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Cablegate: Croatia 2008 Investment Climate Statement (Part Ii)

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E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC KTDB USTR HR
SUBJECT: CROATIA 2008 INVESTMENT CLIMATE STATEMENT (PART II)

REF: STATE 158802

This is Part II of Croatia's 2008 Investment Climate Statement. The
numbering of paragraphs continues from Part I.

A.8 Transparency of the Regulatory System

42. Croatia is under pressure to increase transparency and its
commitments to adopt EU laws, norms, and practices, provide steady
pressure for reform. Nevertheless, bureaucracy and regulation
continue to be overly-complex and time-consuming.

43. In 2006, the Croatian government, with the assistance of USAID,
began the Hitrorez project, which has as its goal the elimination of
thousands of laws and regulations that affect business in Croatia.
The goal of the project is remove needlessly complex bureaucracy as
an obstacle to investment. At the end of its first phase in
mid-2007, Hitrorez identified 599 regulations for simplification or
elimination. As of September 2007, 123 Hitrorez recommendations had
been implemented, with plans to implement another 158
recommendations by February 2008.

44. New legislation on public procurement, accounting and financial
security was passed in 2007 with the intent to increase
transparency. An amended Company Law is expected in April 2008. The
new procurement law provides for greater transparency with the
introduction of electronic auctions, definitions of special
procurement procedures and framework agreements, as well as
publication of all procurement procedures over 70,000 HRK ($14,000).
The new Accounting Law includes reporting provisions according to
which large companies will apply International Financial Reporting
Standards, while small and medium businesses will apply Croatian
Financial Reporting Standards. Progress, however, is still necessary
in this area.

45. Bureaucracy is still 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 34). 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 34). 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."

46. 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.

47. 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.

48. The Institute of Public Finance maintains a useful table of
Croatian taxes at 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

49. 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).

50. Croatia's capital markets grew strongly in 2007. The ZSE saw

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record trading in 2007, which nearly doubled to 22 billion HRK ($4.4
billion) from 2006. According to the Central Depository Agency
records, approximately 840,000 Croatian citizens now own stocks.

51. 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.

52. The Agency for Supervision of Financial Services (HANFA),
headed by the Directorate for Supervision of Agencies oversees the
capital market in Croatia. See www.hanfa.hr for all legislation and
information relative to capital markets.

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 are foreign owned. By the 2nd quarter of 2007,
there were 33 commercial banks and five savings banks, whose assets
totaled 325.2 billion HRK ($65 billion). Austrian-owned Zagrebacka
Bank (23.05%) and Privredna Bank (17.26%) are the two largest banks
per percentage of total bank assets in Croatia.

54. 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.

55. Currently, securities are traded on the Zagreb Stock Exchange
(ZSE), established in 1991. The Varazdin Stock Exchange (VSE), which
was established in 1993 as an over-the-counter (OTC) merged into the
ZSE in 2007. The OMX X-Stream trading system is now used on the ZSE.


56. 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). The intention was to increase
transparency and encourage companies to obtain low cost equity
financing, which would result in increased turnover and trade
volumes.

57. 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.

58. Transactions on the Zagreb Stock Exchange in 2007 were 66.49
billion HRK (approximately $13.34 billion), of which 39.05 billion
HRK (approximately $7.83 billion) was in institutional turnover. In
2006, transactions totaled 49.06 billion HRK (approximately $8.79
billion) of which 29.39billion HRK (approximately $5.27billion) was
institutional turnover

59. 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.

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


A.10 Political Violence

61. The risk of political violence in Croatia is low. Following
the break up of Yugoslavia and the subsequent wars in the region,
Croatia has emerged as a stable, democratic country on the threshold
of NATO membership. Membership in the European Union is also likely
in the coming years. Relations with neighboring countries are
generally good and improving, although some disagreements regarding
border demarcation remain.

62. 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

63. Corruption remains a problem in Croatia. The EU highlighted
corruption as a major challenge in its November 2007 progress report
on Croatia's accession negotiations and citizens continue to cite
corruption as one of the most important problems plaguing their
society.

64. Croatia has ratified the Council of Europe Criminal Law
Convention on Corruption, the Council of Europe Civil Law Convention

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on Corruption, the United Nations Convention Against Transnational
Organized Crime and the United Nations Convention Against
Corruption.

65. Croatia is also 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 Croatia's progress
in its fight against corruption, can be found on GRECO's website
(www.greco.coe.int).

66. The Office for the Prevention of Corruption and Organized Crime
(USKOK, which is the agency responsible for battling corruption, is
currently staffed by 36 employees and participates in joint task
forces with the Ministry of Finance and Police. In June 2007, USKOK
was the lead in the largest anticorruption action to date. Seven
persons employed by the Croatian Privatization Fund were arrested on
allegations that they accepted bribes and sold state-owned companies
without legal bids. The investigation into the case was still
underway at year's end. In December 2007, another USKOK operation,
this time in the Zagreb land registry, led to charges of bribery and
corruption against 26 suspects. The investigation is on-going.
There were other cases of alleged corruption involving city
officials and businessmen, but none have yet resulted in
conviction.


