CROATIA 2007 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 14 ZAGREB 000046

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SIPDIS

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TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC
KTDB, USTR, HR
SUBJECT: CROATIA 2007 INVESTMENT CLIMATE STATEMENT

REF: 06 STATE 178303


1. Summary: Croatia has enjoyed respectable
economic growth over the last few years, accompanied
by low inflation, a stable exchange rate and growth
in the tourism sector. At the same time, the
government has undertaken several initiatives aimed
at streamlining the bureaucracy in an effort to
attract and facilitate foreign investment. Although
many challenges still remain, particularly in the
legal system, land registries and distorting
subsidies to state-owned industries, Croatia has
made significant strides in recent years with
foreign investors enjoying solid returns in this
growing market. Now a candidate for membership in
the European Union, Croatia hopes to position itself
as a gateway to the markets of South Eastern Europe,
capitalizing on its developed infrastructure and
favorable geographic position. With the bulk of the
countryQs USD 12 billion in foreign investment since
1991 in the financial and retail sectors, the
governmentQs greatest challenge is to attract
greenfield investments, particularly export-oriented
industries that could help narrow the countryQs
substantial trade deficit. END SUMMARY


A.1 Openness to Foreign Investment


2. Croatia is open to foreign investment. The
Croatian government has set a goal of increasing
foreign investment and continues to undertake
measures to improve the investment climate in the
country, hoping to build on recent positive trends
that include a stable macroeconomic environment and
future EU membership. The GoC passed a National
Development Strategy that includes plans for
economic reform. In 2006, the GoC, with the
assistance of USAID, began the Hitro.rez project,
which has as its goal the elimination of thousands
of laws and regulations that affect business in
Croatia. Its managers hope to eliminate 30-50% of
existing provisions and simplify another 30-40%.
The goal of the project is remove needlessly complex
bureaucracy as an obstacle to investment.


3. Despite recent progress, however, Croatia still
poses challenges for foreign investors. Of these,
the greatest is the countryQs dysfunctional legal
system. Although being reformed, the wheels of
justice turn slowly in Croatia, with even the
simplest cases taking years to resolve among a
backlog of over 1 million pending cases. Although
there are laws that govern the sanctity of
contracts, the current backlog of cases precludes
effective enforcement. The impossibility of
obtaining timely judicial remedy in a dispute has
hindered investment in Croatia.


4. The GovernmentQs e-government initiative ?HITRO?
(www.hitro.hr) became operational in 2005, with an
on-line business registration component that reduces
the time it takes to register a company to four
days. Business registration is the first step in a
plan to make more government services available on-
line in coming years and includes the full
digitization of CroatiaQs broken system of land
records (see www.pravosudje.hr and www.kataster.hr
to find digitized land records).


5. The Agency for Trade and Investment Promotion
was given new leadership in 2006. The Agency has a
mandate to assist potential investors in Croatia,
with specialists available in strategic planning,
investment support and export support (see
www.apiu.hr) and is actively seeking projects that
it can promote to foreign investors. The Agency is
also active in advising the government on how to
make CroatiaQs regulatory environment more
transparent and competitive.


6. CroatiaQs legal framework accords national
treatment to foreign and domestic investors. The
Internet website of the Croatian Chamber of Economy
(www.hgk.hr) provides a useful English-language
guide, "How to Start Up an Enterprise in Croatia,"

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as well as sector-specific and general reports. The
Zagreb Stock Exchange's website (www.zse.hr) posts
English-language translations of key laws in force.


7. The Company Act defines the forms of legal
organization for domestic and foreign investors.
The following are permitted for foreigners: general
partnerships, limited partnerships, branches,
limited liability companies, and joint stock
companies. The Law on Ownership and Other Property
Rights permits acquisition/ownership by foreigners
with the approval of the Ministry of Justice and on
the basis of reciprocity (reciprocity exists with
the United States). However, a foreign investor,
incorporated as a Croatian legal entity, may
acquire/own property without ministry approval.
Purchasing by any private party of certain types of
land (principally land directly adjacent to the sea
or in certain geographically designated areas) can
be restricted.


8. In privatization, especially of tourism assets
along the coast, local governments have occasionally
voiced opposition to foreign investment and thrown
up barriers to block or limit development,
particularly through the non-issuance of
construction and use permits.


A.2 Conversion and Transfer Policies


9. The Croatian constitution guarantees the free
transfer and repatriation of profits and invested
capital for foreign investments. Article VI of the
U.S. Croatia Bilateral Investment Treaty (BIT)
establishes protection for American investors from
government exchange controls that limit current and
capital account transfers, and limits on inward
transfers made by screening authorities. The BIT
obliges both countries to permit all transfers
relating to a covered investment to be made freely
and without delay into and out of each other's
territory. The Croatian Foreign Exchange Law
permits foreigners to maintain foreign currency
accounts and to make external payments.


