Proposal for a COUNCIL AND COMMISSION DECISION concerning the conclusion of the Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and the Republic of Croatia, of the other part

(presented by the Commission)

EXPLANATORY MEMORANDUM

The Commission Communication of 26.05.1999 on the Stabilisation and Association Process with Bosnia and Herzegovina, Croatia, Federal Republic of Yugoslavia and former Yugoslav Republic of Macedonia and Albania [1], established a new framework for closer relations between the EU and these countries, to be developed through a progressive approach adapted to the specific situation of each country. This new context provides for a wide-ranging partnership, notably through a new category of agreements, the Stabilisation and Association Agreements (SAA).

[1] COM(1999) 235 of 26.05.1999.

The opening of negotiations for a SAA depends upon compliance by the specific country with the relevant political and economic conditions. The political developments in the Republic of Croatia, following Parliamentary and Presidential Elections in early 2000, marked a new beginning in bilateral relations and resulted in the adoption by the Commission on 24 May 2000 [2] of a positive report on the feasibility of negotiating a Stabilisation and Association Agreement with the Republic of Croatia. The report underlined the encouraging steps undertaken by the new Croatian Government towards compliance with the EU conditionality and assessed that the Republic of Croatia has the capacity ultimately to fulfil the obligations of a Stabilisation and Association Agreement. It therefore concluded that the conditions for the opening of negotiations for a Stabilisation and Association Agreement with the Republic of Croatia were met.

[2] COM(2000) 311 of 24.05.2000.

As a result, on 19 July 2000 the Commission adopted its recommendation for the opening of negotiations. The Council, in its conclusions of 20 November 2000, authorised the Commission to open negotiations for a Stabilisation and Association Agreement with the Republic of Croatia, on the basis of agreed negotiating directives.

The negotiations were opened by the Commission on 24 November 2000, in the margins of the Zagreb Summit. Following three official rounds of negotiations and several technical meetings, the negotiating process was concluded in Zagreb on 11 May. The Commission conducted all the negotiations in close consultation with the Special Committee created by the Council for this purpose, namely the COWEB. The Stabilisation and Association Agreement was therefore initialled by Commissioner Patten and the Croatian Chief negotiator, Mr. Mimica, on 14 May 2001.

The Stabilisation and Association Agreement initialled with Croatia is the second one, since a similar type of agreement has already been signed with the Former Yugoslav Republic of Macedonia. The output of the negotiations with Croatia takes fully into account the precedent framework while certain parts of the agreement are tailor-made for the individual situation of the Republic of Croatia.

It is to note that the Stabilisation and Association Agreement will be the first comprehensive contractual relation established between the European Communities and the Republic of Croatia. Negotiations for a Cooperation Agreement, as well as for a Transport Agreement, started in 1995 but were never concluded because of the "frozen" political relations between the EU and this country. At present, the bilateral relations have been developed as follows:

- The trade regime is regulated by the autonomous trade preferences, unilaterally granted by the Community to Croatia under Council Regulation No. 2007/2000 of 18 September 2000, as amended by Council Regulation 2563/2000 of 20 November 2000;

- A Textiles agreement, initialled on 8 November 2000 and signed on 17 May 2001, is applied since 1 January 2001;

- An EU/Croatia Consultative Task Force, set up in February 2000, has served as a forum for bilateral technical discussion, in the absence of any other formalised body.

The establishment of contractual relations with the Republic of Croatia in the form of a SAA, will provide for a wide-ranging co-operation and will take forward the process of its integration into European structures. The agreement focuses on the following elements:

- The establishment of a formalised framework for political dialogue with the Republic of Croatia, both a bilateral and regional level;

- Enhanced regional co-operation;

- The promotion of economic and trade relations with the perspective of establishing a free trade area covering goods and services after a transitional period of six years from the entry into force of the agreement;

- The regulation of movement of workers, freedom of establishment, supply of services, current payments and movement of capital;

- The commitment by the Republic of Croatia to progressively harmonise its legislation with that of the European Community, notably in key areas of the internal market;

- The establishment of wide-ranging relations covering all the fields of Community interest and including co-operation in the field of justice and home affairs;

- The complete liberalisation of road transit traffic across the Republic of Croatia and the Community as a whole and the development of the associated infrastructure, within a specific protocol on land transport which takes into account the absence of a pre-existing Transport agreement;

- The formalisation of Community financial and technical assistance to the Republic of Croatia as a support to the implementation of certain aspects of the agreement;

- The establishment of a specific institutional framework in the form of a Stabilisation and Association Council which supervises the implementation of the agreement, a Stabilisation and Association Committee and a Stabilisation and Association Parliamentary Committee.

After the entry into force of the Stabilisation and Association Agreement the more favourable trade concessions granted by Council Regulation 2007/2000 of 18 September 2000 (as amended by Council Regulation No. 2563/2000 of 20 November 2000) will continue to apply.

Having completed the negotiating process the Commission proposes now to the Council to approve the results of the negotiations and to engage the procedures aimed at the signature and the conclusion of this agreement. To this regard the Commission presents two proposals, which constitute the legal instruments for the signature and the conclusion of the Stabilisation and Association Agreement between the European Communities and their Member States, on the one part, and the Republic of Croatia, on the other part:

(i) Proposal for a Council Decision for the signature of the Agreement;

(ii) Proposal for a Council and Commission Decision for the conclusion of the Agreement.

The procedures for the signature and the conclusion of the Agreement are different for the three European Communities: (European Community, European Atomic Energy Community and European Coal and Steel Community):

a) as regards signature, Article 300.2, first indent, first sentence of the EC Treaty provides for a separate Council Decision concerning the signing of the Agreement on behalf of the European Community. Similar acts are not required under the ECSC and EAEC Treaties;

b) as regards the conclusion of the Agreement:

- The Council concludes the Agreement on behalf of the European Community, after having received the assent of the European Parliament, by virtue of Article 310 of the Treaty;

- The Council approves the Agreement on behalf of the European Atomic Energy Community by virtue of the second paragraph of Article 101 of the EAEC Treaty and the Agreement is then concluded by the Commission;

- The Commission concludes the Agreement on behalf of the European Coal and Steel Community, by virtue of Article 95 of the ECSC Treaty, with the unanimous assent of the Council and following consultation of the Consultative Committee.

In the light of the above, the Commission proposes:

- that the Council decide on the signature of the Stabilisation and Association Agreement between the European Communities and the Republic of Croatia on behalf of the European Community;

- that the Council conclude the Stabilisation and Association Agreement between the European Communities and the Republic of Croatia on behalf of the European Community and give its assent and approval for conclusion by ECSC and EURATOM.

Ratification by all Member States of the European Union is a prerequisite for the entry into force of the Agreement.

2001/0149 (AVC)

Proposal for a COUNCIL AND COMMISSION DECISION concerning the conclusion of the Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and the Republic of Croatia, of the other part

THE COUNCIL OF THE EUROPEAN UNION,

THE COMMISSION OF THE EUROPEAN COMMUNITIES

Having regard to the Treaty establishing the European Community, and in particular Article 310 in conjunction with Article 300, second paragraph, first indent, last sentence, and third paragraph, second indent thereof;

Having regard to the Treaty establishing the European Coal and Steel Community, and in particular Article 95 thereof;

Having regard to the Treaty establishing the European Atomic Energy Community, and in particular the second paragraph of Article 101 thereof

Having regard to the proposal from the Commission [3]

[3] OJ C ...

Having regard to the assent of the European Parliament [4];

[4] OJ C ...

After consultation of the Consultative Committee and with the assent of the Council pursuant to Article 95 of the Treaty establishing the European Coal and Steel Community;

Having regard to the approval of the Council granted pursuant to Article 101 of the Treaty establishing the European Atomic Energy Community;

Whereas

(1) The Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and the Republic of Croatia, of the other part, has been signed on behalf of the European Community, in [...] on [........2001], subject to its possible conclusion at a later date, in accordance with the Council Decision no. .../.../CE of ... [5]

[5] OJ C ...

(2) The commercial provisions contained in this agreement are of an exceptional nature, connected with the policy implemented within the framework of the stabilisation and association process and will not constitute, for the European Union, any precedent in the commercial policy of the Community with regard to third countries other than those of the Western Balkans,

(3) This Agreement should be concluded;

HAVE DECIDED AS FOLLOWS:

Article 1

1. The Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and the Republic of Croatia, of the other part, including Annexes and Protocols annexed thereto and the declarations attached to the Final Act are hereby approved on behalf of the European Community, the European Coal and Steel Community, and the European Atomic Energy Community.

2. The texts referred to in the first paragraph are attached to this Decision.

Article 2

1. The position to be taken by the Community within the Stabilisation and Association Council and within the Stabilisation and Association Committee shall be determined by the Council, on a proposal by the Commission, or, where appropriate, by the Commission, each in accordance with the corresponding provisions of the Treaties.

2. The President of the Council shall, in accordance with Article 111 of the Stabilisation and Association Agreement, preside over the Stabilisation and Association Council. A representative of the Commission shall preside over the Stabilisation and Association Committee, in accordance with the Rules of Procedure thereof.

3. The decision to publish the decisions of the Stabilisation and Association Council and the Stabilisation and Association Committee in the Official Journal of the European Communities shall be taken on a case-by-case basis by the Council and the Commission respectively.

