Chapter 4. Croatia’s regulatory framework for investment and national treatment
This chapter provides an overview of the regulatory framework for starting and expanding a business in Croatia and reviews existing regulatory restrictions to foreign direct investment. It looks at the conditions Croatia imposes on the entry of foreign investors and the extent it provides them national treatment once they are established. The chapter also benchmarks the openness to foreign investment, an area where Croatia far exceeds many of its competitors.
Croatia has long acknowledged the long-term benefits of an open and non-discriminatory international investment environment. Investment is a critical condition to spur growth and sustainable development. While domestic firms typically undertake the bulk of investments, international investors can sometimes bring important complementarities. Beyond bringing additional capital to a host economy, evidence suggests that foreign direct investment (FDI) can help to improve resource allocation and production capabilities, act as a conduit for the local diffusion of technological and managerial expertise, and provide improved access to international markets (Moran, Graham, and Blomström, 2005).
A country’s attractiveness to foreign direct investment (FDI) depends on a large range of determinants, some of which are exogenous to government control, such as geography and economic size. Unlike these, the openness to foreign investment is an area which governments can shape. Two policy areas have a direct bearing on an economy’s openness to FDI, namely the conditions it imposes on the entry of foreign investors and the extent to which they are discriminated once established. Both policies have been shown to be a significant determinant of the attractiveness of countries to FDI (Fournier, 2015; Mistura and Roulet, forthcoming; Nicoletti et al., 2003), and, consequently, of the potential effects foreign investments can have on the host economy (OECD, 2018; OECD, 2015). Partly due to their relevance in shaping the operating environment for international investors, market access conditions and the extent of discrimination against foreign-owned established investors typically lie at the heart of key international regulatory frameworks on investment.
At the OECD, these policies are, respectively, the objective of two internationally-recognised instruments, namely the Code of Liberalisation of Capital Movements1, and the National Treatment instrument (Box 4.1), which is part of the OECD Declaration on International Investment and Multinational Enterprises. Parties to these instruments are encouraged to uphold the principle of non-discrimination at entry (between residents and non-residents, and across the latter) and thereafter (between nationals and foreigners) as a way of creating an enabling environment for foreign direct investment, and to be transparent about any departures from such principle.
Any candidate for adherence to the Declaration is encouraged to voluntarily commit to providing national treatment to foreign investors in its territory – i.e. to treat enterprises operating on its territory, but controlled by the nationals of other adhering countries, no less favourably than domestic enterprises in like situations.2 It is also encouraged not to backtrack in relation to existing measures consisting exceptions to the national treatment. For transparency reasons, any candidate is also required to report a list of any existing exceptions to national treatment during the adherence process. Likewise, it is required to report other measures that may not constitute exceptions to national treatment, but that are important determinants of policies in the context of national treatment, such as measures on corporate organisation or related national security.
Drawing from the above frameworks, this chapter examines the openness of Croatia’s investment regime against these two sets of policies: barriers to entry and exceptions to national treatment. In view of Croatia’s application to adhere to the Declaration, this chapter also reports the list of exceptions to national treatment and measures reported for transparency notified by Croatia to the OECD. Lastly, it benchmarks the openness of Croatia’s FDI regulatory regime against OECD and various other emerging economies through the OECD FDI Regulatory Restrictiveness Index (Box 4.2).
National treatment is the commitment by an Adherent to the Declaration on International Investment and Multinational Enterprises to treat enterprises operating on its territory, but controlled by the nationals of another country, directly or indirectly, no less favourably than domestic enterprises in like circumstances.
The term "operating in its territory" in the instrument conveys the idea of doing business from a place of business in the host country, as distinct from conducting business in the country from abroad. This recognises that adhering countries' practices differ regarding recognised forms of business but that the main forms of doing business are through locally incorporated subsidiaries and branches. The principle of national treatment applies regardless of the home country's treatment of enterprises from the host country (OECD, 2005).
The National Treatment instrument consists of two elements: a declaration of principle, which forms part of the Declaration, and a procedural OECD Council Decision which obliges Adherents to notify their exceptions to national treatment and establishes follow-up procedures to deal with such exceptions. The Decision comprises an annex that lists exceptions to national treatment, as notified by each Adherent and accepted by the OECD Council. The Investment Committee periodically examines the exceptions. Only measures concerning legal entities are reported for the purpose of the National Treatment instrument, and thus any measure that may apply to natural persons is not reflected in the list contained in the annex to the Council’s decision. To ensure transparency, Adherents to the Declaration also undertake to report any measures that, while not representing exceptions to national treatment, have an impact on it. The lists of these exceptions and measures are published and regularly updated. There are featured in Annexes A and B to the present Review.
Croatia is open to foreign direct investment
Croatia is an open economy to foreign investment, and market participants benefit from high standards of protection. As discussed in greater detail in the next Chapter, the 1990 Constitution requires the state to ensure equal legal status to all entrepreneurs. It also assures that all rights acquired through the investment of capital cannot be restricted by law or any other legal act. Foreign investors are also guaranteed the right to free transfer and repatriation of profit and invested capital. In addition, there are no laws aimed particularly at foreign investors, which reduces the risk of inconsistent and discriminatory treatment between foreign and domestic investors.
The Companies Act, which regulates the establishment and operation of businesses in Croatia, provides for equal treatment between domestic and foreign-owned enterprises established in Croatia. Accordingly, a foreign investor may establish or participate in establishing a company and may acquire rights and/or commitments as for any domestic investor. Foreign investors, headquartered or with residence in a non-WTO member country, however, are subject to a reciprocity condition for engaging in business activities in Croatia directly or through a branch in the territory. Nonetheless, this condition can be circumvented by the incorporation of a company in Croatia. The establishment of a business entity by foreign investors is carried out as per regulations for domestic investors. The establishment of a subsidiary or branch office is made upon registration with the Croatian Commercial Court, while representative offices are registered with the Ministry of Economy, Entrepreneurship and Crafts.
