May 05, 2025
1. What is a partnership agreement according to the Croatian Civil Obligations Act?
A partnership agreement, according to the Civil Obligations Act, is defined as an agreement by which two or more persons (partners) undertake to act jointly in order to achieve a certain economic goal, and each of them contributes with a role, work or otherwise, and shares profits and losses (Civil Obligations Act, Article 698). A partnership agreement does not create legal personality, but it is a contractual relationship between partners. Partnerships are often used in construction projects when multiple partners want to develop and build a property together, and each of them contributes different resources or knowledge.
2. Construction contract – basic definition
A construction contract, according to the Civil Obligations Act, Article 606, is a contract by which the contractor undertakes to perform certain construction works on the land or building for the client, and the client undertakes to pay the agreed price. In the context of a partnership agreement, a construction contract can be one of the fundamental contracts that governs the relations between partners, especially when one of the partners takes on the role of contractor.
3. The five most important clauses in a construction partnership agreement
a) Defining the roles of the partnersThe key clause of any partnership agreement is the precise definition of the roles of each partner. For example, one partner can bring in the land, another can provide financing, and a third can take over the execution of construction work. According to Article 699. of the Civil Obligations Act, each partner must clearly know his contribution and rights. This clause prevents misunderstandings and makes it easier to resolve any disputes.
b) Share in profit and lossThe partnership agreement must contain provisions on the distribution of profit and loss. According to Article 701. Unless otherwise agreed, the shares are determined according to the value of the stakes. A clear definition of these shares is crucial for the transparency and fairness of the relationship between partners.
c) Management and decision-makingIn the partnership agreement, it is necessary to regulate in detail the manner of project management and decision-making. It is recommended to define who has the right to represent the partnership, how key decisions are made (e.g. by majority vote or unanimity) and how disagreements are resolved. This clause protects the project from downtime and ensures efficient management.
d) Exit of partners and transfer of sharesIt is important to provide for the possibility of a partner leaving the partnership, as well as the conditions under which the share can be transferred to third parties. According to Article 703. of the Civil Obligations Act, the transfer of shares is possible only with the consent of the other partners, unless otherwise agreed. This clause protects other partners from unwanted partners.
e) Dispute resolutionA partnership agreement should contain a clause on how disputes are to be resolved, for example by arbitration or court. It is also recommended to define the competent court or arbitration body, as well as the applicable law. This clause speeds up the resolution of potential disputes and reduces the cost of litigation.
4. The special importance of defining the roles of the partners
The role of each partner must be clearly defined in the partnership agreement. For example, if one partner gives land, it is necessary to precisely describe the property, the method of transfer of rights and possible conditions. If the other partner finances the project, the contract must contain details of the amounts, deadlines and method of reimbursement. The third partner, who performs the work, must have clearly defined obligations, quality standards and deadlines. A clear division of roles reduces the risk of misunderstandings and ensures the success of the project.
5. Tax Implications of a Partnership Agreement in Construction
A partnership agreement in construction has significant tax implications. According to the Income Tax Act and the Corporate Income Tax Act, each partner taxes his share of the profit according to his or her own tax status. If the partnership makes a profit from the sale of real estate, each partner declares his share. Also, the transfer of land or other rights may be subject to real estate transfer tax or VAT, depending on the status of the partners and the type of real estate. It is recommended to consult a tax advisor before concluding a partnership agreement in order to avoid undesirable tax consequences.
Conclusion
A partnership agreement is the foundation of successful cooperation in construction projects. A properly drafted partnership agreement, with clearly defined roles, shares, management and dispute resolution, is crucial for the safety of all partners. Special attention should be paid to the tax aspects of the partnership agreement, in order to avoid unforeseen obligations.
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