Article 3

The President of the Council is hereby authorised to designate the persons empowered, on behalf of the European Community, to deposit the act of notification provided for in Article 127 of the Agreement. The President of the Commission shall deposit the said acts of notification on behalf of the European Coal and Steel Community and European Atomic Energy Community.

Done at Brussels,

For the Council For the Commission

The President The President

FINAL ACT

The plenipotentiaries of:

THE KINGDOM OF BELGIUM,

THE KINGDOM OF DENMARK,

THE FEDERAL REPUBLIC OF GERMANY,

THE HELLENIC REPUBLIC,

THE KINGDOM OF SPAIN,

THE FRENCH REPUBLIC,

IRELAND,

THE ITALIAN REPUBLIC,

THE GRAND DUCHY OF LUXEMBOURG,

THE KINGDOM OF THE NETHERLANDS,

THE REPUBLIC OF AUSTRIA,

THE PORTUGUESE REPUBLIC,

THE REPUBLIC OF FINLAND,

THE KINGDOM OF SWEDEN,

THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND,

Contracting Parties to the Treaty establishing the European Community, the Treaty establishing the European Coal and Steel Community, the Treaty establishing the European Atomic Energy Community, and the Treaty on European Union,

hereinafter referred to as 'the Member States', and of

the EUROPEAN COMMUNITY, the EUROPEAN COAL AND STEEL COMMUNITY and the EUROPEAN ATOMIC ENERGY COMMUNITY,

hereinafter referred to as 'the Community',

of the one part, and

the plenipotentiaries of the REPUBLIC OF CROATIA,

of the other part,

meeting in ... on...in the year two thousand and one for the signature of the Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and the Republic of Croatia of the other part, hereinafter referred to as 'the Agreement';

have at the time of signature adopted the following texts:

the Agreement,

its Annexes I - VIII, namely:

Annex I (Art 18.2) Croatian Tariff concession for EC Industrial Products

Annex II (Art 18.3) Croatian Tariff concession for EC Industrial Products

Annex III(Art 27) : EC Definition of "Baby beef"

Annex IV a) (Art 27.3(a) Croatian Tariff concession for Agricultural products (duty-free for unlimited quantities at the date of entering into force of the Agreement)

Annex IV b) (Art 27.3(b) Croatian Tariff concession for Agricultural products (duty-free within quota at the entering into force of the Agreement)

Annex IV c) (Art 27.3(c) Croatian Tariff concession for Agricultural products (duty-free for unlimited quantities one year after entering into force of the Agreement)

Annex IV d) (Art. 27.3(d) Croatian Tariff concession for agricultural products (progressive elimination of MFN duties within tariff quotas)

Annex IV e) (Art. 27.3(e) Croatian Tariff concession for agricultural products (progressive reduction of MFN duties for unlimited quantities)

Annex IV f) (Art. 27.3(f) Croatian Tariff concession for agricultural products (progressive reduction of MFN duties within quotas)

Annex V a) Products referred to in Article 28.1

Annex V b): Products referred to in Article 28.2

Annex VI (Art. 50): Establishment:" Financial services"

Annex VII (Art. 60.2) Acquisition of real property - List of exceptions

Annex VIII (Art 71): Intellectual, Industrial Commercial property rights: List of Conventions

and the following Protocols:

Protocol 1 On Textile and clothing products

Protocol 2 On Steel Products

Protocol 3 On trade between Croatia and the Community in Processed agricultural products

Protocol 4 Concerning the definition of the concept of "originating products"

and methods of administrative co-operation

Protocol 5 On mutual administrative assistance in customs matters

Protocol 6 On Land Transport

The plenipotentiaries of the Member States and of the Community and the plenipotentiaries of the Republic of Croatia have also adopted the following declarations attached to this Final Act:

Joint Declaration concerning Articles 21 and 29 of the Agreement

Joint Declaration concerning Article 41 of the Agreement

Joint Declaration concerning Article 45 of the Agreement

Joint Declaration concerning Article 46 of the Agreement

Joint Declaration concerning Article 58 of the Agreement

Joint Declaration concerning Article 60 of the Agreement

Joint Declaration concerning Article 71 of the Agreement

Joint Declaration concerning Article 120 of the Agreement

Joint Declaration concerning the Principality of Andorra

Joint Declaration concerning the Republic of San Marino

The plenipotentiaries of the Republic of Croatia have taken note of the Unilateral declaration by the Community and its member States concerning Article 30 of the Agreement, annexed to this Final Act:

Done at Brussels,

For the Council

The President

ANNEX

STABILISATION AND ASSOCIATION AGREEMENT

between the European Communities and their Member States and the Republic of Croatia

THE KINGDOM OF BELGIUM,

THE KINGDOM OF DENMARK,

THE FEDERAL REPUBLIC OF GERMANY,

THE HELLENIC REPUBLIC,

THE KINGDOM OF SPAIN,

THE FRENCH REPUBLIC,

IRELAND,

THE ITALIAN REPUBLIC,

THE GRAND DUCHY OF LUXEMBOURG,

THE KINGDOM OF THE NETHERLANDS,

THE REPUBLIC OF AUSTRIA,

THE PORTUGUESE REPUBLIC,

THE REPUBLIC OF FINLAND,

THE KINGDOM OF SWEDEN,

THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND, Contracting Parties to the Treaty establishing the European Community, the Treaty establishing the European Coal and Steel Community, the Treaty establishing the European Atomic Energy Community, and the Treaty on European Union, hereinafter referred to as "Member States", and

THE EUROPEAN COMMUNITY, THE EUROPEAN COAL AND STEEL COMMUNITY, THE EUROPEAN ATOMIC ENERGY COMMUNITY,

hereinafter referred to as the "Community",

of the one part, and

THE REPUBLIC OF CROATIA, hereinafter referred to as "Croatia",

of the other part,

Considering the strong links between the Parties and the values that they share, their desire to strengthen those links and establish a close and lasting relationship based on reciprocity and mutual interest, which should allow Croatia to further strengthen and extend the relations with the Community.

Considering the importance of this Agreement, in the framework of the Stabilisation and Association process with the countries of south-eastern Europe, in the establishment and consolidation of a stable European order based on co-operation, of which the European Union is a mainstay, as well as in the framework of the Stability Pact.

Considering the commitment of the Parties to contribute by all means to the political, economic and institutional stabilisation in Croatia as well as in the region, through the development of civic society and democratisation, institution building and public administration reform, enhanced trade and economic co-operation, wide-ranging co-operation, including in justice and home affairs, and the strengthening of national and regional security;

Considering the commitment of the Parties to increasing political and economic freedoms as the very basis of this agreement, as well as their commitment to respect human rights and the rule of law, including the rights of persons belonging to national minorities, and democratic principles through a multiParty system with free and fair elections;

Considering that Croatia reaffirms its commitment to the right of return for all refugees and displaced persons and to the protection of their related rights;

Considering the commitment of the Parties to the full implementation of all principles and provisions of the UN Charter, of the OSCE, notably those of the Helsinki Final Act, the concluding documents of the Madrid and Vienna Conferences, the Charter of Paris for a New Europe, and of the Stability Pact for south-eastern Europe, as well as to compliance with the obligations under the Dayton/Paris and Erdut agreements, so as to contribute to regional stability and co-operation among the countries of the region;

Considering the commitment of the Parties to the principles of free market economy and the readiness of the Community to contribute to the economic reforms in Croatia;

Considering the commitment of the Parties to free trade, in compliance with the rights and obligations arising out of the WTO;

Desirous of establishing regular political dialogue on bilateral and international issues of mutual interest, including regional aspects, taking into account the Common Foreign and Security Policy of the European Union;

Convinced that the Stabilisation and Association Agreement will create a new climate for economic relations between them and above all for the development of trade and investment, factors crucial to economic restructuring and modernisation;

Bearing in mind the commitment by Croatia to approximate its legislation in the relevant sectors to that of the Community;

Taking account of the Community's willingness to provide decisive support for the implementation of reform and reconstruction, and to use all available instruments of co-operation and technical, financial and economic assistance on a comprehensive indicative multi-annual basis to this endeavour;

Confirming that the provisions of this agreement that fall within the scope of Part III, Title IV of the Treaty establishing the European Community bind the United Kingdom and Ireland as separate Contracting Parties, and not as a part of the European Community, until the United Kingdom or Ireland (as the case may be) notifies Croatia that it has become bound as part of the European Community in accordance with the Protocol on the position of the United Kingdom and Ireland annexed to the Treaty on European Union and the Treaty establishing the European Community. The same applies to Denmark, in accordance with the protocol annexed to those Treaties on the position of Denmark;

Recalling the Zagreb Summit, which called for further consolidation of relations between the countries of the Stabilisation and Association Process and the European Union as well as enhanced regional co-operation;

Recalling the European Union's readiness to integrate to the fullest possible extent Croatia into the political and economic mainstream of Europe and its status as a potential candidate for EU membership on the basis of the Treaty on European Union and fulfilment of the criteria defined by the European Council in June 1993, subject to the successful implementation of this Agreement, notably regarding regional co-operation.

HAVE AGREED AS FOLLOWS

Article 1

1. An Association is hereby established between the Community and its Member States of the one part and Croatia of the other part.

