Investing In... 2024 Comparisons

Croatia (officially “the Republic of Croatia”) is a civil law jurisdiction, influenced to an extent by German and Austrian jurisprudence. The law is codified, and the legal system in principle does not follow the precedent rule. Croatia has been an EU member state since 1 July 2013.

The Croatian judicial system is composed of municipal and county courts (which hear both civil and criminal cases); misdemeanour, commercial and administrative courts; the High Misdemeanour Court, the High Commercial Court and the High Administrative Court; and the Supreme Court of Croatia. Croatia (like some other jurisdictions in continental Europe) has in place a Constitutional Court (separate from the judicial branch) which has the authority, among other things, to decide on the conformity of laws and regulations with the constitution, and to hear challenges against specific decisions of other courts and state bodies, which are claimed to be in violation of the constitution.

The Croatian government has adopted the necessary regulations to implement Regulation (EU) 2019/452 (the “EU FDI Screening Regulation”) and has established a national contact responsible for co-ordination and communication with other EU member states and the EU Commission in the context of the regulation’s implementation (as discussed in more detail in 7.1 Applicable Regulator and Process Overview). However, Croatia does not currently have a national foreign direct investment (FDI) screening mechanism in place. Consequently, there is no national FDI screening regime under which investments require review or approval by Croatian authorities (other than the merger review and approval mechanism under Croatian competition laws). That being said, the Croatian government has announced the introduction of a national FDI screening regime based on Article 3 of the EU FDI Screening Regulation, by way of adopting a separate national FDI screening act. The adoption of the Croatian FDI screening act is planned for 2024.

In addition, even though Croatian laws generally provide for equal treatment of foreign investors and Croatian citizens and entities, certain regulatory restrictions on FDI are relevant to the acquisition of assets or the conduct of business operations in Croatia by foreign investors, including the acquisition of real estate and the conduct of regulated business activities, as discussed in more detail in 8.1 Other Regimes.

Recent Economic and Political Developments and Trends

Croatia is a small economy with strong financial and trade links to the eurozone and is generally open to foreign investment. Both foreign and domestic investors generally enjoy equal treatment, with specific exceptions described in more detail in 8.1 Other Regimes.

Croatia adopted the euro as its official currency on 1 January 2023 and the country’s inclusion in the eurozone has eliminated currency risks. The country’s GDP is characterised by the domination of tourism in the services sector, which accounted for 19.5% of Croatia’s GDP in 2022. After the post-COVID economic recovery in 2021, economic activity continued to grow in 2022, despite inflationary pressure and the surge of energy prices. This price increase deepened the shortage of trade with other countries, which resulted in a noticeable decrease in the capital and current account surplus of Croatian payments balance. In 2022, Croatia’s real GDP growth amounted to 6.3%. According to the Croatian National Bank, the growth in GDP was a result of all the components of domestic and foreign demand, in particular, the export of services due to a particularly successful tourist season. Furthermore, investment activities saw a 6% increase during 2022, which reflected the growth of investments in the private sector, while public investments declined.

Croatia is a parliamentary democracy with legislative powers entrusted to the Croatian parliament, the body of people’s representatives elected for a term of four years. Executive powers are vested with the government, which is responsible to the parliament. Judicial powers are vested in the judiciary, with the Supreme Court of Croatia ultimately ensuring uniform application of the law and the equality of all citizens. The president, who is elected for a term of five years, is the chief of state who represents Croatia at home and abroad. The Constitutional Court supervises the constitutionality of the country’s laws and protects the constitutional rights of its citizens. The Croatian parliamentary and presidential elections will both take place in 2024, with the parliamentary election announced for the second quarter of 2024 and the presidential election planned for December 2024 and January 2025.

FDI Screening Policy

There was not much public debate around the need to adopt a national FDI screening regime in Croatia, and the absence of any stronger initiatives to introduce an FDI screening mechanism may be interpreted as a sign of specific policy in Croatia. Furthermore, there were no legislative developments at the time of the EU Commission’s Annual Report on the screening of FDI into the EU in 2021. After the first EU Commission’s Annual Report, the Croatian government established a national contact for the purpose of enforcing the EU FDI Screening Regulation. The national contact point has been established at the Croatian Ministry of Economy and has subsequently entered into bilateral exchanges with other EU member states to develop a national FDI screening legislative framework by way of adopting a national FDI Screening Act. The developments regarding the introduction of a national FDI screening regime seem to be more a result of expectations expressed by the EU Commission to have such screening mechanisms in all EU member states, than any specific Croatian policy on this issue. Information published by the Croatian authorities indicates that the national FDI Screening Act is expected to be adopted in the second quarter of 2024.

In Croatia, M&A transactions are most commonly structured either as share deals or asset deals. In addition, mergers and de-mergers are also used for corporate restructuring transactions.

