1 Legislative and regulatory framework
1.1 In broad terms, which legislative and regulatory provisions govern alternative investment funds in your jurisdiction?
Alternative investment funds (AIFs) are governed by the Alternative Investment Funds Act (Official Gazette 21/2018, 126/2019). The act transposed Directive 2011/61/EU and Directive 2011/89/EU into Croatian law. The act further established preconditions for the implementation of the following EU regulations:
- Commission Delegated Regulation 231/2013;
- Commission Implementing Regulation 447/2013;
- Commission Implementing Regulation 448/2013;
- Commission Delegated Regulation 694/2014;
- Regulation 345/2013; and
- Regulation 346/2013.
The AIF Act is supplemented by a number of ordinances enacted by the Croatian Financial Services Supervisory Agency (HANFA), which elaborate on its provisions (eg, types of AIFs, damages to investors, regulatory capital (sum of initial capital and own funds), shares of AIFs, depositary, authorisation of AIF managers (AIFMs)). Furthermore, HANFA and AIFMs must act in accordance with the mandatory guidelines adopted by the EU supervisory bodies (hereinafter referred to as ‘subordinate regulations').
1.2 Do any special regimes or provisions apply to specific types of alternative investment funds?
The Ordinance on the Types of AIFs (Official Gazette 28/2019) prescribes the types of AIFs which can be incorporated in Croatia and the rules applicable to each different type. The ordinance distinguishes between AIFs with public and private offerings, which may be incorporated as open-ended or closed-ended AIFs. Closed-ended AIFs can further be established with or without legal personality. When incorporating a closed-ended AIF with legal personality, the provisions of the Companies Act must be observed.
The type of AIF is relevant when deciding on issues such as:
- the types of investors at which the AIF will be targeted;
- how the assets of the AIF may be invested; and
- applicable investment restrictions.
AIFs with private offering may take the following forms:
- private equity funds;
- venture capital funds;
- AIFs for investment in real estate;
- funds of funds;
- hedge funds;
- specialised AIFs;
- European venture capital funds, which are governed by Regulation (EU) 345/2013; and
- European social entrepreneurship funds, which are governed by Regulation (EU) 346/2013.
1.3 Do the legislative and regulatory provisions governing alternative investment funds have extra-territorial reach?
The AIF Act contains provisions with extra-territorial reach, analogous to the rules included in Directive 2011/61/EU. Croatian AIFMs can generally manage and market the shares of AIFs incorporated:
- in Croatia or another EU member state (‘EU AIFs'); or
- in a third country (‘non-EU AIFs'), subject to further notification to HANFA and as long as they comply with the AIF Act.
The same rules apply to EU AIFMs intending to manage or market the shares of Croatian incorporated AIFs. More stringent provisions govern non-EU AIFMs, which are subject to further authorisation by HANFA where they intend to manage or market the shares of EU or non-EU AIFs within the European Union. The AIF Act sets out further conditions that must be fulfilled and documents that must be submitted to HANFA in order for AIFMs to provide notification or obtain authorisation for management or marketing in such situations. Small and medium AIFMs, as defined in questions 4.1 and 4.2, cannot manage or market the shares of non-Croatian AIFs, so the provisions outlined herein are relevant only for large AIFMs.
1.4 Are any bilateral, multilateral or supranational instruments in effect in your jurisdiction of relevance to alternative investment funds?
The Foreign Account Tax Compliance Act (FATCA) Agreement between the Government of Republic of Croatia and the Government of the USA to Improve International Tax Compliance and to Implement FATCA is relevant in this regard.
1.5 Which bodies are responsible for regulating alternative investment funds in your jurisdiction? What powers do they have?
HANFA is authorised to implement and supervise the AIF Act, other applicable regulations and subordinate regulations as set out in question 1.1. Specific authorities and powers granted to HANFA are regulated in more detail by the Croatian Financial Services Supervisory Agency Act (Official Gazette 140/2005, 154/2011, 12/2012).
Supervision also includes the authority to impose administrative measures such as the following in case of breach:
- formal notice;
- orders to remedy illegalities and irregularities;
- special supervisory measures, such as an increase in capital or dismissal of members of the management or supervisory board; and
- annulment of authorisations.
HANFA is also authorised, among other things, to:
- adopt implementing provisions regulating the capital markets, investment and other types of funds, and pension and insurance funds;
- issue and annul permits, authorisations, licences and consents in accordance with the respective provisions;
- organise and supervise measures for the effective functioning of the financial markets;
- propose initiatives to adopt provisions to regulate the financial markets and financial services; and
- inform the public on the principles under which the financial markets operate.
1.6 To what extent do the regulators cooperate with their counterparts in other jurisdictions?
HANFA and other Croatian supervisory bodies are obliged to deliver all data on subjects under their supervision upon request to the supervisory bodies of other EU member states. Supervisory bodies are obliged to inform each other of all determined irregularities and other circumstances of importance for the performance of their duties.
HANFA also cooperates with competent bodies of other member states, the European Securities and Markets Authority (ESMA) and the European Systemic Risk Board (ESRB). HANFA shall, on its own initiative or upon request, deliver to these bodies information of importance for the performance of their duties. HANFA may also request information from competent bodies relevant for the performance of its own duties. Supervisory bodies shall also cooperate where this is necessary to analyse the business of a particular entity or to conduct other investigative measures.
If HANFA has clear and justifiable reasons to suspect that an AIFM which is not subject its supervision is acting or has acted contrary to the provisions transposing Directive 2011/61/EU into national law, it shall inform ESMA and the competent bodies of the AIFM's home member state and host member state accordingly.
HANFA will also exchange information with the competent bodies of other member states where relevant in monitoring and responding to possible consequences that the business of individual AIFMs or AIFMs in general may have for the stability of systematically important financial institutions and for the proper functioning of markets in which the AIFMs are conducting business. This information will be delivered to ESMA and the ESRB.
2 Form and structure
2.1 What types of alternative investment funds are typically found in your jurisdiction?
Under Croatian law, alternative investment funds (AIFs) may be either AIFs with public offerings or AIFs with private offerings.
AIFs with public offerings include a sub-category for investment in real estate and are governed by specific rules.
