Croatia an investor s guide to tourism

Transcription

1 Croatia an investor s guide to tourism 2014

2 Croatia An Investor s Guide to Tourism

3 Croatia An Investor s Guide to Tourism Foreword by His Excellency Ambassador of the United Kingdom of Great Britain and Northern Ireland Mr. David Slinn In the last few years, Croatia has generated a lot of headlines in the tourism pages of the world s media. It is easy to understand why. Its natural beauty, its historical and cultural legacy, its location within easy reach of major European population centres, and of course its climate, make Croatia an obvious growth market for tourism. Other factors are of course relevant, Croatia s Accession to the EU in 2013 being an important one. As a result, I have lost count of the number of times I have read headlines such as Croatia: the new, up and coming destination. The visitor numbers bear out those headlines. From UK alone, visitor numbers have grown by around 20% a year for the last 3 years, and that trend is likely to continue. Last year in the high season there were almost 80 flights a week between UK and Croatia, this year that figure will be higher. And this is just the UK, the overall trend is also upwards for visitor numbers from other markets as well. The potential is massive. That potential includes sports, activity, medical, gastro and shopping tourism which all offer big opportunities, as does the opening up the inland areas of Croatia, including the capital Zagreb. Another important potential growth area is tourism in the shoulder and low seasons. These are all areas tried and tested in other markets, there is no reason why they should not work in Croatia as well. Some projects in some of these sectors are now moving forwards, but there are real possibilities for significant further development in the coming years. If that is the current picture, Croatia is also thinking about the future. It has to in order to get ahead of the field. The key question, in Croatia as elsewhere, is how to diversify what it has to offer to visitors, how to move away from the focus on beach tourism in the height of summer, so far the bedrock of the tourist economy in Croatia. Tourism is already a significant contributor to Croatia s GDP, but considerable scope exists for it to generate so much more. The realisation of that potential will require investment, internal and external. Judging by the increased number of enquiries from UK institutions, especially since Croatia s Accession to the EU, there will be no shortage of investor interest in these future opportunities. This increased interest should probably not come as a surprise to anybody, since it has been recognised for some time that the Croatian tourism market is likely to be one of the key opportunities for investment in the short to medium term. But the Croatian Government knows that to secure that investment, there is still work to be done to improve competitiveness and the overall business climate, and this is an issue that the Government is actively addressing. In our experience, the Agency for Investments and Competiveness is always very willing to discuss what support it can offer to potential investors. Every market has to make the most of its advantages. In Croatia s case, one such advantage is very definitely its scope for tourism. Successful exploitation of the potential in this sector would certainly give the Croatian economy a significant boost as it looks to become a successful member of the EU.

4 Croatia An Investor s Guide to Tourism

5 Croatia An Investor s Guide to Tourism Content Table 1. Executive Summary 6 2. Labour Market 7 3. Grants & Incentives 8 4. Act on Strategic Investment Projects of the Republic of Croatia Tax Structure in Croatia Specific Investment Opportunities in the Tourism Sector Leisure & Tourism Real Estate Market Investment Opportunities in Tourism Tourism, now for a different reason Shopping and Tourism Overview of the Construction Process Greenfield Investment -v- Acquisition of an Existing Hotel Setting up a Business 26 Information on Content Providers 31

6 Croatia An Investor s Guide to Tourism Executive Summary Underdeveloped and being discovered Croatia s coastline is long, varied, unspoilt and beautiful. With visitor numbers increasing year on year and with more airlines opening new routes the future looks bright and sunny. Visitors require accommodation, they require entertainment, amenities and restaurants. The list is endless and the potential for investment is huge. Croatia's economy Croatia s economy remains fragile with the road to recovery having been a difficult one. GDP growth is anticipated as we move into the second half of this year and it is expected that this growth will increase steadily over the next few years. The political situation is stable and the government is making inroads into the structural reforms that are required. Attractive Croatian labour market Croatia has a well-developed education system and an employee base with good skills and language abilities. Labour cost is low and is in fact one of the lowest in the EU. 57.6% of all employed persons are skilled workers with secondary vocational education. According to GFK Croatia, 79% of Croatians state that they have knowledge of at least one foreign language with English being well spoken in the younger working age bracket. Croatia currently suffers from high unemployment that has driven down salaries which are now among the lowest in Europe. This in turn has given Croatia a large labour pool from which investors into the country can take from. In addition to this, following entry into the EU, experts from the common market can move here with significantly less restrictions. New appealing grants & incentives The Agency for Investment and Competitiveness details what incentives investors can expect if they invest in Croatia. The incentives are both attractive and transparent. In addition to this, the Agency provides a high quality of service to investors. The Agency also provides details on the new Act on Strategic Investments. Previously, a common complaint of investors was the red tape involved in investing in the country. This Act deals with this problem, both speeding up the process and increasing transparency. Investment opportunities in tourism In this section, KPMG Croatia identifies some of the investment opportunities which exist in Croatia. Key highlights include the potential in nautical tourism. The 1,244 islands and reefs give Croatia a significant comparative advantage. Privatisation also presents a number of opportunities for future investment. We also see information on the potential to extend the season with investments in golf and healthcare which are hot topics at the moment. Contributions We are delighted to be able to include contributions from two well respected professionals in Croatia. Davor Stern, of Trade Consulting, offers an interesting and alternative perspective on tourism. Mike Pugh, the Director of Arena Shopping and Entertainment Centre, highlights the opportunities and benefits of tourism and shopping. Legal and Tax structure KPMG have provided guidance for potential investors on the important legal and tax issues that would affect an investor in Croatia. They have also explored the options of investing in an existing hotel or, a greenfield site. You will also find all relevant and necessary information regarding the setting up of a business in Croatia. In Croatia, there are no restrictions on foreign ownership of Croatian business enterprises. All different forms of commercial enterprises that are most commonly used in Croatia are explained in detail in this section of the paper.

7 Croatia An Investor s Guide to Tourism Labour Market The cost of labour in Croatia Eurostat s records reveal that the cost of labour in Croatia, including salary, contributions and taxes, was among the lowest in the EU last year and well below the European average. The average cost is 8.8 per hour in contrast with EU average of 23.7 per hour. Cost of labour in the EU grew 10.2% in the period between 2008 and 2013, with the slowest growth in Lithuania (0.5%) and Croatia (0.7%). Average cost of labour, including salaries, contributions As to be expected, the majority of workers are required in the provision of accommodation, food services, wholesale and retail trade. This includes occupations such as waiters, cooks, cleaners, maids, vendors, kitchen workers, receptionists, bakers, tourist guides and representatives for example. The largest number of seasonal workers (per county) were employed in Split-Dalmatia, Dubrovnik-Neretva, Brod-Posavina, Vukovar-Sirmium and Istria County. There are a large number of seasonal workers who come from outside of coastal Croatia. They mainly originate from the Vukovar-Sirmium, Osijek-Baranja, Brod-Posavina and Sisak Counties. Source: Eurostat, 2014 The tourism sector is labour intensive and employee costs make up to 40% of the total operating costs. This gives Croatia a competitive advantage from a cost perspective. The average monthly gross earning per person in paid employment in legal entities in the Republic of Croatia for January 2014 amounted to 1,046 (8,007 kuna), while the average monthly paid off net earnings per person amounted to 726 (5,553 kuna). Unemployment and seasonal employments In 2013 the unemployment rate in Croatia according to the ILO method reached 17.2%. It is expected that due to the forthcoming tourist season this number will decrease. There is ample labour to support tourism in Croatia and it s continuing growth. Educational Institutions for Tourism in Croatia Education and foreign languages The Croatian education system is considered to provide a good quality education, with a particular speciality in technical and engineering professions. There are a growing number of institutions, high schools and universities who now operate courses on tourism and hospitality. Language skills are important for tourism and according to recent research, 79% of Croatian citizens state that they have knowledge of at least one foreign language, most commonly English, German or Italian. (Source: GFK Croatia, November 2012). Unemployed by education 5% 5% 6% 20% Without schooling and uncompleted basic school Basic school 63% Secondary vocational school and grammar school Non-university degree University level and postgraduate degrees Source: Antal International Source:Mazvag.hr, 2014 Knowledge of English is significantly higher within younger age groups (55% of the age group consider their knowledge of English as good or very good) and those with higher education (55% of those educated at a university, also evaluate their knowledge of English as good or very good). Fluent German speakers are more common among the older age groups. The Italian language holds third position and is more frequently spoken in coastal areas, particularly Istria and Primorje.