2. The aims of this Association are:

- to provide an appropriate framework for political dialogue, allowing the development of close political relations between the Parties;

- to support the efforts of Croatia to develop its economic and international co-operation, also through the approximation of its legislation to that of the Community;

- to support the efforts of Croatia to complete the transition into a market economy, to promote harmonious economic relations and develop gradually a free trade area between the Community and Croatia;

- to foster regional co-operation in all the fields covered by this Agreement.

TITLE I

GENERAL PRINCIPLES

Article 2

Respect for the democratic principles and human rights as proclaimed in the Universal Declaration of Human Rights and as defined in the Helsinki Final Act and the Charter of Paris for a New Europe, respect for international law principles and the rule of law as well as the principles of market economy as reflected in the Document of the CSCE Bonn Conference on Economic Cooperation, shall form the basis of the domestic and external policies of the Parties and constitute essential elements of this Agreement.

Article 3

International and regional peace and stability and the development of good neighbourly relations are central to the Stabilisation and Association Process referred to in the conclusions of the Council of the European Union on 21 June 1999. The conclusion and the implementation of this Agreement come within the framework of the conclusions of the Council of the European Union of 29 April 1997, and are based on the individual merits of Croatia.Article 4

Croatia commits itself to continue and foster co-operation and good neighbourly relations with the other countries of the region including an appropriate level of mutual concessions concerning the movement of persons, goods, capital and services as well as the development of projects of common interest, notably those related to refugee return and combating organised crime, corruption, money laundering, illegal migration and trafficking. This commitment constitutes a key factor in the development of the relations and co-operation between the Parties and thus contributes to regional stability.

Article 5

1. The Association shall be implemented progressively and shall be fully realised at the latest within six years after the entry into force of this Agreement.

2. The Stabilisation and Association Council established under Article 110 shall regularly review the application of this Agreement and the accomplishment by Croatia of legal, administrative, institutional and economic reforms in the light of the preamble and in accordance with the general principles laid down in this Agreement.

Article 6

The Agreement shall be fully compatible with the relevant WTO provisions, in particular Article XXIV of the GATT 1994 and Article V of the GATS.

TITLE II

POLITICAL DIALOGUE

Article 7

Political dialogue between the Parties shall be established within the context of this Agreement. It shall accompany and consolidate the rapprochement between the European Union and Croatia and contribute to the establishment of close links of solidarity and new forms of co-operation between the Parties.

The political dialogue is intended to promote in particular:

- Croatia's full integration into the community of democratic nations and gradual rapprochement with the European Union;

- an increasing convergence of positions of the Parties on international issues, also through the exchange of information as appropriate, and, in particular, on those issues likely to have substantial effects on the Parties;

- regional co-operation and the development of good neighbourly relations;

- common views on security and stability in Europe, including co-operation in the areas covered by the Common Foreign and Security Policy of the European Union.

Article 8

1. Political dialogue shall take place within the Stabilisation and Association Council, which shall have the general responsibility for any matter which the Parties might wish to put to it.

2. At the request of the Parties, political dialogue may also take place in the following formats:

- meetings, where necessary, of senior officials representing Croatia, on the one hand, and the Presidency of the Council of the European Union and the Commission, on the other;

- taking full advantage of all diplomatic channels between the Parties, including appropriate contacts in third countries and within the United Nations, the OSCE, the Council of Europe and other international fora;

- any other means which would make a useful contribution to consolidating, developing and stepping up this dialogue.

Article 9

Political dialogue at parliamentary level shall take place within the framework of the Stabilisation and Association Parliamentary Committee established under Article 116.

Article 10

Political dialogue may take place within a multilateral framework, and as a regional dialogue including other countries of the region.

TITLE III

REGIONAL COOPERATION

Article 11

In conformity with its commitment to peace and stability, and to the development of good neighbourly relations, Croatia will actively promote regional co-operation. The Community will also support projects having a regional or cross-border dimension through its technical assistance programmes.

Whenever Croatia foresees to reinforce its co-operation with one of the countries mentioned in Articles 12 to 14 below, it shall inform and consult the Community and its Member States according to the provisions laid down in Title X.

Article 12

Co-operation with other countries

having signed a Stabilisation and Association Agreement

After the signature of this Agreement, Croatia shall start negotiations with the country or the countries which have already signed a Stabilisation and Association Agreement with a view to conclude bilateral conventions on regional co-operation, the aim of which will be to enhance the scope of co-operation between the countries concerned.

The main elements of these conventions will be:

- political dialogue;

- the establishment of a free trade area between the parties, consistent with relevant WTO provisions;

- mutual concessions concerning the movement of workers, establishment, supply of services, current payments and movement of capital as well as other policies related to movement of persons at an equivalent level to that of this Agreement;

- provisions on co-operation in other fields whether or not covered by this Agreement, and notably the field of Justice and Home Affairs.

These conventions will contain provisions for the creation of the necessary institutional mechanisms, as appropriate.

These conventions shall be concluded within two years after the entry into force of this Agreement. Readiness by Croatia to conclude such conventions will be a condition for the further development of the relations between Croatia and the European Union.

Article 13

Co-operation with other countries concerned by the Stabilisation and Association Process

Croatia shall engage in regional co-operation with the other countries concerned by the Stabilisation and Association Process in some or all the fields of co-operation covered by this Agreement, and notably those of common interest. Such co-operation should be compatible with the principles and objectives of this Agreement.

Article 14

Co-operation with countries candidate to EU accession

Croatia may foster its co-operation and conclude a convention on regional co-operation with any country candidate for EU accession in any of the fields of co-operation covered by this Agreement. Such convention should aim to gradually align bilateral relations between Croatia and this country to the relevant part of the relations between the European Community and its Member States and this country.

TITLE IV

FREE MOVEMENT OF GOODS

Article 15

1. The Community and Croatia shall gradually establish a free trade area over a period lasting a maximum of six years starting from the entry into force of this Agreement in accordance with the provisions of this Agreement and in conformity with those of the GATT 1994 and the WTO. In so doing they shall take into account the specific requirements laid down hereinafter.

2. The Combined Nomenclature of goods shall be applied to the classification of goods in trade between the two Parties.

3. For each product the basic duty to which the successive reductions set out in this Agreement are to be applied shall be the duty actually applied erga omnes on the day preceding the signature of this Agreement or the duty bound in the WTO for the year 2002 whichever is the lowest.

4. If, after the signature of this Agreement, any tariff reduction is applied on an erga omnes basis, in particular reductions resulting from the tariff negotiations in the WTO, such reduced duties shall replace the basic duty referred to in paragraph 3 as from the date when such reductions are applied.

5. The Community and Croatia shall communicate to each other their respective basic duties.

CHAPTER I

INDUSTRIAL PRODUCTS

Article 16

1. The provisions of this Chapter shall apply to products originating in the Community or in Croatia listed in Chapters 25 to 97 of the Combined Nomenclature, with the exception of the products listed in Annex I. I, (ii) of the Agreement on agriculture (GATT 1994).

2. The provisions of Articles 17 and 18 shall neither apply to textile products nor to steel products of Chapter 72 of the Combined Nomenclature, as specified in Articles 22 and 23.

3. Trade between the Parties in products covered by the Treaty establishing the European Atomic Energy Community shall be conducted in accordance with the provisions of that Treaty.

Article 17

1. Customs duties on imports into the Community of products originating in Croatia shall be abolished upon the entry into force of this Agreement.

2. Quantitative restrictions on imports into the Community and measures having equivalent effect shall be abolished on the date of entry into force of this Agreement with regard to products originating in Croatia.

Article 18

1. Customs duties on imports into Croatia of goods originating in the Community other than those listed in Annexes I and II shall be abolished upon the entry into force of this Agreement.

2. Customs duties on imports into Croatia of goods originating in the Community which are listed in Annex I shall be progressively reduced in accordance with the following timetable:

- on the entry into force of the Agreement each duty shall be reduced to 60% of the basic duty

- on 1 January 2003 each duty shall be reduced to 30% of the basic duty;

- on 1 January 2004 the remaining duties shall be abolished.

3. Customs duties on imports into Croatia of goods originating in the Community which are listed in Annex II shall be progressively reduced and eliminated in accordance with the following timetable:

- on the entry into force of the Agreement each duty shall be reduced to 70% of the basic duty;

- on 1 January 2003 each duty shall be reduced to 50% of the basic duty;

- on 1 January 2004 each duty shall be reduced to 40% of the basic duty;

- on 1 January 2005 each duty shall be reduced to 30% of the basic duty;

- on 1 January 2006 each duty shall be reduced to 15% of the basic duty;

- on 1 January 2007 the remaining duties shall be abolished.

4. Quantitative restrictions on imports into Croatia of goods originating in the Community and measures having equivalent effect shall be abolished upon the date of entry into force of this Agreement.Article 19

The Community and Croatia shall abolish upon the entry into force of this Agreement in trade between themselves any charges having an effect equivalent to customs duties on imports.

Article 20

1. The Community and Croatia shall abolish any customs duties on exports and charges having equivalent effect upon the entry into force of this Agreement.

2. The Community and Croatia shall abolish between themselves any quantitative restrictions on exports and measures having equivalent effect upon the entry into force of this Agreement.

Article 21

Croatia declares its readiness to reduce its customs duties in trade with the Community more rapidly than is provided for in Article 18 if its general economic situation and the situation of the economic sector concerned so permit.

The Stabilisation and Association Council shall make recommendations to this effect.

Article 22

Protocol 1 lays down the arrangements applicable to the textile products referred to therein.

