Banking & Finance 2020 Comparisons

Last Updated October 05, 2020

Contributed By Porobija & Porobija

Law and Practice


Porobija & Porobija is based in Zagreb. Its banking and finance team consists of two partners, an attorney at law and two associates, who offer expertise in project and asset finance, securities offerings, syndicated loans, contract law, real estate law and projects involving commercial/company law. The team acts for arranging banks, lenders and borrowers in virtually every type of commercial and financial transaction, and advises clients on Croatian energy market issues, among other matters.

The Croatian National Bank (CNB) has reported that its expansionary monetary policy supported the economic recovery with a stable nominal exchange rate of the Croatian kuna against the euro.

The highest levels of bank liquidity so far were recorded during 2019, which effected the fall in interest rates on loans and the growing demand for loans. In conditions of high liquidity, the price of government borrowing dropped to the lowest rates ever recorded.

Annual growth in corporate placements in 2019 was 0.4%, while in 2018 it was 1.9%, which was driven by the reduction of banks' claims on the Fortenova Group (formerly Agrokor) and the activation of state guarantees issued as security for shipbuilding loans.

The fall in interest rates continued, with 2.9% being the average interest rate on new HRK household loans at the end of 2019, compared to 3.6% in 2018. In addition, interest rates on consumer and other household loans continued to decline, with the interest rate on new consumer loans in HRK being 6.1% (compared to 6.7% in 2018). In the corporate sector, the average interest rate on short-term loans at the end of 2019 was 2.5%, and 2.1% on long-term loans.

Although the quality of banks' loan portfolios continues to improve, and non-performing loans decreased from 7.6% in 2018 to 5.5% in 2019, the percentage of non-performing loans in Croatia is still among the highest in Europe, compared to other EU Member States. Total bank placements to domestic sectors in 2019 increased by 4.2%, which is slightly lower than last year (4.4%).

The long-term consequences of the pandemic are yet to be seen. The European Commission estimates that Croatia's GDP will decline by 10.8% in 2020, with a recovery rate of 7.5% in 2021. The government adopted economic measures to mitigate the pandemic's negative impact on the overall economy, with the goal of helping the private sector, as the bearer of economic activities.

The CNB has taken several interventions with the purpose of increasing the liquidity of the financial system and maintaining a stable exchange rate for the Croatian kuna. It has also provided additional liquidity for commercial banks and supported the stability of the state securities market through the purchase of government bonds.

The government has issued recommendations to banks to introduce, inter alia, moratoriums on loan payments, the restructuring of existing loans and standstill periods. These measures are not legally binding, and therefore depend on each credit institution's business decisions.

The Croatian Bank for Reconstruction and Development (HBOR) also implemented measures in order to preserve the level of economic activities and the liquidity of economic entities and, most importantly, to preserve jobs, all in the context of the COVID-19 pandemic. Measures include a moratorium on clients' credit obligations under existing HBOR credit placements, the reprogramming of existing loans to HBOR clients with the introduction of a repayment delay of the loan principal, and the approval of new liquidity loans for financing salaries, overheads and other operating expenses in co-operation with commercial banks under favourable terms (interest starting at 0% for respective part of HBOR’s loan).

The government has also established a special loan programme through the Croatian Agency for SMEs, Innovations and Investments (HAMAG-BICRO). This programme is financed through the European Regional Development Fund. Measures include the following:

  • a moratorium on all instalments of ESIF Micro and Small Loans and Micro and Small Rural Development Loans and extended repayment period for the guaranteed loans;
  • an increase in the allocation for the financial instrument ESIF Micro Working Capital Loans for Micro and Small Businesses;
  • a reduction of interest rates on ESIF Micro and Small Loans;
  • an increase in the maximum guarantee rate for ESIF individual guarantees for working capital loans; and
  • the establishment of new financial instruments: the "COVID-19 loan" and the “Micro loan for rural development”.

The high-yield market remains relatively modest, as the credit institutions retain their dominant position in the financing market in Croatia.

As of 15 August 2020, the value of projects contracted thought European Structural and Investment Funds (ESI Funds) was EUR10.6 billion – ie, 99.2% of the allocated funds for the financial period 2014-2020.

The portion of financing through crowdfunding remains minor, although it has played a more significant role in the last two to three years. Most of the biggest crowdfunding platforms have gone from the region, with only the smaller or local ones remaining active.

At the beginning of 2019, the Zagreb Stock Exchange Progress Market was registered. The Progress Market is a multilateral trading facility that may be used by SME in order to achieve the implementation of their investment plans. Five issuers had their shares admitted to trading on the Progress Market by July 2020.

Although financings with a foreign currency clause have been very common in Croatia for decades now, a collective lawsuit was filed in 2012 by consumers with CHF-denominated loans against the largest Croatian banks, as a result of significant increases in the exchange rates between Swiss francs and Croatian kuna since 2008, asking for the CHF currency clauses and variable interest clauses to be declared null and void on the grounds of being unfair. After the Commercial Court in Zagreb approved the claim, the dispute has been subject to the rulings of Croatian courts of several levels, including the High Commercial Court, the Supreme Court and the Constitutional Court.

In September 2019, the Supreme Court confirmed the High Commercial Court judgment of 2018, where the CHF currency clause was determined unfair and therefore null, and decided that local banks have "breached the collective interests and rights of consumers-loan holders by concluding loan contracts containing unfair and invalid contractual provisions under which the loan principal was tied to the Swiss franc (currency clause), without negotiating the matter with individual loan holders.”