8 Croatia An Investor s Guide to Tourism Grants & Incentives Introduction Investment projects in the field of high added value services in tourism are granted additional incentives besides those available to investments in other sectors. This would include investments such as accommodation projects (hotels, apart-hotels, tourist resorts categorized as four- or more stars, tourist apartments within tourist resorts categorized as four- or more stars, camps categorized as four- or more stars, heritage hotels and other types of accommodation facilities resulting from renovation of cultural and historical structures), supporting services, health tourism, congress tourism, nautical tourism, cultural tourism, ecological tourism and entertainment and/or recreation centres and parks. This, coupled with the fact that Croatia has one of the most generous investment incentives in the region, has made investing in tourism very attractive for both foreign and domestic entities. Investment incentives Both cash grants and tax relief are available to investors entering or expanding their businesses in Croatia. Aid intensity is calculated as 40% - 60% of the eligible investment costs, depending on the size of the enterprise. Eligible investment costs are either cost of tangible (value of buildings and plant/machinery) and intangible assets (patent rights, licenses, know-how) or gross salary (total cost to the employer) calculated over a period of two years. Minimum amount of investment 50,000 and at least 3 new jobs created for microenterprises 150,000 and at least 5 new jobs for SME and large enterprises Cash Grants: Job creation incentives The amount of aid depends on the unemployment rate in the county where the investment is located as well as the category of persons employed. The investor may also receive additional aid for the education and training of newly employed workers linked to the investment, up to the amount of 80% of the training costs. County Unemployment Rate Aid amount as a % of two years gross salary costs/per new work place* Increase for business support strategic activities and high added value activities, including tourism sector activities Up to 10% 10% (max. 3,000) +25% (+ 750) 10-20% 20% (max. 6,000) +25% (+ 1,500) Above 20% 30% (max. 9,000) +25% (+ 2,250) *An investor will be granted 100% of the non-refundable aid for eligible costs of new jobs created if employing certain categories of people, such as unemployed and first-time employed. In other cases, only 40% of the non-refundable aid will be granted. Incentive measures for labour-intensive investment projects For labour intensive investments, non-refundable aid for new jobs created is increased by a given percentage, depending on the number of new jobs created. Number of newly created jobs Increase of support for creating new jobs Maximum amount of incentives 40% of the eligible costs + increase for SME's (10% or 20%) 100 and higher 25% 300 and higher 50% Tax incentives % tax relief depending on the amount of investment and number of new jobs created. Standard Corporate Income tax rate is 20%. Investment amount ( million) <1 Number of newly employed 5 (3 for micro) Period of tax years 10 (5 for micro) > Period of employment (years) 3 (SME's) 5 (large companies) 3 (SME's) 5 (large companies) 3 (SME's) 5 (large companies) Corporate Income tax rate 10% 5% 0% 500 and higher 100% Incentive measures for the capital costs of the investment project The eligibility conditions for incentive measures for capital costs of the investment project are: investment in long-term assets of at least 5 million and with the condition of opening at least 50 new workplaces.

9 Croatia An Investor s Guide to Tourism County unemployment rate Incentives for capital expenses Cash grant to the amount of 10% of eligible costs of investments for: Construction of a new factory, production facility or tourist facility 10-20% Acquisition of new machinery, i.e. production equipment (max. amount up to 0.5 million with the condition that the part of investment in to the machinery/equipment equals at least 40% of the investment and that at least 50% of the machinery/equipment is of high technology) Cash grant to the amount of 20% of eligible costs of investments for: Construction of the new factory, production facility or tourist facility >20% Acquisition of new machinery, i.e. production equipment (max. amount up to 1 million, with the condition that the part of investment in to the machinery/equipment equals at least 40% of the investment and that at least 50% of the machinery/equipment is of high technology) Agency for Investments and Competitiveness In addition to favourable investment incentives, the Government s Agency for Investments and Competitiveness offers free assistance throughout the investment process, saving time to undertake the investment project of the interested investors. Likewise, all questions regarding the availability of incentives and the application procedure can be addressed to the Agency. Agency for Investments and Competitiveness Radnička cesta 80, Zagreb, Croatia [email protected] phone: fax:

10 Croatia An Investor s Guide to Tourism Act on Strategic Investment Projects of the Republic of Croatia The Act on Strategic Investment Projects of the Republic of Croatia enables: quicker investment implementation less procedures and licenses needed each step of the investment process is specified exact deadlines for each step of the investment process The following may qualify as strategic investment projects: private, public or public- private investment projects; which include construction of structures and are in one of the following sectors: economy, energy, tourism, transport, infrastructure, electronic communications, postal services, environmental protection, public utilities, agriculture, forestry, water management, fisheries, health care, culture, science, technology, education, defence and judiciary; which meet 7 requirements prescribed by law, such as the employment of a significant number of persons, minimum value of total capital investment costs, alignment with spatial plans, etc.; and private investment projects, if they are in production and processing activities, development and innovation activities, business support activities, activities of high added value services, activities in the energy sector, infrastructure, or activities related to agriculture and fisheries. In order to be considered as a strategic investment project, the project needs to meet the above listed prerequisites and be proclaimed as such by the Government of the Republic of Croatia. Additional information can be obtained from the Ministry of Economy: Ministry of Economy Ulica grada Vukovara 78 T: [email protected] More information can be found in the Publications section of the Agency for Investments and Competitiveness website: The Strategic Investment Process Potential investor submits the project application to the Ministry of Economy Ministry of Economy performs administrative check of the received application and submits proper and complete application for the consideration to the Commission for Assessment of Strategic Investment Projects Proposals (further: Commission) Commission assesses if the applied project meets the criteria prescribed by law and proposes its inclusion on the List of Strategic Investment Projects. Commission also appoints the Head of the Operational Group for the Preparation and Implementation of Strategic Projects (further: Operational Group) Head of the Operational Group nominates other members of the Operational Group. Operational Group determines necessary steps for the project preparation and implementation and the overview of administrative and other acts necessary for its implementation. Operational group also determines the elements of the proposal of the Decision on Designation of Strategic Investment Project by the Government of Croatia and submits it to the Commission Commission gives its opinion about the proposal of the Decision on Designation of Strategic Investment Projects to the Ministry of Economy and proposes to the Government of Croatia the adoption of the Decision on Designation of Strategic Investment Project The Government of the Republic of Croatia shall render a Decision on Designation of Strategic Investment Project of the Republic of Croatia that is then published in the Official Gazette. Finally, Agreement on the Preparation and Implementation of the Strategic Investment Project is concluded between an interested private investor and the Ministry of Economy within 30 days from the publication of the Government s Decision on Designation of Strategic Investment Project in the Official Gazette.