AIFs with private offerings are divided into the following categories:
- private equity;
- venture capital;
- AIFs for investment in real estate;
- funds of funds;
- hedge funds;
- specialised AIFs;
- European venture capital funds; and
- European social entrepreneurship funds.
2.2 How are these alternative investment funds typically structured?
AIFs with public and private offerings can be structured as open-ended or closed-ended AIFs.
Open-ended AIFs are defined as separate assets, without legal personality, incorporated and managed by an external AIF manager (AIFM) in its own name and for the account of investors. The units or shares of open-ended AIFs may be redeemed at the request of the investors, according to the procedures and frequency set out in the AIF's rules or documents of incorporation, prospectus or offering documents.
Closed-ended funds may be incorporated:
- with legal personality, in which case the AIF is incorporated as a legal person in the form of a limited liability company or joint stock company and can be managed externally (by an AIFM) or internally (by the management board); or
- without legal personality, defined as separate assets without legal personality incorporated and managed by the AIFM in its own name and for the account of investors; although units and shares of the AIF are not redeemable on the investors' request.
2.3 What are the advantages and disadvantages of these different types of structures?
The structure of the AIF will determine which set of rules will apply; the applicable rules may be more or less flexible. The structure will also determine:
- the types of investors that may be targeted;
- investment restrictions;
- the types of assets in which investment is permitted; and
- other circumstances relevant to the investment strategy of each AIF. For instance:
- open-ended AIFs must be externally managed, while closed-ended funds may be externally or internally managed;
- AIFs with public offerings may be marketed to retail investors and professional investors, while AIFs with private offerings may be marketed only to professional investors and qualified investors; and
- AIFs with public offerings may only hold assets consisting of, for example, securities offered to the public or admitted to trading in Croatia or other EU member states or third countries; while AIFs with private offerings may hold any types of assets permitted under the AIF's rules, provided that they accord with the AIF's investment strategy and objectives.
On a general note, AIFs with public offerings are more stringently regulated, especially when it comes to investments and applicable restrictions thereto.
2.4 What are the most widely used alternative investment funds structures used in your jurisdiction?
The latest available statistics from the Croatian Financial Services Supervisory Agency and reflecting the situation in November 2019 indicate that most AIFs are incorporated as AIFs with private offerings. Out of 36 AIFs, just four are incorporated as AIFs with public offerings. Out of 32 AIFs with private offerings, there are:
- 10 base with private offerings;
- 15 special with private offerings;
- six private equity (out of which one is open-ended with private offerings and five are open-ended funds for economic cooperation); and
- one closed-ended with private offerings.
2.5 Is there a preferred alternative fund structure for particular investment strategies (ie, hedge fund/private credit/private equity)?
The Ordinance on the Types of AIFs provides for ex ante categorisation of AIFs with private offerings by the nature of their investments, which should therefore be based on these provisions. The ordinance also foresees closed-ended AIFs with public offerings for investment in real estate. As for other AIFs, categorisation should be undertaken on an ex ante basis and determined in the prospectus or the rules; but the final decision on the specific type of AIF is at the discretion of the founders.
The categorisation provided ex ante by the applicable provisions of AIFs with private offerings is as follows:
- Private equity: Assets are predominantly invested in business entities with the objective of optimising their business and financial performance in anticipation of a return on funds invested.
- Venture capital: Assets are predominately invested in start-ups that show potential for growth and expansion.
- Specialised AIFs for investment in specific industries: These may include sustainable development, energy or technology, or specific assets such as artwork, jewellery or gemstones.
- European social entrepreneurship funds: These are AIFs that intend to invest at least 70% of their assets in social entities (ie, entities which have social objectives as their aim rather than the simple maximisation of profits).
- Closed-ended AIFs with public or private offerings for investment in real estate: The assets of these AIFs are predominately comprised of real estate and they can invest only in defined types of assets.
- Funds of funds: These are AIFs that primarily invest in the shares or units of other AIFs.
2.6 Are alternative investment funds required to have a local administrator appointed?
AIFs in Croatia can be externally or (in the case of closed-ended AIFs) internally managed. If managed externally, a separate legal person (AIFM) must be established; if managed internally, the AIF's management board is responsible for its management. Management includes:
- incorporation of the AIF;
- asset and risk management;
- administrative services; and
Administrative services include, among others:
- legal and accounting services;
- assessment of the AIF's assets; and
- determination of the price of units or shares.
Certain types of AIFMs, as explained in question 4.2, may also perform auxiliary services, such as portfolio management, investment consulting and repository and administration with respect to units or shares of investment funds. Closed-ended AIFs with internal management cannot perform any activity other than management of the AIF.
The AIF Act, in line with the EU rules, prescribes that EU AIFMs can manage AIFs in EU member states other than their home member state, provided that they are authorised by the competent body of the respective member states or establish branches in those other member states. This also applies for non-EU AIFMs, provided that they are authorised by the reference state. This means that non-local AIFMs can perform management services in Croatia.
Lastly, AIFMs can outsource certain specified services, but not to the extent that they become a dormant company. The AIF Act prescribes certain conditions that must be fulfilled by the company to which the services are outsourced, such as necessary qualifications and expertise.
However, given that the effective performance of legal and accounting services also demands knowledge of local law, AIFMs should delegate these services to local advisers. This may also apply to other activities.
2.7 Are alternative investment funds required to appoint a local custodian to hold assets? If yes, what legal protections are in place to protect the alternative investment fund's assets?
Under the AIF Act, for every AIF under management and incorporated in Croatia, the AIFM must designate a credit institution with a seat in Croatia, or a Croatian branch office of a credit institution from an EU member state or non-EU state, as a depositary.
Where an AIFM established in Croatia manages an AIF incorporated in another EU state, it must designate a depositary established in the home member state of the AIF. Likewise, where it manages an AIF incorporated in a non-EU state, it must designate a depositary established in the respective state or in Croatia. Alternatively, where Croatia is a state of reference for non-EU AIFMs, the depositary for those non-EU AIFs under management must have its seat in either the home member state of those AIFs or Croatia.
2.8 Is it possible for an alternative investment fund to redomicile to your jurisdiction? If yes, what considerations are required and what are the steps involved?