Article 23

Protocol 2 lays down the arrangements applicable to steel products of Chapter 72 of the combined nomenclature.

CHAPTER II

AGRICULTURE AND FISHERIES

Article 24

Definition

1. The provisions of this Chapter shall apply to trade in agricultural and fishery products originating in the Community or in Croatia.

2. The term ''agricultural and fishery products" refers to the products listed in Chapters 1 to 24 of the Combined Nomenclature and the products listed in Annex I, I, (ii) of the Agreement on agriculture (GATT, 1994)

3. This definition includes fish and fisheries products covered by chapter 3, headings 1604 and 1605, and sub-headings 0511 91, 2301 20 and ex 1902 20 ("stuffed pasta containing more than 20% by weight of fish, crustaceans, molluscs or other aquatic invertebrates").

Article 25

Protocol 3 lays down the trade arrangements for processed agricultural products which are listed therein.

Article 26

1. On the date of entry into force of this Agreement, the Community shall abolish all quantitative restrictions and measures having equivalent effect, on imports of agricultural and fishery products originating in Croatia.

2. On the date of entry into force of this Agreement, Croatia shall abolish all quantitative restrictions and measures having equivalent effect, on imports of agricultural and fishery products originating in the Community.

Article 27

Agricultural products

1. From the date of entry into force of this Agreement, the Community shall abolish the customs duties and charges having equivalent effect, on imports of agricultural products originating in Croatia, other than those of heading Nos 0102, 0201, 0202 and 2204 of the Combined Nomenclature. For the products covered by Chapters 7 and 8 of the Combined Nomenclature, for which the Common Customs Tariff provides for the application of ad valorem customs duties and a specific customs duty, the elimination applies only to the ad valorem part of the duty.

2. From the date of entry into force of this Agreement, the Community shall fix the customs duties applicable to imports into the Community of «baby-beef» products defined in Annex III and originating in Croatia, at 20% of the ad valorem duty and 20% of the specific duty as laid down in the Common Customs Tariff of the European Communities, within the limit of an annual tariff quota of 9.400 tonnes expressed in carcass weight.

3. From the date of entry into force of this Agreement, Croatia shall

(a) abolish the customs duties applicable on imports of certain agricultural products originating in the Community, listed in Annex IV (a);

(b) abolish the customs duties applicable on imports of certain agricultural products originating in the Community, listed in Annex IV (b) within the limits of tariff quotas indicated for each product in that Annex. The tariff quotaswill be increased yearly by a quantity indicated for each product in that Annex.

From the first year after the date of entry into force of this Agreement, Croatia shall

(c) abolish the customs duties applicable on imports of certain agricultural products originating in the Community, listed in Annex IV (c).

From the date of entry into force of this Agreement, Croatia shall

(d) abolish progressively the customs duties applicable on imports of certain agricultural products originating in the Community, listed in Annex IV (d) within the limits of tariff quotas and in accordance with the timetable indicated for each product in that Annex.

(e) reduce progressively to 50% of the MFN duty the customs duties applicable on imports of certain agricultural products originating in the Community, listed in Annex IV (e) in accordance with the timetable indicated for each product in that Annex.

(f) reduce progressively to 50% of the MFN duty the customs duties applicable on imports of certain agricultural products originating in the Community, listed in Annex IV (f) within the limits of tariff quotas in accordance with the timetable indicated for each product in that Annex.

4. The trade arrangements to apply to wine and spirit products will be defined in a separate wine and spirit agreement.

Article 28

Fisheries products

1. From the entry into force of this Agreement the Community shall totally eliminate customs duties on fish and fisheries products, other than those listed in Annex V (a), originating in Croatia. Products listed in Annex V (a) shall be subject to the provisions laid down therein.

2. From the entry into force of this Agreement Croatia shall abolish all charges having an equivalent effect to a custom duty and totally eliminate customs duties on fish and fisheries products, other than those listed in Annex V (b), originating in the European Community. Products listed in Annex V (b) shall be subject to provisions laid down therein.

Article 29

Taking account of the volume of trade in agricultural and fishery products between the Parties, of their particular sensitivities, of the rules of the Community common policies and of the Croatian policies for agriculture and fisheries, of the role of agriculture and fisheries in Croatia's economy and of the consequences of the multilateral trade negotiations under the WTO, the Community and Croatia shall examine in the Stabilisation and Association Council, no later than 1 July 2006 product by product and on an orderly and appropriate reciprocal basis, the opportunities for granting each other further concessions with a view to implementing greater liberalisation of the trade in agricultural and fishery products.

Article 30

The provisions of this Chapter shall in no way affect the application, on a unilateral basis, of more favourable measures by one or the other Party.

Article 31

Notwithstanding other provisions of this Agreement, and in particular Article 38, given the particular sensitivity of the agricultural and fisheries markets, if imports of products originating in one of the two Parties, which are the subject of concessions granted pursuant to Article 25, 27 and 28, cause serious disturbance to the markets or to their domestic regulatory mechanisms, in the other Party, both Parties shall enter into consultations immediately to find an appropriate solution. Pending such solution, the Party concerned may take the appropriate measures it deems necessary.

CHAPTER III

COMMON PROVISIONS

Article 32

The provisions of this Chapter shall apply to trade in all products between the Parties except where otherwise provided herein or in Protocols 1, 2 and 3.

Article 33

Standstill

1. From the date of entry into force of this Agreement, no new customs duties on imports or exports or charges having equivalent effect shall be introduced, nor shall those already applied be increased, in trade between the Community and Croatia.

2. From the date of entry into force of this Agreement, no new quantitative restriction on imports or exports or measure having equivalent effect shall be introduced, nor shall those existing be made more restrictive, in trade between the Community and Croatia.

3. Without prejudice to the concessions granted under Article 26, the provisions of paragraphs 1 and 2 of this Article shall not restrict in any way the pursuit of the respective agricultural policies of Croatia and the Community or the taking of any measures under those policies in so far as the import regime in the Annexes III, IV (a) (b) (c) (d) (e) (f) and V (a) (b) is not affected.

Article 34

Prohibition of fiscal discrimination

1. The Parties shall refrain from, and abolish where existing, any measure or practice of an internal fiscal nature establishing, whether directly or indirectly, discrimination between the products of one Party and like products originating in the territory of the other Party.

2. Products exported to the territory of one of the Parties may not benefit from repayment of internal indirect taxation in excess of the amount of indirect taxation imposed on them.

Article 35 The provisions concerning the abolition of customs duties on imports shall also apply to customs duties of a fiscal nature.

Article 36

Customs unions, free trade areas, cross-border arrangements

1. This Agreement shall not preclude the maintenance or establishment of customs unions, free trade areas or arrangements for frontier trade except in so far as they alter the trade arrangements provided for in this Agreement.

2. During the transitional periods specified in Article 18 this Agreement shall not affect the implementation of the specific preferential arrangements governing the movement of goods either laid down in frontier agreements previously concluded between one or more Member States and the Socialist Federal Republic of Yugoslavia and succeeded to by Croatia or resulting from the bilateral agreements specified in Title III concluded by Croatia in order to promote regional trade.

3. Consultations between the Parties shall take place within the Stabilisation and Association Council concerning the agreements described in paragraphs 1 and 2 of this Article and, where requested, on other major issues related to their respective trade policies towards third countries. In particular in the event of a third country acceding to the Community, such consultations shall take place so as to ensure that account is taken of the mutual interests of the Community and Croatia stated in this Agreement.

Article 37

Dumping

1. If one of the Parties finds that dumping is taking place in trade with the other Party within the meaning of Article VI of the GATT 1994, it may take appropriate measures against this practice in accordance with the Agreement on implementation of Article VI of the GATT 1994 and its own related internal legislation.

2. As regards paragraph 1 of this Article, the Stabilisation and Association Council shall be informed of the dumping case as soon as the authorities of the importing Party have initiated an investigation. When no end has been put to the dumping within the meaning of Article VI of the GATT or no other satisfactory solution has been reached within 30 days of the matter being referred to the Stabilisation and Association Council, the importing Party may adopt the appropriate measures.

Article 38

General safeguard clause

1. Where any product of one Party is being imported into the territory of the other Party in such increased quantities and under such conditions as to cause or threaten to cause:

- serious injury to the domestic industry of like or directly competitive products in the territory of the importing Party; or

- serious disturbances in any sector of the economy or difficulties which could bring about serious deterioration in the economic situation of a region of the importing Party,

the importing Party may take appropriate measures under the conditions and in accordance with the procedures laid down in this Article.

2. The Community and Croatia shall only apply safeguard measures between themselves in accordance with the provisions of this Agreement. Such measures shall not exceed what is necessary to remedy the difficulties which have arisen, and should normally consist of the suspension of the further reduction of any applicable rate of duty provided for under this Agreement for the product concerned or the increase of the rate of duty for that product. Such measures shall contain clear elements progressively leading to their elimination at the end of the set period, at the latest. Measures shall not be taken for a period exceeding one year. In very exceptional circumstances, measures may be taken up to a total maximum period of three years. No safeguard measure shall be applied to the import of a product that has previously been subject to such a measure for a period of, at least, three years since the expiry of the measure.

3. In the cases specified in this Article, before taking the measures provided for therein or, in the cases to which paragraph 4 (b) of this Article applies, as soon as possible, the Community or Croatia, as the case may be, shall supply the Stabilisation and Association Council with all relevant information, with a view to seeking a solution acceptable to the two Parties.

