Guidelines to Taxation 2020 Croatia

guidelines to taxation 2020 croatia croatia croatia I TAX FRAMEWORK FOR DOING BUSINESS IN CROATIA 170 II SPECIAL AREAS OF TAXATION OF BUSINESS-RELATED ACTIVITIES 200 A LEGAL FORMS 170 A HOLDING STRUCTURES 200 B INCOME TAX ASPECTS 172 1 Participation exemption 200 1 Sole entrepreneurs and partnerships 172 2 Outbound dividends 200 2 Corporations 177 3 Interest deduction and thin capitalization 200 3 Reorganizations 182 4 Non-resident shareholders 202 4 Specific aspects for foreign investors 183 5 Tax group 202 C INTERNATIONAL BUSINESS-RELATED ISSUES 184 B REAL ESTATE INVESTMENTS 203 1 Tax treaties 184 1 Resident investors 203 2 Transfer pricing 184 2 Non-resident investors 204 3 Controlled foreign corporations 187 3 Real estate taxes 205 4 Exit taxation 187 4 VAT on real estate 206 5 Hybrid mismatches 187 5 Real estate investment funds 207 6 DAC 6 reporting obligation 188 6 Structuring of real estate investments 210 D VALUE ADDED TAX 189 1 Taxable persons 189 III EMPLOYEES AND BOARD MEMBERS 211 2 Taxable transactions 189 A EMPLOYEES 211 3 Place of supply 190 1 Resident employees 211 4 Taxable amount 191 2 Non-resident employees 214 5 Tax rates 192 3 Municipal tax (surtax on income tax) 214 6 Exemptions 192 7 Input VAT deduction 193 B BOARD MEMBERS 215 8 VAT liability 195 1 Executives 215 9 Tax assessment 196 2 Non-executives 215 10 Quick fixes 197 3 Non-resident board members 215

E OTHER BUSINESS-RELATED TAXES 198 C MUNICIPAL TAX 216 1 Capital duty 198 D SPECIFIC PROVISIONS FOR CROSS-BORDER 2 Stamp duties 198 EMPLOYMENTS 216 3 Customs duties 198 1 General provisions 216 4 Other excise duties 198 2 Specific provisions 216 5 Environmental taxes 198 6 Advertising duty 198 IV TAX ASPECTS FOR PRIVATE INVESTORS 217 7 Digital services tax 198 8 Real estate transfer tax 198 A CAPITAL INVESTMENTS 217 9 Inheritance and gift tax 199 B INHERITANCE AND DONATION TAX PLANNING 217

168 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 169 I TAX FRAMEWORK FOR DOING BUSINESS IN CROATIA Upon registration of the new entity (company), the entity shareholder has to submit a statement verified by the public notary evidencing the sharehol- A LEGAL FORMS der(s) has/have no outstanding tax and social contributions liabilities. It is also required to submit a statement that other registered entities in which Business activities in Croatia are carried on by sole entrepreneurs or by com- these respective shareholders have 5% or more of the shares or voting rights panies. A sole entrepreneur is an individual carrying on business activities. have no outstanding tax and social contributions liabilities. Such a statement The term »company« refers to legal entities. All companies are registered cannot be older than eight days, and has to be submitted also in the cases in a court register in accordance with the Court Register Act and the rules when the shareholder’s structure is changed. regarding the procedures for registration with the court registry. Croatian law provides for – inter alia – the following types of companies that are commonly Furthermore, companies established as limited liability companies are ob- used for establishing a business in Croatia: liged to have all of their shareholders inscribed in the Court Register. Such information is publicly available on the Court Register’s website. 1 General partnership – Javno trgovačko društvo (JTD) 2 Limited partnership – Komanditno društvo (KD) 3 Limited liability company – Društvo s ograničenom odgovornošću (d.o.o.); and the simplified form of this type of the company – Jednostavno društvo s ograničenom odgovornošću (j.d.o.o.) 4 Joint stock company – Dioničko društvo (d.d.) Information about the legal and tax framework of sole entrepreneurs (SEnt) and companies is provided below:

FORM LIABILITY MINIMUM REGISTRATION TAX TAX OF SHAREHOLDERS CAPITAL IN COMMERCIALTREATMENT RATES

(HRK) MINIMUM OF FOUNDERS AND SHARHOLDERS REGISTER (HRK) SEnt no shares, personal 1 obligatory, tax liability 24-36% liability of the sole if turnover of sole entrepreneur > 15,000,000 entrepreneur per year

JTD unlimited 2 obligatory non-transparent, 18% dividend taxation at the level of the shareholders KD unlimited 2 obligatory non-transparent, 18% dividend taxation at the level of the shareholders d.o.o. limited 20,000 1 obligatory non-transparent, 18% dividend taxation at the level of the shareholders d.d. limited 200,000 1 obligatory non-transparent, 18% dividend taxation at the level of the shareholders j.d.o.o. limited 10 1 obligatory non-transparent, 18% dividend taxation 3 max at the level of the shareholders

170 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 171 B INCOME TAX ASPECTS 1.2 PRINCIPLES OF DETERMINATION OF THE INCOME FROM BUSINESS AND INDEPENDENT (PROFESSIONAL) ACTIVITIES 1 Sole entrepreneurs and partnerships As regards the determination of the income tax base of a sole entrepreneur, 1.1 UNLIMITED TAX LIABILITY AND INCOME the same principles apply to sole entrepreneurs and »societas«. Croatian tax law provides for three different methods of determination of the tax base: If a sole entrepreneur has his domicile or habitual place of abode in Croatia he will be subject to unlimited personal income tax liability (i.e. resident taxation) Methods on his worldwide income in Croatia (subject to tax treaties). Thus, income THE ASSESSMENT OF THE ESTIMATED TAX/LUMP SUM METHOD from business activities carried on in Croatia is subject to tax at the level The income and income tax of a taxable person who acquires income from the of the individual. An individual is resident in Croatia if he owns or leases an independent small business activities and independent activities of agricul- apartment in Croatia for at least 183 days in one or two years (regardless of ture and forestry may be determined as a lump sum, provided that: whether he lives there). An individual has his habitual place of abode where he is physically present under circumstances indicating a permanent presence ¬ total turnover in the tax period is less than the prescribed or stay. The habitual place of abode is deemed to be in Croatia if the indivi- turnover for obligatory registration for value added tax (VAT) of dual stays permanently or temporarily for more than 183 days in one or two HRK 300,000 (approx. EUR 40,000); calendar years. ¬ the taxable person is not subject to VAT pursuant to the Value Added Tax Act (VATA). Partnerships (JTD and KD), according to Croatian legislation, are defined as business entities that are regarded as non-transparent for tax purposes and If this option is exercised, the Tax Administration will assess an annual esti- profits are thus taxable at the company level, i.e. they are non-transparent mated tax by a ruling. A sole entrepreneur who pays an estimated income tax entities for personal income tax purposes. (The only exception is the »societas«, is not obliged to keep business accounts, except turnover records. the partnership of several natural persons that can jointly acquire income. For The income of sole entrepreneurs derived from the renting of apartments, tax purposes, each partner of the »societas« is a separately taxable person rooms and beds to travellers and tourists, and from organizing campsites under the Croatian Personal Income Tax Act, in respect of his share in the may also – under special provisions – be taxed by estimation if the sole jointly acquired income.) entrepreneur is not subject to VAT and the income is not determined on the Furthermore, the taxation of silent and civil partnerships is not regulated by basis of business accounts. the Croatian Profit Tax Act (PTA), but for tax purposes they can be regarded The income of non-residents derived from the renting of apartments, rooms, as transparent entities and the partners are taxed individually on their share and beds can also be taxed under the lump-sum method, although for this of the profits. The general rules regarding the profits tax and income tax activity non-residents are always obliged to register for VAT purposes. The apply to the »shareholders«. lump-sum method can be applied only in case the threshold for obligatory In the following, we refer to the category »income from self-employment«, as VAT registration is not exceeded. this category is the most important one for the taxation of sole entrepreneurs. METHOD FOR PERSONAL INCOME TAXPAYERS/SIMPLE BOOKKEEPING Self-employment income is income from small business and activities equi- Taxable income is calculated as the difference between the business receipts valent to it, income from independent professions and income from agricul- that arose during the tax period and expenditures incurred during the tax pe- ture and forestry. riod (cash principle). Only expenditures directly connected with income from Furthermore, a sole entrepreneur is liable to tax under the PTA if: business are deductible. To that respect certain restrictions are prescribed by law (e.g. entertainment and promotional expenses such as expenses for gifts, ¬ the total revenue of the entrepreneur was at least HRK 7.5 million holidays, sports activities, etc, are deductible up to 50%; expenses incurred (approx. EUR 1,000,000); in relation to the acquisition and usage of personal cars are deductible up A sole entrepreneur may be liable under the PTA if he opts to be subject to to 50% etc). These taxpayers use the simple bookkeeping method (receipts profits tax instead of individual income tax. minus expenditures = income).

172 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 173 DETERMINATION ON THE BASIS OF BUSINESS ACCOUNTS Provisions (accruals), reserves Determination of the income on the basis of business accounts (i.e. double- Provisions are not recognized as an expense, unless created for specific entry bookkeeping) is assessed in accordance with the provisions of the purposes, e.g.: PTA regulating computation of income for corporate profit taxpayers i.e. ¬ provisions to cover the risks and costs pursuant to law or other corporations. regulations and reserves stipulated by agreements (reserves for Taxable income is calculated as the difference between the business severance payments, reserves for the costs of renewing natural revenues that arose during the tax period and expenses incurred during the tax resources, reserves for costs during guarantee periods, and period according to the accounting books (prepared on the basis of Croatian reserves for the costs of instituted lawsuits); accounting law and applicable accounting standards), which is increased or ¬ provisions for unused annual leave pursuant to accounting decreased under the provisions of the PTA. As a result of the adjustment, the regulations. taxable income of a company differs from its accounting profits. only expenses directly connected to income from business are deductible. Amortization (depreciation) The depreciation of fixed tangible and intangible assets is recognized as an Deductions expenditure to the amount calculated on the basis of the acquisition costs by Income from independent personal activities derived in Croatia and abroad using the linear method and applying the annual depreciation rates provided by a resident is reduced by: below.

