The Republic of Croatia is a country at the crossroads of Central and Southeast Europe on the Adriatic Sea. It declared independence on 25 June 1991 and has ever since been a sovereign state. It is a member of the European Union, the United Nations, the Council of Europe, NATO, the World Trade Organization, and a founding member of the Union for the Mediterranean.
Croatia is classified by the World Bank as a high-income economy and ranks very high on the Human Development Index. Leisure and hospitality, certain industrial sectors, and agriculture dominate the economy, respectively. Tourism is a significant source of revenue, with Croatia ranked among the 20 most popular tourist destinations in the World. Croatia provides social security, universal health care, and tuition-free primary and secondary education to its citizens. It also plans to adopt Euro as its formal currency by 1 January 2023 at the earliest.
Croatia pertains to the circle of the European continental legal systems in which law arises primarily from written statutes. Its development was largely influenced by German and Austrian legal systems. Croatian legislation is fully harmonised with the Community acquis. The main legal acts which govern commercial activities in Croatia are: (i) the Civil Obligations Act, which regulates contractual and extra-contractual obligations on the principles of freedom of contract, equal standing in obligations, equal value of obligations, conscientiousness and fairness, et al.; (ii) the Ownership and Other Real Rights Act, which regulates ownership and transfer of ownership and other rights such as pledges, mortgages, easements, et al.; and (iii) the Company Act, which regulates the founding, organization, termination and status changes of companies, as well as general rights and obligations of company shareholders and stock-holders.
The Croatian economy is dominated by the service sector followed by the industrial sector, consisting of the shipbuilding, food processing, pharmaceuticals, information technology, biochemical, and timber industry. These sectors are bolstered by intense tourism activity, especially during the spring/summer season with Croatia ranked among the 20 most popular tourist destinations in the World. Lastly, agriculture accounts for around 3.7% of the GDP. Croatia’s main business partner is the rest of the European Union, with the top three countries being Germany, Italy, and Slovenia.
Business of Foreign Persons
Natural and legal persons, entrepreneurs situated outside of Croatia, which are validly incorporated by the law of the country they are situated in, may conduct business within Croatia’s borders under the same conditions as domestic entrepreneurs, as long as requirements proscribed by the law are met. Generally, foreign entrepreneurs cannot conduct business on a permanent basis in Croatia, without establishing a permanent presence through either, (i) incorporation of a wholly owned subsidiary (most frequently in a form of a limited liability company – for which the minimum share capital is HRK 20,000.00 (EUR ~2,650.00) and it may be contributed in cash, rights and other assets.); or (ii) setting-up a branch office. There are certain exceptions to this general rule, such as freedom of performance of information society services within EU that applies to Croatia as well.
A limited liability company (LLC) is a most common type of company in Croatia and has the most flexible structure. The minimum share capital of a limited liability company is HRK 20,000.00 (EUR ~2,650.00) and it may be contributed in cash, rights and other assets (e.g., one can contribute a real estate in the share capital). The share capital of a limited liability company consists of one or more business shares. The minimum amount of a business share is HRK 200.00 (EUR ~26.50). The law does not impose any restrictions in relation to the number of shareholders one limited liability company may have. There is no requirement for the company shareholders or directors to be domestic persons. However, foreign shareholders and company directors who wish to reside and work in Croatia would need to regulate their status in line with the Croatia immigration law.
The majority of actions for establishment of the LLC can be made through a Power of Attorney without physical presence of the founder’s authorized representatives or the newly appointed director(s) of the LLC in Croatia. However, due to anti-money laundering regulations, the prevailing majority of banks in Croatia require a physical presence of at least one person (director) authorized to represent the newly established company in order to open a bank account, i.e., remote opening of bank accounts is not permitted.
A branch office is set up in accordance with the decision passed by the founder, in line with the founder’s Articles of Association (Statute, Articles of Association or any other similar corporate deed). Such decision should be signed by an authorized person of the founder, his/her signature notarized by the public notary and apostilled. The decision on setting up of a branch office must be translated into Croatian language and authorized by a certified Croatian court interpreter.
Companies are subject to a corporate income tax at a rate of 10% for realized profits up to HRK 7,500.000 (EUR ~100,000), and a higher, 18% rate for realized profits upward of the aforementioned amount for one fiscal year.
Natural persons are subject to income tax at a rate of 20% for gross income in amount up to HRK 360,000 (EUR ~47,500), and a higher, 30% rate for gross income upward of the aforementioned amount. Specifically for employees, the subject liable for paying income tax is the employer on behalf of the employee. It is the employer’s responsibility to calculate and pay all tax and social contributions obligations to the relevant authorities (Tax authority, Pension/Health Fund, etc.). Therefore, when calculating the employee’s salary, the employee receives only the net salary, i.e., the salary after all aforementioned obligations have been paid, whereas the higher, gross salary amount will represent the actual expense for the employer.
Croatia adopted the Value Added Tax system (the “VAT”) with the general VAT rate being 25%. Depending on the goods and/or services provided, the VAT rate can also be lower than the general one, equaling to either 13% or 5%.
Lastly, special excise duties are mandatory for alcohol and alcoholic beverages, tobacco products, electrical energy and other energy sources.
Croatian Labour law is mainly regulated by the Labour Act, along with specific laws which regulate social contributions, as well as collective agreements, internal regulations by the employers and lastly, individual employment contracts. It is generally perceived that Croatian labor law system is a conservative and very protective of the employees’ rights. The Labour Act proscribes the minimal conditions which must be afforded to employees; however, employers are eligible to proscribe better conditions for their employees through internal regulations and employment contracts. Croatian Labour Law proscribes that the same working conditions must be ensured by the employer for employees of the same or similar skills and qualifications, regardless of whether they are an indefinite or fixed-term employee, or if they are a full-time or part-time employee. Also, special categories of employees such as, pregnant women, minors, people with certain disabilities/injuries are proscribed additional protections.
Employees are allowed maternity/paternity leave, sick leave, paid annual leave, and mandatory daily/weekly rest. Employers must consider specific requirements when issuing an employment termination. Every type of employment termination is regulated by the law and must be issued for specific and proscribed reasons.