Share Deals

Share deals are typically more straightforward to implement, and require registration with a single, appropriate registry. In practice, the transaction documents most often consist of a lengthier share purchase agreement which sets out in detail all the terms of the transaction; and a separate, short-form transfer agreement for registration purposes. Share transfer issues are regulated under the Croatian Companies Act. Share deals are also a more appropriate structure for acquisition of a minority interest. The downside of the share deal is that the acquirer acquires the company together with all its liabilities (noting that shareholders of Croatian joint stock companies and limited liability companies may generally benefit from the corporate veil protection mechanism).

A natural person or legal entity which has directly or indirectly (and solely or jointly) acquired more than 25% of the voting shares of a joint stock company seated in Croatia and traded on a regulated market in Croatia or another EU member state (if not traded on a regulated market in Croatia) is required to publish a mandatory takeover bid and undertake the mandatory takeover procedure in accordance with the Croatian Act on Takeover of Joint Stock Companies (the “Croatian Takeover Act”).

In addition, when a natural person or a legal entity directly or indirectly reaches, exceeds or falls below the thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75% of voting rights in a public issuer of shares, the relevant person/entity is required to simultaneously notify the issuer and the Croatian Financial Services Supervisory Agency of this fact.

Asset Deals

Asset deals are in principle less regulated under Croatian law than share deals (ie, unlike share deals, asset deals are in principle not regulated by the Croatian Companies Act). From the corporate law perspective, they tend to be preferred when an acquirer is not interested in buying the entire company together with its liabilities, but rather, only particular assets of the company (or business/part of the business as a going concern). Asset deals are more complex to implement as each asset needs to be transferred individually (and if the transfer of certain assets, such as real estate or vehicles, needs to be registered in a public registry, then each registration needs to be performed separately). On the other hand, the acquirer’s liability is limited to the value of acquired assets.   

Other than the registration, disclosure and takeover requirements listed in 3.1 Transaction Structures, a transaction may be subject to merger control, as described in more detail in 6. Antitrust/Competition.

A limited liability company and joint stock company are the most frequently used types of corporate vehicles in Croatia. Both forms provide a limited liability benefit to their shareholders.

Limited Liability Companies (LLCs)

In practice, LLCs are the preferred and predominantly used corporate form for foreign investors setting up their operations in Croatia. An LLC can only be established as a private company. Ownership in the LLC is not represented by equity securities (ie, stock), but rather by business quotas which constitute a share in the share capital of the LLC. The LLC may have one or more founders (foreign or domestic) and its minimum share capital must amount to EUR2,500 (which is significantly less than what is required for a JSC). The overall corporate governance is in principle less complex and the management is less independent of the shareholders than the management of a JSC. The mandatory corporate bodies of an LLC are the management board and the shareholders’ meeting, while the supervisory board is generally optional (with only a few exceptions, where even an LLC is required to have a supervisory board in place).   

Joint Stock Companies (JSCs)

Shares in JSCs are represented by equity securities, that is, stock (predominantly nowadays issued as non-materialised stock, registered with the central securities depository and a registry of non-materialised securities operated by the Central Depository & Clearing Company Inc, abbreviated in Croatian as “SKDD”). The minimum share capital of a JSC is set at EUR25,000. A JSC may be either a private or a public company (to this extent, any investor considering an IPO down the line may be more interested in establishing/acquiring a JSC, although Croatian corporate law rules also provide for the possibility of converting an LLC into a JSC). JSCs have a choice between establishing a one- or two-tier corporate governance system. In the two-tier governance system, the company’s corporate bodies are the management board (ie, the directors), the supervisory board (which is mandatory for JSCs) and the general assembly (consisting of shareholders), while in the one-tier system the company has executive directors, a board of directors and a general assembly.

In addition, foreign investors may also establish local branch offices, whose activities must be limited to those of its foreign founder and which are not regarded as separate entities from the corporate law perspective, but rather form part of the foreign founder (and accrue liabilities for the founder).   

From an FDI perspective, the choice of a local company’s form does not play a role. 

Croatian corporate laws provide for instances where qualified majorities are required to adopt certain shareholders’ resolutions, which may be viewed as one of the mechanisms of minority investor protection. For example, a qualified majority of at least 75% is required for amendments to the articles of association, mergers and de-mergers, an increase and decrease in share capital, and dissolution of the company, while a 95% majority is required for squeeze-out procedures (in public JSCs only). Furthermore, under specific company’s articles of association, a qualified majority may also be required for issues for which a simple majority is required under the law.