¬ the amount of salaries of newly employed persons and stipends to Fixed tangible and intangible assets include items and rights whose acqui- pupils during practical work and apprenticeship; sition cost exceeds the value of HRK 3,500 (approx. EUR 460), and whose ¬ the amount of expenses for education and professional useful life exceeds one year. Land, forests and similar renewable natural improvement; resources, financial assets, cultural monuments and works of art are not ¬ the amount of expenses for research and development; subject to depreciation. The depreciation of assets not used for a business ¬ losses carried forward in Croatia and abroad (for five years at activity are not recognized as tax expenditure. most). The annual depreciation rates are determined according to the depreciation A difference between residents and non-residents is that non-residents may periods for taxation purposes for each group of fixed assets as follows: not consider foreign losses when deriving income from independent personal ¬ for buildings and ships of over 1,000 GRT (20 years) – 5%; activities (self-employment income) in Croatia. ¬ for basic herd and personal cars (5 years) – 20%; ¬ for intangible assets, equipment, vehicles (except personal cars) Valuation and machinery (4 years) – 25%; The valuation of assets and liabilities is required for the determination of ¬ for computers, computer hardware and software, business income, and the general principles of the PTA apply. mobile telephones, and computer network accessories(2 years) Generally, impairment of fixed assets is not a deductible cost for PT purpo- – 50%; ses, unless it is clearly evident and documented that the impairment was ¬ for other non-mentioned assets (10 years) – 10%. the result of physical damage of the asset. Regular impairment (i.e. that is Please note that the above annual depreciation rates may be doubled. not related to the physical damage of the asset) will be tax deductible only up to the cost that would be recognized in accordance with the basic annual Where the calculated depreciation amount of a taxpayer is lower than the depreciation rates prescribed by PTA. amount allowable for tax purposes, the calculated depreciation amount is regarded as a recognized expenditure. Value adjustments arising from the adjustment of the value of claims against customers for goods delivered and services rendered are generally recog- The depreciation of personal cars and other means of personal transportation nized as expenditures, provided that more than 60 days elapsed between are recognized at the acquisition cost of up to HRK 400,000 (approx. EUR the maturity of the claim and the end of the tax period, and provided that the 52,000) per means of transportation. Where the acquisition cost exceeds the claims were not paid up to 15 days before filing the tax return. stated amount, the amount of depreciation for acquisition cost in excess of the stated amount is only recognized if the means are exclusively used for PT treatment of unrealized F/X differences follows their IFRS treatment. carrying out a registered rental or transportation activity.

174 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 175 A taxpayer who has vessels, aircrafts, apartments and holiday cottages that For a sole entrepreneur whose tax liability is assessed based on the provi- are recorded as fixed assets is granted the recognition of depreciation of such sions of the PTA, the annual tax rate is prescribed at a flat level of 18% (or assets as a tax expenditure, provided that: alternatively, 12% if revenue does not exceed HRK 7,500,000). This taxpayer is obliged to submit a tax return in the prescribed period – in Croatia this is (i) the taxpayer is registered for carrying out a registered rental and within four months from end of the business year (if business year is equal transportation activity using vessels and airplanes or for the to calendar year that means by the end of April of the current year for the activity of renting out apartments and holiday cottages; and previous year). (ii) the taxpayer, on the basis of the use of vessels and air-planes, acquires, in one tax period, revenues equal to 7% of the purchase 1.5 TAXATION OF DIVIDENDS AND SHARES IN PROFIT value of such assets; and BASED ON SHAREHOLDING (iii) the taxpayer, on the basis of the use of apartments and holiday cottages, acquires, in one tax period, revenues equal to 5% of the Advance tax payments are withheld at 12% with no personal allowances purchase value of such assets. included in the calculation. This provision applies to all dividends and profit shares paid out, except for di- 1.3 CARRY-FORWARD OF LOSSES vidends out of retained earnings realized before 31 December 2000 and in the A tax loss may be carried forward and offset against profits by reducing the period from 2004 to February 2012, regardless of when the payment is made. tax bases in the following five years. Losses are set off against taxable income before personal allowances are 2 Corporations deducted. 2.1 TAXPAYERS AND RESIDENCE 1.4 TAX RATES AND TAX PAYMENTS In Croatia all corporate entities (including general partnerships and limited part- For sole entrepreneurs who are personal income taxpayers (whose tax liabi- nerships) are regarded as non-transparent under Croatian tax law. Therefore, lity is not determined on the basis of business accounts), the personal income the income derived by the corporation is taxable at the level of the corporation. tax is computed on the total net income of an individual. The total net income A corporation having its statutory seat or place of management and control consists of business income and other income derived by the individual. Tax of business in the Republic of Croatia is subject to unlimited corporate income is levied at progressive rates. The following tax rates and tax bands apply: tax liability; this entails taxation of income on a worldwide basis (subject to applicable tax treaties). ANNUAL TAXABLE INCOME TAX RATE up to HRK 360,000 (EUR 48,000) 24% 2.2 PRINCIPLES OF DETERMINATION OF THE TAX BASE more than HRK 360,000 (EUR 48,000) 36% Taxable income is computed on the basis of the accounting regulations (the »Croatian Financial Reporting Standards« – CFRS), which are applicable for A sole entrepreneur is also obliged to submit an annual tax return in the micro, small and medium-sized companies, and the »International Financial prescribed period – in Croatia this is the end of February of the current year Reporting Standards« (IFRS), which are applicable for large companies), as for the previous year. the difference between revenues and expenditures before corporate income tax (profits tax), which is increased or decreased under the provisions of the In addition, municipalities are authorized to introduce a surcharge on the PTA. As a result of the adjustment, the taxable income of a company differs income tax at rates between 0% and 18%, depending on the number of inhabi- from its accounting profits. The tax base also includes a profit derived from tants. Income taxpayers who have a domicile or a habitual abode in the area the liquidation, sale, change in the legal form and division of a taxpayer and is of the commune/municipality that has enacted the tax are subject to the determined at the market value of assets unless the PTA provides otherwise surcharge. Taxable income is computed on an accrual basis. For more details, see III.A.1.3.

176 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 177 Expenses related to company owned vessels, aircraft and holiday 2.4 DECREASE OF TAX BASE FOR REALIZED PROFITS INCREASING houses/apartments THE SHARE CAPITAL Depreciation expenses of vessels, aircraft or apartments and holiday houses Relief for reinvested profits is abolished as of the 2017 fiscal year. Those are tax-deductible expenses, only in the case the following conditions provi- entities that utilized the relief in previous tax periods will have to maintain ded for by the Law are fulfilled: the criteria valid at the time for which relief was granted. ¬ the taxpayer is registered for the lease of vessels and aircraft or transportation services by vessels and aircraft while revenue 2.5 TAX RATES AND TAX PAYMENTS realized from the above-mentioned activity(ies) in the tax period Any profit derived by a corporation or – under certain conditions – individual amounts to at least 7% of the acquisition value of such assets; entrepreneurs is subject to profit tax at a flat rate of 18%, regardless of ¬ the taxpayer is registered for the rental of apartments and whether the profit is distributed to shareholders or retained. holiday houses while revenue realized from the above-mentioned activity in the tax period amounts to at least 5% of the acquisition For corporations with annual revenues below HRK 7,500,000 a flat tax rate value of such assets. of 12% will apply. In the cases where such assets are leased under operational lease arrange- A corporation has to make monthly advance payments based on the taxable ment, lease costs as well as all other costs related to the use of the respec- income of the preceding year and must file annual tax returns to the com- tive asset must be recognized only if the income generated through the use petent tax office. The taxpayers that are categorized as large and medium- of such an asset in the tax period at least equals lease costs. sized entrepreneurs or as VAT payers have the obligation to file their CPT returns by electronic means (and not in paper form). Monthly advance pay- 2.3 CARRY-FORWARD OF LOSSES ments made throughout the year are credited against the final annual corporate income tax liability. An ordinary loss occurs when deductible costs exceed the gross income subject to tax. Losses may be carried forward for a maximum period of five 2.6 INVESTMENT PROMOTION (IP) LAW years, unless otherwise provided for in the PTA. If the right to offset losses incurred in the process of mergers, acquisitions or divisions is transferred to The main goal of the IP Law is to stimulate economic growth in Croatia and legal successors during a tax period, the right to carry forward the loss begins to promote economic development, as well as to increase competitiveness after the expiry of the period in which the legal successor acquired the right within the Croatian business community by granting certain tax, customs and to carry forward the loss. monetary incentives, an overview of which we will provide in the next section. In the case of statutory changes (acquisitions, mergers, de-mergers, etc) the The law is harmonized with the European Commission’s Directive (651/2014 legal successor is not entitled to utilize the tax losses carried forward of the of 17 June 2014). legal predecessor if: Investment incentives will apply to the investments and improvements in ¬ the legal predecessor did not perform any business activity competitiveness in the following activities: for two tax periods before the statutory change; or ¬ production and processing activities; ¬ the business activity of the legal predecessor substantially ¬ development and innovation activities; changes in the course of two tax periods following the statutory ¬ business support activities; and change. ¬ high added-value activities. The above rule also applies where there is a change of more than 50% in a Investment incentives for the above-mentioned activities will apply in cases company’s ownership structure. where one or more of the following objectives are met: No carry-back is allowed. ¬ acquisition of new equipment and modern technologies; Foreign losses are computed in the same way as domestic losses. However, ¬ increased employment and level of training of employees; such losses may be set off only against income from the foreign source to ¬ development of products and services with higher added value; which they are related. ¬ increase in entrepreneurial competitiveness; ¬ balanced regional development of the Republic of Croatia.