There are no express provisions regarding the redomiciliation of AIFs to Croatia. This may be explained by the fact that Croatia does not provide for the redomiciliation of companies. However, an effect similar to redomiciliation can be achieved through cross-border mergers and acquisitions of AIFs, regulated by the Ordinance on Status Changes to AIFs without Legal Personality and Conditions for Changes to Distinctiveness and Type of AIFs (Official Gazette 20/2019).
Following a status change, the AIF transferor ceases to exist without any need to conduct a liquidation procedure; while its assets, rights and obligations are transferred to the newly incorporated AIF or to an existing AIF. Investors in the AIF transferor acquire shares or units in the AIF transferee. Status changes are governed by the law of the home member state of the AIF transferor.
Further to the above, where an AIF is structured as a closed-ended fund with legal personality, it is incorporated as a joint stock company or limited liability company, and thus the provisions of the Companies Act (Official Gazette 111/1993, 34/1999, 121/1999, 52/2000, 118/2003, 107/2007, 146/2008, 137/2009, 111/2012, 125/2011, 68/2013, 110/2015, 40/2019) will apply. The Companies Act sets out rules on cross-border mergers and acquisitions that correspond to the above-described rules. Mergers and acquisitions take effect as of registration of the status change in the relevant court register.
3.1 Must alternative investment funds be authorised or licensed in your jurisdiction?
Yes, before an alternative investment fund (AIF) can be established, the Croatian Financial Services Supervisory Agency (HANFA) must issue authorisation for its establishment and management. HANFA authorisation is a precondition for the incorporation of AIFs without legal personality (both closed-ended and open-ended). For the incorporation of closed-ended externally managed AIFs with legal personality, the provisions regulating the authorisation of AIFs without legal personality shall apply accordingly; but some additional documents must also be submitted, since such AIFs are incorporated in the form of a joint stock company or limited liability company. With respect to closed-ended internally managed AIFs with legal personality, provisions regulating the authorisation of AIFs and AIF managers (AIFMs) shall apply accordingly.
3.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
Before an AIF requests authorisation, all formalities necessary for its operation must be fulfilled. The documents to be submitted with the request include:
- the AIF's rules or prospectus;
- its investment strategy;
- the risk profile;
- data on the master AIF, if the AIF to be incorporated is a feeder AIF;
- the agreement with the depositary, including the depositary's consent where this is required by law, and other documents as requested by special ordinance;
- proof that the AIF complies with the organisational requirements set out in the AIF Act; and
- details of capital maintenance.
In addition to the above, where a closed-ended AIF is externally managed, the AIFM must further submit:
- the articles of association;
- the decision on the appointment of supervisory board members, if applicable; and
- the management agreement with the external AIFM.
The request for authorisation shall be rejected if:
- the AIFM has not entered into an agreement with the depositary;
- the AIF's rules or prospectus is contrary to the provisions of the AIF Act;
- the AIFM does not fulfil the conditions for management of the respective type of AIF; or
- the AIFM does not have the appropriate organisational structure.
In the case of closed-ended AIFs with internal management, the requisite documentation for authorisation of an AIFM must be submitted simultaneously with the request for authorisation of the AIF. The request for authorisation shall be rejected if:
- the AIF does not comply with the provisions that regulate its form, shares or capital;
- there is a close link which makes supervision difficult or impossible; or
- supervision is difficult due to the applicability of third-country provisions regulating one or more natural or legal persons with close links to the AIF.
3.3 What is the process for obtaining authorisation of alternative investment funds and how long does this usually take?
Upon receipt of a request for authorisation, HANFA will review all documentation received and verify that all conditions have been fulfilled. If some documents have been omitted or if irregularities are determined, HANFA will specify an additional deadline for rectification thereof. In practice, HANFA reviews all documentation in detail and engages in negotiations with the AIFM or founders to amend the documents as necessary pursuant to the applicable statutory provisions. Once all documents have been harmonised with the statutory provisions, HANFA will decide whether to grant authorisation accordingly.
The AIF Act does not specify a deadline within which a decision must be issued. However, in accordance with the Croatian Financial Services Supervisory Agency Act, all issues not expressly regulated therein shall be governed by the General Administrative Procedure Act (Official Gazette 47/2009). Under that act, a decision should be issued and delivered to a party within 60 days of submission of a complete request containing everything prescribed by law. However, HANFA considers that this timeframe begins to run only once (in its opinion) the request and accompanying documents are complete and in accordance with the applicable provisions.
4 Management and advisory relationships
4.1 How are alternative investment fund managers and advisers typically structured in your jurisdiction?
Alternative investment fund managers (AIFMs) must be established as a joint stock company or limited liability company with its seat in Croatia, in accordance with the Companies Act. The AIF Act prescribes rules specific to AIFMs which must be observed and which prevail over those of the Companies Act, such as rules on capital and members of the management and supervisory boards. An AIFM can also be established as Societas Europaea or as a branch office of an AIFM from an EU or non-EU state.
AIFMs can conduct their activities as external AIFMs managing one or more AIFs or as an internal AIF where the management board of the AIF, with the consent of the supervisory board, decides not to appoint an external AIF.
AIFMs can be further divided into small, medium and large AIFMs, depending on the value of assets under management, with respect to either one or more AIFs. Generally:
- small AIFMs manage cumulative leveraged AIFs with a total value below HRK 75 million;
- medium AIFMs manage cumulative leveraged AIFs with a total value of between HRK 75 million and 750 million, or unleveraged AIFs with a total value of up to HRK 3 billion; and
- large AIFMs manages cumulative leveraged AIFs with a total value of between HRK 750 million and 750 billion, or unleveraged AIFs with a total value of between KRK 3 billion and 3.75 trillion, and where investors cannot redeem their shares or units within five years of the investment start date.
Additionally, AIFMs managing AIFs marketed to retail investors must be established as large AIFMs, irrespective of the value of assets under management.
4.2 What are the advantages and disadvantages of these different types of structures?
Decisions on the structure will depend on the interests of the founders. Some basic rules of the AIF Act apply to all categories (small, medium and large AIFMs); but as the value of assets under management increases, the AIFM becomes subject to more detailed regulation. Meanwhile, certain options are not available to AIFMs that are smaller in both size and capital worth.
