Introduction - FiFo Ost

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<strong>Introduction</strong> Investment climate Investment policy and incentives In 2000, the government took important steps to improve the business environment for foreign investors, such as introducing generous investment incentives, updating its legal regime on intellectual property rights to WTO standards, and reducing corporate and payroll taxes (See Taxation and social security below). New investment incentive legislation was approved in July 2000. The minimum investment needed to qualify is HRK 4 million (€ 512,000), and investments must meet one or more criteria such as introducing new production processes and creating jobs. Real estate will be sold or leased on favourable terms, while job creation will be rewarded by one-off payments of HRK 15,000 (€ 1,900) for each new job, on condition that the number of newly employed people does not fall for three years. In addition, up to 50 per cent of vocational or re-training costs may be refunded. The law also offers reduced corporate tax within the following categories: • 7 per cent corporate tax for 10 years for companies that invest HRK 10 million (€ 1.3 million) and create 30 new jobs; • 3 per cent corporate tax for 10 years for companies that invest HRK 20 million (€ 2.6 million) and create 50 new jobs; and Free zones in Croatia Location (county) Name Concession granted No. of users No. of employees Current investments, DEM millions Zagreb Free zone Zagreb 25 Sept 1997 155 20 0 Krapino-Zagorska Krapinsko-zagorska free zone 24 Apr 1997 23 130 3.5 Primorsko-goranska Port of Rijeka free zone 19 June 1997 7 430 0 Free zone Kukuljanovo 22 May 1997 3 na 0 Zadar Free zone Obrovac 24 July 1998 2 32 1.8 Osijek-Baranja Free zone Osijek 12 May 1997 27 169 10.0 Sibenik-Knin Free zone Podi 22 May 1997 0 1 0 Split-Dalmatia Port of Split free zone Splitsko-Dalmatinska 10 Dec 1998 28 241 3.0 free zone 22 July 1999 2 165 5.0 Istria Port of Pula free zone 11 March 1999 8 488 9.7 Buje free zone 26 July 2000 10 185 2.7 Dubrovnik-Neretva Port of Ploce free zone 9 Dec 1999 132 1,200 12.0 Total: 397 3,061 47.7 Source: Ministry of Finance 8 Croatia Investment Profile • 0 per cent corporate tax for 10 years for companies that invest HRK 60 million (€ 7.8 million) and create 75 new jobs. The full text of the law is available in English on the Croatian National Bank's web site at www.hnb.hr/propisi/epropisi.htm Croatia has 12 free zones. Companies located in such zones may engage in manufacturing, wholesale trade, foreign trade and provisions of foreign services. Goods that are not intended for trade on the domestic market or for consumption in Croatia are fully exempt from customs duties or taxes. Users engaged or participating in infrastructure construction within the free trade zone, in projects with a value exceeding HRK 1 million (€ 130,000), are exempt from paying any profit taxes during the first five years of business activities. Other users in the zone pay a profit tax equal to 50 per cent of the standard rate. There are no capital controls on the repatriation of profits. Some controls are in place on capital-account transactions, but not on current accounts. The Foreign Exchange Law permits foreigners to open hard currency accounts and to make external payments. The Law on property permits acquisition/ownership by foreigners (subject to approval from the Ministry of Foreign
Affairs and the Ministry of Justice) except in certain geographically designated areas due to national security concerns. According to the same law a foreign investor, incorporated as a Croatian legal entity, is allowed to acquire/own property without restriction. In preparation for joining the WTO, Croatia enacted fundamental changes to its intellectual property regime in 1999. New TRIPscompliant copyright legislation took effect in July 1999, with laws on trademarks, patents, industrial designs, geographical indications and integrated circuit layouts coming into force six months later. Privatisation Croatian privatisation had a slow start in the early 1990s, when assets were sold mostly with the participation of domestic investors. In the second wave, the voucher privatisation implemented in 1998 accelerated the divestiture of residual stakes held by the Privatisation Fund, but still left significant assets in state hands. However, the current government has begun a serious effort to accelerate the privatisation of state-owned assets and to close down loss-making enterprises. In total, 850 state-owned companies are due to be privatised. The Privatisation Fund hopes to bring the entire process to a close and expects to raise some € 7.5 billion in revenues. A key project is the further privatisation of Hrvatske Telekomunikacije (Croatian Telecom), scheduled for 2001, in which Deutsche Telekom acquired a 35 per cent stake in 1999. (See Major sectors of the economy: Telecommunications below.) Other major privatisations to follow are in the shipbuilding, tourism, electronics and energy sectors. Stakes in INA, which has a monopoly in gas distribution and which also engages in oil exploration, refining and distribution, Janaf, the Adriatic pipeline operator, electrical company Koncar, and national power utility HEP, will be offered for sale (see Major sectors of the economy: Energy below). In the banking sector, two state-owned enterprises remain to be privatised: Dubrovacka Banka and Croatia Banka. Foreign participation in the sector is very high, as among the top 10 banks, which control over 83 per cent of the total banking assets, all but Dubrovacka Banka have foreign strategic partners. The privatisation of the largest insurance company, Croatia Osiguranje is also planned for 2001. (See Financial sector below.) Taxation and social security Investment climate In 2001, the government introduced important adjustments to the tax system in a bid to reduce the costs of doing business in Croatia. Most importantly, corporate tax was cut to a 20 per cent standard rate, making Croatia very competitive in comparison with other countries in the region. Health and pension contributions paid by employers on their employees behalf were reduced. Pension insurance contributions have been reduced from 10.75 per cent to 8.75 per cent, while health insurance contributions have fallen from 9 per cent to 7 per cent. Changes were introduced to the income tax regime, as the previously existing two rates of income tax were increased to three (15 per cent, 25 per cent and 35 per cent). Earlier plans to cut the VAT from 22 per cent to 19 per cent have been abandoned for the time being, after the government decided that it could not afford the revenue loss. In addition to the taxes mentioned above, there is an excise duty on tobacco products, alcoholic and non-alcoholic beverages, coffee, beer, petroleum derivatives, certain transportation vehicles and luxury products. Finally, real estate transfer tax and local taxes also apply. Croatia is also implementing major reforms to its pension system. A "three-pillar" pension system was approved by the parliament in 1998 (Pillar I – the pay-as-you-go state system; Pillar II – contributions to private funds; Pillar III – voluntary contributions to private funds). However, the introduction of a privately managed compulsory tier has been delayed until January 2002, primarily due to the short-term impact on the government budget, and the voluntary third pillar will begin on 1 July 2001. The pension reforms are expected to have a broad impact on the economy, namely on capital markets, government finances and labour markets. Croatia Investment Profile 9
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