11 Croatia An Investor s Guide to Tourism Tax Structure in Croatia Corporate Profit Tax (CPT) Croatian resident companies (that either have their registered office or place of effective management in Croatia) pay CPT on their worldwide income and capital gains. Non-resident companies are taxed only on income and capital gains earned in Croatia, unless a specific double tax treaty (DTT) provides otherwise. The standard CPT rate is 20%. CPT is payable on taxable income which is pre-tax accounting profit according to the accounting framework applicable to the taxpayer, either International Financial Reporting Standards (IFRS) or Croatian Financial Reporting Standards (CFRS), adjusted in accordance with the CPT Law. Companies pay monthly advance CPT payments based on the CPT return for the previous tax period. The advance CPT payment for each month is payable by the end of the following month, in the amount equal to the previous tax period's liability divided by the number of months in the tax period. The first advance payment for the year is due by the end of the month following the month in which the CPT return for previous year was submitted. The amounts of CPT advance payments can be changed in certain circumstances (e.g. at the request of the company). Companies which start performing business activities are not required to make advance payments until their first CPT return is submitted. The standard withholding tax rate is 12% on dividends and 15% on interest and royalties, as well as on market research services, tax, business advisory and audit services paid to nonresidents. However, withholding tax at the rate of 20% applies in respect of payments for all types of services (other than payments of dividends, interest, market research services, tax, business advisory and audit services) made by Croatian legal entities to legal entities which either have their seat or place of effective management or supervision in a tax haven which is included in the list published by the Ministry of Finance. Adjustments include, amongst others, increasing accounting profit for entertainment, car related expenses, excessive interest paid on certain related party loans, depreciation in excess of prescribed rates, penalties, etc. A company can reduce its tax base by the amount of declared after tax profit used to increase the company's registered share capital. In addition, a company can reduce its tax base if it qualifies under the Act on Investment Promotion and Enhancement of the Investment Environment, Free Trade Zones Law, Law on Renewal and Development of the City of Vukovar, Law on Scientific Activities and Higher Education and Training and the Education Incentives Law. Dividends received by a Croatian company are not subject to CPT. A CPT return must be submitted to the Croatian Tax Authorities (CTA) within 4 months of the company s tax year end (31 December, unless permission to use another date has been granted). Withholding tax rates on dividends, interest, royalties, market research services, tax, business advisory and audit services paid to a non-resident may be reduced or eliminated pursuant to a DTT concluded between Croatia and the country of residence of the non-resident. In order to apply a reduced rate of withholding tax under a DTT the non-resident should provide the Croatian payer with a prescribed form verified by the tax authority of its country of residence. If a zero rate applies under a DTT, the non-resident can, instead of the form verified by the tax authority of its country of residence, provide the Croatian payer with the tax residence certificate issued by the tax authority of its country of residence. The provisions of the Interest and Royalties Directive, the Parent Subsidiary Directive and the Merger Directive are incorporated in the Croatian CPT legislation.

12 Croatia An Investor s Guide to Tourism Personal Income Tax (PIT) Individuals who are tax resident in Croatia pay tax on their worldwide income. An individual is deemed to be tax resident in Croatia if he/she has residence or habitual abode in Croatia. An individual has residence in Croatia if he/she owns/rents accommodation without interruption for at least 183 days in one or two consecutive calendar years. An individual has habitual abode in Croatia if the circumstances suggest that he/she permanently resides in that place or region for a period of at least 183 in one or two consecutive calendar years. A resident taxpayer is also an individual who has neither residence nor habitual abode in Croatia, but is employed by the Croatian government and receives a salary based on this appointment. Limited taxation (e.g. on income sourced in Croatia only) applies to those individuals who are not tax resident in Croatia. PIT is payable on most sources of income, including: employment income; self-employment income; income from property and proprietary rights; income from capital; income from insurance; and other income. Income from dividends and profit shares paid after 1 March 2012 (except for dividends and profit shares earned up to and including 31 December 2000 and in the period from 1 January 2005 up to 28 February 2012 as well as dividends and profit shares realized through qualifying ESOP programs) is taxable at source at the rate of 12%. A non-taxable threshold of HRK 12,000 per annum can be claimed upon submission of an annual PIT return. Annual taxable income bands are as follows: Income % up to HRK 26,400 (approx. 3,520) 12 between HRK 26,400 and HRK 105,600 ( 3,520-14,080 above HRK 105,600 (approx. 14,080) Taxpayers who are required to submit their annual PIT return for the total income derived in the tax year must do so by the 28 February of the following year. Employees are obliged to pay pension insurance contributions on their gross wages and salaries at a 20% rate. The contributions due from employees are paid at the following rates: 15% to the Pillar I pension insurance fund (the State fund); and 5% to a Pillar II pension insurance fund (four private pension funds to choose from). In addition, employers pay contributions based on gross wages and salaries for health insurance (at the rate of 15%), for unemployment insurance (at the rate of 1.7%) and for work related injury insurance (at the rate of 0.5%). Value Added Tax (VAT) Croatian VAT legislation is harmonized with EU VAT framework and there have been significant changes compared to the pre-accession period. Most of the changes became effective as of 1 July Amongst other, changes relate to the place of taxation of services, introduction of intra-eu taxation rules, provisions regarding VAT refunds to taxpayers established in another EU member state and VAT refunds to taxpayers established in a non-eu member state. One of the changes which is of importance to the tourism sector is the introduction of the tour operator margin scheme. The standard VAT rate in Croatia is 25%. There are also reduced rates of 13% and 5%. The reduced VAT rate of 13% applies to tourist accommodation, preparation and serving of food and drinks in hospitality facilities, periodic newspapers and magazines, edible oils and fats, baby food, supply of water (except bottled or otherwise packaged drinking water), refined (white) sugar and concert tickets. The reduced VAT rate of 5% applies to bread, milk, certain books, certain medicines, medical equipment, cinema tickets, daily newspapers and scientific magazines. Certain supplies are exempt from VAT (no right to recover input VAT), for example, financial and insurance services, health and welfare services, education services, deliveries by charitable organizations, deliveries by museums, libraries, theatres, orchestras and other cultural services, betting and gambling, rent of residential property, etc.

13 Croatia An Investor s Guide to Tourism Specific Investment Opportunities in the Tourism Sector The Agency for Investments and Competitiveness in cooperation with the Ministry of Maritime Affairs, Transport and Infrastructure (MPPI), Croatian Chamber of Economy (HGK), Center for Monitoring Business Activities in the Energy Sector and Investments (CEI), Croatian Agency for SMEs and Investments (HAMAG Invest) and Croatian Chamber of Trades and Crafts (HOK), has published the new, fourth edition of the Catalogue of Investment Opportunities in order to provide relevant information about projects for sale or in search for strategic partners (on March 25, 2014). The Catalogue was first published in June 2013, and since then the status of the existing projects have been regularly updated and new investment projects have been added. Among the projects that were included in the first edition of the Catalogue (41 projects), six tourism companies have successfully found a strategic partner in the process of pre-bankruptcy settlement procedures and for four projects owned by the Republic of Croatia, public invitation for expression of non-binding interest was recently published (Hoteli Plat Plc., Hoteli Maestral Plc., Imperial Plc. and project Kupari I). For project Kupari I, it will be possible for all interested investors to participate further in the transaction process, while for the three other tourism companies, only investors who already expressed their interest, will be invited to submit binding offers. Currently, the Catalogue includes 45 investment projects, 18 of which are public projects (regional and local authorities), 23 private projects, as well as information on 4 technology incubators. The largest number of projects relate to projects in the sector of tourism, public infrastructure and industry. The following projects are a small selection: PROJECT PINETA Brijuni Rivijera Ltd. is a development company founded in 2003 by the public authorities (The Republic of Croatia and Istria County), with the purpose to develop and implement the project of Brijuni Rivijera, based on the Master Plan of the Istrian tourism of Brijuni Rivijera area. It is planned to be developed on three unique locations: Pineta, Hidrobaza and Sv. Katarina and Monumenti, which should be profiled as the highest category of tourist destinations. PROJECT HOTELI MAKARSKA Hoteli Makarska Plc. is a dominantly state owned tourism company, established in 1952, which offers accommodation and hospitality services in its two hotels and a hotel complex near the beach: the four star Meteor Hotel has 277 rooms, two outdoor swimming pools, a gym and a wellness centre (23,391 m 2 ), the three star Dalmacija Hotel has 190 rooms (13,423 m 2 ) and the two star Rivijera Hotel Complex consists of nine pavilions and 258 rooms (13,997 m 2 ), a tennis centre with 8 outdoor and 2 indoor tennis courts totalling 7,808 m 2. The Company has already established a prominent position on international markets (approximately 90% of guests are from abroad) and its location provides endless possibilities for active holidays (hiking/walking and cycling paths on the Biokovo mountain, cultural and heritage sightseeing and catholic pilgrimage tourism Medjugorje, Vepric) for example. The state owned portion of share capital (41.39%) will be offered for sale by the state agency Center for Restructuring and Sale (CERP), upon determination of interest from investors in purchasing shares which will be defined through a public tender. The Pineta site is situated in the small village of Fažana, in the vicinity of Pula, near the famous National Park Brijuni Islands. The total area of the Pineta location is 50 hectares and is envisaged for the construction of a hotel (4* 5*), with a total of 650 beds as well as sports and recreational facilities.

