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The Croatian legal market is still a small one for international firms. However, within the sphere of international representation, the firms that dominate the market hail from Austria and have a strong base in Central and Eastern Europe (CEE)....

The Croatian legal market is still a small one for international firms. However, within the sphere of international representation, the firms that dominate the market hail from Austria and have a strong base in Central and Eastern Europe (CEE). In fact, a trend in recent times has seen offices of global firms in CEE either downsize or pullout. In the Croatian context, DLA Piper is a case in point. "The level of business in Croatia won't cause local offices [of international firms] to open up," one partner says, adding that, "apart from the regional powerhouses like Wolf Theiss, Schoenherr and CMS, which are an exception to the rule."

International firms do tend to maintain informal relationships with domestic firms and engage them in various mandates. When one considers the size of business that global firms are able to generate in Croatia, it is a pragmatic arrangement. Nevertheless, Croatia's impending EU membership does strengthen the position of international firms already present on the market, as they are better positioned than other firms to assist clients with the challenges and opportunities incidental to Croatia's upcoming accession. In terms of work, practitioners spend a lot of time restructuring loans and companies. "On the legal business side, it is great work to find," one practitioner says, while another states in contrast: "Work is not as enjoyable as before. It is better to create something new than repair something which is wrecked."

CONTEXT AND TRENDS Over the last year, Croatia's journey towards EU membership continued to gain momentum despite new instalments in its unresolved disputes with Slovenia, the latest of which prompted the neighbouring state to threaten to block membership in light of a banking dispute dating back to the collapse of Yugoslavia. Nevertheless, the country signed the accession treaty on December 9 2011 and is now set on becoming the 28th member state of the Union on July 1 2013....

Over the last year, Croatia's journey towards EU membership continued to gain momentum despite new instalments in its unresolved disputes with Slovenia, the latest of which prompted the neighbouring state to threaten to block membership in light of a banking dispute dating back to the collapse of Yugoslavia. Nevertheless, the country signed the accession treaty on December 9 2011 and is now set on becoming the 28th member state of the Union on July 1 2013. "We know from the EU experience of Romania and Bulgaria that there was a rush of money and then people were disappointed," one commentator says, adding that, "the market is smarter now and it does make Croatia more interesting. We will become more competitive."

In a similar vein, although in many ways independent of EU accession, there is excitement surrounding further investment into the Port of Rijeka and the possibility of it becoming a strong competitor to the Port of Koper in Slovenia. Apart from this, there isn't too much cheerfulness in the market as the state still has substantial liquidity problems. "Croatia is basically broke," one partner says, adding that, "the state will need to sell its assets." In fact, there has already been movement on this front as the government renewed its privatisation drive. The centre-left government has been proactive in this regard and plans to offload assets that include fertilizer company Petrokemija, insurer Croatia Osiguranje, and Croatian postal bank, Hrvatska Postanka Banka (HPB). "It's a very long list. The insurance company as a practical matter will be a big bite off the apple and there will be many," one partner says with another adding: "In the media, privatisation of 10-20 hotels and state owned companies was announced. It's a great opportunity for foreign investors. We're keeping our fingers crossed."

Apart from this awareness to finance the needs of the budget, the market has observed a reduction in the number of companies that are not operational, as significant debtors are a big source of illiquidity. There have also been changes to the tax regime and amendments to the Enforcement Act were delayed with the new government stepping in. "The tax administration is getting more difficult and investors know this. I hope there are no further increases," one partner says.

M&A over the last 12 months was slow and in fact it has been a tough environment for a number of years, with low volumes in terms of transactions. Renewable energy, an area full of promise, slipped back into dormancy. Nevertheless, there was finance work for firms and while new money was limited work centred on the expansion of existing loans and restructuring. "Money is tight, getting bank financing remains terribly difficult. More often, and it is a trend, most bank work tends to be on the workout side," one partner says. On the infrastructure side, a lot of interest has been generated but so far, not much has materialised. Nevertheless, recently, French companies Aeroports de Paris and Bouygues won the concession bid to finance, design and construct a passenger terminal to replace the current one and operate the Zagreb airport for 30 years.

MAJOR LEGISLATION CHANGES

Alterations to the Tax Law
In effect as of March 1 2012