2. Doing Business in CEE Croatia

2. Doing Business in CEE Croatia 1 Croatia

2.1. Facts & figures... 4 The Croatian economy in 2008... 4 Key indicators... 6 2.2. Interview with Mr. Petar Radaković, President of Erste Bank Management Board, on the economic situation in Croatia... 7 2.3. Law relating to the founding of companies... 9 Corporate law... 9 Types of enterprise... 11 Joint stock companies... 11 Limited liability companies... 13 General partnerships... 15 Limited partnerships... 16 Economic interest association... 16 Branch offices... 17 Representative office... 18 Sole traders... 19 Capital requirements... 19 Starting up a company... 19 HITRO.HR... 22 Business activities requiring special licences... 22 Financial reporting and auditing: the Accounting Act... 22 Taxes and duties... 24 Corporation profit tax... 24 Value added tax (VAT)... 27 Excise duties on passenger cars, other motor vehicles, boats and aircraft... 28 Petroleum duty... 29 Alcohol duty... 30 Duty on beer... 30 Duty on non-alcoholic beverages... 31 Tobacco duty... 31 Coffee duty... 31 Duty on luxury goods... 32 Duty on third-party and comprehensive vehicle insurance... 32 Inheritance and gift tax... 32 Vehicle tax... 33 Boat tax... 33 Coin operated amusement machine tax... 34 Income surtax... 35 Local hospitality tax... 35 Tax on holiday homes... 35 Trademark tax... 36 Tax on the use of public land... 36 Personal income tax... 36 Property transfer tax... 37 2.4. Incentives for strategic investors... 39 Areas of Special National Concern (ASNC)... 39 Tax free zones... 39 Investment incentives/tax incentives... 39 State aid for research and development projects... 39 New employees... 40 Special increases in total state aid... 40 State aid for education and training... 40 2.5. Double taxation relief... 42 2.6. Croatia on the way to the EU... 43 2.7. Industrial parks/free zones... 45 Advantages of operating in a free zone... 45 Free zones in Croatia... 46 2.8. Labour market... 47 Employment of foreigners... 47 Wages and salaries... 49 Social security contributions... 49 2.9. Bilateral investment agreements... 51 2.10. Real estate market... 52 Property rights in Croatia... 52 2 Croatia

Property register... 52 Real Estate Business Association... 53 2.11. Export finance... 54 Croatian Bank for Reconstruction and Development... 54 3 Croatia

2.1 Facts & figures The Croatian economy in 2008 The available monthly economic indicators for the last quarter of 2008 suggest a continuing downturn in most non-financial sectors. Industrial production contracted year on year in the October December 2008 period, and similar changes were observed in retail turnover from October November. Registered tourist overnight stays were unchanged in the last quarter of 2008 compared to the same period of 2007. Construction activity, however, continued its strong growth during the first two months of the quarter. These trends largely reflected the global economic crisis which led to a weakening of export demand. The impact of the deteriorating international environment on business sentiment has also affected domestic demand. The fourth quarter of 2008 saw a further quarter-on-quarter decline in industrial production which fell at an annualised rate of 2.5% (seasonally adjusted). Industrial production for the year as a whole increased by only 1.6% in 2008 3.9% less than in 2007. Weakening domestic and export demand led to an accelerating contraction in industrial output towards year end 2008, with a particularly sharp drop in December. Employment and job vacancies also declined. Companies anticipated the weakening of demand for manufactured goods during the last quarter (according to the September 2008 business confidence survey by Privredni vjesnik), but seem to have underestimated its severity, meaning that inventories of finished goods continued to grow. Output of all categories of goods decreased over the final quarter of 2008, according to MIGs. After increasing in October, production of intermediate goods declined in November and December, due to shrinking domestic and export demand, and extremely high inventories. The trend in output of capital goods was similar. Meanwhile production of consumer durables decelerated rapidly over the fourth quarter of 2008, largely due to weakening of export demand. Output of non-durable consumer goods was also down, with inventories piling up, but production of tobacco goods was up in November and December, due to preemptive buying ahead of an increase in tobacco duty on 1 January 2009. The tobacco and chemical industries made the largest contributions to manufacturing output growth in the last quarter of 2008. With most other industries recording declines, manufacturing output fell by 2.2% year-on-year. Energy production rose in December 2008, partly offsetting the sharp annual drop. Activity in the mining and quarrying sector slid, largely as a result of lower oil and gas production; there was also a sharp fall in other mining and quarrying in December. The first two months of the fourth quarter were marked by robust construction activity, which grew at an annualised rate of 11.3%, seasonally adjusted, with building construction leading the way. However most of the gain came from buildings already under construction, and both construction permits issued and the index of new construction orders declined in 2008. Seasonally adjusted real retail turnover was down by 3.1% year on year in October and November 2008. The effects of on household consumption of a recovery in the main sources of household finance were more than outweighed by weakening consumer confidence, sapped by economic fears. Sales of clothing, footwear and furniture all fell, as did those of motor vehicles particularly private and fleet purchases of cars. As a result, retail turnover for the year is set to decline. The number of tourist overnight stays in the fourth quarter of 2008 was steady, year on year. Bednights and arrivals rose by 2.0% and 0.9%, respectively over the year as a whole. Prices According to recent CBS data, the annual consumer price inflation rate rose from 2.9% in December 2008 to 3.4% in January 2009. Prices jumped by 1.2% in January as compared with the previous month. This was in line with expectations as it largely reflected government decisions. In particular, the price of gas for households rose by 15.2%, the prices of tobacco products by 6.9% (higher excise duty) and health care prices by 14.4% (introduction of charges for medical and hospital services). The change in the index was also driven by a sharper seasonal increase in vegetable prices than in the previous two years. These items were only partly offset by the seasonal fall in prices of clothing and footwear. The core consumer price index, excluding food and prices set by the government, fell by 0.1% in January month on month, mainly as a result of lower clothing and footwear prices. The annual core inflation rate was 4.2% in January, the same as in December 2008. The year-on-year rate of change of industrial producer prices fell from 4.7% in December 2008 to 1.8% in January 2009. This was largely due to a base period effect in the shape of strong monthly growth in producer prices in January 2008. Industrial producer prices fell by 0.1% in January 2009 relative to December 2008, largely as a result of lower energy and non-durable 4 Croatia

consumer goods prices. Lower energy prices were chiefly a reflection of falling petroleum product prices, while in the group of non-durable consumer goods the largest decrease was in tobacco product producer prices. The increase in excise duty was only partly passed on to the consumers, and the tobacco companies bore the remaining burden by lowering their cigarette prices. Exchange rate The kuna came under pressure in January 2009 due to demand for foreign exchange to service external government and private debt. The kuna/euro exchange rate continued to depreciate in the first half of January 2009, but slightly more slowly than in December 2008. The currency was shored up by a decision by the Croatian National Bank (CNB) to increase the kuna component of the reserve requirements from 50% to 75%. However the kuna/euro exchange rate started to slide more rapidly in the second half of January, reaching HRK 7.44/EUR on 24 January. CNB intervened in the foreign exchange market, selling EUR 328.3m to banks on 23 January and withdrawing HRK 2.4bn from circulation. The exchange rate then stabilised, recovering to HRK 7.37/EUR by the end of January a devaluation of 0.7% compared to the HRK 7.32/EUR recorded at year end 2008. The central bank also carried out foreign exchange transactions with the government in January, and on 26 January sold EUR 59.7m worth of foreign exchange to the Ministry of Finance for repayment of London and Paris Club debt. The US dollar appreciated by 9.3% versus the euro in January, largely as a result of weak economic indicators and expectations of continued monetary easing in the eurozone. On 15 January the ECB cut the base rate by 0.50% to 2.0%. In the same month, the Fed held its benchmark interest rate unchanged in the range of 0.0 0.25%. The HRK/USD exchange rate, also affected by developments on world s foreign exchange markets, depreciated by 11.0% in January, from HRK 5.16/USD on 31 December 2008 to HRK 5.72/USD on 31 January 2009. The kuna also weakened against the pound sterling and the Swiss franc in January, by 9.3% and 1.0%, respectively. These exchange rate movements, and the depreciation of the kuna versus the euro and US dollar, influenced the index of the daily nominal effective exchange rate of the kuna, which retreated by 3.5%, from 31 December 2008 to 31 January 2009. In November 2008 the fall in the index of the real effective exchange rate of the kuna deflated by consumer prices slowed to 0.3%. This was because foreign consumer prices declined more rapidly than domestic consumer prices. The index of the real effective exchange rate of the kuna deflated by producer prices appreciated by 0.2% in the same month, due to the much sharper fall in domestic producer prices than in those in the eurozone and the US. A bid to improve international competitiveness, Croatia launched an export drive (www.izvoz.hr) in 2007. This programme is aimed at promoting mineral water, small shipyards, textiles and clothing, ICT, wood and furniture, and fish processing export clusters. To date the export drive has not brought a turnaround in export performance, and exports of food, wood, furniture and clothing actually declined by volume in 2008. Exports of textiles and transport equipment other than cars grew in 2008. However the future of the latter sector is doubtful due to the heavy losses of the five state owned shipyards; the shipbuilding industry is to be restructured ahead of EU accession. 5 Croatia

Key indicators 31 December 2008 (expected figures) Key economic indicators 2005 2006 2007 2008e Population (ave., million) 4.4 4.4 4.4 4.4 GDP (nominal, EUR billion) 35.7 39.1 42.8 47.4 GDP per capita (in EUR thousand) 8.0 8.9 9.7 10.7 Real GDP growth (in %) 4.2 4.8 5.5 2.4 Private consumption growth (in %) 4.4 3.5 6.2 0.9 Exports (share of GDP in %) 20.2 21.6 21.5 20.6 Imports (share of GDP in %) 41.3 43.0 43.5 43.5 Unemployment (Eurostat definition, in %) 12.3 10.5 9.7 8.9 Consumer price inflation (ave., in %) 3.3 3.2 2.9 6.1 Short term interest rate (3 months eop, in %) 6.0 4.6 6.9 8.2 EUR FX rate (ave.) 7.4 7.3 7.3 7.2 EUR FX rate (eop) 7.4 7.4 7.3 7.3 Current account balance (share of GDP, in %) -5.5-6.9-7.5-9.4 General government balance (share of GDP, in %) -3.5-2.1-1.4-1.6 Source: Erste Group 6 Croatia

2.2 Interview with Mr. Petar Radaković, President of Erste Bank Management Board, on the economic situation in Croatia How have the current economic situation and difficult market conditions affected Erste Bank's operations in Croatia? Petar Radaković: While the second half of 2008 gave some indication of a slowdown in economic growth, the downturn became even more acute at the beginning of the year. Even though it is difficult to make any reliable predictions at this point, we expect the negative trends from the first quarter to stabilize towards the end of the year. However, we need to be realistic and cannot expect the economy to rebound significantly in the very short term. That will depend largely on the recovery in other European economies and the implementation of structural reforms in the medium term. In this context, it is clear that the business environment has become more complex and challenging. However, the developments so far have illustrated that the financial system and monetary policies were robust and well positioned. This has ensured the stability of the overall system and the economy, and also cushioned some of the negative effects of the global crisis. How have Erste Bank clients been dealing with the current situation? Petar Radaković: Erste Bank has a satisfactory client structure with a range of above-average quality customers. Our primary task at this point is to maintain that stability in order to help our clients emerge from this situation as unscathed as possible. We have also been taking steps to neutralize the effects of the crisis, mainly by focusing on the needs of our clients and improving our own efficiency. How are you helping your corporate clients overcome the financial crisis and the recession? Petar Radaković: The problem of insolvency has become apparent, especially in big state-run companies and the biggest players in the construction industry. In this respect, we are using factoring to secure the necessary working capital for companies. In other words, we are trying to free up their monetary assets for everyday operations, so that they have sufficient cash flow to settle all payables including those to us once the company becomes stable again. Furthermore, in response to the current situation in the Croatian real estate market, and with the aim of giving impetus to that market, we are cooperating with our corporate clients from the building industry to offer more favourable housing loans for our existing and prospective borrowers. By joining forces with our clients from the construction business, we have developed a model that tries to bring potential buyers and residential property developers closer together. This should encourage communication between them and breathe new life into the real estate market. What measures has Erste Bank taken to alleviate the current difficult economic situation for the retail customers? Petar Radaković: Bearing in mind the aggravated market conditions and the potential negative effects on people s everyday lives, Erste Bank introduced benefits for certain categories of clients at the end of last year. Pregnant women, new mothers and people who have lost their jobs now have the possibility to agree a grace period for loan repayment during which interest rates can be decreased by up to 25 percent. And customers with consumer, agricultural and tourist loans have been allowed to extend their repayment period by up to two years. Can you tell us about Erste Bank s plans and strategy in the near future? Petar Radaković: In the short to medium term, Erste Bank will in line with its business strategy continue to support quality, profitable projects in the corporate sector. However, these projects will have to be better prepared and a slightly higher participation in total financing will be necessary. The Bank will retain its strategic focus on the tourist sector and will not think twice about taking over companies that we believe have good long-term prospects. The current crisis will come to an end one day and we are already looking to plan for more positive future scenarios. Furthermore, in line with the market situation, the Bank will provide its customers with competitive credit terms. In structuring our credit exposure to specific industries we will continue to adhere to the principles of positive evaluation of customers credit ratings, their businesses, and especially the markets they operate in. Depending on the needs of a specific customer or a project, an appropriate financing model can be chosen from a wide array of credit products. The priority in increasing our placements will be given to private individuals, but 7 Croatia

also to small and medium-sized enterprises, which we plan to support with additional efforts. We will cooperate with our customers in an attempt to find the best business solutions for all parties. This will allow us to overcome the current situation together and avoid any serious consequences. 8 Croatia