In addition, minority shareholders are afforded certain rights, including but not limited to the right to convene the shareholders’ meeting/general assembly (the minimum shareholding required for this in an LLC is 10%, and in a JSC 5%), or the right to claim damages from the management board/supervisory board on behalf of the company (by the 10% shareholding in an LLC), or request the company to claim damages from the management board/supervisory board (by a 10% shareholding in a JSC). 

In addition to the disclosure and reporting obligations discussed in 3.1 Transaction Structures, and any future obligations that may arise from the anticipated FDI screening regime, local companies are also required to report the following foreign investments or divestitures to the Croatian National Bank for statistical purposes:

• an initial investment resulting in at least 10% shareholding in the local company, regardless of the value of the investment;
• any subsequent investment in the local company increasing the share capital or any other capital component of the company, or the acquisition of additional shares in the company with a minimum value of EUR15,000;
• any investment resulting in less than 10% shareholding in the local company, if the sum of all transactions in a single month exceeds EUR15,000;
• any withdrawal of investment resulting in the reduction of share capital or divestiture of shares of a minimum value of EUR15,000; and
• each withdrawal of investment which would result in a domestic person/entity holding a 100% share in the company.

In Croatia, the primary source of funding is still predominantly bank financing. Although access to capital markets exists, this type of financing is still rarely utilised and not long ago, the trends actually showed a decrease in the number of JSCs (which have the possibility of going public and benefiting from equity financing).

Although new listings are rare, Croatia’s recent joining of the eurozone is expected to boost interest in the Croatian capital market, and foreign investment in general. In 2022, the Croatian market saw a listing of the first “green” (sustainability linked) bonds, valued at almost EUR40 million, while in early 2023, Croatia raised more than EUR2.3 billion in its first government bond issue aimed primarily at retail investors.   

The Croatian securities market is primarily regulated by the Croatian Capital Market Act, which has transposed various EU legal instruments, including the:

• Markets in Financial Instruments Directive (Directive 2004/39/EC of the European Parliament and of the Council);
• Directive on Investor Compensation Schemes (Directive 97/9/EC of the European Parliament and of the Council);
• Market Abuse Directive (European Parliament and Council Directive 2003/6/EC);
• Directive 2016/1034/EU amending Directive 2014/65/EU on markets in financial instruments (the so-called “Quick Fix Directive”); and
• Directive 2011/61/EU (MiFID II).

Other important pieces of legislation include the Act on Open-End Investment Funds with a Public Offering, the Alternative Investment Funds Act, the Takeover Act, the CCA, and a number of implementing regulations.

Authorities

The Croatian regulator in charge of the supervision of the securities market in Croatia is the Croatian Financial Services Supervisory Agency (abbreviated in Croatian as “HANFA”). HANFA’s main tasks with respect to the securities market are the supervision of fair securities trading rules; supervision over the conduct of stock exchanges, authorised dealers, investment funds and other market participants; as well as issuing licences and mandating the measures necessary for proper functioning of the securities market.

The SKDD is authorised to manage the central depository of non-materialised securities, as well as to perform clearances and settlements with respect to transactions with securities executed on or outside of a regulated market or a multilateral trading facility.

Issuance of Securities

Securities in Croatia may generally only be placed on the market by way of public offering, and public offering requires preparation of a prospectus (subject to certain exceptions). The content of the prospectus is defined in detail by relevant laws and regulations. The prospectus must be approved by HANFA and subsequently published, subject again to certain exceptions to the publication rule.

Trading in Securities

Trading in securities as a permanent activity may be performed only by dealers authorised by HANFA or the Croatian National Bank, and such authorisation may only be given to investment companies and credit institutions.

Organised trading in securities, as well as matching the supply and demand of securities, may only be performed on a regulated market and on a multilateral trading facility (MTF), based on the authorisation of HANFA. The operation of the regulated market in Croatia can be managed only by a stock exchange with its registered office in Croatia. The operation of MTFs may be managed by a stock exchange or an investment company subject to certain conditions. A regulated market consists of a regular market and official market, which imposes more stringent listing requirements.

Croatian laws contain provisions prohibiting insider trading (for insiders as well as other persons who obtain this information without authorisation), market manipulation and providing false information.

Since Croatia’s accession to the EU on 1 July 2013, investment funds have been governed primarily by the Act on Open-End Investment Funds with a Public Offering and the Alternative Investment Funds Act. Investment funds may be established as open-end investment funds with a public offering (undertakings for the collective investment in transferable securities or “UCITS”) or as alternative investment funds (AIFs), the latter being either open-end or closed-end AIFs. Whereas closed-end AIFs may be established as JSCs or LLCs, open-end investment funds, established either as UCITS or open-end AIFs, are separate pools of assets without legal personality.

Considering that Croatia currently does not have an FDI clearance regime as such in place, no specific rules or exemptions apply to foreign investors structured as investment funds.