For example, small and medium AIFMs cannot:
- perform auxiliary services, as explained in question 4.10;
- manage or market the shares of AIFs in another EU member state or third country;
- market the shares of non-EU AIFs in the European Union; or
- use leverage or acquire control over unlisted companies.
However, small and medium AIFMs are also more flexible, in that:
- they can appoint only one management board member (instead of the two that are mandatory for large AIFMs);
- they are not subject to a provision requiring them to contribute an additional amount of capital where certain prescribed conditions are fulfilled;
- they need not establish a remuneration policy; and
- small AIFs need not establish a compliance function, internal audit function or risk management system.
As regards capital requirements:
- large AIFMs must contribute capital in a minimum amount of HRK 2.4 million for closed-ended AIFs with internal management or HRK 1 million for external management;
- medium AIFMs must contribute capital in a minimum amount of HRK 1.8 million for closed-ended AIFs with internal management or HRK 750 million for external management; and
- small AIFMs must contribute capital in a minimum amount of HRK 1.2 million for closed-ended AIFs with internal management or HRK 500 million for external management.
In all cases the shares must be paid up in full in cash before registration with the court registry.
4.3 Must alternative investment fund managers be authorised or licensed in your jurisdiction?
AIFMs must be authorised by the Croatian Financial Services Supervisory Agency (HANFA) before they are registered with the competent court registry and thereby established. Authorisation is issued for an indefinite period, cannot be transferred and is not valid for the legal successor of an AIFM. The request for authorisation must be submitted by the founders of the AIFM. The request for authorisation can also be submitted for an existing joint stock company or limited liability company, in which case the request must be submitted by the management board members. As explained in question 3.2, when incorporating a closed-ended AIFs with internal management, HANFA shall issue authorisation for both the AIFM and the AIF in a single procedure, and the request must be supported by all documentation required for the authorisation of both.
Large AIFMs can also provide auxiliary services such as portfolio management, investment consulting and repository and administration with respect to the units or shares of investment funds, in which case authorisation must also be requested for the provision thereof. A separate request is not required for the provision of auxiliary services. An AIFM may widen the scope of its activities after incorporation, but must submit a request for authorisation before such activities are registered with the court registry.
4.4 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
HANFA shall issue authorisation if all provisions relating to the following are fulfilled:
- the shares of the AIFM;
- the minimum capital of the AIFM;
- the holders of qualified shares;
- close links;
- management and supervisory board members; and
- organisational requests.
Potential management board members of AIFMs and closed-ended AIFs with internal management and supervisory board members must meet conditions prescribed by the AIF Act and subordinate regulations, and must be authorised by HANFA before being appointed. The management board must have at least two members for large AIFMs, but only one member for medium and small AIFMs, appointed for a maximum period of five consecutive years. Qualified shareholders must also meet certain conditions in order to be entitled to acquire qualified shares of AIFMs, as explained in question 4.8, and must be approved by HANFA. The conditions regarding the shares and capital of AIFMs are set out in questions 4.1. and 4.2. Lastly, AIFMs must implement an organisational structure that is appropriate with respect to the types of AIFs under management and covering issues such as:
- the adoption of decisions;
- administrative and accounting practices;
- supervision and protection measures for information systems; and
- procedures to ensure appropriate investment of assets.
In practice, this means that before the request for authorisation is submitted, all documents relevant for the establishment and conduct of business must be prepared and adopted - where necessary, before a public notary; and all persons that will be effectively conducting the business fulfil all prescribed conditions.
4.5 What is the process for obtaining authorisation and how long does this usually take?
HANFA must decide whether to grant authorisation within three months of receipt of a full complete request containing everything prescribed by law. This deadline may be extended for an additional three months where HANFA deems this necessary due to the specific circumstances of the individual case.
4.6 What other requirements or restrictions apply to alternative investment fund managers and advisers in your jurisdiction?
With respect to operating conditions, an AIFM must establish, implement and maintain policies and procedures that include the following:
- an effective policy on conflicts of interest;
- policies and procedures to ensure that the AIFM is conducting its business in accordance with all mandatory provisions;
- policies and procedures for the management of risks to which the AIFM or AIFs under management are exposed, including assessment of the credit ratings of entities in which the AIFM plans to invest its own assets or the AIFs' assets;
- the maximum level of leverage which they may employ on behalf of each AIF under management, as well as the extent of the right to reuse collateral or guarantees that could be granted under the leveraging arrangement;
- measures to reduce exposure to securitisation if that is in the best interests of investors and if the securitisation does not fulfil the conditions prescribed by Regulation 2017/2402;
- an appropriate liquidity management system for each AIF under management which is not an unleveraged closed-ended AIF;
- procedures to facilitate the uninterrupted and regular conduct of business;
- remuneration policies which promote and maintain effective risk management; and
- clear and transparent procedures on document management and the archiving of all documents relating to the conduct of business.
The implementation of the measures and procedures listed above will depend on the type, scope and complexity of the activities conducted by the AIFM, as well as the investment strategies and the value of assets under management. Thus, the obligation to implement them and the contents thereof will vary on a case-by-case basis.
4.7 Can an alternative investment fund manager impose restrictions on the issue, redemption or transfer of interests in the funds under management?
The shares of closed-ended AIFs with legal personality can be issued and transferred in accordance with the provisions of the Companies Act. In general, the shares of both types of companies are freely transferable, but the articles of association may impose various restrictions on such transfer. New shares may be issued through an increase of capital of AIFs, based on the decision of the shareholders.
In general, the shares of AIFs without legal personality are freely transferable, whether by way of sale or encumbrance. However, shares may be transferred only to eligible investors in AIFs, and any additional rules and conditions on the transfer of shares imposed by the AIF's rules or prospectus must be fulfilled.
Closed-ended AIFs by their nature restrict the possibilities for the redemption of shares. Shares of open-ended AIFs are redeemable upon the request of the investor, provided that all conditions set out in the AIF's rules or prospectus are fulfilled. The AIF's rules may impose certain restrictions on redemption to ensure liquidity, such as side pockets, lock-up periods or gates. An investor may request redemption of shares provided that it is entitled to freely dispose thereof.