As such, foreign investors are generally treated without discrimination. There is no general investment screening mechanism for inbound FDI, and there are only a few regulatory restrictions preventing the entry and participation of foreign investors in economic activities in Croatia. These measures are typically limited in scope. They mainly consist of conditions on the entry of foreign investors (e.g. local incorporation requirement and reciprocity condition for the establishment of a branch) in a few specific sectors, as well as foreign ownership restrictions in few other ones (e.g. in legal services, freshwater fisheries and air transport). They also apply almost exclusively to investors from outside the European Union or the European Economic Area (EU/EEA). According to the authorities, the acquis communautaire has been transposed into Croatia’s legal system, resulting in the elimination of most national-based restrictions on foreign investment in commercial sectors and most public sectors for nationals and legal entities incorporated in the European Union.
Investors from outside the EU/EEA and their branches in the territory of Croatia remain constrained in their ability to acquire real estate in Croatia, be it for business purposes or as real estate investments. They can acquire ownership rights over real property only on the condition of reciprocity and upon approval by the Minister of Justice. Otherwise, they may lease land on a long-term basis. There are, however, no impediments to the acquisition of real estate if carried out through an enterprise incorporated in Croatia, with the exception of agricultural land and properties located in areas legally declared as restricted to foreign investors in view of protecting the interests and safety of the Republic of Croatia. All these measures are discussed in further detail below.
The Index focuses on four types of measures: foreign equity restrictions, discriminatory foreign investment screening and approval requirements, restrictions on the employment of foreign key personnel, and other operational restrictions (such as limits on purchase of land or on repatriation of profits and capital). The extent of discrimination between foreign and domestic private investors is the central criterion to decide whether a measure should be scored. Nevertheless, non-discriminatory measures are also covered when they are considered more burdensome for foreign investors, such as rules regarding the nationality of board of directors. The Index covers 22 sectors, almost all sectors of the economy except health and education. The economy-wide index is obtained by averaging the scores for all 22 sectors.
Scores range from 0 (open) to 1 (closed). The scoring methodology is inspired by the seminal work of Hardin and Holmes (1997) based on expert judgement. Foreign equity restrictions are given a higher score, followed by discriminatory screening measures. Restrictions on foreign key personnel and other measures receive relatively lower scores. Scores reflect the sum of scores under each policy dimension, capped at one. For further details on the scoring methodology, please refer to Kalinova et al. (2010).
The Index is based on statutory measures as reflected in OECD instruments or identified in OECD Investment Policy Reviews and yearly monitoring reports. The use of country positions under the OECD Code of Liberalisation of Capital Movements and the OECD National Treatment instrument, as well as the comprehensive discussion of countries’ discriminatory measures undertaken in the Investment Policy Reviews ensure the appropriate identification of measures and allows for a great deal of consistency in their interpretation. The Index is updated on a yearly basis, based on the Secretariat’s monitoring of investment policy changes in all OECD members, G20 economies and adherent countries to the OECD Declaration on International Investment and Multinational Enterprise, which is undertaken in the context of Freedom of Investment Roundtable and is extended for the purposes of the Index to all countries covered. Adherents to the Declaration are also formally required to notify the OECD in case of changes to regulations affecting foreign investment, which facilitates keeping track of reforms for the purposes of the Index. This allows the Index to be used to track the progress of liberalisation over time.
Actual implementation of statutory restrictions, which is difficult to assess, is not factored into the scoring. Although important, other aspects of the regulatory framework, such as the nature of corporate governance, the extent of state ownership, and institutional or informal restrictions which may also impinge on the FDI climate, are not incorporated.
Source : Kalinova, Palerm and Thomsen (2010).
The openness of Croatia’s investment regime is attested by its position under the OECD FDI Regulatory Restrictiveness Index. The extent of discrimination against foreign investors observed in Croatia’s regulations is lower than for most of the 73 countries benchmarked under the Index (Figure 4.1). Croatia compares favourably against both the OECD and non-OECD averages in this respect, and against the average of non-OECD Adherents to the Declaration. Its level of restrictiveness is at par with the average of the 25 EU member states covered by the Index, and is about 60% lower than the average of adherents to the Declaration.
Note: The OECD FDI Regulatory Restrictiveness Index covers only statutory measures discriminating against foreign investors (e.g. foreign equity limits, screening & approval procedures, restriction on key foreign personnel, and other operational measures). Other important aspects of an investment climate (e.g. the implementation of regulations and state monopolies, preferential treatment for export-oriented investors and SEZ regimes among other) are not considered. Data reflect regulatory restrictions as of December 2017. For Croatia, information reflects the regulatory environment as of September 2018. Please refer to Kalinova et al. (2010) for further information on the methodology.
* This designation is without prejudice to positions on status, and is in line with United Nations Security Council Resolution 1244/99 and the Advisory Opinion of the International Court of Justice on Kosovo’s declaration of independence.
Source: OECD FDI Regulatory Restrictiveness Index, www.oecd.org/investment/fdiindex.htm.
On a sectoral basis, Croatia also maintains a more open environment than most other countries. When compared to the OECD average, regulatory restrictions on FDI are greater only in business services, reflecting essentially some discriminatory measures in legal services sectors (Figure 4.2). In financial services, existing restrictions in insurance, banking and other financial services puts it at par with the OECD average. Any difficulty in attracting FDI into Croatia is, therefore, unlikely to be related to a fragmented regulatory environment for foreign investors. Croatia is largely open to foreign investment and generally treats domestic and foreign investors alike. This is the case for foreign investors in general, not only EU-based ones.