Croatia has a merger control regime which is governed by the Croatian Competition Act and which prohibits any concentration of undertakings that may significantly restrict competition, in particular by strengthening an existing or creating a new dominant position in the relevant market. Croatian merger control rules follow the key principles of the EU merger control regime as governed by the EU Merger Regulation (139/2004). In addition, the Croatian Competition Act expressly provides that in the case of gaps or uncertainties in the interpretation of Croatian competition laws, the criteria set forth by the rules of EU competition laws will be applied as appropriate. The relevant authority is the Croatian Competition Agency (CCA). 

Definition of a Concentration

The regime applies to a concentration of undertakings, that is, the change of control of an undertaking on a lasting basis by merger by acquisition, or by merger by forming a new company; or by acquisition of direct/indirect control or the controlling influence of one or more undertakings over one or more other undertakings or parts thereof by way of acquisition of a majority shareholding or a majority of the voting rights; or by other means in accordance with the provisions of the Croatian Companies Act and other laws. The creation of a full-function joint venture is also considered as a concentration. The Croatian Competition Act exempts internal re-organisations from the duty to notify.

Merger Control

Thresholds

Under the Croatian Competition Act, a concentration (including an FDI) is notifiable to the CCA if the following thresholds are cumulatively met:

• the combined worldwide annual turnover of all the undertakings concerned was at least EUR132.72 million in the financial year preceding the concentration, and at least one undertaking that is party to the concentration has a seat or a branch office in Croatia; and
• the aggregate national turnover in Croatia in the preceding financial year of each of at least two of the undertakings concerned was at least EUR13.23 million.

As an expectation, transactions in the media sector must be notified regardless of whether the above thresholds have been reached, provided that the acquirer is also a media company. Also, if the acquisition of electronic communications operators does not meet the above thresholds, the transaction will not need to be notified to the CCA, but will still need to be notified to and cleared by the Croatian Regulatory Authority for Network Industries (abbreviated in Croatian as “HAKOM”) if the transaction involves operators with significant market power, or operators that are licensed to use the radio frequency spectrum over Croatian territory.   

Procedure and clearance

Once the CCA receives a merger notification, the CCA publishes a notice on its website inviting all interested parties to provide written opinions and objections about the notified concentration within a deadline set by the CCA (which cannot be less than eight or longer than 15 days). The CCA must conclude its Phase I investigation within 30 days from the date of receipt of the complete notification. The CCA will provide a written confirmation of complete notification and the Phase I review period will start running from the date of such confirmation. If the CCA does not adopt a decision on the commencement of the Phase II investigation, the notified concentration will be presumed approved. In such case, the CCA will deliver a confirmation of the cleared concentration to the notifying party and will publish such confirmation on the CCA’s website. On the other hand, if the CCA finds that the concentration may give rise to appreciable effect on competition in the relevant market, the CCA will take a decision on the commencement of the Phase II investigation. The Phase II process must generally be completed (either by an unconditional or conditional clearance decision, prohibition decision or a remedial decision after implementation of a prohibited concentration) within three months from the CCA’s decision on the commencement of Phase II proceedings, with the possibility for the CCA to extend this deadline for an additional three months.

Other Merger Control Regimes

Investments in Croatia may also meet the thresholds for review under other merger control regimes, including the EU merger control regime and national merger control regimes for special sectors such as the media, electronic communications, credit institutions, insurance and investment activities (as discussed in 8.1 Other Regimes).

When conducting a substantive review of a concentration, the CCA performs a counterfactual analysis comparing the competitive conditions that would result from the concentration with the conditions that would have prevailed without the concentration. The CCA assesses the effects of the concentration on the relevant market and the existence of possible barriers to entry, in particular, when the concentration is creating a new, or strengthening an existing, dominant position of a party to the concentration.

When assessing the effects of the concentration on the relevant market, the CCA will take into account:

• the structure of the relevant market, existing and potential future competitors, the structure and choice of offer and demand, market trends, prices, risks, and economic, legal and other barriers to entry;
• the market position, market shares, the economic and financial power of undertakings in the relevant market, the degree of competition, and alternative sources of supply resulting from the concentration; and
• the effects of the concentration on other undertakings or consumers. 

The CCA has the power to impose all the necessary behavioural and structural measures required to restore effective competition in the relevant market, as well as the deadlines for implementation of the imposed measures. In particular, the CCA has the power to order the transfer or divestment acquired shares or stock, as well as to prohibit or restrict the exercise of voting rights related to shares or stock in undertakings that are parties to the concentration, or to order the joint venture or other forms of acquisition of control to be dissolved.

Prohibition or Clearance With Conditions

The CCA has the power to prohibit (block) the concentration or clear the concentration with conditions attached. In the case of a conditional clearance, the parties may start implementing the concentration from the date of delivery of the CCA’s conditional clearance decision. If the parties do not satisfy the conditions imposed by the CCA, the CCA will annul or amend the conditional clearance decision (depending on the reason for non-compliance with the conditions imposed).

