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Viewing cable 08ZAGREB49, CROATIA 2008 INVESTMENT CLIMATE STATEMENT (PART II)

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Reference ID Created Released Classification Origin
08ZAGREB49 2008-01-24 14:06 2011-08-25 00:00 UNCLASSIFIED Embassy Zagreb
VZCZCXRO0299
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVB #0049/01 0241406
ZNR UUUUU ZZH
R 241406Z JAN 08
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 8499
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPCIM/CIMS NTDB WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
UNCLAS SECTION 01 OF 07 ZAGREB 000049 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS TO EB/IFD/OIA 
USTR 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC KTDB USTR HR
SUBJECT: CROATIA 2008 INVESTMENT CLIMATE STATEMENT (PART II) 
 
REF: STATE 158802 
 
This is Part II of Croatia's 2008 Investment Climate Statement.  The 
numbering of paragraphs continues from Part I. 
 
A.8  Transparency of the Regulatory System 
 
42.  Croatia is under pressure to increase transparency and its 
commitments to adopt EU laws, norms, and practices, provide steady 
pressure for reform.  Nevertheless, bureaucracy and regulation 
continue to be overly-complex and time-consuming. 
 
43.  In 2006, the Croatian government, with the assistance of USAID, 
began the Hitrorez project, which has as its goal the elimination of 
thousands of laws and regulations that affect business in Croatia. 
The goal of the project is remove needlessly complex bureaucracy as 
an obstacle to investment. At the end of its first phase in 
mid-2007, Hitrorez identified 599 regulations for simplification or 
elimination.  As of September 2007, 123 Hitrorez recommendations had 
been implemented, with plans to implement another 158 
recommendations by February 2008. 
 
44.  New legislation on public procurement, accounting and financial 
security was passed in 2007 with the intent to increase 
transparency. An amended Company Law is expected in April 2008. The 
new procurement law provides for greater transparency with the 
introduction of electronic auctions, definitions of special 
procurement procedures and framework agreements, as well as 
publication of all procurement procedures over 70,000 HRK ($14,000). 
The new Accounting Law includes reporting provisions according to 
which large companies will apply International Financial Reporting 
Standards, while small and medium businesses will apply Croatian 
Financial Reporting Standards. Progress, however, is still necessary 
in this area. 
 
45.  Bureaucracy is still a major challenge for foreign investors, 
although the government has made progress in this area, particularly 
through the development of its e-government initiatives (see 
paragraph 34).  Property registration, for example, has 
traditionally been notoriously inefficient, sometimes taking up to 
several years.  However, recent reforms and the digitization of the 
land registers are hopeful signs that this problem will be mitigated 
in the near future (see paragraph 34).  A valuable source of 
analysis is located on the website of the Croatian office of the 
World Bank, at www.worldbank.hr.  Click on the link for the "Doing 
Business in Croatia Forum." 
 
46. The regulatory system does not specifically discriminate against 
foreign investors.  However, transparency in developing legislation 
and regulation is often hampered by an inefficient public 
administration, a lack of intra-governmental coordination, and 
reliance on expert advice from national champions, sometimes giving 
the latter a privileged position in influencing new regulations. 
 
47.  Tax on corporate income is a flat 20%.  There is a 15% tax on 
interest revenue and royalties.   In 2005, tax on dividends was 
eliminated as a spur to investment.  For a detailed description of 
extant tax legislation, please consult the Tax Administration's 
website at www.pu.mfin.hr/en.  Detailed information about customs 
can be found at www.carina.hr. 
 
48.  The Institute of Public Finance maintains a useful table of 
Croatian taxes at www.ijf.hr/eng/taxguide/08_05/taxtable.pdf, and 
the Ministry of Finance maintains information at www.pu.mfin.hr/en. 
Croatia also maintains a 22 percent value-added tax (VAT).  Some 
companies have had difficulty with the tax authorities due to 
differing understandings of how certain goods and services are 
affected by the VAT. 
 
