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What inhibits Croatian free entrepreneurial initiative?

What inhibits Croatian free entrepreneurial initiative? Croatian Centre for Public Policy and Economic Analysis provides answers in one place.

Centre for Public Policy and Economic Analysis (CEA) promotes Article 49 of Croatian Constitution through the project of Entrepreneurial initiative. Let’s advocate free market together! Free entrepreneurial initiative stands for easier and cheaper solutions for value creation in Croatia, less regulation and better public management.

Tell us about barriers and burdens to your freedom of entrepreneurial initiative!

info@cea-policy.hr

Centre for Public Policy and Economic Analysis communicates anonymously your submitted initiatives to the relevant institutions.

Why is the freedom of entrepreneurial initiative inhibited?

We are presenting the results of Centre for Public Policy and Economic Analysis’s survey done in cooperation with entrepreneurs.

  1. At the beginning of any kind of entrepreneurial initiative there are many regulatory burdens – including expensive notaries, documentation, high costs and non-digitalized processes of application.

 

Starting the entrepreneurial initiative is hampered by the following regulations:

  • Notary fee founding an enterprise 63%
  • Total scope of required documentation 61%
  • Time for waiting to be registered 55%
  • Absence of electronic registration 53%
  • Reservations and authorizations obstacles of desired company names 47%
  • High costs of commercial court fees 43%
  • Requirement for physical presence of all founders during the notarization 38%
  • The number of locations required to visit prior to founding of enterprise, instead of just founding an enterprise online
  • Requirement of notary services during the formation of a company
  • Registration lasts weeks if an entrepreneur is unable to come to Zagreb
  • Obscurity of systematization in the National classification of business activities
  • Some scientific endeavors cannot be registered
  • Registering the enterprise in one of EU official languages is conditioned by bringing a copy of dictionary with an explanation of the name
  • discretionary powers of the court during registering of business and name varies from court to court, creating legal instability
  • various practices of commercial courts
  • initial capital can only be deposited personally on a bank counter

 

  1. Gathering data from multiple institutions. Entrepreneurial initiative often depends on business data gathered from the media.
  • Only 5% of those surveyed gathered needed regulation information from a single source. 95% of those surveyed seeks information from multiple institutions. Data is frequently gathered from different internet portals.
  • “Lack of penalty and/or responsibility for those who are publicizing false information”, or interpretations and information are either contrary, incomplete or vague
  • Information is often received through the word of mouth by accountant, lawyer, acquaintance, on the Internet or by drinking in a bar
  • Some clerks responsible for information assistance are rude, and some have their own personal interpretations of procedures and regulations. It often happens that different clerks have differing requests.
  • It happens that associations/chambers or Tax administration do not have some information
  • There is too much regulation for small businesses and “micro business do not have enough money to pay for a person who will deal with regulation”
  • It even happens that “regulation is not uphold by some institutions”
  • “Media provides much more specific and useful information.”

 

 

  1. At least five hours monthly is spent on studying the regulation and on filling of regulatory requirements and procedures which is a waste of time from the point of entrepreneurial initiative.

On studying the regulation, and on filling of regulatory requirements and procedures:

  • 26% of enterprises spend five to ten hours on monthly basis
  • 20% of enterprises spend ten to fifteen hours
  • 19% of enterprises spend 25 hours
  • some enterprises spend twenty five to thirty percent of their working time on regulations and administration
  • frequent regulatory changes expand the time needed for information gathering about new regulatory obligations
  • regulation is created “to be of use to legal professions, and not to entrepreneurs”
  • there is a need for interpretation of unclear regulations
  • Obtained information is not necessarily accurate but needs to be verified from at least three different sources
  • no one is accountable for wrong information
  • “the feeling of weariness because of dealing with regulation”
  • several laws and rules govern the same thing, which means that collision is possible
  • some rules are vague and ambiguous
  • Frequent examination of the Official Gazette in order to find new regulatory changes. There are constant regulatory changes so entrepreneurs often spend most of time with the accountant
  • Entrepreneurial message is clear “we don’t have enough time and money to deal with that”. Entrepreneurs are complaining on time wasting “instead of doing business”

 

  1. Entrepreneurial initiative notes that most of liabilities and expenses come through tax and accountancy obligations, safety at work and labor relationships. Nevertheless entrepreneurs have reported a series of meaningless obstacles and interferences.