Imposition of Remedies

The CCA also has the power to impose structural and behavioural remedies after the concentration (ie, investment) has been implemented, in cases of implementation contrary to the CCA’s prohibition decision or if the concentration was implemented without filing a notification on the intended concentration to the CCA.

Imposition of Fines

In the case of implementation of a prohibited concentration, the CCA may also impose a fine of up to 10% of the undertaking’s worldwide annual turnover for the last financial year for which there are complete financial statements. In addition, failure to notify a concentration to the CCA, as well as the implementation of a concentration ahead of the CCA’s clearance, may be subject to a fine of up to 1% of the undertaking’s worldwide annual turnover for the last financial year.

Challenges to Decisions of the CCA

The CCA’s decisions on prohibition or conditional clearance of a concentration, as well as its decisions on the imposition of fines, are not subject to appeal, but may be challenged by administrative claims before the High Administrative Court of Croatia.

Croatia does not currently have a national foreign investment/national security review regime applicable to FDI.

Based on publicly available information, the Croatian government is planning to introduce an FDI screening regime in accordance with Articles 3 and 4 of the EU FDI Screening Regulation by way of adopting the Croatian FDI Screening Act. Information published by the Croatian Ministry of Finance (which is in charge of the process of drafting the Croatian FDI Screening Act) indicates that the act is expected to be adopted in the second quarter of 2024.

The EU FDI Screening Regulation

With respect to enforcement of the EU FDI Screening Regulation, the Croatian national contact point responsible for the implementation of this regulation has been placed within the Croatian Ministry of Economy. The Croatian national contact point is responsible, in particular, for preparation of the annual reports to the EU Commission which includes aggregated information on FDI that took place in Croatia; and providing information pursuant to Articles 7 and 9 of the EU FDI Screening Regulation to the European Commission and/or other EU member states. For the latter purpose, the Croatian contact point for implementation of the EU FDI Screening Regulation is authorised to request that the foreign investor or the undertaking in which the FDI is planned or has been completed, provides the information referred to in Article 9(2) of the EU FDI Screening Regulation. In such a case, the foreign investor or the undertaking in which FDI is planned must provide the requested information to the Croatian contact point within seven days of receipt of the request for information.

See 7.1 Applicable Regulator and Process Overview.

See 7.1 Applicable Regulator and Process Overview.

See 7.1 Applicable Regulator and Process Overview.

Under Croatian law, there is no comprehensive foreign investment regime nor a single authority that oversees all foreign investments. Generally, domestic and foreign-owned entities established in Croatia have equal legal treatment. That being said, there are certain sectors in Croatia where industry-specific requirements and/or restrictions apply, such as the obligation to acquire prior approval from the competent regulatory bodies, or to notify the regulatory body before conducting certain activities. Those restrictions often apply only to non-EU and/or non-EEA based investors. The competent authorities, as well as the sanctions threatened for non-compliance with specific requirements, vary from sector to sector. The most significant areas that have a special regime regulating FDI are real estate, media, transportation, fishery and construction.

Real Estate

Legal entities established in the EU and natural persons who are EU nationals have equal rights and obligations as domestic nationals/entities when it comes to acquisition of ownership of real estate in Croatia. Non-EU investors may acquire ownership subject to the requirement of reciprocity, and conditional on obtaining the approval of the Ministry of Justice and Public Administration. Failure to acquire approval from the Ministry of Justice and Public Administration will result in the legal transaction being null and void. Generally, restrictions apply only to the direct acquisition of real estate. However, based on information published by the Ministry of Justice and Public Administration, approval is also required in cases where the competent authority establishes that the sole intention behind the acquisition of shares in a local entity is the acquisition of the respective real estate owned by such entity. This is to be determined on a case-by-case basis.

In addition, non-EU investors cannot acquire ownership of agricultural land and state-owned forests (ie, there is no approval system available in these instances).

Media

Entities seated in EU/EEA member states may conduct publishing activities, as well as publish electronic publications and video sharing platforms in Croatia, only on a temporary or sporadic basis, in reliance on the EU freedom of services principle. As an exception, the publisher of an electronic publication seated in another EU/EEA member state may be allowed to permanently provide its services in Croatia, subject to being registered locally with the court (ie, if it has a local branch office established) or other appropriate registry (ie, if it has a representative or correspondent office in Croatia) and if it has an editor’s office in Croatia.

Non-EU/EEA investors may not perform publishing activities, or provide electronic publication and video sharing platforms in Croatia, without having a local presence. Non-compliance with the above provisions is sanctionable by an administrative fine for the legal entity and the responsible person within the legal entity.