14 Croatia An Investor s Guide to Tourism PROJECT VELI JOŽE CAMP The project is wholly owned by Zagreb Holding Ltd. (Zagrebački holding d.o.o.), a company owned by the City of Zagreb, which, in the process of restructuring, is selling noncore assets, including the Veli Jože Camp. The camp is located on the Istrian peninsula, at the westernmost point of the Croatian coast, near Savudrija, 10 km from the Croatian-Slovenian border and 55 km from Trieste, Italy. Facilities Total net usable space Gross floor area Reception and shop 702,02 m 2 780,02 m 2 With a 1,800 meters long beach, the camp covers an area of 303,543 m2 with an accommodation capacity of 3,000 visitors in campsites and wooden bungalows. Additional facilities include five modern equipped bathing blocks, reception, shops, restaurants and a variety of sports grounds: nine basketball courts, two handball courts, two volleyball courts, two football and four street-ball pitches, as well as a miniature-golf course. It also has a multi-purpose stadium for basketball, volleyball and five-a-side football, with seating for 1,200 people. Sanitary facilities 173,72 m 2 199,68 m 2 Restaurant and kitchen 402,48 m 2 473,50 m 2 Prefabricated buildings 96,60 m 2 105,00 m 2 (per weekend house) Petrol Station 17,10 m 2 18,00 m 2

15 Croatia An Investor s Guide to Tourism PROJECT JANKOVIĆ CASTLE Janković Castle, located in the centre of Virovitica-Podravina County, is a protected cultural monument. Together with the historical park and the remaining supporting structures, the Castle makes a valuable example of feudal countryside architecture of the late 18th and early 19th centuries. The aim of the project is its renovation into a four-star hotel with wellness, restaurants and sports facilities (swimming pools) covering a total area of 74,430 m2. Given the lack of accommodation facilities, especially those of high quality in the County, the project offers significant potential for the development of sports tourism such as hunting, as this region is rich in wild game (wild boars and deer, quail, hare, pheasant, partridge and wild duck hunting). With an estimated value of 10 million, the castle is 100% owned by Virovitica-Podravina County and will be offered to a strategic partner based on a right to build model granted for 99 years for 1 HRK per year (1 HRK = 0.13 EUR) under the condition that the real estate will be developed as agreed within five years from the selection of the winning bidder. All major planning permits and additional documentation necessary for the fulfillment of the project have been obtained. PROJECT KUPARI I Project Kupari I is a former military resort, owned by the Republic of Croatia. Situated in the village of Kupari, near the City of Dubrovnik (11 km) and Dubrovnik International Airport (16 km), it includes 14 hectares of land and is envisaged for the refurbishment or reconstruction of the existing hotel accommodation into high grade hotels (four star plus) with approximately 1,500 beds. Currently, the Kupari I site consists of five non-operating hotels: Grand (6,102 m2), Pelegrin (7,346 m2) Kupari (19,894 m2), Goričina I (2,140 m2) and Goričina II (12,282 m2), with their adjoining facilities. Located right by the sea, these hotels cover a net developed area of 47,764 m2. All hotels, which previously had an accommodation capacity of 1,626 beds, are in a very poor condition and require significant reconstruction or refurbishment. The transaction model includes the right to build and use the property for a period of up to 99 years. The public invitation for submission of binding offers is expected to be announced during the course of 2014.

16 Croatia An Investor s Guide to Tourism Leisure & Tourism Real Estate Market Second home market The current economic climate will have the biggest influence on Croatia s residential sector over the next two to three years. Particularly in the tourist and second home sector until the existing stock of homes is absorbed. The second home residential property market has been characterised by falling transaction levels since 2009 mainly due to the unavailability of property and mortgage finance. As a result, the stock of unsold residential properties throughout Croatia has increased to record levels. In addition, the current European economic climate has significantly reduced the volume of non-domestic residential purchasers within Croatia. This has led to a decrease in sales prices in certain areas, a larger volume of unsold units and a reduced amount of development activity and even developments put on hold. Property purchase demand by non-croatians is concentrated on the Croatian coast, preferably along the Istrian peninsula and in Dalmatia. Since the early 2000 s, there was an increasing demand for residential property from foreign buyers, most notably from Russia, UK, Ireland, Germany and Austria. Italy, Slovenia, Poland and Czech Republic are expected to become an increasingly important source of potential property buyers in the near future. However, in the last five years, demand has had a downward trend due to fewer enquiries from the historically strong foreign market. It is expected however, that with the ongoing EU recovery and the increasing availability of mortgage finance that more buyers will enter the Croatian market. Hotel market Currently, 18% of the Croatian hotel capacities are operated by an international brand, compared to approximately 30% on a European level. The majority of high-end hotel capacities are located along the Croatian coast in Dalmatia and Istria, with the largest concentration of 5-star capacities in Dubrovnik. The Dubrovnik area has a total of 13 five-star hotels followed by the Rijeka area with 5 and Istria with 4 hotels in this category. The following hotels are all operated under internationally renowned brands: Starwood Hotels and Resorts operate Le Méridien in Split, with 381 guest rooms since early Falkensteiner Hotels and Resorts operate a property in Zadar with 250 guest rooms. Sol Meliá operates 14 hotels and five campsites in the region around Umag in the north west of Croatia. Iberostar runs two three star properties and one four star property in and around Cavtat, south of Dubrovnik. Riu operates the Hotel Riu Blue Waves on the island of Krk with 97 guest rooms. Hilton International operates the Hilton Imperial Dubrovnik since early 2005 and another property is planned in Split. Rezidor added Radisson Blu Resort and Spa Dubrovnik Sun Gardens in July Radisson Blu Resort, located in Split, is the newest hotel to open in Croatia and is a modern city hotel located approximately 2 km from the city centre. Hotel Monte Mulini is a luxury hotel with 113 guest rooms located in the south of Istria. The closest airport is Pula, situated approximately 38 kilometres from the property. Hotel facilities include two restaurants, one bar, an extensive spa and swimming pool. We would therefore suggest that there will be opportunities for the development of future luxury hotels for international operators especially as Croatian tourism matures. Development Land Market Up until the global downturn, the land market had experienced the same appreciation as the market for end product, and had in fact exceeded that of apartment and villas, as developers increased their confidence in the market. Until late 2007, development land prices in Croatia had seen average value appreciation of over 10% per annum in the subsequent five years. Throughout Croatia, site values are, proportionately well below more mature markets where land prices typically comprise between 30-35% of sale values. Land prices are higher when planning benefits are in place such as Urbanistic Development Plan (Croatian, Urbanistički Plan Uređenja UPU), Location Permit, Detailed Development Plan (Croatian, Detaljni Plan Uređenja DPU) or Building Permit. Since the mid 1990s, the construction industry has not been able to match demand. The reasons for the lack of supply are mainly coastal zoning overhauls and disparate land structures.

