The New Law on Foreign Investments Could Reduce Competitiveness

After many announcements, the Croatian Parliament has finally adopted the Law on the Review of Foreign Investments. With this law, Croatia joins countries that have established a mechanism for reviewing foreign direct investments (FDI), aimed at protecting security and public order. By enacting this law, the national framework aligns with European regulations (specifically, Regulation (EU) 2019/452) and simultaneously fulfills one of the key criteria for Croatia’s accession to the Organisation for Economic Co-operation and Development (OECD). We provide an overview of the key issues regulated by the Law: who are the obligated parties and foreign investors, which investments are subject to review, what the approval process looks like, and what the consequences of non-reporting or violation of obligations are.

Who Determines the Obligated Parties

The investment review system will not apply to all foreign investments, but exclusively to those related to traders or companies based in the Republic of Croatia, where the investment may affect the security or public order of Croatia, the EU, or the member states of the European Economic Area (EEA). These are strategically important sectors such as energy, transport, healthcare, water management and waste management, digital infrastructure and electronic communications, defense and dual-use goods, the financial system, media, agriculture and food supply, science and research, and the electoral system.

The Law stipulates the obligation of relevant ministries and other bodies designated by it to determine the obligated parties within their jurisdiction, maintain records, and regularly provide data to the Ministry of Finance. Responsible bodies also have the obligation to inform all defined obligated parties of their legal obligations. However, it seems that it will take a long time to determine who the obligated parties are. Namely, the Law provides that the Government must first adopt a regulation that will detail the relevant (sub)sectors and criteria for determining obligated parties. Responsible bodies should determine the obligated parties according to certain criteria only within a further period of six months.

Broad Definition of Foreign Investors

When it comes to individuals, foreign investors are all those who are not citizens of the Republic of Croatia or a member state of the European Economic Area, including individuals who, in addition to Croatian or EU member citizenship, also hold citizenship of a third country, as well as stateless persons. For legal entities, a foreign investor is considered to be any legal entity established under the laws of a third country, including trusts and similar entities, as well as legal entities established in Croatia or the EU or the European Economic Area that are under direct or indirect control of a foreign investor or public authority of a third country, as well as their subsidiaries, branches, and affiliated entities over which they exercise control or significant influence.

It is therefore irrelevant who is formally the investor. Even if, for example, a company established in the EU or the European Economic Area is listed as the acquirer of shares/stakes in the contract, the investment may be qualified as foreign if the control over that acquirer is outside the borders of the EU or the European Economic Area. An interesting case is that of Spain, which has introduced temporary measures to control investments from the EU and blocked the Hungarian acquisition of Talga, a Spanish company operating in the railway sector. According to media reports, there may be a background story in Hungary’s relations with Russia and the importance of the specific business for the war in Ukraine.

Which Investments Are Reviewed

Foreign investments are defined very broadly and include, among other things, any direct or indirect investment by a foreign investor that acquires or increases a qualified share (at least 10 shares/stakes, voting or property rights) or establishes a controlling position. Thus, foreign investments in existing companies (brownfield) and the establishment of new companies (greenfield), as well as changes occurring in the ownership structure or management through a reduction of the qualified share, are included.

The Law defines a controlling position broadly – as actual control over the obligated party, directly or indirectly, through ownership interest or other means. Thus, control may arise from a majority of voting rights in the obligated party, the right to appoint or dismiss a majority of members of the management or supervisory board, significant influence over key decisions, profit or asset distribution, entering into formal or informal agreements with the obligated party or its management members, etc. The review system also applies to concessions, public-private partnership contracts, activities in free zones, and generally to concentrations under competition protection regulations. Knowledge of the latter rules is particularly important given that the concept of concentration encompasses a wide range of legal transactions. Entrepreneurs will therefore need to be careful and check whether a specific legal transaction falls under ‘foreign investment’.

No Business Without Approval

The application for approval of a foreign investment is submitted by the foreign investor or the obligated party (i.e., the Croatian entity) to the Ministry of Finance before acquiring, increasing, or reducing a qualified share or before acquiring a controlling position. This establishes the so-called standstill obligation – without a decision from the Ministry of Finance, the legal transaction cannot be lawfully completed. Control bodies (commercial courts, SKDD, concession providers, AZTN) will perform the function of a control mechanism ex officio to prevent the completion of foreign investments without a prior review process.

To ensure coordinated action, entrepreneurs will need to adequately incorporate the need for obtaining approval into the structure of their legal transaction. Specifically, we are talking about defining preconditions without which the legal transaction cannot be concluded, similar to what is stipulated in the case of needing approval from the Competition Protection Agency or another body.

The Process in Several Stages

The process will be conducted in several stages. In the first stage, the Ministry of Finance checks the completeness of the application and may reject it if the foreign investor or responsible persons are on sanction lists or if there are reasons to suspect that they should be included. In the second stage, the relevant commission assesses the risk to security and/or public order, taking into account the ownership-control structure, connections with bodies of third countries, previous actions of the investor in the EU, the risk of illegal activities, opinions of the European Commission and member states, and relevant Government strategic acts.

Based on the commission’s opinion, the Ministry of Finance ultimately issues a decision to approve or reject the application. The Law speaks of a total period of 120 or 150 days from a complete application, but actual deadlines could be longer, especially considering the possibility of requesting additional information, as well as the fact that the Law does not provide as a consequence of the expiration of the deadline that the approval is considered granted. Compared to some other EU member states, the prescribed deadlines are relatively long and may negatively affect legal transactions (e.g., discourage future investors or cause existing investors to withdraw).

Since the Law came into force on November 13, 2025, it will primarily apply to all investments that need to occur after that date. However, it also provides for the possibility of reviewing those investments that were realized before its entry into force, which raises questions of legal certainty and possible consequences for already concluded legal transactions. The possibility of retroactive control will apply within three years from the entry into force of the Law.

Consequences of Non-Reporting

What if approval is not requested? Investments made without prior approval will be considered illegal, and the Ministry of Finance may ex officio initiate a review, for example, due to non-reporting, suspicion of evading rules, or changes in circumstances.

Previously issued approval may be revoked, and the investor may be ordered to divest, i.e., sell all shares, stakes, or property rights. From the enforceability of such a decision, the voting and property rights of the investor will generally be suspended. Such a restriction on the investor’s rights until the completion of the exit process from the investment may have negative effects on the company’s operations, especially considering that these are entities operating in strategically important sectors, where the risk is further exacerbated by the importance of resolving the issue of obtaining approval in accordance with the Law.

Period of Uncertainty

The introduction of the foreign investment review mechanism will affect the dynamics of the investment environment in Croatia. For entrepreneurs and investors, this means the need for a new approach to transaction planning – from early identification of the obligation to seek approval to contractually addressing regulatory risks. Long deadlines increase uncertainty, and it is particularly challenging that the Law comes into force before the adoption of implementing regulations, such as a regulation with a detailed list of covered sectors, and thus a list of obligated parties.

This means that a legal obligation will exist, but the obligated parties will not yet be clearly defined, placing the market in a period of uncertainty. The key challenge of the foreign investment review system will be balancing between protecting national security and preserving investment attractiveness. Croatia now has the opportunity to demonstrate that the regulatory framework can be predictable and effective, with clear implementing regulations and transparent communication with the market. Otherwise, a strict review regime could become a factor that slows down capital flows and reduces the competitiveness of the domestic economy.