178 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 179 Corporate Profit Tax incentives Incentives for development and innovation activities, business The IP Law provides for preferential CPT rates, depending on the value of support activities and high added-value activities the investment and the number of newly employed personnel. The IP Law Additional incentives for modernization of production processes, providing provides the following CPT preferential rates: business support (via customer contact centers, logistics and distribution centers, centers for ICT development, centers for outsourced business INVESTED AMOUNT* MINIMUM CORPORATE DURATION activities), undertaking activities with higher added value (creative services, NUMBER NEW PROFIT OF EMPLOYEES* TAX RATE INCENTIVE services in tourism, consulting, industrial engineering services, educational services) are introduced. 1 1.0 million 5 9% (or 6%) 10 The above means that incentives that were described above foreligible expen- 2 3.0 million 10 4.5% (or 3%) 10 ses for opening new jobs related to the investment project can be increased 3 3.0 million 15 0% 10 by 25% or 50%, or a non-refundable financial support for the purchase of modern technology of 20% of eligible expenses (but up to the maximum * Please note that in order to qualify for the investment the potential investor (apart from the investment amount and number of employees connected with the amount of EUR 0.5 million) can be obtained. investment stated above) must invest at least EUR 150,000 (EUR 50,000 for micro enterprises) and adhere to the requirements prescribed by the IP Law. Incentives for capital expenses of investment projects For micro enterprises, the invested amount must be set at a minimum of Investments over EUR 5 million that generate 50 new employment positions EUR 0.5 million and at least three new employees. In that case the corporate in the three-year period from the commencement of the investment are profit tax rate is decreased by 50% for a period of five years from the date eligible for the following incentives: of investment. ¬ non-refundable financial support in the amount of 10% of the The minimum period for which the investment project has to be maintained eligible cost of investment for construction of the new factory, is five years for large enterprises, three years for small and medium-sized production facility, hospitality object, or for buying new machines enterprises, but not shorter than the period for using the incentive measures. (maximum amount up to EUR 0.5 million) in administrative districts where the unemployment rate is between 10% and 20%. Employment incentives ¬ non-refundable financial support in the amount of 20% of the One-off employment incentives will be given as a percentage of justified eligible cost of investment (maximum amount up to EUR 1 million) expenses (calculated as a percentage of the two-year period gross salary) in in administrative districts where the unemployment rate is above relation to the new job positions related to the investment. 20%. The amount of the incentive also depends on the unemployment rate in a Please note that for investment projects that are in excess of EUR 50 million, given area; the percentages are given as follows: a special methodology for calculating incentives will be applied.

REQUIREMENT TAX RATE Incentives for labor-intensive investment projects For labor-intensive investment projects the following investment incentives For areas in the Republic Incentives in the amount of 10% of justi- are granted: of Croatia with an fied expenditures that were generated by unemployment rate of opening new employment positions related ¬ increase of incentives for eligible expenses for opening new jobs up to 10%. to the investment, but up to the maximum related to the investment project by 25% for investment projects of EUR 3,000 per newly opened job position. creating 100 or more jobs, in the period of three years from the beginning of the investment; For areas in the Republic Incentives in the amount of 20% of justi- ¬ increase of incentives for eligible expenses for opening new jobs of Croatia with an fied expenditures that were generated by related to the investment project by 50% for investment projects unemployment rate opening new employment positions related creating 300 or more jobs, in the period of three years from the between 10% and 20%. to the investment, but up to the maximum beginning of the investment; of EUR 6,000 per newly opened job position. ¬ increase of incentives for eligible expenses for opening new jobs For areas in the Republic Incentives in the amount of 30% of justi- related to the investment project by 100% for investment projects of Croatia with an fied expenditures that were generated by creating 500 or more jobs, in the period of three years from the unemployment rate opening new employment positions related beginning of the investment. exceeding 20%. to the investment, but up to the maximum Incentives for strategic important investments and projects in order to addi- of EUR 9,000 per newly opened job position. tionally improve the investment climate, Croatia passed the Law on Strategic Investment Projects of the Republic of Croatia.

180 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 181 One of the main goals of the Law is to remove the administrative obstacles for 4 Specific aspects for foreign investors the realization of public and private projects that the Government declares to 4.1 NON-RESIDENT SOLE ENTREPRENEURS be of strategic importance for Croatia. The value threshold of these projects is at least HRK 150 million of total capital investment expenditures, but the When foreign investors start up or participate in the start-up of an enterprise threshold is set lower for projects that can be co-financed from the funds and in Croatia, their rights, obligations and position are identical to those of programs of the European Union, or if the investment is made in aided areas domestic investors. or islands. To qualify as strategic, the project must also meet other criteria Foreign legal entities and persons may: specified by the Law. ¬ invest capital on a contractual basis; ¬ invest in a company; 3 Reorganizations ¬ invest in a bank or insurance company; ¬ set up as craftsmen or do business as sole entrepreneurs; The PTA provides for a specific treatment of mergers and demergers. In this ¬ obtain a concession to exploit natural resources or other regard, the PTA provides for basic definitions of mergers and de-mergers that assets of interest to Croatia. are in line with the Croatian Commercial Law (CCL). A merger is defined as a transaction by which one company ceases to exist by transferring all of its assets and liabilities to another existing company without liquidation, in 4.2 NON-RESIDENT CORPORATIONS accordance with the CCL. A non-resident corporation (i.e. neither the place of management nor the Furthermore, reorganizations should have no influence on taxation if »con- legal seat is in Croatia) carrying on a business in Croatia through a Croa- tinuity in taxation« exists. »Continuity in taxation« is deemed to exist if, upon tian permanent establishment is subject to limited liability with the income merger or demerger, there is no change in the underlying values of assets and attributed to that permanent establishment (PE). liabilities that are being transferred. In the case of a reorganization, if »continuity The definition of a PE generally follows the definitions set out in the OECD in taxation« does not exist, any increase in the value of the assets being trans- Model Convention. In addition, the PE of a non-resident entrepreneur is also ferred would be subject to the applicable CPT rate in the entity that will cease to defined as the place at which services, including advisory and business ser- exist after the merger. vices, are provided, provided that the provision of services for the same or For tax purposes, reorganizations are governed in Croatia by the general related project lasts longer than three consecutive months in any period of accounting provisions (CAL). As prescribed by CAL, the accounting frame- 12 consecutive months. work applicable in Croatia is generally the CFRS, which will be applied by Please note that the existence of a PE has to be formally registered with the micro, small and medium-sized companies, while the IFRS must be applied tax authority, unless a branch office of a foreign company has already been by large companies. set up in Croatia. The provisions of EU Directive 90/434/EEC (the Merger Directive) and The corporate income tax rate is 18% (or alternatively, 12% if revenue does 2005/19/EC (amendments to the Merger Directive) have been implemented not exceed HRK 7,500,000). in Croatian CPT legislation. The provisions of the Merger Directive are also applicable to mergers/demergers involving only Croatian companies. Even if the income is not earned through a PE, it can in certain cases (e.g. royalty payments, dividend payments, interest payments, payments for provision of certain services, income from immovable property located in Croatia) be deemed income from Croatian sources and as such taxable in Croatia, unless the right for taxation is restricted by a tax treaty.

182 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 183 C INTERNATIONAL BUSINESS-RELATED ISSUES The Croatian PTA sets out five methods that can be used for establishing whether the business transactions between related parties are agreed at 1 Tax treaties market prices (please note that these are in line with the OECD Transfer Pricing Guidelines): Croatia has concluded 63 double tax treaties in the area of personal and corporate income taxation. In most of the treaties the exemption method applies, ¬ Comparable uncontrolled price method – Prices of goods and except for dividends, interest and royalties. services sold in controlled transactions are compared with those in uncontrolled transactions and in comparable circumstances if Please note that Croatia also provides unilateral double tax relief in a way there is a possibility to perform a relevant comparability analysis; that is possible to credit tax paid abroad to the domestic tax liability, in which case the respective revenues are also included in the taxpayer’s taxable base ¬ Resale price method – Used for the determination of a price at in Croatia. The amount of tax paid abroad that can be credited in Croatia is up which goods purchased from related parties are sold to non- to the amount that the taxpayer would have paid on such revenue in Croatia. related parties. The selling price is decreased by a relevant gross margin that can be achieved at existing market conditions. The remainder represents the price at which goods could have been 2 Transfer pricing acquired from non-related parties; The Croatian PTA prescribes that all business transactions between related ¬ Cost plus method – The cost of goods, work-in-progress goods or parties, one of which is a resident while the other is a non-resident, must be services incurred by an entity that sold those goods or services to effected at arm’s length, that is, at »fair market value«. Following from this a related party is determined first. Such costs are increased for the principle, should a company through a transfer pricing transaction pay more respective gross profit that can be realized at existing market con- for a service to a non-resident related party than what would be considered a ditions. The resulting amount represents the price at which goods, »fair market value« in accordance with the Croatian corporate profit tax law, work-in-progress goods or services could have been purchased then the excess amount of the transaction would not be a deductible expense from non-related parties; for the resident company for profit tax purposes. ¬ Profit split method – This method is used to eliminate the effects Please note that the Croatian taxation legislation contains a very broad of special conditions on the profits in transactions between related definition of related party, as it defines »related parties« as parties whereby parties. The elimination is done through the determination of the one of the parties directly, or indirectly, participates in the management, profit distribution anticipated by non-related parties from participa- super-vision or capital of the other; or, where the same persons (one of which tion in one or more transactions. The first step is the determination is a resident Croatian company and the other one is a non-resident company) of the profit distribution expected by related parties from the par- participate in the management, supervision or capital of another company. ticipation in one or more transactions. The profit is then allocated Therefore, it is crucial that one party directly (or indirectly) exercises control in a way that would be applicable between non-related parties in or influence over the other party (by means of participating in the manage- existing market conditions; ment, supervision or capital of the other party), and on that basis may control and/or influence the prices to be agreed in a certain transaction. ¬ Transactional net margin method – The net profit is analyzed against an appropriate base such as total costs, sales receivables, assets or share capital realized by an entity in transactions with one or more related parties. The net profit is then compared with the net profit of similar entities in similar circumstances. According to the Croatian PTA, business transactions between related parties and prices agreed between them will be recognized for tax purposes and accepted by the tax authorities if the taxpayer has in its possession, and provides upon a request from the tax authorities, details on the method used for determining the transfer prices; including reasons why the comparable uncontrolled prices method is not appropriate, as well as supporting documentation for such an argumentation. The Croatian company has to be able to document where, when and from whom the services were provided and which services those were. Services need to be supported with documentation as described in the points mentioned above.