10. The Foreign Exchange Law also defines foreign
direct investment (FDI). For example, use of
retained earnings for new investments/acquisitions
is considered FDI, whereas investments made by
institutional investors such as insurance, pension
and investment funds are not considered FDI. The
law also liberalizes foreign exchange transactions
for Croatian entities and individuals allowing them
to invest abroad. Generally, this law liberalized
foreign exchange transactions, but it also
introduced criteria for the possible imposition of
capital controls. The full potential impact of this
law and its consistency with investment protection
treaties, including the U.S. BIT, is undetermined,
and prospective investors should review the
legislation carefully.


11. The U.S. Embassy in Zagreb has not received any
complaints from American companies regarding
transfers and remittances.


A.3 Expropriation and Compensation


12. There have been no cases of expropriation of
foreign investments by the government since Croatia
became independent. Article III of the BIT covers
both direct and indirect expropriations. The BIT
bars all expropriations or nationalizations except
those that are for a public purpose, carried out in
a non-discriminatory manner, are in accordance with
due process of law, and are subject to prompt,
adequate and effective compensation.


13. Croatian law gives the government broad
authority to expropriate property under various
economic and security related circumstances. The
law provides for an appellate mechanism to challenge
expropriation decisions by means of a complaint to
the Ministry of Justice within 15 days of the

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expropriation order. The law, however, does not
describe the Ministry's adjudication process and the
fact that the Ministry of Justice represents the
government, which initiates expropriations, is an
area of potential concern for investors.


A.4 Dispute Settlement


14. Partly because of the low level of U.S.
investment in recent years (aside from portfolio
investment),there have been few instances of
investment disputes involving U.S. companies. As a
result of the very long timeframes involved in
obtaining judgments in court, it is likely that
companies try to resolve disputes informally, often
attempting to use political or personal connections.
The government is currently working to reduce court
backlogs and to encourage the use of alternative
dispute settlement.


15. The government continues efforts to reform the
judiciary, including reducing the backlog of cases,
reforming the land registry, training court officers
and reducing the backlog and length of bankruptcy
procedures. An important move to lessen the backlog
of cases is the on-going redistribution of non-
disputed decisions to public notaries. During the
past year, the number of pending cases has decreased
from 1.64 million to 1.23 million cases. However,
the enforcement of judgments still makes up 25% of
all pending cases. Although there has been progress
in reducing the number of cases, enforcement and
execution of judgments remain problematic. According
to the provisions of the Law on Enforcement, a
judgment made by a judge or panel of judges to order
payment or direct actions to be taken or ceased must
be executed immediately per such decision. Current
practice, however, delays enforcement until all
appeals are decided. Article 17 of the Law on
Enforcement states that foreign judgments may be
executed only if the "judgment fulfills the
conditions for recognition and execution as
prescribed by an international agreement or the
law." The Ministry of JusticeQs reform plan is
available on its website under ?e-pravosude? at
www.pravosudje.hr.


16. The Law on Bankruptcy establishes deadlines
that force companies to enter bankruptcy
proceedings. Bankruptcy and foreclosures have
traditionally been slow and inefficient in Croatia.
The Ministry of Justice announced in 2005 that
streamlining bankruptcy procedures is a priority.
The World Bank has estimated that the recovery rate
in Croatia is approximately a third of the
Organization for Economic Cooperation and
Development (OECD) average, and somewhat worse than
the regional average.


17. The Commercial Court has exclusive jurisdiction
over bankruptcy matters. A bankruptcy tribunal
decides on initiating formal bankruptcy proceedings,
appoints the trustee, reviews creditor complaints,
approves the settlement for creditors, and decides
on the closing of proceedings. The bankruptcy judge
supervises the trustee (who represents the debtor)
and the operations of the creditors' committee. A
creditors' committee is convened to protect the
interests of all creditors during the proceedings,
to oversee the trustee's work and to report back to
the creditors. The law establishes the priority of
creditor claims, assigning higher priority to those
related to taxes and revenues of state, local and
administration budgets. The law also allows for a
debtor or the trustee to petition to reorganize the
firm, an alternative aimed at maximizing asset
recovery and providing for fair and equitable
distribution among all creditors.


18. Arbitration is available, if underused. Within
the Croatian Chamber of Economy, there is a
permanent arbitration court that has been in
existence since 1965. Arbitration is voluntary and
conforms to United Nations Commission on
International Trade Law (UNCITRAL) model procedures.

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The court reviews 30 to 40 cases per year, of which
40% are international cases. There have been five
cases of a U.S. company submitting to arbitration in
this venue.


19. The English-language text of the Law on
Arbitration can be found on the website of the
Croatian Chamber of Economy (www.hgk.hr). The law
covers domestic arbitration, recognition and
enforcement of arbitration rulings, jurisdictional
matters, and procedures. Once a dispute has been
arbitrated the decision is executed upon notice from
the court to the obligatory party. If no payment is
made by the established deadline, then the party
benefiting from the decision notifies the commercial
court and the commercial court becomes responsible
for enforcing compliance. Rulings of the
arbitration court have the force of a final
judgment, but can be appealed within three months.