17 Croatia An Investor s Guide to Tourism Investment Opportunities in Tourism Introduction In 2013 tourism accounted for 16.5% of GDP, and it has been a sector which has not only resisted the general economic downturn but, has been a key contributor to preventing a more pronounced recession. The full EU accession in July 2013, is expected to encourage tourist demand and was a driver in bringing order into existing legislation. This has laid the foundations for a recovery of the economy and the tourism sector in particular. fiscalisation, i.e., the mandatory reporting of all cash payments, has significantly reduced unrecorded transactions and the grey economy in tourism and catering. Destination highlights Over the past few years, Croatia has emerged as a hotspot on the world travel map, increasingly recognised by both a growing number of visitors and by the global tourism establishment. Croatia s advantages as a tourist destination lie in its unspoiled nature and traditional Mediterranean culture. Moreover, untapped potential lies in the development of continental, rural and culinary tourism, which is still underdeveloped compared to certain neighbouring destinations. The combination of Croatia as a traditional Mediterranean culture coupled with the increasingly viable branding as a lifestyle destination, offers potential investors an opportunity to position their investments in a number of ways. The Building Blocks A well-developed road infrastructure will soon be complemented by a significant improvement in airport infrastructure with the construction of a new regional airport hub in Zagreb, planned to start operation in In addition to this, a series of legislative changes have opened the way for further investments into tourism infrastructure: a new law on strategic investments has simplified procedures and reduced the time needed for realisation of investments of above HRK 150 million via implementation of strict deadlines for issuing of permits and penalties on failing to meet such deadlines; e-permits were introduced from January 2014 with the aim of simplifying the issuing of building permits and reducing the time needed for their issue to 35 days or less; an action plan for legalisation of real-estate is expected to all but eliminate the existing un-legalised real-estate stock by 2016 and simplify investment projects going forward; the VAT rate in tourism and catering has been reduced from 25% to 13%; These changes, together with full access to EU funds, which could facilitate investments beneficial to the tourism industry, have laid the building blocks for a new cycle of investment into Croatia s tourism sector, both by those already active in Croatia and by new investors ready to take advantage of the opportunities. Tourism industry outlook Croatia recorded 64.8 million overnight stays in 2013 (up by 3.3% y-o-y), with an average stay of just over five days, with growth continuously outperforming the EU27. Despite intensified investments into tourism infrastructure in recent years, currently only 13% of total accommodation relates to hotels and of this, only 40% is within the 4 and 5-star category. Capacities are dominated by private accommodation

18 Croatia An Investor s Guide to Tourism accounting for just under 50% of total capacities while an additional 25% relates to camp sites. The current tourism master plan envisages an increase of the share of hotel capacities by some 40% (i.e. to 18%) by There is evident under-supply of first class hotel brands, which currently operate only some 18% of the hotel supply. This is partly due to the relatively strong position of the five largest local hotel groups, which hold a quarter of the hotel accommodation supply and partly due to a lack of new projects. Key investment opportunities lie in: nautical tourism, mixed-use resorts, golf resorts, healthcare tourism, rural and culinary tourism. Nautical tourism Croatia is a Mediterranean country recognisable for its indented coastline and islands. Croatia s 1,244 islands and reefs are a distinguishing symbol of Croatian tourism and a comparative advantage in its development. Due to such natural assets, nautical tourism is an especially valuable and successful segment of Croatian tourism and presents an opportunity for investors to venture into this highend market, which is still significantly underdeveloped. There are 50 nautical marinas in Croatia, which provide a total of 17,000 nautical berths. The most expensive nautical destinations are Spain, France and Italy. Compared to the prices in those countries, prices in Croatia are 30% lower on average. Prices in Greece are lower than in Croatia on average, but the quality of service is also generally considered to be lower. With regard to the coastline length, Croatia currently has about 2.7 nautical moorings per kilometre, while in 2007, France had 64, Spain 20, Italy 3.1, Turkey 2.2 and Greece 1.1. Such a comparatively low density of moorings indicates that Croatia still has significant competitive development potential on the nautical services market as well as existing capacity expansion opportunities. Although recent developments in the market saw foreign investments into a number of smaller marinas and a start of consolidation of the market, there remains ample room for further investment in this segment via: upgrading the existing marina infrastructure; development of new capacities, as the Adriatic still lacks an estimated 15,000 berths; and building mega yacht mooring capacities. The total income of nautical ports in 2013 amounted to some HRK 690 million ( 90 million), of which some HRK 505 million ( 66 million) related to rent of marina berths. Despite the global economic crisis, nautical tourism in Croatia is expanding. Croatian competitiveness in nautical tourism is influenced by neighbouring and other nearby Mediterranean countries - by flag, the largest number of permanently moored vessels came from: Croatia (38%), Austria (18%), Germany (16%), Italy (6%), Slovenia (5.5%) and the USA (3%), accounting for 86.5% of the total number of permanently moored vessels. Privatisation opportunities Croatia s political heritage gives rise to investment opportunities comprising numerous properties still in state hands, either in the form of state-owned properties or companies in various phases of privatisation or commercialisation. Recent projects have been initiated by the State and include: Brijuni, Kupari, Pineta and others which have yet to be officially announced. Island tourism The undisputed natural beauty of more than a thousand Croatian islands such as Hvar, famous for being one of the sunniest locations in the world, provides great investment opportunities. Many of these islands base much of their economic wellbeing on the summer high season.

19 Croatia An Investor s Guide to Tourism There are opportunities for investing in the development of the current infrastructure (ports and ferries) and creating alternative transportation means go hand in hand with the development of accommodation facilities on the islands. Golf tourism Despite a favourable climate and geo-location, Croatia currently has only four 18-hole golf courses, two 9-hole courses and a few practice courses. The recent streamlining of legislation and a more investor friendly stance at both state and local levels (as a result of the protracted recession) have now reopened the door for investments into golf tourism. Meanwhile, the number of golf courses in comparison to Mediterranean destinations, has increased in the period between 2009 to 2011 from 17 to 20 in Turkey, 78 to 86 in Portugal and from 316 to 352 in Spain. As a result, opportunities abound for investors into this high-end segment, which is intended to form an important part of Croatia s tourism strategy going forward, as is already the case in comparable Mediterranean destinations, especially in the shoulder and off-seasons. Areas which provide particular opportunities for investors include continental wellness tourism, specialist medical treatment centres and nursing homes, especially in coastal regions. The latter is of particular relevance given the increasingly ageing population in the EU, creating opportunities for assisted living projects as a specific niche of healthcare tourism. A study by the German Ministry of Economy for example, suggests a change in travel behaviour of senior citizens, resulting in more international trips coupled with a rising interest for coast/islands in the south, whereby Croatia is likely to be perceived as an ideal candidate to spend one s golden years. Croatia has a number of comparative advantages for the successful development of healthcare tourism: its proximity to a large regional market, a favourable climate, the untouched nature, safety, relatively favourable prices (compared to those in the EU) and a long tradition and good reputation of the health sector. The right time to invest Croatia is an up-and-coming destination, receiving more and more attention from the global community, and appears set to remain a tourist hotspot in the foreseeable future. Now is the right time to invest - on the demand side, the building blocks have been laid internally which should simplify and expedite investments into the tourist infrastructure whilst on the supply side, and on the back of EU accession, Croatia is on course to transition from a current hotspot into an established tourist destination, able to attract a stable level of premium visitors. The most attractive opportunities lie in the development of highend tourist resorts and nautical marinas in prime locations on the Croatian coast. Also of significance are the current opportunities to invest into distressed assets and brownfield projects, primarily in state ownership in prime locations on the Croatian coast. Healthcare tourism The healthcare tourism segment is one of the fastest growing segments, currently growing at an annual rate of some 15%-20% globally. In Croatia, however, this segment has a potential for development.

20 Croatia An Investor s Guide to Tourism Tourism, now for a different reason... An article by Davor Stern (Trade Consulting d.o.o.) Introduction We are all knowledgeable when it comes to tourism: the season, the number of overnight stays, the grey economy, the preparations, the results,... In my view, Tourism (I deliberately used a capital letter) is something else entirely. It is a food export channel to millions of visitors who consume food on the spot and carry positive impressions of food which they will hopefully buy at home, should it be available. It is a selling point for fuels that can increase in price by a few lipas during the season, but will significantly replenish the state budget. It is a place for wealthy retirees from northern countries to spend their winter season. Government of Croatia donates Raša Valley, as the youngest member of the EU, in order for each EU country to build its typical village with its indigenous peoples, in which, apart from housing for permanent residents, would include a national restaurant, the manufacture and sale of typical souvenirs, artists, production of foods and food products specific to each country and so on. Such clusters of various national villages would be the image of creation and genesis of Europe. Even though it is united on a political and economic level, it is completely different in many other aspects. It is a number of attractions that can and must work throughout the year and are no less than a world renown brand. I will only mention one attraction although I am convinced that there are many more tilt away in people s heads: the challenge is to realise those ideas! European village - Theme Park The Raša Valley in Istria is a neglected region in which the state owns approximately 3,000,000 m2 of land which is not operational. The Raša Valley can be reached by car via the Istrian Y road, by rail via Slovenia, by plane through Pula or by boat (for instance by cruiser line) through the beautiful fjord straight to the port which served as a loading bay for the exports of coal while the mine in Raša was active. The Raša Valley is crossed by numerous landscaped canals for drainage during high tides that are not functional, however can be easily and simply governed and put into operation. They are navigable by boats and can present a way of transportation within the valley. Imagine this Science Fiction scenario Imagine what a "learning ground" that would be for school children, students, families and individuals who could, in one or more days, experience a Finnish breakfast, lunch in Spain, dine in France while never crossing more than one kilometre inside the perimeter of the theme park. The visitors would have access to hundreds of thousands of beds in Istria and Kvarner, available within 1.5 hour drive in comfortable bus or by car at any time, enjoying the mild climate of Istria. Such theme park would enrich the exiting attractions which todays tourists desperately need. In times of relative saturation it is essential to devise new projects that will attract visitors and especially those who have been everywhere and seen everything...