Nonetheless, as mentioned above, the regulatory environment for FDI must not be seen in isolation from the overall business environment. While barriers to FDI should not necessarily be a concern for attracting international investment, the stringency and cumbersomeness of business regulations and the level of state participation in the economy may be (see Chapters 3 and 6). The number of regulated professions, for instance, seem particularly high in Croatia and existing regulations remain relatively burdensome in many cases, hampering the access to and the practice of such professions (European Commission, 2017). As mentioned above, non-discriminatory deficiencies in the business environment affect domestic and foreign investors alike. The costs of regulatory heterogeneity with regional peers can also sometimes be high, providing a real barrier for FDI (Fournier, 2015).
Note: see notes in Figure 4.1.
Source: OECD FDI Regulatory Restrictiveness Index, www.oecd.org/investment/fdiindex.htm
Croatia has few exceptions to national treatment of foreign-controlled enterprises
Croatia has no trans-sectoral exception to national treatment. Existing trans-sectoral measures are essentially limited to entry conditions for non-EU/EEA investors, notably in relation to land ownership and, more generally, on establishing a business in Croatia. Market access conditions are also more common across sectors than exceptions to national treatment. Sector-specific measures consisting on departures from the national treatment principle are limited to foreign ownership restrictions in a few commercial activities, such as freshwater fishing, air transport and legal services. Croatia also does not impose limits on access to local finance and incentives (e.g. tax concessions) or government purchasing markets for foreign-controlled enterprises incorporated in the territory.
These measures are discussed in further details below. Croatia’s list of the measures constituting an exception to national treatment at national and territorial level is reported in Annex A of this Review. Annex B contains the list of measures reported for transparency reasons (e.g. measures based on national security considerations, as well as non-discriminatory corporate organisation requirements, official aids and subsidies and public and private monopolies and concessions). For clarity, measures restricting investments by natural persons are not reported because the instrument does not cover these.
Cross-sectoral measures affecting foreign investment
Land and Other Real Estate
The right of ownership of private property and real estate was re-established in the Croatian Constitution of 1990, following the country’s transition from a collectivist and pluralist regulation of ownership in the former socialist Croatia, to the protection of private and individual ownership as fundamental right. The right of acquisition and ownership of real estate was codified in numerous acts and regulations, notably by the Property and Other Real Rights Act of 1996 and the 1996 Land Register Act.
According to the Property and Other Real Rights Act of 1996, legal entities incorporated in EU/EEA member states can acquire and own real estate assets (e.g. commercial and residential units and land) in the Republic of Croatia under the same conditions as those applied to domestic legal entities, with the exception of agricultural land3 and other real estate located in protected nature areas, as defined in the Nature Protection Act.
Other foreign legal entities, however, can only acquire ownership of real estate in Croatia under the condition of reciprocity and subject to consent by the Minister of Justice. They cannot acquire or hold any property rights in agricultural land or forests. No distinction is made between the acquisition of property for business purposes, such as office space, warehouse etc., and real estate investments for renting and capital gains. This restriction can nonetheless be circumvented by the incorporation of a company in Croatia, in which case it would be treated as a Croatian national.4
Reciprocity Condition
A foreign investor may establish or participate in establishing a company and may acquire rights and/or commitments as any domestic investor. However, foreign investors, headquartered or with residence in a non-WTO member country, need to meet the reciprocity condition. Croatia’s reciprocity policy concerns foreign investors’ right to undertake inward direct investment and establish in Croatia, and is, therefore, not a measure properly covered under the NTi, which applies to established enterprises. The implications of such a measure are limited, however. In total, there are 169 countries which are members of the WTO, and all Adherents to the Declaration are members of the organisation.
Nonetheless, policies conditioning market access to reciprocal treatment is reflected under the OECD FDI Regulatory Restrictiveness, since they shy away from the underlying principle of liberalisation embedded in the OECD instruments on international investment and capital movements, which is to promote liberalisation rather through unilateral action at countries’ own pace than through bargaining. Besides, any benefits associated with such investments flowing to host economies are likely to occur regardless of whether the home country of that firm provides equal treatment to host country firms. There may be cases where reciprocity conditions may actually contribute to ensuring an increasing degree of liberalisation overall, and therefore these are given special consideration under the OECD Codes of Liberalisation of Capital Movements for instance, but ultimately they still constitute a barrier for foreign investment.
Sector-specific measures affecting foreign investment
The sector-specific exceptions to the NTi notified by Croatia concern the ownership of commercial fishing companies, air transport and legal firms by non-EU investors (see Annex A to this Review). Other sector-specific measures discussed below refer to measures imposing conditions on the establishment of foreign investors in Croatia. While not covered by the NTi, they constitute statutory barriers to entry and are covered in the OECD FDI Regulatory Restrictiveness Index.
Agricultural Land and State-owned Forests and Forest Land
166. Agricultural land on the territory of the Republic of Croatia is disposed in accordance with the Agricultural Land Act of 2018 and general regulations on the disposal of real estate. Unless otherwise provided by an international agreement or special regulation, foreign natural and legal persons – including their branches in the Republic of Croatia – are not allowed to acquire or hold any property rights in agricultural land and forests. Pursuant to the provisions of the Treaty on the Accession of the Republic of Croatia to the European Union, citizens and legal entities of the EU remain prohibited from acquiring agricultural land for a period of 7 years following the accession date, with the possibility of extension for another 3 years.
Foreigners can circumvent this restriction on the acquisition of agricultural land by incorporating a company in Croatia. Foreign-controlled enterprises incorporated in Croatia are treated equally to domestically-owned firms in this matter. Foreign persons wishing to invest directly or through a branch in Croatia may also obtain a long-term lease for agricultural land. They may also participate in public tenders for lease of state owned agricultural land under the conditions prescribed by the law. The legislation does not impose any limit on the duration of the lease agreement, except regarding the leasing of state owned agricultural land which is allowed for a period of 25 years, renewable for another 25 years. In accordance with the agricultural policy of the Republic of Croatia to preserve the rural area, the priority of selling and leasing rights is given to the former possessors, the younger than 41 and the domicile population.