As a result, numerous consumers filed individual lawsuits asking for monetary compensation. In the model proceedings conducted in accordance with the Law on amendments of the Civil Procedure Act from 2019, the Supreme Court ruled that the conversion agreements concluded in accordance with the Law on Amendments to the Law on Consumer Credit were valid and produced legal effects, regardless of the final judgment adopted in the collective dispute that the provisions of the underlying loan agreement on variable interest rate and a currency rate denominated in CHF were null and void. The ruling of the Supreme Court is binding for all courts.

The Credit Institutions Act was amended in April 2020, in order to align national law with EU legislation. The new amendments, inter alia, enable banks to fully exchange data on their clients, legal entities and individuals, in order to assess creditworthiness and manage credit risk.

The CNB Established Close Co-operation with the ECB

In 2019, the Republic of Croatia submitted a request to the ECB for the establishment of a close co-operation between the ECB and the CNB in the exercise of supervisory tasks over credit institutions within the Single Supervisory Mechanism (SSM). The decision on close co-operation entered into force on 27 July 2020.

The ECB will take over the supervision of certain Croatian banks and will carry out its assessment and decide which banks meet the criterion to be classified as significant institutions, while less significant institutions will continue to be supervised by the CNB.

A comprehensive assessment is required as part of the process of establishing close co-operation between the ECB and the national competent authority of an EU Member State whose currency is not the euro. The assessment comprised an asset quality review and a stress test. The conducted assessment has shown that the five assessed banks do not face any capital shortfalls.

Simultaneously with the establishment of close co-operation with the ECB, the Republic of Croatia became a full member of the Single Resolution Mechanism (SRM) in July 2020.

European Exchange Rate Mechanism II

The Republic of Croatia sent a letter of intent to the EU Member States, Denmark and EU institutions expressing its intent to enter the ERM II. On 10 July 2020 the President of the ECB, the finance ministers and central bank governors of Denmark and Croatia decided to include the Croatian kuna in the ERM II.

The Republic of Croatia has committed to implement additional measures to adopt the euro, once the convergence criteria are met.

Pursuant to the Croatian Credit Institutions Act, banks would need to do the following in order to be authorised to provide financing in the territory of Croatia:

  • obtain a licence to provide banking services from the CNB (for a Croatian-based credit institution or a Croatian branch of an EU-, EEA- or third country-based credit institution); or
  • directly render mutually recognised financial services (in the case of an EU- or EEA-based credit institution) on the basis of a “passport” notification to the CNB, provided such services are not rendered on a regular, frequent or ongoing basis.

In addition, under Croatian law and pursuant to the views of the CNB, if a lender’s activities are not effectively carried out in the territory of Croatia (but rather on a cross-border basis or on the basis of consumption abroad), the lender (either a bank or financial institution) should be able to provide financing to a company organised in Croatia, but would then need to make sure that:

  • the loan agreement is not executed in Croatia;
  • the offer to finance a Croatian borrower is not made in Croatia (including via the international lender’s representative, agent or similar); and
  • the offer to finance a Croatian borrower is given on a reverse inquiry basis.

In Croatia, financing can also be granted by other legal and natural persons without any special licence, provided that such activity is not considered to be the business activity of the relevant entity.

In principle, foreign lenders are not restricted in granting loans, provided that the lending activities are pursued in a manner as described under 2.1 Authorisation to Provide Financing to a Company and, particularly in relation to cross-border lending, that, inter alia, a loan agreement is either executed by both parties outside Croatia or is at least executed by distant means of communication, without the lender’s personnel, agent or similar being present in Croatia, and (pursuant to the views of the CNB) that the financing is based on reverse solicitation by the borrower.

Taking into account the adoption of the Act on Nullity of Loans with an International Element Concluded in the Republic of Croatia and following a recent ECJ decision, lending by EU lenders should not be considered problematic, as the ECJ has concluded that EU law supersedes the legislation of a Member State under which credit agreements and other legal acts based on those agreements concluded with a lender that is established in a Member State (other than that of the recipient of the service) and that does not hold all the necessary authorisations (issued by the competent authorities of the first Member State) are invalid, retroactively, from the date on which they were entered into – ie, that the mentioned Act is not in accordance with the EU law. However, the Croatian national courts can still apply the Act on Nullity of Loans with an International Element Concluded in the Republic of Croatia in cases regarding the nullity of loan agreements granted by unauthorised creditors whose registered offices are located outside EU Member States.

There are no particular restrictions or impediments on granting security or guarantees to foreign lenders, although a foreign lender needs to obtain a personal identification number (OIB) in order to be registered as a holder of any security interest in any Croatian register.

Pursuant to the Foreign Exchange Act, when a resident grants a loan or issues a guarantee for the benefit of a non-resident, it must obtain some form of adequate security or collateral in return, in order to secure repayment. Failure to do so represents a misdemeanour, and the respective resident may be fined.

Foreign currency loans can be granted to residents only by the banks, and such loans can be repaid in foreign currency. Other residents are not allowed to grant each other loans in foreign currency.

The transfer abroad by a non-resident of a profit arising from direct investment is free, under the condition that the applicable profit tax is paid in the Republic of Croatia.

Payments and collections in foreign currencies between residents and non-residents for capital affairs are generally permitted, subject to certain exceptions related to real estate and certain types of securities.