20. Article X of the BIT sets forth several means
for resolution of investment disputes, defined as
any dispute arising out of or relating to an
investment authorization, an investment agreement,
or an alleged breach of rights conferred, created,
or recognized by the BIT with respect to a covered
investment. For more information on the BIT
arbitration provisions, see www.mac.doc.gov/Tcc/e-
guides/eg_bits (under "Croatia").


21. Croatia is a signatory to the following
international conventions regulating the mutual
acceptance and enforcement of foreign arbitration:
the 1923 Geneva Protocol on Arbitration Clauses, the
1927 Geneva Convention on the Execution of Foreign
Arbitration Decisions, the 1958 New York Convention
on the Acceptance and Execution of Foreign
Arbitration Decisions, and the 1961 European
Convention on International Business Arbitration.
In 1998 Croatia ratified the Washington Convention -
the International Center for the Settlement of
Investment Disputes (ICSID),and it became effective
on October 22, 1998.


22. The Croatian constitution provides for an
independent judiciary. The judicial system consists
of courts of general and specialized jurisdictions,
whose core structure is: Supreme Court, County
Courts, Municipal Courts, and the Magistrate/Petty
Crimes Courts. Specialized courts include the
Administrative Court and High Commercial and Lower
Commercial Courts. There is also a Constitutional
Court that determines the constitutionality of laws
and government actions and protects and enforces
constitutional rights. Municipal courts exercise
original jurisdiction over civil and
juvenile/criminal cases. The High Commercial Court
is located in Zagreb and has appellate review of
lower commercial court decisions. Modification of
lower court decisions by the High Commercial Court
may be appealed to the Supreme Court.


23. The Administrative Court has jurisdiction over
the decisions of administrative bodies of all levels
of government. The Supreme Court, under certain
circumstances, may review decisions. The Supreme
Court is the highest court in the country and as
such enjoys jurisdiction over all civil and criminal
cases. It hears appeals from County, High
Commercial, and Administrative Courts.


A.5 Performance Requirements/Incentives


24. Croatian law does not impose performance
requirements on foreign or domestic investors.
Article VII of the BIT prohibits mandating or
enforcing specified performance requirements as a
condition for the establishment, acquisition,
expansion, management, conduct, or operation of a
covered investment. The list of prohibited
requirements is exhaustive and covers domestic
content requirements and domestic purchase
preferences, the "balancing" of imports or sales in
relation to exports or foreign exchange earnings,
requirements to export products or services,

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technology transfer requirements, and requirements
relating to the conduct of research and development
in the host country. Article VII makes clear,
however, that a party may impose conditions for the
receipt or continued receipt of benefits and
incentives.


25. In late 2004, the Ministries of Economy and
Defense agreed to introduce offsets (a requirement
for local sourcing of a portion of the contract) for
defense procurements over 2 million euros, and the
Ministry of Economy said it was looking at
introducing offsets in other areas, however no such
action has been undertaken.


26. As of January 1, 2007, the Investment
Promotion Law offers potentially significant
incentives (the amount of which is dependent upon
the percentage of unemployment in the respective
county) to investors, foreign and domestic, such as
1500-3000 EUR incentive per new job position,
assistance with retraining and tax incentives. It
provides for incentives that apply only to
investments in production based businesses,
technological development centers and strategic
business support activities. The minimum amount of
investment that qualifies for incentives is 300,000
EUR. Tax incentives include substantially lower
profit tax obligations and customs relief. The text
of the law is available on the Croatian National
Bank site (www.hnb.hr).


27. Incentives include: 10% corporate tax for ten
years for companies that invest from 2.2 million to
11 million HRK (approximately $393,000 - $2 million)
and create 10 new jobs; 7% corporate tax for ten
years for companies that invest from 11 million to
30 million HRK (approximately $2 million to $5.35
million) and create 30 new jobs; 3% corporate tax
for ten years for companies that invest 30 million
to 58 million HRK (approximately $2 million to
$10.4 million) and create 50 new jobs; 0% corporate
tax for ten years for companies that invest over 60
million HRK (approximately $10.7 million) and create
at least 75 new jobs.


28. Incentive measures refer to investment in the
following: new equipment and modern technology, new
production processes and new products, greater
employment and education of workers, modernization
and growth of business, development of production
with a higher level processing, an increase in
exports, increasing economic activity in regions of
Croatia in which economic growth and employment
levels lag behind national averages (in accordance
with the map of regional areas of special state
concern),development of new services, energy
conservation, strengthening information technology,
cooperation with foreign financial institutions, and
harmonizing the Croatian economy with EU standards.


29. Investors may also be eligible to receive
assistance from the government to offset costs of
employee re-training. The government may offer real
estate (or permits or infrastructure) to an
investment either cost-free or on a preferential
basis. Finally, the government will allow the duty-
free importation of capital equipment for the
investment.