21 Croatia An Investor s Guide to Tourism Shopping and Tourism An article by Mike Pugh (Arena Centar) Croatian tourism facts and figures Beautiful landscape, pristine beaches, clear sea, breath taking sunsets, historic towns, friendly faces...these are some of the attributes of the Croatian tourism offer. Known as the Mediterranean destination of choice, it ranks high among the top global tourist destinations. The numbers speak for themselves; during the past 12 years, tourism in Croatia has been growing in leaps and bounds, even at rates higher than the rest of Europe. In 2012 Croatia had a total of 11.8 million tourists and 12.9 million in 2013 which is an astounding number for such a small country. The national strategy calls for 17.5 million tourists by cards, shopping on vacations has become accessible to many people. The combination of all these factors has given a tremendous boost to the growth of the tourism industry not only locally, but on the global level. To illustrate this fact more clearly, travel and tourism is an industry double the size of the automotive manufacturing. It employs 1 in 12 or 255 million people worldwide. The benefits of tourist shopping Shopping not only generates revenues; it also contributes to the overall economic development. It plays a key role in the success of the tourist destination. According to the Shop America Alliance, tourists spend between 4 to 10 times more than the local shopper. It is not just about buying souvenirs and mementos; tourists tend to also purchase lifestyle items such as clothing. Needless to say, shopping has become a part of the entire experience. Strategy The European Travel Commission hints that there is a solid foundation to expect further growth in the upcoming years. However, the so called sun and sea selling point Croatia has been relying on will not produce great results in terms of increasing the number of tourists and revenues. In order for Croatia to keep up with its foreign competitors in terms of attracting tourists, it needs to expand its offer and modernize its strategy for attracting tourist. One of the most important duties is to create content that would attract tourists not only during the summer months, but also year round. Apart from conferences, museums and cultural events, shopping is a tourist attraction that is sure to attract tourists even during the dreary winter months. The need for shopping It is a well-known fact that tourists love to shop when they travel. In fact, shopping is the reason why some people venture out on trips. The rest of them believe that their vacation is not complete unless they do some shopping. Motivated by prestige, selfesteem, vanity, economic savings and nostalgia, tourists hunt for souvenirs, special mementos, art pieces and great deals on their trips. According to the Travel Industry Association of America, 60% of the U.S. travellers identify shopping as their favourite travel activity. Thanks to the modernization of the transportation systems, affordable airline tickets, use of internet and acceptance of credit The psychology of tourist shopping Speaking with the psychologist s hat on, shopping on holidays creates both pleasure and excitement for the tourists. Shopping has evolved from purchasing items necessary to cover the basic life needs into an experience. People save and sacrifice all year round so that they can afford to go on vacations. Once on vacation, their penny pinching ways turn into pure hedonistic decision making. It s the retail therapy they do deserve. Tourists have more time so there is less stress to make purchasing decisions. They also tend to make light hearted choices in their pursuit of pleasure and happiness. Their decision making relaxes and becomes more simplistic. They tend to spend money on items they would not purchase when not on vacation, and they tend to spend more money on items they regularly purchase. In addition, they will not hold back when it comes to indulging in luxuries either. This creates a perfect opportunity to increase revenues for countries that heavily rely on tourism money.

22 Croatia An Investor s Guide to Tourism Opportunities to increase revenues Even though the shopping offer in Croatia improves every year, it is not sufficient to change the status of Croatia in comparison to its competitor countries, namely Spain, Greece and Turkey. The offer needs to suit the needs of the new type of tourist active, picky and critical. This is someone who is looking not only to buy specific merchandise, but also life experiences, excitement and stories. Therefore, the offer must be rich, advanced and diversified. The U.S. Department of Commerce has stated that the travellers who engage in shopping and cultural or heritage tourism spend more, stay longer and have a better travel experience overall. For a struggling economy such as Croatia s, tourist shopping creates an opportunity to increase revenues. However, to make it truly successful, the tax rate, import duties, quality of the products, uniqueness of the products, the exchange rate etc. must also be favourable. Necessary steps In order to fully tap into this great source of revenue, the following steps must be implemented: Promote shopping as an additional motivation for travelling Implement policies to simplify VAT refunds and promote it Offer shopping vacation packages Offer unique products that the tourists cannot find at home Provide a special experience Create shopping incentives all year round

23 Croatia An Investor s Guide to Tourism Overview of the construction process Relevant laws: Physical Planning Act (Official Gazette No 153/13) Building Act (Official Gazette No 153/13) Introduction The new Physical Planning Act and Building Act have been in place since January 1, These new laws simplify and speed up the processes. Physical interventions need to be carried out in accordance with the physical plans. In order to familiarize itself with the physical purpose and conditions of the physical intervention prescribed by physical plans on a particular land plot, interested person may request, and the administrative authority in whose area the land plot is situated will issue the Location information. The Ministry of Construction and Physical Planning created the Information system of Physical Planning which is available at Levels of physical plans There are three main levels of physical plans: state physical plans, regional physical plans and local physical plans. State physical plans are National physical development plan (Državni plan prostornog razvoja), Physical plan for areas with special features (Prostorni plan područja posebnih područja) and Urban development plan of national importance (Urbanistički plan uređenja državnog značaja). Regional physical plans are County physical plan (Prostorni plan županije), City of Zagreb physical plan (Prostorni plan Grada Zagreba) and Urban development plan of county importance (Urbanistički plan uređenja županijskog značaja). Local physical plans are Physical development plan of the city or municipality (Prostorni plan uređenja grada ili općine), General urban plan (Generalni urbanistički plan) and Urban development plan (Urbanistički plan uređenja) (if necessary). Building permits In most cases, only the Building permit is necessary for start of construction. Additional Location permit has to be obtained only for: 1. Exploitation field, construction of mining facilities and facilities that are in function of execution of mining operations, storage and permanent disposal of hydrocarbon gases in geological structures 2. Determining the location of new military locations and military buildings 3. Interventions in space which under the special regulations that regulate construction are not considered as construction work 4. Stage and / or phase construction of buildings 5. Construction on the land or building where investor has not resolved property-related rights or for which it is necessary to carry out expropriation. After the construction, and in order for a constructed building or renovated building to be used or put into operation, Use permit for that building has to be issued. Graphic overview of the construction process Location Permit (if necessary) Building Permit Construction works Use Permit Start of operation

