This country-specific Q&A provides an overview of Lending & Secured Finance laws and regulations applicable in Croatia.
Do foreign lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?
Foreign financial institutions from EU member states may perform lending and secured finance activities based on the notification sent to the Croatian National Bank of their intention to do so, while foreign financial institutions from third countries are obliged to obtain the Croatian National Bank’s approval. The operations of all types of non-banking financial intermediaries are regulated and supervised by the Croatian Financial Services Supervisory Agency (HANFA). The HANFA is authorised to supervise the operations of the stock exchange and regulated markets, investment funds, pension funds, pension insurance companies, leasing and factoring companies, insurance companies etc.
Foreign lenders may freely take the benefit of security over assets located in Croatia.
Are there any laws or regulations limiting the amount of interest that can be charged by lenders?
The amount of interest that can be charged by lenders is regulated by the Civil Obligations Act.
The contractual rate of interest among persons of whom at least one is not a trader (e.g. is a natural person) may not exceed the statutory default interest rate applicable on the day of entering into the contract or, where the contracted rate of interest is variable, applicable on the day the contractual rate of interest changed. If the contractual interest exceeds the statutory interest, the highest statutory rate of interest is applicable.
The contractual rate of interest among traders or a trader and a person governed by public law may not exceed the statutory default interest rate, increased by one half of that rate.
The manner of determining the default interest rate on trade and contractual relations, as well as in relation to other relationships, is based on the average interest rate which is determined by the Croatian National Bank and published in the Official Gazette on 1 January and 1 July each year.
Just for reference, on 1 January 2020 the default interest rate on trade and contractual relations amounted to 8.11% and in relation to other relationships it amounted to 6.11%.
Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?
The disbursement of foreign currency loan proceeds into and repayment of principal, interest or fees in foreign currency between residents and non-residents is generally allowed. However, in accordance with the Decision on Payments and Collections in Foreign Means of Payment in the Country enacted by the Council of the Croatian National Bank, the payments and collections in relation to the:
purchase and sale of real estate in the Republic of Croatia and stakes in companies headquartered in the Republic of Croatia;
purchase and sale of securities listed or issued in the Republic of Croatia, irrespective of their denomination in kuna or in foreign exchange, except securities issued in the Republic of Croatia which are listed abroad (but not applicable to any purchase or sale transactions in the primary market of securities issued by the Republic of Croatia denominated in foreign currency);
has to be made in Croatian kuna.
Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction.
Security can be taken over all the above-mentioned assets.
The procedures for the creation of security in relation to the listed types of assets are as follows:
Real property (land) – security may be taken as mortgage or fiduciary transfer of ownership*. The difference between those two types is that the mortgage does not result in the change of ownership title to the creditor, unlike fiduciary ownership that provides transfer of ownership title of assets from the debtor to the creditor. The Security Agreement must be in the form of a notarial deed or in the form of a voluntary court pledge agreement, and registration with the land registry is required for perfection. Security over real property may be extended on plant and machinery if they serve the economic purpose of the building on the real property.
Equipment and inventory – security over equipment and inventory may be established as a pledge or fiduciary transfer of ownership*. Establishing a pledge requires a written agreement between the creditor (pledgee) and the debtor/owner of the pledged assets (pledger). For fiduciary transfer of ownership, the security agreement must be in the form of a notarial deed or in the form of a voluntary court pledge agreement, and the creditor becomes the owner of assets by signing the agreement.
Receivables – security may be established as a pledge and becomes perfected when the agreement is concluded. Security can be created with or without involvement of the court or notary public. The notification to the debtor is not a constitutive element, but if the debtor was not notified, he is entitled to fulfil his obligation by paying the assignor.
Shares in Croatian companies – security over dematerialised shares may be created by assignment and the notarial form is not required while, although the notarial form is neither required for the creation of security over shares in limited liability companies, it is recommendable to create such an agreement in the notarial form in order to register it in the Register of court and notary public security of claims on movable property and rights.
The security can be created under foreign law governed documents but in relation to assets for which the registration with the land registry and Register of court and notary public security of claims on movable property and rights is required. The security document has to be created under domestic law.
*Please note that the fiduciary transfer as a security concept has gone through several changes in law in the last 20 years and due to certain problematic and controversial provisions of the Enforcement Act, the new proposal of the amendments of the Enforcement Act no longer recognises this type of security interest.
Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?
A company that is incorporated in Croatia cannot grant security over its future assets but it may provide security in relation to its future obligations.
Can a single security agreement be used to take security over all of a company’s assets or are separate agreements required in relation to each type of asset?