A borrower’s use of proceeds from loans and debt securities should be in line with the conditions set out in the respective loan agreement or prospectus. The effects of a failure to comply depend on the contractual arrangements and/or the generally applicable rules on obligations. The failure of an issuer of debt securities to use the respective proceeds in line with the purpose specified in the prospectus may lead to the liability of an issuer and some other persons for damage caused to the investor by the fact that the information that is relevant to the valuation of the debt securities is incorrect or incomplete, if such incorrect or incomplete information in the prospectus is their fault. The issuer and its responsible persons may also be fined if the prospectus does not contain the correct and complete information prescribed by the applicable laws and regulations.

The concepts of agent and trust are generally not recognised by Croatian law, as the holder of a security interest has to be a creditor of the respective secured claim.

In cases where more creditors are envisaged, a secured party is usually a security trustee or a security agent holding the respective security; however, given that under Croatian law (as the governing law for the security interests to be registered in Croatian registries) the security interest is an accessory to the claim it secures and thus has to remain with the creditor and cannot be held by an agent/trustee, for years now this has been resolved in relevant transactions by way of a so-called parallel debt or joint creditor relationship, governed by English law (or another applicable law that recognises such concept), which are concepts that are also used in various other European jurisdictions to deal with the same issues.

Pursuant to the Croatian Code of Obligations, any receivable is assignable, unless the assignment of such receivable is proscribed by law or the receivable is strictly personal or, by its nature, controversial to the assignment. Furthermore, the assignment contract will have no effect towards the obligor (ie, the borrower) if the underlying contract between the lender and the borrower prohibits the transferability of the receivables.

After the execution of the assignment agreement, the borrower should, in principle, be notified by the original or new lender of the assignment and the fact that the new lender is now the creditor of the receivables, although this is not a precondition for the effectiveness of the assignment. In the case of assignment, together with the claim being transferred, accessory rights are automatically transferred to the new lender (security instruments, rights to interest, etc), noting, however, that the transfer of the respective security interests registered in various registries should be registered therein and that the formal (and notarised) consent of the transferring lender is required.

It should be noted that the assignee should have the same legal position towards the debtor as was previously held by the assignor.

If there is a need to transfer the whole contractual relationship between the original lender and the borrower to the new lender, the loan agreement must be transferred, and the borrower needs to consent to such transfer, noting that such consent may either already be given in advance in the relevant loan agreement (in which case only notification to the borrower is required for the transfer of the loan agreement) or may need to be obtained at the time of the transfer as a condition for the effectiveness of such transfer.

Pursuant to the Consumer Credit Arrangements Act, subject to certain exceptions, there is an obligation for the original lender to notify the borrower about the assignment of rights. The consent of the borrower of the assigned receivables for the assignment thereof may be needed only if it is so prescribed by the respective loan agreement.

Pursuant to the relevant regulations of the CNB, the originator is obliged to report a change of the creditor of the assigned receivable to the CNB if the new creditor would be a non-resident, provided that the respective resident debtor is not made aware of such change in the creditor.

The transfer of rights and benefits from a contract needs to be exercised in accordance with the applicable data protection and GDPR-related regulations.

Special rules may apply in certain cases of transfer – for example, if the receivables are secured by a state guarantee, prior written consent from the Minister of Finance is required in order for the relevant transfer to be effective.

Debt buy-back is permitted by Croatian law and would generally result in the relevant debt ceasing to exist ex lege due to confusion (if the debt purchase is by the borrower). Acquisition of the debt by an affiliated entity may result in the application of thin capitalisation rules and/or rules on loans in lieu of the capital, which may have unwanted effects for such lender, particularly in the context of the potential (pre)bankruptcy of the borrower.

Croatian law imposes a duty to negotiate in good faith. Subject to the circumstances listed below in the context of takeover bids, there is no legal or regulatory requirement to provide a “certain funds” confirmation, and such concept is used in acquisition transactions only if it is negotiated by the relevant parties. Therefore, what constitutes “certain funds” differs between transactions.

In certain acquisitions of shares in a PLC with a registered office in Croatia, whose voting shares are admitted to trading on a regulated market in Croatia or another European Economic Area country, or the acquisition of shares in a PLC whose registered office is in another European Economic Area country and whose voting shares are admitted to trading on a regulated market in a European Economic Area country, when the takeover bid is published, the bidder is obliged to ensure the necessary funds for the payment for all outstanding target company shares by way of making a cash deposit on a separate account held by the Central Clearing and Depository Company, or obtaining an irrevocable and unconditional bank guarantee payable on first demand.       

Pursuant to the Croatian Profit Tax Act, withholding tax (15% in principle, subject to certain exemptions) is levied on profits generated by a non-resident in Croatia and is charged on, inter alia, interest and dividends, etc, paid to foreign entities that are not physical persons. The withholding tax is not payable on interest paid in relation to loans granted by foreign banks or other financial institutions, nor on interest paid to foreign persons as holders of sovereign or corporate bonds, nor on interest paid in relation to commodity loans for the purchase of goods that are used by the taxpayer to carry on its business.

Subject to the restrictions noted above, no stamp, registration or similar duty or tax is payable in the Republic of Croatia in respect of loan agreements and related security documents, apart from the fees and stamp duties for the solemnisation/notarisation of the Croatian law security and other documents being notarised and other related notary public actions and documents, and the stamp duties and/or fees payable for the registration of the security interest over the security assets in the competent registry.

Currently, the rate of contractual interest between merchants may not exceed 13.81% per annum, and the rate of contractual interest in contracts involving non-merchant parties may not exceed 8.83% per annum.