184 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 185 In addition to the above general conditions that have to be met and the docu- 3 Controlled foreign corporations mentation that has to be prepared in order for an expense to be tax deduc- Croatian tax law provides for a specific controlled foreign corporation (CFC) tible for Croatian Corporate Profit Tax purposes, the Croatian PTA regulations legislation in line with the Anti-Tax Avoidance Directive. require additional documentation that has to be obtained in order to be able to prove the arm’s length nature of the transaction: If certain criteria are met, profits of a CFC which are controlled by a Croatian company are attributed to and taxed at the level of the Croatian entity. These ¬ documentation that specifies the chosen transfer pricing method rules only apply to non-distributed profits of the CFC arising especially from and the reasons why this method was preferred; the following categories of passive income: interest or any other income ¬ documentation that describes the data that is used and the generated by financial assets, royalties or any other income generated from analytical methods used in a transfer pricing benchmarking study, intellectual property, dividends, financial leasing, income from insurance and as well as the documentation that supports all calculations per- banking, etc. An exemption is available if a CFC carries out substantial econo- formed; mic activity through engagement of staff, equipment, property and buildings, ¬ documentation related to the functional analysis and risk analysis as evidenced by relevant facts and circumstances. If only one third or less performed; and of the total income of the foreign entity falls within the categories of passive ¬ updates of transfer pricing documentation from previous years income as listed above, the foreign entity will not be considered a CFC. (if any) to reflect current changes (if any). Additionally, general tax rules, especially the »substance-over-form princi- Provisions regarding »advance pricing agreements« (APA) for transfer pricing ple«, the con- cept of beneficial ownership, and the general anti-abuse rules, were introduced in 2017. are applied by the Croatian tax authorities when deciding on the lawfulness Further, as of 2017, the taxpayer can, for the purpose of determination of of actions taken by the taxpayer. arm’s length nature of related party financing and in addition to the interest rate published by the Minister of Finance, use a different interest rate, presu- 4 Exit taxation ming that he can prove and argue that such interest rate is the arm’s length interest rate and that it applies it to all financing agreements. As of 1 January 2020, and based on the provisions of EU Council Directi- ves 2016/1164 and 2017/952, (so called »Anti-Tax Avoidance Directive« –or Country-by-country report (CbCR) »ATAD«)provisions on exit taxation are in effect. These provide criteria for Council Directive (EU) 2016/881 states that all multinational enterprise taxation of capital gains realized in certain cases where business activities (MNE) groups must provide annually and for each tax jurisdiction in which or assets are transferred across borders. These provisions are in line with the group does business information on the amount of revenue, profit (or loss) the ATAD. before tax, profit tax paid and accrued, number of employees, stated capital, accumulated earnings and tangible assets, as well as on the identity of each 5 Hybrid mismatches participating entity and its economic activity – a so-called CbCR. The CbCR filing obligation applies to MNE groups having a total consolidated group As of 1 January 2020 and based on the provisions of EU Directives 2016/1164 revenue of at least EUR 750 million where the ultimate parent entity is required (so-called »Anti-Tax Avoidance Directive« – ATAD) and 2017/952 (so called to file the CbCR in the jurisdiction where it is tax resident. »Anti-Tax Avoidance Directive II« or– »ATAD II«), provisions on hybrid mismatch are in effect. These provisions define the tax treatment of cross-border Notifications need to be submitted by 30 April or four months after year end hybrid mismatch arrangements and are in line with the ATAD. (if the tax year is different to the calendar year). The CbCR, on the other hand, is due 12 months after the year end.

186 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 187 6 DAC 6 reporting obligation D VALUE ADDED TAX DAC 6 provisions have been transposed into the Croatian Law on Administ- 1 Taxable persons rative Assistance in the field of Taxation. In general, entrepreneurs carrying out taxable transactions in Croatia are This includes reporting requirements for intermediaries who design, market, subject to VAT. A taxable person for VAT purposes is defined as a person who organize, make available for implementation, or manage the implementation independently carries out any business activity, irrespective of the purpose or of reportable cross-border arrangements based on prescribed hallmarks. results of that activity. Non-residents may also be subject to VAT if they carry Taxpayers may also be required to disclose arrangements when there is no out taxable transactions in Croatia. intermediary, or when an intermediary is unable to report due to professional secrecy obligations. Government bodies, central and local authorities and self-governing bodies, political parties, trade unions, and chambers of commerce are considered to DAC 6 provisions entered into force on 1 January 2020, although the initial be taxable persons if they perform business activities and if the non-taxation deadline for reporting is 31 August 2020 in respect of reportable arrange- of such activities would lead to unfair competition. ments where the first step of implementation occurred between 25 June 2018 and 1 July 2020. Taxable persons whose supplies exceeded HRK 300,000 (approx. EUR 40,000) in the preceding or current calendar year are obliged to register for VAT as of the following year/month. With respect to foreign taxable persons, see I.D.9.2.

2 Taxable transactions Under the provisions of the Croatian Value Added Tax Act (VATA), the following transactions are taxable: ¬ the supply of goods and services within Croatia for a consideration by taxable persons within the scope of their business; ¬ the withdrawal of goods and rendering of services for the taxable person himself (self-supply); ¬ the import of goods from a country outside the EU; ¬ intra-Community acquisitions.

2.1 SUPPLY OF GOODS AND SERVICES A supply of goods is defined as an event whereby a taxable person transfers the right to dispose of the supplied goods as their owner. It may be transferred by the supplier himself or, upon his instructions, by a third party. How- ever, the transfer of the right to dispose of the supplied goods does not require the transfer of legal ownership (e.g. a conditional sale). The term »services« for VAT purposes is described by a negative definition: according to the VATA, supplies of services are all supplies that do not qualify as a supply of goods. A supply of services may consist of a positive action, in the abstaining from performing an action and/or in permission with respect to actions of another person. Taxable transactions include the delivery of goods or provisions of services ordered by a government administrative body as well as those supplied by a taxable person to his employees or to members of their immediate family under an employment contract.

188 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 189 2.2 WITHDRAWAL (SELF-SUPPLY) In general, when supplying to a taxable person, the supply of services is taxable at the place where the recipient has established his business or has Under the VATA, self-supplies of goods and services are subject to VAT. These a fixed establishment. There are numerous exceptions to this general rule. include: When supplying to a non-taxable person, the supply of services is generally ¬ a transfer of goods from business assets for private needs; taxable where the supplier has established his business or has a fixed estab- ¬ use of services or goods of one’s own enterprise for private needs; lishment from which the service is supplied. There are some exemptions to ¬ expenditures for entertainment under certain conditions. that rule. Self-supply is taxable only if the acquisition of the goods in question gave rise to a full or partial input VAT deduction. 4 Taxable amount The taxable amount is the consideration that the customer has to pay to 2.3 IMPORT receive the goods or services, excluding the VAT itself. The taxable base for The transfer of goods from a country outside the EU to Croatia is subject to imported goods is the customs value increased by the customs duty and import VAT. Import covers movements of goods, irrespective of the economic other charges and special taxes payable in the course of customs clearance. background of that movement. The importer is the debtor of the import VAT In respect of the supply of goods or services involving family or other persons and is entitled to deduct the VAT paid on the imported goods if the goods with close personal ties with a taxable person, or with any financial and legal are used for business purposes. For private persons, the import VAT is final. ties, including the relationships between an employer and employee and Under certain conditions a postponed accounting via the VAT return members of their families, as well as ties arising from membership, manage- is possible for imports of specific equipment with a value of more than ment or ownership, the taxable base is the market value, where: HRK 1,000,000. (i) the consideration is lower than the market value and the recipient of the supply does not have a full right of deduction within the 2.4 INTRA-COMMUNITY ACQUISITIONS meaning of the VAT; An intra-Community acquisition is the acquisition of goods transported from (ii) the consideration is lower than the market value and the supplier one EU Member State to another EU Member State, provided that both the does not have a full right of deduction within the meaning of the supplier and recipient are entrepreneurs for VAT purposes. On the one hand, VATA and the supply is subject to a VAT exemption; the supplier carries out an exempt intra-Community supply; on the other (iii) the consideration is higher than the market value and the supplier hand, the recipient has to pay VAT and may deduct it if he is entitled to input does not have a full right of deduction within the meaning of this VAT deduction. Act. A transfer of goods that are business assets by an entrepreneur from an EU As a rule, VAT is imposed on the basis of the consideration agreed between Member State to Croatia is also deemed to be an intra-Community acquisi- the parties. If the entrepreneur does not finally receive the agreed consideration, unless the goods are only used temporarily in Croatia. tion, or if the price changes, the chargeable and overpaid VAT may be adjusted on the condition that the client corrects (reduces) the deduction of input VAT and can prove that he informed the supplier in writing. 3 Place of supply The supply of goods and services as well as self-supply is only taxable under the VATA if it has a domestic place of supply. The supply of goods is effected at the place where the goods are located at the time economic ownership is transferred to the recipient. The place of the supply of goods dispatched or transported by the supplier or by the recipient is deemed to be the place where the goods are at the time when the dispatch or the transport starts. The rules on distance selling apply if goods are transported from a Member State to a »threshold acquirer« (i.e. private consumer) in Croatia and the total value of supplies to Croatia by the supplier exceeds HRK 270,000 (approx. EUR 35,000) in the calendar year. It is possible to opt voluntarily for the taxation before the distance-selling threshold is exceeded. Intra-Community acquisitions are, in general, taxable at the place where the dispatch or transport ends. The place of supply of goods is also deemed to be the place where goods are installed by the supplier or by another person on his behalf.