A single security agreement can be used to take security over all of a company’s assets, although in practice, since the requirements and the procedure for creation, registration and enforcement of security are different for different types of assets, separate agreements are usually used.
Are there any notarisation or legalisation requirements in your jurisdiction? If so, what is the process for execution?
For the creation of security over different types of assets, there are different perfecting requirements. In respect of the details please see our answer under 4.
Are there any security registration requirements in your jurisdiction?
Although as a general rule, the moment of creating security coincides with the moment of the conclusion of the agreement, this rule does not apply to security over real estate and over boats and aeroplanes, where the moment of registration with the land registry or registration with the relevant registries which record ownership titles, has constitutive effect.
Are there any material costs that lenders should be aware of when structuring deals (for example, stamp duty on security, notarial fees, registration costs or any other charges or duties), either at the outset or upon enforcement?
When structuring deals, lenders should be aware of associated (pertaining) material costs such as:
a) Fees of the notary public – for security agreements in the form of a notarial deed, which are prescribed by the notary’s tariff and depend on the value of the collateral. For example, if the value of the secured claim exceeds approximately EUR 100,000.- the notary public fees and duties for each such security document amount to approximately EUR 450.-;
b) Registration fees (land registry, Register of court and notary public secured claims kept by the Financial Agency (FINA), the Central Depository & Clearing Company – the fee for the registration of the collateral in the Register amounts to approximately EUR 35.- per application;
c) Court fees to be paid in enforcement proceedings – the amount of court fees is determined in accordance with the value of the claim;
d) Other expenses of enforcement proceedings – there may be other expenses associated with enforcement, such as attorney’s fees, expenses of the court bailiff for the attachment of movables, expenses of the appraisal of the value, etc.
Can a company guarantee or secure the obligations of another group company; are there limitations in this regard?
Generally, a company can guarantee or secure the obligations of another group company but there are liabilities and limitations set forth in the Companies Act. For example, if no contract on the conduct of a company’s affairs has been concluded, the controlling company must not use its influence to advise the subsidiary to engage in harmful legal transactions or to take action or neglect the action to its detriment unless it commits to compensate the subsidiary for the damage it would thereby incur.
Are there any issues that lenders should be aware of when requesting guarantees (for example, financial assistance or lack of corporate benefit)?
There are some restrictions against providing guarantees and/or security to support borrowings incurred for the purposes of acquiring, directly or indirectly, shares of the company, shares of any company which, directly or indirectly, owns shares in that company, or shares in a related company, which restrictions are described in more detail under question 12.
Even when the provision of an advance payment, loan or security for the acquisition of shares is permitted, the following conditions have to be met:
the market price of shares must be fair;
approval of the general meeting of shareholders must be obtained;
the financial assistance cannot lead to a decrease of the company’s net assets under the legally required level.
Are there any restrictions against providing security to support borrowings incurred for the purposes of acquiring shares: (i) of the company; (ii) of any company which directly/indirectly owns shares in the company; or (iii) in a related company?
In accordance with the Croatian Companies Act a legal transaction under which a company grants financial assistance in the form of advance payment, loan or security for the acquisition of its own shares is null and void. These restrictions do not apply to operations of credit and financial institutions and in cases where the financial assistance is given in order to enable the employees of the company or of its subsidiary to acquire the shares but only under condition that the company can set up the prescribed reserves for these shares without reducing the company’s share capital.
A legal transaction under which a company grants financial assistance in the form of advance payment, loan or security for the acquisition of its shares by the controlling company shall be also null and void if it is not in the best interest of the company.
Can lenders in a syndicate appoint a trustee or agent to (i) hold security on the syndicate’s behalf, (ii) enforce the syndicate’s rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate?
The Croatian law does not regulate the role of agent and trustee, but agents and trustees are recognised in financial practice in Croatia. Croatian banks act in such roles in relation to the international syndicated loans taken by Croatian legal entities, undertaking all of the listed actions on behalf of the banks in syndicate. Like in other jurisdictions where trusts are not recognised, parallel debt provisions are sometimes used to achieve a similar commercial result.
If your jurisdiction does not recognise the role of an agent or trustee, are there any other ways to achieve the same effect and avoid individual lenders having to enforce their security separately?
One of the solutions to avoid multiple claims of individual lenders is to name all of them as joint creditors in which case each of them is entitled to enforce the whole claim from the debtor, and the debtor is entitled to fulfil his obligation to one of the creditors (who will then distribute the collected amount to other creditors).
Does withholding tax arise on (i) payments of interest to domestic or foreign lenders, or (ii) the proceeds of enforcing security or claiming under a guarantee?
