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.