2.3 Law relating to the founding of companies Corporate law All the opportunities open to domestic investors are also available to foreigners investing in Croatia. However foreign investors enjoy additional guarantees that are not given to domestic investors. The Croatian Constitution provides that no law or other legal document shall reduce the rights granted to a foreign investor at the time of investment in Croatia. It also guarantees the free repatriation of profits or capital upon fulfilment of all legal obligations. When foreign investors start up or participate in the start-up of an enterprise in Croatia, their rights, obligations and positions are identical to those of domestic investors, provided that the condition of reciprocity is met. Foreign legal entities and persons may: Invest capital on a contractual basis; Invest in a company; Invest in a bank or insurance company; Set up as craftspeople or do business as sole traders; Obtain a concession to exploit natural resources or other assets of interest to Croatia; Participate in build-operate-transfer (BOT) and build-own-operate-transfer (BOOT) operations. A company is a legal entity established and organised in accordance with the Companies Act. All companies are registered in a court register, in accordance with the Court Register Act and the Rules of Court Register Entry Procedures. Under the Companies Act, it is possible to start a company as a limited liability company or a partnership, which is an association of persons. Note: The Croatian Companies Act includes legal forms that are not regarded as corporate by some other legal systems (e.g. partnerships as defined by Croatian law). Limited companies comprise: Limited liability companies; Joint stock companies; Economic interest associations. Partnerships may be: General partnerships; Limited partnerships. The Croatian Companies Act also regulates the establishment of branch offices and the position of sole traders. Further regulations governing the establisment of companies: Companies Act (Narodne novine [Official Gazette; abbreviated: NN] 111/93, 34/99, 52/00, Decision of the Constitutional Court of RC, 118/2003) Court Register Act (NN 1/95, 57/96, 45/99) Rules of Procedure for Entry into a Court Register (NN 10/95, 101/96, 62/98, 123/2002) Decision on the Procedure and Requirements for Access to Court Register Information (NN 138/2002) National Classification of Economic Activities Act (NN 98/94) Decision on the National Classification of Economic Activities (NN 13/2003) 9 Croatia

Source: Croatian Chamber of Economy Rooseveltov trg 2 HR-10000 Zagreb Tel: +385 (0)1 4561 555 Fax: +385 (0)1 4828 380 E-mail: hgk@hgk.hr Start-up companies A number of general principles apply to any start-up company: Founders A domestic or foreign legal entity or natural person may establish a company. Legal entity status A company is a legal entity. The status of a legal entity is acquired by being entered in a court register. Company liability A company is liable to settle its debts with all its assets. Owners/shareholders in limited liability and joint stock companies are not personally liable for the obligations of the company, unless the Companies Act provides otherwise. Partners in general partnerships and general partners in limited partnerships have unlimited liability to satisfy the debts of their partnerships jointly, severally and with all their personal assets. Company name A company name is the name used by a company in business transactions and legal affairs. It must be clearly different from the name of any other company entered in the register of the same register court. It must consist of a proper name and an indication of the company s business activity. It must be written in the Croatian language but may contain foreign words if these are part of the name/company name of a partner/owner/shareholder, of the trade/service mark of a partner/owner/shareholder or their company registered in Croatia, or if such words are common in Croatian. The company name may also be entered in a court register in a translation into one or more foreign languages. If the word Croatia or any word form derived from it is to be used in the company name, special consent from the Central State Administrative Office for Public Administration is required. A company must use the company name and abbreviated version thereof as those registered. Its stationery (invoices, letterheads, etc.) must display the company name, registered office, court of registration, registration number, company name, bank account number and sortcode. Business activity A company may be registered to engage in any permitted business activity. The business activity of the company (object of business) is specified in the memorandum or articles of association. It is also entered in a court register, using the respective activity code specified by the National Classification of Economic Activities. In the case of activities that require a licence, permit or other document issued by a governmental authority or an institution, registration is not possible until this document has been obtained. Registered office A company s registered office is the premises used by its management and from which it is run. It is indicated in the memorandum or articles of association. The entry in the register of companies may not include more than one registered office. Representation The authority to represent a company is accorded to the persons specified in the Companies Act for the legal form in question. The persons representing the company and restrictions on their representative powers towards third parties are entered in the register. The law distinguishes between legal representatives, representatives by proxy and authorised signatories. Source: Croation Chamber of Economy 10 Croatia

Types of enterprise English name Joint stock company Limited liability company General partnership Limited partnership Economic interest association Croatian name Dioničko društvo (d.d.) Društvo s ograničenom odgovornošću (d.o.o.) Javno trgovačko društvo (j.t.d.) Komanditno društvo (k.d.) Gospodarsko interesno udruženje (g.i.u.) Joint stock companies A joint stock company is based on capital, with owners (shareholders) investing in share capital divided into shares. A joint stock company may be formed by a single owner, i.e. it may have only one shareholder. A joint stock company is a legal entity. This legal status is established by entry in a court register. The company is liable for its debts with all its assets. Shareholders are not liable for the debts of the company. The basic document for a joint stock company is the articles of association, as they specify the internal organisation of the company. Share capital The company s share capital and shares must be denominated in the currency of the Republic of Croatia. The minimum share capital is HRK 200,000. The company may issue shares with an indication of their par value or no par shares. The par value of a share may not be below HRK 10. Par values higher than this minimum amount must be in multiples of HRK 10. In the case of shares indicating par value, the portion of the share capital held is determined by the ratio of the par values of share capital and shares, whereas in the case of shares of no par value the portion of capital held is based on the number of shares. Shares may only be registered or bearer shares. As a rule, shares are freely negotiable. Bearer shares are transferred when handed over, while registered shares are transferred by endorsement or assignment (cession). Shares may be ordinary or preference shares depending on the rights they confer. Ordinary shares ensure the right to vote at general meetings, to receive dividends and to receive the respective portion of the bankruptcy estate. Preference shares confer certain preferential rights, such as the right to a dividend in an amount or percentage of the par share value, priority in the disbursement of dividends or in receiving the remainder of the bankruptcy estate, and such other rights as are provided for by law and articles of association. Company formation procedure The Companies Act provides for the simultaneous and staged establishment of joint stock companies. Company founders are the shareholders who have adopted the articles of association. The formation of a joint stock company is simultaneous when the founders: Take possession of all company shares and make a notarised statement to this effect; Accept and sign the company articles of association, and make a notarised statement to this effect; Make a notarised statement declaring that they are establishing a joint stock company. The formation of a joint stock company is staged when the founders: Adopt the articles of association; Take possession of a certain number of shares; Make a public invitation to subscribe to the remaining shares, and such subscription then takes place. 11 Croatia

The subscription period may not exceed three months. If, within this period, all the shares are not subscribed and paid up in accordance with the public offering, the company founders are entitled to subscribe for or take possession of the unsubscribed shares within 15 days. If they fail to do so, the company formation is deemed to have failed, and the founders will ask the subscribers to take their payments back within 15 days. If all the shares have been subscribed for, the founders deliver them to their owners within 15 days of expiry of the subscription period and call the first general meeting. Shares may be paid for in cash, or in kind where it is possible to determine the value of the assets concerned. If shares are paid for in cash, at least one quarter of the par value of each share must be paid up, and if the shares are sold above par the entire amount exceeding the par value must be paid up. If a share is paid for partly in kind, the amount not so paid must also be fully paid up before the company is registered. If shares are paid for in cash, the full amount must be paid into a temporary bank account. Contributions in kind must be made in full prior to registration. If they involve undertakings to transfer assets to the company, these transfers should be completed not later than five years after registration. All investments in the company must be fully paid up for the capital to be freely available to the company. The founders must make a notarised statement appointing the first supervisory board of the company or the board of directors, and the auditor for the first financial year. Following this, the supervisory board or board of directors appoints management board members or executive directors. Croatian joint stock companies are allowed to choose between the old two-tier system with supervisory and management boards, and the new unitary system with only a board of directors. The founders must then submit a report on the completion of the formation procedure so that the management and supervisory board members or board of directors can review the process. Upon completion of the procedure, the management and supervisory boards or board of directors apply for registration. The application should contain the following information: Company name, registered office and business activity; Shareholders (name and surname, citizen s personal ID number [MBG] or, if it is a foreign person or entity, passport number, issuing country and domicile, i.e. company name and registered office); Information about persons authorised to represent the company and their powers; Legal form of the company; Date of adoption of the articles of association; If the legal entity is not a going concern, period of operation; Circumstances constituting grounds for dissolution of the company. The application must also contain the following information: The share capital; The amount of capital represented by the shares issued; The total amount paid for the shares issued and form of payment; A declaration by the management board or executive directors that they are aware of their obligation to report to the court and that they meet the criteria for membership of a management board/board of directors; Information about the management and supervisory board members or directors. In addition, the following should be enclosed with the application: The company s articles of association, the documents submitted when the articles were adopted and documents evidencing that the founders have taken possession of their shares; In the event that certain benefits are granted or contributions in kind made, contracts to this effect; Evidence of the contributions in cash or in kind and of the company s right to freely use them; 12 Croatia

An itemised statement of the formation costs; Documents evidencing the appointment of management and supervisory board members or directors; Reports on the company formation and on the audit of the formation procedures, together with accompanying documentation; The permit or licence from a governmental body or institution, if required by the company s business activity or another provision of the articles of association; A notarised statement to the effect that neither the shareholders nor the companies in which they have interests or shares have overdue liabilities; a confirmation from a financial institution that neither the shareholders nor companies in which they hold interests have a recorded unpaid payment order in their accounts, and confirmations from the Tax Administration, the Croatian Pension Insurance Institute and the Croatian Institute for Health Insurance that neither the shareholders nor companies in which they hold interests are in default of obligations to these institutions. Governing bodies The management board consists of one or more members (directors), their number being determined by the articles of association. If the management board consists of several members, one must be appointed as the chairperson. At least one member of the management board of an active company must be an employee of the company. Any person of full legal capacity may be appointed as a management board member, unless he/she has been sentenced for criminal offences within the past five years. The latter restriction also applies to persons who have been barred from a profession included in the objects of business to the extent that the ban remains in force. Both Croatian and foreign nationals may be members of a management board, and they are appointed by the supervisory board for a maximum term of five years. The management board has the following rights and obligations: Management of the company; Representation of the company; Drafting of resolutions for general meetings; Preparation of contracts; Implementation of the general meeting s decisions; Reporting to the supervisory board on issues relating to company management. The supervisory board must have at least three members. Their number is determined by the articles of association and should be an odd number. A foreign national may be a member and there is no obstacle to all members being foreign nationals. Members of the supervisory board are elected by the general meeting for a maximum term of office of four years, and can be re-elected. The supervisory board supervises the management of the company, and has the right to examine its accounting records and all other company documents. The board reports to the general meeting on the supervision carried out. The general meeting is a body consisting of all the shareholders, and it allows them to exercise their rights in company matters. All shareholders are entitled to attend the general meeting. The responsibilities of the general meeting are set out in the articles of association. Decisions are generally taken by a simple majority of votes. The articles of association may state that a joint stock company has a board of directors instead of management and supervisory boards. A board of directors must have at least three members. The directors are elected for a maximum term of office of six years and may be re-elected. The board of directors appoints one or more executive directors. Limited liability companies Limited liability companies are the most common legal form in Croatia. A limited liability company is one in which one or more legal entities or natural persons invest in initial business shares, with which they participate in the total share capital contractually determined beforehand. Interests in the company are not necessarily of the same amount. In the process of company formation, the founder can have multiple business shares. However, their subsequent acquisition is possible. The interests in the company may not take the form of securities. 13 Croatia

