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Brief description of Croatian property process

 

1. Estate Agent
Firstly, find a property which fits your requirements. Estate agents in Croatia are very accommodating concerning visits to properties but please remember that they are not always in because of this. Their mobile telephone numbers are usually posted on their office doors, so if they are not in give them a call to make a rendezvous.

2. The structural survey
Structural surveys are not very common in Croatia, not least because most properties for sale are of fairly recent construction. There is nothing to stop you having a survey done though. There are any number of architects and surveyors in the large towns who would be happy to do a survey for you.

3. Find yourself a lawyer
You might be surprised to learn that most real estate purchases in Croatia are done without a lawyer. However, since all documents concerning your sale will be in Croatian, it is advisable to have a lawyer to help you go through it all. He or she can do a proper search of the Land Registry to see if the property title is clean and also prepare the contract of purchase for you. The chances are that there will be at least one lawyer in every major town who can speak either very good English, German or Italian.

4. Preliminary contract stage
At this stage you are expected to make a deposit of 5-10% of the sales price, the amount being decided between the contractual parties. It is usual to write a condition in the contract that the vendor pays a sum equal to your deposit if they pull out of the sale. The pre-contract is prepared by the estate agents, not the Public Notary, so you should involve your solicitor at this stage, if you have one.

5. Permission to purchase from the Croatian Ministry of Foreign Affairs
Please see the section below ‘Who can buy real estate in Croatia’

6. Certification of contracts by a Public Notary
Whether you are buying the property as a private individual or as a Croatian registered company the contract of sale is signed in front of the Public Notary. As a foreign purchaser the presence of an official court translator is obligatory. The notary’s fees are very low since the notary only certifies the signatures, and the translator’s fees are usually in the order of 60 €

7. Submission of documentation to the Land Registrar
The Land Registry records legal title over real estate. The estate agent or your lawyer requests the registration of the property on behalf of the buyer. Please see below for more details on the Land Registry and the Cadastral Registry.

8. Payment of Real Estate Purchase Tax
There is a uniform tax rate of 5% on the value of real estate when sold, the value being determined by a commission of the local tax authority. The value may or may not be the same as the price paid for the real estate in the sales contract. The reason for the commission is because it is quite common in Croatia to have a contract for only 75% of the value of the property and to pay the remainder in cash, thus avoiding tax. We strongly recommend foreign buyers in Croatia not to get involved in this kind of transaction. The commission is usually very fair, if you have paid the correct price for a property it is unlikely that they will mark the value up. Once the commission have presented you with their decision there is a 30-day deadline to pay the tax.

 

Traditional Buying Practice

 

The traditional practice assumes that a pre-contract is drawn-up, the purchaser pays a 10% deposit, and then waited the 6-12 month period for approval from the Ministry before taking possession. If the purchaser withdrew from the deal in the interim, the deposit would be forfeited – where the vendor withdrew, they were required to return the deposit and pay an additional 10% as a penalty.

However, in such a buoyant property market, with rapidly rising prices, there is distinct risk that the purchaser may be gazumped. The rising market price makes it worthwhile for the vendor to break the contract and return the deposit and penalty to the purchaser, and still be well ahead.

At Adria Mare we advise payment of the full upfront price allowing our clients to:

  • Take occupation before the permission is granted.
  • Earn rental income during the approval process.
  • Begin internal refurbishment (within the same footprint)
  • Have peace of mind in that the property is theirs and there is no risk of gazumping. (Please note that when buying property off-plan, the payments can be staged with traditionally a down payment of 35% of the contact value followed by up to five equal installments over the development period

Private Buyer Route

Adria Mare, with your input will negotiate with the property owner an acceptable price and verbally reserve the property.

We will draw up the contracts (a pre-contract where the full amount is not paid) between the vendor and our client. 

We will assist you in setting up a local bank account (with internet banking).

The contract is then signed and exchanged in the presence of a notary public.

However, if the buyer is not present, the contract can be signed in their home country.

The documents are submitted to the local land registry department.

The application for permission to purchase is prepared by DPC and forwarded to the Ministry of Justice. This will include:

  • Providing power of attorney to our lawyers to enable the permit application to proceed. the purchasers proof of citizenship and identity.
  • The contract outlining the terms of sale. Land and Cadastral registry documents.
  • A written request signed by the applicant.
  • After gaining approval and within 30 days,our lawyer will register the sale with the local tax authority.
  • On receipt of the tax calculation for the property from the tax office, the client has 15 days to pay the tax bill before penalties are accrued.

