Croatia

Buyers Guide

I PURCHASE OF REAL ESTATES IN CROATIA

BY NON-RESIDENTS

Non-residents may purchase real estates in Croatia subject to an approval from the Ministry of Justice. The approval is granted only to the citizens of the states where Croatian citizens may purchase and own properties. The Ministry of justice itself ascertains the position on a case-by-case basis. The procedure for obtaining the approval takes 12 to 16 months.

The other option is acquisition of a property through a corporate body incorporated in Croatia. Such a company, as a Croatian legal entity, may purchase real estate without any approvals from the Ministry. Incorporating a Croatian limited liability company normally takes approximately one month. The required minimum share capital is Kn 20,000 (approx. 2,750 Euros).

II EXPENSES

Expenses incurred in connection with a new building

- the preliminary and general design fees

In order to obtain a compulsory location permit a preliminary design of the new building is required. Fees payable for the preliminary design are in the range between 2 and 5 percent of the costs of the project. General design is required for the building permit subject to fees equivalent to the fees payable for the preliminary design. Usually, for big projects of a higher value, the fees for preliminary and general design are negotiable. They are normally in the range of 2,5 percent for each of the designs and even lower depending on negotiations. For example, for the apartment colony of 5.000 sq meters x 800 Euro of build costs per 1 sq meter, where the cost of the project is 4.000.000 Euros, the fees, in the amount equal to 2,5 percent for each of the preliminary and general designs, will be in the range of 100.000 Euros. For smaller projects i.e. houses etc of approximately 300 sq meters the fee for each of the preliminary and general design is in the range of 2,5 to 3 percent. For example, for the house of approximately 300 sq meters x 800 Euro of build costs per 1 sq meter, where the cost of the project is 240.000 Euros, the fee, in the amount equal to 3 percent for each of the preliminary and general design, will be in the range of 7,200 Euros. The above fees represent the architects fees and are usually payable 50 percent on signing the contract and 50 percent on completion.

- the location permit fee

is subject to the size of the building. For example, the fee payable in connection with a building of approximately 300 sq meters shall being the range of 40 Euros. The fee is payable together with the application for the location permit.

- the building permit fee

is subject to the size of the building. For buildings up to 1.000 sq meters the fee shall be in the range of 110 Euros. For buildings of between 1.000 and 5.000 sq meters the fee shall be in the range of 0,35 percent of the estimated construction cost and for buildings in excess of 5000 sq meters, the fee shall be in the range of 0,25 percent of the estimated construction cost. The fee is payable together with the application for the building permit.

- the utility fees

15 Euro per one cubic meter of the built-up space such as buildings, garages etc. For the built-up space that can not be calculated in cubic meters, such as parking areas, paths and roads, the utility fee is calculated per sq meter of the built-up space. Upon purchase of a property, the purchaser is required to advise the local authorities without delay accordingly. The utility fee is payable within 15 days upon the authorities request.

- the permit to use fee

the same calculation as for the building permit fee shall apply.

- water connecting charge

are subject to the volume of work required and the distance of the site from the public water utility. Usually it is in the range of 500 Euros.

- electricity connecting charge

for a family house is approximately 1,550 Euros.

Yearly running costs (as per monthly consumptions)

These costs are payable monthly and depend on whether the client lives in the house full time or temporarily. The following figures relate to a house of 150 sq meters occupied full time by the family of four.

electricity - 500 Euro per year,

water - 150 Euro per year,

overhead expenses - 400 Euro per year,

telephone - 500 Euro per year,

television - 100 Euro per year,

All these expenses have to be paid monthly and are calculated as per monthly consumption.

If the house is used as a holiday house an additional tax (holiday house tax) between 2 and 4 Euros per sq meter is payable.

III TAXES

Tax on transfer of property (stamp duty)

is equal to 5% of the value of the property and is payable on purchases of the buildings built before 01 January 1998 (hereinafter old buildings). When the contract is concluded and signatures notarised the same shall be filed with the tax authorities. The tax administrations expert shall evaluate the property upon which the order for payment of tax shall be made. The tax is payable within 30 days from the receipt of the order, failing which default interest of 15 % per annum shall occur.

VAT

The VAT Act has become effective on 01 January 1998 and applies, inter alias, to sales and purchases of buildings built after that date (herein new buildings). The VAT rate is 22% of the contract price.

VAT is due and payable, generally speaking, in respect of the sale and purchase contracts where the seller is a corporate body or an individual registered as a VAT payer, and the building was built after 01 January 1998.

Taxable transactions

Individuals are liable for 25% tax on profit earned through sale of property which is not its main residence or if the property has been purchased and sold within the period of three years.

