Amendments to the Croatian tax legislation from 1 January 2019
TAX Alert, December 2018
Amendments to the several tax statutes were published in Official Gazette no. 106/2018. The majority of the amendments will enter into force on 1 January 2019. We present a summary of these amendments below.
- Corporate income tax
- Changes to personal income taxation and social security contributions from 1 January 2019
- Value added tax (VAT)
- Real estate transfer tax (RETT) amendments
- General Tax Act
Corporate income tax
The amendments mostly relate to the implementation of the Anti Avoidance Tax Directive (“ATAD”) rules, i.e. limitations to the deductibility of financing expenses and controlled foreign company (“CFC”) rules. Additionally, there are also important amendments to the definition of a permanent establishment (“PE”), to rules on “Lex Agrokor” receivable write-offs and to withholding tax (“WHT”) provisions.
- The definition of a PE is moved to the General Tax Act provisions, which also extend the PE scope in line with ATAD by, as an example, adding the anti-fragmentation rule
- A write-off of receivables made in line with the regulations on bankruptcy applicable to special interest entities, e.g. the so called “Lex Agrokor” statute, is tax deductible, including in FY18
- Taxpayers, except financial institutions or those not part of a group of companies, whose annual net financing expenses exceed EUR 3 million, will only be allowed to deduct financing expenses for tax purposes at up to 30% of their EBITDA, with a 3 year carry forward option. Tax non-deductible interest assessed under the thin capitalization rule and/or the related party statutory prescribed interest rate rule will be considered first.
- CFC rules, which attribute the income of a low-taxed controlled subsidiary to its parent company, are introduced. A CFC is considered to be any legal entity or permanent establishment located in another country if the local taxpayer or a group of related taxpayers holds more than 50% of the voting rights or share or foreign entity’s profits and the actual CIT paid by the entity abroad is less than the difference between the CIT which would be payable if assessed by applying the Croatian CIT rules and the actual CIT paid by the foreign entity. Attributable profit is generated from interest or other income from financial assets, licence or other intellectual property income, dividends/shares in profit, financial leasing, insurance, banking and other financial activities or sale and purchase of goods and services procured with related parties with little or no economic value added
- Fees paid to foreign enterprises for performance of non-resident artists, entertainers and sportspersons will be subject to WHT at a 15% rate with no obligation to calculate personal income tax and social security contributions if such WHT is paid
- All service fees and other fees that are subject to WHT (i.e. interest, royalties and dividends) paid to entities in tax havens which do not have a Double Tax Treaty with Croatia will be subject to WHT at the 20% rate, as opposed to regular 12 or 15% rates.
Changes to personal income taxation and social security contributions from 1 January 2019
Amendments to the Personal Income Tax Act, Social Security Contributions Act and General Tax Act will come into force on 1 January 2019. Amendments to the Personal Income Tax Regulations already became effective on 1 December 2018.
Personal Income Tax Regulations – applicable from 1 December 2018
Based on the amendments to the Personal Income Tax Regulations, a performance award (e.g. bonuses) can be paid up to HRK 5,000 per employee per annum as a non-taxable receipt. The provision regulating the payment of annual non-taxable payments in the amount up to HRK 2,500 such as Christmas bonus, Easter bonus, holiday allowance, etc. has remained unchanged.
Personal Income Tax Act – applicable from 1 January 2019
- The monthly 24% tax rate bracket is extended from HRK 17,500 to HRK 30,000. The monthly tax bracket (base) above HRK 30,000 will be taxed at 36%. The change is also reflected in the annual tax brackets
- The taxable benefits from share option schemes for employees are reclassified from employment to capital income, which is taxed at a rate of 24% (versus employment income that can fall within the 36% rate bracket). The income reclassification applies also to employees’ share options schemes of related domestic and foreign entities
- Minimum interest rate below which employee loans are considered a benefit in kind is reduced from 3% p.a. to 2% p.a.
- Income realized abroad will now be taxed as envisaged by the sourcing country. For example, if a Croatian tax resident receives benefit in kind from a foreign employer which is considered gross income in the country of source, the taxpayer will not be required to treat such income as net income under the Croatian legislation, as had been the case so far
- Taxpayers realizing types of income from abroad that are considered self-employment income in Croatia are no longer required to keep business records in Croatia
- The flat-rate tax per bed or per campsite unit will be HRK 150 to HRK 1,500 (currently: HRK 150 to HRK 350)
Mandatory social security contributions
- The unemployment contribution of 1.7% and work injury contribution of 0.5% are abolished. The contribution rate for health insurance contribution is increased from 15% to 16.5%. The total social security contributions rates decrease from 37.2% to 36.5%.
