Category: Croatia

Following three rounds of changes to Croatia’s tax system in recent years to ease business and reduce the overall tax burden, the Government announced plans to further relax the tax system in 2021.

The plan is to further reduce the corporate profit tax rate from 12% to 10% for small and medium-sized taxpayers earning revenues of up to approximately EUR 1 million. The effects of this change should materialize almost immediately based on reduced tax advance payments. Withholding tax on dividends would also be reduced from 12% to 10%.

The plan is to increase the threshold for VAT taxation procedure based on collected fees from approximately EUR 1 million to EUR 2 million of taxable supplies. An expansion of “the calculation method” for import VAT has also been announced. This means that entrepreneurs would not need to engage funds to pay VAT on imports but would calculate import VAT liability and deduct it as input VAT in the same VAT return.

The goal for personal taxation is to further relieve taxpayers by reducing tax rates from 36% to 30% for annual income, from 24% to 20% for final income, and from 12% to 10% for a flat-rate taxation of activities. This would directly affect the increase in disposable income.

Although the announced legislative changes are expected to help Croatia become a more competitive market, in practice we see that the Tax Authorities continues to rigidly interpret tax rules.

Recently, the tax administration has issued several opinions relating to the treatment of different types of work/income. They argue that any income earned for the work with elements of the employment relationship should be treated as “employment income” (instead of self-employment income or other income) and subject to progressive taxation. Otherwise, the natural person performing such work will be liable for personal income tax on employment income and the company who engaged the person will be liable as tax guarantor.

The elements of the employment relationship are set out in the Personal Income Tax Bylaw. For example, the following criteria imply employment: (a) control of activities (including time/place of work, work instructions, providing equipment, and training); (b) financial control (including reimbursing business/travel expenses, regular/monthly payment of a similar amount) and (c) relations between the parties (including compensating annual leave, providing sick pay or similar, and market conditions for engaging a person for a particular assignment).

While the aim to eliminate unjustified attempts to use tax benefits seem reasonable, it is questionable whether there are legal grounds for the tax administration to generally apply these rules to directors/management of a company.

In some opinions, the tax administration has argued that directors (board members) and managers of a company who are not employed by the company should, nonetheless, be taxed as employees of the company, even where these is no signed employment agreement and despite the fact that the person is registered as self-employed (or employed in his own company). This is explained as follows: the management represents the company and manages the business of the company, but within the limitations set in the regulations, the statute of the company, and decisions of the supervisory board and the general assembly. The management is also obliged to regularly report to the supervisory board. Consequently, the tax administration concludes that only in exceptional conditions can management income not be treated as employment income.

Only if the director is an independent entrepreneur or a business partner of the company will his income be taxed as self-employed income. However, the responsibilities for management of the company described above exclude independent entrepreneur status.

In addition, the tax administration argued that management positions also include other elements of an employment relationship: management is physically or otherwise present at work, they are informed of the company’s activities, and they perform management activity on a permanent basis. Control of activities is reflected in the relationship between the management and the supervisory board of the company.

The tax administration concludes that there may be exceptional situations in management activities do not qualify as an employment relationship. This, however, should be considered on a case by case basis

It remains to be seen how this recent interpretation of the management income tax treatment will be accepted/applied in practice.

By Tamara Jelic Kazic, Partner, CMS Zagreb

This Article was originally published in Issue 7.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

It has become evident by now that the 2020 global pandemic has reshaped many aspects of the legal industry, with one of the eminent examples being the way M&A transactions are carried out – almost everything has become less certain, more urgent, and largely virtual. As though the circumstances have not been challenging enough, recent developments in local jurisprudence concerning the form of legal documents have started to negatively impact M&A deals in Croatia.

M&A Deals in Croatia are Impacted by More Than Just COVID-19

Even though Croatia does not adhere to the common law system of precedent, court practice is more often than not invoked as legal authority. This is the reason why a recent decision by the Croatian High Commercial Court ruffled some feathers among legal practitioners. In its December 11, 2019 decision, the High Commercial Court rather mechanically applied the “parity of form” rule, which requires a power of attorney to be in the same form as a contract signed under it. The problem arising out of the High Commercial Court’s interpretation is that local law sometimes requires the use of legal forms that are almost exclusively unique to Croatia, so carrying out cross-border deals would get rather complicated should this one decision become standard practice.