If the real estate is purchased and sold within the three years period, but in the meantime it served as the main residence of the seller, or purchased and sold after the three years period, no tax is payable.

If an individual purchased and sold more than 3 properties within the period of 5 years the same would be considered as trade with properties and the following taxes are payable:

- tax of 15% on earned profit in the amount of more than Kn 38.400 (app Euro 5.200)

- tax of 25% on earned profit in the amount of more than Kn 57.600 (app Euro 7.800)

- tax of 35% on earned profit in the amount of more than

Kn 172.800 (app Euro 23.350)

- tax of 45% on earned profit in the amount of more than

Kn 268.800 (app Euro 36.320)

Where a house consisting of more than one apartment is sold, every such apartment shall be considered, for tax purposes, as a separate real estate.

Corporation tax is 20%.

Deadline for payment of corporation tax for newly registered companies is 30 April of the particular year for the previous year.

If the company has been doing business for more than 1 year, corporation tax is payable monthly on a basis of 1/12 of total corporation tax calculated for the previous year. If some differences appear, it can be paid or returned when submitting the annual financial reports to tax authorities, at latest on 30 April for previous year.

Tax on dividends and on transfer of shares

Since 1 January 2005 no tax is payable on dividends and on transfer (sale) of shares.

IV DOMICILE AND RESIDENCE

If the foreign citizens intend to stay in Croatia for more than six months they need to apply for a temporary residence permit. A temporary residence permit may be granted to an individual having financial support and a place to live in Croatia, health insurance, certificate of no conviction from his domicile country and an acceptable reason to stay in Croatia (such as work permit, family reasons, education, etc). The permit is valid one year and may be renewed, before its expiry, for an additional period of one year.

Foreign citizens may apply for the domicile/citizenship if they have continuously, during the preceding period of five years, been granted the temporary residence permit.

V OPENING A BANK ACCOUNT :

a) non-resident companies

- the extract from the company register not older than 6 months;

- the application with reasons for opening the account (such as receipt of money, payments, or other reasons);

- details of the members of the company given by the authorised executive;

- upon receipt of satisfactory documents the bank will send to the client the Contract which upon signing should be returned to the bank together with Specimen of signatures of the persons authorised to sign documents in connection with the account;

b) foreign branch offices

- evidence issued by the Ministry of Commerce confirming that the branch office has been established.

c) non-resident individuals presentation of valid passport

Two choices exist for purchasing houses in Croatia. As an individual, foreign buyers can own real estate provided that the condition of reciprocity is satisfied. Proof is attained from the Croatian Ministry of Foreign Affairs which can takes several months. Alternatively, a foreign individual can register a company in Croatia in order to purchase a houses accordingly, permission is not required. However, purchasing a house via a company does impose tax implications.

Three key stages exist in the buying process:

1. Reservation Contract in order to reserve the house.

2. Preliminary Contract for a foreigner to apply for permission to buy a house via a deposit (circa 10%)

3. Final Contract upon signing, the final payment is made and the purchase registered with the local Land Registry. A Power of Attorney can be grated if the buyer is not in attendance at this stage.

Fees relating to a purchase include:

* Transfer Tax

* Stamp Duty

* Registry fees

* Notary fees

Typically, fess and charges total 8% of the house price.

Solicitors fee appr. 1%

Agency Fee is 3 % from the property price.

WHAT IS THE REAL ESTATE PURCHASE TAX IN CROATIA ?

The Republic of Croatia has a unified tax rate of 5% for all types of real estate and respective transactions. The tax is defined based on the price of the real estate in the sales contract and the value estimate by the authorized tax authority in charge for the area in which the real estate is located. According to the Law, tax on purchase of real estate is paid by the customer or the seller on behalf of the customer, if the parties agree upon this.

WHAT IS THE TAX IN CASE OF EXCHANGE OF REAL ESTATE ?

The same, 5%, but here each of the real estate owners pays 5% of the value of his real estate as tax.

WHEN MUST THE REAL ESTATE PURCHASE TAX BE PAID ?

After conclusion of the sales contract the customer is obliged to register the purchase at the authorized tax authority within 30 days from the day of conclusion of the contract. Public notaries do also submit one copy of the sales contract to the tax authorities. The customer is obliged to pay respective real estate purchase tax within 15 days from the day of reception of the decision received from the tax authorities on the exact tax amount. If this tax is not paid within this term, interest on arrears are charged for every day of delayed payment.

DOES THE SELLER HAVE TO PAY TAXES WHEN SELLING HIS REAL ESTATE ?

No. Only in case the real estate is sold prior to the expiration of three years after it has been purchased and if sold at higher price than originally purchased. In such a case the seller has to pay a 35% income tax on the difference in value of the real estate (purchase and sales price) increased for local taxes, different in every municipality.

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