The default interest rate payable on due but unpaid amounts arising from contracts between merchants is currently 7.89% per annum, but may be contracted differently under certain conditions, in which case such rate may not exceed 13.81% per annum. The default interest rate payable on due but unpaid amounts arising from contracts involving non-merchant parties is currently 5.89% per annum.

Concerning the interest rate on loans between related parties for purposes of the corporate profit tax, the arm’s length interest rate is 3.42% per annum, effective 1 January 2020.

Security interests that have in rem effect are most commonly used in practice.

A security interest may be granted in the form of a pledge (or a mortgage in the case of real estate, a ship or an aircraft) or in the form of a fiduciary transfer of ownership of the relevant asset. There is also a possibility to enter into financial collateral arrangements. The pledge is a commonly used security instrument for various objects, including movables, shares, bank accounts, claims and intellectual property rights, as well as any other right that is subject to the same legal regime applied to the movables.

A pledge may be established as a registered or non-registered pledge.

The granting of a registered pledge may be through a security agreement executed before a court or before a notary public, and in each case followed by the registration of the pledge in the competent registry, or in the depository operated by the Central Depository & Clearing Company’s (CDCC) registry for dematerialised shares in the share capital of a public limited company.

Generally, full perfection of the registered pledge takes place after the decision on the entry of the security interest in the registry becomes final, at which point it is deemed that the security interest has been created retroactively – ie, from the date of submission of the registration application.

In the case of a non-registered pledge, the creation of the respective security interest remains outside of the public domain, which represents a risk and is certainly less beneficial to the secured creditor.

In relation to the pledge of claims, the secured creditors commonly require the granting of the pledge to be notified to the counterparty(ies) (ie, the debtors of the pledged claims), and require the counterparty(ies) (if at all possible) to acknowledge the receipt of the notification and confirm they would act in accordance with the instructions given in the notice of pledge. As mentioned under 3.6 Loan Transfer Mechanisms, taking security over the receivables owed by the state requires prior written consent from the Minister of Finance.

The fee for the registration of the collateral in the registry is approximately EUR35 per application, and it takes around eight days for a pledge to be registered.

The notary public’s fees, duties and costs related to the granting of the security interest (provided the document is solemnised – ie, notarised as to content) depend on the amount of the secured claim.

A mortgage over real estate is created upon entry thereof into the land registry of the competent court, and is commonly used as a security interest. When it comes to mortgages (as well as any registered pledge), the principle of “first in time, first in right” applies.

Stamp duty for the registration of the mortgage in the land registry is approximately EUR35 (no stamp duty is payable if registration is made based on a solemnised agreement), whilst the public notary’s fees and duties are determined under the same rules as for the pledge.

A fiduciary transfer of ownership enables the secured creditor to become a fiduciary owner of the relevant assets, and to become a full owner thereof under certain conditions.

However, due to certain historical controversy, this type of security interest has not been seen in practice very often in the past ten years and, thus, is generally not recommendable.

Financial collateral arrangements were introduced into Croatian law via the Financial Collateral Law (the FCL), which was adopted in 2007.

It is necessary to have written evidence or evidence in a durable electronic medium of the execution of the respective agreement and the delivery/acquisition of the collateral. The financial collateral is considered delivered/acquired once the title transfer or creation of a special pledge over the financial collateral is noted on the relevant account with the registry of financial instruments (in the case of securities collateral) or at the relevant bank account (in the case of cash collateral).

Analysis of the FCL reveals that uncertainty persists over the material scope of its application, as well as the definition of crucial terms, even at a rather basic level.

Information on the existence and/or scope of such arrangements is limited to contractual relationships between the parties; there is no reliable and complete publicly available information on the scope of such arrangements and the impact of their implementation on business practice.

The Croatian legal system recognises a floating pledge as a contractually created registered pledge of movables of all kind or movables of a specific kind (goods, inventory, spare parts, furniture, tools and alike), located in a specific place (eg, warehouse, factory, business premises) otherwise owned or leased by the debtor.

The main characteristic of the floating pledge is that a debtor (the owner of the relevant movables) retains control over the assets – ie, the debtor continues to be entitled to dispose of the movables subject to the floating pledge and a person who acquires the possession of such movables acquires it free of encumbrances (ie, free of floating pledge) as the floating pledge ceases to exist by the mere taking of the relevant movables out of the specific place/area. It should be noted that the provisions of the relevant law impose an obligation on the debtor to substitute disposed-of assets with new ones in accordance with the nature of its business operations (unless that obligation is contractually excluded). Ultimately, the rights of the pledgee may be heavily affected if the debtor fails to act accordingly and effectively substitute the relevant assets promptly.

If the secured creditor initiates enforcement proceedings on the basis of the floating pledge, the relevant enforcement will effectively include all movables of a described type (eg, vehicles, machinery, raw material, etc) found in the specific place/area set out in the pledge agreement at the moment the seizure list is created (in the course of enforcement proceedings).

The Croatian legal system recognises a floating pledge as a contractually created registered pledge of movables of all kind or movables of a specific kind (goods, inventory, spare parts, furniture, tools and alike), located in a specific place (eg, warehouse, factory, business premises) otherwise owned or leased by the debtor.

The main characteristic of the floating pledge is that a debtor (the owner of the relevant movables) retains control over the assets – ie, the debtor continues to be entitled to dispose of the movables subject to the floating pledge and a person who acquires the possession of such movables acquires it free of encumbrances (ie, free of floating pledge) as the floating pledge ceases to exist by the mere taking of the relevant movables out of the specific place/area. It should be noted that the provisions of the relevant law impose an obligation on the debtor to substitute disposed-of assets with new ones in accordance with the nature of its business operations (unless that obligation is contractually excluded). Ultimately, the rights of the pledgee may be heavily affected if the debtor fails to act accordingly and effectively substitute the relevant assets promptly.