The best example is an agreement for the transfer of shares in a Croatian limited liability company (the most-used corporate vehicles locally). Croatian law provides that the share transfer agreement must be authenticated as to content by a local notary public and thus it is made in a special notarial form (in Croatian, solemnizacija). Under the High Commercial Court’s interpretation, powers of attorney authorizing party proxies (including proxies of non-Croatian parties) to act on their behalf in connection with entry into a Croatian share transfer agreement would also have to be authenticated as to content in a special form by the notary public. Naturally, the issue here is that many countries are not familiar with this form of document authentication, and if the High Commercial Court’s interpretation turns into a standard, this would leave parties with the unfortunate alternative of traveling to Croatia to either grant power of attorney before a Croatian notary public or execute the relevant agreement themselves.

The Spillover Effect of the “Parity of Form” Decision

This formalistic interpretation of Croatian corporate and commercial laws has already led to a more cautious approach in cross-border M&A deals, with some parties preferring to (at least partially) close the deal in person in Croatia or having a power of attorney executed in countries familiar with Croatian type of document authentication (such as Austria or Germany), when this is an option. Needless to say, travel bans and general uncertainty have not helped. However, this shift should not be viewed as standard practice, as the decision of the High Commercial Court does not represent a binding rule of law in the Croatian legal system. Also, the Croatian Notary Public Act provides grounds for alternative thought on the issue, as it provides that a large number of documents requiring authentication as to content may be executed based on a power of attorney in which only a signature has been notarized, rather than with authenticated content. Seeing as a large number of countries are more familiar with the signature notarization, the provisions of the Notary Public Act could be used to oppose the application of a formalistic interpretation of law arising from the Court’s decision.

Cross-Border Deals Without Crossing the Border?

Even though Croatia is lovely to visit year-round, superfluous business trips during a global pandemic are generally frowned upon. With Croatian legislation slowly moving towards use of e-communication and virtual corporate tools, hope remains that the High Commercial Court’s decision on “parity of form” will not gain too much momentum in practice, and that a business-friendly approach will be taken to minimize the efforts and maximize the effects of cross-border M&A deals involving Croatian companies.

By Iva Basaric, Partner, and Ivona Vidovic, Associate, Babic & Partners

This Article was originally published in Issue 7.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

It is now more than obvious how much the COVID-19 pandemic has shaken up both global and national economies. Although various measures have already been undertaken to support businesses during this COVID-19 crisis, financial distress of many companies is inevitable, which will ultimately, for many of them, result in bankruptcy or restructuring.

In order to mitigate the adverse effect of the COVID-19 pandemic on the Croatian economy, a number of urgent measures have been introduced in fiscal, monetary, and financial policy, along with the provision of aid for preserving jobs in affected sectors. One of the actions taken was enacting a law putting a standstill on most enforcement procedures and providing temporary bankruptcy protection. However, as they will remain in force only until mid-October, these measures are not a long-term solution for debtors. After the ban is lifted, it is expected that more than 300,000 enforcement procedures will be initiated, which will, together with the unfavorable economic situation, result in significant financial problems for many Croatian companies. Consequently, a number of them will become insolvent or over-indebted. Predictions are that Croatia is facing a worse recession than it did during the 2008 global financial crisis.

Under these circumstances, financially distressed companies will have two options: reach an agreement with creditors via out-of-court restructuring or file for bankruptcy. Although out-of-court restructuring provides a flexible, swift, and cost-efficient means for restoring companies’ financial stability, it implies consensus of the affected creditors, who are usually reluctant to enter into settlements with debtors. If the creditors are unwilling to cooperate with the companies to solve their financial problems, the companies will be forced into in-court bankruptcy, the main purpose of which is to liquidate assets and “kill” the debtor. In this formal procedure, the bargaining position of creditors is generally weakened as the proceedings are subject to the authority of the bankruptcy court and are conducted in line with the strict set of rules of the Bankruptcy Act.

However, even during the in-court bankruptcy procedure, a light at the end of the tunnel for the debtors might be a restructuring plan to reorganize and resolve the debtor under court supervision. This option, although provided for by the Croatian Bankruptcy Act, is rarely preferred by major creditors in practice. In fact, only a few bankruptcy debtors have undergone formal restructuring so far. Maybe now, in these uncertain times for business, creditors will recognize the benefits of restructuring for the companies that have the potential to continue operating.