Similarly, according to the Forestry Act of 2018, foreign investors from outside the European Union may not acquire ownership rights in state-owned forests and forest land, unless otherwise provided by an international agreement. The implications of such measure may, however, be limited. Generally, state-owned forests and forest land may not be alienated from the ownership of the Republic of Croatia, except in the cases provided for by the Law. Only in these cases legal persons incorporated in Croatia or in another EU member country are allowed to acquire ownership rights over state-owned forests and forest land. There are no restrictions on foreign investment in private forestry land.
Fisheries
Commercial fisheries activities in Croatia are governed by three different regulations: the 2017 Marine Fisheries Act, the 2017 Aquaculture Act and the 2005 Freshwater Fisheries Act. Foreign-controlled enterprises incorporated in Croatia are generally allowed to invest in fishery activities without discrimination under these regulations. The only exception to national treatment concerns commercial freshwater fishing activities. According to the Law on Freshwater Fisheries, this activity shall not be conducted by a domestic legal person wholly or partly owned by a foreign natural or legal person, unless otherwise provided in an international agreement. According to the authorities, these activities take place in a part of the Sava river and the Danube, and it is recognised as a preferential small artisan activity. The measure aims to preserve the activity as a form of traditional, ethnological and cultural heritage of Croatia. There are no other exceptions to national treatment in the sector.
Market access is restricted to investments in marine fisheries activities by non-EU/EEA investors. All fishing vessels used in commercial and small-scale fishing and exclusively in aquaculture in Croatia must be registered with the national registry of fishing vessels. And according to the 2004 Maritime Code, the registration of a vessel by a non-EU/EEA investor is permitted only when carried through an intermediate legal entity incorporated in an EU/EEA member state and after the establishment of a branch office in Croatia. Foreign legal persons may also obtain a concession for the economic use of maritime assets for carrying out aquaculture, upon the incorporation of a company in the Republic of Croatia for such purposes.
Foreign legal persons are also restricted from owning agricultural land as per the 2018 Agricultural Land Act and, therefore, cannot acquire agricultural land used for carrying out freshwater aquaculture activities, such as fish ponds owned by the State or aquaculture farms owned by other natural or legal persons. They may only obtain long-term leases for agricultural land for this purpose. This can be circumvented by the incorporation of a company in Croatia, except in relation to state-owned fish ponds. These can only be leased to natural or legal persons, regardless of investors’ nationality, by a public tender for a period of 25 years with the possibility of extension for the same period.
For all other fishery activities, foreign investors are allowed without limitations. They need only register a branch for such purposes and meet the conditions established by law for carrying out these activities in the country, similarly to firms incorporated in Croatia. According to the authorities, however, there is a moratorium in the issuing of new licences for maritime commercial fishing since 2008. Hence, participation is only possible through the transfer of rights from a valid licence holder engaged in commercial fishing, which is possible under certain conditions.
Rail Transport
In accordance with the Law on Railways of 2013, the provision of railway transport services is subject to licensing by the Ministry of the Sea, Transport and Infrastructure. The licence is valid throughout the European Union and is issued by the Ministry upon request by a domestic legal entity (i.e. incorporated in Croatia) wishing to carry out the activity of railway transport services and registered for such a purpose. Among other conditions established in the law and implementing regulations, the domestic legal entity is also required to have its seat, i.e. effective management, in the territory of Croatia.
In accordance with the international agreement on mutual recognition of permits, the government recognises the licences issued by the competent authorities of other EU member states. Hence, licensed railway undertakings from other EU member states are also authorised to operate in Croatia and vice-versa. There is no requirement to incorporate a local company for such purposes. Foreign legal persons established outside the EU may also have the possibility to obtain a licence for the provision of railway transport services in Croatia through a branch office on the basis of license recognition, whenever legal basis exist, in bilateral or multilateral agreements to which Croatia and the contracting state of the foreign legal entity are parties, on the mutual recognition of official documents related to rail transport services.
Inland Water and Maritime Transport
The 2007 Act on Inland Waterway Navigation and Ports, last amended in 2018, regulates the provision of inland waterway passenger and freight transport in Croatia. Accordingly, only Croatian and EU/EEA-incorporated carriers may conduct domestic waterway transport services in Croatia. In accordance with the law, other carriers may also be allowed to carry out inland waterway cabotage, but only upon approval by the Ministry responsible for inland navigation. Such an approval is only given under exceptional circumstance according to the authorities.
As for maritime cabotage, it is regulated by the Maritime Code of 2004 and implementing regulations, and is permitted to foreign persons in accordance with EU regulations (No 3577/92). Accordingly, Croatian and EU/EEA-incorporated enterprises may provide maritime cabotage services in Croatian waters under the same conditions, whereas non-EU/EEA persons must obtain a special authorisation from the Ministry of the Sea, Transport and Infrastructure. Otherwise, non-EEA operators may incorporate within the EU to invest in maritime cabotage under the same conditions of domestic investors.
The provision of domestic and international passenger line shipping services are also reserved to companies incorporated within the EU/EEA according to the 2006 Act on Carriage by Line and Occasional Coastal Shipping, as amended, and implementing regulations.
Air Transport
In line with EU rules governing the operation of air services within the territory, Croatia’s Air Traffic Act of 2009 provides that commercial air transport and other commercial and non-commercial operations may only be carried out by undertakings complying with conditions laid down in EU regulations and other regulations adopted pursuant to this act. As such, as per the Regulation (EC) No 1008/2008, no undertaking established in the EU shall be permitted to carry passengers, mail and/or cargo for remuneration and/or hire by air, unless it has been granted the appropriate operating licence. The granting of such licences is conditioned inter alia on the ownership and control by EU member states and/or nationals of member states of more than 50% of the undertaking, whether directly or indirectly through one or more intermediate undertakings, except if provided differently in an agreement with a third country to which the European Union is a party.