When granting any type of guarantee to foreign legal entities, Croatian companies must comply with certain additional obligations under the Croatian Foreign Exchange Act – please see 3.3 Restrictions and Controls on Foreign Currency Exchange. In addition, pursuant to the Bankruptcy Act, if the appropriate security (or other type of consideration) is not provided to a guarantor, a guarantee may be considered to be of no value or no considerable value, and may be voided upon the insolvency of the respective guarantor.

Also, when granting guarantees, Croatian legal entities need to take into consideration the applicable capital maintenance rule contained in the Croatian Companies Act (the CA), as any support in whatever form by a company for the debt of the shareholder or its affiliated companies/subsidiaries may also be considered as being contrary to the applicable capital maintenance rules, pursuant to which a company is generally not allowed to repay the paid-in capital to its shareholders (Article 217 of the CA). According to Article 406 of the CA, shareholders are not entitled to request repayment from a company of their contribution to the share capital and, according to Article 407 of the CA, payments made to a shareholder from the company’s assets that would be equal to the value of the company’s share capital are not allowed. If the shareholder would receive a payment contrary to the rules prescribed by the CA, the company’s articles of association or shareholder resolutions, such payment would be considered to be contrary to the capital maintenance rules, and the shareholder(s) would be obliged to return the payments made by the company. If it is not possible to collect such prohibited payment that has reduced the value of the company’s share capital, either from the shareholder(s) who received it or from the management board, other shareholder(s) shall be jointly liable for the decrease in the company’s share capital, in proportion to their basic shares in the company, provided such funds are necessary for settling the creditor(s). Such request from the company becomes statute-barred five years after the receipt of such payment constituting a breach of the capital maintenance rules, unless the company can prove that the shareholder who received the payment knew it was not permitted.

Namely, the distribution of assets to shareholders outside of the regular distribution of profits is not allowed, so any potential subsequent payment by the company to the creditor on the account of the company’s co-debtorship/security provided for the debts of its shareholder or its affiliated companies/subsidiaries may be construed as a breach of the applicable capital maintenance rules and thus as a prohibited payment. In practice, the respective guarantees often contain guarantee limitation wording specifying that the obligations and liabilities of the guarantee granted by a guarantor shall not include any liability to the extent it would result in payments made to the shareholders being considered contrary to the relevant provisions of the CA.

Subject to certain exceptions, the CA does not allow a target that is a Croatian PLC to support the acquisition of shares therein with the assets of that target. The consequence of any legal transaction that would be qualified as prohibited support is that the respective security interest would be considered null and void. If the respective financing transaction includes both the actual financing of the acquisition of shares in the target and other financing of the target, it is necessary for the acquisition financing facility to be separated from such other facility(ies), and for any security granted by the target to not relate to such acquisition financing.

While the aforementioned restriction is not prescribed for LLC, the capital maintenance rules apply to both types of company.

Besides the above-mentioned restrictions, actions like the granting of security, the issuing of a guarantee, the repayment of a loan and others may be subject to claw-back provisions contained in the Croatian Bankruptcy Act, which prescribes conditions under which the bankruptcy administrator and bankruptcy creditors are entitled to challenge certain legal actions of a bankruptcy debtor taken during the prescribed hardening period before the opening of the (pre)bankruptcy proceedings if such actions are deemed to disrupt the right of the balanced settlement of the bankruptcy creditors, or are taken in favour of certain bankruptcy creditors. The hardening periods vary between one month and ten years.

Upon the repayment of the secured claim, a security release statement must be issued by the secured creditor in order for the deregistration of the mortgage and registered pledge to occur; such statement has to be notarised before the notary public, and the relevant deregistration application needs to be submitted to the competent registry and approved thereby.

The principle of “first in time, first in right” applies equally to a mortgage and the registered pledge.

Contractual subordination of certain claims is generally possible, but creditors entering into intercreditor arrangements and agreeing on different priority between different group of lenders should not assume the insolvency court or the bankruptcy administrator would act in accordance with such contractual arrangements and distribute the respective proceeds according to the agreed waterfall provisions; instead, they should rely on the effectiveness of the relevant distribution provisions inter partes and outside of the bankruptcy/enforcement proceeding.

Security interests may generally be enforced upon a default that leads to the occurrence of a payment default that remains unremedied. Depending on the type of security interest and security assets, and on the type of underlying obligation, and in each case subject to the contractual arrangements, enforcement may be conducted both out-of-court and before the court (eg, in case of shares, claims, accounts, movables) or solely in the enforcement procedure run by the court (eg, real estate). In each case, a proper enforcement title needs to be in place in order for the enforcement to be initiated, so it is market practice for a security document to be executed in the form of a notarised deed containing an appropriate enforcement clause allowing for direct enforcement (provided the contracted conditions are met), that way allowing the secured creditor to avoid having to obtain a previous final and enforceable ruling from a competent authority and enabling the secured creditor to directly start the relevant enforcement proceeding (out-of-court or before the court).