Road, Air and Inland Water and Maritime Transport

As a general rule, domestic and EU incorporated entities can provide road, air, as well as inland and maritime cabotage within the borders of the Republic of Croatia under the same conditions, in accordance with the EU rules. By contrast, non-EU entities are generally prohibited from providing road, air, or inland water and maritime cabotage, unless international agreements provide differently, or if special approval from the Ministry of the Sea, Transport and Infrastructure is obtained. However, some differences may occur between regulations of different types of transportation in Croatia. Providing cabotage without special approval from the Ministry of the Sea, Transport and Infrastructure is sanctionable by an administrative fine for the legal entity and the responsible person within the legal entity.

Fishery Activities

Commercial freshwater and marine fishery activities are not allowed in Croatia for non-Croatian legal entities or natural persons, unless otherwise provided in an international agreement. This applies regardless of the fact that foreign entities may own a ship registered with the Croatian Ship Register. Performance of commercial freshwater fishing activities by a foreign legal entity or natural person is sanctionable by an administrative fine for the legal entity, responsible person within the legal entity and natural person.

Construction, Architectural and Engineering Services

Legal entities from EU/EEA/WTO member states, authorised to undertake construction, physical planning and construction-related architectural and engineering services in their home jurisdictions, may on a temporary or sporadic basis perform such activities in Croatia, if they meet the requirements established by the law and only after notifying the Ministry of Physical Planning, Construction and State Assets. These activities may be performed on a permanent basis through a local branch or subsidiary incorporated in Croatia.

Under the condition of reciprocity, entities from non-EU/EEA/WTO member states, authorised to undertake the above-mentioned activities in their home jurisdictions, may provide such activities on a temporary or occasional basis if they meet the requirements prescribed by law, and after notifying the relevant ministry. Such entities are required to incorporate a company in Croatia to carry out such activities on a permanent basis.

Non-compliance with the above-mentioned provisions is sanctionable by an administrative fine for the legal entity and the responsible person within the legal entity.

Corporate Profit Tax

Taxpayers

Business activities in Croatia are taxed by corporate profit tax. Corporate profit taxpayers include:

• Croatian resident companies and other legal entities engaged in economic activity for the purpose of earning profit;
• domestic permanent establishments of non-resident entrepreneurs (eg, local branch offices of foreign founders); and
• individuals who meet certain statutory criteria.

Obligations

The taxpayer has the obligation to make monthly advance payments of corporate profit tax based on the previous year’s tax return. The monthly payments may be adjusted by the Croatian Tax Authority. Upon a company’s request and subject to the Tax Authority’s approval, a company may set its business/financial year differently to the calendar year.

Calculation of tax

The tax base of corporate profit tax is the profit generated in a fiscal year, calculated in accordance with applicable accounting regulations and then adjusted pursuant to profit tax legislation. The tax base of resident taxpayers is the profit earned worldwide, while the tax base of permanent establishments of non-resident entrepreneurs is the profit earned in Croatia. Profit earned in the sale, liquidation, change of legal form and the split off/de-merger of a taxpayer is also included in the profit tax base. The tax return must be submitted to the Tax Administration within four months from the end of the financial year. Any shortfalls at the end of the year must be self-assessed and paid. On the other hand, in the case of a surplus, the Tax Authority returns the payments on request or carries the surplus into the next taxable period.

The corporate profit tax rate varies depending on the ascertained tax base. In case of earned income below EUR1 million, the tax rate is set at 10%. On the other hand, if the income exceeds the amount of EUR1 million (a minimum of EUR1,000,000.01), the corporate profit tax rate is 18%.

Additional Taxes

In addition to corporate profit tax, companies doing business in Croatia may be subject to VAT and may, depending on the circumstances, be subject to various other taxes and parafiscal levies (eg, monument annuity, tourist community fee, Croatian Chamber of Commerce membership fee, etc).

Croatian corporate profit tax laws require the calculation and withholding of tax on dividends, profit, interests, and royalties relating to copyright and other intellectual property rights (eg, patents, trade marks, designs, know-how, etc) paid to foreign (ie, non-Croatian) legal entities.

Withholding Tax Rates

As a general rule, the withholding tax rate is set at 15% for all taxable transactions, except payment of dividends and profit for which the applicable withholding tax rate is 10%. As a measure for fighting tax evasion and avoidance, Croatian corporate profit tax law has also introduced a punitive withholding tax rate of 25% for all taxable transactions, including payment of compensation for services such as market research, tax and business consulting, and auditing services, when paid to persons having their headquarters, place of effective management or supervision of business in the countries placed on the EU list of non-cooperative jurisdictions for tax purposes (eg, Guam, Panama, Seychelles, etc), unless otherwise provided in individual double taxation treaties.