30. The Croatian government also offers concessions
for business activity carried out in "areas of
special state concern" (those areas most affected by
the 1991-95 war). Activities in customs free zones
are taxed at a lower corporate tax rate and
concessions are awarded under the current Law on
Free Zones. Also, for a period of ten years from
when the Profit Tax Act was enacted in October 2003,
no profit tax will be paid for business operations
in those FTZs located in the Vukovar and Srijem
Counties. However, although still in effect, some
of these incentives are not in compliance with EU
standards. The Government is currently studying how
to bring them into compliance without reneging on
previously-made commitments. A decision on this is
likely in 2007.

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31. The Trade and Investment Promotion Agency can
be helpful in identifying and applying for
investment incentives. Also, the (separate) Office
of Investment and Export Promotion in the Ministry
of Economy can be helpful in looking for incentive
information. Further information can be found on
their website at www.mingorp.hr.


32. CroatiaQs WTO Trade Related Investment Measures
(TRIMs) agreement went into effect in 2000. Croatia
has no trade-related investment measures in place at
the present time, nor does the government intend to
introduce any such measures in the future.
Accordingly, Croatia did not seek to list any
measures for elimination under the provisions of the
WTO Agreement on TRIMs. Croatia committed to
maintaining measures consistent with the TRIMs
agreement and has applied the TRIMs agreement from
the date of accession without recourse to any
transition period.


33. Foreign investors will find that the process of
obtaining business visas is straightforward. For
information on obtaining business and work permits,
please contact a Croatian embassy or consulate or
visit Embassy Zagreb's website (www.usembassy.hr,
see Consular Section, American Citizen Services).


A.6 The Right to Private Ownership and
Establishment


34. Both foreign and domestic legal entities have
the right to establish and own businesses and engage
in remunerative activity. Foreign investors can
acquire ownership and shares of joint stock
companies. The lowest amount of initial capital for
establishing a joint stock company is 200,000 HRK
($36,300) and the nominal value per share cannot be
less than 10 HRK ($1.78). Minimum initial capital
for establishment of a limited liabilities company
is 20,000 HRk ($3.571),while individual
representation per investor cannot be less than 200
HRK ($35.71)


35. Article 49 of the Constitution provides
assurances that all entrepreneurs have equal legal
status and that monopolies are forbidden. The
Competition Act defines the rules and methods for
promoting and protecting competition. This law, and
information about the Croatian Competition Agency
can be found at www.aztn.hr. In theory, competitive
equality is the standard applied to private
enterprises in competition with public enterprises
with respect to market access, credit and other
business operations, such as licenses and supplies.
In practice, however, state-owned enterprises and
"strategic" firms continue to receive preferential
treatment, including government bailouts and
subsidies.


A.7 Protection of Property Rights


36. The right to ownership of private property is
established in the Croatian Constitution and
numerous acts and regulations safeguard this right.
A foreign physical or legal person incorporated
under Croatian law is considered to be a Croatian
legal person. The Law on Ownership and Property
Rights establishes procedures for foreigners to
acquire property by inheritance as well as legal
transactions such as purchases, deeds, and trusts.
The right of foreigners to acquire property in
Croatia is based on reciprocity. The U.S. and
Croatia share reciprocity in this area. Foreign
investors, incorporated as a Croatian legal entity,
may acquire and own property without restriction.
Both Croatian and foreign citizens may mortgage
property and pledge real and tangible property.


37. In order to acquire property by means other
than inheritance or as an incorporated Croatian
legal entity, foreign investors require the approval
of the Ministry of Justice. Approval often takes

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several months or longer owing to a lengthy
interagency clearance process that requires advisory
opinions from local authorities. All requests that
were awaiting Ministry of Foreign Affairs approval
were transferred to the Ministry of Justice as of
July 25, 2006 when the Ministry of Foreign Affairs
was removed from the approval process.


38. Clarifying Croatia's land registry system is an
on-going process and while Croatia has made progress
resolving a backlog of cases, potential investors
should seek a full explanation of land ownership
rights before purchasing property. It is highly
advisable to seek competent, independent legal
advice in this area (see www.usembassy.hr, Consular
section for a list of English-speaking attorneys),
as there are sometimes ambiguous and conflicting
claims to property, making it necessary to verify
that the seller possesses clear title to both land
and buildings, which can be titled and owned
separately. Inheritance laws have led to a
situation in which some properties can have dozens
of legal owners, some of whom are long since
deceased and others of whom emigrated and cannot be
found. It is also important to verify the existence
of necessary building permits, as some newer
structures in coastal areas have been subject to
destruction at ownerQs expense and without
compensation for not conforming with local zoning
regulations. Investors should be particularly wary
of promises that structures built without permits
will be regularized retroactively.


39. Some aspects of land ownership, as distinct
from ownership of objects, are not clear. Investors
interested in acquiring companies from the Croatian
Privatization Fund should seek expert legal advice
to determine whether any deal also includes the
right to ownership of the land on which an object is
located, or merely the right to lease the land
through a concession. The various Croatian laws on
privatization are not clear on this point.


