Croatia: Small business red tape cut in efforts to stimulate self-employment

Although received with a fair amount of skepticism and confusion by many in Croatia the government’s seemingly swift move to cut red tape, simplify small business registration and make it affordable to any entrepreneur or person with a view to entering into a business enterprise is praiseworthy.

As of 18 October people in Croatia are able to form or register a small business (so called simple company with limited liability) with only 10 Kunas (1.33 EURO) of founding capital/ share value. This falls within the new amendments of trading company laws and is aligned with EU standards and tasks imposed upon Croatia for its accession to EU in July 2013.

Under Article 390.a of Croatia’s Trading Companies Act (Zakon o trgovačkim društvima), a simple company with limited liability is a company with a lowest base capital of 10 Kunas, and the lowest nominal share value is 1 Kuna. Such a company cannot have more than three members/shareholders and can only have one member on its management. If the members of management do not have “health and pension insurance” through some other means (e.g. another job elsewhere) then such insurance will need to be paid by the business entity itself.

Dubbed a “simple company”, this limited liability company is required, under the law, to pay into its reserve capital one quarter of its annual profits. Hence, providing the company an avenue (given a thriving business through time) to reach the status of a “normal” or ordinary company where reserve capital is set at 20,000 Kunas (2,659 Euro), equivalent to about 3.7 average monthly wages. Up until now the cost around forming/registering a company had been around 5,000 Kunas and the new 10 Kuna deal makes the mere registration accessible for all.

The simple company registration process is user-friendlyvia a prescribed Form that needs to be filled in by a Public Notary, stating the intention to form a company, the list of members, the list of persons authorised to manage the company’s business and acceptance of a member of the nomination to manage the company. The Form is signed by all members and lodged electronically with the business court registry.

The use of company reserve capital is very strict,” says the Croatian justice minister Orsat Miljenic, adding: “These reserves can only be used to cover losses in previous financial year, but also to increase the company’s capital. This is a simple way of entering into business, designed to prevent the gray and black markets and the legalisation of business trading”.

He further added that this opportunity of starting and working within the frame of a simple company has been inserted into legislation as yet another measure in Croatia’s approach to EU membership. Just like in Germany, Italy and numerous other countries such opportunity is there for those who wish to “test their business entrepreneurship”.

The pleasing outcome of this new “push” to attract self-employment and/or pull in the reins of gray or black economy (that without exception avoids tax paying) is also in the reported fact that the company registration certificates take only 24 hours now, as opposed to the formerly unnerving practice/ red tape that took months and months.

Economist Ljubo Jurcic has been quoted as saying that “this new measure by the government is a damaging measure as it could reflect badly against individuals”. Jurcic added that “stimulating people to become business entrepreneurs is very bad because people who start a business out of desperation find themselves in an even worse situation a year later. The measure of simple companies sounds nice, but it’s more important to come up with a good idea and needed information, and then start a business.”

While Jurcic’s statement reflects those of many others in Croatia it is patronising, nevertheless.

The new measure by the Croatian government must be seen in a positive light.

It is there to offer opportunities that have never existed before in Croatia or in former Yugoslavia. It’s there as a vessel to bring about personal business responsibility and open up a new hopefully busy world of “cottage industries”, service outlets, small-scale manufacturing, open up small business veins throughout the country’s economy without which a healthy economy would struggle. Most Croatian people are well aware that one cannot start a business out of thin air, empty pockets or without a solid business plan projecting viability; they don’t need lectures or grandstanding such as the one offered by Jurcic.

With unemployment in Croatia reaching almost 18% cutting red tape around small business is a positive move. The government should now do more in low-cost and/or free training or educating people in small business via workshops, seminars, brochures etc. Furthermore, assisting people who come up with sound and viable business plans could also develop into small business government grants and loans.

The deeply regretful thing about Croatian business entrepreneurship is that its major development bank ( Croatian Reconstruction and Development Bank/Hrvatska banka za obnovu i razvoj/HBOR) has for years been extending loans to big business that often found itself in dire straits of profitless struggles and unchecked risks. Had there been greater attention to small and medium business, in developing better accountability for loans and grants, perhaps we’d be looking at a much healthier picture of employment and economy. Certainly a sole trader or small business owner feels the immediate effects of nonviable trading and fights harder to stay afloat than what an employee of a larger company does. The horizon for small and medium business in Croatia might be looking healthier as we speak. European Investment Bank has been reported in September for extending 100 Million Euro loan to HBOR for financing small to medium business in Croatia. I trust, though, that strict accountability and monitoring measures will be put in place for these loans and that such moneys will go to the genuine business entrepreneurs and not to  “free-money” larks or become an avenue for corruption or fraud which has not been swept clean yet. Ina Vukic, Prof. (Zgb); B.A., M.A.Ps. (Syd)

 

Comments

  1. I would be happy with this move if Croatia had a comprehensive plan for those wishing to start their own company that involved mentorship, a streamlined all-around reporting process, and reduced fees to reduce the risk of failure.