Founders Owners may be domestic and foreign legal entities or natural persons. A sole owner may also establish this type of company. A limited liability company is a legal entity. This status is established by entry in a court register. Company assets are strictly separated from the property of the owners. The company is liable for its debts with all its assets. Owners are not liable for company debts. Exceptionally, they may be held liable for company debts if they abuse the principle of their non-liability. Share capital The initial share capital of a limited liability company must be denominated in Croatian currency. The minimum capital is HRK 20,000. The minimum capital must be a whole number that is a multiple of 100. The initial capital must be equal to the total capital. Prior to registration each founder must pay up at least one-quarter of his/her/its cash contribution, and the total cash contribution may not be lower than HRK 10,000, i.e. at least one-half of the share capital must be contributed in cash. The initial contribution may also be made in kind, in which case it must be made in full prior to registration. Cash contributions must be made to a company account at a bank in Croatia. Company formation procedure A limited liability company is established on the basis of articles of association, which must be signed by all the founders in the form of a notarised document. If the company is established by only one person, the founding document is a memorandum submitted by the company founder in the form of a notarised document. The memorandum or articles of association should contain the following: Information about the founder (name and surname or company name, founder s residence or registered office, and, if the founder is a natural person, citizen s personal ID number [MBG]); Company name and registered office; Business activity of the company; Total share capital; Amount of each investor s interest (if the investment is a contribution in kind, a detailed description and valuation of the assets is required); Indication whether or not the company is established for a limited or indeterminate period; The owners rights and obligations with respect to the company, in addition to the obligation to pay for the interest in the company, as well as the rights and obligations of the company with respect its founders. The totality of each individual owner s rights and obligations constitutes his/her interest in the company. As a rule, the size of this is proportionate to the size of the paid-up share capital. Formation costs The cost of the preparatory procedures and formation may not be refunded to the founders from the share capital. In particular, it is not permitted to add such costs to the capital as an investment. Compensation for formation costs may only be approved up to the amount specified in the articles of association. Unless otherwise contractually agreed, the founders bear the cost of formation in proportion to the size of their holdings. Governing bodies A limited company must have a management board and a general meeting. The company management board may have one or more members (directors). Foreign nationals may be members of management boards. Members are appointed and released from their duties by the owners of the company. The management board is responsible for management of the company, representation of the company, the orderly keeping of the company s accounting records, preparation of financial reports, and maintaining records of the ownership interests in the company. A company must have a supervisory board only: if the average number of employees in a year exceeds 200; if the law explicitly requires a supervisory board for a given business activity; if the initial share capital of the company exceeds HRK 600,000 and the company has more than 50 owners; if the company has a single management that runs joint stock and limited liability companies with mandatory supervisory boards, and its direct share in these companies exceeds 50%; and in both cases if the average number of employees at one of the companies or the combined number of employees at all of the companies exceeds 200; or if the company is a general partner in a limited partnership with the total average number of employees in the company and limited partnership together exceeding 200. The supervisory board must have at least three 14 Croatia

members, and the membership should be an odd number if larger. Foreigners may also be members of supervisory boards. Company owners appoint supervisory boards. The holding of general meetings is mandatory for limited liability companies. The owners must vote at general meetings on matters that are their responsibility under the Companies Act and the articles of association. General partnerships A general partnership is a business entity in which two or more individuals associate to conduct business as a going concern and under a common company name. Every partner has unlimited and joint liability in respect of the partnership s debts with all his/her assets. A partner may not dispose of his/her interest without the consent of the other partners. Founders Any legal entity or individual, domestic or foreign, may become a partner. The articles of association define the legal relationships between the partners. The latter enjoy maximum freedom in this respect, because the Companies Act applies only where the articles of association do not regulate certain matters otherwise. Share capital A general partnership does not have share capital. Unless otherwise provided by the articles of association, partners must make equal contributions to the company. The contributions may be made in cash or in kind (in the form of tangible assets, rights, work, and other goods and services). Management is the responsibility of all the partners. However the articles of association may stipulate that only one or a limited number of partners run the company. Each partner is authorised to represent the company unless the articles exclude one or more partners from representing the company. Formation procedure A general partnership is established by adopting the articles of association, which need not be a notarised document. A notarised application for entry in a court register is then submitted. The application for registration must contain the following information: Company name, registered office and business activity; Partners (name and surname, tax number and domicile i.e. company name and registered office of each partner); Persons authorised to represent the company and their powers; Legal and organisational form; Date of adoption of the articles of association; If the partnership is not a going concern, period of operation; Circumstances constituting grounds for dissolution of the company. Enclosures: Articles of association; List of partners; Notarised statement confirming that neither the partners nor companies in which they hold interests have overdue liabilities; A confirmation from a bank that neither the partners nor companies in which they hold interests have a recorded unpaid payment order in their accounts; Confirmations from the Tax Administration, the Croatian Pension Insurance Institute and the Croatian Institute for Health Insurance that neither the shareholders nor companies in which they hold interests are in default of obligations to these institutions. A notarised statement containing information about all accounts held by the founders and the legal entities that manage these accounts; a list of all companies where the partners individually or jointly hold interests of more than 50% and information about all the accounts of these companies, the legal entities managing these accounts, as well as confirmations for these companies issued by the Tax Administration, Croatian Pension Insurance Institute and Croatian Institute for Health Insurance. 15 Croatia

Original documents or certified copies may be submitted. As a rule, they should not be more than one year old. Limited partnerships A limited partnership is a company in which two or more individuals associate to conduct business as a going concern under the same company name. At least one partner must have unlimited and joint liability for company debts with all his/her assets (general partner), and at least one partner must have limited liability proportionate to the assets invested (limited partner). Founders Both domestic and foreign individuals and legal entities may be partners in a limited partnership. A limited partnership is a legal entity that achieves such legal status by being entered in a court register. Share capital A limited partnership does not have any share capital. Formation procedure A limited partnership is formed by adopting articles of association, which need not take the form of a notarised document. These should designate the general and limited partner(s). The application for registration of a limited partnership should contain the following: Company name, registered office and business activity; Partners (name, surname and residence, or company name and registered office); Information about the limited partners; Amount of investment contracted for and paid by each limited partner; Persons authorised to represent the company and their powers; Legal and organisational form; Date of adoption of the articles of association; If the entity is not established as a going concern, period of operation; Circumstances constituting grounds for dissolution of the company. Management and representation of the company are the responsibility of the general partner(s). Economic interest association An economic interest association is a legal entity established by two or more natural persons or legal entities for the purpose of facilitating and promoting their business activities, but on a non profit-making basis. Share capital The association is established without share capital, and the rights of members may not take the form of securities. The business activity of the association must of assistance to members business activities. Formation procedure An economic interest association is formed by concluding a formation agreement which must be notarised and entered in a court register. The agreement should contain the following: Company name, registered office and business activity; List of partners; If not established as a going concern, period of operation. The association becomes a legal entity upon registration. The application for registration should be submitted by all members of the new management board. While the association is liable itself, the members also have secondary unlimited liability including all their assets. The management board runs and represents the association. The board may consist of one or more natural persons appointed by association members. 16 Croatia

Branch offices Under Croatian law foreign companies and sole traders may conduct business in Croatia by setting up branch offices. The start-up and operation of branch offices owned by foreign companies are governed by the same regulations that apply to the establishment of branches by domestic companies. A branch office is not a legal entity. The liabilities and rights stemming from its operation do not attach to the branch office but to the founder. The branch office operates under its own name. The name should also indicate both the branch s and the founder s registered office. A branch office may be established in the following ways: By a special decision taken by a sole trader in accordance with the memorandum; By a special decision of a company s authorised body in accordance with the memorandum or articles of association. The decision to establish a branch office must be notarised, and should contain: The company name and registered office of the founder and of the branch; The business activity of the founder and operations of the branch; If the founder is a limited company, the share capital and paid-up capital, and if the founder is a partnership, the names of the general partners or of the sole trader; The name(s) and domiciles of the individual(s) authorised to represent the founders in branch operations; A branch office is registered in the registers of the court with jurisdiction over the area where it has its registered office. To register a branch office, it is necessary to apply for registration enclosing the following original documents and certified translations into Croatian: An excerpt from the register in which the founder is entered showing the legal form and the date when the foreign founder of the branch was formed; The founder s decision to establish the branch; A certified transcript of the memorandum or articles of association in accordance with the legislation of the country where the founder has its registered office. A certified abridged financial report for the founder s previous financial year. The register court may approve the entry provided that the founder has proved that: The branch office has been legally established and that the founder exists in the country of its registered office; The branch office has appointed persons to perform operations in Croatia that are authorised for representation and are resident there; Croatian nationals are permitted to establish branch offices in the founder s country, under the same conditions as those that apply to the founder in Croatia. The founder is obliged to report any changes in the registration data to the register court. If the same founder intends to establish several branch offices, the establishment procedure is carried out separately for each branch. The application for registration must specify the main branch, while identifying the others with ordinal numbers. The founder is obliged to authorise one or more individuals at each branch to represent it, or the same person to represent several branch offices. As they are not legal entities, branch offices may not independently assume legal rights and obligations. The founder legally holds all rights and obligations of branch offices. In the event of a dispute with a third party it is not the branch but the company or sole trader that owns it which is a party to the dispute. Branch offices are required to keep accounting records that comply with the applicable legislation in Croatia, which includes the Accounting Act, International Accounting Standards and the tax regulations. 17 Croatia

Representative office In case a business involves only limited activities then the Trade Act offers the possibility to establish the business in form of a representative office. A representative office may be established in Croatia by any foreign entity engaging in business, and by any national or international business association. A representative office may be established for the purpose of market research, promotion, provision of information and representation. A representative office is not a legal entity, and is considered part of the entity that has established it. It may not carry out operations that the founder naturally performs, but may only carry out activities as ordered by the founder. As an exception, air carriers representative offices may sell tickets in conformity with Croatian international agreements and with international treaties. A representative office operates under the name of its founder with the indication of its status as a representative office. A foreign entity with a representative office in Croatia may establish one or more branches of that office. Representative offices are registered in the Croatian Register of Foreign Entities Representative Offices, maintained by the Ministry of Economics, Labour and Entrepreneurship, and may not commence operations until registered. Applications for registration submitted by foreign entities or their authorised representatives must contain the following: Company name, registered office and business activity; Registered address of the representative office in Croatia; Basic information about the person responsible for operation of the representative office (name, surname, citizen s ID number [MBG], and passport number and issuing country in the case of foreign nationals). The following documents must be submitted with the application: The founder s decision to establish a representative office in Croatia; Evidence of a foreign entity s registration in the country where it has its registered office or other valid document evidencing establishment in compliance with the legislation of the country where the founder has its registered office and showing the founder s legal form and time of establishment; A description of the representative office s business activity; A decision to appoint a person responsible for the operations of the representative office (manager); Evidence of payment of the administrative fee (HRK 1,000). Original documents must be submitted together with a certified translation into Croatian. The Ministry of the Economics, Labour and Entrepreneurship registers representative offices within 30 days of application and document submission. A representative office must be managed by a person appointed as the office manager by the founder. The founder must notify any changes in the registration data. The representative office may employ domestic or foreign nationals, but it may also operate without employees. Labour relations, salaries and other employment conditions for Croatian nationals working at representative offices are governed by the applicable Croatian legislation. The founder must conclude an employment contract with any person it employs, and the terms may not be worse than the minimum terms established by labour legislation and the relevant collective agreements. Foreign nationals and individuals without citizenship who are to be employed in a representative office are required to obtain a work permit in accordance with the applicable regulations. The founder of a representative office may open a non-resident foreign currency and a local currency account with a bank licensed for international transactions. These accounts may not be used for payment and collection (with the exception of foreign air carriers representative offices). The founder is expected to use them for the payment of operational costs of the representative office. 18 Croatia