24 Croatia An Investor s Guide to Tourism Greenfield investment vs. acquisition of an existing hotel business Investment into the Croatian hotel and tourism sector has predominantly been effected through the acquisitions of existing hotels, marinas and other tourist facilities in the 1st and 2nd wave of privatizations, and in some smaller part through Greenfield investments. Either approach can involve the acquisition of assets and shares from both private parties, and from public authorities through public tendering. Whether you intend to purchase an existing hotel or tourism business, or undertake a Greenfield investment, there are certain legal issues that need to be considered in relation to your investment. Necessity of undertaking an in-depth title search of real estate In Croatia, there are two different property registries the Cadastral Registry which, amongst other information, records plot position, boundaries, surface area, land culture and possession, and the Land Registry which, amongst other information, records ownership and encumbrances. Although both registries are computerized and their records easily accessible on the Internet, such records should only be used as a starting point. During the period of communist rule, most real estate was nationalized and placed into social ownership. However, in the 1990 s private ownership of real estate again became common, and the State commenced the process of payment of restitution, or, return of real estate to those owners whose real estate was taken during the period of communist rule. In accordance with the Croatian Law on Ownership, there is no reliance on Land Registry records for some real estate that was in social ownership as at 1 January Even for real estate in relation to which there should be reliance on the Land Registry records, it is advisable to undertake an in depth title search to ensure that there are no rights of third parties. Greenfield investments Greenfield investments in tourism usually start by acquiring suitable real estate for development of a hotel, marina, or other tourist facility. As a general rule, foreign business entities and physical persons must seek approval from the Ministry of Justice to acquire ownership over real estate in Croatia. Approval is primarily based on the principle of reciprocity. Approvals are not issued for agricultural land, national parks and other real estate of special national importance for Croatia. The process of obtaining approval usually takes between two to four months. In some cases, going back to the root of title and reviewing individual inscriptions may not be realistic due to time constraints, or lack of available records. For real estate that was in social ownership as at 1 January 1997, one should at least go back to the inscription preceding the nationalization to determine the identity of former private owners. A proper title search commences by identifying the relevant plot numbers in both the Land Registry and the Cadastral Registry. If possible, it is advisable to obtain official plot identification from the Cadastral Registry. However, EU citizens can freely acquire real estate in Croatia, with the exception of some special categories of real estate, such as agricultural land, land within national parks or reservations, etc. which remain restricted, even for EU citizens. There is no restriction on indirect ownership of Croatian real estate by foreigners through a Croatian company. As a result, real estate development projects are usually undertaken by foreigners through Croatian companies. It is possible that information on particular real estate in either registry could be outdated and may not reflect the actual status of the real estate. An attempt should be made to reconcile any discrepancies to ensure that they do not indicate the existence of

25 Croatia An Investor s Guide to Tourism rights of third parties. If there is a discrepancy in plot boundaries, it is always advisable to obtain an official survey. As in some cases the State or the local government may have the right of first refusal, official confirmations may have to be obtained from the relevant authorities on whether the real estate falls within this category (e.g cultural heritage building or island), and whether the relevant authorities plan to exercise their preemption rights. For example, if the targeted real estate is designated as falling within the area of a national park, the Republic of Croatia, the county and the municipality all have preemption rights. As Croatia is dotted with archaeological and historical sites, an investigation may be necessary with the Ministry of Culture into whether the targeted real estate has been placed under special cultural protection. The existence of an archaeological site on the real estate in question, could impede any development plans and cause additional construction expenses. Furthermore, to confirm whether or not there are any restitution claims or, claims for return related to the targeted real estate, a written request for confirmation should be filed with the relevant county s Office for State Administration. Should the targeted real estate be adjacent to the sea, another issue to consider is whether that real estate falls within the area of maritime domain. Maritime domain is an area of general national interest and as such cannot be subject to private ownership. The use of maritime domain for commercial purposes can only be obtained on the basis of a concession agreement for a period between 5 and 99 years depending on the importance of a particular development (with shorter concession periods being more realistically achievable). Acquisition of an existing hotel company The acquisition of an existing hotel business through the acquisition of shares in an existing hotel company, besides real estate title searches, usually requires investigation into the key business areas such as corporate organization and management, licensing, material agreements inclusive of agreements with related parties, employment, ownership of key movables, financing and related securitization, litigation and intellectual property. Considering that a number of Croatian tourist facilities were built during the 1970 s and 1980 s, there are certain issues related specifically to the process of privatization that usually require special consideration. In particular, in a transaction involving privatized hotel companies, a consideration must be given to whether all property used for the operation of the particular hotel business had been included in the capital at the time of privatization. Some insight into the matter and other issues arising from the process of privatization can usually be gained by examining audit reports of the particular company s privatization process. Such audit reports were prepared by the State Office for Audit, but not all privatized companies had undergone an audit (the list of audited companies is located on the web site of the State Office for Audit). In the event that some real estate used by the hotel had been omitted from the company s capital, the Law on Tourist Land and Other Construction Land Not Valued in Privatization provides for a continuing right of use on the basis of a concession to be granted by the local municipality (acquisition is only possible in limited cases). An investigation should be made into whether all facilities have appropriate building and operational licenses. Operational hotel licenses which include categorization references are registered with the Registry of Licenses held by the Ministry of Tourism. With Croatia s accession to the EU, some new requirements have been introduced, such as energy certificates. In the event that acquisition is being made from the Croatian Government, it is possible (although not always the case) that the sale could be conditional on agreeing to retain employees for a specific length of time. Although this would not be the case in a private sale transaction, a consideration should be given to whether the company has an Employees Council or, a union. Please note that all companies carrying out tourism activities are subject to the General Collective Agreement for Tourism which affords some benefits to employees which are over and above those provided for under the Labour Law (e.g. additional holiday leave). Consideration should also be given to whether the transaction triggers any approval requirements under the Competition Law. Furthermore, in the case of joint stock companies, the provisions of the Law on Take-over of Joint Stock Companies have to be followed including, amongst others, the requirement to publish an offer to acquire other voting shares, if the acquisition would result in the purchaser holding more than 25% of voting shares.

26 Croatia An Investor s Guide to Tourism Setting-up a Business Introduction There are no restrictions on foreign ownership of Croatian business enterprises. The primary legislation governing the form and regulation of companies in Croatia is the Croatian Companies Law ( the CCL ). The CCL was originally based on German Company Law. The following forms of commercial enterprise are most commonly used in Croatia: Joint-stock company Dioničko društvo (in Croatian abbreviated as d.d. ); Limited liability company Društvo s ograničenom odgovornošću (in Croatian abbreviated as d.o.o. ); Simple limited liability company Jednostavno društvo s ograničenom odgovornošću (in Croatian abbreviated as j.d.o.o. ); Sole proprietorship Obrt; General partnership Javno trgovačko društvo (in Croatian abbreviated as j.t.d. ); and Limited partnership Komanditno društvo (in Croatian abbreviated as k.d. ). In practice, most foreign investors are likely to form or take a financial interest (i.e. acquire shares / stakes) in either a limited liability company or a joint-stock company. Limited liability company A limited liability company is a very popular entity form for small and medium-sized businesses in Croatia. Furthermore, in practice, limited liability companies are the most common legal form for wholly owned subsidiaries. A limited liability company is registered in the Commercial Court Register and may be established by one or more physical persons or legal entities. With limited exceptions, founders of a limited liability company are not personally liable for the obligations of the limited liability company. The minimum share capital required to establish a limited liability company is HRK 20,000 (approximately 2,700). The share capital is divided into shares with a nominal value of at least HRK 200. Unless stated otherwise, each member s share can be freely transferred and inherited. The share capital can be paid in cash, or in kind by contribution of rights or assets. Contributions in kind must be valued by a certified court valuer and must be made in full before the registration of the company. Generally, limited liability companies require lower standards of corporate governance than joint-stock companies. A limited liability company usually has only two governing bodies: the general assembly and the management board. It is possible to elect a supervisory board but, with the exception of some special cases, is not mandatory.. The management and representation of a limited liability company is carried out by the management board. The management board consists of one or more members. The CCL does not impose a maximum term of appointment, but the same can be determined by the Deed of Incorporation. If not determined otherwise by the Deed of Incorporation, members of the management board represent the company jointly. There is no requirement for any member of the management board to be employed by the company. A foreign national can be appointed to the management board. If not stipulated otherwise, in the Deed of Incorporation the general assembly may pass its decisions by a simple majority. However, some decisions (e.g. amendments to the Deed of Incorporation, increase of share capital, winding-up of the company) must be made by a majority of at least three quarters of the votes present (unless a higher majority requirement is imposed by the Deed of Incorporation). Simple limited liability company A simple limited liability company was introduced into the Croatian legal system by the amendments to the CCL that came into force on 18 November The minimum amount of share capital of a simple limited liability company is HRK (approximately 1.35). The share capital is divided into shares with a nominal value of at least HRK 1. The share capital must be paid in cash prior to the registration of the company. It is not possible for the share capital to include contributions in kind. A simple limited liability company cannot have more than three shareholders and can only have one member of the management board appointed (and revoked) by the shareholders. A simple limited liability company must allocate one fourth of the profit reported in the annual financial statements into legal reserves. The legal reserves can only be used to increase the share capital of the simple limited liability company and to cover losses that cannot be covered from the current year s profit. If a simple limited liability company increases its share capital to the legal minimum required to establish a regular limited liability company, the requirement of having to allocate profit to the legal reserves no longer exists, but in those cases a new Deed of Incorporation has to be adopted.