Likewise, Croatia’s Air Traffic Act establishes that the provision of terrestrial services at airports shall be conducted in accordance with EU regulations. As such, the provision of ground handling services at Croatian airports is reserved to legal or natural persons registered for such purposes and incorporated in Croatia or in the territory of another EU member state. Additionally, according to the Croatian legislation, foreign investment in such services is subject to reciprocal treatment. Whenever a non-member country or a party to the European Common Aviation Area agreement (which includes EU’s neighbouring countries in South-East Europe, as well Norway and Iceland) does not grant to Croatian air carriers and operators the mutual treatment on airport terrestrial services, the Ministry may suspend, in whole or in part, the treatment accorded to investors from such state.
Professional Services (legal services)5
The Law on the Legal Profession of 1994, as amended, regulates the provision of legal services in the country. Accordingly, only lawyers who have been registered with the Croatian Bar Association can practice on the territory and be equity partners in Croatian law firms. Registered lawyers are allowed to practice as a sole practitioner, within a joint law office or within a law firm established by at least two lawyers either as a general partnership or as a limited liability company. Registering with the Bar is, however, limited to Croatian citizens and citizens of an EU/EEA or WTO member state. Other foreign persons cannot practice law nor invest or become partners in a Croatian law firm.
Registered EU/EEA and WTO lawyers can practice law in Croatia under equal conditions with Croatian lawyers. They can establish subsidiaries of their home country law firms to provide legal advice on the law of the Republic of Croatia, their home-country law, EU law and international law. Only EU/EEA lawyers, however, can represent clients before the Croatian courts, under condition they act together with a lawyer admitted to practice under the professional title “odvjetnik”, which is granted to those lawyers who are Croatian or EU citizens and who have passed the Croatian Bar exam, among other requirements established by the legislation.
Law firms of an EU member state, or of a member state of the WTO, may also establish their own branches in Croatia in accordance with the relevant legislation and obligations of the Republic of Croatia under international treaties. Their branches may, however, only provide legal advice on their home-country law, the law of the European Union and international law.
Construction, Architectural and Engineering Services
Construction activities, and architectural and engineering services involving physical planning and construction-related activities, are regulated by the Act on Physical Planning and Building Tasks and Activities of 2015.6 There are no exceptions to national treatment in the legislation, but market access conditions apply for non-EU/EEA investors wishing to undertake the above-cited activities. The law distinguishes between two distinct modalities of engagement by foreign legal persons: the provision of such services on a temporary or occasional basis, and their provision on a permanent basis. According to the authorities, the latter implies the establishment of a subsidiary or a branch in the country (i.e. provision through FDI).7
In accordance with the law, legal persons from EU/EEA member states, authorised to undertake construction, physical planning and construction-related architectural and engineering services in their home jurisdictions, may perform such activities in Croatia, in a temporary or occasional basis, after notifying the Ministry of Construction and Physical Planning and upon meeting the requirements established by the law. Non-EU/EEA legal persons, who are not established in a WTO member country, may only perform such activities, on a temporary or occasional manner, under the condition of reciprocity.
The performance of these activities on a permanent basis by an authorised EU/EEA legal person, through a branch or subsidiary, is permitted under the same conditions as for other legal persons incorporated in the Republic of Croatia. Non-EU/EEA investors, however, are required to incorporate a company to carry out such activities on a permanent basis. Thereafter, they are subject to the same conditions applying to other investors.
Media
Market access conditions also apply to non-EU/EEA investors in audio and audio-visual media services, as well as to electronic and printed media. According to the 2009 Electronic Media Act and the 2004 Media Act, which regulate radio and television broadcasting services concessions and printed publishing activities, respectively, only Croatian companies and branches of EU/EEA companies are allowed to carry out such activities in Croatia. Non-EU/EEA legal persons are required to incorporate a company in Croatia or within the EU/EEA, and establish a branch in Croatia, in order to engage in such activities in the country. Upon establishment they are treated equally to Croatian companies. Local content requirements are applied indiscriminately to authorised established companies, regardless of owners’ nationalities.
Financial Services (banking, insurance and other financial services)
The 2013 Credit Institutions Act regulates the conditions for establishment, operation and termination of banks and other credit institutions in Croatia. Foreign legal persons are allowed to acquire or incorporate a credit institution in Croatia without any market entry restriction, subject to meeting prudential financial requirements established in the legislation. The establishment of a branch office by a non-EU/EEA credit institutions, however, is subject to a reciprocity condition.
Similarly, according to the 2015 Insurance Act, non-EU/EEA insurance providers are also subject to reciprocity for establishing a branch office for the purpose of providing insurance services in the country. There are no market access conditions, however, for the incorporation of insurance company in Croatia by non-EU/EEA investors. Upon establishment they are allowed to engage in insurance activities in the same manner as other domestic insurance firms and branches of EU/EEA-based insurance firms.
Pension fund activities are generally conditioned upon the incorporation of a company in Croatia for such purposes.8 Under the 2014 Pension Insurance Companies Act, which regulates the establishment and operation of pension insurance companies in relation to the compulsory and voluntary pension insurance systems, a pension insurance company is required to be established as a joint stock company upon authorisation from the Croatian Financial Services Supervisory Agency and after meeting the requirements established in the law. The provision of compulsory pension insurance services is only permitted to companies meeting this requirement.
A pension insurance company from another EU Member State, which establishes a branch in Croatia or is empowered to directly carry out the related activities on the basis of an authorisation from the competent authority of the Member State, is allowed to provide voluntary pension insurance services in relation to closed funds and support services to sponsors for the implementation of their closed voluntary pension fund.
Likewise, the provision of pension fund management services is also generally restricted to pension companies incorporated in Croatia. The 2014 Voluntary Pension Funds Act, for instance, which inter alia regulates the establishment and operation of voluntary pension fund management companies, also establishes that these activities may only be performed by a pension company incorporated for such purposes and upon authorisation from the Croatian Financial Services Supervisory Agency. A pension company from another EU member state is allowed, in accordance with the Act, to establish a branch in Croatia or directly carry out basic and auxiliary voluntary pension fund activities from its home office, but only in relation to closed funds.9 All other voluntary pension fund management activities can only be performed by pension companies incorporated in Croatia.