The Ministry of the Economics, Labour and Entrepreneurship may deregister a representative office if: The founder decides to close the representative office; The founder discontinues its operations in Croatia; There is no one responsible for office operations and the founder fails to appoint a manager within two months of a reminder from the Ministry; Croatian regulations are infringed; Activities other than those of representing the foreign founder are conducted; The founder has been sentenced by the relevant court for business violations or offences more than twice in the course of the previous two years. Applications for registration of representative offices should be submitted to: Ministry of Economics, Labour and Entrepreneurship Ulica grada Vukovara 78 HR-10000 Zagreb Tel: +385 (0)1 6106 111 Fax: +385 (0)1 6109 120 Sole traders A sole trader is a natural person conducting a business activity independently and according to the regulations governing trades, and registered as such. A tradesman/woman who meets the relevant criteria may be registered as a sole trader. Registration as a sole trader is open to any tradesperson whose annual revenue exceeds HRK 2,000,000, and is mandatory for tradespersons whose annual revenue exceeds HRK 15 million. Sole trader status is acquired by registration, and is terminated upon deletion from the register. Applications registration should contain the following: Sole trader s name, registered office and business activity; Information on annual revenue; The name and number of the register of trades in which registration is desired. Capital requirements Type of enterprise Minimum capital Joint stock company Minimum equity of HRK 200,000 (approx. EUR 27,000); minimum nominal value per share HRK 10 (approx. EUR 1.35). Limited liability company Minimal equity of HRK 20,000 (approx. EUR 2,700) of which at least HRK 10,000 (EUR 1,350) must be paid up prior to registration. Starting up a company Starting up a company in Croatia requires registration with the commercial court, the Central Bureau of Statistics, the Tax Administration, the Croatian Pension Insurance Institute and the Croatian Institute for Health Insurance. It is customary to engage a domestic lawyer to handle the formation procedure. Prior to registration, it is necessary to check with the commercial court whether the desired company name already exists in the register. Business premises A company must have an official address in Croatia in order to be registered. A legal representative may temporarily use his/her own office address as the address of a company that is in the process of registration. 19 Croatia

Certification of documents All legal documents must be certified by a notary public. Under Croatian law, a notary public is a private person with some of the powers of a public official who certifies and authenticates certain legal documents. The costs of notarisation depend on the amount of share capital and average HRK 2,500. Certified translations If a relevant document is in a foreign language, a certified translator must translate it into Croatian. The cost of translations depends on the length. Company bank accounts Share capital (HRK 20,000 for a limited liability company and HRK 200,000 for a joint stock company) must be paid into a bank account, and the receipt of deposit should be enclosed when registering a company. Accounts used by legal entities and natural persons to conduct payment transactions are opened and managed by banks on a contractual basis and conformity with the applicable regulations. A business entity may hold accounts with several banks of its choice. Only one account per bank may be used for regular transactions, one for each organisational unit and several accounts for special purposes. If a business entity has more than one account for regular transactions it must specify which account will be used for the payment of statutory contributions and public dues, for collection on the basis of securities and instruments guaranteeing payment, for the execution of courts writs of execution and other documents of this kind, and for records of payment orders not executed. Public announcement of a company registration Upon entry in a court register, the commercial court in question sends the registration data to Narodne novine (the Official Gazette) and daily newspapers. The announcement of formation in Narodne novine costs HRK 810, and HRK 450 is charged by daily newspapers. Official Gazette: Narodne novine Odjel oglasa i pretplate Ulica SR Njemačke 6 HR-10020 Zagreb Tel: +385 (0)1 6652777 Fax: +385 (0)1 6652897 http://www.nn.hr Company stamp Upon receiving the certificate of registration it is necessary to have a stamp made. A copy of the registration certificate should accompany the stamp order form. The stamp must show the company name and registration number. Company number A request must be submitted to the Central Bureau of Statistics to classify the company s operations in accordance with the National Classification of Business Activities, i.e. to issue a company number (matični broj MB) and activity code within 15 days from receiving the certificate of court registration. The following must be enclosed with the request: Certificate of court registration; Form RPS-1 (available at Narodne novine shops); Copy of the administrative fee receipt (HRK 55). Central Bureau of Statistics Ilica 3 HR-10000 Zagreb Tel: +385 (0)1 4806111 http://www.dzs.hr Tax number Upon registration with the Commercial Court and Central Bureau of Statistics, the new company must be registered with the tax office having jurisdiction over the area where the registered office is located. Data is entered directly in the computer system, with the profits tax and value added taxpayer registrations taking place simultaneously, such that separate 20 Croatia

applications are not required. The set of commercial court registration documents and the notification of business entity classification from the Central Bureau of Statistics must be presented. Ministry of Finance/Tax Administration Katančićeva 5 HR-10000 Zagreb Tel: +385 (0)1 4809 555 Fax: +385 (0)1 4809 530 http://www.porez.hr Pension insurance Employers, legal entities and natural persons liable to pay contributions must send the following documents to the regional office of the Croatian Pension Insurance Institute, responsible for the location of the registered office within 15 days of the commencement of operations: Registration form M-11 P, relating to commencement of operations by the taxable entity; Registration form M-1 P for each new employee. The following must be enclosed with the registration forms: A copy of the certificate of registration; The notification of the business entity classification by the Central Bureau of Statistics. Croatian Pension Insurance Institute Mihanovićeva 3 HR-10000 Zagreb Tel: +385 (0)1 4595500 Fax: +385 (0)1 4577105 http://www.mirovinsko.hr Health insurance Legal entities liable to make health insurance contributions must register for basic health insurance with the relevant regional office of the Croatian Institute for Health Insurance within 15 days of the commencement of operations. Registrants must submit the following forms: Contribution payer registration form 1 (contribution payers); Basic health insurance registration form 2 (insured persons); Basic health insurance registration form 3 (insured person s family members). A legal entity must enclose the following with form 1 and form 2: Notification of business entity classification from the Central Bureau of Statistics; Registration form of the Croatian Institute for Health Insurance (copies: M-1P and M-11P); Evidence of residence (certificate from the Ministry of the Interior [Cro: MUP] or personal ID card). Croatian Institute for Health Insurance Margaretska 3 HR-10000 Zagreb Tel: +385 (0)1 4806333 Fax: +385 (0)1 4812606 http://www.hzzo-net.hr 21 Croatia

Certificate of fulfilment of minimum technical requirements A company may not commence operations until it has submitted to the commercial court a certificate from the competent administrative body (county office of economic affairs) evidencing compliance by its premises, plant and equipment with the technical, health, environmental and other legal requirements for the performance of the activity or activities in question. HITRO.HR In order to simplify and accelerate company registration procedures, the government has established the HITRO.HR service. The counter positions of HITRO.HR at the offices of the Financial Agency (FINA) in all major Croatian cities provide a onestop-shop for fast-track formations of limited liability companies and trade businesses, and all the necessary information. HITRO.HR Tel: 0800 0080 (info line) E-mail: info@hitro.hr http://www.hitro.hr Business activities requiring special licences Certain business activities may only be performed in Croatia with a special certificate of approval or consent, licence or other document issued by the relevant governmental body or institution. Without such approvals, it is impossible to register a company and, consequently, to commence operations. The activities concerned are: Banking; Insurance; Road haulage; International freight forwarding; State surveying and land register activities; Production of, and trade in tobacco and tobacco products; Production of, and trade in explosives; Energy; Product compliance testing; Protection and preservation of cultural heritage; Production of, and trade in drugs and medical products; Production of, and trade in veterinary drugs and veterinary medical products; Production of, and trade in arms and ammunition; Environmental protection; Physical planning; Tax consultancy; Auditing; Mine clearance; Telecommunication services; Veterinary services; Employment agency services; Security services; Air transport. Financial reporting and auditing: the Accounting Act As of 1 January 2008 the official accounting frameworks in Croatia are Croatian Financial Reporting Standards (CFRS) and International Financial Reporting Standards (IFRS). CFRS must be applied by small and medium-sized entities while IFRS must be applied by large entities and entities whose securities are registered on an organised securities market (i.e. stock exchange). CFRS are based on International Accounting Standards (IAS) and IFRS. 22 Croatia

The Accounting Act introduces a classification of enterprises applicable from 1 January 2008 that is compatible with the EU Fourth Directive. The breakdown of the classification is as follows: Small companies: may not exceed two of the following three limits: Assets of HRK 32,500,000; Revenue of HRK 65,000,000; Average number of employees of 50. Medium-sized companies: may exceed two limits for small companies but may not exceed two of the following thresholds: Assets of HRK 130,000,000 Revenue of HRK 260,000,000 Average number of employees of 250 Large companies: exceed two of the limits for medium-sized companies. The following types of businesses are always treated as large companies: Banks, other financial service providers, insurance and reinsurance companies, and leasing companies. Under the Croatian Auditing Act annual external audits are mandatory for the following types of companies: Large and medium-sized public limited companies; Large and medium-sized limited liability companies; Listed companies and companies in the process of listing; Companies carrying out certain kinds of business activities (banks, insurance companies, investment funds, etc.); Small companies with annual revenue of more than HRK 30,000,000.00. The annual financial statements of companies thus classified must include a: Balance sheet; Income statement; Cash flow statement; Statement of changes in equity; Notes. All companies are obliged to deliver their annual financial statements and auditors report to the Financial Agency (FINA). Companies are obliged to file parent entity annual financial statements and auditors reports within six months of the end of the year, and annual consolidated financial statements within nine months of year end. Personal income tax returns must be filed with the tax authority (Croatian Tax Administration) not later than 28 February of the current year. Where a company s financial year is the calendar year corporation tax returns must be filed not later than 30 April of the current year. 23 Croatia

Taxes and duties The Croatian tax system is comparable to those of EU member states, and is based on a number of direct and indirect taxes. The current Croatian tax system includes the following taxes: Corporation profit tax; Withholding tax; Personal income tax; Value added tax; Special taxes (excise duties) on certain products (crude oil and petroleum products, tobacco products, alcoholic beverages, non-alcoholic beverages, beer, coffee, automobiles and other motor vehicles, vessels and aircraft, and luxury products); Tax on third party and fully comprehensive motor insurance premiums; Property transfer tax; Gambling levies; County, municipal and town/city taxes; Inheritance and gift tax. The Tax Administration is the administrative organisation within the Ministry of Finance whose basic task is to implement tax regulations and regulations concerning the payment of compulsory contributions. All residents are obliged to contribute to government revenue in accordance with their means. The tax system is based on the principles of equality and equity. The Tax Administration website provides up-to-date information on taxes in Croatia: http://www.porezna-uprava.hr/en/index.asp Corporation profit tax Taxable persons 1. A company or another legal or natural person resident in the Republic of Croatia who is permanently and independently engaged in an economic activity for the purpose of deriving a profit, income, revenue or other assessable economic benefits; 2. A resident permanent establishment (an inland business unit) of a non-resident enterprise; 3. A natural person liable to income tax if he/she declares that he/she intends to pay corporate income tax instead of personal income tax; 4. An entrepreneur, i.e. a natural person who derives income from a small business or related activities, where: a. Total revenue in the preceding tax period exceeded of HRK 2,000,000; or b. Total income in the preceding tax period exceeded of HRK 400,000; or c. The value of the non-current assets exceeds HRK 2.000,000; or d. Employment averaged more than 15 persons during the preceding tax period. 5. State administrative bodies, regional and local authorities, the Croatian National Bank, state institutions, institutions of units of regional and local self-government, state institutes, religious congregations, political parties, trade unions, chambers, civic organisations, artists associations, volunteer fire companies, technical culture communities, tourist boards, sports clubs, sports associations and unions, open-ended investment funds established and operating in accordance with the law, endowments and foundations, are liable to corporation profit tax on profits derived from economic activities if non-taxation of this activity would result in their gaining unjustified competitive advantages. Liability also extends to all enterprises not classified under 1 5 and not liable to income tax under the Income Tax Act, if their profits are not otherwise taxed. 24 Croatia

