Croatia

Setting up in Croatia

Company structure, taxation and contract law for foreign investors

The Croatian legal system is part of the Middle European continental law.

The Croatian legal system is part of the Middle European continental law. Several legal acts deal with foreign investments. The Company Act prescribes that foreign investors have the same rights, obligations and legal status within the enterprise as domestic investors, provided the condition of reciprocity exists.

The legal regulations regarding exchange control and currency regulations are contained in the Law on Foreign Currency Transactions and in the adopted implementation regulations. The Investment Promotion Act contains a system of incentive measures, tax and customs privileges for both domestic and foreign investors. The Property Act prescribes that foreign legal and natural entities may acquire ownership over immovables in the territory of the Republic of Croatia, under the condition of reciprocity, with the consent of the Minister of Foreign Affairs of the Republic of Croatia, after the acquiring of the prior opinion of the Minister of Justice of the Republic of Croatia.

The only restriction on foreign investments is that foreign legal and natural entities cannot be holders of ownership rights on agricultural land, except when an international agreement foresees differently. The most common forms of business entities used by foreign investors to conduct business in Croatia are limited liability companies and joint stock companies. A joint stock company may be established by the founders taking over all shares, adopting and executing the articles of association and the statements on establishment (simultaneous establishment) or the founders adopting the articles of association, taking over part of the shares and publishing a public invitation (prospectus) for the entry of the remaining shares (successive establishment).

A limited liability company is established by an agreement concluded between the founders (company agreement). The minimum basic capital for a limited liability company amounts to HRK 20,000 and for a joint stock company amounts to HRK 200,000. The shareholders may pay the contributions instead of paying the amount for which the shares are issued in monies by entering objects or asset rights for which an economic value can be established.

The Company Act gives the company autonomy to determine in the articles of association the issuance of shares which give different membership rights, but the principle of equal shareholders’ position must not be violated, pursuant to which under equal terms the shareholders have an equal position in the company. The parent company cannot use its influence to instruct the dependent company to undertake damaging legal actions or to undertake or fail to undertake actions to its damage, except when the parent company is obliged to reimburse the dependant company for any damage it may incur from such conduct.

The management of the company is obliged to prepare financial reports pursuant to the international accounting standards, the supervisory board has to check the financial reports and the General Meeting of the company The regulatory environment for employment issues is established on the civil-law approach, with elements of compliance with public-law characteristics of the employment relationship in the part necessary for the securing of employee protection.

The Employment Act prescribes that an employment contract is concluded in written form. The collective agreement and internal regulations on employment also govern the employment relationship. Employees employed by an employer who employs at least 20 employees have the right to participate in deciding on matters regarding their economic and social rights and interests. Employees have the right to establish a workers’ counsel, with which the employer has to consult on decisions regarding the status of the employees. The employer who within 90 days for economic, technical or organisational reasons intends to terminate at least 20 employment contracts, is obliged to prepare a programme on providing for the redundancy of employees.

Personal income tax is paid at the rate of 15% of the tax base up to the amount of double basic personal allowance. The tax is paid at the rate of 25% on the portion of the tax base that is equal to the difference twice and 4.5 times the amount of the basic personal allowance. The tax is paid at the rate of 35% on the portion of the tax base that is equal to the difference 4.5 and 14 times the amount of the basic personal allowance. The tax is paid at the rate of 45% on the portion of the tax base that exceeds 14 times the amount of the basic personal allowance. Personal income tax may be increased by the surcharges set by the local self-government (0% to 18%). The base is the accounted personal income tax.

The contribution for retirement is 20% and is the obligation of the employee, and the contribution for basic health insurance is 15%, the separate contribution for health insurance for consequences of injuries at the working place and professional illnesses are 0.5% and the employment incentive contribution is 1.7%, and also the obligation of the employer. The obligation of income taxes for foreign natural persons in Croatia depends on their status, which has to be established for each person separately. The Income Tax Law is applied to the determination of tax obligations as well as bilateral agreements on avoiding double taxation of income taxes which have been concluded by the Republic of Croatia. These are part of the internal legislature, and are stronger legal tools than domestic laws and their provisions are binding.

Foreign workers may work in the Republic of Croatia only based on a working or business permit, except the categories of foreign workers which are explicitly stated in law. At the request of a legal or natural entity which employs foreign workers, a working permit is issued by the competent body in accordance with the seat of the employer, within 15 days of the submitting of the application.

The tax base for companies incorporated in Croatia is the profit determined as the difference between income and expenses determined in accordance with corporate income tax. In principle, foreign companies and foreign individual traders cannot perform activities in the Republic of Croatia unless they establish a branch or company. The rate of corporate income tax is 20 %. Dividends paid to foreign corporate shareholder are taxable with withholding tax at the rate of 15 %. Under Croatian law, generally, deliveries of all kinds of goods are taxed with VAT. The place of delivery is the place in which the goods are at the moment of delivery. Imports of goods are taxed with VAT also. The tax base of imports is the customs base established in accordance with customs regulations, increased by the amount of customs duty, other charges and special taxes payable in the course of import customs clearance.

Croatia has concluded several treaties on avoidance of double taxation.

 

Contact details:
Law Firm, Hanzekovic,
Radakovic & Partners
Radnicka cesta 22,
10000 Zagreb, Croatia
Tel: +385 (0)1 6184611
Fax: +385 (0)1 6184816
E-mail: hanrad@zg.t-com.hr

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