The performance of compulsory pension fund management services is restricted to pension companies incorporated in Croatia, without exceptions. According to the 2014 Mandatory Pension Funds Act, which regulates the establishment and operation of capitalised compulsory pension funds and their management by pension companies, only a pension company incorporated in Croatia for such purposes following an authorisation by the Croatian Financial Services Supervisory Agency is allowed to provide mandatory pension fund management services.
The above laws also restrict which institutions can be depositaries of voluntary and compulsory pension funds. Accordingly, only a credit institution headquartered in Croatia and having the approval of the Croatian National Bank for the conduct of related activities, or a branch of a credit institution of another EU Member State, established in Croatia in accordance with the relevant legislation, are allowed to be appointed as depositaries of mandatory and voluntary pension funds.
Transposing the European Union’s regulation concerning undertakings for collective investment in transferable securities (UCITS), the Law on Open-end Investment Funds with Public Offering of 2016 also establishes that only fund management companies incorporated in Croatia or in another EU Member State, which have been authorised by the Croatian Financial Services Supervisory Agency or the competent authority from the other Member State, may carry out the activity of managing UCITS funds in Croatia. A third-country management company may, through a branch established in Croatia and upon approval by the Croatian Financial Services Supervisory, engage in UCITS trading activities, but is not allowed to establish and manage UCITS funds. For this, they are require to incorporate in Croatia in accordance with the law.
Market access conditions also apply to the provision of electronic money services by non-EU/EEA electronic money institutions in Croatia. Under the 2018 Electronic Money Act, they are allowed to provide electronic money payment services associated with the issuance of electronic money in Croatia either directly or through a branch established under special rules. Among others, a reciprocity condition applies in these cases. Reciprocity is not required if they incorporate a company for such purposes in Croatia. The Electronic Money Act allows EU/EEA-registered electronic money institutions to issue electronic money and to provide payment services covered by their authorisation, directly or through a branch, under the same conditions as electronic money institutions incorporated in Croatia.
Lastly, according to the 2018 Payment System Act, payment institutions from non-EU/EEA member states may not provide payment services in Croatia. For this, they need to incorporate a payment institution in Croatia or within the territory of an EU/EEA member state. In line with the related Directive (EU) 2015/2366 on payment services in the internal market, the law allows EU/EEA-registered institutions to provide payment services covered by their authorisation, directly or through a branch, under the same conditions as payment institutions incorporated in Croatia.
Other policies affecting foreign investment and reported for transparency purposes under the National Treatment instrument
A few other policies applied by Croatia, while not discriminating between foreign-controlled enterprises and domestic enterprises, may result in difference in impact by potentially imposing a greater burden on the foreign controlled-enterprise. Policies based on public order and essential security considerations may restrain access to certain sectors of national interest. Likewise, the existence of public, private, or mixed monopolies may render access to certain sectors difficult for foreign investors. As such they are important determinants in the context of national treatment. Such measures are notified by a country adhering to the OECD Declaration for transparency purposes.
Croatia has reported only a few measures for transparency purposes under the NTi (see Annex B). These are related to conditions imposed on management board members both in credit institutions and audit firms, as well as a few sectors which are kept under public monopoly and a few sectors in which private participation is possible under concession agreements only. In addition, foreign investment activities can be limited in certain areas due to national security considerations. While Croatia does not have national security review mechanisms nor any other specific policy that would allow it to respond to threats for its national security stemming from established foreign direct investors, it does not allow foreign persons to own land and other real estate located in key legally specified areas in view of protecting the interests and safety of the Republic of Croatia. Some industries connected with national defence and security are also subject to special conditions and approval procedures by the competent authorities, but these apply equally to both domestic and foreign investors and are not reported here.
Measures based on public order and essential security considerations
International instruments such as the OECD Declaration and the OECD Guidelines for Recipient Country Investment Policies relating to National Security (OECD, 2009) recognise countries’ rights to regulate to manage potential risks for the host country’s national security or public order. Unlike some governments which have recently increasingly invoked national security to control foreign investment (Wehrlé and Pohl, 2016; Wehrlé and Christiansen, 2017), Croatia has remained content with the absence of formal policies to manage or potentially prevent certain acquisitions by foreigners on national security grounds. If such policies exist, they are limited to the acquisition of land or real estate in some sensitive geographical areas.
According to the Property and Other Real Rights Act of 1996, unless otherwise provided by law, foreign persons are prohibited from owning land or other real estate located in an area which, in order to protect the interests and safety of the Republic of Croatia, is legally declared a territory in which foreign persons may not have the right of ownership. No specific territory area (e.g. border areas) has been designated as prohibited, but foreign natural and legal persons remain prohibited from acquiring ownership of agriculture land and protected areas in nature in accordance with the Agricultural Land Act of 2018 and the Law on Protection of Nature of 2013, as amended in 2018.
A foreign person who has acquired the right of ownership of real estate in an area, which thereafter becomes legally declared a restricted territory, shall cease to be the owner such property and shall be entitled to compensation as per the expropriation regulations (see Chapter 4, which discusses expropriation rules in Croatia in greater detail). If a foreign person, by inheritance, becomes the owner of a property located in an area legally declared a restricted territory, the person is entitled to compensation as per the expropriation regulations. These conditions do not apply to nationals and legal entities from the European Union, except in the case of agricultural land and protected parts of nature delimited in the Nature Protection Act of 2005.
Corporate organisation and key personnel
Croatia imposes conditions on the management board members of credit institutions and audit firms. In the case of credit institution in Croatia, the 2013 Credit Institutions Act requires that at least one member of the management board of a credit institution be fluent in speaking and writing of the Croatian language in order to be able to perform his/her functions. In practice, this requirement does not exclude the possibility that the whole board be constituted by foreign persons if at least one of the members speaks and writes Croatian fluently. The members of the management board in the banking sector undergo suitability assessment conferring that they possess adequate knowledge, skills and experience required to direct the business of the bank.