Taxable persons A domestic paying agent making payments to foreign entities (non-residents) which are not natural persons; The permanent establishment(s) of a non-resident entrepreneur paying the parent company interest, royalties or other consideration for intellectual property rights. There are exemptions for consideration recognised as the revenue of a permanent establishment of a non-resident entrepreneur. Withholding tax is due on: Royalties and consideration for other intellectual property rights paid to non-resident legal entities; Fees for market research, accountancy, business consultancy and auditing services paid to non-residents; Interest. Withholding tax is not payable on interest already paid: On loans for the purchase of goods used for carrying out of a taxable person s business activity; On loans granted by non-resident banks or other financial institutions; To holders of government or corporate bonds which are non-resident legal entities; On finance leases. Taxable period The taxable period is, as a rule, the calendar year. Exceptionally, the Tax Administration may agree, at the request of a taxable person that the taxable period shall not correspond to the calendar year. In such cases the taxable period may not exceed 12 months and may not be changed for five years. Tax base Tax base of corporation tax (profit tax) The profit for taxation purposes is the difference between income and expense before the corporation tax assessment, increased and reduced in accordance with the Profit Tax Act. Tax base of a resident The profit earned in Croatia and abroad assessed in accordance with the Profit Tax Act Tax base of a non-resident The profit earned in Croatia assessed in accordance with the Profit Tax Act. Allowable depreciation and amortisation The useful lives of assets for taxation purposes are: Asset type Depreciation and amortisation lifetimes Annual depreciation and amortisation rates Buildings and ships of over 1,000 GRT* 20 years 5% Cars 5 years 20% Intangible assets, equipment, vehicles (other than cars) and machinery 4 years 25% Computer hardware and software, mobile telephones and computer network accessories 2 years 50% Other non-mentioned assets 10 years 10% * Gross registered ton Depreciation and amortisation rules Depreciation and amortisation are recognised as expenditure up to the amount calculated on the basis of the acquisition cost of the assets, using the straight line method and applying the annual depreciation rates. Non-current tangible and intangible assets include assets whose single acquisition costs do not exceed HRK 2,000 and whose useful lives do not exceed one year. At the request of the taxpayer, the annual rates may be doubled. 25 Croatia

Land, forests and similar renewable natural resources, financial assets, cultural monuments and works of art are not subject to depreciation/amortisation. Where the calculated depreciation expense of a taxable person is lower than the amount allowable for tax purposes, the calculated depreciation is treated as recognised expenditure. Depreciation and amortisation are recognised as deductible expenditure from the first day of the month following the month in which the assets were put to use. Depreciation and amortisation expenses in respect of non-current assets sold, donated or otherwise alienated, or destroyed are allowable until the end of the last month in which these assets were used. The undepreciated/unamortised acquisition cost of non-current assets is recognised as tax deductible expenditure in the taxation period in which these assets are sold, donated, or otherwise alienated or destroyed. Exceptionally, if the acquisition cost is stated at a revalued amount, the tax deductible expenditure includes the undepreciated/unamortised acquisition cost less the revalued amount included in revenue up to the time of the sale, donation, alienation or destruction of the assets. The depreciation of non-current assets that have already been written off is not recognised as tax deductible expenditure. The depreciation of cars and other means of personal transportation is recognised at acquisition cost up to HRK 400,000 per vehicle. Where the acquisition cost exceeds this amount, depreciation for the excess amount is only recognised if the vehicle is exclusively used for hire. Non-current assets must be accounted for even after their complete write-off, and must be stated on the balance sheet up to the time of their sale, donation, alienation or destruction. Items that increase the tax base 70% of entertainment expenses (food and drink, gifts with or without the printed firm logo or product brand and expenses for vacation, sport, recreation and leisure time, renting cars, vessels, airplanes and holiday cottages), up to the amount of the costs arising from a business relationship with a business partner. 30% of the cost, except for insurance and interest expenses, incurred in connection with own or rented motor vehicles or other means of personal transportation used by managerial, supervisory and other employees, unless the use of such means of transport is defined as a salary component. Personal expenses of shareholders and partners (withdrawals), as well as employees (entertainment, relaxation, sport and recreation costs) including value added tax. Hidden profit distributions. Fines imposed by competent bodies. The cost of enforced collection of tax and other levies. Accrued penalty interest. Privileges and other economic benefits granted to natural persons or legal entities for the purpose of causing or preventing a certain event. Gifts in kind or cash made in Croatia for cultural, scientific, educational, health, humanitarian, sports, religious, environmental or other socially beneficial purposes to associations and other persons engaged in the above mentioned activities pursuant to special regulations, if they exceed 2% of the revenue generated in the previous year. Interest on loans received from shareholders or partners. Interest on loans received from a shareholder or partner holding at least 25% of shares or equity capital or voting rights in a taxable entity, provided that, in any tax period, these loans exceed the fourfold amount of such shareholder s or partner s share of the capital or voting rights, determined in relation to the amount and duration of loans in the taxable period, except for interest on loans from financial institutions. Loans received from shareholders or partners include loans from third parties guaranteed by such shareholders or partners. Interest on transactions between associated persons. Income from interest on loans granted by associated persons is calculated using normal market interest rates, which are determined and published by the finance minister prior to the applicable taxable period. Losses on the revaluation of shares and interests in private companies (unrealised losses) if these were included in the tax base. Increases in the tax base resulting from changes in the method of tax assessment (from personal income tax to corporation tax). Losses on the write-down and write-off of receivables. Write-downs of inventories and financial assets. Statutory provisions and provisions stipulated by agreements (e.g. provisions for severance payments, warranty costs and litigation) are recognised as deductible expenditure. Any other expenditure not directly related to profit earning, as well as other increases in the tax base. 26 Croatia

Items that decrease the tax base Dividends. Gains on the write-up of shares and interests in private companies (unrealised gains), if these were included in the tax base. Revenue from collected written-off receivables that were included in the tax base in previous tax periods but not excluded from the tax base as recognised expenditure. Expenditure from previous periods which was included in the tax base. Depreciation not recognised in previous tax periods, up to the prescribed limit. Decreases in the tax base due to changes in the method of tax assessment (from personal income tax to corporation tax). State support for training and development. State support for research and development programmes. Relief for employment. Tax loss carryforwards A tax loss is carried forward and offset by reducing the tax bases in the following five years unless otherwise provided by the Profit Tax Act. If the right to offset losses incurred in the process of mergers, acquisitions or demergers is transferred to legal successors during a tax period, the right to carry forward the losses begins after the expiry of the period in which the legal successor acquired the right to carry forward the losses. Tax base for withholding tax The withholding tax base is the gross amount of consideration paid by a resident taxpayer to a non-resident recipient. Tax rates Corporation tax (profit tax) 20% Withholding tax 15% If a foreign recipient of remuneration, interest or dividends has its headquarters in a state with which a tax treaty specifying lower tax rates is in force, lower withholding tax is payable. Value added tax (VAT) Taxable persons Entrepreneurs (natural persons or legal entities) who supply goods or render services. Importers. Exporters. Issuers of invoices if these itemise VAT although the issuer is not authorised to do so. Domestic entrepreneurs for whom a service is rendered by an enterprise whose headquarters is abroad. Exceptionally, national government bodies, local authorities, political parties, unions and chambers undertaking business or other gainful activities, if the non-taxation of such activities would lead to unfair advantages (the Tax Administration issues rulings determining that they are liable to taxation on such activities). An entrepreneur whose annual value of taxable goods delivered and services rendered in the previous calendar year was not greater than HRK 85,000 does not pay VAT. He has no right to display this tax on invoices issued and cannot deduct the tax charged by other entrepreneurs. The entrepreneur can, by the end of the current year, apply to the Tax Administration for VAT liability from 1 January the following year. A Tax Administration ruling to this effect makes the entrepreneur liable for the next five calendar years. Tax rates VAT is zero rated on: All kinds of bread; All kinds of milk; Books; Medicines; Surgical implants; Scientific and scholarly journals, and the public screening of films. 27 Croatia

VAT is payable at a rate of 10% on: Accommodation services, and accommodation with breakfast, full or half board at all kinds of commercial hospitality facilities and agency commissions for such services; Daily and periodical newspapers and magazines with the exception of those that, in their entirety or mainly, contain advertisements or serve advertising purposes. VAT is payable at a rate of 22% on: All other taxable goods and services. Excise duties on passenger cars, other motor vehicles, boats and aircraft Taxable persons New passenger cars, other motor vehicles and aircraft: Importers. Manufacturers. Used passenger cars, other motor vehicles, boats and aircraft: Purchasers. Acquirers (natural persons or legal entities). Duty base New passenger cars, other motor vehicles, boats and aircraft: The ex VAT sales price of the passenger or motorcycle (domestic sales). Importers: the value for customs duty purposes plus the customs duties payable. Boats: depending on the length measured in metres. Aircraft: depending on the number of seats. Used passenger cars, other motor vehicles, vessels and aircraft: Market value at the time that the tax liability is incurred. The market value is determined: According to the purchase document; or By estimation, if the Tax Administration decides that the tax base has not been stated realistically. Duty amount Passenger cars and motorcycles Sales price base (HRK) Tax (in HRK) Over Up to 0 50,000 13% 50,000 100,000 6,500 + 15% on the amount exceeding 50,000 100,000 150,000 15,500 + 23% on the amount exceeding 100,000 150,000 200,000 27,500 + 28% on the amount exceeding 150,000 200,000 250,000 41,000 + 33% on the amount exceeding 200,000 250,000 300,000 57,500 + 38% on the amount exceeding 250,000 300,000 350,000 76,500+ 43% on the amount exceeding 300,000 350,000 98,000 + 48% on the amount exceeding 350,000 Duty is increased by 50% on passenger cars, and by 100% on passenger cars with rotary engines, on motorcycles that are not deemed to be new, on passenger cars with engine capacities of over 1,600 cc and on motorcycles with engine capacities of over 250 cc. Duty is not payable on electric cars and motorcycles. 28 Croatia

Boats without cabins Length of vessel (in metres) Tax (in HRK) Over Up to 8 12 6,000 12 15 18,000 15 48,000 A duty of HRK 6,000 is payable on boats without cabins up to 8 m long, with or without built-in engines, and with outboard motors rated at over 35 kw. Boats with cabins and semicabins Length of vessel (in metres) Tax (in HRK) Over Up to 8 12 15,000 12 15 60,000 15 150,000 A duty of HRK 15,000 is payable on boats with cabins or semicabins up to 12 metres long with or without built-in engines, and with outboard motors rated at over 35 kw. Aircraft Number of Seats Tax (in HRK) From Up to 1 4 7,000 5 12 70,000 13 50 140,000 over 50 300,000 The tax rate of the duty on the sale of used passenger cars, other motor vehicles, boats and aircraft is 5%. Petroleum duty Taxable persons Petroleum producers and importers, and the competent body of the national administration for commodity reserves. If the petroleum is imported in one s own name but for the account of another then the user of the import is the person liable to pay the petroleum duty. Duty base Litre of petroleum at a temperature of +15 C or kilogram of net weight. 29 Croatia

Duty amount Per litre Duty (in HRK) Motor petrol (MB 98 and MB 86) and other kinds of leaded petrol irrespective of octane value and commercial name 2.40 Motor petrol (BMB-98, BMB-95 and BMB-91) and other kinds of unleaded petrol irrespective of octane value and commercial name 1.65 Diesel fuel (D1, D2, D3) and other kinds of diesel fuel irrespective of commercial name 1.00 Eurodiesel, diesel fuel coloured with a blue dye 0.00 Heating oil, extra light and special light (EL, LS) 0.30 Per kg of net weight Duty (in HRK) Light, medium and heavy heating oil 0.00 Jet fuel and aviation fuel 0.00 Liquefied petroleum gas 0.10 Paraffin 1.40 Alcohol duty Taxable persons Legal entities or natural persons that produce or import alcohol or alcoholic beverages. The user of the import if the alcohol or alcoholic beverages are imported in one s own name for another s use. Duty base A litre of absolute alcohol contained in ethyl alcohol, distillates and alcoholic beverages that is expressed in volume percent measures at a temperature of 20 C. Duty amount HRK 60 per litre of the absolute alcohol. Fruit wine is exempt. Duty on beer Taxable persons Breweries, brewers and other legal entities and natural persons that produce or have beer produced on their own account, and persons who import beer to the customs territory of the Croatia, other than persons and quantities exempt under the customs regulations. Duty base One hectolitre of produced or imported beer. Duty amount HRK 200 per hectolitre of domestic or imported beer. HRK 60 per hectolitre of domestic or imported non-alcoholic beer (up to 0.5% vol/vol). 30 Croatia