Interests paid to domestic or foreign lenders are subject to withholding tax. The payment of this tax is regulated either under bilateral treaties or under the Income Tax Act.
If payments of interest to foreign lenders are generally subject to withholding tax, what is the standard rate and what is the minimum rate possible under double taxation treaties?
The standard rate of withholding tax is 15% in absence of a treaty regulating double taxation. Under the regime of most bilateral treaties the standard rate varies from 10% or 5% in order to avoid double taxation, while in some treaties withholding tax is non-existent.
Are there any other tax issues that foreign lenders should be aware of when lending into your jurisdiction?
There are no other tax issues that foreign lenders should be aware of when lending into Croatia.
Are there any tax incentives available for foreign lenders lending into your jurisdiction?
At this moment, there are no tax incentives available or provided for foreign lenders in Croatia.
Is there a history in your jurisdiction of financing structures being challenged by tax authorities, and if so, can you give examples.
There are no relevant examples of financing structures being challenged by tax authorities in Croatia.
Do the courts in your jurisdiction generally give effect to the choice of other laws (in particular, English law) to govern the terms of any agreement entered into by a company incorporated in your jurisdiction?
Courts in Croatia generally give effect to the choice of other laws to govern the terms of an agreement. In accordance with the Act on International Private Law and Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the Law Applicable to Contractual Obligations (ROME I), a contract may be governed by the law chosen by the parties, and the parties may select the law applicable to the whole or to only a part of the contract.
Do the courts in your jurisdiction generally enforce the judgments of courts in other jurisdictions and is your country a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
Judgments of foreign courts may be enforced in Croatia subject to the fulfilment of conditions for the recognition and enforcement of foreign judicial decisions and arbitral awards. Croatia is a member of the New York Convention.
What (briefly) is the insolvency process in your jurisdiction?
The insolvency process in Croatia is regulated by:
1) The Consumer Bankruptcy Act for personal borrowers.
The bankruptcy procedure for personal borrowers may be conducted as out of court proceedings, proceedings before the court and since 1 January 2019 as simplified consumer bankruptcy proceedings.
The consumer is considered to be insolvent if he cannot fulfil one or more due payment obligations for at least 90 consecutive days the amount of which in total exceeds HRK 30,000.00 and in case of simplified consumer bankruptcy proceedings this amount is lowered to HRK 20,000.00. The verification of the consumer’s conduct is only prescribed in relation to the proceedings before the court and it cannot be shorter than one year nor longer than five years.
2) The Croatian Bankruptcy Act for commercial borrowers (it sets out a pre-bankruptcy and bankruptcy regime)
Pre-bankruptcy proceedings can be initiated within 60 days after the company’s assets have been seized and it is conducted for the purpose of establishing the legal position of the debtor and its relationship towards the creditors with the aim of maintaining its activities. The pre-bankruptcy proceedings allow the debtor to write off a part of their debts towards the creditors and to repay the remaining debt in accordance with a pre-bankruptcy settlement. It shall be deemed that he creditors have accepted the restructuring plan if the majority of all creditors has voted in favour of it and if in each group the sum of claims of creditors who have voted in favour of the plan is two times higher than the sum of claims of creditors who voted against the adoption of the plan. If the debtor fails to comply with the pre-bankruptcy settlement, bankruptcy will be initiated.
Bankruptcy proceedings are conducted for the purpose of collective settlement of the creditors of the bankruptcy debtor, by realising the debtors’ assets and distributing the funds to the creditors. Creditors are reimbursed from the value of the debtor’s assets, according to the percentage of their claims in relation to the total amount of all creditors’ debts, after the expenses of the proceedings have been paid, as well as privileged claims (e.g. employee salaries). Bankruptcy proceedings may be initiated by the company itself, by its creditors or by the Financial Agency.
The law allowed the debtor to continue doing business during the course of bankruptcy proceedings but only for the maximum length of one and a half years since the initial hearing, unless an insolvency plan has been submitted to the judge in charge of the bankruptcy proceedings.
3) The Law on the Procedure of Extraordinary Administration in Companies of Systemic Importance for the Republic of Croatia (the so- called “Lex Agrokor”) entered into force in April 2017.
Companies of Systemic Importance for the Republic of Croatia are those who employ more than 5000 employees on average and their liabilities, alone or together with its subsidiaries or affiliated companies, amount to more than HRK 7,500,000,000.00. In the procedure of extraordinary administration, the procedural rules of the Croatian Bankruptcy Act regulating bankruptcy are applied in an appropriate manner. The only extraordinary administration procedure conducted so far is the one related to the Agrokor Group.
What impact does the insolvency process have on the ability of a lender to enforce its rights as a secured party over the security?