 

Most of the administrative costs (time and money) can be found in the following:

  • Tax regulation 76%
  • Accounting obligations 69%
  • Employment protection 54%
  • Work relations 52%
  • Construction and spatial planning 29%
  • Health and sanitary conditions 27%
  • Public procurement 22%
  • Sectoral market regulations 17%
  • Complicated tax forms which demand a lot of data
  • Register of employee working time
  • Authorization and acknowledgement of vacation
  • Documentation for public procurement
  • Minimal technical requirements and licenses for certain services activities
  • Conditions of professional chambers
  • Advances (income tax advance)
  • Liquidation of accounting documents
  • Various certificates, attestations and authentications
  • Various notary verifications

 

  1. Entrepreneurial initiative detects that highest administrative costs are created by various procedures, permits and decisions, chamber fees and labor obligations.

 

High administrative costs of doing business are created by the following administrative obligations:

  • Procedural permits and administrative decisions 74%
  • Chamber duty (obligatory membership fee) 65%
  • Labor status 39%
  • Technical standards 34%

 

  1. Entrepreneurial initiative cannot fulfill all of the administrative obligations which were imposed by regulations. Many inspectors are quick with penalization, without giving any time for correction, but it is on arbitrary basis, and if often depends on the inspector’s mood.

 

When there is a question of inspector to entrepreneur relation:

  • 82% deems that it is hard to fulfil a multitude of regulatory obligations every year
  • 60% complain that inspectors are penalizing without giving time for correction
  • Only 4% of respondents said that inspectors first give a warning about irregularity and then give a time for correction.
  • Situations when some inspectors subjectively interpret regulations. It happens that two inspectors have two differing opinions about the same case – “it depends on a person”. There are situations when “everything depends on inspector’s mood, and if he’s coming by the assignment from superior or without it”
  • Inspectors often behave towards entrepreneurs as if they were criminals. Some regulations leave space for corruption, and there’s an uneven relation of administration and inspectors. Every inspector interprets the law differently, and penalization depends if he needs to penalize for statistics or for the budget.
  • Impossibility of fulfilling all of the requirements and obligations because of the wide range of inspections.
  • Demands that entrepreneurs need to meet are often contrary and inspectors are penalizing entrepreneurs depending on the subject’s relations with the government. Inspectors do not have advisory role and they function more as a government’s enforced racket.
  • Satisfied entrepreneurs are those who have never encountered inspectors
  • Inspectors take 5000 Croatian kunas from a clerk if he lacks garbage can lid.
  • Entrepreneur had to pay 20 000 Croatian kunas because he did not accounted VAT on the administrative fee
  • Rule book of capital gain tax (article 2., paragraph 1 and 2) gives inspectors the right to “asses and estimate” with their own “opinions” “violations” and to penalize the subject independently, without the court.

 

  1. Entrepreneurial initiative can only be imperiled with one penalty which can lead to bankruptcy

 

When talking about the level of proportionality of penalties:

  • 74% consider that only one penalty can lead to imperilment and bankruptcy of business
  • 17% consider that imposed penalties or highest assigned penalty can lead to imperilment and bankruptcy of business
  • 9% considers that penalties will negatively reflect on balance sheet and income statement
  • Levels of penalties are more appropriate for big market players and not for small businesses
  • For most of the businesses, one penalty is a death warrant and the damage is ten times bigger than the penalty’s amount which in any case cannot be reimbursed
  • For the same violation another business doesn’t even get a warning notice because of the impersonal connections with the inspectors. Beside high amount of regulations, thanks to which, almost anyone is in some kind of transgression, the greatest problem is inconsistency of penalization – some will be penalized and others will not. Political connections of some entrepreneurs allow them to behave however they want, whether they’re breaking the law, nobody will penalize them, and by that they are crushing competition because the rest are doing by the rules.
  • Lack of single paper (which is completely irrelevant to business) can result with a penalty of several tens of thousands of Croatian kunas. Penalties are disproportionately high for transgression. Entrepreneur forgets to give in a filled form paper and he’s penalized with 5000 Croatian kunas.
  • “For small businesses penalty often means bankruptcy or even worse – flight from entrepreneurship”
  • Inspector estimates that employment contract is not in accordance with the law and is considered as a moonlighting. Inspector seals the doors of the company for 30 days and the matter goes to penalty court. The penalty is 7-100 thousands Croatian kunas for a company and 7-15 thousands Croatian kunas for a responsible company’s representative.
  • Entrepreneur was given a choice: 30 000 Croatian kunas of penalty or a closure of an object because he had a business certificate from 1994 up till now and didn’t possess a number of tables, but had surface area in an object which wasn’t registered in cadaster
  • The entrepreneur was late with the annual financial statement and was given a minimal penalty of more than 25.000 Croatian kunas. Afterwards she filed an appealed due to statute of limitation of three years. The appeal was overruled since the government repealed the former decision and issued the new one after a month. There is no legal obligation of the government to notify the entrepreneur about the new decision. The government rather sent the decision to court for enforcing.
  • If it is written on a declaration the equivalent word – “composition” instead of “ingredients” the penalty is 50.000 Croatian kunas.
  • Labor protection penalties are draconically high and accidents often happen because of carelessness and irresponsibility of the workers
  • Penalties are not proportionate to the size of the company
  • Penalties for accounting mistakes are from 100.000 to 500.000 Croatian kunas – due to complex labor law and great number excise duties.
  • A small surplus in the cash register which can lead to the closure of business
  • For minor offence of not reporting an open work post, before the worker is hired, there is an assigned penalty
  • Due to unkempt working hours record, even though it is correct (as seen from paid salary per working hours), the penalty is from 60.000 to 100.000 Croatian kunas. “Unkempt working hours record” meant that time of arrival and time of leave weren’t calculated in third row, even though correctly paid
  • Penalties are paid because there are different opinions in the Tax administration. Therefore, the government punishes entrepreneur because of its own problems.

 

  1. Entrepreneurial initiative considers legal debt collection as very expensive.
  • 70% considers that the legal system is very expensive regarding debt collection and 22% considers it relatively expensive
  • The legal system is unjust and inefficient, with long and risky legal process. “Justice is not attained on time”. Sometimes it’s easier for entrepreneurs to write off the claim, than to seek justice on the court and loose time by doing so.
  • “The system does not give and justice or support. First you have to pay everything to the state, pay for an attorney, waste years on courts, deal with corrupted system because the hearing moves from court to court and are postponed suddenly etc., and after a few years you win on the court, and then nothing, it all starts over again”. It is not a good bargain to have a small or medium business and go to the court.
  • The very possibility to restrain someone’s account is anti-entrepreneurial. Enterprise either goes bankrupt and all creditors take some of the bankruptcy assets or they make a deal, but there shouldn’t be any restraint.
  • Apart from regulation and the slowness of legal system, there is a great barrier in existing habit that it is “normal” to be late with payments or never to pay for service we’ve received on time.

 

  1. Entrepreneurial initiative considers business closure to be disproportionately expensive
  • 72% of examinees consider that the business closure is disproportionately expensive. 26% of examinees consider business closure to be relatively cheap, only under the condition of deleting it from court register. Therefore, only 3% examinees consider that the process of closure is cheap.
  • It is a long and expensive mission. “If you had money, you wouldn’t close your business. If you don’t have money, everything is expensive. And the most expensive is to not have money, because than you can’t close your company.” Additionally, procedure is complicated and lasts too long.
  • Liquidation is too expensive because the company does not have debts. The only things that are created are new expenses. Closure is often more expensive than starting a company.
  • When liquidation costs more than zero kunas it means it is expensive. If an entrepreneur closes the company it means that it doesn’t have money. If you had money, you wouldn’t stop doing business. If you don’t have money, everything is expensive. And the most expensive thing is not to have money because than you can’t close your company. After paying up all the debts to the creditors from the day of closure, the price of closure should be zero. Company must be closed with the simple request and signature. The end!

