Croatia: Ownership options, purchase process, transaction costs and taxes, financing

Word is quickly getting out that Croatia's stunning coastline is on its way to becoming the next French Riviera. The new government has given foreign investors the same rights as local investors-including free expatriation of profits-and there is a handful of major privatizations in the making.

Though property prices have started to climb again, the general price level is still 50% below 1990 prices. In 2001, the number of people passing through Croatian airports was still less than half of what it was in 1987, when tourism was at its peak. But Croatian tourism is on the rise. We believe that in as little as five years, this stretch of coast will be well on its way to becoming one of the most exclusive in all of Europe. But right now, you have a chance to get in at bargain basement prices.

Whatever kind of property you are looking for, it's best to work with an estate agent. With foreign interest in Croatian property on the increase, more and more agents offer a one-stop service with established contacts to notaries, solicitors, and even builders. Be sure to check an estate agent's reputation before you commit yourself.

Don't be surprised if your agent asks for a ?40 to ?80 ($50 to $100) fee for showing you a property. This is standard practice now, as agents had too many problems with curiosity seekers who merely wanted to be shown around. The fee is refunded if you buy the property.

Also, we discovered that quite a lot of properties are listed with several agents…but at different prices. If you are interested in a particular property, be sure to check that another agent isn't offering it for a lower price.

Are there any restrictions on foreign ownership?

As a foreign buyer, you are free to purchase real estate in Croatia provided an application is made to-and approved by-the Ministry of Foreign Affairs. Acquiring this approval may take up to 12 months. However, this process can easily and legally be avoided if you purchase your property through a Croatian corporation (see below).

What are my ownership options?

There are three ways by which foreigners can purchase property in Croatia and take advantage of the incredible new growth that Croatia is experiencing. We will explain each method here, but be warned, although each method is fairly simple, there is a lot of paperwork involved. You can expect this bureaucracy to be greatly reduced when Croatia joins the EU. Currently the only major difference between each method is the time involved in the transfer of title.

1. Buy through a Croatian company
The easiest and fastest way to purchase real estate is to incorporate a Croatian company. Going this route, the company is regarded as a Croatian entity and is not, therefore, subject to the drawn-out waiting times you would otherwise encounter at the Ministry of Foreign Affairs.

Domestic companies in Croatia can be entirely owned and controlled by a foreign person. This is the most tax efficient way to buy and sell real estate in Croatia. Additionally, when purchasing though a company there is no restriction on what type of land you can buy- forested, coastal and agricultural land, and, in some cases, even cultural monuments. The company method is also the best way by which to purchase larger properties, invest in several properties, or use your property for business purposes.

You will, however, need to register your company in the same district where you will purchase the property. This can take anywhere from a week to a month, depending on the court backlog.

The process of incorporating in Croatia is quite straightforward, and by signing a Power of Attorney, your lawyer will be able to handle the majority of the paper chase for you. It is important to note, though, that the cost of incorporating in Croatia can run as much as $5,000. Plus, you'll need a capital reserve of about $3,700 in a Croatian bank account, in your name, during the incorporation process. However, on the day that your company is listed in the corporate register you can withdraw all the start-up capital, if you wish.

Once you have completed all the legal and contractual formalities associated with both the incorporation of your company and of the sale of the real estate, you can register your property immediately in the Land Registry. In Croatia, the actual physical signing of the Land Registry ledger is the final and most significant step of the process of land ownership, and it is the means by which title is claimed.

In Croatia, you can also purchase property in your own name. There are two ways to go about this (detailed below). Either way, though, you will need to apply to the Ministry of Foreign Affairs for permission to purchase the land. And be warned: Although Communism has ended in this part of the world, the dregs of its slow and inefficient bureaucracy still reign here. Purchasing property in your own name can take anywhere from three weeks to 12 months or more.

Plus, it is important to note, that the system by which the Ministry of Foreign Affairs operates in Croatia is not uniform. In the southern part of the country things tend to go a lot slower because they still rely heavily on manual systems for the processing of the applications, and they don't necessarily have the required manpower dedicated to the task.

There is one significant benefit of waiting for the Ministry of Foreign Affairs: The purchase goes through a myriad of checks and there is a much slimmer chance of running into any problems with title or validity of the sale. But, being paperwork-obsessed, if there is one paper or formality that is missing or incorrect, the Ministry of Foreign Affairs will send your whole application back. And you may have to start again, from the beginning, which can be extremely frustrating.

Furthermore, there is a statute of limitations on the age of your documents in Croatia. If any document is over six months old at the time of submission, it will be rejected and a new one will be required. Not having all the correct paperwork at the time you submit your application could set you back up to a year. That said, if you do decide to buy property in your own name, here's how to do it…

2. Buy in your own name-the 10% pre-contract method
Via this purchasing method, you will need to put down at least a 10% deposit, in order to have the property removed from the market. Generally, 10% is all that is required. But, with the enormous enthusiasm that is being shown in the Croatian real estate market at the moment, many vendors now demand that the entire amount be held on deposit.