    Unfortunately, the (initial) registration process represents a very small percentage of the over-all necessary interaction that a business person in Croatia is destined to have with various administrative bodies, all with their own fee structure and reporting duties. Just as a small example, 10 kune will initiate the process of forming a company, but to continue you will have to get your application notarized, and for this you will need to pay a set fee of 500 kune, set by the gov’t (in cooperation with the notaries association). This fee will cover about a minute of a notary’s time to stamp your application. And this is just the beginning, cost-wise. Reporting and chasing paperwork is no less tedious or less expensive than before.

    I would almost agree with Ljubo Jurcic, despite the fact that I agree that his cynicism is highly politicized and as you say, he seems “somewhat patronising” towards the project. I think that by itself this cheap registration process will mislead a lot of people for whom the 20,000 kuna requirement may have represented a roadblock in registering a business. With the new property seizure laws, under-financed entrepreneurs who have yet to learn the ins and outs of a free market could find themselves without a car, cottage, or even home very quickly. It is they who will have to pay if “testing their business entrepreneurship” goes sideways.

    The fact is, the measures that this government is taking to stimulate growth in our economy is a joke. Nothing but trial and error. What else could one expect from a government whose members charged with improving Croatia’s fiscal situation still have self-administered socialist principles from the yugo-regime, running through their veins? What this country needs is some credible, progressive young leadership (almost forgot the most important criterion – that they be patriotic) that will take the best of the west and incorporate that into Croatia’s circumstances as painlessly as possible.

    The 10 kuna business reg. is a prime example of this trial and error government – the plan only goes part way before encountering the first inevitable precipice of failure, and instead of covering it up with good, comprehensive planning, they back away and say “you’re on your own now”. What the chicken coop doesn’t get is that running a country’s economy is a bit more involved than posting a drink special at the local bar, for example. The aparatchiks in this administration would probably have trouble figuring out what goes into a gin and tonic.

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    • We’re on the same wavelength Brankec; I too pointed out that the government would need to get into low-cost or cost-free education on small business etc as that is what’s needed especially given the lack of history in private small business entrepreneurship. Certainly cutting red tape is not enough, but it’s a start. So let’s hope that if the government is serious about this move they’ll invest some funds in assisting people to start a business, at least those that genuinely need it, otherwise it will be a joke and a knee-jerk reaction by an incompetent government to a dire economic situation.

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      • Michael Silovic says:

        Ina I agree with your statements totally but I would like to see the lending institutions implement training classes as a requisite for guaranteeing a business loan. This should be mandatory for those who accept the loans as a way of understanding accounting practices. Our goverment needs to remove all red tape for those who want to start a business and they should also reduce the tax rate for start up business the first year with increases in the follow years under any plan. As an example, if the current tax rate is set at 25% then the first year new small business should be 10% the first year, 15 % the second year, 20% the third year etc. This is the most important thing the goverment can do to help stabilize new start up businesses. The same should go for the lending institutions based on the amount of years the loans are given for. The lending institutions should provide any training required free of charge to the business to help them succeed and based on their re – payment history allow increases in the loan.
        I think that everyone will be surprised at how many Croats will be successful in business. Croats are some of the most intelligent people in the world and have a hunger for success that is unparalleled.All we need is for our goverment to give us the free reign of the open market.

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      • Let’s hope Michael that the government will take seriously helping small business from education, support to loans/grants. I agree with you totally

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  2. I know we’re on the same wavelength here Ina, as we almost always are. I’m not afraid to congratulate the government’s few moves that will positively affect Croatia’s situation. But it seems that they never quite get the gist of what their role is and how to complete the job at hand. Linic’s cuts would be fine if they happened in the right sector – the terribly inefficient and overpopulated, often duplicated and triplicated gov. administration. But then he goes and cuts education. The gov. announces this 10 kuna blow-out special like this were Walmart, but they once again stop way short by leaving the rest at status quo. They publish names of citizens who owe taxes, collect 2% of that debt, and call it a day, meanwhile probably spending an amount equal to that which they collected on administering the project. I could go on…. 🙂 Cheers!