190 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 191 5 Tax rates ¬ transactions, including negotiation, concerning deposits and current accounts, payments, transfers, debts, checks and other The following tax rates are provided for by the VATA: negotiable instruments, but excluding debt collection; 25% standard VAT rate ¬ transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of 5% applies to all kinds of bread and milk, certain types of books, collectors’ items, that is to say, gold, silver or other metal coins medicine (approved by competent authority) and medical or bank notes which are not normally used as legal tender or equipment, movie tickets, daily newspapers coins of numismatic interest; 13% applies to services of providing accommodations or accommo- ¬ transactions, including negotiation except management or dation with breakfast, full or half board in all kinds of commercial safekeeping, in shares, interests in companies or associations, hospitality facilities, preparing and serving meals (including take debentures and other securities, but excluding documents away), services and related copyrights of writers, composers and establishing title to goods, and the rights or securities estab- artists, and holders of phonographic rights performing that acti- lishing certain rights to immovable property; vity under special regulations, child car seats, electricity to other ¬ the leasing or letting of residential property; supplier or end customer, including fees related to the supply, ¬ supply of buildings or parts thereof, and of the land on which public service – collection of mixed and biodegradable communal waste and collection of separated waste, urns and coffins, bed- they stand, other than the supply before the first occupation or ding plants, seeds, fertilizers, pesticides and other agrochemical use, that is, the supply where not more than two years have passed products, cattle food, supplies of edible oils and fats, infant food, from the date of the first occupation or use to the date of the next water (except bottled), tickets for concerts, newspapers and supply. For the purposes of the VATA, a building shall mean any scientific periodicals, children’s nappies (diapers), livestock, fresh structure fixed to or in the ground; meat, fish, fruits and vegetables, eggs, and services and related ¬ supply of land other than building land, etc. authorship rights of writers, composers, and performers under certain conditions. In addition, a taxable person shall have the right to opt for taxation of the transactions regarding the supply of land, and supply of buildings, provided that the customer is a taxable person who has a full right of deduction. The 6 Exemptions right of option in respect to taxation and the right of deduction may be exercised at the time of supply. The numerous exemptions from VAT can be classified in two categories, depending on whether or not they preclude the deduction of input VAT. The most important exemptions are listed below (the list is exemplary, not exhaustive). 7 Input VAT deduction An entrepreneur is entitled to deduct VAT paid on goods and services, as well 6.1 EXEMPTIONS WITH RIGHT TO THE VAT DEDUCTION as imports and intra-Community acquisitions, if the following conditions are The following supplies do not affect the right to deduct input VAT: fulfilled: ¬ export of goods; ¬ the supply of goods and services must be effected by another ¬ intra-Community supply; entrepreneur in Croatia for the business of the recipient; ¬ cross-border transport of export goods; ¬ an invoice has to be issued (according to Sec. 79 VATA); and ¬ work on and the processing of goods to be exported outside the ¬ no VAT exemption, which precludes the deduction of input VAT, Community. is applicable. Input VAT deduction cannot be claimed for the procurement of goods and 6.2 EXEMPTIONS WITHOUT RIGHT TO DEDUCTION services for entertainment purposes. The numerous exemptions from VAT that affect the right to deduct input VAT The entrepreneur has the right to a 50% input VAT deduction in case of are listed below: purchase or leasing of personal vehicles and other goods and services related ¬ insurance and reinsurance transactions, including related services to their use. Certain exemptions related to carrying on of core business are performed by insurance brokers and insurance agents; available. ¬ the granting and the negotiation of credit and the management of credit by the person granting it; ¬ the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit;

192 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 193 Finally, if the amount of input tax exceeds the amount of output tax, the diffe- 8 VAT liability rence is refunded within 30 days of submitting the request for refund or within In general, an entrepreneur carrying out a taxable transaction is liable to VAT. 90 days from the day the auditing procedure was instituted. If the amount of He is obliged to pay the invoiced VAT to the tax office. output tax exceeds the amount of input tax, the entrepreneur must pay the balance due to the tax office. Exceptionally, for taxpayers who have opted for the assessment of VAT on a cash basis, the tax liability arises at the time when his outgoing invoices are Entrepreneurs who deliver goods and perform services that are VAT exempt settled by the customer. On the other hand, the right to input VAT deduction are not entitled to deduct input VAT. Entrepreneurs who deliver goods and for this taxable person arises at the time when incoming invoices issued by perform services that are partly subject to VAT, and partly exempt from it, the supplier are settled. are entitled to deduct input VAT to that extent that relates to the taxable deliveries. The option of the postponed accounting on import is provided in the Croatian VATA. However, in current practice, import VAT still has to be paid in cash If, in respect to certain capital goods, the relevant conditions that were appli- upon importation. A provision in the VATA stipulates that VAT on importa- cable to input VAT deductions are subsequently changed within five years, in- tion is deemed paid if the taxable person who has a right to deduct the full cluding the calendar year in which the capital goods were acquired or manu- amount of input import VAT declares that VAT as a liability in the VAT return factured, then the input VAT deductions for the period after the change are for which the decision by the Tax Authorities needs to be obtained. However, adjusted. Subsequent changes to the conditions applicable to the input VAT neither the procedure for obtaining the decision nor the requirements for deductions that led to a greater or reduced right of deduction in relation to the issuance of such have been published to date. year in which the goods were acquired or produced are regarded as changes to the relevant conditions applicable to input VAT deductions. In the case of In respect of intra-Community acquisitions and in respect of services that immovable property, the adjustment period is not five, but rather ten years. are subject to a reverse-charge mechanism, the recipient of the goods and services is liable to settle the VAT liability. The reverse-charge mechanism Additionally, VAT calculation based on collected consideration is possible applies to: for certain entrepreneurs. Taxable persons whose value of supplied goods and provided services in the previous calendar year did not exceed ¬ supply of services, if they are taxed according to the general rule HRK 7,500,000 (approx. EUR 1,00,000) exclusive of VAT are allowed to opt for the place of supply of services, and if they are supplied to a for the assessment of VAT on a cash basis. taxable person and carried out by a foreign taxable person (no seat or fixed establishment in Croatia); ¬ supply of goods and services carried out by a foreign taxable person (no seat or fixed establishment in Croatia, non-registered in Croatia), if such supply is taxable in Croatia and is supplied to a Croatian taxable person or legal entity acting as such; ¬ construction work, including services pertaining to construction, maintenance, reconstruction, or removal of a building, supplies of concrete steel and iron and products made from concrete steel and iron (reinforcement structures); ¬ the supply of used material, used material that cannot be re-used in the same state, scrap, industrial and non-industrial waste, recyclable waste, part processed waste; ¬ the supply of immovable property under certain conditions; ¬ the transfer of allowances to emit greenhouse gases. If an entrepreneur or a private person charges VAT on an invoice without a legal basis, the amount of VAT stated on the invoice has to be paid even though there is no legal basis for it.

194 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 195 9 Tax assessment 9.3 VAT REFUND TO FOREIGN ENTREPRENEURS

9.1 RESIDENT TAXABLE PERSONS Foreign EU taxable persons who do not carry out taxable transactions in Croatia may claim a refund of input VAT by filing an electronic application Any person that starts business activities in Croatia must register with the at their home tax office. If the refund application relates to a refund period tax authorities. If an entrepreneur’s supplies exceeded HRK 300,000 (approx. of less than one calendar year, but no less than three months, the amount EUR 40,000) in the preceding calendar year or during the current year, he is of VAT for which a refund is applied for may not be less than EUR 400 required to register for VAT purposes at the local office of the tax authori- (HRK 3,100). If the refund application relates to a refund period of a calendar ties from the first day of the month after the month in which the threshold year or the remainder of a calendar year, the amount of VAT may not be less is exceeded. Entrepreneurs performing supplies in an amount less than than EUR 50 (HRK 400). The request is to be submitted electronically by the HRK 300,000 may apply to the tax authorities to be liable to pay VAT from end of September of the current year for the previous year. the day of the submission of the request. The entrepreneur is then liable for the next three calendar years. Foreign taxable persons from third countries who do not carry out taxable transactions in Croatia can also claim the VAT refund by filing a VAT refund Croatian VAT legislation does not include any provisions on VAT grouping, application with the Croatian tax authorities. The right to a tax refund for which means that each taxable person is considered an independent taxable taxable persons from third countries is granted under the condition that a person for VAT purposes. domestic entrepreneur also has the right to a VAT refund in the applicant’s For VAT purposes, an entrepreneur who carries out taxable transactions state of residence. has to file periodical declarations and make payments during the tax year. The condition of the right to a tax refund is that taxpayers, in the period to The assessment period is one month or alternatively on a quarterly basis which a VAT refund is related, did not carry out any deliveries of goods and (if the deliveries do not exceed HRK 800,000 (approx. EUR 105,000). VAT is services for which the place of taxation is in Croatia, except for transport ser- pay- able within 30 days following the end of the assessment period when vices and transport-related services that are VAT exempt, as well as for the tax liability arose. services for which the VAT liability is shifted to the domestic recipient of the The submission of the annual VAT return is no longer prescribed. service (reverse-charge mechanism). For the VAT refund, the taxpayer needs to submit the request for a tax refund to the tax authorities within a period of All taxpayers are required to file their VAT returns by electronic means (and six months after the end of the calendar year to which the request relates. not in paper form) via e-card. The deadlines for submission of the European General provisions that are applicable for domestic entrepreneurs for the Sales List for goods and services coincide with the filing periods of the VAT input VAT deduction are also applicable to foreign entrepreneurs. returns. Please note that the refund of the input VAT will be performed only on the 9.2 FOREIGN TAXABLE PERSONS basis of the valid reciprocity agreements concluded between countries. VAT registration for foreign entrepreneurs Foreign taxable persons carrying out taxable transactions in Croatia must re- 10 Quick Fixes gister for VAT purposes at the competent tax office and electronically submit As of 1 January 2020 Croatia implemented EU temporary cross-border monthly VAT returns just like resident taxable persons. There is no registra- transaction simplifications known as the »quick fixes«. The quick fixes aim to tion threshold for foreign businesses (without a seat or fixed establishment provide clarity, guidance, and simplifications to VAT treatments that should in Croatia). They are obliged to register for VAT purposes if they perform apply when intra-community supplies of goods take place. These include: transactions considered taxable for VAT purposes in Croatia, regardless of the value of these transactions. The VAT application must be submitted at ¬ Simplification and harmonization of rules regarding call-off stock least 15 days before the first taxable transaction. arrangements (i.e. movement of own goods); ¬ Provisions regarding the allocation of the transport of goods in Croatia has abolished the reverse-charge mechanism in certain chain transactions to enhance legal certainty by establishing cases where the taxable supply of goods or services is carried out by a uniform criteria; taxable person who is not established and does not have a permanent or ¬ Harmonization and simplification of the documentary evidence habitual residence in Croatia (Member State in which the VAT is due) – if VAT as proof of an intra-Community transport of goods for the pur- registered in Croatia. In those cases the person liable for payment of VAT is pose of VAT exemption application. the non-established VAT registered person. Foreign EU taxable persons may choose a fiscal representative in the event that they effect supplies subject to Croatian VAT. In the case of a foreign, non-EU taxable person, the appointment of a fiscal representative is obligatory.