Unless you speak Croatian, do not sign or turn over any money until you have had the agreement translated and notarized. In fact, by law in Croatia, as a non-Croatian speaking person you will need to have all documents translated. Notary fees, though constant, will be minimal (to the tune of only a few dollars a visit), as the Notary Public will only be verifying the names of yourself and the seller in his presence.

You would then apply to the Ministry of Foreign Affairs (MoFA) in order for them to
approve the purchase. Then the waiting begins…

Once the approval from the MoFA is granted and the final contracts and other assorted documents are checked, translated and notarized, the documents are then submitted to the land registrar to convey the title. Once the ledger is signed, the property is officially yours.

You will have some protection while you wait for the MoFA. If the seller breaks the contract, he must pay you double the 10% deposit. And it is often beneficial for them to do so, with property prices appreciating at up to 30% a year. Although, not a very ethical method of business, it has been known to happen here. That said, it is better to go in with a higher deposit of at least 20% or 30%.

Two cons of the 10% pre-contract method are that you cannot occupy the premises while you are waiting for the MoFA (as you would with the full payment method outlined below), and you will not be able to obtain financing in Croatia.

3. Buy in your own name-the full payment method
You can, of course, pay for the property in full. By doing so, you can move in straight away and live on the property while you wait for approval from the MoFA. There is nothing illegal about this, but remember the house or property does not belong to you in the eyes of the Croatian authorities, as you have not signed the land register. As a result you are not entitled to any utilities or any building permits.

If you are planning on paying in full and occupying the premises, be sure to make arrangements with the previous owners to keep the utilities on in their name. Once the utilities are cut off, only the previous owners will be able to get them turned back on for you, at least until your approval comes through. It is not uncommon though to go to the utility board offices with the sellers and make arrangements in person; i.e. the utilities will be in their names, but the payment scheme will be changed to have the money debited from your account.

Utilities aside, another boon of buying outright is that while you are waiting, you are authorized to start refurbishing and renovating any buildings or structures, just as long as the renovations are within the footprint of the pre-existing structure.

Also, make sure to have your lawyer put markers on the deeds so that it is apparent that ownership is being applied for. Again, an unscrupulous vendor could mortgage or even sell the property from under your feet while you're applying for MoFA permission.

According to our contacts at Croatiansun (www.croatiansun.com), "approximately 98% of all of the applicants are approved the right to purchase and own the property in Croatia. Also, in the case that the client would be denied the right, then the Croatian company would be set up and the property ownership would be transferred from an individual to a company."

Transaction costs

Real estate agents' fees in Croatia are quite reasonable. Generally, both buyer and seller pay about 2% to 3% of the purchase price each. However we have seen agents that charge commissions of up to 5%. Legal fees amount to 1% or 2% of the purchase price.

Croatian real estate taxes

Transfer tax: Within 30 days of concluding the sales contract, you will need to register the purchase with the local tax authority in order to arrange the payment of the Croatian equivalent of stamp duty. This is a unified tax rate of 5% of the purchase price for all types of real estate built before December 31, 1997. This figure is calculated by the price of the real estate in the sales contract and the value estimate by the tax authority in charge for the local area.

Once you have received news of the exact tax amount, you will have 15 days to pay the tax authorities in full. If this tax is not paid within that time, you will be charged interest for every day the payment is late

Sales tax: If you buy through a Croatian corporation, VAT is levied on the purchase of new property-i.e. buildings constructed after December 31, 1997-at a rate of 22%. Individual buyers will not be charged VAT.

Inheritance/gift tax: As the recipient of a gift or legacy of Croatian real estate, you may be liable for the standard inheritance/gift tax rate of 5%. Depending on your relationship to the donor, however, you may be exempt from paying this tax.

Property tax: There is no property tax levied in Croatia.

Rental income tax: If you receive rental earnings from your Croatian property, you will be subject to Croatian income tax. The corporate income tax rate is 10% (or 0% for companies operating in the Free Zones). For individuals, the rate is 25%.

Capital gains: As long as you meet one of the following requirements, you will pay no capital gains tax on the sale of your Croatian property:

" You occupied the real estate while you owned it
" You have held the property for more than three years
" You sell the property to your spouse or to a member of your immediate family.

For Croatian corporations, standard corporate income tax is paid at a single rate of 20%. This is reduced to 10% (or 0% in some cases), for companies operating in Free Zones.

Financing

Getting financing in Croatia is still quite difficult. Domestic banks don't like to lend to foreigners whose income is remitted from abroad. And foreign banks don't like to lend to those wishing to purchase in Croatia. The problem is that the legal system is so clogged up with minor cases that getting a default case to court in order to get some compensation would take years.

Also, when you are transferring money to Croatia, the banks usually charge a fee on incoming transfers. With Raiffeisenbank, for example, the charge is 0.2%, where ?10 is the minimum charge and ?500 is the maximum.

For more information on investing in Croatian real estate, contact Croatiansun, tel. (385)2031-2228; fax (385)2031-2226; e-mail: info@croatiansun.com; website: www.croatiansun.com.