 
A.9  Efficient Capital Markets and Portfolio Investments 
 
49.  Croatia's markets are open to both domestic and foreign 
investment equally.  There are no restrictions that would disrupt 
foreign investment in the securities market and other markets in 
Croatia.  Foreign residents may open non-resident accounts and may 
do business both domestically and abroad.  Article 24 of the Foreign 
Currency act states that non-residents may subscribe, pay in, 
purchase or sell securities in the Republic of Croatia in accordance 
with regulations governing securities transactions.  Non-residents 
and residents are afforded the same treatment in spending and 
borrowing.  These and other non-resident financial activities 
regarding securities are covered by Articles 24, 25 and 27 of the 
Foreign Currency Act, which can be viewed on the Central Bank 
website (www.hnb.hr). 
 
50.  Croatia's capital markets grew strongly in 2007.  The ZSE saw 
 
ZAGREB 00000049  002 OF 007 
 
 
record trading in 2007, which nearly doubled to 22 billion HRK ($4.4 
billion) from 2006. According to the Central Depository Agency 
records, approximately 840,000 Croatian citizens now own stocks. 
 
51.  In 2006, the amended Investment Fund Law went into force, which 
provides for the establishment of derivative funds, index funds and 
other funds in accordance with EU legislation. 
 
52.  The Agency for Supervision of Financial Services (HANFA), 
headed by the Directorate for Supervision of Agencies oversees the 
capital market in Croatia. See www.hanfa.hr for all legislation and 
information relative to capital markets. 
 
53.  The privatized and consolidated banking sector is advanced and 
is becoming more competitive.  More than 90% of the total assets of 
the banking sector are foreign owned.  By the 2nd quarter of 2007, 
there were 33 commercial banks and five savings banks, whose assets 
totaled 325.2 billion HRK ($65 billion).  Austrian-owned Zagrebacka 
Bank (23.05%) and Privredna Bank (17.26%) are the two largest banks 
per percentage of total bank assets in Croatia. 
 
54.  The government uses the market to finance government 
expenditure.  Government debt instruments must be bought through an 
intermediary such as a commercial bank, and are tradable on 
exchanges. 
 
55.  Currently, securities are traded on the Zagreb Stock Exchange 
(ZSE), established in 1991. The Varazdin Stock Exchange (VSE), which 
was established in 1993 as an over-the-counter (OTC) merged into the 
ZSE in 2007. The OMX X-Stream trading system is now used on the ZSE. 
 
 
56.  The Securities Law requires that all companies with more than 
100 shareholders and with share capital of at least HRK 30 million 
(approximately $5.4 million) list on the newly established quotation 
for public stock companies (JDD).  The intention was to increase 
transparency and encourage companies to obtain low cost equity 
financing, which would result in increased turnover and trade 
volumes. 
 
57.  All Croatian workers under age 40 are required to pay five 
percent of their gross salary into a pension fund of their choice. 
EU Pillar III (additional voluntary savings with government matching 
of 25%) has also been introduced.  Croatian financial markets are 
benefiting from this infusion of capital. 
 
58.  Transactions on the Zagreb Stock Exchange in 2007 were 66.49 
billion HRK (approximately $13.34 billion), of which 39.05 billion 
HRK (approximately $7.83 billion) was in institutional turnover.  In 
2006, transactions totaled 49.06 billion HRK (approximately $8.79 
billion) of which 29.39billion HRK (approximately $5.27billion) was 
institutional turnover 
 
59.  There are three tiers of securities traded on the ZSE. 
Companies must meet high disclosure and operating requirements to be 
fully listed (quotation I).  A detailed explanation of all 
requirements is provided at www.zse.hr in English. 
 
60.  The Croatian Chamber of Economy provides a useful summary of 
the capital markets in Croatia at: www.hgk.hr. 
 
 
A.10  Political Violence 
 
61.  The risk of political violence in Croatia is low.  Following 
the break up of Yugoslavia and the subsequent wars in the region, 
Croatia has emerged as a stable, democratic country on the threshold 
of NATO membership.  Membership in the European Union is also likely 
in the coming years.  Relations with neighboring countries are 
generally good and improving, although some disagreements regarding 
border demarcation remain. 
 