Certain measures to mitigate the negative impact of the COVID-19 pandemic on economic activities were introduced by a new Act on Intervention Measures in Enforcement and Insolvency Proceedings During Special Circumstances, adopted in April 2020. One of the measures introduced by this Act set out that enforcement proceedings are temporarily suspended, subject to certain exemptions, during the period of special circumstances (as defined in the Act), which was originally set to last three months and was then extended to last until 18 October 2020). In addition, default interest does not accrue during the same period.

The Private International Law Act came into force in 2019. As it completely adopts Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), it recognises the choice of foreign law to govern a contract containing an international element and involving a Croatian party (and any contractual obligations connected with such contract) as being effective on such Croatian party, and the choice of foreign law as the governing law of the relevant contract would generally be upheld as a valid choice by the courts of Croatia, subject to certain exceptions. Should the relevant foreign law-governed contract be without an international element, it can still be governed by foreign law, but would nevertheless remain subject to the mandatory rules. The Croatian courts may not uphold the choice of foreign law if the application of such law would result in an obvious violation of the Croatian public policy rules. Additionally, the Croatian courts may apply a provision of Croatian law that is considered to be of such high importance for the protection of the Croatian public interest that it is applicable to all situations that fall within its field of application, irrespective of the law otherwise applicable.

Generally, provisions in a contract that provide for the submission by a Croatian party to a foreign court are valid, binding and enforceable on such Croatian party under the laws of the Republic of Croatia, to the extent that there is no exclusive competence of the Croatian court or other Croatian competent authority, and provided that at least one party in the dispute is an entity with a registered office outside the Republic of Croatia, or that another acceptable international element exists in relation to such dispute.

Waivers of immunity provisions are generally binding (unless otherwise prescribed by Croatian law) – ie, generally, all assets are available for enforcement unless they are indispensable to the performance of the party’s activities and enforcement would result in the discontinuation of the party’s business; such limitations do not apply in relation to the assets if the relevant entity explicitly agreed to the creation of the security interests over said assets. Special restrictions apply to the immunity applicable to the assets of the Republic of Croatia and local self-government (municipalities, cities and counties and their bodies).

Different rules apply, depending on whether a judgment was given by the court of an EU or non-EU Member State.

Recognition of a judgment given by a court of an EU Member State is regulated by Regulation (EU) no 1215/2012 (Brussels I).

Recognition of a judgment given by a court of a non-EU Member State is regulated by the Croatian conflict of law rules; subject to certain exceptions, such judgments will be recognised and enforced in the Republic of Croatia.

An award of an arbitral tribunal seated in a jurisdiction that is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958 – the New York Convention) may be recognised and enforced in the Republic of Croatia by the Croatian courts, in accordance with the provisions of the New York Convention.

In a legal proceeding before a Croatian court, any relevant document that is in a language other than Croatian would have to be translated by a certified court interpreter into Croatian in order to become admissible in evidence in Croatia.

Under Croatian law, a creditor may be required to post security for the costs of the debtor (unless they are domiciled in the EU).

International lenders should also be aware of the Act on Nullity of Loans with an International Element Concluded in the Republic of Croatia, which applies to loan agreements with an international element that are concluded in Croatia between debtors and unauthorised creditors, except for contracts concluded by the following debtors:

  • the Croatian state or local regional governments;
  • a legal person owned or majority owned by Croatia or a local or regional government at the time of execution of the contract;
  • a legal person who is a budgetary or an extra-budgetary user of a state budget or the local or regional budget at the time of execution of the contract; or
  • a legal person who is considered to be a "large" or "medium" enterprise pursuant to the law regulating the accounting of enterprises at the relevant time (ie, the date of execution of the loan agreement).

Pursuant to the Act on Nullity, in order to be considered an unauthorised creditor, the person must have had a registered office outside Croatia on the date of conclusion of the agreement, and must have offered or provided loan-related services in Croatia without meeting the conditions prescribed by any special regulation.

In the sense of the Act on Nullity, a loan agreement with an international element includes a loan or other agreement whereby an unauthorised creditor has granted a debtor a certain amount of money and the debtor has undertaken to pay the contractual interest and return the money used at the time and in the manner stipulated in the respective agreement.

The Act on Nullity prescribes that loan agreements with an international element that are concluded in Croatia between debtors and unauthorised creditors are null and void ex tunc (with retroactive effect). The Act on Nullity also applies to other legal transactions concluded in Croatia between debtors and unauthorised creditors arising as a consequence of, or based on, said agreements (eg, security documents).

The ECJ decision regarding the Act on Nullity was adopted in February 2019 and the Croatian national courts have recognised the binding effect of ECJ decision C-630/17, at least when it comes to EU creditors. As of April 2019, Croatian national court decisions tend to decline lawsuits on the nullity of loan agreements falling within the scope of the Act on Nullity, basing their reasoning on Case C-630/17. However, the Croatian national courts can still apply the Act on Nullity in cases involving unauthorised creditors from non-EU Member States (see 3.1 Restrictions on Foreign Lenders Granting Loans).

Under the Croatian Bankruptcy Act, the restructuring of companies outside of bankruptcy proceedings is possible through the pre-bankruptcy proceeding. Croatian law also recognises the restructuring of companies through the bankruptcy proceeding, either via the bankruptcy plan, which is most commonly seen in practice, or, on an exceptional basis, through a self-administration proceeding within the bankruptcy proceeding.

Generally, the most common method of voluntary reorganisation is through pre-bankruptcy. The debtor can initiate pre-bankruptcy proceedings if it is considered imminently insolvent.