The process to complete the purchase with the vendor can take anywhere from 7 days to 1 month, depending on the location of the client for document execution purposes. In the background, the approval from the Ministry of Justice can take between 6-12 months. Waiting time for the permit does not affect your client's ability to move in, begin internal refurbishments or letting out the property.

The Corporate Buyer Route

There can be advantages in purchasing property in Croatia via the ‘ Corporate Buyer Route '. These advantages need to be offset with the initial and ongoing costs in maintaining the new entity.

We work with a expert property lawyer in Croatia and who analyses our client's needs and expectations, on a case-by-case basis, and then advises on the most appropriate route to meet our client's objectives.

Our lawyer is experienced in establishing limited private entity's for individuals wishing to purchase property in Croatia via this route. Other than the requirement to apply for permission to own property and the ensuing waiting period, all other steps outlined above, still apply.  We can immediately initiate proceedings to establish the limited liability company - this usually takes 2-3 weeks. Typically during this time our client is reviewing properties and by the time they are ready to proceed, the company has been formed. From this point, the completion and exchange of contracts can occur anywhere between 7 days to 1 month depending on the location of the client, for document execution purposes. 

The advantages of the corporate buyer route are as follows:

  • Approval by The Ministry of Justice is not required and you have full ownership of the property as soon as the final payment is made.
  • If you plan to sell your property within the first three years, the profit realised (appreciation) from the sale is not subject to Capital Gains tax (35%). However, company (profit) tax is payable and is currently 20%. There are provisions in the Croatian tax law to account for amounts invested in the real estate, as well as depreciation of buildings. Our lawyer advises our clients on this issue, case by case.
  • When selling the property purchased under the corporate buyers route, depending on the date the property was built, there are additional tax benefits to the seller.
  • The sale of a Croatian company that owns real estate may the most tax efficient exit strategy for a foreign investor.

How much does it cost?

Here are the costs associated with purchasing a property in Croatia.

  • Buying a property built pre December 31 st 1997.  5% RETT* (Real Estate Transfer Tax) on the value of the contract
  • Buying a property built after December 31 st 1997 from a VAT registered developer or self-employed builder. 22% VAT calculated on the costs to build the property. (Usually absorbed by the vendor into the price) plus 5% RETT* (Real Estate Transfer Tax) calculated on the land value portion of the sale.
  • Buying a property built after December 31 st 1997 as a private sale. 5% RETT* (Real Estate Transfer Tax) on the value of the contract . (Assuming no refurbishment (extensions etc) have been carried out on the building which would attract VAT Real Estate Transfer Tax (RETT) is assessed on the market value of the real estate, as determined by the local tax authorities.

Surveys and Clean Title

Surveys are not typically commissioned in Croatia however we would be pleased to arrange this services if you so require.

Clean Title

We believe that one of the most important aspects of your property purchase in Croatia is establishing that the property has ‘clean title' – In other words, the seller has legal authority to sell the property and there are no pending claims on the property before the courts.

Over the years, the property administration system has lacked an effective method of tracking ownership of land and/or buildings. The reasons being that in the past, properties were bought and sold without proper registration and documentation, occasionally to avoid taxes. In turn, during the communist regime, significant portions of land and property were confiscated from wealthy families and sometimes divided up into smaller lots and given to those in need. These original owners may now have a claim to ownership of the land. Many properties in rural areas were inherited by all siblings in equal shares however never registered as such. In this instance, no one sibling has legal authority to sell the property.

This requirement to have an updated and effective land and building registry system is also recognised by The Croatian Government and The European Commission. In June 2003, the World Bank under the European Commissions CARDS 2002 program for Croatia awarded a special grant. The grant will be used for activities aimed at building a land administration system and contributing to the development of an efficient real property market – a crucial prerequisite to economic growth and social equity.

All properties that we offer are screened for title prior to being offered to our clients to ensure that when you have decided on your property, the completion process is fast, safe and you get the keys sooner than you expected.

Croatia has signed double taxation treaties with most European countries including the UK and Ireland.

We advise our clients to seek independent taxation advice in their local country especially relating to the Corporate Buyers Route and the potential treatment of the property as a ‘benefit in kind' in future proposed legislation.

There are no restrictions on repatriating money from Croatia.

 

Who can buy property in Croatia?

 

This depends on whether you buy property as a private individual or as a company.

Buying as a private individual

In general, foreign individuals can purchase and own real estate in Croatia provided that the condition of reciprocity is satisfied. The condition of reciprocity is satisfied if Croatian individuals can legally purchase and own real estate in the country of origin of the foreign individual who intends to purchase real estate in Croatia. You will need to check if your country has this reciprocal agreement - for example, the U.S.A and EU members have reciprocity but Russia does not . Proof of reciprocity must be submitted to the Land Registry (Zemljisne Knjige) when the foreign individual seeks to register title to real estate in Croatia. Thus the whole process might take a number of months.

