Transparency of the Regulatory System
All investors, foreign or domestic, are guaranteed equal treatment under all forms of market related legislation. Croatian legislation, which is harmonized with European Union legislation (acquis communautaire), affords transparent policies and fosters a climate in which all investors are treated equally. Croatia implements international accounting standards and abides by international practices through the implementation of the Accounting Act, which is applied to all accounting businesses. Nevertheless, bureaucracy and regulation can be complex and time consuming, although the government is actively removing unnecessary regulations. There are no informal regulatory processes and investors should rely solely on government issued legislation to conduct business.
The Croatian Parliament adopts all national legislation, which is implemented at every level of government throughout the country although local regulations vary from county to county.
New legislation and changes to existing legislation which could have a significant impact on citizens are made available for public debate. Once the government receives draft legislation, the full legislation is made available for public comment on the government website as part of their session agenda. Croatian courts are responsible for ensuring that laws are enforced correctly. If an investor believes that the law or an administrative procedure is not implemented correctly the investor may initiate a case against the government at the appropriate court. All legislation is published both on-line and in in the National Gazette, available at: www.nn.hr . The current government has pledged to implement regulatory reforms to ease business procedures, however, similar past announcements were never fully implemented.
Ministries develop regulations based on responsibilities. Working groups of subject matter experts draft laws for the Ministries, which then approve draft legislation which is sent to Parliament for final approval. Once Parliament approves an act, it becomes official per the date defined by Parliament.
Croatia has been a member of UNCTAD since 1992.
International Regulatory Considerations
Croatia, as an EU member, adopts all EU legislation. Domestic legislation is applied nationally and there is no locally based legislation that overrides national legislation. Local governments oversee zoning for construction and can therefore delay investment projects. International accounting, arbitration, financial and labor norms are incorporated into Croatia’s regulatory system.
Croatia has been a member of the World Trade Organization (WTO) since 2000 and maintains obligations to the WTO. There are no cases of dispute involving Croatia as complainant, respondent or third party.
Legal System and Judicial Independence
The legal system in Croatia is civil and provides for ownership of property and enforcement of legal contracts.
The Commercial Company Act defines the forms of legal organization for domestic and foreign investors. It covers general commercial partnerships, limited partnerships, joint stock companies, limited liability companies and economic interest grouping. The Obligatory Relations Act serves to enforce commercial contracts and includes the provision of goods and services in commercial agency contracts.
The Croatian constitution provides for an independent judiciary. The judicial system consists of courts of general and specialized jurisdictions. Core structures are the Supreme Court, County Courts, Municipal Courts, and Magistrate/Petty Crimes Courts. Specialized courts include the Administrative Court and High and Lower Commercial Courts. A Constitutional Court determines the constitutionality of laws and government actions and protects and enforces constitutional rights. Municipal courts are courts of first instance for civil and juvenile/criminal cases. The High Commercial Court is located in Zagreb and has appellate review of lower commercial court decisions. The Administrative Court has jurisdiction over the decisions of administrative bodies of all levels of government. The Supreme Court is the highest court in the country and, as such, enjoys jurisdiction over all civil and criminal cases. It hears appeals from the County, High Commercial, and Administrative Courts. The government continues efforts to reform the judiciary, including reducing the backlog of cases, reforming the land registry, training court officers and reducing the backlog and length of bankruptcy procedures.
Regulations and enforcement actions are appealable and adjudicated in the national court system.
Laws and Regulations on Foreign Direct Investment
There are no specific laws aimed at foreign investment. Both foreign and domestic market participants in Croatia are protected under the same legislation. The Company Act defines the forms of legal organization for domestic and foreign investors. The following entity types are permitted for foreigners: general partnerships; limited partnerships; branch offices; limited liability companies; and joint stock companies. The Obligatory Relations Act regulates commercial contracts.
The Agency for Investments and Competitiveness (www.aik-invest.hr/en ) facilitates both foreign and domestic investment and is available to all interested investors for assistance. Their website offers relevant information on business and investment legislation and includes an investment guide.
Competition and Anti-Trust Laws
The Competition Act defines the rules and methods for promoting and protecting competition. In theory, competitive equality is the standard applied with respect to market access, credit and other business operations, such as licenses and supplies. In practice, however, state-owned enterprises and “strategic” firms may still be perceived to receive preferential treatment. The Croatian Competition Agency is the country’s competition watchdog, determining whether anti-competitive practices exist and punishing infringements. It has determined in the past that some subsidies to state-owned firms constituted unlawful state aid. Information on authorities of the Agency and past rulings can be found at www.aztn.hr . The website includes a “call to the public” inviting citizens to provide information on competition-related concerns.
Expropriation and Compensation
There have been no cases of expropriation of foreign investments by the government since Croatia’s independence in 1991. Article III of the U.S.-Croatia BIT covers both direct and indirect expropriations. The BIT protects against expropriations or nationalizations except those that are for a public purpose, carried out in a non-discriminatory manner, are in accordance with due process of law, and are subject to prompt, adequate and effective compensation.
Croatian Law on Expropriation and Compensation gives the government broad authority to expropriate real property under various economic and security-related circumstances, including eminent domain and strategic investments. However, it includes provisions that guarantee adequate compensation, in either the form of monetary compensation or real estate of equal value to the expropriated property in the same town or city. The law includes an appeals mechanism to challenge expropriation decisions by means of a complaint to the Ministry of Justice within 15 days of the expropriation order. The law does not describe the Ministry’s adjudication process, and the fact that the Ministry of Justice represents the government, which initiates expropriations, could be an area of potential concern. Parties not pleased with the outcome of the Ministry decision can take administrative action against the decision, but no appeal to the decision is allowed.