In the case of audit firms, in accordance with the 2017 Audit Act, the majority of the members of the management board of an audit firm is required to be formed by authorised auditors from Croatia or another EU Member State. When the management board is constituted by two members only, at least one member must be an authorised auditor from Croatia or another EU Member State. Similarly to the case of credit institutions, at least one member of the management board of an audit firm shall be fluent in the Croatian language.
Activities covered by public, private, mixed monopolies or concessions
A number of activities are reserved to the Republic of Croatia, namely:
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the provision of electricity transmission which is carried out by the state-owned company HRVATSKI OPERATOR PRIJENOSNOG SUSTAVA d.o.o. (HOPS)
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the provision of electricity distribution, which is reserved to the state-owned company HEP-OPERATOR DISTRIBUCIJSKOG SUSTAVA d.o.o. (HEP-ODS)
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the provision of wholesale electricity market supply, which is reserved to HEP-ELEKTRA d.o.o.
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the transport of natural gas, whose monopoly is reserved to the state-owned company PLINACRO d.o.o.
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the operation of Croatia’s gas storage system, which is reserved to PODZEMNO SKLADIŠTE PLINA d.o.o
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the wholesale gas market supply, which is reserved to HEP d.d
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water management, which is the monopoly of the state-owned company Croatian Waters
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water supply, wastewater treatment and sewage, which is the responsibility of local governments and provided by various public utility companies
A few sectors are also subject to private or mixed monopolies or concessions. For example, the company Jadranski naftovod (JANAF), which has mixed ownership but is majority owned by the State, holds the monopoly over crude oil transportation in Croatia, while the following activities are subject to concession agreements between the private investor and Croatia: mining research and exploitation and related secondary activities (i.e. exploration and exploitation of hydrocarbons and geothermal energy), the exploitation of maritime domains and the provision of management and operation of ports.
Starting and operating a company nevertheless remain cumbersome according to business surveys
As it can be seen from above, Croatia has one of the most open regimes for international investment according to the OECD FDI Regulatory Restrictiveness Index. Exceptions under the OECD National Treatment instrument are limited to foreign ownership restrictions in a very few number of activities or sectors. Despite this openness to foreign investment, Croatia suffers from shortcomings that investors say they experience when establishing a business and in the day-to-day running of their business operations as documented by Croatia’s performance in international rankings (Table 4.1). This is also attested by interviews conducted by the OECD as part of this Review where concerns were raised about administrative burdens in terms of time and costs, long judicial proceedings, fragmented public institutions, and corruption and favouritism, especially at regional and local government level.
In 2018, Croatia ranked 58th out of 190 countries in the World Bank’s 2019 edition of Doing Business indicators. In comparison with other EU countries, Croatia is among the lower third, together with countries such as Bulgaria and Hungary, while having a somewhat better score than some South European Union Mediterranean countries (e.g. Greece, and Malta). When compared with non-OECD countries that are Adherents to the OECD Declaration, Croatia is behind countries such as Kazakhstan and Romania, which rank 28th and 52nd respectively, and above Costa Rica at 67, Egypt at 120, Morocco at 60, Peru at 68, and Ukraine at 71. While Doing Business - which addresses ten business regulatory areas such as starting a business, dealing with construction permits and enforcing contracts - should not be construed as an overall measure of the investment climate, Croatia's relative poor performance, in particular in comparison with other EU countries, suggests that, despite reforms and on-going improvements, some critical areas remain to be addressed.
The Global Competitiveness ranking of the World Economic Forum provides additional perspectives on issues arising from doing business in Croatia. In 2017, Croatia ranked 74th out of 137 countries in the Global Competitiveness Index. Despite improvements in some areas, the main obstacles for doing business as perceived by entrepreneurs remained unchanged from the previous year (e.g. inefficient institutions, corruption). Other listed factors included the perceived insufficient capacity to innovate; labour regulations, seen as offering not enough flexibility; and an inadequately educated workforce. All of these areas have already been discussed in Chapter 3.
As suggested by Croatia’s overall rankings in the World Bank’s Doing Business report for 2018 and the Global Competitiveness Index for 2017, there is a room for rendering administrative procedures in Croatia speedier, more transparent and effective, and improving the overall quality and transparency of public governance. The rather inefficient public administration in Croatia, at both central and local levels, as discussed in Chapter 7 of the present Review, leads to unsatisfactory public services and undermines the investment climate.
In addition, while important steps have been taken to fight corruption in Croatia, perceived corruption remains relatively high, not only by regional standards (Croatia was ranked 57th among 180 countries in the Transparency International’s Corruption Perception Index in 2017). For sure, when compared with other non-OECD countries that are Adherents to the OECD Declaration on International Investment, Croatia is above countries such as Egypt (117th), Kazakhstan (122nd) and Ukraine (130th). It is nevertheless below other non-OECD countries Adherents to the Declaration such as Costa Rica (38th). Continued progress in the fight against corruption remains essential for Croatia’s citizens and businesses. As discussed in Chapter 7, Croatia needs to maintain its anti-corruption efforts, in particular at local level.
While an open and transparent environment for foreign investment is important since it expands market opportunities and enhances predictability for investors, these are not the only incentives to which FDI responds to. Foreign investors are equally affected by deficiencies in the overall business environment impinging on domestic investors too. Behind-the-borders regulatory challenges, which affect foreign and domestic investments altogether, should be seen in complement to market access and treatment of foreign investors. These other policies affecting the overall business environment are addressed in the next chapters.
Outlook and policy recommendations
Croatia has one of the most open regimes for international investment according to the OECD FDI Regulatory Restrictiveness Index. It is more open in statutory terms than the average OECD member country and Croatia's exceptions under the National Treatment instrument are limited to restrictions in a few activities. Likewise, regulatory barriers to entry are confined to a few sectors, and notably restricted to non-EU/EEA investors. Croatia’s observed level of regulatory restrictiveness is at par with the average EU member country.