Provided there is a basis for it, restructuring certainly has more effective consequences than liquidation for the distressed companies – the company’s business continues, the jobs and value of the debtor’s assets are preserved, the business generates income for employees and their families, and state and local budget continue to be funded. All the consequences would surely positively affect not only the debtors but also the national economy, consequently influencing and speeding up the country’s economic recovery.

In a time of recession and economic crisis, restructuring may be a lifesaver for many companies. It is to be seen whether creditors in Croatia will opt for saving the debtors and continuing their business or deem that settling claims via in-court bankruptcy procedure is more suitable. The COVID-19 pandemic may certainly be a great opportunity for the rise of restructuring.

By Ana-Marija Grubisic Cabraja, Partner, and Marija Gojevic Sparavec, Attorney, Divjak, Topic, Bahtijarevic & Krka

This Article was originally published in Issue 7.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Marohnic, Tomek & Gjoic has advised LCN Capital Partners on its acquisition of five Emmezeta retail and warehouse units in Croatia. Josip Martinic in cooperation with Wolf Theiss reportedly advised the seller on the deal.

Financial details of the transaction were not disclosed.

According to MTG, “the units [cover] 75,000 square meters and will continue to be leased by the Croatian subsidiaries of Genesis Properties Investment.”

LCN Capital Partners is an investor in the primary sale-leaseback and built-to-suit market, with over EUR 3 billion in real estate assets under management across North America and Europe.

MTG’s team included Partners Josip Marohnic and Tena Tomek and Senior Associate Ivona Zagajski.

Cipcic-Bragadin Mesic & Associates has advised Pfizer on a global business combination with Mylan N.V. The transaction involved a spin-off of Pfizer’s Upjohn business and a subsequent merger of that business with Mylan N.V. to form a new global generics company, called “Viatris.” Bird & Bird was global lead counsel to Pfizer, with Karanovic & Partners providing local support for Serbia and Jadek & Pensa providing local support in Slovenia. 

According to Cipcic-Bragadin Mesic & Associates, “Viatris is forecast to have a market capitalization of about USD 24 billion and will include in its portfolio blockbuster products like Pfizer’s Viagra and Mylan’s EpiPen. It is now set to overtake the largest player in the global generics market, Teva, which commands more than USD 18.9 billion worth of global sales, according to European Pharmaceutical Review.”

Cipcic-Bragadin Mesic & Associates’ team included Partners Silvije Cipcic-Bragadin and Marina Mesic.

Karanovic & Partners’ team included Senior Partner Marjan Poljak, Partner Milena Jaksic Papac, Senior Associates Ana Stankovic, Kevin Rihtar, and Boris Dvorscak, and Associate Milos Rubezic.

Jadek & Pensa’s team included Managing Associate Iris Pensa, Senior Associate Nastja Merlak, and Senior Tax Manager Domen Romih.

Editor’s Note: After this article was published Cobalt announced that it had provided Latvian law advice to Pfizer on the deal, and that the deal had closed on November 16, 2020. The firm’s team included Partner Indrikis Liepa and Associates Janis Sarans and Ivo Maskalans.

Subsequently, on December 18, 2020, Clifford Chance Badea announced that it had advised Pfizer on Romanian aspects of the transaction. The firm’s team included Partner Nadia Badea, Counsel Loredana Ralea, and Senior Associates Diana Crangasu and Andrei Caloian.

“The Croatian government is a bit under fire right now for not implementing stricter measures to deal with the uptick in Covid cases,” reports Kallay & Partners Partner Mara Terihaj Macura. Still, she concedes it’s a difficult problem. “There are still businesses that are open and operating despite the numbers being higher now than they were in the spring – but according to the economic experts another lockdown would be disastrous for the economy, so it’s difficult to find the balance.” 

In an effort to stimulate the economy, Croatia’s government has proposed to amend the tax regime by lowering the tax burden for individuals and empowering the authorities to become more stringent in finding those that evade and avoid paying their dues. “Amendments of four laws have been proposed – the VAT, the fiscalization in cash transactions, the income tax, and the profit tax frameworks are subject to amendments,” Terihaj Macura says, in an effort to provide tax relief. According to the Croatian government, “the volume of expected changes should amount to around HRK 2 billion. In addition, banks will get more incentives such as write-offs for loans.” 