Exemptions

Specifically with regard to interest, withholding tax will not be levied on interest paid:

• for commodity loans for the procurement of goods used for the performance of a business activity of the taxpayer;
• for loans given by a foreign bank or other financial institution; and
• to foreign legal persons that hold bonds (both state and corporate).

The withholding rates set by Croatian law may be further reduced or even eliminated subject to either double taxation treaties (Croatia currently has 65 double taxation treaties in force) or special rules provided for taxation of dividend, profit, interest and royalty payments made between affiliated companies in different EU member states. In both cases, a minimum percentage of share/stock ownership requirement and a holding period requirement may apply.

The General Anti-avoidance Rule

As a means of battling tax fraud/evasion (including the prevention of treaty shopping), Croatia has also implemented the general anti-avoidance rule under which certain tax benefits, available either through a treaty or domestic law (eg, withholding tax exemption or reduction), will not be extended to the taxpayer if the Croatian authorities determine that the taxpayer created arrangements (eg, business transactions, activities, schemes, agreements, obligations or events) or a series of arrangements, without valid commercial reasons, reflecting the economic reality (or in other words, if the arrangements were created for the purpose of tax fraud or tax evasion).

Manoeuvring space for tax mitigation is fairly limited due to various anti-evasion regimes implemented in Croatia and the scrutiny by the Croatian Tax Administration. In this regard, strategies utilising intercompany debt are restricted, as respective interest is subject to the market interest rate rule, the thin capitalisation rule and the interest limitation rule. Furthermore, strategies utilising intercompany services and licence fees are subject to OECD transfer pricing rules and are heavily scrutinised by the Croatian Tax Authority.

Among the tax mitigation strategies currently used by companies in Croatia is the carry-forward of tax losses, where the accumulated tax losses may be utilised within five years following the year in which the losses were incurred and set off against taxable profits). In addition, Croatian companies may also reduce the tax rate or tax base by utilising generous tax incentives for capital expenditures (eg, construction costs for factories and acquisition costs for manufacturing equipment) and R&D expenditures (eg, development and significant improvement of products, manufacturing processes, manufacturing technologies, etc). Lastly, Croatian companies are also able to use the deferral of taxation of a step-up in value of depreciable assets, but only in relation to intragroup restructuring.

Considering that the anti-evasion regimes applicable in Croatia create a very complex terrain for tax planning, such analyses are created on a case-by-case basis and in close co-operation with tax advisers and experts.

Capital gains derived from the sale of financial assets – for example, shares (ie, business quota in Croatian LLCs), stock, financial market instruments, derivatives, etc – is taxed as income of both resident and non-resident individuals (ie, the disposal of financial assets by legal entities is not subject to capital gains tax). The applicable tax rate is set at 12%. The tax basis is calculated as the difference between the capital gains and capital losses occurring within the same calendar year. The taxpayer is under an obligation to pay capital gains tax until the end of February for the previous year.

There are a number of exceptions related to payment of capital gains tax. Most notably, capital gains tax will not be paid in case of:

• transfer of financial instruments between spouses and immediate family;
• inheritance of financial instruments; and
• the disposal of financial instruments more than two years from the day the financial instrument was acquired.

In addition to any general anti-avoidance rule (the denial of tax benefits of arrangements which do not have economic substance) and the punitive withholding tax rate for non-cooperative jurisdictions (both described in 9.2 Withholding Taxes on Dividends, Interest, Etc), Croatia is also following the anti-avoidance trends on the European and global scene. In this regard, Croatia has implemented the anti-hybrid mismatching rules of the ATAD 2 Directive, as well as introducing the BEPS MLI measures. In addition to this, Croatian law has been populated with the provisions originating in the OECD’s Transfer Pricing Guidelines. Finally, Croatia has also implemented the DAC-6 Directive, creating stronger ties between the Croatian Tax Authority and its European counterparts, thus facilitating anti-tax evasion activities and diligence.

The Employment Act and Other Sources

In Croatia, employment and labour matters are primarily governed by the Employment Act, complemented by various sources, like the Croatian Constitution, International Labour Organization conventions, and additional statutes (eg, the Work Safety Act, Minimum Wage Act, Prevention of Discrimination Act, and the Gender Equality Act). The relevant sources also encompass collective labour agreements (CLAs), shop agreements with works councils, company policies, and individual employment contracts. The Employment Act ensures employees’ minimum rights, overriding any agreement or policy that falls below these standards. In cases of conflict, the document favouring employees will prevail.

Collective Bargaining Bodies

Collective bargaining, works council and labour union arrangements are less common in Croatia compared to other EU countries. No universal CLA applies nationwide; collective bargaining is prevalent in the public sector, specific industries (construction, accommodation, catering, forest products), and large private enterprises with historical union ties.