Under the AIF Act, the redemption and issuance of shares may be suspended by the AIFM and the depositary if there are justifiable reasons and such suspension is in the interests of investors or potential investors. HANFA may order a suspension for the same reasons. The suspension must be lifted as soon as possible and in any case after 28 days, although this deadline may exceptionally be extended by HANFA.
4.8 Are there any requirements regarding the ownership of alternative investment fund managers? If so, please provide details.
In order to acquire qualified shares in AIFMs, certain conditions must be met. Under the AIF Act, a ‘qualified share' is any direct or indirect share in an AIFM representing 10% or more of the share capital or voting rights, or a smaller share allowing the holder to exercise significant influence over the management of the AIFM. The AIF Act does not contain provisions regulating such conditions, but refers to the Act on Open-Ended Funds with Public Offerings (Official Gazette 16/2013, 143/2014, 44/2016.). HANFA will authorise the acquisition or transfer of a qualified share in an AIFM if it makes a positive assessment of the appropriateness, suitability and financial stability of the qualified shareholder, taking into account:
- its reputation;
- the reputation and experience of the persons proposed by the qualified shareholder of the qualified shares as management or supervisory board members;
- the financial stability of the qualified shareholder;
- whether it will be possible for the AIFM to continue to comply with mandatory provisions, and especially whether the AIFM has the necessary structure for effective supervision; and
- whether there is a justified suspicion that shareholders or qualified shareholders of the AIFM have committed or attempted to commit criminal offences of money laundering or terrorist financing.
HANFA shall make this assessment based on the documents delivered with the request for authorisation of the AIFM or before registration of the qualified shareholder with the court registry, which is a precondition for the acquisition of a share in an AIFM.
4.9 Can alternative investment fund managers delegate to third-party investment managers or investment advisers? If yes, please provide details of any specific requirements.
An AIFM may delegate its activities to a third party, provided that it has previously informed HANFA accordingly. If the AIFM has AIFs with public offerings under management, asset and risk management and valuation of the AIF's assets may be delegated only with the prior authorisation of HANFA. Delegation must be based on a written agreement which contains an express provision obliging the third party to enable supervision by HANFA.
Certain conditions must be met for the delegation to be valid - for example:
- the third party must have the necessary expertise and qualifications;
- the delegation may not leave the AIFM as a ‘letterbox' company;
- activities cannot be delegated to a third party where there is a conflict of interest;
- the delegation cannot jeopardise the interests of investors;
- the AIFM must remain fully liable for the conduct of delegated activities; and
- asset and risk management can be delegated only to entities that hold appropriate authorisation or other permit and are subject to supervision (otherwise, the delegation must be authorised by HANFA).
Moreover, asset and risk management cannot be delegated to the depositary, an entity to which the depositary has delegated part of its activities or another entity whose interests may conflict with those of the AIFM, the AIF or investors, unless such entity separates asset and risk management from the other activities it conducts.
In general, when delegating, the AIFM must act with all necessary expertise and diligence, and in the best interests of investors.
4.10 Can alternative investment fund manager provide investment management services to clients other than alternative investment funds? If yes, do any additional requirements apply?
Only large AIFM (as defined in question 4.2) may provide auxiliary services such as portfolio management, investment consulting and repository and administration with respect to units or shares of investment funds. From the wording of the relevant provision, it may be concluded that such services may be provided to third parties where this accords with the provision in Directive 2011/61/EU stating that external AIFMs should not be prevented from additionally providing the service of management of investment portfolios under mandates given by investors on a discretionary, client-by-client basis.
When providing such services, the AIFM must observe the provisions regulating the financial markets. The AIFM can also manage undertakings for collective investment in transferable securities (UCITS) funds, provided that it has been authorised by HANFA in accordance with the law regulating the management of UCITS funds; and for investment funds incorporated under special regulations if authorised by HANFA in relation thereto.
An entity that is not authorised to provide services relating to the management of AIFs cannot be authorised under the AIF Act to provide auxiliary services. An AIFM that is not authorised to provide portfolio management services cannot be authorised to provide services relating to investment consulting and repository and administration.
5.1 Is the marketing of alternative investment funds subject to authorisation in your jurisdiction?
The marketing of the shares and units of alternative investment funds (AIFs) may be subject to further notification or authorisation by the Croatian Financial Services Supervisory Agency (HANFA), depending on whether the AIFs or the AIF manager (AIFM) is an EU or non-EU body and whether it operates under the European passport or another authorisation equivalent to the European passport.
5.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
The criteria for marketing will vary on a case-by-case basis. Croatian AIFMs can market the shares of Croatian AIFs without further notification or authorisation.
However, Croatian AIFMs that intend to market the shares of EU AIFs must notify HANFA and submit:
- a programme of planned activities;
- the AIFs' rules;
- information on the depositary; and
- mechanisms to prevent the marketing of shares to retail investors.
This information must be submitted to HANFA where a Croatian AIFM intends to market the shares of non-EU AIFs. In specified cases, HANFA will inform the AIFM of whether it can begin marketing shares; HANFA will forbid this where the management of the AIFs or the AIFM itself does not comply with the AIF Act.
A non-EU AIFM that intends to market the shares of AIFs must obtain authorisation from HANFA if Croatia is a state of reference. HANFA shall reject such authorisation if any of the following conditions is not fulfilled:
- Croatia is chosen as a state of reference;
- The AIFM has appointed a legal representative in Croatia;
- The legal representative, together with the AIFM, is the contact person for investors, the European Securities and Markets Authority, HANFA and supervisory bodies of other member states;
- The legal representative is qualified to perform the function of compliance with the AIF Act;
- Cooperation has been established between Croatia, and the home states of the AIFs and AIFM;
- The AIFM's home state has not been listed as uncooperative;
- The AIFM's home state has signed an agreement with Croatia regarding tax issues; and
- HANFA's supervisory powers are not precluded by the laws of the third country.
5.3 What is the process for obtaining authorisation and how long does this usually take?
The provisions governing the authorisation of AIFMs incorporated in Croatia shall apply accordingly, meaning that the procedure must be completed within three months of submission of a full complete request; this deadline may be extended for an additional three months by decision of HANFA in specific circumstances.