The total relief for Croatian citizens, Terihaj Macura reports, is expected to be around HRK 10 billion (around EUR 1.32 billion). “Of course,” she says, “the government is poised to apply a more rigorous treatment of cases where there is suspected evasion or avoidance, for example where there is a large discrepancy between assets and reported income.”

Terihaj Macura says that there is a “new Foreigners Act in the works that is designed to create a more lenient framework for foreign nationals working in Croatia.” She says that the new act, currently in parliamentary proceedings, should liberalize the labor market. 

Finally, the EU is expected to funnel relief and aid funding to the country in order to keep key projects moving forward. “The reconstructions of the Dubrovnik Airport and the Peljesac Bridge are still underway,” Terihaj Macura says, “co-financed by the EU in an amount of almost HRK 4.5 billion.” That’s not all. “Also, a new waste management center is to be constructed in the northwestern part of Croatia – the tender documentation for this EUR 60 million project is being prepared as we speak and it will be 70% funded by the EU.” She says that this new plan falls within the new energy policy the country has adopted, which focuses heavily on green energy and renewables.

Earlier this month, the Croatian Competition Agency confirmed that Coca Cola HBC Hrvatska d.o.o. had complied with the commitments the company had offered, and which had been accepted by the CCA, in the course of an investigation of vertical restraints imposed by Coca Cola on its distributors (most notably exclusive purchasing and tying arrangements). Early on, the CCA expressed concern that Coca Cola’s practices would constitute infringements under Articles 8 and 13 of the Croatian Competition Act (essentially corresponding to Articles 101 and 102 of the Treaty on the Functioning of the European Union).

The concerns were that exclusive purchasing obligations and tying arrangements imposed on Coca Cola’s distributors could lead to the foreclosure of Coca Cola’s competitors, placing distributors at a competitive disadvantage towards other buyers, who are not subject to exclusivity agreements. To a number of local stakeholders, it seemed that the types of violations discussed warranted imposition of fines, which is why the decision to accept and go through with commitments was met with a certain degree of criticism.

Croatia has had relatively few in-depth investigations, especially in abuse-of-dominance cases involving tying practices. In this context, and considering the insignificant precedential value of commitment decisions in general, acceptance of commitments in these types of cases (involving undertakings that are likely dominant) does not benefit the development of Croatian competition law practice. This is largely because commitment decisions do not contain detailed legal findings and typically do not end up in litigation before the courts. In the absence of significant case law with detailed legal reasonings, undertakings can struggle to assess the compliance of their practices with Croatian competition law and the CCA’s decisions. Furthermore, commitment decisions are naturally less helpful to victims of competition law infringements that are requests for compensation of damages, considering that a commitment decision does not contain a finding of infringement, but concludes there are no longer grounds for action.

This being said, the CCA’s opting for a commitment decision in this case appears to be in line with its practice of accepting commitments offered by dominant undertakings which entered into single branding agreements (most notably the CCA’s July 12, 2012 decision in proceedings against Primalab d.o.o., Zabok). CCA’s commitment decision also follows the approach taken by European Commission in proceedings against The Coca Cola Company and its bottlers, which had joint dominance in the market for sale of carbonated soft drinks where the restraints imposed on their distributors included, among others, exclusivity and tying arrangements leading to foreclosure of rival suppliers. It would appear that choosing to accept the commitments offered by Coca Cola allowed the CCA to accomplish a relatively quick change of behavior in the market – a result that would probably only be achieved through a prohibition decision after a much longer adversarial procedure, which could go on for several years.

In its March, 2014 policy brief titled “To commit or not to commit?”, the European Commission expressed its position that opting for a prohibition decision instead of a commitment decision is suitable if the aim is to punish for past behavior, or if it is important to set a legal precedent, or if the only commitment that can be offered is to cease anti-competitive behavior. Commitment decisions are generally not appropriate in cases where nature of infringement requires imposition of fines, which is why their application is excluded in cartel cases. The situation with abuse-of-dominance cases is not as clear as with cartels, since the gravity of the infringement found in the preliminary assessment significantly influences the decision as to whether commitments are appropriate or if deterrence is required. Still, the European Commission’s practice shows a frequent use of commitment decisions in abuse-of-dominance investigations dealing with similar restrictions. For this reason, the CCA’s imposition of commitments in the present case – although subject to local criticism – is not entirely unusual. The CCA would, of course, also have the power to impose fines where an undertaking fails to comply with commitments accepted by the CCA.