4. For the implementation of the above paragraphs the following provisions shall apply:

(a) The difficulties arising from the situation referred to in this Article shall be referred for examination to the Stabilisation and Association Council, which may take any decisions needed to put an end to such difficulties.

If the Stabilisation and Association Council or the exporting Party has not taken a decision putting an end to the difficulties or no other satisfactory solution has been reached within 30 days of the matter being referred to the Stabilisation and Association Council, the importing Party may adopt the appropriate measures to remedy the problem in accordance with this Article. In the selection of safeguard measures, priority must be given to those which least disturb the functioning of the arrangements established in this Agreement.

(b) Where exceptional and critical circumstances requiring immediate action make prior information or examination, as the case may be, impossible, the Party concerned may, in the situations specified in this Article, apply forth with precautionary measures necessary to deal with the situation and shall inform the other Party immediately thereof.

The safeguard measures shall be notified immediately to the Stabilisation and Association Council and shall be the subject of periodic consultations within that body, particularly with a view to establishing a timetable for their abolition as soon as circumstances permit.

5. In the event of the Community or Croatia subjecting imports of products liable to give rise to the difficulties referred to in this Article to an administrative procedure having at its purpose the rapid provision of information on the trend of trade flows, it shall inform the other Party.

Article 39

Shortage clause

1. Where compliance with the provisions of this Title leads to:

(a) a critical shortage, or threat thereof, of foodstuffs or other products essential to the exporting Party; or

(b) re-export to a third country of a product against which the exporting Party maintains quantitative export restrictions, export duties or measures or charges having equivalent effect, and where the situations referred to above give rise, or are likely to give rise to major difficulties for the exporting Party

that Party may take appropriate measures under the conditions and in accordance with the procedures laid down in this Article.

2. In the selection of measures, priority must be given to those which least disturb the functioning of the arrangements in this Agreement. Such measures shall not be applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination where the same conditions prevail, or a disguised restriction on trade and shall be eliminated when the conditions no longer justify their maintenance.

3. Before taking the measures provided for in paragraph 1 of this Article or, as soon as possible in cases to which paragraph 4 of this Article applies the Community or Croatia, as the case may be, shall supply the Stabilisation and Association Council with all relevant information, with a view to seeking a solution acceptable to the Parties. The Parties within the Stabilisation and Association Council may agree on any means needed to put an end to the difficulties. If no agreement is reached within 30 days of the matter being referred to the Stabilisation and Association Council, the exporting Party may apply measures under this Article on the exportation of the product concerned.

4. Where exceptional and critical circumstances requiring immediate action make prior information or examination, as the case may be, impossible, the Community or Croatia, whichever is concerned, may apply forth with the precautionary measures necessary to deal with the situation and shall inform the other Party immediately thereof.

5. Any measures applied pursuant to this Article shall be immediately notified to the Stabilisation and Association Council and shall be the subject of periodic consultations within that body, particularly with a view to establishing a timetable their elimination as soon as circumstances permit.

Article 40

State monopolies

Croatia shall progressively adjust any State monopolies of a commercial character so as to ensure that, by the end of the fourth year following the entry into force of this Agreement, no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of the Member States and Croatia. The Stabilisation and Association Council shall be informed about the measures adopted to attain this objective.

Article 41

Protocol 4 lays down the rules of origin for the application of tariff preferences provided for in this Agreement.

Article 42

Restrictions authorised

This Agreement shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures of artistic, historic or archaeological value or the protection of intellectual, industrial and commercial property, or rules relating to gold and silver. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between the Parties.

Article 43

Both parties agree to co-operate to reduce the potential for fraud in the application of the trade provisions of this Agreement.

Notwithstanding other provisions of this Agreement, and in particular Articles 31, 38 and 89 and Protocol 4, where one Party finds that there is sufficient evidence of fraud such as a significant increase in trade of products by one party to the other party, beyond the level reflecting economic conditions such as normal production and export capacities, or failure to provide administrative co-operation as required for the verification of evidence of origin by the other Party, both Parties shall enter into consultations immediately to find an appropriate solution. Pending such solution, the Party concerned may take the appropriate measures it deems necessary. In the selection of the measures priority must be given to those which least disturb the functioning of the arrangements established in this Agreement.

Article 44

The application of this Agreement shall be without prejudice to the application of the provisions of Community law to the Canary Islands.

TITLE V

MOVEMENT OF WORKERS, ESTABLISHMENT, SUPPLY OF SERVICES, CAPITAL

CHAPTER I

MOVEMENT OF WORKERS

Article 45

1. Subject to the conditions and modalities applicable in each Member State:

- treatment accorded to workers who are Croatian nationals and who are legally employed in the territory of a Member State shall be free of any discrimination based on nationality, as regards working conditions, remuneration or dismissal, compared to its own nationals;

- the legally resident spouse and children of a worker legally employed in the territory of a Member State, with the exception of seasonal workers and of workers coming under bilateral agreements within the meaning of Article 46, unless otherwise provided by such agreements, shall have access to the labour market of that Member State, during the period of that worker's authorised stay of employment.

2. Croatia shall, subject to the conditions and modalities in that country, accord the treatment referred to in paragraph 1 to workers who are nationals of a Member State and are legally employed in its territory as well as to their spouse and children who are legally resident in the said country.

Article 46

1. Taking into account the labour market situation in the Member States, subject to their legislation and to compliance with the rules in force in the Member States in the area of mobility of workers:

- the existing facilities of access to employment for Croatian workers accorded by Member States under bilateral agreements should be preserved and if possible improved;

- the other Member States shall examine the possibility of concluding similar agreements.

2. The Stabilisation and Association Council shall examine the granting of other improvements, including facilities for access to professional training, in accordance with the rules and procedures in force in the Member States, and taking into account the labour market situation in the Member States and in the Community.

Article 47

1. Rules shall be laid down for the co-ordination of social security systems for workers with Croatian nationality, legally employed in the territory of a Member State, and for the members of their families legally resident there. To that effect, a decision of the Stabilisation and Association Council, which should not affect any rights or obligations arising from bilateral agreements where the latter provide for more favourable treatment, shall put the following provisions in place:

- all periods of insurance, employment or residence completed by such workers in the various Member States shall be added together for the purpose of pensions and annuities in respect of old age, invalidity and death and for the purpose of medical care for such workers and such family members;

- any pensions or annuities in respect of old age, death, industrial accident or occupational disease, or of invalidity resulting therefrom, with the exception of non-contributory benefits, shall be freely transferable at the rate applied by virtue of the law of the debtor Member State or States;

- the workers in question shall receive family allowances for the members of their families as defined above;

2. Croatia shall accord to workers who are nationals of a Member State and legally employed in its territory, and to members of their families legally resident there, treatment similar to that specified in the second and third indents of paragraph 1.

CHAPTER II

ESTABLISHMENT

Article 48

For the purposes of this Agreement:

a) "Community company" or a "Croatian company" respectively shall mean a company set up in accordance with the laws of a Member State or of Croatia respectively and having its registered office or central administration or principal place of business in the territory of the Community or Croatia respectively.

However, should the company, set up in accordance with the laws of a Member State or of Croatia respectively, have only its registered office in the territory of the Community or of Croatia respectively, the company shall be considered a Community or a Croatian company respectively if its operations possess a real and continuous link with the economy of one of the Member States or of Croatia respectively;

b) "Subsidiary" of a company shall mean a company which is effectively controlled by the first company;

c) "Branch" of a company shall mean a place of business not having legal personality which has the appearance of permanency, such as the extension of a parent body, has a management and is materially equipped to negotiate business with third Parties so that the latter, although knowing that there will if necessary be a legal link with the parent body, the head office of which is abroad, do not have to deal directly with such parent body but may transact business at the place of business constituting the extension;

d) "Establishment" shall mean:

(i) as regards nationals, the right to take up economic activities as self-employed persons, and to set up undertakings, in particular companies, which they effectively control. Self-employment and business undertakings by nationals shall not extend to seeking or taking employment in the labour market or confer a right of access to the labour market of another party. The provisions of this Chapter do not apply to those who are not exclusively self-employed;

(ii) as regards Community or Croatian companies, the right to take up economic activities by means of the setting up of subsidiaries and branches in Croatia or in the Community respectively;

e) "Operations" shall mean the pursuit of economic activities;

f) "Economic activities" shall in principle include activities of an industrial, commercial and professional character and activities of craftsmen;

g) "Community national" and "Croatian national" shall mean respectively a natural person who is a national of one of the Member States or of Croatia ;

h) with regard to international maritime transport, including intermodal operations involving a sea leg, nationals of the Member States or of Croatia established outside the Community or Croatia respectively, and shipping companies established outside the Community or Croatia and controlled by nationals of a Member State or Croatian nationals respectively, shall also be beneficiaries of the provisions of this Chapter and Chapter III, if their vessels are registered in that Member State or in Croatia respectively, in accordance with their respective legislation.

i) "Financial services" shall mean those activities described in Annex VI. The Stabilisation and Association Council may extend or modify the scope of that Annex.