62.  There is little domestic anti-American sentiment.  There have 
been no incidents involving politically motivated damage to American 
projects and/or installations in Croatia. 
 
 
A.11.a  Corruption 
 
63. Corruption remains a problem in Croatia.  The EU highlighted 
corruption as a major challenge in its November 2007 progress report 
on Croatia's accession negotiations and citizens continue to cite 
corruption as one of the most important problems plaguing their 
society. 
 
64.  Croatia has ratified the Council of Europe Criminal Law 
Convention on Corruption, the Council of Europe Civil Law Convention 
 
ZAGREB 00000049  003 OF 007 
 
 
on Corruption, the United Nations Convention Against Transnational 
Organized Crime and the United Nations Convention Against 
Corruption. 
 
65.  Croatia is also a member of GRECO (the Group of States Against 
Corruption), a peer monitoring organization that allows members to 
assess anticorruption efforts on a continuing basis.  An evaluation 
of Croatia including suggestions and opinions on Croatia's progress 
in its fight against corruption, can be found on GRECO's website 
(www.greco.coe.int). 
 
66.  The Office for the Prevention of Corruption and Organized Crime 
(USKOK, which is the agency responsible for battling corruption, is 
currently staffed by 36 employees and participates in joint task 
forces with the Ministry of Finance and Police. In June 2007, USKOK 
was the lead in the largest anticorruption action to date. Seven 
persons employed by the Croatian Privatization Fund were arrested on 
allegations that they accepted bribes and sold state-owned companies 
without legal bids. The investigation into the case was still 
underway at year's end. In December 2007, another USKOK operation, 
this time in the Zagreb land registry, led to charges of bribery and 
corruption against 26 suspects. The investigation is on-going. 
There were other cases of alleged corruption involving city 
officials and businessmen, but none have yet resulted in 
conviction. 
 
 
A.11.b  Bilateral Investment Agreements 
 
67.  Croatia does not have a foreign investment law; foreigners 
receive national treatment under existing legislation.  In addition, 
investments by American citizens are covered by the U.S. Croatian 
Bilateral Investment Treaty (BIT), which entered into force in June 
2001.  The treaty fulfills the principal U.S. objectives for 
agreements of this type: 
 
--  All forms of U.S. investment in the territory of Croatia are 
covered; 
 
--  Covered investments receive the better of national treatment or 
most-favored-nation (MFN) treatment, both while they are being 
established and thereafter, subject to certain specified 
exceptions; 
 
--  Specified performance requirements may not be imposed upon or 
enforced against covered investments; 
 
--  Expropriation is permitted only in accordance with customary 
international law standards; 
 
--  Parties are obligated to permit the transfer, in a freely usable 
currency, of all funds related to a covered investment, subject to 
exceptions for specified purposes; 
 
--  Investment disputes with the host government may be brought by 
investors, or by their covered investments, to binding international 
arbitration as an alternative to domestic courts. 
 
68.  For further information about BITs and for the text of the 
U.S.-Croatian BIT please see www.mac.doc.gov/Tcc/e-guides/eg_bits 
(under "Croatia"). 
 
69.  Croatia has signed investment protection treaties/agreements 
with the following countries, however, not all have entered into 
force: 
 
Albania, Argentina, Austria, Belgium, Belarus**, Bulgaria, Bosnia 
and Herzegovina, Czech Republic, Chile, Denmark, Egypt, Finland, 
France, Greece, Germany, India, Indonesia**, Iran, Italy, Israel, 
Jordan, Kuwait, Cambodia, Canada, Qatar*, China*, Cuba**, Latvia, 
Libya, Hungary, Macedonia, Malaysia*, Malta, Republic of Moldova**, 
Netherlands, Oman**, Poland, Portugal, Romania, Russia*, United 
States, Serbia Montenegro, Slovakia, Slovenia**, Spain, Sweden, 
Switzerland*, Thailand*, Turkey, United Kingdom, Ukraine, 
Zimbabwe*. 
(* = ratified, but not in force)   (** = not ratified or in force) 
 