196 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 197 E OTHER BUSINESS-RELATED TAXES 9 Inheritance and gift tax The inheritance and gift tax is included in the Municipal Tax Act (MTA). 1 Capital duty Inheritance and gift tax is levied on the transfer of movable property, inclu- N/A ding cash or monetary claims, upon death or inter vivos in the territory of Croatia. Movable property, cash, monetary claims and shares received are 2 Stamp duties only taxable if their taxable value exceeds HRK 50,000 (approx. EUR 6,500). Stamp duties as a certain type of tax are not levied in Croatia. Stamp charges The tax base is the market value of the property at the moment of tax assess- are levied on documents and on dealings involving bodies of public adminis- ment after deduction of expenses and debts encumbering the property. Tax tration, embassies and consulates, as well as local authorities, in form of is charged at rates of up to 4%. lump-sum fees of insignificant amounts (up to EUR 50). The MTA provides for various tax exemptions and credits, applicable in particular in cases where the movable property is transferred to closely related persons. 3 Customs duties In Croatia customs duties are levied on imported goods from third countries. The tax base is the value of the goods. As an EU Member State, Croatia does not levy customs duties on the import of goods from other EU Member States.

4 Other excise duties Excise duties in Croatia are levied on alcohol, non-alcoholic drinks, beer, tobacco products, cars, motorbikes, boats, airplanes, oil products and coffee that are placed on the Croatian market.

5 Environmental taxes Croatian law provides for various environmental fees with regards to the environmental protection of forests, CO₂ emissions, packaging waste, used pneumatic tires, etc.

6 Advertising duty N/A

7 Digital services tax N/A

8 Real estate transfer tax For more details, see II.B.3.

198 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 199 II SPECIAL AREAS OF TAXATION OF BUSINESS-RELATED 3.2 EXCESSIVE INTEREST ACTIVITIES In accordance with the PTA, interest that is paid by a CPT taxpayer to a non-resident related party is considered to be at arm’s length (i.e. deductible A HOLDING STRUCTURES for profit tax purposes) up to the rate prescribed by the Minister of Finance. The same applies to related party financing between domestic entities if one 1 Participation exemption of the related parties has preferential profit tax status (applies a profit tax Dividends derived by resident corporations from resident or non-resident rate that is lower than the standard rate of 12% or 18% or is fully exempt from corporations (under prescribed criteria) are exempt from CPT. corporate profit taxation) or is entitled to use tax losses carried forward from previous tax periods. The default rate for the related party interest rate is currently set at 3.42% per year – effective from 1 January 2020. 2 Outbound dividends Following from the above, any interest charged between domestic corporate Withholding tax applies to dividends and shares in profit made to foreign profit taxpayers (if at least one of them has preferential profit tax status) entities. This tax applies at a rate of 12% (unless reduced by a relevant double which is in excess of the current 3.42% rate would not be deductible for Croa- tax treaty). tian corporate profit tax purposes. If interest is charged below the 3.42% rate, These rules apply to all dividends except for dividends and shares in profit the Croatian taxpayer should increase his corporate profit tax base for the realized before 31 December 2000 and in the period from 2004 to February amount of »lost« revenue (difference between interest charged by applying 2012, regardless of when the payment is made. the 3.42% rate and actual agreed rate). Withholding tax on dividends and shares in profit is not payable if dividends Accordingly, if any related party provides debt financing to a Croatian com- and shares in profit are paid out to an enterprise that applies one of the joint pany, any interest charged in excess of the current 3.42% per year will not be taxation models applicable to holding and related companies from different a tax-deductible expense for the Croatian company. EU countries, if: Alternatively, as of 2017, the taxpayer can, for the purpose of determination of ¬ the dividend or share-in-profit recipient holds at least 10% arm’s length nature of related party financing and in addition to the interest share in the capital of the entity making the payment; rate published by the Minister of Finance, use a different interest rate, presu- ¬ the recipient holds the minimum share stated above for ming that he can prove and argue that such interest rate is the arm’s length at least 24 months. interest rate and that it applies it to all financing agreements. Additionally, the excessive interest deduction rule in line with the Anti-Tax 3 Interest deduction and thin capitalization Avoidance Directive is applicable. Interest and other borrowing costs with respect to borrowings received from abroad will be tax deductible up to the 3.1 THIN CAPITALIZATION higher of the following two amounts: The Croatian PTA provides that interest on loans provided by shareholders with ¬ 30% of the EBITDA; or a 25% or more holding in a Croatian company is not deductible for profit tax ¬ EUR 3,000,000. purposes if the amount of the loan exceeds four times the amount of the equity holding for that shareholder (i.e. a 4:1 safe harbor). The Croatian PTA regula- Any financing expenses in excess of the aforementioned amount will be tions clarify that the non-deductibility treatment is applicable to interest that non-deductible but can be carried forward for up to three years (the new corresponds to the amount of a shareholder’s loan in excess of the safe harbor. rule has to be applied next to the current thin capitalization rule as well as to the current limitation rule for excessive interest rates). An exemption from The thin capitalization provisions also apply to loans granted from third the rule will apply to taxpayers that have no related parties or to financial parties that are guaranteed by a direct shareholder and for loans granted by institutions. related parties. The above-mentioned thin capitalization rules do not apply to resident shareholders and shareholders that are financial institutions (as defined by the Croatian legislation). Therefore, to the extent that the Croatian company raises debt financing from its direct parent company or any related party, or if the Croatian company’s direct parent company guarantees any such debt financing, then interest on any such debt financing that exceeds four times the Croatian company’s capital (capital for the purpose of thin capitalization calculations also includes reserves and retained earnings reduced for possible losses) will not be a tax- deductible expense for the Croatian company.

200 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 201 4 Non-resident shareholders B REAL ESTATE INVESTMENTS

4.1 INTEREST AND ROYALTY PAYMENTS TO NON-RESIDENTS The general principles of taxation of Croatian resident or non-resident individual and corporate investors also apply for real estate investors. In accordance with the CPT Law, a withholding tax of 15% is generally required to be deducted in respect to the following payments to non-residents: 1 Resident investors ¬ interest on borrowings (excluding borrowings from financial institutions) and interest on commodity loans and on bonds); An individual person is resident in Croatia for tax purposes if he has a domicile ¬ royalties and other intellectual property rights; and or habitual place of abode in Croatia. Such a person is subject to Croatian ¬ market research services, tax and business consulting personal income tax on all its worldwide income, including income from real services and auditor services. estate. However, a valid double tax treaty (DTT) may reduce or eliminate any with- A corporate investor is tax resident if the statutory seat or place of manage- holding tax liability if the foreign entity is seated in a jurisdiction with which ment and control of business is in the Republic of Croatia. Such a corporate Croatia has a DTT in effect. investor is subject to Croatian corporate profit tax on all its worldwide income, including income from real estate. Please note that the provisions of EU Directive 2003/49/EC (Interest and Royalty Directive) have been incorporated into Croatian CPT legislation. 1.1 REAL ESTATE INVESTMENT INCOME WHT at the rate of 20% must be withheld on payments for services made to Individual investors companies outside the European Union if the country is included in the list of Real estate income can take the following forms: non-cooperative jurisdictions for tax purposes by the European Union, provi- ¬ income from alienation of real estate; and ded that there is no effective double tax treaty concluded between Croatia ¬ income from rentals and leasing. and the specific country. Income from alienation of real estate 4.2 CAPITAL GAINS The alienation (sale, exchange or other transfer) of more than three real Capital gains of a non-resident corporation resulting from the alienation of a estate items or more than three property rights of the same kind within a participation in a Croatian corporation are not taxable in Croatia. five-year period, except where the real estate is expropriated pursuant to a special law, is considered to be an income from property and property In addition, as of 1 January 2016, the capital gains of individuals arising from rights and the taxpayer is obliged to pay income tax on such an alienation of the disposal of financial assets acquired after 1 January 2016, if they have real-estate and property rights (unless this income is already taxed as income been held for less than two years, are subject to personal income tax at a from independent activities). tax rate of 12%.

Income from rentals and leasing The income and income tax of a taxable natural person (individual) who earns 5 Tax group income from the renting of flats, rooms and beds to tourists is determined as In general, each corporate entity is regarded as a separate entity for profit a lump-sum amount (annual lump sum), provided that: tax purposes. There is no possibility under Croatian tax law to be taxed on ¬ the competent area authority approved the provision of the service the basis of consolidated income or as a fiscal unity. Thus, neither profit of renting flats, rooms and beds to travelers and tourists and and loss transfer agreements nor control agreements result in taxation as organizing campsites according to the Hospitality and Catering a fiscal unity. Industry Act; ¬ the accommodation services are in a flat, room or holiday house that the lessor owns, up to a maximum of 20 beds (which does not include any extra beds), or the accommodation services are in a camp, organized on land which the lessor owns, with a maximum of ten accommodation units, in other words 30 guests at the same time; ¬ the taxable person is not subject to VAT pursuant to the VATA. Alternatively, a taxable person may determine income on the basis of the data from business books and records (for more details, see I.B.1.2).