- For the board members who are not registered for paying the social security contributions on board member base, but on the employment base or some other base, the minimum base for the payment of the social security contributions on an annual level has been prescribed. If there is a difference between the social security contributions paid on the base on which the board member is registered (e.g. employment) with the relevant authorities and social security contributions calculated on the lowest prescribed base for the board member (average salary x 0.65) on the annual level, the board member will have to settle the social security contributions difference
General Tax Act
- The local legislation has been harmonized with the OECD tax convention in terms of residence criteria. Therefore, from now when a taxpayer has a permanent residence both in the Croatia and abroad, it will be considered that the taxpayer has a permanent residence in the country where their family resides. For a taxpayer-who has no family or whose family’s residence cannot be determined, their residence will be set in the country in which they engage in work activities or in which they predominantly reside
Value added tax (VAT)
The VAT Amendments Act (Act) brings the third step of tax relief within the tax reform and the harmonisation of national legislation with the VAT Directive provisions in terms of place of supply of services and distance sales.
- The Act clarifies that the use of company cars for private purposes is not seen as non-business use to which VAT applies even though input VAT was partially deducted upon purchase or lease, irrespective of the deduction period
- The HRK 400,000 threshold for the deduction upon purchase or lease of passenger cars is abolished so the taxpayers can deduct 50% of VAT charged on purchase or lease of passenger cars and related goods or services, irrespective of the car’s purchase value
- The scope of the reduced rates is extended, so that the reduced rate of 5% applies to all prescription and over the counter medicines. Reduced rate of 13% will apply to supply of baby diapers and certain categories of foodstuffs (live animals, fresh or cooled meat, fresh or cooled sausages and similar products, meat or blood, live fish, fresh or cooled fish, molluscs and other aquatic invertebrates, fresh or cooled crayfish, fresh or cooled vegetables, roots and tubers, fresh and dried fruit and nuts, fresh poultry eggs in shell). Further categorization of these goods will be provided in amendments to the VAT Regulations by the use of Combined Nomenclature. The rate of 13% will also apply to copyright and similar author’s fees paid to authors, composers and performers who are members of organizations for the collective exercise of rights that are engaged in these activities under special regulations and with prior approval of the central state authority for intellectual property
- All taxpayers registered in the VAT register will be required to electronically submit, together with VAT return, the ledger of incoming invoices. The ledger’s format and content will be prescribed by the VAT Regulations, whose amendments are expected
- Non-resident taxpayers that are registered for VAT in Croatia will no longer be eligible to apply the local reverse charge mechanism from section 75 (2) of the VAT Act to their local supplies. In other words, from 1 January 2019, VAT registered non-residents will have to charge VAT on local supplies. Local reverse charge will still apply to local supplies of non-residents that are not registered for VAT purposes in Croatia
- The scope of application of local reverse charge mechanism to the supplies between domestic taxpayers (Section 75 (3) of the VAT Act) is extended, and from 1 January 2019 will also apply to the supply of concrete steel and iron and products thereof
- The reporting of VAT liability on imports of machinery and equipment worth more than HRK 1,000,000 and categorised in the prescribed Combined Nomenclature codes through VAT return will be available only upon import of tangible fixed assets
- In case of doubts about the justifiability of the VAT identification number assignation, the Tax Authorities may request the applicant to provide an insurance instrument (collateral) for a period of up to 12 months. If the taxpayer fails to submit the insurance instrument, the Tax Authorities will terminate the VAT identification number
- Small enterprises that exceed the threshold of HRK 300,000 have to register for VAT immediately and not from 1 January of next year as it had been prescribed earlier
- The Customs or the Tax Authorities will be allowed to request from the taxpayer acquiring the used means of transport from another Member State, prior to its registration, provision of an insurance instrument for the settlement of VAT liability arising from the acquisition
- Conditions for the application of simplified triangulation for the second party involved in the supply chain, when the final destination of goods is Croatia, change. The simplified triangulation will also be available to a non-resident taxpayers who are registered for VAT purposes in Croatia, which is not allowed under the current legislation
- Threshold for the determination of place of supply of telecommunications, broadcasting and electronically supplied services non-taxable persons is introduced. Main place of supply rule prescribes taxation where the customer has its headquarters, residence or habitual residence. However, from 1 January 2019, the place of supply of those services is, exceptionally, in the Member State of the supplier, if their value does not exceed HRK 77,000 (VAT excluded) in the current and the preceding calendar year
- From 1 January 2020, the standard rate will be reduced from 25% to 24%
Real estate transfer tax (RETT) amendments
RETT is to be reduced from 4% to 3% from 1 January 2019
General Tax Act
We provide a summary of general amendments to the General Tax Act that were not previously mentioned in the corporate income taxation and personal income taxation sections.
- The provisions prescribing areas for the application for binding opinions have been deleted, meaning that the tax authority is authorized to provide binding tax opinions on all areas of interest to the taxpayers, provided they relate to future and intended transactions
- It is prescribed that during the tax audit, the taxpayer (legal entity or private individual) with registered business can appoint as an authorised representative (i.e. person authorised to act on the taxpayer’s behalf) only qualified expert that is lawyer or tax advisor
- From 1 January 2019, two or more physical or legal persons who, for completing their tax liability constitute a single risk in the way that they continue activity by using the same business premises and same equipment will be considered as associated persons
- Instead of quarterly filing, OPZ-STAT will be submitted once a year within deadlines for filing of personal income tax or corporate income tax returns. The report will cover all outstanding invoices on 31 December
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