In addition, where HANFA determines that Croatia has been chosen as a reference state, it must inform the European Securities and Markets Authority (ESMA) thereof and request advice on its assessment. The deadline for completion of the authorisation procedure shall be extended until HANFA receives this advice from ESMA.
5.4 To whom can alternative investment funds be marketed?
The types of investors that may be targeted by an AIF are determined on the basis of the type of AIF in question. AIFs with public offerings may be marketed to retail investors or professional investors, or to investors that request to be treated as professional investors. AIFs with private offerings may be marketed only to professional investors or qualified investors or investors that request to be treated as professional investors. Shares covered by those provisions of the AIF Act that have extraterritorial reach - that is, shares for which notification or authorisation is required as set out in question 5.2 - may be marketed to professional investors only.
5.5 What are the content criteria that marketing materials for alternative investment funds must satisfy?
All marketing materials intended for investors or potential investors in AIFs for the purpose of raising capital must be clearly recognisable as marketing materials. The content of such marketing materials must be unambiguous, accurate and not misleading. The marketing materials cannot be contrary to the AIFs' rules and prospectus, where applicable. The marketing materials must contain information as to where, how and in which language the AIFs' rules and prospectus are available.
AIFs with private offerings cannot be publicly advertised for the purpose of attracting potential investors. Highlighting presentation material in public, whereby only the name and business activities of the AIFM are indicated, in order to refer potential investors to the AIFM is not considered to constitute a public advertisement.
The marketing materials for AIFs with private offerings and the AIFMs that manage them must be complete, unambiguous, accurate and not misleading. They must:
- contain up-to-date information on the business results of AIFs;
- reflect the business results as of the AIFs' incorporation or at least for the last five years;
- be compiled on a consistent basis; and
- not be presented in a way that suggests the data is indicative of future business results.
5.6 What other requirements or restrictions apply to marketing materials for alternative investment funds?
5.7 Can alternative fund managers from other jurisdictions market alternative investment funds in your jurisdiction without authorisation?
As explained in question 5.2, EU AIFMs can market the shares of EU or non-EU AIFs subject to further notification of HANFA; while non-EU AIFMs can market the shares of EU or non-EU AIFs subject to further authorisation by HANFA.
5.8 Is the appointment of local marketing entities required in your jurisdiction?
5.9 Is it possible to market alternative investment funds to retail investors in your jurisdiction? If so, are there specific requirements?
Croatian or EU AIFMs intending to market the shares of AIFs under management to retail investors must obtain prior authorisation from HANFA. In each individual case HANFA must determine whether the AIFs may be regarded as AIFs whose shares can be marketed to retail investors under the Ordinance on the Types of AIFs. AIFMs intending to market to retail investors the units or shares of EU AIFs in Croatia must ensure that all conditions necessary for the following activities are satisfied:
- paying investors;
- transferring and redeeming shares or units;
- publishing documents and information with respect to the AIFs and their delivery to investors acquiring shares in Croatia; and
- settling investors' claims.
The AIFM can distribute only the shares of non-EU AIFs whose investors have at least the same level of protection as investors in AIFs with public offerings incorporated in Croatia.
Only AIFs with public offerings can be marketed to retail investors.
The AIF Act provides that appropriate measures preventing marketing to retail investors must be implemented in the following cases:
- where Croatian AIFMs manage and market the shares and units of EU AIFs;
- where Croatian AIFMs manage and market the shares and units of non-EU AIFs or Croatian or EU feeder AIFs under the European passport;
- where non-EU AIFMs manage and market the shares and units of Croatian, EU or non-EU AIFs in Croatia as their state of reference; and
- where non-EU AIFMs that have Croatia as their state of reference market the shares and units of EU or non-EU AIFs in the European Union.
6 Investment process
6.1 Do any investment or borrowing restrictions apply to the portfolios of alternative investment funds?
Investment restrictions and allowed investments are discussed in the Ordinance on the Types of Alternative Investment Funds (AIFs). Investment restrictions in general determine the maximum percentage of net value of the AIF's assets that must be invested in certain assets and/or instruments. Special rules govern restrictions with respect to:
- index replication;
- securities or financial market instruments issued or guaranteed by public bodies;
- shares or units of investment funds; and
- the prevention of a significant impact on investors.
Different criteria apply depending on the type of AIF.
With regard to private equity, at least 70% of the AIF's assets must be invested in equity or equity-like interests, while no more than 30% can be invested in other assets. The AIFM can borrow and issue debt securities or guarantees only if the types and restrictions thereof are prescribed by the AIF's rules.
With respect to venture capital, at least 70% of the AIF's assets must be invested in:
- equity or equity-like instruments issued by entities that fulfil certain conditions prescribed in the ordinance;
- secured or unsecured loans issued by AIFs to entities (provided that these do not exceed 30% of the AIF's value);
- company shares acquired by existing shareholders; and
- shares of other venture capital AIFs (provided that those AIFs themselves have not invested more than 10% of their capital in other venture capital AIFs).
At least 70% of the net value of specialised AIFs must be invested in the specific area determined as the object of the AIF's investments.
6.2 Are there any specific legal or regulatory requirements regarding investments in particular assets?
There are no specific rules in the legislative and regulatory provisions governing AIFs. However, when making a particular investment, the rules applicable to the respective assets must be observed.
7 Reporting, governance and risk management
7.1 What key disclosure requirements apply to alternative investment funds in your jurisdiction?
Alternative investment fund managers (AIFMs) must compile an annual report for each EU AIF under management and for each AIF whose shares or units it is marketing in the European Union. At minimum, the annual report must contain data on:
- the AIF's assets and liabilities;
- its revenues and expenses;
- its business activities in the financial year;
- material changes to its rules and information distributed to investors; and
- the remuneration policy.
The AIFM must further compile a semi-annual report that includes at least data on the AIF's assets and liabilities, and revenues and expenses. The accounting information given in the annual report must be prepared in accordance with accounting standards. The accounting information given in the annual report must be audited by an authorised auditor.
