Only citizens of EU member states can now purchase real estate in Croatia under the same conditions as locals, while for all other foreigners, the conditions of reciprocity and consent from the Ministry of Justice still apply.
Written by: Prof. Dr. Hrvoje Kačer
In the Official Gazette number 146 from December 17 of last year, the Law on Amendments to the Law on Ownership and Other Real Rights was finally published. With relatively little public attention, this amendment contains one expected but significant change in our legislation. It is about the almost complete equalization of the rights of EU citizens with those of Croatian citizens regarding the acquisition of ownership rights to real estate. This new measure abolishes the previous procedure for acquiring ownership rights to real estate exclusively with prior consent from the Minister of Justice, which was conditioned by reciprocity, meaning that Croatian citizens could also acquire ownership rights to real estate in that foreign state. Predictions have begun to appear in the media about whether this change will lead to the sale of the Croatian coast to foreigners, whether it is or is not a betrayal of national interests, etc.
In assessing the scope of this new legal measure, one should remember not only the not-so-distant past but also the present, the laws that apply until the new provisions come into force, i.e., until February 1, 2009. Since the moment of Croatia’s independence, restrictions on the acquisition of real estate rights for foreigners have been presented as a supposedly significant protection of national interests, forgetting (whether intentionally or accidentally) that life goes on despite legal restrictions and that opening the market and generally pro-ownership and pro-market society must mean greater opportunities for this form of foreign investment. It was forgotten that even during the time of the former state, many properties were actually sold to foreigners, although this was not visible from official records, as these properties were still registered under the names of the sellers, and ‘Hans’ or ‘Giovani’ (to mention just two convincingly most represented nationalities) formally appeared as guests or relatives, or formally did not even exist.
The state turned a blind eye
When the Law on Ownership was adopted (January 1, 1996), strict formal barriers were set (consent from two ministries), and even the fact that one who is rejected cannot appeal to the Administrative Court, because ‘consent is not an administrative act’. However, foreigners were still able to purchase real estate without major problems ‘through the back door’. Through the institute of building rights, which allows construction on land owned by others for everyone, including foreigners, without restrictions based on citizenship criteria and the establishment of domestic companies as a cover for purchasing real estate, restrictive legal provisions were practically nullified. Over time, partly due to the intervention of the Constitutional Court, which annulled the provision that consent is not an administrative act, access to the Administrative Court was enabled, and the procedure was significantly simplified by placing the entire process under the jurisdiction of the Minister of Justice, which meant further conveniences for foreigners.
‘Other’ foreigners will again circumvent regulations
If a foreigner is not an EU citizen, then acquisition is possible through building rights (but only on land, not on an existing building), which is currently rare, or by establishing a company based in Croatia that appears as the buyer – here one must be careful not to change the practice, because if it were required that this company actually operates, and the foreigner established it only to buy some real estate for themselves or a family member and enjoy it without engaging in business, it could happen that the costs of operation make the entire project unprofitable. Although this does not appear in practice, we see no obstacle to establishing the right of usufruct (which can be registered), nor to registering a mortgage or fiduciary right while contracting the right to possess the real estate until the debt is repaid, whereby these last two options, it must be admitted, are simulations that are not in accordance with the legal system.
In practice, many foreigners have obtained consent, but even more have avoided any restrictions by conducting purchases through the establishment of their companies, which, according to the criteria of headquarters in Croatia, are domestic legal entities. Generally, the passivity of all authorities, who could have utilized many legal options, including annulling the decision on the registration of a company established solely as a cover for purchasing real estate, but did not do so, was a clear indicator of state policy.
Stateless persons without any rights
On November 29, 2001, Croatia signed the Stabilization and Association Agreement with the then EU and member states, which came into force on February 1, 2005. In the Agreement, which as an international treaty has force above the law, Croatia committed to abolishing restrictions for foreigners within four years of the Agreement coming into force, except for the exceptions listed in Annex VII of the Agreement, which pertains to agricultural land and, which is particularly legally clumsy and restrictive to our detriment, only that which is protected by the Nature Protection Act. This means that the latest amendment to the Law on Ownership is merely the implementation of our international obligation and that it is not in any real sense a novelty or something we could have avoided if we want to adhere to our obligations.
However, what could cause us problems is that the amendment does not use the same terminology as the Agreement, so instead of the Nature Protection Act, it uses the formulation ‘protected parts of nature according to special law’, which is not the same and it could happen that we have to adjust our system and include everything that is now quite ‘scattered’ into the Nature Protection Act, including forest land protected by the Forest Act. In this regard, it is quite inconvenient that due to the lack of reciprocity as a condition, the right to acquire ownership rights to real estate is now also held by a foreigner from an EU country where our citizens either cannot acquire those rights or must meet some special conditions, or those whose country blocks the negotiation process for EU membership.
On the other hand, for all those who are not EU members, the same procedure and the same conditions remain as before, with it being particularly interesting that so-called stateless persons (people without citizenship) cannot acquire the right to ownership of real estate in Croatia because they have no citizenship (not even EU citizenship), and there is no state that would allow the examination of reciprocity conditions.
Good and bad consequences
What should Croatian entrepreneurs, whether owners, investors, or just intermediaries, who count on foreigners as their potential clients in such businesses do? If the business is ongoing and if it concerns a foreigner who is an EU citizen, then it is reasonable not to engage in the procedure of obtaining consent, which objectively will not be completed in just over a month anyway – one should just wait, and it is clear that then contracts with foreigners from that group who no longer need consent will be validated or become legally valid.
All in all, from February 1, foreigners are divided into two large groups, one that has enormous rights (almost like locals) and the other that is formally quite limited (consent, reciprocity primarily), but which, like all, can relatively easily avoid those restrictions. When that is the case and when it is known that a huge number of properties are already in the hands of foreigners in one way or another, the problem is only of an academic nature without any real possibility of changing the situation. Even if it were different, the question is whether the solution lies in prohibitions or in a set of incentive measures that ensure benefits from foreign investments (taxes, jobs…), while preventing or at least mitigating the negatives, such as the emergence that in the center of Dubrovnik, except for the full season, almost no one lives and that we will experience that in some locations foreigners will be the majority of the formally registered population.