Article 49

1. Croatia shall facilitate the setting-up of operations on its territory by Community companies and nationals. To that end, it shall grant, upon entry into force of this Agreement:

(i) as regards the establishment of Community companies treatment no less favourable than that accorded to its own companies or to any third country company, whichever is the better, and;

(ii) as regards the operation of subsidiaries and branches of Community companies in Croatia, once established, treatment no less favourable than that accorded to its own companies and branches or to any subsidiary and branch of any third country company, whichever is the better.

2. The Parties shall not adopt any new regulations or measures which introduce discrimination as regards the establishment of Community or Croatian companies on their territory or in respect of their operation, once established, by comparison with their own companies.

3. The Community and its Member States shall grant, from the entry into force of this Agreement:

(i) as regards the establishment of Croatian companies, treatment no less favourable than that accorded by Member States to their own companies or to any company of any third country, whichever is the better;

(ii) as regards the operation of subsidiaries and branches of Croatian companies, established in their territory, treatment no less favourable than that accorded by Member States to their own companies and branches, or to any subsidiary and branch of any third country company, established in their territory, whichever is the better.

4. Four years after the entry into force of this Agreement, the Stabilisation and Association Council will establish the modalities to extend the above provisions to the establishment of nationals of both Parties to the Agreement to take up economic activities as self-employed persons.

5. Notwithstanding the provisions of this Article:

(a) Subsidiaries and branches of Community companies shall have, from the entry into force of this Agreement, the right to use and rent real property in Croatia;

(b) Subsidiaries of Community companies shall also have the right to acquire and enjoy ownership rights over real property as Croatian companies and as regards public goods/goods of common interest, the same rights as enjoyed by Croatian companies, where these rights are necessary for the conduct of the economic activities for which they are established excluding natural resources, agricultural land, forests and forestry land. Four years after the entry into force of this Agreement the Stabilisation and Association Council shall establish the modalities for extending rights under this paragraph to the excluded sectors.

(c) Four years after the entry into force of this Agreement, the Stabilisation and Association Council shall examine the possibility of extending the rights under (b), including rights in the excluded sectors, to branches of Community companies.Article 50

1. Subject to the provisions of Article 49, with the exception of financial services described in Annex VI, each Party may regulate the establishment and operation of companies and nationals on its territory, in so far as these regulations do not discriminate against companies and nationals of the other Party in comparison with its own companies and nationals.

2. In respect of financial services, notwithstanding any other provisions of this Agreement, a Party shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owned by a financial service supplier, or to ensure the integrity and stability of the financial system. Such measures shall not be used as a means of avoiding the Party's obligations under the Agreement.

3. Nothing in the Agreement shall be construed to require a Party to disclose information relating to the affairs and accounts of individual customers or any confidential or proprietary information in the possession of public entities.

Article 51

1. The provisions of this Chapter shall not apply to air transport services, inland waterways transport services and maritime cabotage services.

2. The Stabilisation and Association Council may make recommendations for improving establishment and operations in the areas covered by paragraph 1.

Article 52

1. The provisions of Articles 49 and 50 do not preclude the application by a Party of particular rules concerning the establishment and operation in its territory of branches of companies of another Party not incorporated in the territory of the first Party, which are justified by legal or technical differences between such branches as compared to branches of companies incorporated in its territory or, as regards financial services, for prudential reasons.

2. The difference in treatment shall not go beyond what is strictly necessary as a result of such legal or technical differences or, as regards financial services, for prudential reasons.

Article 53

In order to make it easier for Community nationals and Croatian nationals to take up and pursue regulated professional activities in Croatia and Community respectively, the Stabilisation and Association Council shall examine which steps are necessary for the mutual recognition of qualifications. It may take all necessary measures to that end.

Article 54

1. A Community company or a Croatian company established in the territory of Croatia or the Community respectively shall be entitled to employ, or have employed by one of its subsidiaries or branches, in accordance with the legislation in force in the host country of establishment, in the territory of Croatia and the Community respectively, employees who are nationals of the Member States and of Croatia respectively, provided that such employees are key personnel as defined in paragraph 2 and that they are employed exclusively by companies, subsidiaries or branches. The residence and work permits of such employees shall only cover the period of such employment.

2. Key personnel of the above mentioned companies, herein referred to as "organisations", are "intra-corporate transferees" as defined in c) of this paragraph in the following categories, provided that the organisation is a legal person and that the persons concerned have been employed by it or have been partners in it (other than as majority shareholders), for at least the year immediately preceding such movement:

(a) Persons working in a senior position with an organisation, who primarily direct the management of the establishment, receiving general supervision or direction principally from the board of directors or stockholders of the business or their equivalent including:

- directing the establishment of a department or sub-division of the establishment;

- supervising and controlling the work of other supervisory, professional or managerial employees;

- having the authority personally to recruit and dismiss or recommend recruiting, dismissing or other personnel actions;

(b) Persons working within an organisation who possess uncommon knowledge essential to the establishment's service, research equipment, techniques or management. The assessment of such knowledge may reflect, apart from knowledge specific to the establishment, a high level of qualification referring to a type of work or trade requiring specific technical knowledge, including membership of an accredited profession;

(c) An "intra-corporate transferee" is defined as a natural person working within an organisation in the territory of a Party, and being temporarily transferred in the context of pursuit of economic activities in the territory of the other Party; the organisation concerned must have its principal place of business in the territory of a Party and the transfer be to an establishment (branch, subsidiary) of that organisation, effectively pursuing like economic activities in the territory of the other Party.

3. The entry into and the temporary presence within the territory of the Community or Croatia of Croatian and Community nationals respectively shall be permitted, when these representatives of companies are persons working in a senior position, as defined in paragraph 2(a) above, within a company, and are responsible for the setting up of a Community subsidiary or branch of a Croatian company or of a Croatian subsidiary or branch of a Community company in a Member State or in Croatia respectively, when:

- those representatives are not engaged in making direct sales or supplying services, and

- the company has its principal place of business outside the Community or Croatia, respectively, and has no other representative, office, branch or subsidiary in that Member State or in Croatia respectively.

Article 55

During the first three years following the date of entry into force of this Agreement, Croatia may, on a transitional basis, introduce measures which derogate from the provisions of this Chapter as regards the establishment of Community companies and nationals of certain industries which:

- are undergoing restructuring, or are facing serious difficulties, particularly where these entail serious social problems in Croatia, or

- face the elimination or a drastic reduction of the total market share held by Croatian companies or nationals in a given sector or industry in Croatia, or

- are newly emerging industries in Croatia

Such measures:

(i) shall cease to apply at the latest five years after the entry into force of this Agreement.

(ii) shall be reasonable and necessary in order to remedy the situation, and

(iii) shall not introduce discrimination concerning the activities of Community companies or nationals already established in Croatia at the time of introduction of a given measure, by comparison with Croatian companies or nationals.

While devising and applying such measures, Croatia shall grant preferential treatment wherever possible to Community companies and nationals, and in no case treatment less favourable than that accorded to companies or nationals from any third country. Prior to the adoption of these measures, Croatia shall consult the Stabilisation and Association Council and shall not put them into effect before a one month period has elapsed following the notification to the Stabilisation and Association Council of the concrete measures to be introduced by Croatia, except where the threat of irreparable damage requires the taking of urgent measures, in which case Croatia shall consult the Stabilisation and Association Council immediately after their adoption.

Upon the expiry of the third year following the entry into force of this Agreement Croatia may introduce or maintain such measures only with the authorisation of the Stabilisation and Association Council and under conditions determined by the latter.

CHAPTER III

SUPPLY OF SERVICES

Article 56

1. The Parties undertake in accordance with the following provisions to take the necessary steps to allow progressively the supply of services by Community or Croatian companies or nationals which are established in a Party other than that of the person for whom the services are intended.

2. In step with the liberalisation process mentioned in paragraph 1, the Parties shall permit the temporary movement of natural persons providing the service or who are employed by the service provider as key personnel as defined in Article 54, including natural persons who are representatives of a Community or Croatian company or national and are seeking temporary entry for the purpose of negotiating for the sale of services or entering into agreements to sell services for that service provider, where those representatives will not be engaged in making direct sales to the general public or in supplying services themselves.

3. As from four years after the entry into force of this Agreement, the Stabilisation and Association Council shall take the measures necessary to implement progressively the provisions of paragraph 1. Account shall be taken of the progress achieved by the Parties in the approximation of their laws.

Article 57

1. The Parties shall not take any measures or actions which render the conditions for the supply of services by Community and Croatian nationals or companies which are established in a Party other than that of the person for whom the services are intended significantly more restrictive as compared to the situation existing on the day preceding the day of entry into force of the Agreement.

2. If one Party is of the view that measures introduced by the other Party since the entry into force of the Agreement result in a situation which is significantly more restrictive in respect of supply of services as compared with the situation existing at the date of entry into force of the Agreement, such first Party may request the other Party to enter into consultations.

Article 58

With regard to supply of transport services between the Community and Croatia, the following provisions shall apply:

1. With regard to inland transport, Protocol 6 lays down the rules applicable to the relationship between the Parties in order to ensure, particularly, unrestricted road transit traffic across Croatia and the Community as a whole, the effective application of the principle of non discrimination and progressive harmonisation of the Croatian transport legislation with that of the Community.

2. With regard to international maritime transport the Parties undertake to apply effectively the principle of unrestricted access to the market and traffic on a commercial basis.