Pre-bankruptcy is effectively always voluntary, as it is initiated directly by the debtor, or by a creditor with the consent of the debtor. Such procedure was introduced into Croatian legislation with the purpose of allowing the restructuring of illiquid companies with a business perspective, but without initiating a rather ineffective, long-lasting bankruptcy procedure carried out by a bankruptcy manager. Unlike the bankruptcy procedure, in the pre-bankruptcy procedure the company is run by the management appointed by the shareholders.

The essential legal effects of opening pre-bankruptcy proceedings include the following:

  • all creditors are obliged to report their claims within the deadline determined in the decision on the opening of the proceedings;
  • the debtor can only make payments related to the ordinary course of business, and in relation to supplies made after the opening of pre-bankruptcy (such legal effect arises upon submission of the application for opening the pre-bankruptcy procedure);
  • without prejudice to the secured creditors’ rights, the initiation of litigation, enforcement or administrative proceedings or proceedings aimed at securing claims against the debtor is prohibited, and all ongoing proceedings shall be suspended; and
  • the seizure of funds on the debtor’s accounts is suspended, except with respect to claims related to salaries, severance payments and temporary injunctions issued in criminal proceedings.

Management retains its representation powers in pre-bankruptcy proceedings, but may exercise only those powers that fall within the scope of the ordinary course of business. The debtor may dispose of its assets only with the prior approval of the pre-bankruptcy trustee or the court. Otherwise, such transactions have no legal effect.

The pre-bankruptcy proceeding may only last up to 300 days from the date of its opening; in exceptional circumstances only, the court may allow a prolongation for a further 60 days, upon the debtor’s proposal. If the pre-bankruptcy agreement is not entered into within such time, it will be suspended by the court. If the creditors accept the restructuring plan, the court would decide to accept the restructuring plan and confirm the pre-bankruptcy agreement, subject to certain exemptions prescribed by the Bankruptcy Act, in which the court may nevertheless decide not to adopt a decision and confirm the pre-bankruptcy agreement.

The New Act on Intervention Measures in Enforcement and Insolvency Proceedings During Special Circumstances brings legislation changes in Croatia as part of the measures to address the consequences of the COVID-19 pandemic (please see 6.1 Enforcement of Collateral by Secured Lenders). If any of the statutory bankruptcy reasons occur during the period of special circumstances, they will not be considered as satisfying the condition for the opening of a bankruptcy proceeding. However, in certain exceptional cases, a debtor itself, the Financial Agency and creditors can nevertheless request the initiation of bankruptcy proceedings based on such reasons. This Act is currently set to remain applicable until 18 October 2020.

Once the bankruptcy proceeding has been opened, all creditors’ claims towards the bankruptcy debtor become due. Creditors should report their claims to the bankruptcy administrator, and such claims may only be settled through the bankruptcy proceeding. All rights, authorisations and obligations of the debtor’s corporate bodies, such as authorisations of the management board, etc, shall pass on to the bankruptcy administrator, who becomes authorised to represent the company and administer the bankruptcy estate. All assets of the bankruptcy debtor existing at the time of opening the bankruptcy proceeding form the bankruptcy debtor’s bankruptcy estate.

Pursuant to the Croatian Bankruptcy Act, creditors are classified into payment ranks in the bankruptcy proceeding. The claims of creditors of a lower payment rank can only be settled after the creditors of the higher payment rank have been fully settled. Within the same payment rank, creditors’ claims are settled pro rata.

First higher ranking claims include employees’ and competent authorities’ claims arising out of an employment relationship, such as salaries, contributions and related tax. All other claims against the bankruptcy debtor are considered claims of the second higher rank, unless they have been classified into a lower payment rank.

Creditors with the right to separate satisfaction (such as holders of pledges and mortgages) generally preserve their rights to separate satisfaction directly from the respective security assets.

Pursuant to the CA, and subject to certain exceptions, if a shareholder grants a loan to the company at the time of the company’s adverse financial situation, instead of providing equity to the company, it is entitled to make a request for the repayment of such loans in the bankruptcy proceedings against the company only as a creditor with a lower rank claim. The same rule is applied with respect to any other legal transaction that may be construed as a loan from a commercial point of view. Pursuant to the Bankruptcy Act, claims for the repayment of loans in lieu of equity are claims of a lower rank, which may be settled only after claims of all creditors of higher rank and all other creditors of lower rank are settled.

Bankruptcy proceedings are usually time-consuming, with any satisfaction of the creditors (even secured creditors) being subject to a significant time delay, and satisfactory repayment of the debt being rare.

Moreover, under the Bankruptcy Act, there are a number of circumstances under which legal actions of the debtor that have been taken prior to the opening of bankruptcy proceedings that either undermine the right to even satisfaction of the creditors (creditors’ damage) or put certain creditors in a more favourable position (preferential treatment of creditors) may be challenged by the bankruptcy administrator and other creditors by a lawsuit, in which case further significant costs and delay may be expected. The respective hardening period can vary between one month and ten years, depending on the circumstances.

There is no separate legal framework in Croatia that applies solely to project finance, so generally applicable laws and regulations dealing with secured financing apply. Various other laws and secondary regulations also need to be taken into consideration, depending on the type of project. The project finance concept is used mainly in connection with infrastructure, energy, real estate and other concession and PPP projects.

The legal framework relating to PPP transactions (in the wider sense of that concept) includes the following:

  • the special PPP Act and related secondary regulations;
  • the Concessions Act and a number of sector-specific laws and regulations dealing with sector-specific concessions (eg, roads, airports, sea ports, etc) that are relevant in PPP projects that require a concession to be awarded;
  • the Public Procurement Act; and
  • other relevant laws and regulations otherwise applicable to projects in specific sectors.