References
European Commission (2017), “Country Report Croatia 2017: Including an In-Depth Review on the prevention and correction of macroeconomic imbalances”, Commission Staff Working Document, SWD(2017) 76 Final, February 22.
Fournier, J. M. (2015), “The negative effect of regulatory divergence on foreign direct investment”, OECD Economics Department Working Papers No. 1268, OECD Publishing, Paris, https://doi.org/10.1787/5jrqgvg0dw27-en.
Kalinova, B., A. Palerm, and S. Thomsen. (2010), “OECD’s FDI Restrictiveness Index: 2010 Update”, OECD Working Papers on International Investment, 2010/03, OECD Publishing, Paris, https://doi.org/10.1787/5km91p02zj7g-en
Mistura, F. and C. Roulet (2019), “The Determinants of Foreign Direct Investment: Do Statutory Restrictions Matter?”, OECD International Investment Working Paper, https://doi.org/10.1787/641507ce-en.
Moran, T. H., E. M. Graham, and M. Blomström, (2005), “Chapter 14: Conclusions and Implications for FDI Policy in Developing Countries, New Methods of Research, and a Future Research Agenda”, in Moran, Graham, and Blomström (eds.), Does Foreign Direct Investment Promote Development?, Institute for International Economics, Washington D.C.
Nicoletti, G., S. Golub, D. Hajkova, D., Mirza, and K-Y Yoo, (2003), “The Influence of Policies on Trade and Foreign Direct Investment”, OECD Economic Studies No. 36, 2003/1, OECD Publishing, Paris, https://doi.org/10.1787/eco_studies-v2003-art2-en
OECD (2019), OECD Investment Policy Reviews: Southeast Asia, www.oecd.org/daf/inv/investment-policy/oecd-investment-policy-review-southeast-asia.htm
OECD (2015), The Future of Productivity, OECD Publishing, Paris, https://doi.org/10.1787/9789264248533-en
OECD (2009), Guidelines for Recipient Country Investment Policies relating to National Security, www.oecd.org/daf/inv/investment-policy/43384486.pdf
OECD (2005), National Treatment for Foreign-Controlled Enterprises: 2005 Edition, OECD Publishing, Paris, https://doi.org/10.1787/9789264012912-en
Wehrlé, F. and H. Christiansen (2017), “State-owned enterprises, international investment and national security: The way forward”, OECD Insights Blog https://medium.com/@OECD/state-owned-enterprises-international-investment-and-national-security-the-way-forward-c21982c9fa8c
Wehrlé, F. and J. Pohl (2016), “Investment Policies Related to National Security: A Survey of Country Practices”, OECD Working Papers on International Investment, No. 2016/02, https://doi.org/10.1787/18151957
Notes
← 1. The Code of Liberalisation of Capital Movements is an OECD instrument designed to support the progressive freedom of capital movements, while providing flexibility for countries to lodge reservations regarding operations the country is not yet in the position to liberalise and to reintroduce restrictions in situations of serious economic and financial disturbance. Since 2011, non-OECD economies may apply for adherence to the Code. Currently seven non-OECD countries are undergoing the process of adherence (Argentina, Brazil, Bulgaria, Croatia, Peru, Romania, and South Africa).
← 2. In the case of the Code, for instance, members are required to progressively abolish measures that discriminate between residents and non-residents and to treat residents of all other members alike. Any remaining restriction on operations they are not yet in a position to liberalise are notified and lodged in the country reservation list for transparency reasons.
← 3. Pursuant to the provisions of the Treaty on the Accession of the Republic of Croatia to the European Union, citizens and legal entities of the European Union cannot acquire agricultural land for a period of seven years from the date of accession of the Republic of Croatia to the European Union [1 July 2013], with a possibility of a ban for another three years.
← 4. According to the Law on Maritime Domain and Sea Ports of 2003, no real estate located within the maritime domain can be acquired by private parties, be them Croatians or foreigners. However, these can be given under concession for a period of up to 99 years to persons and firms registered for business operations in Croatia, regardless of their nationality or the ownership of the capital.
← 5. The practice of regulated professions is conditioned on obtaining a license. Measures that discriminate on grounds of nationality the granting of such licenses to foreign natural persons are not taken into account here, unless they also prevent foreign persons from taking a direct investment in the related business. For instance, this may occur when citizenship is required for membership in a professional association with regulatory powers, and such membership is required for practicing such profession and establishing a business for such purposes.
← 6. Architectural and engineering services regulated by this Act include, for instance, physical planning, design and/or professional construction supervision, project management of construction projects, testing of and certification of construction products and projects’ compliance with building requirements, preparatory research for construction and reconstruction works.
← 7. The temporal or occasional provision of such activities refers to either the direct provision by the foreign legal person by its head office (i.e. direct trade) in its home country or the occasional provision by a foreign national not-resident in Croatia as an independent supplier or employee of a service supplier.
← 8. The pension system in Croatia consists of three tiers. The first pillar consists of the mandatory pension insurance on the basis of generation solidarity. All employed insured persons are require to contribute 15% of their gross salary to this pillar. The funds are used to pay pensions of the present pensioners. The second pillar consists of the mandatory pension insurance on the basis of individual capitalized savings. All insured persons under pillar I, which meet the conditions established by the Act (e.g. having not reached the age of 50 on 1 January, 2002, date of implementation of pillar II), are required to contribute 5% of their gross salary to a capitalised mandatory pension fund of their choice. The third Pillar consists of the voluntary pension insurance on the basis of the individual capitalized savings.
← 9. A closed fund is a voluntary pension fund, in which, participation is limited to natural persons employed by the fund sponsor or that are members of the fund sponsor. The sponsor may be an employer, trade union or an association.