40. Inconsistent regulations and restrictions on
coastal property ownership and construction have in
the past provided challenges for foreign investors.
Legislation passed in 2004 restricts coastal
construction and commercial use within 70 meters of
the coastline.


41. Croatia has intellectual property rights
legislation, including the Patent Law, Trademark
Law, Industrial Design Law, Law on the Geographical
Indications of Products and Services, Law on the
Protection of Layout Design of Integrated Circuits,
and Law on Copyrights and Related Rights. Croatia
is on the U.S. Special 301 Watch List for failing to
protect U.S. intellectual property rights. The
Agency for Medical Products, which is separate from
the Patent Agency, does not require license seekers
to submit information on existing patents, which has
resulted in the past in marketing authorization
being given to products that are protected by valid
Croatian patents. Problems also exist in the
protection of trademarks and copyrights, but at a
much lower level.


42. As a full WTO member, Croatia is a party to the
Uruguay Round Agreement on Trade-Related
Intellectual Property Rights (TRIPS). A WTO/TRIPS
Working Group in June 2001 accepted Croatia's IPR
legislation. Texts of these laws are available on
the website of the State Intellectual Property
Office: www.dziv.hr. Croatia is also a member of
the World Intellectual Property Organization (WIPO).
For a list of international conventions to which
Croatia is a signatory, consult the State
Intellectual Property Office's website.


A.8 Transparency of the Regulatory System


43. Together with CroatiaQs ineffective legal
system, a lack of transparency in both business and
government has presented one of the greatest
challenges to investors. Croatia is under pressure

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to increase transparency and its commitments to
adopt EU laws, norms, and practices, provide steady
pressure for reform. However, much more progress is
needed on this front.


44. Bureaucracy is also a major challenge for
foreign investors, although the government has made
progress in this area, particularly through the
development of its e-government initiatives (see
paragraph 2). Property registration, for example,
has traditionally been notoriously inefficient,
sometimes taking up to several years. However,
recent reforms and the digitization of the land
registers are hopeful signs that this problem will
be mitigated in the near future (see paragraph 4).
A valuable source of analysis is located on the
website of the Croatian office of the World Bank, at
www.worldbank.hr. Click on the link for the "Doing
Business in Croatia Forum.?


45. The regulatory system does not specifically
discriminate against foreign investors. However,
transparency in developing legislation and
regulation is often hampered by an inefficient
public administration, a lack of intra-governmental
coordination, and reliance on expert advice from
national champions, sometimes giving the latter a
privileged position in influencing new regulations.


46. Tax on corporate income is a flat 20%. There
is a 15% tax on interest revenue and royalties. In
2005, tax on dividends was eliminated as a spur to
investment. For a detailed description of extant
tax legislation, please consult the Tax
Administration's website at www.pu.mfin.hr/en.
Detailed information about customs can be found at
www.carina.hr.


47. The Institute of Public Finance maintains a
useful table of Croatian taxes at
http://www.ijf.hr/eng/taxguide/08_05/taxtable .pdf,
and the Ministry of Finance maintains information at
www.pu.mfin.hr/en. Croatia also maintains a 22
percent value-added tax (VAT). Some companies have
had difficulty with the tax authorities due to
differing understandings of how certain goods and
services are affected by the VAT.


A.9 Efficient Capital Markets and Portfolio
Investments


48. CroatiaQs capital markets grew strongly in
2006, fueled by the sale of the GovernmentQs stakes
in Pliva Pharmaceuticals and the national oil
company, INA. Typically, Croatian firms have used
more debt and less equity financing than comparable
U.S. firms.


49. In 2006, the amended Investment Fund Law went
into force, which provides for the establishment of
derivative funds, index funds and other funds in
accordance with EU legislation.


50. On January 1, 2006, CROSEC (Croatian Securities
and Exchange Commission) HAGENA (the Pension
Insurance and Fund Supervising Agency),and the
Directorate for Supervision of Insurance Agencies
merged into one agency called the Agency for
Supervision of Financial Services ( HANFA),headed
by the Directorate for Supervision of Agencies. See
www.hanfa.hr for all legislation and information
relative to capital markets.


51. The privatized and consolidated banking sector
is advanced and is becoming more competitive. More
than 90% of the total assets of the banking sector
are foreign owned. By the end of September 2006,
there were 34 commercial banks and five savings
banks, whose assets totaled 285 billion HRK ($51
billion). Italian-owned Zagrebacka Bank (23.11%)
and Privredna Bank (17.93%) are the two largest
banks per percentage of total bank assets in
Croatia.


52. Croatia's markets are open to both domestic and

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foreign investment equally. There are no
restrictions that would disrupt foreign investment
in the securities market and other markets in
Croatia. Foreign residents may open non-resident
accounts and may do business both domestically and
abroad. Article 24 of the Foreign Currency act
states that non-residents may subscribe, pay in,
purchase or sell securities in the Republic of
Croatia in accordance with regulations governing
securities transactions. Non-residents and
residents are afforded the same treatment in
spending and borrowing. These and other non-
resident financial activities regarding securities
are covered by Articles 24, 25 and 27 of the Foreign
Currency Act, which can be viewed on the Central
Bank website (www.hnb.hr).