ICSID Convention and New York Convention
There is no specific legislation that refers to the Washington Convention that established the Center for the Settlement of Investment Disputes (ICSID) ICSID, however Article 19 of the Act on Enforcement, states that judgments of foreign courts may be executed only if they “fulfill the conditions for recognition and execution as prescribed by an international agreement or the law,” and would be applied after an ICSID ruling.
Investor- State Dispute Settlement
Croatia is a signatory to the following international conventions regulating the mutual acceptance and enforcement of foreign arbitration: the 1923 Geneva Protocol on Arbitration Clauses; the 1927 Geneva Convention on the Execution of Foreign Arbitration Decisions; the 1958 New York Convention on the Acceptance and Execution of Foreign Arbitration Decisions; and the 1961 European Convention on International Business Arbitration. In 1998 Croatia ratified the ICSID Convention. The Croatian Law on Arbitration is implemented for both national and international proceedings in Croatia. Parties to arbitration cases are free to appoint arbitrators of any nationality or professional qualifications and Article 12 of the Law on Arbitration requires impartiality and independence of arbitrators. Croatia recognizes binding international arbitration, which may be defined in investment agreements as a means of dispute resolution. For example, the Croatian government has two open arbitration cases with a private investor in the national oil company. Article X of the U.S.-Croatia BIT provides for international arbitration of certain types of investment disputes.
International Commercial Arbitration and Foreign Courts
Alternative dispute resolution is implemented at the High Commercial Court, the Zagreb Commercial Court and six municipal courts around the country. In order to reduce backlog, non-disputed decisions are redistributed to public notaries. This reduces enforcement cases and the enforcement of judgments, over 10 percent of pending cases.
Although underutilized, both mediation and arbitration services are available through the Croatian Chamber of Economy. The Chamber’s permanent arbitration court has been in operation since 1965 Arbitration is voluntary and conforms to UNCITRAL model procedures. There are currently no arbitration matters involving U.S. companies, though one U.S-affiliated institution has been involved in an arbitration process for over three years. The Chamber’s Mediation Center has been operating since 2002 – see http://en.hgk.hr/about/mediation-centre. The Arbitration Act covers domestic arbitration, recognition and enforcement of arbitration rulings, jurisdictional matters and procedures. Once an arbitration decision has been reached, the judgment is executed by court order. If no payment is made by the established deadline, the party benefiting from the decision notifies the Commercial Court, which becomes responsible for enforcing compliance. Arbitration rulings have the force of a final judgment, but can be appealed within three months.
In regard to implementation of foreign arbitral awards, Article 19 of the Act on Enforcement states that judgments of foreign courts may be executed only if they “fulfill the conditions for recognition and execution as prescribed by an international agreement or the law.” The Act on Enforcement serves to decrease the burden on the courts by passing responsibility for the collection of financial claims and seizures to the Financial Agency (FINA), which is responsible for paying claimants once the court has rendered a decision ordering enforcement. FINA also has the authority to seize assets or directly settle the claim from the bank account of the person or legal entity that owes the claim. More information can be found at www.fina.hr. The Ministry of Justice is also pursuing a court reorganization plan that is intended to increase efficiency, and reduce the backlog of cases.
The World Bank Ease of Doing Business 2016 report commended Croatia for making enforcing contracts easier by introducing an electronic system to handle public sales of movable assets and by streamlining the enforcement process as a whole.
There are no major investment disputes currently underway involving SOEs other than the Croatian government vs. Hungarian oil company MOL in regard to disagreement over implementation of the purchase agreement of Croatian oil and gas company INA.
Croatia’s Bankruptcy Act is internationally harmonized and corresponds to the EU regulation on insolvency proceedings and United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. All stakeholders in the bankruptcy proceeding, foreign and domestic are treated equally in terms of the Bankruptcy Act. The World Bank Ease of Doing Business 2017 rating for Croatia in the category of resolving insolvency was 54, up three spots from the 2016 ranking of 57. Bankruptcy is not considered a criminal act.
The Financial Operations and Pre-Bankruptcy Settlement Act, help expedite proceedings and establish timeframes for the initiation of bankruptcy proceedings. One of the most important provisions of pre-bankruptcy is that it allows a firm that has been unable to pay all its bills to remain open during the proceedings, thereby allowing it to continue operations and generate cash under financial supervision in hopes that it can recover financial health and avoid closure.
The Commercial Court of the county in which a bankrupt company is headquartered has exclusive jurisdiction over bankruptcy matters. A bankruptcy tribunal decides on initiating formal bankruptcy proceedings, appoints a trustee, reviews creditor complaints, approves the settlement for creditors, and decides on the closing of proceedings. A bankruptcy judge supervises the trustee (who represents the debtor) and the operations of the creditors’ committee, which is convened to protect the interests of all creditors, oversee the trustee’s work and report back to creditors. The Act establishes the priority of creditor claims, assigning higher priority to those related to taxes and revenues of state, local and administration budgets. It also allows for a debtor or the trustee to petition to reorganize the firm, an alternative aimed at maximizing asset recovery and providing fair and equitable distribution among all creditors.