The first stage of purchase is to sign a preliminary contract (or pre-contract) of sale, which involves paying a deposit of 5-10% of the sales price. This can be either before or after getting confirmation from the MFA of reciprocity. If you sign the pre-contract before confirmation and it is refused, for whatever reason, you will have wasted a lot of time. On the other hand, if you wait for confirmation before signing, you risk losing the purchase because another buyer has come along in the meantime.

If this process sounds too long winded for you there is a much quicker alternative, and that is to buy the property as a Croatian registered company.

Buying as a Croatian registered company

The requirement of a foreign individual to obtain confirmation of reciprocity from the Croatian Ministry of Foreign Affairs to purchase a particular real estate can be avoided by the foreign individual registering a corporate entity in Croatia, such as a Croatian limited liability company. A foreign individual can be the sole shareholder of a Croatian limited liability company. Once an investor incorporates a company in Croatia, that company can enter into a contract for the purchase of the particular real estate of interest to the investor. No confirmation from the Croatian Ministry of Foreign Affairs will be required in that case.

This is the fastest route to buying property in Croatia, and one of the most common, but it is not without drawbacks. You will need to do quarterly returns for your company, for which you will need an accountant. How complicated, and therefore how expensive, your returns will be depends on what you want to use the property for. If you want to use it as a holiday home and to let it out during the periods you’re not using it, then your returns won’t be too costly. You will, of course, have to pay corporate tax on any profits your company makes.

Before purchasing your property you need to decide whether your company should be registered for PDV (Value Added Tax in the UK). If your uses for the property are simple, as just described, then it would probably not be worth registering for PDV, and you would not be able to recover any PDV on the expenses incurred during the purchase, such as on lawyer’s and estate agent’s fees. This would be exactly the same situation as if you were making a private purchase. However, if your plans for the property are more ambitious and particularly if they involve building, then being registered for PDV maybe worth considering, as PDV on your expenses will be recoverable.

In Croatia, a PDV registered company which is involved in tourism is expected to charge its customers PDV (at 25%) on services or commodities it is selling only if it is receiving payments in Croatian currency, the kuna, from Croatian Nationals. If it is receiving payments in euros from non-Croatians, it doesn’t need to charge PDV! If your company is involved in the tourist industry the chances are most of your clients will be non-Croatians and will be paying in euros. When you sell the property you will be expected to charge PDV on the portion of the selling price which is left over after deduction of the original purchase price and all capital expenses incurred since the purchase. This PDV is only recoverable by the buyer if the buyer themselves are registered for PDV. To know a bit more about which taxes are levied during the purchase or sale of property please see our page ‘The costs of buying’

Setting up a Croatian registered company

Setting up a company in Croatia is actually very simple, is not expensive and is fairly quick (most Croatians consider their country to be excessively bureaucratic but it is no worse than other European countries). The paper work is all done by a Notary Public and it takes about 2-3 weeks to finalise. The name you choose for your company must be either Croatian or Latin. To start the process you have to open a kuna account for your company with a minimum deposit of 20,000 kunas (about 3,000€). The receipt of your deposit will be required by the Public Notary. This money can be used freely later once you have bought the property, so it is not a cost. The Public Notary will take down all your personal details (passport number, address, etc.) and will also ask you for a list of the activities your company will be partaking (it is a good idea to have this prepared beforehand). Unlike the articles of association of Anglo-Saxon countries, which can be very restrictive, you can put any business activity down you like (of course professional activities, such as medicine, have to be supported by the necessary documents). If you put down tourism this encompasses a very broad spectrum of activities without the need to be more detailed.

So, do I buy as a private individual or as a Croatian registered company?

I’m afraid this is entirely up to personal choice. Both methods have their advantages and both have their drawbacks. Buying as a private individual takes longer but once the purchase is finalised there is not much to do. Buying as a company is quicker but engages you in a certain amount of regular paperwork and expense after the sale, although you do have the chance at least to recover PDV on your expenses if you register for PDV.

 

The Land Registry and the Cadastral Registry

 

Land Registry

In brief, the Land Registry Office keeps records on real estate ownership. The data kept by the Land Registry Office are public. Furthermore, the contents can be relied upon to ascertain and establish ownership over real estate.