(a) The above provision does not prejudice the rights and obligations under the United Nations Code of Conduct for Liner Conferences, as applied by one or the other Party to this Agreement. Non-conference liners will be free to operate in competition with a conference as long as they adhere to the principle of fair competition on a commercial basis;

(b) The Parties affirm their commitment to a freely competitive environment as being an essential feature of the dry and liquid bulk trade.

3. In applying the principles of paragraph 2, the Parties shall:

(a) not introduce cargo-sharing clauses in future bilateral agreements with third countries, other than in those exceptional circumstances where liner shipping companies from one or other Party to this Agreement would not otherwise have an effective opportunity to ply for trade to and from the third country concerned;

(b) prohibit cargo-sharing arrangements in future bilateral agreements concerning dry and liquid bulk trade;

(c) abolish, upon the entry into force of this Agreement, all unilateral measures and administrative, technical and other obstacles that could have restrictive or discriminatory effects on the free supply of services in international maritime transport.

(d) Each Party shall grant, inter alia, no less favourable treatment for the ships operated by nationals or companies of the other Party than that accorded to a Party's own ships with regard to access to ports open to international trade, the use of infrastructure and auxiliary maritime services of the ports, a well as related fees and charges, customs facilities and the assignment of berths and facilities for loading and unloading.

4. With a view to ensuring a co-ordinated development and progressive liberalisation of transport between the Parties adapted to their reciprocal commercial needs, the conditions of mutual market access in air transport shall be dealt with by special agreements to be negotiated between the Parties after the entry into force of this Agreement.

5. Prior to the conclusion of the agreement referred to in paragraph 4, the Parties shall not take any measures or actions which are more restrictive or discriminatory as compared with the situation existing prior to the entry into force of this Agreement.

6. Croatia shall adapt its legislation, including administrative, technical and other rules, to that of the Community existing at any time in the field of air and inland transport insofar as it serves liberalisation purposes and mutual access to markets of the Parties and facilitates the movement of passengers and of goods.

7. In step with the common progress in the achievement of the objectives of this Chapter, the Stabilisation and Association Council shall examine ways of creating the conditions necessary for improving freedom to provide air and inland transport services.

CHAPTER IV

CURRENT PAYMENTS AND MOVEMENT OF CAPITAL

Article 59

The Parties undertake to authorise, in freely convertible currency, in accordance with the provisions of Article VIII of the Articles of the Agreement of the International Monetary Fund, any payments and transfers on the current account of balance of payments between the Community and Croatia.

Article 60

1. With regard to transactions on the capital and financial account of balance of payments, from the entry into force of the Agreement, the Parties shall ensure the free movement of capital relating to direct investments made in companies formed in accordance with the laws of the host country and investments made in accordance with the provisions of Chapter II of Title V, and the liquidation or repatriation of these investments and of any profit stemming therefrom.

2. With regard to transactions on the capital and financial account of balance of payments, from the entry into force of this Agreement, the Parties shall ensure the free movement of capital relating to credits related to commercial transactions or to the provision of services in which a resident of one of the Parties is participating, and to financial loans and credits, with maturity longer than a year.

As from the entry into force of this Agreement, Croatia shall authorise, by making full and expedient use of its existing procedures, the acquisition of real estate in Croatia by nationals of Member States of the European Union, except for areas and matters listed in Annex VII. Within four years from the entry into force of this Agreement, Croatia shall progressively adjust its legislation concerning the acquisition of real estate in Croatia by nationals of the Member States of the European Union to ensure the same treatment as compared to Croatian nationals. At the end of the fourth year after the entry into force of this Agreement, the Stabilisation and Association Council shall examine the modalities for extending these rights to the areas and matters listed in Annex VII.

The Parties shall also ensure, from the fourth year after the entry into force of this Agreement, free movement of capital relating to portfolio investment and financial loans and credits with maturity shorter than a year.

3. Without prejudice to paragraph 1, the Parties shall not introduce any new restrictions on the movement of capital and current payments between residents of the Community and Croatia and shall not make the existing arrangements more restrictive.

4. Without prejudice to the provisions of Article 59 and of this Article, where, in exceptional circumstances, movements of capital between the Community and Croatia cause, or threaten to cause, serious difficulties for the operation of exchange rate policy or monetary policy in the Community or Croatia, the Community and Croatia, respectively, may take safeguard measures with regard to movements of capital between the Community and Croatia for a period not exceeding six months if such measures are strictly necessary.

5. Nothing in the above provisions shall be taken to limit the rights of economic operators of the Parties from benefiting from any more favourable treatment that may be provided for in any existing bilateral or multilateral agreement involving Parties to this Agreement.

6. The Parties shall consult each other with a view to facilitating the movement of capital between the Community and Croatia in order to promote the objectives of this Agreement.

Article 61

1. During the first four years following the date of entry into force of this Agreement, the Parties shall take measures permitting the creation of the necessary conditions for the further gradual application of Community rules on the free movement of capital.

2. By the end of the fourth year following the date of entry into force of this Agreement, the Stabilisation and Association Council shall determine the modalities for full application of Community rules on the movement of capital.

CHAPTER V

GENERAL PROVISIONS

Article 62

1. The provisions of this Title shall be applied subject to limitations justified on grounds of public policy, public security or public health.

2. They shall not apply to activities that in the territory of either Party are connected, even occasionally, with the exercise of official authority.

Article 63

For the purpose of this Title, nothing in this Agreement shall prevent the Parties from applying their laws and regulations regarding entry and stay, employment, working conditions, establishment of natural persons and supply of services, provided that, in so doing, they do not apply them in such a manner as to nullify or impair the benefits accruing to any Party under the terms of a specific provision of this Agreement. This provision shall be without prejudice to the application of Article 62.

Article 64

Companies which are controlled and exclusively owned jointly by Croatian companies or nationals and Community companies or nationals shall also be covered by the provisions of this Title.

Article 65

1. The Most-Favoured-Nation treatment granted in accordance with the provisions of this Title shall not apply to the tax advantages that the Parties are providing or will provide in the future on the basis of agreements designed to avoid double taxation or other tax arrangements.

2. None of the provisions of this Title shall be construed to prevent the adoption or enforcement by the Parties of any measure aimed at preventing the avoidance or evasion of taxes pursuant to the tax provisions of agreements to avoid double taxation and other tax arrangements or domestic fiscal legislation.

3. None of the provisions of this Title shall be construed to prevent Member States or Croatia in applying the relevant provisions of their fiscal legislation, from distinguishing between taxpayers who are not in identical situations, in particular as regards their place of residence.

Article 66

1. The Parties shall endeavour wherever possible to avoid the imposition of restrictive measures, including measures relating to imports, for balance of payments purposes. A Party adopting such measures shall present as soon as possible to the other Party a timetable for their removal.

2. Where one or more Member States or Croatia is in serious balance of payments difficulties, or under imminent threat thereof, the Community or Croatia, as the case may be, may, in accordance with the conditions established under the WTO Agreement, adopt restrictive measures, including measures relating to imports, which shall be of limited duration and may not go beyond what is strictly necessary to remedy the balance of payments situation. The Community or Croatia, as the case may be, shall inform the other Party forthwith.

3. Any restrictive measures shall not apply to transfers related to investment and in particular to the repatriation of amounts invested or reinvested or any kind of revenues stemming there from.

Article 67

The provisions of this Title shall be progressively adjusted, notably in the light of requirements arising from Article V of the General Agreement on Trade in Services (GATS).

Article 68

The provisions of this Agreement shall not prejudice the application by either Party of any measure necessary to prevent the circumvention of its measures concerning third-country access to its market through the provisions of this Agreement.

TITLE VI

APPROXIMATION OF LAWS, LAW ENFORCEMENT AND COMPETITION RULES

Article 69

1. The Parties recognise the importance of the approximation of Croatia's existing legislation to that of the Community. Croatia shall endeavour to ensure that its existing laws and future legislation will be gradually made compatible with the Community acquis.

2. This approximation will start on the date of signing of the Agreement, and will gradually extend to all the elements of the Community acquis referred to in this Agreement by the end of the period defined in article 5 of this Agreement. In particular, at an early stage, it will focus on fundamental elements of the Internal Market acquis as well as on other trade-related areas, on the basis of a programme to be agreed between the Commission of the European Communities and Croatia. Croatia will also define, in agreement with the Commission of the European Communities, the modalities for the monitoring of the implementation of approximation of legislation and law enforcement actions to be taken.

Article 70

Competition and other economic provisions

1. The following are incompatible with the proper functioning of the Agreement, in so far as they may affect trade between the Community and Croatia:

(i) all agreements between undertakings, decisions by associations of undertakings and concerted practices between undertakings which have as their object or effect the prevention, restriction or distortion of competition;

(ii) abuse by one or more undertakings of a dominant position in the territories of the Community or of Croatia as a whole or in a substantial part thereof;

(iii) any State aid which distorts or threatens to distort competition by favouring certain undertakings or certain products.

2. Any practices contrary to this Article shall be assessed on the basis of criteria arising from the application of the competition rules applicable in the Community, in particular from Articles 81, 82, 86 and 87 of the Treaty establishing the European Community and interpretative instruments adopted by the Community institutions.

3. The Parties shall ensure that an operationally independent public body is entrusted with the powers necessary for the full application of paragraph 1 (i) and (ii) of this article, regarding private and public undertakings and undertakings to which special rights have been granted.