Duty on non-alcoholic beverages Taxable persons Legal entities and natural persons who make or who have made non-alcoholic beverages on their own account and persons importing non-alcoholic beverages to the customs territory of the Croatia, other than persons and quantities exempt under the customs regulations. Duty base One hectolitre of produced or imported non-alcoholic beverages. Duty amount HRK 40 per hectolitre. Tobacco duty Taxable persons Producers and importers of tobacco products. Duty base Cigarettes: 1,000 units of 9 cm in length with or without a filter, and the retail price. Tobacco: 1,000g Cigars: per unit. Cigarillos: packet of 20. Kind of tobacco product Rate Specific duty Group A cigarettes 30% of the retail price HRK 175.00 per 1,000 units Group B cigarettes 30% of the retail price HRK 197.50 per 1,000 units Group C cigarettes 30% of the retail price HRK 310.00 per 1,000 units Tobacco 30% of the retail price HRK 38 per kg Cigars 30% of the retail price HRK 1.10 per unit Cigarillos 30% of the retail price HRK 4.40 per packet Coffee duty Taxable persons A legal entity or natural person importing coffee to the customs territory of the Croatia. Duty base One kilogram of net weight of non-roasted coffee, roasted coffee and other coffee products. Duty amount Kind of coffee or coffee product per kg of net weight Tax (in HRK) Non-roasted coffee (with or without caffeine) 5.00 Roasted coffee in beans or crushed (with or without caffeine) 12.00 Coffee shells and membranes 15.00 Other coffee products 20.00 31 Croatia

Duty on luxury goods Taxable persons Producers and importers of luxury goods. Duty base The sales value of the product. Duty amount 30 % of the duty base. Duty on third-party and comprehensive vehicle insurance Taxable persons Insurance companies making contracts with legal entities and natural persons, and collecting premiums for third-party and comprehensive vehicle insurance directly or via an agent or representative. Duty base Policy type Third-party motor vehicle insurance Comprehensive motor vehicle insurance Duty base Insurance premiums that an insurance company quotes a natural person or legal entity when making a contract concerning the compulsory insurance of road motor vehicles. The insurance premiums that an insurance company quotes a natural person or legal entity when making a contract concerning the comprehensive insurance of road motor vehicles. Duty rate 15% of the contractual compulsory motor vehicle insurance premium. 10% of the contractual comprehensive motor vehicle insurance premium. Inheritance and gift tax Taxable persons A legal entity or natural person inheriting an estate, receiving a gift or otherwise acquiring assets on which inheritance or gift tax on is payable without consideration. Tax base The amount of cash and/or the market value of financial and other assets on the day when the tax liability is determined, less debts and costs associated with the taxable assets. Tax rate Up to 5%. Exemptions The inheritance and gift tax is not paid by: The spouse, blood kin in the direct line, and the adopted children or adoptive parents of the deceased or the donor; Brothers and sisters, their progeny, sons-in-law and daughters-in-law of the legator or donor if they lived together in a joint household with the legator at the time of decease or with the donor at the time of receipt of the gift. Natural persons and legal entities to whom the Croatia or a local or regional authority donates movables as compensation or for other reasons connected with the Homeland War. The national government, and local and regional authorities, public institutes, religious congregations, foundations, the Red Cross, and other humanitarian and charitable associations. Natural persons and legal entities that receive gifts (donations) for purposes laid down in separate regulations. 32 Croatia

Forms and submission deadlines Persons liable to inheritance or gift tax must submit to the competent tax body an inheritance ruling or a decision of the body of the national administration or a court or a deed of gift, within 30 days of the day of the legal effectiveness of the ruling or decision, or of the day of the making of the deed of gift. Payment deadline Payment is due 15 days from the receipt of the ruling imposing the tax. Vehicle tax Taxable persons Owners of registered passenger cars or motorcycles. Taxable items Passenger cars (up to ten years old) Motorcycles Tax rates Passenger vehicles are taxed according to the power of the engine expressed in kw and the age of the car. Passenger cars: Engine power Age of the car (tax in HRK) Up to 2 years old From 2 5 years old From 5 10 years old Over kw Up to kw 55 300 250 200 55 70 400 350 250 70 100 600 500 400 100 130 900 700 600 130 1,500 1,200 1,000 Motorcycles: Engine power Age of the motorcycle (tax in HRK) Over kw Up to kw Up to 2 years old From 2 5 years old From 5 10 years old Over 10 years old 20 100 80 50 20 50 200 150 100 50 50 80 500 400 300 200 80 1200 1000 800 600 Exemptions The tax on road motor vehicles is not paid on: National and local government vehicles; Health service and fire brigade vehicles; Diplomatic vehicles; Hearses and taxis. Persons who have been entirely exempted from the payment of customs duty, VAT or turnover tax on vehicles are also exempt from vehicle tax. Boat tax Taxable persons Owners of boats. 33 Croatia

Taxation items Boats, rated according to length expressed in metres, age, cabin and the power of the engine expressed in kw. Tax rates Cabinless boat, engine powered: Vessel length (in m) Engine power (kw) (in HRK) Over Up to Up to 30 kw 31 100 kw Over 100 kw 5 m 7 m 200 400 7 m 10 m 100 300 500 10 m 200 450 600 Cabin boat, engine powered: Vessel length (in m) Engine power (kw) (in HRK) Over Up to Up to 30 kw 31 100 kw 101 500 kw Over 500 kw 5 m 7 m 200 300 7 m 10 m 200 400 500 2,500 10 m 12 m 300 500 1,000 3,500 12 m 400 1,000 3,000 5,000 Sailboat with cabin: Vessel length (in m) Engine power (kw) (in HRK) Over Up to Up to 10 10 25 kw 26 50 kw Over 50 kw 5 m 7 m HRK 300 HRK 400 HRK 500 7 m 10 m HRK 200 HRK 600 HRK 1,000 HRK 2,000 10 m 12 m HRK 300 HRK 800 HRK 2,000 HRK 3,000 12 m HRK 400 HRK 1,500 HRK 3,000 HRK 4,000 Exemptions Tax on vessels is payable on pleasure boats owned by non-residents. Payment deadline Within 15 days of receipt of the tax assessment. Coin operated amusement machine tax Taxable persons Operators of amusement machines in use at clubs, arcades, catering facilities and other public premises. Tax base Coin operated amusement machines in use at clubs, arcades, catering facilities and other public premises. 34 Croatia

Tax rate HRK 100 per month per coin operated machine. Income surtax Taxable persons Those liable to pay income tax who have a domicile or a common residence in the area of the city/municipality that has prescribed the obligation to pay the tax. Tax base The income tax base. Tax rate Municipalities max. 10%; Towns with populations of less than 30,000 max. 12%; Cities with populations of more than 30,000 max. 15%; Zagreb max. 30%. For surtax rates per municipality/town visit: http://www.pu.mfin.hr/include/stope_prireza_2006.doc Local hospitality tax Taxable persons Providers of catering and hospitality services. Tax base The price of wine, spirits, beer and non-alcoholic beverages served at catering facilities. Tax rate Up to 3%. Payment deadline Determined by the municipality or town council concerned. Tax on holiday homes Taxable persons Owners of holiday homes. A holiday home is any building, or part of a building or apartment that is used occasionally or seasonally; A holiday home is not a building used to store agricultural machinery, tools and equipment; A municipality/town council determines the of taxation of a holiday home according to the location, the age, condition and other factors relevant to use. Tax basis Square metres of usable area in the holiday home. Tax rate Between HRK 5 15 per square metre of usable area. Exemptions The tax on holiday houses is payable: On holiday homes that are unusable because of war damage, natural disasters, age or dilapidation; Holiday homes used as accommodation for displaced persons and refugees; 35 Croatia

State owned holiday and recreational accommodation for children aged up to 15; Homes otherwise exempted for economic or social reasons. Forms and submission deadlines Those liable to tax on holiday homes must submit the relevant forms, stating the location and usable floor space, to the competent tax authority by 31 March. Payment deadline 15 days from the receipt of the ruling assessing this tax. Trademark tax Taxable persons Natural persons and legal entities liable to personal income tax or corporation tax, and registered for the performance of a business activity. Taxable items Trademarks. Tax rate Up to HRK 2,000 per trademark. Payment deadline Determined by the municipality/town concerned. Tax on the use of public land Taxable persons Natural or legal persons making use of public land. What is deemed to be public land is determined by the municipality/town concerned. Taxable items Public land used by natural or legal persons. Tax rate Set by the municipality/town concerned. Payment deadline Determined by the municipality/town concerned. Personal income tax Taxable persons Natural persons with an income. If a number of natural persons collectively acquire an income, each natural person individually is a taxable person in respect of his/her share of that income. Residents are liable to taxation of the following sources of income acquired in Croatia and abroad: Income from employment; Income from self-employment; Income from property and property rights; Investment income; Insurance income; Other income. 36 Croatia

Non-residents are liable to taxation of the following sources of income acquired in Croatia: Income from employment; Income from self-employment; Income from property and property rights; Investment income; Insurance income; Other income. Tax base Residents The total income of a taxable person earned at home and abroad (income from employment + income from self-employment + income from property and property rights + investment income + insurance income + other income) minus personal allowances. Non-residents The total income of a taxable person acquired in Croatia (income from employment + income from self-employment + income from property and property rights + investment income + insurance income + other income) minus personal allowances. Monthly tax base Annual tax base Rates Up to HRK 3,600 Up to HRK 43,200 15% Over HRK 3,600 and up to 9,000 (the next HRK 5,400) Over HRK 9,000 and up to HRK 25,200 (the next HRK 16,200) Over HRK 43,200 and up to HRK 108,000 (the next HRK 64,800) Over HRK 108,000 and up to HRK 302,400 (the next HRK 194,400) 25% 35% Over HRK 25,200 Over HRK 302,400 45% Property transfer tax Some properties (land, old real estate and sales of real estate transacted by citizens and legal persons which are not subject to value added tax) are liable to property transfer tax, while the acquisition of properties built, handed over or paid for after 31 December 1997 is subject to value added tax at 22%. Taxable persons Acquirers of property (by: purchase; exchange; inheritance; gift; acquisition and withdrawal of real estate property from a company; and acquisition in liquidation or bankruptcy proceedings, or on the basis of a court decision). Land Building land (developed or undeveloped) Agricultural land (improved or unimproved) Forests Buildings Residential buildings and parts thereof Commercial and parts thereof Other buildings and parts thereof them (roads, bridges, garages, tombs, etc.) Tax rate 5% Tax base The tax base is the market value of the property at the time of acquisition. Exemptions for contributions of property to companies Contributions of property to companies as founding investments or as an augmentations of paid-up capital are exempt from 37 Croatia

property transfer tax. The same applies if the property is transferred in connection with merger or demerger, or acquisition. 38 Croatia

2.4 Incentives for strategic investors In the process of approximation to EU regional policy regulations Croatia has adopted the Decree on the Regional Aid Map (National Gazette, No. 52/2008). Under the decree the maximum aid intensity permitted for three Croatian statistical regions (Northwest Croatia, Continental Croatia and Adriatic Croatia) is calculated on the basis of gross aid equivalent, i.e. aid as a percentage of eligible costs. The gross aid equivalent for Northwest Croatia is 40%, and that for the other two regions 50%. Maximum aid intensity is also calculated according to the size of the company receiving support. Large companies can only apply for the above gross aid equivalent, but it is higher for SMEs (small company +20%; medium-sized company +10%). Areas of Special National Concern (ASNC) Taxable persons carrying on business activities in Areas of Special National Concern and permanently employing more than five people, at least half of whom are resident in an ASNC, pay corporation tax at the following rates: Areas of Special National Concern Period Corporation tax rate Group I 50 areas 2005 2014 Fully exempt from corporation tax Group II 61 areas 2005 2014 25% of the prescribed tax rate Group III 69 areas 2005 2014 75% of the prescribed tax rate If the taxable person began carrying on a business activity during the year, and the assessment period does not exceed nine months, the conditions for tax advantaged treatment are deemed to be met if the taxable person has permanently employed ASNC residents since the commencement of operations. Tax free zones Taxable persons User of a tax free zone (in the meaning of the Free Zones Act) User of a tax free zone that builds or takes part in the construction of facilities and invests more than HRK 1,000,000 within the zone Corporation profit tax rate 50% of the prescribed rate of taxation Exempt from corporation tax in the year of the investment and for the next five years of business operations in the zone (up to the amount of the investment) User of a tax free zone in Vukovar or Srijem County Exempt from corporation tax from 2005 2014 Investment incentives/tax incentives Investment (HRK equivalent) Obligation to create new jobs within three years of the investment Rates Duration of incentives At least EUR 1.5 million At least ten new jobs associated with the investment 10% 10 years At least EUR 1.5 4 At least 30 new jobs associated with the investment 7% 10 years million EUR 4 8 million At least 50 new jobs associated with the investment 3% 10 years Over EUR 8 million At least 75 new jobs associated with the investment 0% 10 years State aid for research and development projects Taxable persons liable to corporation tax can be granted additional relief if the ministry in charge of science confirms their status as a state aid beneficiaries. Taxable persons liable to corporation tax are eligible for the following deductions from the tax base for research and development costs: Type of R&D project Basic research Applied research Development research Percentage deduction up to 150% of eligible project expenses up to 125% of eligible project expenses up to 100% of eligible project expenses 39 Croatia