In accordance with the Bankruptcy Act, enforcement proceedings of secured creditors shall be continued by the court, which conducts the bankruptcy proceedings. After the opening of bankruptcy proceedings, initiating enforcement proceedings against the debtor is not permitted but lenders with secured claims have the right for their claim to be reimbursed from the proceeds of the sale of collateral.
Please comment on transactions voidable upon insolvency.
The bankruptcy receiver and/or the bankruptcy creditors may challenge the legal actions or omissions taken before the opening of bankruptcy proceedings that disturb the right to equal settlement of all bankruptcy creditors.
Such legal actions or omissions that may be challenged are e.g.:
1) paying a creditor or providing security for the payment if the debtor was insolvent* at the time of the transaction and the creditor knew or should have known of it ;
2) transactions that put the bankruptcy creditors at a disadvantage, if the debtor was insolvent* at the time of the transaction and the other party knew of it
3) transactions between the debtor and persons closely connected to the debtor that put the bankruptcy creditors at a disadvantage;
4) transactions with the intent of damaging creditors, if the other party knew of it at the time of the transaction;
5) transaction without compensation;
6) shareholder loans replacing capital contributions.
* The debtor is considered to be insolvent if he cannot permanently fulfil due payment obligations for at least 60 consecutive days.
Is set off recognised on insolvency?
The creditor’s right to set-off, acquired prior to the opening of bankruptcy proceedings based on law or a contract, is not affected and is recognised in bankruptcy.
Set off is always prohibited:
1. if the obligation of the bankruptcy creditor towards the bankruptcy estate occurred after the opening of the bankruptcy proceedings;
2. if the bankruptcy creditor acquired the claim from another creditor only after the opening of bankruptcy proceedings;
3. if the bankruptcy creditor acquired the claim by assignment for the last six months prior to the day of the opening of bankruptcy proceedings, i.e. if the bankruptcy proceedings were not opened for the last six months prior to the day of the opening of bankruptcy proceedings, and he knew or should have known that the debtor had become insolvent or that an application for the opening of pre-bankruptcy settlement proceedings, i.e. an application for the opening of bankruptcy proceedings, had been filed against him. By way of derogation, set-off will be permitted in the event of a claim that was assigned in connection with the fulfilment of non-fulfilled agreements or a claim the right of fulfilment of which was re-acquired by the successful challenging of the debtor’s legal transaction;
4. if the bankruptcy creditor acquired the possibility of set-off by a voidable legal action.
Can you comment generally on the success of foreign creditors in enforcing their security and successfully recovering their outstandings on insolvency?
The success of foreign creditors in the enforcement of their security and successful recovery of their outstanding claim primarily depends on the type of collateral.
Based on our experience, both, domestic and foreign creditors, are most successful in recovering their claim if it is secured by a pledge on real property, but success depends on:
the established value of the real estate;
the amount of the creditors’ outstandings in relation to the value of the real estate; and
the amount collected at public auction for the sale of the real estate.
According to the Enforcement Act and the Bankruptcy Act the sale of the real estate is implemented by the FINA at an online public auction.
In enforcement proceedings, the real estate cannot be sold at the first online public auction for an amount less than 4/5 of the established value of the real estate and at the second 3/5 of the established value of the real estate.
In bankruptcy proceedings, there are 4 public auctions. At the first online public auction, the real estate cannot be sold for an amount less than 3/4 of the established value of the real estate, at the second for an amount less than 1/2 of the established value of the real estate and at the third for an amount less than 1/4 of the established value of the real estate.
On the fourth online public auction real estate can be sold for 1.00 HRK.
Are there any impending reforms in your jurisdiction which will make lending into your jurisdiction easier or harder for foreign lenders?
As far as we know, there are no impending reforms in Croatia which will make lending easier or harder for foreign lenders.
What proportion of the lending provided to companies consists of traditional bank debt versus alternative credit providers (including credit funds) and/or capital markets, and do you see any trends emerging in your jurisdiction?
Croatia’s financial system can be classified as a bank-centric system where the majority of loans are provided by the banking sector. The Croatian National Bank only collects and publishes data in relation to the lending provided by the banking sector, where a continuing negative growth in respect of lending to companies has marked 2018. It is worth noting, that this data is coloured by the sale of numerous bank NPL portfolios, in which loans granted to companies have a significant role.
One of the trends that has recently been witnessed on our market is foreign financing provided to companies undergoing the pre-bankruptcy procedure, which trend, we presume, is mostly driven by the fact that Croatian banks are the major creditors of such debtors and therefore reluctant to provide further funds.