 
A.11.c  OPIC and Other Investment Insurance Programs 
 
70.  Croatia is eligible for coverage from the U.S. Overseas Private 
Investment Corporation (OPIC).  For more information on OPIC's 
insurance activities, see www.opic.gov.  The OPIC-supported $200 
million Bedminster Investment Capital Management Fund invested in 
the Croatian banking sector (as part of the consortium that 
purchased Dubrovacka Banka) and the Croatian communications sector 
(by investing in Digital City Media, a broadband cable TV network in 
 
ZAGREB 00000049  004 OF 007 
 
 
Croatia).  Bedminster Capital Management also manages an 
OPIC-supported private equity fund -- Southeast Europe Private 
Equity II -- which targets investments in Croatia, among other 
countries.   Croatia is a member country of the Multilateral 
Investment Guarantee Agency (MIGA), for more information see 
www.miga.org. In 2004, OPIC provided $250 million in political risk 
insurance to support financing for the construction of a motorway in 
Croatia that will do much to improve the country's infrastructure, 
reduce transportation costs, and develop the tourism potential of 
the Dalmatian coast. OPIC provided the insurance to Private Export 
Funding Corporation (PEFCO) to support PEFCO's financing to Croation 
Motorways Ltd. for construction of a portion of the Zagreb-Split 
Motorway, consisting of a tolled four-lane highway connecting 
Bregana and Zagreb, and Bosiljevo with Sveti Rok. 
 
71.  In the event that OPIC should pay an inconvertibility claim 
under its political risk coverage, the local currency accepted by 
OPIC in any subsequent recovery would be made available to the 
Embassy on a priority basis for U.S. Government expenses.  The 
estimated annual U.S. dollar value of local currency used by the 
Embassy is approximately $16 million.  The Embassy currently 
purchases local currency from a local commercial bank at the market 
rate.  A major devaluation is considered unlikely. 
 
 
A.11.d  Labor 
 
72.  Croatia has an educated, highly-skilled, and relatively high 
cost labor force compared with the region.  In general, employer's 
wage costs are approximately 110% of an employee's net wage. The 
estimated average cost to employers in Croatia was 7,096 HRK 
(approximately $1,419) per month as of October 2007.  The average 
net wage at the end of the third quarter of 2007 was 4,579 HRK 
($915). Minimum wage, as determined by the government, is 2100 HRK 
gross ($420) monthly, net is between 1400-1500 HRK ($280-$300) 
depending upon exemptions. The Croatian government controls wage 
levels in government agencies/institutions and in the remaining 
state-owned enterprises, affecting around half of all workers.  The 
wages in privately owned companies are freely determined by 
contracts between employer and employee. 
 
73.  Croatia adopted new labor laws in mid-2003 aimed at increasing 
labor market flexibility by shortening the mandatory notification 
period before dismissal and reducing generous severance package 
requirements.  However, Croatia still fares badly in terms of time 
and expense in hiring and firing employees.  Labor has generally 
been supportive of government efforts to boost competitiveness and 
welcomes foreign investment, but remains concerned about any 
possible cuts in social spending. 
 
74.  The Law on Labor regulates employee and employer relations 
through "employment contracts."  Fulltime employment must not amount 
to more than 40 hours per week and employees are entitled to at 
least 18 working days of paid annual leave and seven days of 
personal leave. The Law on Labor also provides special protections 
for workers in dangerous occupations, work at night, and work by 
minors between the ages of 15 and 18. 
 
75.  Chapter 7 of the Law on Foreigners covers the issuance of work 
permits.  While there are quotas (determined annually) for work 
permits, there are no quotas for foreigners who execute key 
positions in companies or representative offices. Likewise, there 
are no quotas for business visas. 
 
76.  Workers are entitled by law to form or join unions of their own 
choosing, and workers exercised this right in practice.  In general, 
unions were independent of the government and political parties. 
The Labor Code prohibits anti-union discrimination and expressly 
allows unions to challenge firings in court; however, in general, 
attempts to seek redress through the legal system were seriously 
hampered by the inefficiency of the court system. 
 