A PPP is defined as a long-term contractual relationship between the public and the private partner, the subject of which is the construction and/or reconstruction of public infrastructure for the purpose of rendering public services otherwise being within the public partner’s competence, whereby the private partner assumes:

  • obligations and risks regarding the building process from the public partner during implementation of a PPP project; and
  • one or both of public building availability risk and demand risk.

In accordance with the purpose of a PPP project, a public body may allow the performance of commercial activities intended to collect revenues from third parties on the market. Pursuant to the PPP Act, PPP projects are implemented via two models: a contractual PPP model and an institutional PPP model.

The maximum contracted period may vary from three to 40 years, unless a longer period is allowed by a particular sector law.

There are no specific laws in Croatia that govern project finance transactions, so the approvals, taxes, fees or other charges required in these transactions are generally those that are required for any sector-specific project/transaction, including but not limited to the applicable zoning requirements, location and building permits, sector-specific regulatory licences and permits, competition, safety, etc.

When it comes to PPP and concession projects, as well as in some other cases (eg, in the energy sector), registrations in the respective registries are required.

Generally, the Croatian energy sector regulatory framework consists of:

  • the Energy Act;
  • the Electricity Market Act;
  • the Gas Market Act;
  • the Liquefied Natural Gas Terminal Act;
  • the Heat Energy Market Act;
  • the Oil and Oil Products Market Act;
  • the Act on Biofuels for Transport;
  • the Act on Regulation of Energy Activities;
  • the Energy Efficiency Act; and
  • the Renewable Energy Sources and High-Efficiency Cogeneration Act.

The main regulatory body is the Croatian Energy Regulatory Agency (HERA).

Regarding mining and hydrocarbons, the basic laws are the Mining Act and the Hydrocarbons Act, with the Ministry of Economy and Sustainable Development and the Croatian Hydrocarbon Agency being the competent authorities.

The legal framework for investments is provided in the Investment Promotion Act, the Strategic Investment Projects Act, the Companies Act and other applicable regulations.

The Strategic Investment Projects Act provides measures aiming to shorten and accelerate the licensing procedure for public and private investment projects as well as for public-private partnership investment projects of strategic interest for Croatia.

Legal entities registered in Croatia are considered to be domestic legal entities, regardless of who the shareholders are and the origin of the capital. As a general rule, foreign investments are not subject to restrictions under Croatian law, but certain strategic sectors or assets/sources are either subject to restrictions that apply generally, irrespective of the citizenship of the acquirer (eg, maritime domain), or are subject to restrictions that apply to persons who do not have Croatian or other EU country citizenship, or that in certain cases apply to all foreigners.

In practice, most project companies are established in the form of an LLC, as the incorporation and operation of such companies are the simplest, and they are sufficiently flexible and straightforward.

The main risks to be taken into consideration when structuring a project finance transaction in Croatia are primarily legal and technical aspects, political aspects and commercial risks, including credit and repayment risk. In order to try to mitigate some of these risks, it is common to conduct an adequately detailed due diligence dealing with the relevant areas, and it is often advisable to engage experienced (local) professionals with respect to the most critical areas (depending on the type of the project).

Typical financing sources for project finance include bank financing and equity. In addition, major projects are being financed through EU funds, the European Investment Bank, the European Bank for Reconstruction and Development and the Croatian Bank for Reconstruction and Development. Project bonds are rarely used in practice.

Croatian legislation sets out various restrictions relating to natural resources, ranging from the general exclusion of certain natural resources from any trade or ownership (eg, air and water in rivers, lakes and seas, as well as the seashore (common good)) to specific measures adopted for certain categories of natural resources.

Certain restrictions apply generally, irrespective of the citizenship of the acquirer. For example, a right of ownership or any other property right cannot be acquired on a maritime domain on any basis, as it represents a common good of interest for the Republic of Croatia.

Additional acquisition and export restrictions may apply, depending on the category of natural resources in question, so Croatian and foreign investors should seek reliable legal advice in this respect prior to acquiring any such properties.

The environmental legal framework for projects consists of EU-harmonised legislation, and includes the Environmental Protection Act and various other laws. Any project that might have a significant impact on the environment must be assessed.

At a national level, the tasks of the Ministry of Economy and Sustainable Development focus on the protection and conservation of the environment and nature, in line with the sustainable development policy of the Republic of Croatia, and on water management and administrative and other tasks from the field of energy. At a regional level, the competent administrative body in the county or the City of Zagreb and other state administrative and expert organisations/institutions deal with various environmental protection matters within the scope of their responsibilities.

Health and safety issues are primarily regulated by the Law on Occupational Health and Safety.

The Ministry of Labour, Pension System, Family and Social Politics is the main administrative body for health and safety at work in the Republic of Croatia, with the involvement of additional institutions included in the implementation of health and safety at work. In this respect, the Institute for Occupational Safety Improvement is the main national institution in charge of monitoring and improving safety at work, while the Institute for Health Protection and Safety at Work provides professional assistance.       

Porobija & Porobija

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Law and Practice in Croatia


Porobija & Porobija is based in Zagreb. Its banking and finance team consists of two partners, an attorney at law and two associates, who offer expertise in project and asset finance, securities offerings, syndicated loans, contract law, real estate law and projects involving commercial/company law. The team acts for arranging banks, lenders and borrowers in virtually every type of commercial and financial transaction, and advises clients on Croatian energy market issues, among other matters.