to both domestic and 
 
ZAGREB 00000046  009 OF 014 
 
 
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). 
 
¶53.  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. 
 
¶54.  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. 
 
¶55.  The Securities Law requires that all companies 
with more than 100 shareholders and with share 
capital of at least HRK 30 million (approximately 
$5.4 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 trade volumes. 
 
¶56.  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 this infusion 
of capital. 
 
¶57.  Transactions on the Zagreb Stock Exchange in 
2005 were 34.2 billion HRK (approximately $6.1 
billion), of which 25 billion HRK (approximately 
$4.5 billion) was in institutional turnover.  As of 
December 2006, transactions totaled 45.3 billion HRK 
(approximately $8.1 billion) of which 29.4 billion 
HRK (approximately $5.3 billion) was institutional 
turnover.  In 2005, transactions on the Varazdin 
Stock Exchange totaled 2.2 billion HRK 
(approximately $390 million) andin 2006transactions 
totaled  3.7 billion HRK (approximately $660 
million). 
 
¶58.  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. 
 
¶59.  The Croatian Chamber of Economy provides a 
useful summary of the capital markets in Croatia at: 
www.hgk.hr. 
 
 
A.10  Political Violence 
 
¶60.  Political violence is low in Croatia.  In late 
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.  Full NATO membership for Croatia is 
likely before the end of the decade.  In October 
2005, the European Union began accession 
negotiations with Croatia in order to prepare 
Croatia for membership. Relations with neighbors 
 
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have improved steadily in the last few years, and 
minority parties are represented in the current 
ruling coalition. 
 
¶61.  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 
 
¶62.  Although Croatia is not a uniquely corrupt 
country, corruption is still a problem and is 
perceived to be widespread.  In the 2006 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"), remaining unchanged from 2005. 
 
¶63.  In March 2006, the government presented its 
National Strategy for Battling Corruption and 
Organized Crime (Strategy) that proposed to overhaul 
the judicial system, health system, local 
government, political party financing, public 
administration, and the economy. 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. 
While Croatia has undertaken the guidelines set by 
the Strategy, the European Commission, in its 
"Croatia 2006 Progress Report," issued November 
2006, stated that corruption and a flawed judicial 
system were still the greatest problems the country 
faced. 
 
¶64.  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. 
 
¶65.  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.  An 
evaluation of Croatia including suggestions and 
opinions on CroatiaQs progress in its fight against 
corruption, can be found on GRECOQs website 
(www.greco.coe.int). 
 
¶66.  The Office for the Prevention of Corruption and 
Organized Crime (USKOK)is currently staffed by 36 
employees (doubled from 2005) and participates in 
joint task forces with the Ministry of Finance and 
Police.  In 2006, a couple of high profile cases of 
alleged corruption came under investigation, but 
none have yet resulted in conviction. In order to 
secure success of the Strategy (see paragraph 66), 
the government will have to enforce cooperation 
between Ministries and ensure financial as well as 
human resources.  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 
 
¶67.  Croatia does not have a foreign investment law; 
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 
 
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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. 
 
¶68.  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"). 
 
¶69.  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 
 
¶70.  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. 
 
¶71.  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 
$13.5 million.  The Embassy currently purchases 
local currency from a local commercial bank at the 
market rate.  A major devaluation is unlikely. 
 
 
A.11.d  Labor 
 
¶72.  Croatia has an educated, highly-skilled, and 
relatively high cost labor force compared with the 
region.  In general, employerQs wage costs are 
approximately 110% of an employeeQs net wage. The 
estimated average cost to employers in Croatia was 
7,713 HRK (approximately $1,377) per month as of 
October 2006.  The average net wage at the end of 
the third quarter of 2006 was 4,585 HRK ($818). 
Minimum wage, as determined by the government, is 
2100 HRK gross ($375) monthly, net is between 1400- 
 
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1500 HRK ($250-$267) depending upon exemptions. 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. 
 
¶73.  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. 
 
¶74.  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. 
 
¶75.  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. 
 
¶76.  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 
 
¶77.  Croatia has several Free Trade Zones (FTZs), 
some in war-affected areas.  Special incentives are 
offered to users of FTZs. 
 
¶78.  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 
$178,000) 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%). 
 
¶79.  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 
duties per the value of the production materials 
imported for the product and not per the value of 
the finished product. 
 
¶80.  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.  As mentioned 
previously, EU accession will force the Government 
 
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to make changes in the free trade zone system and 
the incentives system associated with them. 
 
 
A.11.f  Foreign Direct Investment Statistics 
 
¶81.  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 18 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 1012 (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 
11.524 billion HRK ($2.06 billion).  Information 
regarding the Croatian Privatization Fund, including 
information on companies currently for sale, can be 
found on its website, www.hfp.hr. 
 
¶82. In November 2006, the GoC as part of its 
privatization efforts, offered to the public first 
rights for 15 per cent of their INA holdings. 
Individual purchase was limited to 38,000 HRK 
($6,785) and included the offer of one free share 
for every ten retained for at least a year. 44,271 
citizen participated in this unprecedented offer and 
purchased shares at the cost of 1,690 HRK ($301) 
each. 
 
¶83.  Foreign Direct Investment between 1993 and the 
third quarter of 2006 totaled $13.15 billion, with 
investments in the financial and telecommunications 
sectors accounting for 40% of the total.  FDI in 
Croatia has shown steady growth in recent years. 
 
¶84.  Austria is the largest source of foreign 
investment in Croatia, accounting for 22% of total 
FDI since 1993.  Germany is second with 16% of total 
FDI, followed by France with 8.8% and the United 
Stateswith 8.6%. Croatian firms invested $1.8 
billion abroad between 1993 and the third quarter of 
¶2006.  The leading destinations for Croatian 
investment were Switzerland, Bosnia and Herzegovina, 
and Serbia and Montenegro.  In the first three 
quarters of 2006, Croatians invested $98million 
abroad: approximately 38% in Switzerland, 16% in 
Bosnia-Hercegovina, 15% in Serbia and Montenegro and 
8% in Poland. 
 
¶85.  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: Barr Pharmaceuticals 
Sector: pharmaceuticals 
Croatian company: Pliva 
Value $2.3 billion 
 
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) 
 
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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 
 
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 
 
BRADTKE