 
A.11.e  Foreign Trade Zones/Free Ports 
 
77.  Croatia has several Free Trade Zones (FTZs), some in 
war-affected areas.  Special incentives are offered to users of 
FTZs. 
 
78.  The Law on Free Trade Zones allows a foreign-owned or domestic 
company in FTZs to engage in manufacturing, wholesale but not retail 
trade, foreign trade, banking and other financial activities.  The 
Law on Profit Tax also covers business in FTZs.  FTZ users are 
eligible for tariff waivers on imported products. FTZ users who 
construct or participate in construction of infrastructure projects 
worth 1 million HRK (about $178,000) or more in the zone, are 
exempted from paying corporate tax during the first five years of 
 
ZAGREB 00000049  005 OF 007 
 
 
operation in the zone.  Other users in the zone pay corporate tax in 
the amount of 50% of the regular rate (i.e., 10% instead of 20%). 
 
79.  FTZs are exempted from any Croatian emergency measures or other 
restrictions pertaining to foreign trade or hard currency 
transactions.  Users of the zones may freely store their goods and 
production equipment in the zones.  Goods that are not intended for 
trade on the Croatian market or for domestic consumption are fully 
exempt from custom duties or taxes.  Imported goods will be taxed 
and assessed duties per the value of the production materials 
imported for the product and not per the value of the finished 
product. 
 
80.  The following fifteen counties currently have FTZS: Buje, 
Krapina-Zagorje, Osijek, Rijeka, Slavonski Brod, Split, 
Splitsko-Dalmatinska County, Obrovac, Ploce, Pula, Kukuljanovo, 
Varazdin, Zagreb, Vukovar, and Ribnik counties.  As mentioned 
previously, EU accession will force the Government to make changes 
in the free trade zone system and the incentives system associated 
with them. 
 
 
A.11.f  Foreign Direct Investment Statistics 
 
81.  Compared to other advanced transitional economies in the 
region, Croatia is in the middle group in terms of foreign direct 
investment (FDI).  New or green-field investments have seen 
particularly slow growth. According to the Trade and Investment 
Promotion Agency, there were 2 large-scale foreign investment 
projects initiated this year, Rockwool and Applied Ceramics (see 
list below paragraph 85).  Privatization of strategic 
government-owned assets has been the main source of FDI since 
Croatian independence.  Large state assets such as utilities, the 
state insurance company and banks, are being sold by the government, 
usually through international tenders, and in some cases, through 
initial public offerings (IPOs), as was the case recently with the 
state oil company INA and the national telecom HT. The Croatian 
Privatization Fund, the agency responsible for the sale of other 
assets, has shares and stock in 1112 (mostly non-performing) 
companies.  The state's share of the equity base value of these 
companies is about 21.8 billion HRK ($4.36 billion).  Information 
regarding the Croatian Privatization Fund, including information on 
companies currently for sale, can be found on its website, 
www.hfp.hr. 
 
82. In October 2007, the Croatian government, as part of its 
privatization efforts, offered to the public first rights for 
purchase of its 32,5 per cent stake in Croatia Telecom (Germany's 
Deutsche Telekom is the majority shareholder),  of which 25 per cent 
were reserved as priority for Croatian citizens. Individual purchase 
was limited to 16.695,00 HRK ($ 3,227.20) and included the offer of 
one free share for every ten retained for at least a year. 358.406 
citizens participated in this offer and purchased shares at the cost 
of 265,00 HRK ($70.56) each. 
 
83.  Foreign Direct Investment between 1993 and the third quarter of 
2007 totaled $24.3 billion, with investments in the financial, 
chemical and telecommunications sector accounting for 58% of total 
investment. Croatian firms invested $3.9 billion abroad between 1993 
and the third quarter of 2007. FDI in Croatia has shown steady 
growth in recent years. It is estimated that FDI for the first 3 
quarters of 2007 amounted to 9.7% of GDP. FDI per capita is 
estimated at $1700. 
 