53. The government uses the market to finance
government expenditure. Government debt instruments
must be bought through an intermediary such as a
commercial bank, and are tradable on exchanges.


54. Currently, securities are traded on the Zagreb
Stock Exchange (ZSE),established in 1991, and to a
lesser extent on the Varazdin Stock Exchange (VSE),
which was established in 1993 as an over-the-counter
(OTC) market and registered as a Stock Exchange on
July 16, 2002.


55. The Securities Law requires that all companies
with more than 100 shareholders and with share
capital of at least HRK 30 million (approximately
$5.4 million) list on the newly established
quotation for public stock companies (JDD) on one of
the two stock exchanges in-country, Zagreb or
Varazdin. The intention was to increase
transparency and encourage companies to obtain low
cost equity financing, which would result in
increased turnover and trade volumes.


56. All Croatian workers under age 40 are required
to pay five percent of their gross salary into a
pension fund of their choice. EU Pillar III
(additional voluntary savings with government
matching of 25%) has also been introduced. Croatian
financial markets are benefiting from this infusion
of capital.


57. Transactions on the Zagreb Stock Exchange in
2005 were 34.2 billion HRK (approximately $6.1
billion),of which 25 billion HRK (approximately
$4.5 billion) was in institutional turnover. As of
December 2006, transactions totaled 45.3 billion HRK
(approximately $8.1 billion) of which 29.4 billion
HRK (approximately $5.3 billion) was institutional
turnover. In 2005, transactions on the Varazdin
Stock Exchange totaled 2.2 billion HRK
(approximately $390 million) andin 2006transactions
totaled 3.7 billion HRK (approximately $660
million).


58. There are three tiers of securities traded on
the ZSE. Companies must meet high disclosure and
operating requirements to be fully listed (quotation
I). A detailed explanation of all requirements is
provided at www.zse.hr in English.


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


A.10 Political Violence


60. Political violence is low in Croatia. In late
1995, the conclusion of the Erdut Agreement and the
Dayton Peace Accords ended the wars on Croatian
territory that followed the break-up of Yugoslavia.
In May 2002, Croatia was accepted into NATO's
Membership Action Plan, underscoring the improved
relationship between Croatia and the international
community. Full NATO membership for Croatia is
likely before the end of the decade. In October
2005, the European Union began accession
negotiations with Croatia in order to prepare
Croatia for membership. Relations with neighbors

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have improved steadily in the last few years, and
minority parties are represented in the current
ruling coalition.


61. There is little domestic anti-American
sentiment. There have been no incidents involving
politically motivated damage to American projects
and/or installations in Croatia.


A.11.a Corruption


62. Although Croatia is not a uniquely corrupt
country, corruption is still a problem and is
perceived to be widespread. In the 2006 Corruption
Perception Index survey compiled by Transparency
International (TI),an international watchdog
organization for corruption, Croatia received an
index score of 3.4 out of 10 (ten being "highly
clean"),remaining unchanged from 2005.


63. In March 2006, the government presented its
National Strategy for Battling Corruption and
Organized Crime (Strategy) that proposed to overhaul
the judicial system, health system, local
government, political party financing, public
administration, and the economy. Most observers
consider that corruption is a problem of opportunity
and that continued reforms of the bureaucracy and
judiciary, combined with pressure from the
international business community and the EU will
result in greater transparency and accountability.
While Croatia has undertaken the guidelines set by
the Strategy, the European Commission, in its
"Croatia 2006 Progress Report," issued November
2006, stated that corruption and a flawed judicial
system were still the greatest problems the country
faced.


64. Croatia has ratified the Council of Europe
Criminal Law Convention on Corruption, the Council
of Europe Civil Law Convention on Corruption, the
United Nations Convention Against Transnational
Organized Crime and the United Nations Convention
Against Corruption.


65. Croatia is a member of GRECO (the Group of
States Against Corruption),a peer monitoring
organization that allows members to assess
anticorruption efforts on a continuing basis. An
evaluation of Croatia including suggestions and
opinions on CroatiaQs progress in its fight against
corruption, can be found on GRECOQs website
(www.greco.coe.int).


66. The Office for the Prevention of Corruption and
Organized Crime (USKOK)is currently staffed by 36
employees (doubled from 2005) and participates in
joint task forces with the Ministry of Finance and
Police. In 2006, a couple of high profile cases of
alleged corruption came under investigation, but
none have yet resulted in conviction. In order to
secure success of the Strategy (see paragraph 66),
the government will have to enforce cooperation
between Ministries and ensure financial as well as
human resources. The U.S. and EU are working with
Croatian authorities to build capacity to fight
organized crime and corruption.


