VZCZCXRO0306
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVB #0050/01 0241406
ZNR UUUUU ZZH
R 241406Z JAN 08
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 8506
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPCIM/CIMS NTDB WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 06 ZAGREB 000050 
 
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 2008 INVESTMENT CLIMATE STATEMENT (PART I) 
 
REF: STATE 158802 
 
¶1.  Summary: Croatia has enjoyed steady growth in foreign investment 
over the last several years, buoyed by a growing economy, low 
inflation, a stable exchange rate and developed infrastructure. 
With progress towards membership in NATO and the European Union well 
advanced, Croatia has taken a leading position in the region, with 
the expectation that Euro-Atlantic integration will provide further 
stimulus for investment and growth.  However, despite progress in 
economic and administrative reforms, problems remain.  These include 
a judiciary plagued by case backlogs, overly complex bureaucracy, 
corruption and the country's relatively high costs.  Nevertheless, 
many foreign investors are prospering in this growing market. 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 has undertaken 
incremental measures to improve the investment climate in the 
country, hoping to build on recent positive trends that include a 
stable macroeconomic environment and future NATO and EU membership. 
 
 
¶3.  Croatia's 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," 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. 
 
¶4.  Despite recent progress, however, problems remain that dampen 
investment in Croatia.  Of these, the greatest is the country's 
legal system.  Amid a backlog of over 1 million pending cases, even 
the simplest cases can take years to resolve.  The result is that, 
in spite of laws that govern the sanctity of contracts, timely 
enforcement is a problem.  The difficulty of obtaining timely 
judicial remedy in a dispute has hindered investment in Croatia. 
Other problem areas include inefficient bureaucracy and the 
country's relatively high costs in relation to other locations in 
Central and Eastern Europe. 
 
¶5.  The Agency for Trade and Investment Promotion has a mandate to 
match potential investors with projects in Croatia.  The Agency has 
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 Croatia's regulatory 
environment more transparent and competitive. 
 
¶6.  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 
Obligatory Relations Law regulates commercial contracts. 
 
A.2  Conversion and Transfer Policies 
 
¶7.  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. 
 
¶8.  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. 
 
¶9.  The U.S. Embassy in Zagreb has not received any complaints from 
American companies regarding transfers and remittances. 
 
 
A.3  Expropriation and Compensation 
 
ZAGREB 00000050  002 OF 006 
 
 
 
¶10.  There have been no cases of expropriation of foreign 
investments by the government since Croatia became independent in 
¶1991.  Article III of the BIT covers both direct and indirect 
expropriations.  The BIT bars all expropriations or nationalizations 
except those that are for a public purpose, carried out in a 
non-discriminatory manner, are in accordance with due process of 
law, and are subject to prompt, adequate and effective 
compensation. 
 
¶11.  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 
 
¶12.  There have been few instances of investment disputes involving 
U.S. companies in Croatia.  As a result of the very long timeframes 
involved in obtaining judgments in court, companies often try to 
resolve disputes without seeking judicial remedy.  The government is 
currently working to reduce court backlogs and to encourage the use 
of alternative dispute settlement. 
 
¶13.  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. 
 
¶14.  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. 
 
¶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.  Alternative dispute resolution has 
been implemented at the High Commercial Court, the Zagreb Commercial 
Court and 6 municipal courts throughout the country.  An important 
move to lessen the backlog of cases is the on-going redistribution 
of non-disputed decisions to public notaries.  During the past year, 
the number of pending cases has decreased from 1.23 million cases to 
approximately one million.  While the greatest reduction was in the 
backlog of enforcement cases, the enforcement of judgments continues 
to make up 25% of all pending cases.  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 exhausted. 
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 Justice's reform plan is 
available on its website at www.pravosudje.hr. 
 
¶16.  The Law on Bankruptcy, internationally harmonized and 
corresponding to the EU regulation on insolvency proceedings and 
United Nations Commission on International Trade Law (UNCITRAL) 
Model Law on Cross-Border Insolvency, establishes timeframes for the 
initiation of bankruptcy proceedings.  Bankruptcy and foreclosures 
have traditionally been slow and inefficient in Croatia.  A World 
Bank funded project, "Technical Assistance Associated with 
Bankruptcy Proceedings", ended in January 2007. The project had as 
its goal the advancement of company court administration through the 
introduction of an information and legal system for bankruptcy 
trustees, which was to assist in shortening bankruptcy proceedings. 
The World Bank has estimated that the recovery rate in Croatia is 
approximately 40 per cent of the Organization for Economic 
Cooperation and Development (OECD) average, and somewhat better than 
 
ZAGREB 00000050  003 OF 006 
 
 
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, although underutilized.  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 UNCITRAL model procedures.  The court reviews 30 to 40 
cases per year, of which 40% are international cases. 
 