84.  According to official statistics from the Croatian National 
Bank, Austria is the largest source of foreign investment in 
Croatia, accounting for 27% of total FDI since 1993.  The 
Netherlands is second with 17% of total FDI, followed by Germany 
with 14% and France with 8%. Because transactions are often executed 
through third countries and the Croatian National Bank records 
country of origin of the final transaction leading to the 
investment, in many cases, this results misleading statistics. The 
U.S. Embassy Zagreb estimates that the actual amount of U.S. 
investment in Croatia is approximately $ 2.5 billion, making the 
U.S. one of the leading investors.  The leading destinations for 
total Croatian investment, from 1993 to third quarter 2007, were 
Serbia and Bosnia Hercegovina with 18% each, the Netherlands with 
16% and Hungary with 14%.  In the first three quarters of 2007, 
Croatians invested $300 million abroad.  Hungary was the lead 
destination for 2007 accounting for 40% of investment, with 30% in 
the Netherlands, and 7 % each in Serbia and Bosnia Hercegovina. 
 
85.  The Croatian National Bank provides information about foreign 
investments in aggregate form which can be found on their website at 
www.hnb.hr.  The following is a list of some of the major ($20 
million and above) foreign investments in Croatia to date: 
 
 
ZAGREB 00000049  006 OF 007 
 
 
 
Foreign investor: Barr Pharmaceuticals (U.S) 
Pharmaceuticals 
Croatian company: Pliva 
Value $2.3 billion 
 
Foreign investor:  Deutsche Telekom (Germany) 
Telecommunications 
Croatian Company:  Croatian Telecom (51% of shares) 
Value:  $1.272 billion 
 
Foreign investor: MOL (Hungary) 
Oil Industry 
Croatian Company: INA d.d. (26% of shares) 
Value: $505 million 
 
Foreign investor: Lactalis (France) 
Dairy 
Croatian company: Dukat 
Value $400 million 
 
Foreign investor: Banca Commerciale Italiana (Italy) 
Banking/financial services 
Privredna Banka (66.66% of shares in 1999 plus 10% 
in 2002) 
Value:  $300 million + approximately $50 million, according to media 
reports 
 
Foreign investor: Unicredito Italiano (Italy) 
TAKEN OVER BY BANK AUSTRIA IN 2007 
Banking/financial services 
Zagrebacka Banka (96% ownership) 
Value:  $230 million (estimate) 
 
Foreign investor: Erste und Steiermarkische Bank (Austria) 
Banking/financial services 
Rijecka Banka (85% share) 
Value:  $155 million 
 
Foreign investor: Austria Creditanstalt Group (HVB Group) (Austria) 
TAKEN OVER BY SOCIETE GENERAL IN 2006 
Banking/financial services 
Splitska Banka (88% ownership) 
Value:  $132 million 
 
Foreign investor: Heineken N.V. (Netherlands) 
Brewery 
Karlovacka Pivovara company (94.42%) 
Value:  $125 million 
 
Foreign investor: Rockwool Group (Denmark) 
Stone wool producers 
Value $110 million 
 
Foreign investor: Sutivan Investment and Excelsa Anstalt 
(Lichtenstein) 
Hotels and tourism 
Plava Laguna (81.5%) 
Value: $70 million 
 
Foreign investor: CMC (U.S / Switzerland) 
Steel 
Croatian company: Sisak Steel Company 
Value $52 million 
 
Foreign investor: Ericsson (Sweden) 
Telecommunications 
Tesla Company 
$48 million 
 
Foreign investor: Hofmann and Pankl Betelligungasse (Austria) 
Minerals processing 
Straza Company 
$39 million 
 
Foreign investor: Societe Suisse de Cemment Portland (Switzerland) 
Cement 
Tvornica Cementa Koromacno company 
$38 million 
 
Foreign investor: Applied Ceramics (U.S) 
Ceramics 
Value $30 million 
 
Foreign investor: Interbrew (Belgium) 
Brewery 
Zagrebacka Pivovara company 
 
ZAGREB 00000049  007 OF 007 
 
 
$27 million 
 
Foreign investor: Coca Cola Amatil (Australia) 
Non-alcoholic beverages 
Croatian company:  n/a 
$20 million 
 
BRADTKE