A.11.b Bilateral Investment Agreements


67. Croatia does not have a foreign investment law;
foreigners receive national treatment under existing
legislation. In addition, investments by American
citizens are covered by the U.S. Croatian Bilateral
Investment Treaty (BIT),which entered into force in
June 2001. The treaty fulfills the principal U.S.
objectives for agreements of this type:

-- All forms of U.S. investment in the territory of
Croatia are covered;

-- Covered investments receive the better of
national treatment or most-favored-nation (MFN)
treatment, both while they are being established and

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thereafter, subject to certain specified exceptions;

-- Specified performance requirements may not be
imposed upon or enforced against covered
investments;

-- Expropriation is permitted only in accordance
with customary international law standards;

-- Parties are obligated to permit the transfer, in
a freely usable currency, of all funds related to a
covered investment, subject to exceptions for
specified purposes;

-- Investment disputes with the host government may
be brought by investors, or by their covered
investments, to binding international arbitration as
an alternative to domestic courts.


68. For further information about BITs and for the
text of the U.S.-Croatian BIT please see
www.mac.doc.gov/Tcc/e-guides/eg_bits (under
"Croatia").


69. Croatia has signed investment protection
treaties/agreements with the following countries,
however, not all have entered into force:

Albania, Argentina, Austria, Belgium, Belarus**,
Bulgaria, Bosnia and Herzegovina, Czech Republic*,
Chile, Denmark, Egypt, Finland, France, Greece,
Germany, India, Indonesia**, Iran*, Italy, Israel*,
Jordan, Kuwait, Cambodia, Canada, Qatar*, China*,
Cuba**, Latvia**, Libya**, Hungary, Macedonia*,
Malaysia*, Malta, Republic of Moldova**,
Netherlands, Oman**, Poland, Portugal, Romania,
Russia*, United States, Serbia Montenegro, Slovakia,
Slovenia**, Spain, Sweden, Switzerland*, Thailand*,
Turkey, United Kingdom, Ukraine, Zimbabwe*.
(* = ratified, but not in force) (** = not
ratified or in force)


A.11.c OPIC and Other Investment Insurance Programs


70. Croatia is eligible for coverage from the U.S.
Overseas Private Investment Corporation (OPIC). For
more information on OPIC's insurance activities, see
www.opic.gov. The OPIC-supported $200 million
Bedminster Investment Capital Management Fund
invested in the Croatian banking sector (as part of
the consortium that purchased Dubrovacka Banka) and
the Croatian communications sector (by investing in
Digital City Media, a broadband cable TV network in
Croatia). Bedminster Capital Management also
manages an OPIC-supported private equity fund --
Southeast Europe Private Equity II -- which targets
investments in Croatia, among other countries.
Croatia is a member country of the Multilateral
Investment Guarantee Agency (MIGA),for more
information see www.miga.org.


71. In the event that OPIC should pay an
inconvertibility claim under its political risk
coverage, the local currency accepted by OPIC in any
subsequent recovery would be made available to the
Embassy on a priority basis for U.S. Government
expenses. The estimated annual U.S. dollar value of
local currency used by the Embassy is approximately
$13.5 million. The Embassy currently purchases
local currency from a local commercial bank at the
market rate. A major devaluation is unlikely.


A.11.d Labor


72. Croatia has an educated, highly-skilled, and
relatively high cost labor force compared with the
region. In general, employerQs wage costs are
approximately 110% of an employeeQs net wage. The
estimated average cost to employers in Croatia was
7,713 HRK (approximately $1,377) per month as of
October 2006. The average net wage at the end of
the third quarter of 2006 was 4,585 HRK ($818).
Minimum wage, as determined by the government, is
2100 HRK gross ($375) monthly, net is between 1400-

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1500 HRK ($250-$267) depending upon exemptions. The
Croatian government controls wage levels in
government agencies/institutions and in the
remaining state-owned enterprises, affecting around
half of all workers. The wages in privately owned
companies are freely determined by contracts between
employer and employee.


73. Croatia adopted new labor laws in mid-2003
aimed at increasing labor market flexibility by
shortening the mandatory notification period before
dismissal and reducing generous severance package
requirements. However, Croatia still fares badly in
terms of time and expense in hiring and firing
employees. Labor has generally been supportive of
government efforts to boost competitiveness and
welcomes foreign investment but remains concerned
about any possible cuts in social spending.


74. The Law on Labor regulates employee and
employer relations through "employment contracts."
Fulltime employment must not amount to more than 40
hours per week and employees are entitled to at
least 18 working days of paid annual leave and seven
days of personal leave. The Law on Labor also
provides special protections for workers in
dangerous occupations, work at night, and work by
minors between the ages of 15 and 18.


75. Article 87 of the Law on Foreigners covers the
issuance of work permits. While there are quotas
(determined annually) for work permits, there are no
quotas for foreigners who execute key positions in
companies or representative offices. Likewise,
there are no quotas for business visas.


76. Workers are entitled by law to form or join
unions of their own choosing, and workers exercised
this right in practice. In general, unions were
independent of the government and political parties.
The Labor Code prohibits anti-union discrimination
and expressly allows unions to challenge firings in
court; however, in general, attempts to seek redress
through the legal system were seriously hampered by
the inefficiency of the court system.