¶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 
http://tcc.export.gov/Trade_Agreements 
 
¶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. 
 
 
A.5  Performance Requirements/Incentives 
 
¶22.  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. 
 
¶23.  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. 
 
¶24.  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. 
 
ZAGREB 00000050  004 OF 006 
 
 
 
¶25.  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). 
 
¶26. Incentives include: 10% corporate tax for ten years for 
companies that invest from 2.2 million to 11 million HRK 
(approximately $440,000 - $2.2 million) and create 10 new jobs; 7% 
corporate tax for ten years for companies that invest from 11 
million to 30 million HRK (approximately $2.2 million to $6 million) 
and create 30 new jobs; 3% corporate tax for ten years for companies 
that invest 30 million to 58 million HRK (approximately $6  million 
to $11.6 million) and create 50 new jobs; 0% corporate tax for ten 
years for companies that invest over 60 million HRK (approximately 
$11.6 million) and create at least 75 new jobs. 
 
¶27.  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. 
 
¶28.  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. 
 
¶29.  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. 
 
¶30.  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. 
 
 
¶31.  Although procedures for obtaining business visas are generally 
clear, they can be cumbersome and time-consuming.  Furthermore, the 
Government amended legislation during the summer of 2007, setting up 
new requirements for temporary residency. Article 56 of the Law on 
Foreigners now requires that a person seeking temporary residency 
for family members must, themselves, have been in Croatia for at 
least two years before such residency would be issued to their 
family members.  At the time of the writing of this report, it is 
still unclear how this law will be implemented or may be amended in 
the future.  Questions relating to visas and work permits should be 
directed to a Croatian embassy or consulate.  The US Embassy in 
Zagreb also maintains a website with information on this subject at 
www.usembassy.hr. 
 
 
A.6  The Right to Private Ownership and Establishment 
 
¶32.  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 ($40,000) and the nominal value 
per share cannot be less than 10 HRK ($2.00). Minimum initial 
capital for establishment of a limited liabilities company is 20,000 
 
ZAGREB 00000050  005 OF 006 
 
 
HRk ($4,000), while individual representation per investor cannot be 
less than 200 HRK ($40.00) 
 
¶33.  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. 
 
¶34.  The Government's 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 Croatia's land records (see 
www.pravosudje.hr and www.kataster.hr to find digitized land 
records). 
 
 
A.7  Protection of Property Rights 
 
¶35.  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.  Reciprocity exists on state-by-state basis with the 
United States.  Croatia's Ministry of Foreign Affairs has confirmed 
the existence of reciprocity for real estate purchases for residents 
of the following states: Alabama, Arizona, Alaska, Arkansas, 
California, Colorado, Connecticut, Delaware, Florida, Georgia, 
Idaho, Louisiana, Maine, Massachusetts, Michigan, Montana, Nevada, 
New Jersey, New York, North Carolina, North Dakota, Rhode Island, 
Tennessee, Texas, Virginia, Washington, West Virginia, Iowa and 
Oklahoma (with a condition of permanent residence).  Residents of 
other states could face longer waiting periods while the Ministry 
confirms that Croatian nationals can purchase real estate in those 
states without restrictions.  However, a foreign investor, 
incorporated as a Croatian legal entity, may acquire/own property 
without ministry approval.  Purchasing by any private party of 
certain types of land (principally land directly adjacent to the sea 
or in certain geographically designated areas) can be restricted. 
Both Croatian and foreign citizens may mortgage property and pledge 
real and tangible property. 
 
¶36.  In order to acquire property by means other than inheritance or 
as an incorporated Croatian legal entity, foreign investors require 
the approval of the Ministry of Justice.  Approval often takes 
several months or longer owing to a lengthy interagency clearance 
process. 
 
¶37.  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 owner's 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. 
 
¶38.  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. 
 
 
ZAGREB 00000050  006 OF 006 
 
 
¶39.  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. 
 
 
¶40.  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.  Although some areas of IPR 
protection remain problematic, Croatia has shown improvement and was 
consequently removed from the U.S. Special 301 Watch List in 2007. 
Problem areas continue to be concentrated in piracy of digital media 
and counterfeiting.  Croatia is also a transit country for 
contraband shipments bound for other countries in the region. 
 
¶41.  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. 
 
BRADTKE