New employees One-off employment incentives are accorded as a percentage of justified expenses (calculated as a percentage of gross salary for two years) arising from new positions related to investments. Conditions In areas (counties) with a registered unemployment rate of up to 10% In areas (counties) with a registered unemployment rate of 10 20% In areas (counties) of the Republic of Croatia with a registered unemployment rate of over 20% Incentive Up to 10% of justified expenditure arising from new positions associated with the investment, up to a maximum of EUR 1,500 equivalent per new position. Up to 15% of justified expenditure arising from new positions associated with the investment, up to a maximum of EUR 2,000 equivalent per new position. Up to 20% of justified expenditure arising from new positions associated with the investment, up to a maximum of EUR 3,000 equivalent per new position. Special increases in total state aid Type of state aid State aid for applied and development research State aid for technical feasibility studies (applied research) State aid for technical feasibility studies (basic research) Size of enterprise Percentage increase in eligible project/study expenses Small enterprise up to 20% Medium-sized enterprise up to 10% Large enterprise Small enterprise up to 75% Medium-sized enterprise up to 75% Large enterprise up to 65% Small enterprise up to 50% Medium-sized enterprise up to 50% Large enterprise up to 40% Corporation tax allowances may be granted up to the following percentages of overall state aid: Type of R&D project Percentage of total state aid Basic research up to 100% of eligible project expenses Applied research up to 50% of eligible project expenses Development research up to 25% of eligible project expenses State aid for education and training Investors who have undertaken to create new jobs are granted tax relief for the eligible cost of training the employees in question up to the following limits. State aid beneficiary Reduction in corporation or personal income tax for general education and training expenses Reduction in corporation or personal income tax for special education and training expenses Large enterprise up to 50% of eligible expenses up to 25% of eligible expenses SME up to 70% of eligible expenses up to 35% of eligible expenses A beneficiary meeting all the eligibility requirements for state aid is entitled to an additional reduction in the taxable amount of up to 10% if it operates in Continental Croatia or Adriatic Croatia, or up to 5% if it operates in Northwest Croatia. 40 Croatia

State aid beneficiaries engaging in maritime transport are entitled to corporation or income tax relief of up to 100% of eligible education and training expenses if the following requirements are met: The education or training must take place on board vessels registered with the Croatian Register of Shipping; The trainees must be reserve, not active crew members. State aid beneficiaries are entitled to a further ten percentage points of relief for education and training of disadvantaged employees. Disadvantaged employees are: Workers under the age of 25 who had never been permanently employed; Workers with disabilities resulting from physical, mental or psychological injuries; Workers over the age of 45 without school-leaving qualifications; Long-term unemployed. Employers with between one and three apprentices are entitled to a 5% reduction in their base, and those with more than three apprentices to an allowance of 1 percentage point per apprentice up to a maximum of 15% of the tax base. 41 Croatia

2.5 Double taxation relief All the double taxation agreements signed by the Republic of Croatia are based on the OECD Model Tax Convention. Croatia honours all double taxation agreements made between former Yugoslavia and other countries, and has itself concluded numerous agreements. Those currently in place are with: Albania Austria Belarus Belgium Bosnia and Herzegovina Bulgaria Canada Chile China Czech Republic Denmark Estonia Finland France Germany Great Britain and Northern Ireland Greece Hungary Ireland Italy Israel Jordan Latvia Lithuania Macedonia Malaysia Malta Mauritius Moldova Montenegro Netherlands Norway Poland Romania Russian Federation San Marino Serbia Slovakia Slovenia South Africa South Korea Spain Sweden Switzerland Turkey Ukraine 42 Croatia

2.6 Croatia on the way to the EU Croatia has been a candidate for EU membership since June 2004. It was the second country to sign a Stabilisation and Association Agreement (SAA) with the EU on 29 October 2001. This agreement entered into force on 1 February 2005. On 3 October 2005 the Council decided to open accession negotiations with Croatia. On 12 February 2008 the Council adopted the new Accession Partnership for the country. Following the Accession Conference with Croatia on 19 December 2008, the status of the accession negotiations is that there are seven provisionally closed acquis chapters: Intellectual Property Law (Chapter 7); Information Society and Media (Chapter 10); Economic and Monetary Policy (Chapter 17); Enterprise and Industrial Policy (Chapter 20); Science and Research (Chapter 25); Education and Culture (Chapter 26); and External Relations (Chapter 30). Negotiations have been opened on 22 chapters. However Slovenia has blocked the opening and closing of certain chapters due to a border dispute with Croatia. In reality, the negotiations are further advanced than the chapter score indicates, and the plan to complete the technical negotiations by the end of 2009 which would enable accession in 2011 has still not been completely abandoned. Trade between Croatia and the EU has grown substantially since the opening of the community market under the Autonomous Trade Measures in 2000 and entry into force of the trade provisions of the Stabilisation and Association Agreement in 2002. In 2007 EU imports from Croatia totalled EUR 4.9 billion (14% of GDP) while EU exports to Croatia were EUR 13.2 billion (38% of GDP). The main categories of exports are industrial goods (62.8%), including machinery (18%), textiles (8.2%), transport equipment (5.1%), and chemicals (8.6%). Croatian imports from the EU in 2007 largely consisted of industrial goods (72.7%) including machinery (16.2%), transport equipment (13.6% [10.2% cars and trucks]), chemicals (12%) and textiles (5%). In 2007 the EU was by far Croatia s largest trading partner (67% of external trade). In 2007 EU foreign direct investment in Croatia totalled 3.57 billion (9.5% of GDP). Instrument for Pre-Accession Assistance (IPA) Croatia has been receiving EU financial assistance under the Instrument for Pre-accession Assistance (IPA) since 2007. The Instrument for Pre-Accession Assistance (IPA) provides assistance to countries with prospects of acceding to the EU. The IPA is valid up to 2013. Assistance is provided under the Accession Partnerships of candidate countries. The IPA is intended as a flexible instrument and the assistance provided depends on the progress made by the beneficiary countries and the needs identified by the European Commission s evaluations and annual strategy papers. The IPA is made up of five components, each covering priorities defined according to the needs of the beneficiary countries: Component 2007 2008 2009 2010 2011 2012 I. Transition assistance and institution building 49.6 45.3 45.6 39.4 39.9 40.8 II. Cross-border cooperation 9.6 14.7 15.8 16.2 16.5 16.8 III. Regional development 45.0 47.6 49.7 56.8 58.2 59.3 IV. Human resources development 11.3 12.7 14.2 15.7 16.0 16.0 V. Agriculture and rural development 25.5 25.6 25.8 26.0 26.5 27.2 Total 141.2 146.0 151.2 154.2 157.2 160.4 (in EUR million) IPA assistance to Croatia is implemented under decentralised management according to the five IPA components available to candidate countries. Assistance under the IPA can take the following forms: Investment, procurement contracts or grants; Special loans, loan guarantees and financial assistance; Administrative cooperation, involving experts from member states; Action by the Community in the interest of the beneficiary country; Budget support. 43 Croatia

IPA Component I: Institution building The core activity of IPA Component I is institution building, which focuses on political and economic objectives, as well as Croatia s ability to assume the obligations of membership. This component also includes support for programmes designed to strengthen the institutional capacity for the management of EU funds and participation in Community programmes. The EUR 3 million Civil society programme is aimed at fostering dialogue between civil society organisations, and the Croatian government and EU institutions on the transparency and accountability of public administration, anti-corruption, antidiscrimination and sustainable development. IPA Component II: Cross-border cooperation The IPA 2007 and 2008 programmes supported cooperation with bordering member states (Hungary, Italy and Slovenia) and also included a new generation of cross-border programmes (Bosnia and Herzegovina, Montenegro and Serbia) as well as Croatian participation in the European South-East Europe and Mediterranean cooperation programmes. IPA Components III, IV & V: Cohesion, agricultural and rural development policy Assistance under IPA Components III (Regional Development), IV (Human Resources Development) and V (Agriculture and Rural Development) aims at preparing Croatia for participation in the Community's cohesion, agriculture and rural development policies. Assistance under these three components is deployed under the 2007 2009 Regional Competitiveness, Transportation, Environment and Human Resources Development operational programmes, as well as the IPARD 2007 2013 programme. Key documents: General documents: http://ec.europa.eu/enlargement/candidate-countries/croatia/key_documents_en.htm IPA documents: http://ec.europa.eu/enlargement/candidate-countries/croatia/financial_en.htm 44 Croatia

2.7 Industrial parks/free zones Investors interested in export manufacturing projects, international trade and service activities or R&D intensive operations can choose between 18 free zones in Croatia. Because of the availability of a skilled and productive workforce, modern infrastructure and access to a market of 500 million consumers, a number of multinational companies from Italy, Germany, Austria, Switzerland and France have already located to free zones in Croatia. Their activities range from high-tech ICT, medical equipment, and CNC technologies and machinery, through to mid-tech manufacturing, including automotive components, textiles, engineering and boatbuilding. Advantages of operating in a free zone Storage of goods Both domestic and foreign goods are admitted to free zones, and can be stored there indefinitely. Corporation tax relief Free zone users pay 50% of the prescribed rate. Investors in construction projects to a value of over HRK 1,000,000 (about EUR 135,000) are exempt from corporation tax, up to the amount of the investment, during the year when it is made and for the next five years. Exemption from customs duties Foreign goods in free zones avoid import duty while domestic goods to be exported are eligible for export incentives. Exemption from value added tax Goods and services imported into free zones are exempt from value added tax. Users of free zones are exempt from any special restrictions on foreign currency transactions: There are no limits on transfers or cash payments in HRK between free zone users, and between free zone users and residents of Croatia. There are no restrictions on transfers or cash payments between free zone users and non-residents apart from a EUR 25,000 limit on cash payments from abroad. How to become free zone user All Croatian and foreign natural and legal persons can become free zone users. Equal treatment is guaranteed to all zone users. Companies interested in using a free zone should apply to the company or institution that operates it. The application should include: A description of the business activity to be performed in the free zone; Information on the land, buildings and infrastructure required; Information on planned investments; An estimate of the impacts of the planned activity; A registration certificate. Applicants must conclude an agreement with the free zone operator. The regulations of the zone are deemed to be an integral part of this agreement. 45 Croatia

2.8 Free zones in Croatia Bjelovar Buje Krapinskozagorska Kukuljanovo (Bakar/Rijeka) Kutina Obrovac Osijek Podi, Šibenik Port of Ploče Port of Pula Port of Rijeka Port of Split Ribnik (Karlovac) Slavonski Brod Splitskodalmatinska Varaždin Vukovar Zagreb Source: Free Zone Association Jankomir 25 HR-10090 Zagreb Tel: +385 (0)1 3496 571 Fax: +385 (0)1 3871 401 E-mail: info@croatianfreezones.org http://www.croatianfreezones.org 46 Croatia