By Iva Basaric, Partner, and Lovro Klepac, Senior Associate, Babic & Partners Law Firm

This Article was originally published in Issue 7.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

DTB has advised US-based Devolver Digital on its acquisition of 100% of the shares of Croatian independent game development company Croteam. Krehic & Partners in cooperation with Deloitte Legal advised Croteam on the deal.

Financial details of the transaction were not disclosed.

Croteam started in 1992 and focuses on the development of video games. The company currently employs 40 people and is known for its successful games Serious Sam and the Talos Principle. Its acquisition by Devolver Digital, which was completed on October 19, 2020, is Devolver Digital’s first acquisition in Europe.”

In another recent deal involving Croatia’s gaming industry, DTB recently assisted Playrix on its acquisition of Cateia Games (as reported by CEE Legal Matters on July 9, 2020).

DTB’s team consisted of Senior Partner Damir Topic, Attorneys Dina Salapic, Olena Manuilenko, and Andrej Zmikic, and Associate Iva Vukoja.

The Krehic & Partners team was led by Partner Matea Gospic Plazina.

Schoenherr has advised S Immo AG on the acquisition of the Zagrebtower office complex from CA Immobilien Anlagen AG. CMS advised the sellers on the deal.

The Zagrebtower has a total rental space of approximately 26,000 square meters and was built in 2007.

S Immo AG is a real estate investment company based in Vienna. Its portfolio consists of approximately 70% commercial properties (offices, shopping centers, and hotels) and 30% residential properties.

CA Immo is a Vienna-based property company specializing in the letting, management, and development of office buildings. It has property assets of around EUR 5.2 billion spread across Germany, Austria, and Eastern Europe.

Schoenherr’s team in Vienna included Partner Michael Lagler, Counsel Clemens Rainer, and Associate Wolfgang Rapberger, while its team in Zagreb included Attorneys Ksenija Sourek, Petra Santic, and Vice Mandaric, and Associate Ana Marjancic.

CMS’s Vienna-based team included Partner Clemens Grossmayer and Attorney Mario Maier.

The IT and Telecommunications sectors have been the main source of work for Partner Lovro Gasparac’s Corporate/M&A team at Croatia’s Savoric & Partners in the first half of 2020, and he expects that to continue going forward.

“The M&A team started off the year quite busy,” Gasparac reports. “We had a number of ongoing M&A projects keeping us busy and a good few ones started early in the year.” That was all “severely disrupted” by the pandemic, he says, but “now, after the summer, things seem to be coming back to normal and we hope the uncertainty won’t continue to block too many deals moving forward.”

Gasparac reports working on several ongoing international projects, especially in IT, telecommunications, and related industries. “At the beginning of the year we closed a transaction whereby Mid Europa merged its portfolio company, CMC Iletisim ve Cagri Merkezi Hizmetleri A.S., with Meritus Upravljanje d.o.o.,” he says, adding that Mid Europa is hoping to “leverage this transaction to make a bigger push into the CEE and SEE regions.”

“Another hot story” he says, was the investment by One Equity Partners, advised by Savoric & Partners, in Croatia’s Infobip software company. As a result of the deal, Infobip became the country’s first unicorn.

And, according to Gasparac, his team was also involved in the deal that was announced in early September by which Exclusive Networks acquired the entire CEE operations – covering ten countries – of Veracomp.

On the sale side, “one of the deals we were working on was unfortunately disrupted when the lockdown kicked in,” Gasparac says, but a different one is in the final stages, and he hopes to see it announced soon. Both of these deals, he reports, involve strategic investors who are looking at the same TMT sector targets.

Gasparac suspects that interest in this particular field has been driven by targets “developing software that is internationally recognized and globally-scalable.” And he expects this to continue to fuel the practice’s pipeline in the near future as well. “There are still a good number of local players who are recognized internationally,” he says, “so we expect the focus on these as potential targets to continue, especially now after it has been quiet for some time. I only hope we’ll all learn to adapt to this climate and carry on with our regular activities.”