202 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 203 Corporate investors 2.2 INDIRECT INVESTMENT BY AN INDIVIDUAL OR ENTITY Income of corporate investors is to be regarded as »business income« in (SHARE DEAL) any event, regardless of the nature of the income (e.g. income from real Where shares in a Croatian company that owns real estate in Croatia are estate investment). The rules for business income are applicable (see above, acquired, there are no registration requirements to be fulfilled with the Croa- individual investors II.B.1.1). Rental and leasing payments as well as capital tian Land Registry in respect of the real estate. For companies that own gains are taxable. only real estate, there are no provisions that restrict a foreign investor from The corporate profit tax rate of 18% (or alternatively 12%) applies. owning shares in the company. In addition, a Croatian company can be established by a foreign investor for 1.2 TAX RATES AND TAX PAYMENTS the purpose of land acquisition, as there are no formal approval requirements As regards the personal and corporate income tax rate, see I.B.1.4 (up to to be obtained from relevant governmental bodies (as opposed to the asset 36% progressive income tax rate) and I.B.2.4 (18% corporate profit tax rate). deal described above). For taxation of capital gains, see II.B.6.2. 2 Non-resident investors The most complicated aspect of foreign investment in Croatia is that rela- 3 Real estate taxes ted to the acquisition of real estate (both land and buildings). In addition to 3.1 REAL ESTATE TRANSFER TAX the complicated legal restrictions, problems also exist with outdated land ownership and land use registries. Subject to Real Estate Transfer Tax (RETT) are real estate transactions. The Croatian legislation defines a real estate transaction as every acquisition of However, in recent years with Croatia’s accession to the European Union, ownership of property. the Croatian government commenced several projects of updating and com- puterizing both land use and land ownership registries in order to simplify Under the Croatian legislation real estate is defined as: investments for domestic and foreign investors. ¬ land – whether used for business purposes or for agricultural purposes; ¬ buildings – whether residential buildings, business premises or 2.1 DIRECT INVESTMENT BY FOREIGN INDIVIDUAL OR ENTITY other buildings. (ASSET DEAL) The tax base is defined as the market value of the property at the moment Foreign investors (both individuals and entities) may acquire property with of acquisition, or the market value that could be obtained at the moment of the prior approval of the relevant government bodies based on the reciprocity acquisition (e.g. if the property is transferred without consideration). The principle. For EU citizens, no approval is required. market value of the property is obtained from the acquisition certificate (e.g. The respective approval process still valid for foreign investors that are not purchase agreement, condemnation, etc). Furthermore, if the market value EU citizens can be time-consuming, and the Croatian authorities have the stated in the contract is questioned by the tax authorities, they are authorized discretionary right to reject requests for acquisition. Property rights should be to determine the market value by assessment. In this case the taxpayer is registered with the Croatian Land Registry. Only the Croatian Land Registry obliged to cooperate fully with the tax authorities. may issue certificates that confirm the ownership of real estate. RETT is paid at a rate of 3% and the taxpayer is the person who acquired the The Croatian Land Registry will complete ownership registration only if pre- property (e.g. buyer or successor). sented with valid public documents, or if presented with private documents Generally, the public notary is obliged to report real estate transactions to that have been notarized by a public notary. The following documents should the relevant tax office, according to the location of the real estate, within 30 be presented: days of the transaction (the taxpayer has the RETT reporting obligation only ¬ a proposal for ownership registration, in which the real estate must in cases where the public notary was not informed of the transaction). The tax be accurately specified; has to be paid within 15 days of delivery of the decision on RETT. ¬ a specific declaration on the part of the previous owner In the case of acquisition of buildings and building land that are already stating that the previous owner allows such a registration; and taxable by VAT, RETT is not paid (see II.B.4). Generally, buildings that are ¬ the original or a notarized copy of the sales contract, (the declaration subject to VAT are defined as buildings that have not been inhabited or that under the previous bullet point is usually part of the sales contract). have been used for less than two years. In addition, a taxable person shall The registration process takes approximately one month. have the right to opt for VAT for the supply of land, and supply of used buildings, provided that the customer is a taxable person who has a full right of For taxation of capital gains, see II.B.6.1. deduction. The right of option in respect to taxation and the right of deduction may be exercised at the time of supply.

204 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 205 4 VAT on real estate 4.2 VAT ON THE RENOVATION OF REAL ESTATE

4.1 VAT ON ACQUISITION AND SUBSEQUENT SALE OF REAL ESTATE An entrepreneur registered for VAT purposes may reclaim input VAT on the costs related to the renovation of real estate. Please note that in the case of As of 1 January 2015, the supply of building land is subject to VAT. Building the renovation of an existing building (where costs of the reconstruction in the land is defined as land for which a building permit has been issued. previous two years exceeded 50% of the sales price), the renovated building As for buildings, it should be noted that the VAT Law makes a distinction is considered to be subject to VAT upon its sale (provided the seller is VAT between old buildings and new buildings, as before. registered). Renovation is defined as an investment that alters the previous state of the building, such as extensions, etc. In addition, buildings that are subject to VAT are defined as buildings that have not been inhabited or that have been used for less than two years. 4.3 VAT ON THE RENTAL OF REAL ESTATE Buildings that are not considered taxable by VAT are only subject to RETT The VAT legislation makes a distinction between the renting of real estate (see II.B.3.1). that is used for business purposes as opposed to the renting of real estate Therefore, VAT is paid on the acquisition of a building that fulfils the criteria that is used for residential purposes. Please note that the renting of real of two years (including the attached land) and building land, if the seller is estate to tourists is deemed to be renting for business purposes. registered for VAT purposes. If the seller of the respective property is not registered for VAT purposes, then RETT will be payable on both the land and Residential rentals the building. The Croatian VAT Law provides that the service of renting real estate that will be used for residential purposes is exempt from VAT and consequently VAT charged on the transfer of a property may in certain circumstances be no input VAT can be recovered upon the acquisition of real estate (for resi- recovered. Below we set out certain conditions that need to be met in order dential purposes) by the acquirer, regardless of whether the acquirer is VAT for the input VAT to be reclaimable: registered. ¬ the acquirer of the property must be VAT registered; The rent charged on real estate used for residential purposes is not subject ¬ the property must be used for the performance of the taxpayer’s to VAT. business activity; ¬ the property must be used for the performance of taxable supplies. Business rentals (It should be noted that the service of renting property for The rent charged on real estate used for business purposes is subject to VAT residential purposes is VAT exempt and accordingly no VAT at the general VAT rate of 25%. Rent charged on real estate used in tourism can be reclaimed upon acquisition of the property if it is going is subject to VAT. to be used for this purpose.) If the conditions relevant for input VAT deduction subsequently change within 5 Real estate investment funds the period of ten years (see I.D.7), adjustment for input VAT deduction is made. The Croatian civil and tax legislation contains provisions regarding the orga- Furthermore, foreign entrepreneurs may not claim a refund of VAT paid on nization and the tax treatment of investment funds. The general principles the purchase of immovable property. relating to capital investment funds are also applied to real estate investment As of 1 January 2015, the supply of building land is no longer VAT exempt. In funds. Therefore, in the next section we will provide a short overview of the addition, as of that date, the supply of buildings older than two years starting investment funds available in Croatia. from the moment of first occupation is exempt from VAT. The Croatian parliament enacted the Law on Investment Funds and related investment fund legislation in order to ensure compliance with the principles of security, profitability, liquidity and risk distribution within the investment fund segment of the Croatian financial sector. The Croatian Law on Investment Funds provides for the following types of funds: ¬ open-ended (introduced in 1995); ¬ close-ended funds (introduced in 1995); ¬ open-ended funds with private issue (introduced in 2006); and ¬ venture capital funds (introduced in 2006).

206 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 207 5.1 OPEN AND CLOSED INVESTMENT FUNDS 5.3 REAL ESTATE INVESTMENT FUND Investment funds can be classified as »open« or »closed«. Under the Croatian legislation, a real estate investment fund (REIF) is a closed fund and therefore should be established as a joint stock company. The key features of »open« investment funds can be summarized as follows: An investment fund management company (established as either a joint stock ¬ they are not legal entities and as such they do not have company or limited liability company) carries out investment activities for a a corporate form; rather they are a pool of assets subject to REIF aimed at earning profits; it distributes the proceeds from this activity specific legislation and managed by a fund management company; between the owners. ¬ investors purchase units in an open-ended investment fund and in return receive a receipt proving ownership of a unit in the fund; and The Croatian Investment Fund Law provides for the establishment of a ¬ the receipt proving ownership of units in the fund is freely trans- special investment fund organized as a »closed fund with a public offer for ferable and may be redeemed at the owner’s request at any time. real estate investment«. Only such investment funds may be used for the acquisition of residential and commercial real estate. The key features of »closed« investment funds are as follows: At least 60% of the net assets of a REIF should be in real estate. ¬ closed investment funds have the corporate form of joint stock companies; Limitations are: ¬ investors subscribe for shares through investments ¬ acquisition of land intended for construction is limited to 20% in the closed investment fund; of the net assets of the fund; ¬ the minimum initial share capital of a close-ended ¬ a minimum of 50% of a REIF’s real estate must be located in investment fund is HRK 5,000,000 (approx. EUR 654,000). Croatia. A few exceptions to this rule also exist; and ¬ an individual real estate item at the moment of acquisition may not 5.2 FUND MANAGEMENT COMPANIES exceed 20% of the net assets of the REIF (also valid for real estate Open and closed investment funds are managed by fund management com- composed of several land parcels); panies approved by the Croatian Securities Exchange Commission. Fund Please note that, unlike the capital investment funds, REIFs are currently management companies can be founded either as a joint stock company or very rare in Croatia. a limited liability company. The only allowable activity for such a company is the management of one or more investment funds. Non-resident fund share owners In accordance with the provisions of the Law on Investment Funds, the key The proceeds from the sale of shares in a REIF are not subject to taxation requirements for fund management companies are as follows: in Croatia. ¬ the minimum share capital for fund management companies is Resident fund share owners set at HRK 1,000,000 (approx. EUR 131,000) or more in certain Resident legal entities that own shares in a REIF will be subject to profit tax circumstances; at applicable rate in the case of sale or redemption of shares. ¬ fund management companies must have at least two directors in an employment relationship with sufficient professional knowledge Natural persons that own shares in a REIF are not subject to personal income to manage investment funds and possessing sufficient experience tax in the case of sale or redemption of shares (unless they are considered in managing companies of a similar size and business activities. to be share traders).

VAT implications of REIFs The transfer of ownership over units of a REIF is not subject to VAT.

