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Changes to the Civil Obligations Act: New rates of contractual and default interest

2015-09

The amendments to the Civil Obligations Act (in force as of 1 August 2015) introduced into Croatian legal system EU directives relating to liability for defective products, the self-employed commercial agents, package tours, sale of consumer goods and insurance and reinsurance industry.

An important change refers to the interest rates, which will be calculated based on the average interest rate on the loans granted for a period longer than one year to non-financial companies. The Law on the Financial Operations and Pre-bankruptcy Settlement and Consumer Credit Act were amended accordingly.

Given the differences in the determination of interest rates in the general regulation (Civil Obligations Act; "ZOO") and special legislation (Law on Financial Operations; "ZFP"), there was a need of a unified solution. The amendments introduced the determination of interest rates based on the average interest rate on the loans granted for a period longer than one year to non-financial companies increased by a prescribed percentage points (5% and 3%).

Croatian National Bank determines the average interest rate on the outstanding balance of loans granted for a period longer than one year to non-financial companies and publishes it every 1 January and 1 July in the Official Gazette. On 1 August 2015, CNB announced that the average interest rate for the reference period from 1 November 2014 to 30 April 2015 amounts to 5.14%.

Therefore, the interest rates were reduced as follows: the default interest in the commercial agreements and agreements between traders and public law-persons decreased from 15% to 10.14% (5.14% + 5%), and for business transactions between entrepreneurs and entrepreneurs and public law-persons in which the later is a debtor from 12.14% to 10.14% (5.14% + 5%).

The default interest on the debt based on other relationships decreased from 12% to 8.14% (5.14% + 3%). Other relationships are relationships that does not arise from commercial agreements and contracts between a trader and a public law-person for example, contractual agreements in which at least one party is not a trader; extra-contractual relations, debt based on taxes, contributions and other public charges.

Below is a tabular presentation of the new and the old regulation of interest rates:

DEFAULT INTEREST RATE

Relations arising from:

New regulation

Old regulation

commercial agreements and relations between traders and public entities

Average interest rate increased by 5 percent points (5,14% + 5 = 10,14%)

Discount rate increased by 8 percent points (7% + 8 = 15%)

Business transactions:

Reference rate* increased by 8 percent points (5,14% - 3 + 8 = 10,14%)

Reference rate** increased by 8 percent points (5,29% - 1 + 8 = 12,29%)

Contractual default rate

Not higher than the default interest („ZZK“) increased by three quarters (10,14% × 1,75 = 17,745%)

Not higher than ZZK increased by one half (22,5 %)

Business transactions (only between entrepreneurs)

Not higher than ZZK (10,14%)

Not higher than ZZK (12,29%)

other relations

Average interest rate increased by 3 percent points (5,14% + 3 = 8,14%)

Discount rate increased by 5 percent points (7% + 5 = 12%)

* Reference rate is basic default interest rate, which as of 1 August 2015 equals average interest rate on loans granted for a period longer than one year to non-financial companies, calculated for the reference period preceeding the ongoing half-year decreased for 3 percent points. Considering that average interest rate for reference period from 1/11/2014 – 30/4/2015 amounts 5,14%, reference rate is 5,14% – 3 = 2,14%.

** Until the respective amendments, reference rate was equal to the average interest rate on loans granted for a period longer than one year to non-financial companies, calculated for the reference period preceeding the ongoing half-year decreased for 1 percent points. Therefore, in the last reference period before amendments (from 1/7/2014 – 31/12/2014) the reference rate amounted 4,29% (5,29% – 1).

CONTRACTUAL INTEREST RATE

Relations between:

New regulation

Old regulation

traders and traders and public entities

Not higher than ZZK increased by three quarters (10,14% x 1,75 = 17,745%)

Not higher than ZZK increased by one half (22,5%)

In case interest is contracted but the interest rate is not specified:

Interest rate in the amount of half of ZZK applies (10,14% x 0,5) = 5,07%)

Interest rate in the amount of half of ZZK applies (7.5%)

persons out of which at least one person is not a trader

Not higher than ZZK increased by one half (8,14% x 1,5 = 12,21%)

Not higher than ZZK (12%)

In case interest is contracted but the interest rate is not specified:

Interest rate in the amount of one quarter of ZZK applies (8,14% x 0,25 = 2,035%)

Interest rate in the amount of one quarter of ZZK applies (3%)

Authors

Picture of Tamara Jelic-Kazic
Tamara Jelić-Kazić
Partner
Zagreb