Act on Investment Promotion and Development of Investment Climate

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In September 2012, the Croatian Parliament introduced a new Act on Investment Promotion and Development of Investment Climate which has replaced the earlier Investment Promotion Act. The introduction of the above mentioned Act was aimed at eliminating major economic distortions brought by the global and local economical crisis, but also harmonizing Croatian laws with the European Union’s legislation (Guidelines on National Regional Aid, OJ C 1998, 2000, 2006; European Commission’s Multisectoral Framework on Regional Aid for Large Investment Projects OJ C 2002, 2003). In this respect, the Government of Croatia, as the proponent of the Act, expects that the Act will make the realisation of investment projects easier, creating, in this manner, conditions for economic growth and development at national level, i.e., Croatia’s involvement in the international trade flows and strengthening the competitiveness of Croatian enterprises. In light of the accomplishment of these objectives, said Act imposes a number of measures related to production-processing activities, development and innovation activities, business support activities, high value added service activities and tourism.

The incentive measures provided by this Act include:

  • Incentives for micro enterprises;
  • tax incentives;
  • customs incentives;
  • incentives for eligible costs of new jobs associated with an investment project;
  • incentives for eligible training costs associated with an investment project;
  • incentives for innovation and development activities, business support services and high value added service activities;
  • incentive measures for capital expenditures of an investment project;
  • incentive measures for labour-intensive investment projects.

Tax and customs incentives
Among the novelties introduced by this Act, tax and customs incentives are probably the most appealing to entrepreneurs. Tax incentives are reflected in a reduction of tax rate proportional to the value of investment and number of new employees hired in connection with the investment. Said measures are provided for a 10-year period from the beginning of investment. A special benefit is provided if an investment project aims at modernizing an existing technological process, in which case incentives are available even without hiring new employees. The Act also provides incentives for eligible costs related to job creating, which amount depends on the regional unemployment rate in the region where the employee is hired.

Besides the novelties related to tax incentives, customs incentives are also subject to several changes. Namely, the equipment which is imported and constitutes part of eligible costs of the investment projects shall be exempt from customs duties. It is understood that the foregoing provision shall apply until Croatia’s full accession to the European Union.

The Act also describes in detail the procedure for allocating incentives to entrepreneurs.

Moreover, we should emphasize that, in addition to the Act in question, a proposal of the Act on Strategic Investment Projects, which would enable the Government to declare certain investment projects as projects of interest for Republic of Croatia, is also in the process of preparation. In addition, such Act would provide the criteria for determination and realization of such projects, as well ways of attracting potential investors.

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Introduction of a new simple limited liability company model in the Croatian legal system

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As a part of the development of a strategy for reviving the Croatian economy and entrepreneurship activity, the Law on Amendments to the Companies Act (Official Gazette 111/12, in effect as of October 18, 2012), introduced in the Croatian legal system a new statutory form of company, in addition to the already existing ones. We refer to the simple limited liability company or just “j.d.o.o.”. It appears that the reason for the introduction of such model is the forthcoming Croatia’s accession to the European Union and the necessary harmonization of legislation and legal practices with the standards adopted in the legal systems of individual Member States. On the other hand, the main goal of the introduction of such model is to enable incorporation of companies and performing of entrepreneurial activities to the broadest public, reducing the number of unregistered business activities, decreasing the outflow of Croatian entrepreneurs abroad and facilitating to foreign entrepreneurs to perform their business activities in Croatia.

In comparison with the standard statutory form of the limited liability company, the simple limited liability company model has reduced the minimal share capital required for incorporation of a company, has remarkably reduced the costs of incorporation and made incorporation procedure significantly simpler and faster.

In particular, some of the aforementioned changes include:

  1. Share capital of HRK 10.00 (unlike the regular limited liability company with minimum share capital of HRK 20,000.00)
  2. Minimum share in the simple limited liability company of HRK 1.00 (unlike the regular limited liability company with minimum share of HRK 200.00)
  3. Easier company incorporation due to the use of prescribed protocol forms verified by the notary public; abolition of compulsory publication of company incorporation in the Official Gazette and significant reduction of the costs of incorporation (average costs of simple limited liability company incorporation are only about HRK 750.00, unlike the regular limited liability company incorporation costs amounting from HRK 3,000.00 to HRK 4,000.00)
  4. Easier general assembly convening.

On the other hand, there has been a restriction of the number and group of persons who can be founders of the simple limited liability. There are also limitations with regard to profit distribution, which do not apply to regular limited liability companies.

In line with the above, the number of simple limited liability company members has been limited to three, one of them being also Member of the Management Board. Also, in spite of the fact that this is not explicitly prescribed by the Law, judicial practice has took the stand that only natural persons can be members of the simple limited liability company, and not legal entities as, for instance, commercial companies.

Furthermore, it is important to point out the fact that simple limited liability companies must keep their legal capital reserves where they must place a quarter of the yearly income shown in the annual financial reports. Said legal reserves can be used only for strictly prescribed purposes, i.e., capital increase and covering of current and previous year losses.

Finally, referenced Law envisages the possibility of conversion of simple limited liability company into regular limited liability company if the company adequately increases its share capital.

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