A.11.e Foreign Trade Zones/Free Ports


77. Croatia has several Free Trade Zones (FTZs),
some in war-affected areas. Special incentives are
offered to users of FTZs.


78. The Law on Free Trade Zones allows a foreign-
owned or domestic company in FTZs to engage in
manufacturing, wholesale but not retail trade,
foreign trade, banking and other financial
activities. The Law on Profit Tax also covers
business in FTZs. FTZ users are eligible for tariff
waivers on imported products. FTZ users who
construct or participate in construction of
infrastructure projects worth 1 million HRK (about
$178,000) or more in the zone, are exempted from
paying corporate tax during the first five years of
operation in the zone. Other users in the zone pay
corporate tax in the amount of 50% of the regular
rate (i.e., 10% instead of 20%).


79. FTZs are exempted from any Croatian emergency
measures or other restrictions pertaining to foreign
trade or hard currency transactions. Users of the
zones may freely store their goods and production
equipment in the zones. Goods that are not intended
for trade on the Croatian market or for domestic
consumption are fully exempt from custom duties or
taxes. Imported goods will be taxed and assessed
duties per the value of the production materials
imported for the product and not per the value of
the finished product.


80. The following fifteen counties currently have
FTZS: Buje, Krapina-Zagorje, Osijek, Rijeka,
Slavonski Brod, Split, Splitsko-Dalmatinska County,
Obrovac, Ploce, Pula, Kukuljanovo, Varazdin, Zagreb,
Vukovar, and Ribnik counties. As mentioned
previously, EU accession will force the Government

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to make changes in the free trade zone system and
the incentives system associated with them.


A.11.f Foreign Direct Investment Statistics


81. Compared to other advanced transitional
economies in the region, Croatia is in the middle
group in terms of foreign direct investment (FDI).
New or green-field investments have seen
particularly slow growth. According to the Trade and
Investment Promotion Agency, there were 18 foreign
investment projects initiated this year.
Privatization of strategic government-owned assets
has been the main source of FDI since Croatian
independence. Large state assets such as utilities,
the state insurance company and banks, are being
sold by the government, usually through
international tenders, and in some cases, with
specific laws regulating the sale of each enterprise
(e.g., the oil company and the electric company).
The Croatian Privatization Fund, the agency
responsible for the sale of other assets, has shares
and stock in 1012 (mostly non-performing) companies.
These include hotels, integrated agricultural
companies, an aluminum plant, two steel plants,
shipyards and other companies. The state's share of
the equity base value of these companies is about
11.524 billion HRK ($2.06 billion). Information
regarding the Croatian Privatization Fund, including
information on companies currently for sale, can be
found on its website, www.hfp.hr.


82. In November 2006, the GoC as part of its
privatization efforts, offered to the public first
rights for 15 per cent of their INA holdings.
Individual purchase was limited to 38,000 HRK
($6,785) and included the offer of one free share
for every ten retained for at least a year. 44,271
citizen participated in this unprecedented offer and
purchased shares at the cost of 1,690 HRK ($301)
each.


83. Foreign Direct Investment between 1993 and the
third quarter of 2006 totaled $13.15 billion, with
investments in the financial and telecommunications
sectors accounting for 40% of the total. FDI in
Croatia has shown steady growth in recent years.


84. Austria is the largest source of foreign
investment in Croatia, accounting for 22% of total
FDI since 1993. Germany is second with 16% of total
FDI, followed by France with 8.8% and the United
Stateswith 8.6%. Croatian firms invested $1.8
billion abroad between 1993 and the third quarter of

2006. The leading destinations for Croatian
investment were Switzerland, Bosnia and Herzegovina,
and Serbia and Montenegro. In the first three
quarters of 2006, Croatians invested $98million
abroad: approximately 38% in Switzerland, 16% in
Bosnia-Hercegovina, 15% in Serbia and Montenegro and
8% in Poland.


85. The Croatian National Bank provides information
about foreign investments in aggregate form which
can be found on their website at www.hnb.hr. The
following is a list of some of the major ($20
million and above) foreign investments in Croatia to
date:

Foreign investor: Barr Pharmaceuticals
Sector: pharmaceuticals
Croatian company: Pliva
Value $2.3 billion

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

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

Banca Commerciale Italiana (Italy)

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Banking/financial services
Privredna Banka (66.66% of shares in 1999 plus 10%
in 2002)
Value: $300 million + approximately $50 million,
according to media reports

Unicredito Italiano (Italy)
Banking/financial services
Zagrebacka Banka (96% ownership)
Value: $230 million (estimate)

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

Austria Creditanstalt Group (HVB Group) (Austria)
Banking/financial services
Splitska Banka (88% ownership)
Value: $132 million

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

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

Ericsson (Sweden)
Telecommunications
Tesla Company
$48 million

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

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

Interbrew (Belgium)
Brewery
Zagrebacka Pivovara company
$27 million

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

BRADTKE