208 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 209 6 Structuring of real estate investments III EMPLOYEES AND BOARD MEMBERS The real estate investor can acquire real estate in Croatia by the means of an A EMPLOYEES asset deal (e.g. direct acquisition of real estate) or by means of a share deal (e.g. acquisition of a corporation owning real estate). 1 Resident employees

6.1 DIRECT ACQUISITION OF REAL ESTATE – ASSET DEAL An employee is resident in Croatia if he has his domicile or habitual place of abode in Croatia. An individual is deemed to have his domicile where he A Croatian company may directly acquire real estate in Croatia. Interest occupies a house or apartment in a manner indicating a permanent stay. A expenses for a debt-financed acquisition may be deducted from income of resident is also a natural person who has neither his domicile nor habitual real estate if real estate is rented or used for its own business. The standard abode in the Republic of Croatia but is employed in the civil service of the annual depreciation rate for real estate is 5%. This rate may be doubled for Republic of Croatia and receives a salary on that basis. tax purposes. An individual has his domicile in Croatia if he owns or leases a residence As previously mentioned, the acquisition of real estate is subject to a RETT of in Croatia for at least 183 days in one or two years (regardless of whether 3% of the consideration and the RETT paid is not recoverable and represents he lives there). a final tax for the real estate acquirer. An individual has his habitual place of abode where he is physically present Capital gains derived by a corporate taxpayer from the sale of real estate are under circumstances indicating a permanent presence or stay. The habitual subject to profit tax at the rate of 18% (or alternatively 12%). place of abode is deemed to be in Croatia if the individual stays in Croatia per- On the other hand, capital gains derived by a non-resident legal entity are manently or temporarily for more than 183 days in one or two calendar years. not subject to profit tax (please note that this scenario may have permanent establishment implications). 1.1 EMPLOYMENT INCOME General employment relationships 6.2 INDIRECT ACQUISITION OF REAL ESTATE – SHARE DEAL For purposes of the ITA an employee receiving income under an employment Capital gains derived by a Croatian corporate taxpayer from the alienation contract is deemed to derive employment income. Employment income in- of shares in a Croatian company that owns real estate are subject to profit cludes all remuneration, in cash or in kind, derived by an employed person tax at the rate of 18% (or alternatively 12%). and paid by the employer or by a third party. Both realized and unrealized gains arising from the value adjustment of 1.2 PRINCIPLES OF TAX BASE ASSESSMENT financial assets are taxable if posted to the P&L account as normal business income. If the unrealized gains are posted to the balance sheet, they are not The income tax base of a resident is the total amount of income from taxable. employment, income from self-employment, income from property and property rights, income from capital and other income acquired by a Likewise, the gains derived by a non-resident from the alienation of shares in resident in Croatia and aboard (the worldwide income principle), reduced by a company that owns real estate are not subject to profit tax. the personal allowances. The RETT burden can be avoided if a share deal option is utilized (provided No tax reliefs are prescribed. that such a deal is not made strictly for the purpose of tax evasion). Payments by employers made to Croatian voluntary pension funds (pillar III pension insurance) on behalf of employees up to a maximum of HRK 500 (approx. EUR 67) monthly per employee will be treated as non-taxable income for ITA purposes (and as a corporate profits tax-deductible expense for the employer). As of 1 January 2020 personal income tax for employees under the age of 25 will be entirely abolished, while the tax liability for employees under the age of 30 will be reduced by 50%. The above benefits are available to employees up to a maximum annual tax base of HRK 360,000 (approx. EUR 48,000) and will be granted through the annual tax assessment and not through the monthly payroll calculation.

210 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 211 1.3 TAX RATE, ASSESSMENT AND SOCIAL SECURITY The monthly prepayment of tax on income from tradesmen’s activities, from CONTRIBUTIONS independent professional occupations and from agriculture and forestry has to be in line with a ruling of the tax authorities. Accordingly, the income tax is Tax rate and assessment determined on the basis of the accounting books. Taxpayers who have started The taxable income is determined either as annual or final income. business activities during the tax year do not make advance payments until Annual income is defined as income which has its source in receipts from they submit their first tax return. For tax rates, see I.B.1.4. employment, self-employment activity and other income (exceeding certain threshold). Social security and health insurance contributions Employers are obliged to pay social security contributions on gross wages Final income is defined as income which has its source in receipts from pro- and salaries of the employees at the following rates: perty and property rights, capital, and other income (up to certain threshold). ¬ 16.5% for health insurance. The tax base and annual income tax liability for residents are computed as follows: Employees, on the other hand, are obliged to pay pension contributions on their gross wages and salaries at a 20% rate (or 15% + 5%). These contri- + 1 Income from dependent (employment) activities butions are calculated and withheld by the employer out of the employee’s +/– 2 Income from business and independent (professional) activities salary/remuneration. The maximum social security monthly contribution base currently amounts to HRK 52,452 (approx. EUR 6,994, and the minimum +/– 6 Other income social security monthly contribution base currently amounts to HRK 3,321.96 + 7 Other income (exceeding certain threshold) (approx. EUR 443). Total amount of income Foreign residents employed in Croatia by a Croatian corporate entity will generally be required to contribute to the social security program. If a for- – Personal allowances of a resident/non-resident eigner is subject to mandatory social security contributions in his domicile Tax Base country, the requirement to contribute to the Croatian social security system Application of tax rates may be waived. Income tax liability The Croatian social security system also applies – with minor deviations – to self-employed activities. Self-employed individuals are obliged to pay both – Tax credits contributions, i.e. a pension and health insurance. Annual tax liability For all other payments that can be classified as »other income«, there is an – Wage tax paid in advance obligation to calculate a pension contribution at a rate of 10% (7.5% + 2.5% – Tax prepayments for the insured persons of the second pension pillar) and a contribution for mandatory health insurance at a rate of 7.5%. Additional payment or refund

The taxable amount is calculated as the difference between the total employment income and the employee social contributions. Employees are subject to wage tax on their employment income levied at the time of payment. Wage tax is credited against the individual income tax liability if an assessment is required or requested by the employee (e.g. if the taxpayer wants to claim personal deductions or allowances). Employers are liable to deduct wage tax and social security contributions from salaries paid to their employees. Wage tax constitutes a prepayment on the employee’s annual income tax and is credited against his income tax liability; any excess tax is refunded.

212 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 213 2 Non-resident employees B BOARD MEMBERS A non-resident is a natural person who has neither a domicile nor habitual 1 Executives abode in the Republic of Croatia, but who acquires income in the Republic of Croatia that is subject to tax pursuant to the ITA. In accordance with Croatian law, executive directors of Croatian companies are taxed as employees of the respective companies if they perform their Non-residents may deduct the personal allowance for a tax period in the activities on the basis of an employment contract. amount of the basic personal allowance and the contributions paid for compulsory health insurance in Croatia, up to the amount of prescribed compul- In addition to the above, employment income obtained on the basis of an sory contributions. employment contract, as well as worldwide income received, will be subject to the Croatian ITA. The income tax base of a non-resident is the total amount of income from employment, income from self-employment, income from property and property Furthermore, if the executive director of a Croatian company has no employ- rights, income from capital, and other income acquired by a non-resident in ment contract with the respective company but he is working on the basis Croatia (the domestic income principle), reduced by the personal allowances. of a service contract, the income obtained from the activities performed on the basis of the service contract will be deemed to be other income and 3 Municipal tax (surtax on income tax) subject to ITA. He is obliged to pay social security contributions which are levied as a lump sum according to the ruling of the tax authorities, unless he The rate of municipal tax is governed by the Law on local taxes and each city pays social security on different basis (i.e. has a work contract with another or municipality has the right to levy the municipal tax at a rate in the range of company, etc). 0% to 30%, depending on its population: ¬ municipalities at a rate of up to 10%; 2 Non-executives ¬ a city with a population below 30,000 at a rate of up to 12%; ¬ a city with a population over 30,000 at a rate of up to 15%; In general, non-executive resident directors of a Croatian company are taxed ¬ the City of Zagreb at a rate of up to 30%. in the same way as executive directors working on the basis of a service contract. Currently, the City of Zagreb has the highest city surtax rate; it is levied at 18%. 3 Non-resident board members Therefore, a person with a domicile or a habitual residence in the district/ municipality that has laid down the obligation to pay the tax has to bear the Non-resident executive directors are taxed only on income from employ- burden of the city surtax. The same rule also applies to employees seconded ment activities performed or utilized in Croatia if they are employed by the by non-resident companies to a Croatian company. respective company; otherwise, they are taxed on income from independent (professional) services performed or utilized in Croatia. A non-resident exe- City surtax is calculated on the amount of personal income tax payable. cutive director is taxed on income from independent services if the services The municipal tax is deductible for corporate income tax purposes. were performed or utilized in Croatia. The rules regarding the determination of the tax base, tax rate and assessment are very similar to the treatment of resident directors.

214 leitner leitner guidelines to taxation 2020 guidelines to taxation 2020 leitner leitner 215 C MUNICIPAL TAX IV TAX ASPECTS FOR PRIVATE INVESTORS For more details, see III.A.3. A CAPITAL INVESTMENTS See previous sections. D SPECIFIC PROVISIONS FOR CROSS-BORDER EMPLOYMENTS B INHERITANCE AND DONATION TAX PLANNING 1 General provisions See I.E.9. 1.1 TAX TREATY LAW Foreign residents carrying out their employment in Croatia are basically subject to taxation in Croatia, unless a DTT assigns the taxation rights to the other contracting state. In most cross-border employments, DTTs include an assignment provision (most Croatian DTTs are concluded according to the OECD MC). According to the provisions of the DTT, in general, the country in which the employment is performed (country of exercise) is assigned the taxation rights on the remuneration granted for this activity. However, the employment is taxable in the residence state only if the following criteria are cumulatively met: (i) the employee does not stay longer than 183 days during a calendar/tax year or 12-month period in the country of exercise and (ii) the employee does not receive income from an employer which is resident in the country of exercise and (iii) the salary expenses are not charged to the permanent establishment of the employer in the country of exercise.

1.2 SOCIAL SECURITY LAW According to the Croatian Law on Compulsory Contributions, social security contributions are payable on all types of income subject to the ITA. The Law on Compulsory Contributions coordinates the assessment of liabilities prescribed by specific social security legislation, such as the Croatian Pension Law, the Croatian Health Law and the Croatian Law on Insurance of Foreigners. Further to the above, should a foreigner be subject to the ITA in Croatia, social security contributions would also be payable. An exemption from paying social security contributions in Croatia may be available based on provisions of EU Regulation 883/2004 or an effective social security agreement (or tota- lization agreement) between Croatia and the country in which the foreigner’s employer has his registered seat.

2 Specific provisions

2.1 INWARD EXPATRIATES There are no special tax implications. For more details, see above.

2.2 OUTWARD EXPATRIATES There are no special tax implications. For more details, see above.

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