The AIFM must facilitate the inspection of the AIF's rules and prospectus, if applicable, and the latest audited annual report at all places where the shares of the AIF are marketed. Upon the request of investors, relevant documentation must be delivered to investors, including the latest audited annual report.
The AIF must inform investors periodically on the following;
- assets subject to special measures resulting from their illiquidity;
- new measures regarding liquidity management;
- current risk profile and risk management systems; and
- if it is a leveraged AIF:
- changes to the leverage limits and the right to reuse collateral and guarantees; and
- the maximum amount of leverage used.
At the request of investors, the AIFM must also deliver information without delay on:
- the limits applicable to risk management;
- the procedure followed for such purposes; and
- changes to the risk and yields of financial instruments in which the AIF's assets are invested.
7.2 What key reporting requirements apply to alternative investment funds in your jurisdiction?
The AIFM must regularly inform the Croatian Financial Services Supervisory Agency (HANFA) of the main markets on which it trades in the shares of AIFs and instruments traded for the account of the AIFs under management. For every EU AIF under management and whose shares it markets in European Union, the AIFM must submit a report to HANFA comprising data on:
- the assets subject to special measures resulting from their illiquidity;
- new measures regarding liquidity management;
- current risk profile and risk management systems;
- the main categories of assets in which the AIFs' assets are invested; and
- stress testing results.
The AIFM must also submit to HANFA:
- annual reports for the AIFs under management and whose shares it markets in the European Union; and
- at the end of each trimester, a list of all AIFs under management.
An AIFM managing leveraged AIFs must inform HANFA on the overall level of leverage used by each individual AIF under management. Where necessary to monitor systematic risk, HANFA may request additional information.
An AIFM must also prepare financial reports in accordance with accounting standards. In addition, it must prepare a report on the structure of its financial assets and liabilities, as valid on the last day of the semi-annual or annual reporting period. Annual financial reports must be audited by an external independent certified auditor. Semi-annual financial reports must be submitted within two months of the end of the reporting period; revised annual financial statements within four months of the end of the reporting period; and consolidated annual financial statements within six months of the end of the reporting period. The AIFM must publish financial statements on its official pages within the same deadlines.
7.3 What key governance requirements apply to alternative investment funds in your jurisdiction?
Key governance requirements can be found in the rules on the organisational requirements of AIFMs, which largely correspond to those set out in Appendix I of Directive 2011/61/EU. Depending on the type, scale and complexity of the AIFM's business and the nature and range of its activities, the AIFM is under a general obligation to establish, implement and maintain decision-making procedures and an appropriate organisational structure, including a permanent compliance function, a risk management function and an internal audit function.
The AIFM must also:
- take all reasonable steps to avoid conflicts of interest and, where these cannot be avoided, to identify, prevent, manage and monitor and, where applicable, disclose them;
- implement effective organisational and administrative systems and controls, to prevent such conflicts from adversely affecting the interests of the AIF (or its investors);
- adopt appropriate liquidity management procedures, to ensure that the liquidity profile of each AIF's investments complies with the AIF's obligations;
- ensure that the AIF's investment strategy, redemption policy and liquidity profile are consistent with each other; and
- monitor the AIF's liquidity risk through regular stress testing.
Generally, AIFMs and persons effectively conducting the business of an AIFM are obliged to:
- act conscientiously and fairly, and in accordance with the rules of the profession;
- act with due diligence;
- act in the best interests of the AIF and its investors;
- establish and effectively manage the resources and procedures necessary for the due performance of activities; and
- comply with the AIF Act and subordinate regulations.
7.4 What key risk management requirements apply to alternative investment funds in your jurisdiction?
An AIFM must establish a comprehensive and efficient risk management system in accordance with its type, scope and the complexity of its business, to ensure the proper identification, measurement, management and monitoring of risks relevant to the investment strategies of the AIFs under management. The AIFM must establish, within the risk management system, a procedure for the assessment of the creditworthiness of issuers in which it intends to invest its assets and those of the AIFs under management. The AIFM must also adopt, apply, document and regularly update its risk management policy. Within the risk management process, the AIFM must determine:
- the risk profile of each AIF under management;
- the contribution of individual risks to the overall risk profile; and
- the acceptable degree of risk.
Risk management functions should be functionally and hierarchically separated from operative units, including asset management.
The AIFM should further:
- establish and implement an appropriate procedure for the detailed analysis of business during the investment of AIFs' assets pursuant to their investment strategies, objectives and risk profile;
- ensure that risk can at all times be identified, measured, managed and monitored; and
- ensure that the risk profile conforms to the size, portfolio structure, investment strategies and objectives of the AIFs under management.
The AIFM must also determine the maximum level of leverage to be used for each AIF under management and the right to reuse collateral or guarantees approved under the leverage agreement.
8.1 How are alternative investment funds treated for tax purposes in your jurisdiction?
The tax treatment of alternative investment funds (AIFs) will depend on the type and structure of the fund.
Generally, in line with the Croatian Corporate Profit Tax (CPT) Act, investment funds without legal personality which are established and operate in accordance with legislation under which they are established shall not be considered CPT taxpayers.
From the value added tax (VAT) perspective, the type and structure of the fund should be closely examined when assessing the potential VAT implications.
8.2 How are alternative investment fund managers and advisers treated for tax purposes in your jurisdiction?
In general terms, in line with the Croatian VAT Act, services aimed at the management of investment funds are exempt from VAT; however, certain services do not fall under the VAT exemption. Details on the management services which are VAT exempt and those that do not fall under the VAT exemption are set out in the Croatian VAT Ordinance.
The general VAT rate in Croatia is 25%. Reduced VAT rates of 13% and 5% apply to the supply of certain goods and services. A special VAT regime is available under the VAT Act for ‘small taxable persons' – that is, legal entities with their registered seat or a permanent business unit in Croatia, or natural persons with their residence or habitual abode in Croatia, where the value of goods or services supplied in the preceding or current calendar year does not exceed the threshold of HRK 300,000 (approximately €40,000), such value to be determined in line with the applicable VAT legislation.
