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Cablegate: Croatia 2008 Investment Climate Statement (Part I)

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ZNR UUUUU ZZH
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FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 8506
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RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 06 ZAGREB 000050

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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 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

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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

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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.

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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.


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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

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