2.9 Labour market As a result of the economic slowdown and the usual seasonal decline in employment, unemployment rose by 6,794 (2.9%) in December 2008, to reach 240,455 the fourth consecutive monthly increase. The December figure still represented a year-onyear decline, but at a much slower pace than in the previous months. Unemployment fell by an average of 27,700 or 10.5% in 2008 as a whole. As indicated by CBS data and the number of persons insured with the CPIA, the increase in unemployment was paralleled by a decrease in total employment in December. According to preliminary CBS data, the annual employment growth rate fell to 0.2% at year end (however it should be noted that the preliminary data tends to underestimate employment so that upward revision is likely). The number of persons insured with the CPIA was up by 1.6% year on year in December, reducing the annual average growth rate to 2.3% (compared with 2.7% in 2007). The registered unemployment rate stood at 13.7% at year end 2008 an increase on the previous month. The average registered unemployment rate for 2008 as a whole dropped from 14.8% in 2007 to 13.4% in 2008. The Labour Force Survey data are only available with a certain time lag, and the latest statistics, released at the end of January 2009, are for the third quarter of 2008, when the labour market was still improving. The Labour Force Survey unemployment rate contracted from 7.9% in the second to 7.0% in the third quarter. Influenced by normal seasonal movements, nominal gross and net wages increased in December, but December saw a slowdown in their annual growth rates, by 4.1% and 5.2%, respectively. As consumer price inflation decelerated more slowly than nominal wages, the annual growth of real gross and net wages also slowed in December. As of 31 March 2008 there were 1,238,576 persons in dependent employment in Croatia 3.6% year-on-year increase. The female workforce was up by 3.8% to 557,410. Only one sector electricity, gas and water supply recorded a decrease in employment (-0.2%). The growth of employment in other sectors ranged from 0.3% in transport, storage and communication to 10.9% in fishing. The only sector to register a fall in female employment was electricity, gas and water supply (-0.3%). The lowest gain in the other sectors was 0.3% in manufacturing, and the highest 9.4% in real estate, renting and business activities. In March 2009 the government announced public sector salary cuts for some public employees. Among those affected were some 2,500 judges and court officials. Employment of foreigners Foreigners require a work or business permit to work in Croatia unless they qualify for the exemptions established by the Aliens Act (Official Gazette 79/07). Work permits are subject to a quota system which defines the occupations for which foreigners are eligible, and the number of permits available for each occupation. The government sets annual quotas for new and existing work permits, and may also set a quota for seasonal workers. Permits are no longer confined to given areas of the country. The Aliens Act states that foreigners must be accorded the same employment and work conditions as those enjoyed by Croatian workers under collective agreements and arbitration rulings. Equal treatment applies to maximum working hours and minimum rest periods, minimum paid annual leave, the minimum wage including the overtime rate, health and safety at work, protection for expectant mothers, women and minors, and the ban on discrimination. The annual work permit quota does not include: Daily migrant workers (subject to reciprocity with the countries concerned); Key personnel whose status is regulated by the Stabilisation and Association Agreement between the EU and Croatia; Foreigners with key positions in companies, branch offices and representative offices; 47 von 54

Foreigners transferred as part of internal staff transfers within companies, as defined by the Protocol on the Accession of the Republic of Croatia to the Marrakesh Agreement Establishing the World Trade Organisation; Teachers at educational institutions working in the language and script of a national minority; Professional athletes employed on the basis of valid employment contracts; Persons working under international agreements, except for agreements on professional and technical assistance concluded with the European Union, another state or international organisation, or volunteers working for non-profit associations and institutions. The Aliens Act explicitly defines key positions at companies, branch offices and representative offices of foreign companies (Article 120[1]). Business permits The new act no longer defines business permits as residence and work permits, but only as permission to work in Croatia. Business permits must be issued to: Private founders of companies registered in, and carrying on business in Croatia; Sole proprietors who have registered their business in Croatia; Self-employed persons working in compliance with national employment legislation; Foreigners providing services on behalf of a foreign employer. A business permit may be issued to a private founder or sole proprietor of a company only on the basis of an approval by the state administrative office responsible for economic affairs. Business permits may only be issued to self-employed persons on the basis of approvals by the state administrative office responsible for businesses carried on by foreigners. Business permits may only be issued to foreigners providing services on behalf of a foreign employer on the basis of approvals by the state administrative offices responsible for the services in question. The conditions for obtaining business permits established by the Aliens Act must be met within ten months of its entry into force. Work without a work or business permit The Aliens Act establishes the following categories of foreigners who are exempt from the requirement to hold a work or business permit provided that they do not reside in Croatia for more than 30 days per year: Foreigners who provide tourist services on behalf of foreign employers; Authorised signatories, and management and supervisory board members of companies who perform certain work for a company but are not employed by that company; Representatives of religious congregations performing exclusively religious duties; Artists and technical staff participating in opera, ballet, theatre, concert, visual arts and other cultural events; Authors and film, television, musical, stage, dancing and ballet performers, as well as accompanying reporting, organisational and technical staff; Persons participating in sports events and competitions in the Croatia; Experts in cultural heritage protection, librarianship and archival studies; Foreigners engaged in activities related to the delivery, assembly or maintenance of machinery and equipment whose work is a condition of warranty rights, or is related to the delivery of machinery or equipment; Foreigners participating in fairs or exhibitions at which their employers exhibit; Foreigners participating at organised professional gatherings and seminars Foreigners employed with circuses or amusement parks; Foreigners providing professional education and training; Foreigners receiving professional training at a legal entity domiciled in Croatia which is organisationally linked to a foreign employer; 48 von 54

University professors, native speakers of foreign languages, foreign-language instructors and other lecturers invited by Croatian universities, scientists participating in scientific and professional training, and scientists representing international organisations or participating in scientific and research projects of importance for Croatia; Administrative staff, experts, teachers and lecturers from foreign cultural and educational institutions, performing their work in Croatia as part of cultural and educational cooperation programmes; Civil and military government officials from other countries, working in the Croatia under cooperation agreements with the government; Members of international missions carrying out scientific research in the Croatia and approved by the government; Foreign correspondents accredited in Croatia or foreign media reporters; Foreigners performing activities or professional training pertaining to defence or home affairs under international treaties. The above categories of foreigners may not start work before obtaining a certificate acknowledging their right to work without a work or business, issued by the competent local police administration or police station. The following categories of foreigners may work without a work or business permit: Foreigners granted permanent residence; Foreigners granted asylum; Foreigners granted temporary residence for the purpose of family reunification; Human trafficking victims granted temporary residence; Foreigners with the status of regular pupils or students in the Croatia, provided that they obtain temporary employment via authorised agencies; Foreigners granted temporary residence for the purpose of scientific research. The Aliens Act regulates the entry, residence and employment of nationals of EEA member states and their families (Title XI of the Act), and of third country nationals who have been granted permanent residence in another EEA member state and their families (Title XII). These provisions will enter into force upon the accession of Croatia to the European Union. Wages and salaries Article 4(2) Minimum Wage Act (Official Gazette No. 67/2008) sets the minimum wage for the period from 1 July 2008 to 31 May 2009 at HRK 2,747. The following is an example of the cost of a typical employee to the employer. This relates to a net salary of HRK 5,000 paid in Zagreb (the area with the highest income surtax rate of 18%) to an employee with no children. Net salary 5,000.00 Social security Pillar I 15.00% 1,075.58 Social security Pillar II 5.00% 358.53 Total employee social security contributions 1,434.11 Income tax 624.11 Income surtax 18.00% 112.34 Total income tax + Income surtax 736.45 Basis for employer s contribution 7,170.56 Health insurance contribution 15.00% 1,075.59 Unemployment benefit contribution 1.70% 121.90 Accident insurance contribution 0.50% 35.85 Total employer contributions 1,233.34 Gross salary 8,403.90 Social security contributions Compulsory social security contributions are a kind of direct tax that is used to finance the social security system, and hence in a broader sense form part of the tax system. These contributions fund the pension, health and unemployment insurance 49 von 54

systems. Contributions are collected from the employee and the employer, and are the revenues of the following extrabudgetary funds: Croatian Pension Insurance Fund: contributions for Pillar I pension insurance; Croatian Health Insurance Fund: health insurance contributions; Croatian Employment Service: contributions for accident and occupational illness insurance. The Pillar II pension insurance contributions are paid to private insurance funds selected by the employee. 50 von 54

2.10 Bilateral investment agreements Croatia has signed bilateral investment agreements with the following countries: Albania Argentina Austria Belarus Belgium and Luxembourg Bosnia and Herzegovina Bulgaria Cambodia Canada Chile China Cuba Czech Republic Denmark Egypt Finland France Germany Greece Hungary India Indonesia Iran, Islamic Republic of Israel Italy Jordan Republic of Korea Kuwait Latvia Libyan Arab Jamahiriya Macedonia, TFYR Malaysia Malta Republic of Moldova Montenegro Morocco Netherlands Oman Poland Portugal Qatar Romania Russian Federation San Marino Serbia Slovakia Slovenia Spain Sweden Switzerland Thailand Turkey Ukraine United Kingdom United States Zambia Zimbabwe Source: UNCTAD, 1 June 2008 51 von 54

2.11 Real estate market Property rights in Croatia Provided that the condition of reciprocity is met, foreign legal entities and natural persons may acquire real property in Croatia subject to approval by the Minister of Justice. The applicant may initiate the approval procedure either personally or through an authorised attorney by submitting a written request to the Ministry of Justice. The request must contain the following: Legal basis for property acquisition (purchase agreement, gift agreement, support agreement, etc.), in the original or a duly certified copy; Seller s proof of title, i.e. land certificate, in the original or a duly certified copy, not older than six months; Original certificate (not older than six months) issued by the local administration responsible for urban and physical planning (county offices) evidencing that the property lies within a construction zone designated by the zoning plan; Proof of citizenship of the buyer (certified copy of the passport), or of legal status (certificate from the register of companies); Proof of citizenship of the seller (ID copy or passport copy); If an attorney is involved, a power of attorney, in the original or a duly certified copy; and Non-certified copies of all the documents enclosed with the request. In ruling on requests, the Ministry of Justice determines whether there is reciprocity between Croatia and the applicant s country, i.e. Croatian citizens have the right to acquire property in that country. Foreigners may not acquire ownership of real property: In excluded areas; On agricultural land; In protected natural areas; In forests or on forest land. If the property in question is a protected cultural monument the local authority has preemptive rights, while maritime property as a whole is governed by a special maritime property regime. If approval is granted the alien may apply for the registration of ownership in the land register and must pay property transfer tax. The signature on the contract of sale may be notarised only upon receiving approval from the Ministry of Justice. The notary public must deliver a copy of the contract to the tax administration in the area where the property is located. A foreigner whose application to acquire property has been refused may not reapply for a period of five years from the date of submission of the request. Pursuant to the Stabilisation and Association Agreement with the EU, as of 1 February 2009, entities from the EU will be excluded from this procedure and their rights will be equal to the rights of Croatian entities. Property register Pursuant to the Act on Amendments to Enforcement Act, the Croatian Chamber of Economy is maintaining a register of all property sold under the enforcement procedure (distraint). The register is available to public on the web site http://www.hgk.hr. In organisational terms, it comes under the Business Information Centre of the Croatian Chamber of Economy. 52 von 54

Real Estate Business Association The Real Estate Business Association of the Croatian Chamber of Economy was established in 1995 to regulate the property market and the role of estate agencies in property transactions. Contact: Croatian Chamber of Economy Trade Department/Real Estate Section Rooseveltov trg 2, p.p. 630 HR-10000 Zagreb Tel: +385 (0)1 4561 779; +385 (0)1 4561 555-1846 Fax: +385 (0)1 4826 344; +385 (0)1 4828 499 E-mail: trgovina@hgk.hr; sbrezovic@hgk.hr; mzmajevic@hgk.hr http://www.hgk.hr Source: Croatian Chamber of Economy/Trade Department 53 von 54

2.12 Export finance Croatian Bank for Reconstruction and Development Hrvatska banka za obnovu i razvitak (HBOR) is the development and export bank of Croatia, and is charged with promoting the development of the Croatian economy. By extending loans, insuring export transactions against political and commercial risks, issuing guarantees and providing business advice, HBOR builds bridges between entrepreneurial ideas and their accomplishment with the aim of enhancing the competitiveness of the Croatian economy. As an export bank, HBOR has developed a number of programmes designed to help exporters compete internationally on equal terms. HBOR assists exporters at all stages of transactions, from initial negotiations through to payment. Contact: Croatian Bank for Reconstruction and Development Strossmayerov trg 9 HR-10000 Zagreb Tel: +385 (0)1 4591 524; +385 (0)1 4591 537 E-mail: izvoz@hbor.hr 54 von 54