27 Croatia An Investor s Guide to Tourism The supervisory board appoints a management board. If the management board consists of more than one person, one person must be appointed as its chairman. The members of the management board (directors) may be Croatian or foreign citizens who are appointed to the management board for terms of up to 5 years with the possibility of reappointment. A joint stock company is required to allocate to its reserves funds equal to 5% of the current year's profit, reduced by the amount of any losses from the previous year, until those reserves, together with any capital profits, reach at least 5% of the share capital (or a higher amount prescribed by the Articles of Association). Joint stock company A joint-stock company is registered in the Commercial Court Register and may be established by one or more physical persons or legal entities. A joint-stock company has share capital which is divided into shares. The nominal value of a share must not be less than HRK 10, must be expressed in HRK and must be divisible by 10. The minimum amount of initial share capital required to establish a joint-stock company is HRK 200,000 (approximately 27,000). The share capital can be paid in cash, or in kind by contribution of rights or assets, but if paid in kind, the investment must be contractually agreed prior to the registration of the company with the Commercial Court Register. The market value of the contribution in kind must be certified by a court approved auditor. Shares can either be ordinary or preference shares. Ordinary shares provide their holders with the right to vote at general assembly meetings; the right to receive dividends when declared; and a claim on the net assets of the joint-stock company in case of liquidation or bankruptcy. Preference shares provide their holders with the right to a fixed dividend (which may be cumulative); priority over ordinary shareholders in receiving payment of dividends; and priority over ordinary shareholders in receiving payments in liquidation. Preference shares may be issued with or without voting rights. Shares may only be issued in a shareholder s name. The CCL allows the issuance of registered interim shares prior to shares being paid in full. Although shares are in principle freely transferable, the Articles of Association may stipulate restrictions with respect to registered material shares, requiring the company's consent for their transfer. The transfer of shares issued in non-material form, however, may not be restricted. A joint-stock company generally has three mandatory bodies: the general assembly, the supervisory board and the management board. A supervisory board consists of at least 3 members and may not exceed, depending on the amount of the company s share capital, 9, 15 or 21 members. The members of a supervisory board are elected for terms of up to 4 years with the possibility of re-election. Unless otherwise stated in the Articles of Association, the general assembly passes its decisions by a simple majority, except in the cases previously mentioned in relation to a limited liability company where the majority of at least three quarters of the votes present is required. Registration All companies are required to be registered with the Commercial Court Register. There are seven Commercial Courts in Croatia, located in: Bjelovar, Rijeka, Osijek, Split, Varaždin, Zadar and Zagreb. The location of the seat of the company being registered determines which court has jurisdiction. The application for registration has to be executed before a Croatian Public Notary and the Deed of Incorporation or, the Articles of Association have to be prepared in the form of a notarial deed. The application for registration must be executed by all members on the management board and the president of the supervisory board (if the company has a supervisory board). The founders and new shareholders of commercial companies, both physical and legal persons, must warrant that they have no outstanding Croatian tax and social security debts, or debts for salaries to employees. Furthermore, founders and new shareholders have to provide a list of other companies registered in Croatia in which they own 5% or more of the shares, and also warrant that those companies have no outstanding Croatian tax and social security debts, or debts for salaries to employees. All founders of a limited liability company must be inscribed at the Commercial Court Register. If a joint stock company has one shareholder, this shareholder shall be inscribed with the Commercial Court Register. Shareholders of a joint stock company can either be issued share certificates in their name, or be inscribed with the Central Clearing and Depository Company. Registration of a simple limited liability company generally follows the same pattern as for limited liability companies, but the incorporation documents consist of pre-printed forms that have to be executed before a Croatian Public Notary.

28 Notes

29 Croatia An Investor s Guide to Tourism Notes

30 Croatia An Investor s Guide to Tourism Notes

31 Croatia An Investor s Guide to Tourism Information on the content providers JLL is a financial and professional services firm specialising in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2013 global revenue of $4 billion, JLL serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. In the SEE region, JLL is a leader in the provision of the following services for the real estate industry: Land search & acquisition Industrial and Logistics buildings search & acquisition Built-to-suit projects to own or to lease Tenant representation Landlord & landowner advisory Office market consultancy and agency Retail consultancy and agency Valuation and Professional Services Market Research Technical due diligence and feasibility study for developments Construction services: project management, value engineering, quality and cost control. Agency for Investments and Competitiveness (AIK) is a Government agency whose main tasks are to promote Croatia as a desirable investment destination, to enable quick and easy realisation of the investment projects as well as to help in raising the competitiveness of the Croatian economy on the global level. In this regard, the Agency proactively attracts new investors, provides all the necessary help and assistance to current foreign and domestic investors, promotes sector specialization and cluster competitiveness and continuously works on identifying measures that would enhance the overall level of competitiveness of the Republic of Croatia. On its website the Agency offers concise and user-friendly information about the Republic of Croatia, investment opportunities in the Republic of Croatia and main incentives that are offered to investors. For any more detailed information, a highly qualified and motivated team of experts is available to run the investor from the very beginning of the investment until its end completely free of charge. KPMG Legal s.r.o. advokátní kancelář - Branch Office Zagreb KPMG Legal s.r.o.'s team of lawyers in Croatia specialise primarily in corporate law, employment and labour law, transactions (mergers and acquisitions as well as contractual law in general) and regulatory issues (public law), and serve both international and local clients. Our legal team works together and shares knowledge with other professionals within KPMG in Croatia and KPMG in Bosnia- Herzegovina specialising in tax, accounting, risk management and compliance, transactions and other areas to offer a broad range of services tailored to our clients needs. We can find practical ways of meeting both the legal and business needs of our clients within complex accounting, tax and regulatory frameworks. The KPMG Legal team is part of KPMGs global network of legal advisors. For more information, please visit KPMG Croatia d.o.o KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We have more than 155,000 outstanding professionals working together to deliver value in 155 countries worldwide. We provide services and industry insight to help organisations negotiate risks and perform in the dynamic and challenging environments in which they do business. In every industry, tax has become a boardroom issue. Whether a company is seeking to expand business locally or reach across national boundaries, management should be building tax considerations into its overall business strategy. The number one priority of KPMGs tax practice is to deliver a portfolio of services that matches organisations changing needs in todays global marketplace. KPMG in Croatia's tax practice is an integral part of KPMG in Croatia which boasts 7 partners and 185 staff members. For more information please visit

32 JLL South East Europe Andrew Peirson Managing Director SEE Dominic Burke Head of Valuation & Professional Services Croatia & Slovenia Ana Škorić Senior Surveyor Valuation & Professional Services Croatia & Slovenia Content Partners Agency for Investments and Competitiveness Radnička 80/V Zagreb T E [email protected] Paul Suchar Partner, Tax, Regulatory & Bookkeeping Services KPMG Croatia d.o.o. Eurotower, Ivana Lučića 2a/ Zagreb, Croatia T+385 (0) [email protected] kpmg.hr Marinela Mostić Director, Legal Services KPMG Legal s.r.o., advokátní kancelář - Branch Office Zagreb Eurotower, Ivana Lučića 2a/ Zagreb, Croatia +385 (0) [email protected] April 2014 COPYRIGHT JONES LANG LASALLE IP, INC All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of Jones Lang LaSalle. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. We would like to be told of any such errors in order to correct them.