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 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

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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. In 2004, OPIC provided $250 million in political risk
insurance to support financing for the construction of a motorway in
Croatia that will do much to improve the country's infrastructure,
reduce transportation costs, and develop the tourism potential of
the Dalmatian coast. OPIC provided the insurance to Private Export
Funding Corporation (PEFCO) to support PEFCO's financing to Croation
Motorways Ltd. for construction of a portion of the Zagreb-Split
Motorway, consisting of a tolled four-lane highway connecting
Bregana and Zagreb, and Bosiljevo with Sveti Rok.

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 $16 million. The Embassy currently
purchases local currency from a local commercial bank at the market
rate. A major devaluation is considered unlikely.


A.11.d Labor

72. Croatia has an educated, highly-skilled, and relatively high
cost labor force compared with the region. In general, employer's
wage costs are approximately 110% of an employee's net wage. The
estimated average cost to employers in Croatia was 7,096 HRK
(approximately $1,419) per month as of October 2007. The average
net wage at the end of the third quarter of 2007 was 4,579 HRK
($915). Minimum wage, as determined by the government, is 2100 HRK
gross ($420) monthly, net is between 1400-1500 HRK ($280-$300)
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. Chapter 7 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

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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 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 2 large-scale foreign investment
projects initiated this year, Rockwool and Applied Ceramics (see
list below paragraph 85). 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, through
initial public offerings (IPOs), as was the case recently with the
state oil company INA and the national telecom HT. The Croatian
Privatization Fund, the agency responsible for the sale of other
assets, has shares and stock in 1112 (mostly non-performing)
companies. The state's share of the equity base value of these
companies is about 21.8 billion HRK ($4.36 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 October 2007, the Croatian government, as part of its
privatization efforts, offered to the public first rights for
purchase of its 32,5 per cent stake in Croatia Telecom (Germany's
Deutsche Telekom is the majority shareholder), of which 25 per cent
were reserved as priority for Croatian citizens. Individual purchase
was limited to 16.695,00 HRK ($ 3,227.20) and included the offer of
one free share for every ten retained for at least a year. 358.406
citizens participated in this offer and purchased shares at the cost
of 265,00 HRK ($70.56) each.

83. Foreign Direct Investment between 1993 and the third quarter of
2007 totaled $24.3 billion, with investments in the financial,
chemical and telecommunications sector accounting for 58% of total
investment. Croatian firms invested $3.9 billion abroad between 1993
and the third quarter of 2007. FDI in Croatia has shown steady
growth in recent years. It is estimated that FDI for the first 3
quarters of 2007 amounted to 9.7% of GDP. FDI per capita is
estimated at $1700.

84. According to official statistics from the Croatian National
Bank, Austria is the largest source of foreign investment in
Croatia, accounting for 27% of total FDI since 1993. The
Netherlands is second with 17% of total FDI, followed by Germany
with 14% and France with 8%. Because transactions are often executed
through third countries and the Croatian National Bank records
country of origin of the final transaction leading to the
investment, in many cases, this results misleading statistics. The
U.S. Embassy Zagreb estimates that the actual amount of U.S.
investment in Croatia is approximately $ 2.5 billion, making the
U.S. one of the leading investors. The leading destinations for
total Croatian investment, from 1993 to third quarter 2007, were
Serbia and Bosnia Hercegovina with 18% each, the Netherlands with
16% and Hungary with 14%. In the first three quarters of 2007,
Croatians invested $300 million abroad. Hungary was the lead
destination for 2007 accounting for 40% of investment, with 30% in
the Netherlands, and 7 % each in Serbia and Bosnia Hercegovina.

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:


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Foreign investor: Barr Pharmaceuticals (U.S)
Pharmaceuticals
Croatian company: Pliva
Value $2.3 billion

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

Foreign investor: MOL (Hungary)
Oil Industry
Croatian Company: INA d.d. (26% of shares)
Value: $505 million

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

Foreign investor: 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

Foreign investor: Unicredito Italiano (Italy)
TAKEN OVER BY BANK AUSTRIA IN 2007
Banking/financial services
Zagrebacka Banka (96% ownership)
Value: $230 million (estimate)

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

Foreign investor: Austria Creditanstalt Group (HVB Group) (Austria)
TAKEN OVER BY SOCIETE GENERAL IN 2006
Banking/financial services
Splitska Banka (88% ownership)
Value: $132 million

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

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

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

Foreign investor: CMC (U.S / Switzerland)
Steel
Croatian company: Sisak Steel Company
Value $52 million

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

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

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

Foreign investor: Applied Ceramics (U.S)
Ceramics
Value $30 million

Foreign investor: Interbrew (Belgium)
Brewery
Zagrebacka Pivovara company

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$27 million

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

BRADTKE

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