Croatia taps potential of tax-break zone ahead of EU membership

VARAZDIN, Croatia – Five years ago, the Varazdin Free Zone was a sprawling vacant lot. Today it is bustling with activity as local and foreign investors rush to expand their production facilities. They are making use of incentives and tax breaks that have turned the zone into a rare success story in Croatia as it seeks to join the European Union and recover from nearly a decade of war and instability since independence in 1991. The zone was set up in 2001 by local officials hoping to attract investors who would employ some 1,500 workers laid off from a struggling local textile giant. Today it is home to 11 firms, five of them foreign – from Germany, Switzerland, Austria and France – employing 3,000 people and exporting goods worth 1.3 billion kuna ($222.5 million) last year. «This is with only half of the firms actually working. The others are still completing their facilities so we expect the numbers to increase further,» said Kresimir Mestric, the zone’s manager. Of the 15 free zones in Croatia, Varazdin, close to EU members Hungary, Slovenia and Austria, is the only one focused on production rather than wholesale or storage, he said. Varazdin, known for its baroque buildings and textile industry, is one of the few Croatian cities whose industry did not directly suffer from the war in 1991. Now, the whole of the surrounding Varazdin county is bent on facilitating business and is a model for the rest of the country, county governor Radimir Cacic, a businessman turned politician, said. «In two years, the free zone will have exports worth 500 million euros. That’s 10 percent of Croatia’s overall exports. But there is more work ahead now, on meeting the EU’s environment and waste management standards,» Cacic said. Against EU rules But despite huge interest from investors, the days of Varazdin’s tax advantages may be numbered because of EU rules, and no new free zones are planned. Instead, officials are planning entrepreneurship and business zones with more limited incentives. Croatia started EU entry talks last October, hoping to join around 2010, and it is closely watching developments in other East European states that joined the EU in 2004. Poland, the biggest of the 10 new members, had to revise rules and cut tax breaks in its economic zones to avoid a delay in membership talks with Brussels. Poland’s economic zones had attracted multimillion-dollar investments from Western firms, including giants like US General Motors and Toyota of Japan. In a statement to Reuters, the Economy Ministry said Croatia was aware the free zones would probably have to turn into industrial zones to comply with EU rules. But it had started negotiating with Brussels on «recognizing all the rights of current users of the zones for an undefined transition period.» «It is important that the government defend our position (in EU entry talks). The EU has no free zones but can acknowledge the existing situation,» Cacic said. For the moment, foreign and local firms in Varazdin enjoy a 50 percent lower income tax and can import goods without customs. Investment in infrastructure earns them a full income tax break for five years. In stark contrast to the rest of Croatia, where land ownership is still muddled, administration is slow and red tape abounds, Varzdin is focused on making business go as smoothly as possible. »What we sell investors is safety and reliability, with all paperwork taken care of. If you’re not able to reply to investor queries, in any language, within an hour, you are not competitive,» said Mestric. Marijan Nothig, executive director at GumiImpex, the only tire recycler in Croatia, was one of the first to come to the zone. His firm recycles some 18,000 tons of car tires a year and exports 95 percent of the rubber end-products to the EU. «We decided to use all the benefits and cheap land. We are very content, the plant is working around the clock and we plan to expand,» he said.

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