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    • Totally am aware and totally agree with you. This way, who knows, miracles might happen and the government will start listening to the people, looking at the whole job at hand and getting it all done – no headlines only approach! 🙂 Yeah, right!

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  3. Miso Sorbel says:

    Ina you’re totally right when you say that Croatian government should now put its money where its mouth is and invest in training or mentoring citizens in small business, giving grants or loans to the credible ones and I fear the same as Brankec. I.e. that the chicken coop (i.e. kukuriku coalition) doesn’t really know what they’re doing. I mean they should have prepared the ground for such a groundbreaking move in removing the red tape on small business and had training, mentoring plans in waiting etc. This way it looks like the
    “Monkey see, monkey do” thing, or chicken poop and chicken poop at a drop of a hat, anywhere any time, without thinking.
    It’s well known that self-employment is a “gold-mine” for employment. In 2010 the UK government announced a
    number of new measures in the budget aimed at business start-ups, including the extension of the 10 % relief rate for entrepreneurial
    activities; the extension of the Enterprise Finance Guarantee Scheme to provide GBP 200 million(EUR 237 million) in extra lending to small businesses until 31 March 2011; a reduction in corporation tax for small businesses from 21 % to 20 % from the next tax year; and a job creation scheme which makes new businesses outside London and South East England exempt from up to GBP 5 000 (EUR 5 928) in National
    Insurance contributions for the first 10 employees recruited.
    Similar things are happening everywhere and Croatian government saw that but didn’t really look properly, they just introduced this measure as stand-alone and everything else needed for it to succeed is just not there.

    It might be the beginning of good things to come but for now it sounds like, it looks like, it smells like … a cock-a-doodle-dooooo (ku-ku-riiiii-kuuuuuuu) from the chicken coop.

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  4. Since the government hasn’t done its homework on this one but rushed with scissors to cut some red tape (which is not a bad thing – as Agatha Christie’s Poirot would say: it’ll at least get some of the little gray cells working) I have an idea for a small to medium business that government should fund:

    Small Business Support Center in every city!
    Anybody – go for it! Teach the government how things should be done.

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    • Hold that thought Marko L and spread it into action. Some good might come out quicker than what the governments speedy amendments to trading companies’ law suggests.

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    • Michael Silovic says:

      I have an idea for a small to medium business that government should fund:

      Small Business Support Center in every city!
      Anybody – go for it! Teach the government how things should be done.Small Business Support Center in every city!
      Anybody – go for it! Teach the government how things should be done.

      Marko If the goverment wanted to do such they could follow the example of the SBA in the United States. The SBA ( small business administration) does a fairly decent job in helping small businesses and is probably the only program that is not corrupt in the United states because of limited funding by the goverment. However I am somewhat opposed to having any goverment intervention in implementing small business programs. Government abuse of funding programs become corrupt very quickly as we see this on every level in the American goverment in which 99% of all American goverment funding programs are deemed to be corrupt. I would rather see the Croatian goverment give money to Zagreb university and allow them to use the funds to develop a program and training for small businesses.One of the dangers we can find in goverment is a wide range of favoritism and corruption if we allow the goverment to fund businesses. I do not support taxpayers funding any business what so ever unless it is in the name of our national security interest.Education is vital to anyone wanting to start a business and this can best be handled with out goverment.

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  5. For Ina Vukic.Thank you for your extensive reply to my mali I sent you two days ago…

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    • I love your sense of humour Zeljko 🙂 I had not seen your email and have just gone back to check it and surely enough there it was – it somehow got sent into a hidden folder I did not notice. Thank you for alerting me to it. I shall reply gladly.

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      • I am in general agreement with the posts here although my experience is that opening a d.o.o was never that difficult. I do fear that the process to close one remains hidebound in delays and costs. I also fear that too many folks have a romantic idea about what having a company really means, so many regard it as little more than a loophole to avoid paying purchase tax (PDV) and have little notion of developing anything sustainable. I am aware of the standard of numerous business loan applications which, frankly, are pathetic, most lack even a basic business plan. There’s a long way to go.

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      • Indeed Pavao, there’s a long way to go.

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    Like

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  1. […] and the future looks at efforts from the Croatian government to reduce the amount of small business red tape. Verfassungsblog looks at the recent referendum on Iceland’s constitution, saying that a clear […]

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