The Cadastral Registry

The Cadastral Registry Office plays a different role. It serves as a guide to the real estate that falls within its jurisdiction. In serving as a guide, the Cadastral Registry Office maintains records of real estate and objects built on the real estate. These records contain data on parcels of real estate, including their location, shape, surface area, nature, classification and the possessor of the real estate. These records, particularly the Cadastral Registry Office’s demarcations of real estate, serve as the basis of the Land Registry’s records of title. For this reason, the Cadastral Registry Office’s records are relevant in proceedings to establish title. The Cadastral Registry Office also keeps records on the actual possessor of real estate.

Certificates of Title

A certificate of title has three sections, each section recording specific information as follows:

  Section A of the certificate contains a description of the real estate;
  Section B of the certificate specifies the party that owns the real estate;
  Section C of the certificate specifies any ‘burdens’ on the real estate including:

1) Mortgages;
2) References to any additional entries describing ‘building rights’ or similar ‘utilisation rights’.

The Land Registry operates such that unresolved issues are cited in the Land Registry prior to their resolution. Such issues could be the listing of contested ownership claims, etc. Entries of unresolved issues are recorded in columns immediately to the right of Sections A, B and C.

Purpose of certificates of title

The Land Registry issues certificates of title, which are essential for:

  • Pre-emption of other real estate ownership claims;
  • Obtaining Building Permits; and
  • Proving ownership over the real estate for purposes of entering into commercial transactions (this is useful if the owner plans to enter into a commercial transaction that may involve the real estate; the most common transaction is to mortgage the real estate as collateral for a loan).


Conflict of information

Prospective owners need to ensure that the physical descriptions of a plot of real estate in the Land Registry and Cadastral Registry match. If the two descriptions do not match, then the purchaser must obtain an abstract from the Cadastral Registry explaining the changes and submit that extract to the Land Registry so that the certificate of title can be updated. In theory, the Geodetic and Cadastral authorities in Croatia (governmental offices that oversee the zoning of real estate and collect information on the use of real estate) are responsible for notifying the Land Registry of any changes in the status, description and use of real estate, hence ensuring that the data in the Land Registry matches the data in the Cadastral Registry. In practice, the burden of notifying the Land Registry often falls on the owners or other interested parties of real estate.

The data in the Land Registry (as evidenced on a certificate of title) constitutes the only legal record of land ownership in Croatia. Nevertheless, purchasers should be wary of purchasing real estate when the Cadastral Registry and Land Registry descriptions do not match. Also, if they do purchase such real estate, it is in their best interests to initiate proceedings to harmonise the two descriptions so that their rights to enjoy and own such real estate are safeguarded and any eventual resale is not hindered due to conflicting records.

 

Disclaimer

 

This guide is meant to provide a general outline of the basic features of the Croatian real estate law, how real estate in Croatia may be purchased and how ownership over real estate is recorded. This guide is not an instruction booklet on how to purchase real estate in Croatia. Professional advice should be sought before entering into a real estate purchase and sale transaction. We can accept no responsibility or liability for actions taken on the basis of this general guide. Please be aware that laws and regulations in Croatia are prone to frequent change. The longer the interval between the date of this report’s issuance, the greater the likelihood of changes in the law that may affect the accuracy of this report. This report was based on the legislation in force as of 31 March 2002.

The full report from where most of this legal information came, produced by KPMG based in Zagreb, can be downloaded in pdf format by clicking here.

 

Residency in Croatia

 

A foreign national can stay up to three months in Croatia without any complications. Following this, it is necessary to obtain a residence permit. Having a yacht moored in a Croatian marina, renting or owning a property in Croatia is sufficient to obtain a residence permit. This does not mean that one is automatically deemed a tax resident. A person is resident based on physical presence in Croatia if he stays during a period of at least 183 days. Short absences are not considered as breaking this period of stay. The period can include two calendar years. One would not be considered resident if the stay is exclusively for the purpose of a visit, vacation, therapy or for the purpose of satisfying similar personal needs, providing it does not last longer than one year.

A person is resident based on maintaining a home in Croatia if he has accommodation at his exclusive and continuous disposal in Croatia for 183 days and if it can be concluded from his circumstances that he will keep and use that accommodation. The length of stay in the accommodation is not important nor whether the accommodation is owned or rented. This provision of deemed residence is very attractive for foreigners who wish to maintain legal residence in Croatia without having to physically be there for any minimum length of time.

If a foreign national wishes to be a tax resident based on maintaining a home in Croatia, he needs to have accommodation at his exclusive and continuous disposal for at least 183 days. If he wishes to be a tax resident based on physical presence in Croatia, he must stay continuously during a period of at least 183 days for business, or more than one year for the purpose of tourism, health or similar personal needs.

 

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