8.3 How are alternative investment fund investors treated for tax purposes in your jurisdiction?
Generally, in line with the CPT Act, a taxpayer is a company or other legal entity, or a natural person, that is resident in Croatia and performs economic activity independently, permanently and with the aim of realising a profit, income, revenue or other economic assessable benefit. A taxpayer may also be the domestic business unit of a foreign entrepreneur (non-resident), to be determined in line with the general tax legislation. Further, in line with the CPT Act, withholding tax is a tax to which profits realised by a non-resident in Croatia will be subject, in line with such legislation. Withholding tax shall be payable, among other things, on dividends and profit participation paid to non-resident (foreign) legal persons. Withholding tax on dividends and profit participations shall be payable at a rate of 12%; however, this may be reduced or eliminated based on an applicable double tax treaty or the EU Parent-Subsidiary Directive, assessed on a case-by-case basis.
Generally, for individual investors, capital gains deriving from the disposal of financial property (including units in investment funds) are subject to personal income tax at the rate of 12%, increased by the city surtax (if any). However, if such disposal occurs at least two years after such acquisition, or is performed between certain persons as listed in the Croatian Personal Income Tax (PIT) Act or due to the inheritance of financial property, capital gains deriving from such disposal will not be taxed. Certain disposals are also exempt from such taxation, as listed in the PIT Act. PIT may be reduced or eliminated based on an applicable double tax treaty, assessed on a case-by-case basis.
8.4 What effect do international laws such as the US Foreign Account Tax Compliance Act and international standards such as the Common Reporting Standard have in your jurisdiction?
In general terms, Council Directive 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as regards the mandatory automatic exchange of information in the field of taxation has been transposed into Croatian law through the Act on the Administrative Cooperation in the Field of Taxation.
Furthermore, the Foreign Account Tax Compliance Act (FATCA) Agreement between the Government of Republic of Croatia and the Government of the USA to Improve International Tax Compliance and to Implement FATCA entered into force on 27 December 2016, also impacting on the activities of investment funds.
References to these documents are implemented directly into the AIF Act, such that an AIFM may refuse to execution of an investment agreement (as defined in the act) if the investor fails to provide it with the information necessary to implement the FATCA Agreement and Council Directive 2014/107/EU, which are required for the AIFM to comply with its obligations under the laws that regulate the relationship between taxpayers and tax authorities. Certain further implications are provided for in the AIF Act on the basis of the stated legal sources.
8.5 What preferred tax strategies are typically adopted in the alternative investment fund context?
Tax strategies are devised and decided on a case-by-case basis, in close collaboration with tax advisers, to ensure the optimal outcome in line with the applicable regulations. The preferred tax strategy will depend on the type of AIF, the preferences of the AIFM and the structure of the investors. Tax advice and expertise may be provided upon request by external firms.
9 Trends and predictions
9.1 How would you describe the alternative investment fund landscape and prevailing trends in your
Alternative investment funds (AIFs) account for a relatively small part of the financial market in Croatia, but they are undeniably growing in presence and importance. According to information published by the Croatian Financial Services Supervisory Agency, as at the end of June 2019 there were 36 AIFs, with a net asset value of €0.5 billion. Although undertakings for collective investment in transferable securities still account for the majority of net asset value (€2.7 billion at the end of June 2019), AIFs are becoming increasingly active and popular, and are expanding their presence on the Croatian financial market.
This trend has been enhanced by the growing presence and increased activity of prominent EU funding frameworks and programmes, such as European structural and investment funds and the Investment Plan for Europe, together with increased local activity of the Croatian Bank for Reconstruction and Development.
The availability of European capital is a sign that the Croatian AIF market is maturing. This is expected to enhance investor confidence in the financial markets and the overall business environment, and more generally to result in a more sophisticated investment environment in Croatia.
9.2 Are any new legal or regulatory developments anticipated which will impact on alternative investment funds or alternative investment fund managers in your jurisdiction?
The Act transposing Directive 2011/61/EU and its implementing and delegated regulation, as well as Regulation 345/2013 regulating venture capital funds and Regulation 346/2013 regulating social entrepreneurship funds, was enacted in 2018 and was subsequently revised with changes which entered into force on 24 December 2019. The act envisages the adoption of a number of subordinate provisions, some of which were enacted in 2019; the rest are expected to be drafted during 2020. Since these subordinate provisions will elaborate on specific provisions of the AIF Act in greater detail, they will have an impact on the incorporation and operation of AIFs and AIF managers.
9.3 Do you envisage any particular industry strategy of attracting particular interest in the next 12 months?
Several initiatives have been launched under the EU funding framework. The most prominent include:
- the Croatian Venture Capital Initiative, established in June 2018, under which funds will invest €42 million in various small and medium-sized enterprises (SMEs), ranging from early stage to growth stage start-ups; and
- the Croatian Growth Investment Programme, launched in January 2019, which provides support to SMEs and affords them access to growth and expansion equity capital.
Most recently, Croatia's first social impact investment fund has attracted attention from the European Investment Fund, which plans to contribute over €15 million of a total €30 million to be invested in Croatian and Slovenian SMEs that are committed to having an environmental and social impact. Social impact investing has only recently begun to gain traction, but market developments suggest that there is now a global movement towards more responsible investing. It is expected that once the first movers have overturned the misconception that impact investing is not a profitable investment, other players on the financial market will take steps in the same direction.
Most recent moves in the investment sector reflect the growing presence and popularity of AIFs – especially private equity and venture capital funds, which are becoming ever more active and attracting more and more capital. It is anticipated that this growth will only continue in the years to come.
10 Tips and traps
10.1 What are your top tips for the smooth establishment and management of an alternative investment fund in your jurisdiction, and what specific challenges would you note?
The most important point, from our perspective, is to put together a team of experts with experience of the legal and practical matters associated with alternative investment funds (AIFs). Croatia is still a developing market; and although it is part of the European Union, in which established best practices should be implementable across member states, the biggest challenge remains finding the best way to incorporate certain instruments and practices into the national legal system. It is thus of utmost importance to have a team that understands the investment environment and the main objectives of established instruments and practices, and is creative enough to use the tools available under Croatian law to achieve the desired outcome. However, as the number of AIFs on the market grows, and collaboration between teams working in this field increases not only in Croatia, but across the European Union, the practice is slowly but steadily developing and the gaps will soon be closed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.