Unions with at least five members in a company may appoint a union trustee. Establishment of a works council, which can be initiated by a union or 20% of employees in companies with at least 20 staff, is a workforce prerogative. If there is a works council or a union trustee, specific collective engagement requirements, ranging from providing information and prior consultation to pre-approvals, will apply with regard to a number of actions including, for example, dismissals, introducing employment policies, or personal data processing activities.

Compensation for employees in Croatia commonly encompasses several elements, including notably the base salary, mandatory health and social/pension insurance, and additional compensation elements. Additional compensation elements, such as performance bonuses, 13th salary, allowances, Christmas or vacation bonuses, jubilee awards, equity compensation (eg, stock options) and non-cash perks (eg, a company car) are in principle subject to a company’s discretion. The base salary is paid in cash on a monthly basis in an amount set by the contract, policy or applicable CLA, and in any case no less than the statutory minimum national wage (currently set at EUR840 gross monthly for full-time employment in 2024).

In Croatia, employee compensation generally remains unaffected by acquisition, change-of-control or other investment transactions, regardless of whether the transaction is structured as a share deal or an asset deal. That said, the acquiring party would usually assess before transaction closing whether any adjustments to the current compensation framework at the target will be necessary in the course of integration, as well as the legal prerequisites for any such adjustments.

The legal implications of an M&A transaction on employees vary depending on the type of transaction, and notably, whether the transaction is structured as a share deal or an asset deal.

Under a Share Deal

As a general rule, change of control (direct or indirect) by way of a share deal will not impact the employees of the target company, as the identity of the employer entity and the employment contracts with the employer entity remain unchanged.

Under an Asset Deal

By contrast, an asset deal (if structured as the transfer of a business as a going concern) will often trigger the application of ADR/TUPE-equivalent rules, under which, all employment contracts pertaining to the transferring (part of a) business would transfer to the acquiring entity automatically by operation of law, together with works council and applicable CLAs. Employees are not entitled to object to the transfer, but the works council (or, if there is no works council, a union trustee if one is appointed) must be consulted in advance of the envisaged business transfer.

At this point in time, Croatia does not have an FDI screening regime in place (see 1.2 Regulatory Framework for FDI and 7.1 Applicable Regulator and Process Overview). However, considering the expanding consciousness regarding intellectual property in Croatia, as well as the worldwide shift in the significance of the IP portfolios of companies, it may be expected that IP will play an important role in any future FDI screening regime established in Croatia.

Croatia is historically a jurisdiction that recognises and protects various types of IP. Croatian IP legislation is currently comprised of several pieces of legislation which regulate copyright and related rights, patents, trade marks, industrial designs, geographical indications and designations of the origin of products, plant varieties, topographies of semiconductor products, as well as business secrets. Croatian legislation is entirely harmonised with the respective EU legislation, although Croatia is still outside the European Unitary Patent system. In addition to this, Croatia is a member of the World Intellectual Property Organization (WIPO) and a party to major international treaties relating to IP, including the Bern Convention for the Protection of Literary and Artistic Works and the Paris Convention for the Protection of Industrial Property.

On the other hand, due to Croatia being a relatively small jurisdiction, disputes regarding IP are rare. As a result, a number of areas of IP law do not have any relevant and established case law (eg, in the area of patents and topographies of semiconductor products), while in other more active areas such as copyright and related rights and trade marks, the Croatian courts are still struggling to establish uniform application of the law.

Consequently, from the perspective of foreign investors, it is paramount to pre-emptively screen any intellectual property portfolios in the case of intended acquisitions in order to establish the title of the rights holders. It is therefore worth noting the following.

• Property rights in copyright works created by employees in connection with the employment relationship are automatically assigned to the employer, unless otherwise provided in the contract between the employer and the employee and/or the employer’s regulations. On the other hand, moral rights over copyright works are non-assignable and can only be partially limited by contract.
• Rights over inventions created by employees during the performance of work or in connection with their employment will be vested with the employer, while the employee will have a right to an award as established in a contract or a collective bargaining agreement, or failing this, an appropriate award as established by a court.

The General Data Protection Regulation (GDPR) is the prime source of rules governing the processing of data of individuals in Croatia. The GDPR is particularly important in the context of FDI due to its extraterritorial scope of application, with the GDPR also being applicable to investors that are not established in the EU but process the data of individuals who are located in the EU for the purpose of offering goods or services, or monitoring the behaviour of individuals within the EU.

In addition to the GDPR, Croatia also adopted the Act on Implementation of the GDPR, which regulates special cases of processing personal data, such as the prohibition of processing genetic data in relation to insurance contracts, the processing of biometric data and the processing of video surveillance data, with each of the special cases having a separate territorial scope of application.