 

  1. Entrepreneurial initiative finds different non-taxes and other kind of levies as an additional weight

Non-tax levies that create biggest weights to the business are:

  • Chamber fees 76%
  • Forest fee 63%
  • Water fee 61%
  • Fee for annual financial reports 55%
  • Transportation fees – environmental fees, fees for the road usage, etc. 49%
  • Prices of professional exams, obligatory professional chamber membership, monument annuity, fee for subsidizing production of electric energy from renewable energy sources, electric waste fee, fees for waste and packaging, fees for various other agencies, etc.
  • Maintenance of fire extinguisher costs around 5.000 Croatia kunas annually
  • Among various other levies there are residence tax, car tax and contribution for injuries at work
  • Various high fees are paid to the Financial agency (FINA)
  • Instead annually, many of non-tax levies are paid on monthly or quarterly basis
  • It would be much simpler from administrative point that the state creates unitary non-tax bill with the list of all non-tax levies
  • Many entrepreneurs want to abolish non-tax levies. The government is already paid for its services through the taxes (non-tax levies are actually a form of extra tax)
  • Entrepreneurs call for deregulation of doing business. One entrepreneur states: “In a free society, neither one legal or physical entity shouldn’t be forced to pay for services that he doesn’t use, and for those that are useful, there should be a choice between different suppliers, and not government’s monopoly as the only option.”

Addendum

Examples of reported obstacles and burdens through Entrepreneurial Initiative survey:

  • lump-sum advance of profit tax – entrepreneur pays interest on due advance and credits the State, while he cannot get interest in overpaid advance
  • complicated tax forms
  • sending of JOPPD forms
  • JOPPD monitoring of ENC
  • JOPPD for non-taxable payments
  • great amounts of data required in VAT and JOPPD forms, without automatic drawing from official registers already in possession of the State
  • complex input of gross salary with obligatory salary recapitulation
  • salary and other payments recap towards physical persons and employees
  • printing salary payment
  • certificate and report on salary payment
  • employees obligation on signing of salary (to himself)
  • special permission for seasonal workers for more monthly working hours
  • impossibility of flexible employing and firing of employees
  • permissions and certificates on vacation
  • complicated registrations of employees
  • notary verifications of documents
  • safety at work obligations
  • various certificates, attests and notifications
  • certificates on valid fulfillment of obligations in public competitions
  • numerous documents for public procurement
  • driving record
  • Accounting Act requires documents liquidation, which represents a waste of time
  • discrepancy of cadaster and land registry
  • various minimum technical standards
  • regulations on biocide equipment and waste disposal (toners and batteries)
  • 7 bank accounts instead of 2 must be used during salary payment
  • conditions by various professional bars
  • health insurance while traveling abroad
  • court registry excerpt, even when the Government has it and even charges it
  • certificate on no tax-debt (even if the Government has it already)
  • employers duty to pay for tax debt of its employee
  • various statistics for small companies
  • inability for temporarily inaction of professional services and suspension of social security contribution
  • HASSAP standard required for smaller restaurants
  • 2 private dental practices can merge, but it is not allowed for private practice of one dentist to merge with Ltd. (who must be registered only for dental practice)
  • public invitation for EU funds are messed systems with unnecessary requests such as the obligation of signing already signed document
  • working hours records for each employee
  • payment lists
  • signature of receiving salary even when salary is paid by bank accounts
  • permits for conducting business in different sectors
  • categorizations for tourism and accommodation service providers
  • obligatory price lists in hotel rooms even if guests can already be informed on prices on internet or travel agencies
  • for one invoice issued in EU, an entrepreneur had to have VIES number and exceed monthly VAT instead of three-monthly VAT, with 9 new papers and with rise of accounting expenses
  • during changing of seat from one county to other, Croatian pension insurance institute obliges him to sign off all employees and company and registering them again
  • lease agreements
  • working safety provisions disable work-at-home what modern IT employees want
  • difficulties during legitimizing invoices paid through foreign web-sites
  • difficulties during legitimizing innovative equipment and services

This is not all!

 This is only a small set of examples. CEA firmly believes that it takes a lot of effort for listing all business barriers.

Call to entrepreneurs – Tell us about barriers and burdens

Centre for Public Policy and Economic Analysis urges entrepreneurs to continue to tell us at info@cea-policy.hr about barriers and burdens on doing business, and to suggest initiatives for changes and solutions.

Contact us on info@cea-policy.hr for a free copy of Entrepreneurial initiative – Handbook for business development which offers a set of market oriented reforms for increasing entrepreneurial initiative.