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)