4. Croatia shall establish an operationally independent authority which is entrusted with the powers necessary for the full application of paragraph 1 (iii) of this Article within one year from the date of entry into force of this Agreement. This authority shall have, inter alia, the powers to authorise State aid schemes and individual aid grants in conformity with paragraph 2 of this Article, as well as the powers to order the recovery of State aid that has been unlawfully granted.

5. Each Party shall ensure transparency in the area of State aid, inter alia by providing to the other Party a regular annual report, or equivalent, following the methodology and the presentation of the Community survey on State aid. Upon request by one Party, the other Party shall provide information on particular individual cases of public aid.

6. Croatia shall establish a comprehensive inventory of aid schemes instituted before the establishment of the authority referred to in paragraph 4 and shall align such aid schemes with the criteria referred to in paragraph 2 of this Article within a period of no more than four years from the entry into force of this Agreement.

7. (a) For the purposes of applying the provisions of paragraph 1(iii), the Parties recognise that during the first four years after the entry into force of this Agreement, any public aid granted by Croatia shall be assessed taking into account the fact that Croatia shall be regarded as an area identical to those areas of the Community described in Article 87(3)(a) of the Treaty establishing the European Community.

(b) Within three years form the entry into force of this Agreement, Croatia shall submit to the Commission of the European Communities its GDP per capita figures harmonised at NUTS II level. The authority referred to in paragraph 4 and the Commission of the European Communities shall then jointly evaluate the eligibility of the regions of Croatia as well as the maximum aid intensities in relation thereto in order to draw up the regional aid map on the basis of the relevant Community guidelines.

8. With regard to products referred to in Chapters II of Title IV:

- paragraph 1 (iii) shall not apply;

- any practices contrary to paragraph 1(i) shall be assessed according to the criteria established by the Community on the basis of Articles 36 and 37 of the Treaty establishing the European Community and specific Community instruments adopted on this basis.

9. If one of the Parties considers that a particular practice is incompatible with the terms of paragraph 1 of this Article, it may take appropriate measures after consultation within the Stabilisation and Association Council or after thirty working days following referral for such consultation.

Nothing in this Article shall prejudice or affect in any way the taking, by either Party, of antidumping or countervailing measures in accordance with the relevant Articles of GATT 1994 and WTO Agreement on Subsidies and Countervailing Measures or related internal legislation.

Article 71

Intellectual, industrial and commercial property

1. Pursuant to the provisions of this Article and Annex VIII, the Parties confirm the importance that they attach to ensure adequate and effective protection and enforcement of intellectual, industrial and commercial property rights.

2. Croatia shall take the necessary measures in order to guarantee no later than three years after entry into force of this Agreement a level of protection of intellectual, industrial and commercial property rights similar to that existing in the Community, including effective means of enforcing such rights.

3. The Stabilisation and Association Council may decide to oblige Croatia to accede to specific multilateral Conventions in this area.

4. If problems in the area of intellectual, industrial and commercial property affecting trading conditions occur, they shall be referred urgently to the Stabilisation and Association Council, at the request of either Party, with a view to reaching mutually satisfactory solutions.

Article 72

Public contracts

1. The Parties consider the opening-up of the award of public contracts on the basis of non-discrimination and reciprocity, in particular in the WTO context, to be a desirable objective.

2. Croatian companies, whether established or not in the Community, shall be granted access to contract award procedures in the Community pursuant to Community procurement rules under treatment no less favourable than that accorded to Community companies as from the entry into force of this Agreement.

The above provisions will also apply to contracts in the utilities sector once the government of Croatia has adopted the legislation introducing the Community rules in this area. The Community shall examine periodically whether Croatia has indeed introduced such legislation.

Community companies not established in Croatia shall be granted access to contract award procedures in Croatia pursuant to the Law on Public Procurement under treatment no less favourable than that accorded to Croatian companies at the latest three years after the entry into force of this Agreement. Community companies established in Croatia under the provisions of Chapter II of Title V shall have upon entry into force of this Agreement access to contract award procedures under treatment no less favourable than that accorded to Croatian companies.

The Stabilisation and Association Council shall periodically examine the possibility for Croatia to introduce access to award procedures in Croatia for all Community companies.

3. As regards establishment, operations, supply of services between the Community and Croatia, and also employment and movement of labour linked to the fulfilment of public contracts, the provisions of Articles 45 to 68 are applicable.

Article 73

Standardisation, Metrology, Accreditation and Conformity Assessment

1. Croatia shall take the necessary measures in order to gradually achieve conformity with Community technical regulations and European standardisation, metrology, accreditation and conformity assessment procedures.

2. To this end, the Parties shall start at an early stage to:

- promote the use of Community technical regulations and European standards, tests and conformity assessment procedures;

- conclude, where appropriate, European Conformity Assessment Protocols;

- foster the development of the quality infrastructure: standardisation, metrology, accreditation and conformity assessment;

- promote the participation of Croatia in the work of specialised European organisations, in particular CEN, CENELEC, ETSI, EA, WELMEC, EUROMET.

Article 74

Consumer protection

The Parties will co-operate in order to align the standards of consumer protection in Croatia to those of the Community. Effective consumer protection is necessary in order to ensure that the market economy functions properly, and this protection will depend on the development of an administrative infrastructure in order to ensure market surveillance and law enforcement in this field.

To that end, and in view of their common interests, the Parties will encourage and ensure:

- the harmonisation of legislation and the alignment of consumer protection in Croatia on that in force in the Community;

- a policy of active consumer protection including the increase of information and development of independent organisations;

- effective legal protection for consumers in order to improve the quality of consumer goods and maintain appropriate safety standards.

TITLE VII

JUSTICE AND HOME AFFAIRS

Introduction

Article 75

Reinforcement of institutions and rule of law

In their co-operation in justice and home affairs the Parties will attach particular importance to the consolidation of the rule of law and the reinforcement of institutions at all levels in the areas of administration in general, and law enforcement and the machinery of justice in particular.

Co-operation in the field of justice will focus in particular on the independence of the judiciary, the improvement of its effectiveness and the training of the legal professions.

Co-operation in the area of movement of persons

Article 76

Visa, border control, asylum and migration

1. The Parties shall co-operate in the areas of visa, border control, asylum and migration and will set-up a framework for the co-operation, including at a regional level, in these fields.

2. Co-operation in the matters referred to in paragraph 1 shall be based on mutual consultations and close co-ordination between the Parties and should include technical and administrative assistance for:

- the exchange of information on legislation and practices;

- the drafting of legislation;

- enhancing the efficiency of the institutions;

- the training of staff;

- the security of the travel documents and detection of false documents.

3. Co-operation will focus in particular:

- in the area of asylum on the development and implementation of national legislation to meet the standards of the 1951 Geneva Convention and the 1967 New York Protocol thereby to ensure that the principle of non-refoulement is respected.

- in the field of legal migration, on admission rules and rights and status of the persons admitted. In relation to migration, the Parties agree to the fair treatment of nationals of other countries who reside legally on their territories and to promote an integration policy aiming at granting them rights and obligations comparable to those of their citizens.

The Stabilisation and Association Council can recommend additional subjects for co-operation under this article.

Article 77

Prevention and control of illegal immigration; readmission

1. The Parties agree to co-operate in order to prevent and control illegal immigration. To this end:

- Croatia agrees to readmit any of its nationals illegally present on the territory of a Member State, upon request by the latter and without further formalities;

- and each Member State of the European Union agrees to readmit any of its nationals illegally present on the territory of Croatia, upon request by the latter and without further formalities.

The Member States of the European Union and Croatia will provide their nationals with appropriate identity documents and will extend to them the administrative facilities necessary for such purposes.

2. The Parties agree to conclude, upon request, an agreement between Croatia and the European Community regulating the specific obligations for Croatia and for the Member States of the European Union for readmission, including an obligation for the readmission of nationals of other countries and stateless persons.

3. Pending the conclusion of the agreement with the Community referred to in paragraph 2, Croatia agrees to conclude, upon request of a Member State, bilateral agreements with individual Member States of the European Union regulating the specific obligations for readmission between Croatia and the Member State concerned, including an obligation for the readmission of nationals of other countries and stateless persons.

4. The Stabilisation and Association Council shall examine what other joint efforts can be made to prevent and control illegal immigration, including the trafficking in human beings.

Co-operation on money laundering and illicit drugs

Article 78

Money laundering

1. The Parties agree on the necessity of making every effort and co-operating in order to prevent the use of their financial systems for laundering of proceeds from criminal activities in general and drug offences in particular.

2. Co-operation in this area may include administrative and technical assistance with the purpose to develop the implementation of regulations and efficient functioning of the suitable standards and mechanisms to combat money laundering equivalent to those adopted by the Community and international fora in this field.

Article 79

Co-operation on illicit drugs

1. Within their respective powers and competencies, the Parties shall co-operate to ensure a balanced and integrated approach towards drug control. Drug control policies and actions shall be aimed at reducing the supply of, trafficking in and the demand for illicit drugs as well as at a more effective control of precursors.

2. The Parties shall agree on the necessary methods of co-operation to attain these objectives. Actions shall be based on commonly agreed principles along the lines of the EU Drug Control Strategy.

The co-operation between the Parties shall comprise technical and administrative assistance in particular in the following areas:

- drafting of national legislation and policies;

- establishment of institutions and information centres;

- training of personnel;

- drug related research;

- and the prevention of diversion of precursors used for the illicit manufacture of drug