Tax reform - What to look out for
Tax news, December 2016
The tax legislation amendment proposals, the most important aspects of which were presented in our previous Tax News, have been voted in and, in most respects, are in force from 1 January 2017. Certain changes, however, will be relevant even for the 2016 tax year.
This Tax News review a selection of key law changes, emphasizing that there are also many other changes to consider. We recommend you perform a detailed review of all tax law changes to ensure that you continue carrying on your business in line with the law.
Corporate income tax
The new corporate income tax rates, as already announced, amount to 18%, or 12% for enterprises with annual revenues below HRK 3 million.
The Corporate Income Tax Act amendments will predominantly be applicable to the tax year starting from 1 January 2017. However, there are certain exceptions: amendments relating to personal vehicle expenses apply from 1 January 2018, while the new rules about write-offs of receivables apply as early as the 2016 corporate income tax return.
The taxpayers will calculate 2017 corporate income tax prepayments by applying the new corporate income tax rates of 18% or 12%.
Taxpayers whose tax periods differ from the calendar year will continue to apply provisions from the 2016 Corporate Income Tax Act until the end of their financial years. For example, the taxpayer whose financial year runs from 1 June 2016 to 31 May 2017 will apply the 2016 rules for that whole period.
Receivables write-offs – the key changes
- Expenses of writing off receivables will be tax deductible if the taxpayer is able to prove that the collection expenses exceed the write-off amount, or if the legal procedure had already been initiated but the future collection is deemed impossible.
- Collection actions that qualify for the deduction have been expanded in their definition and now include procedures such as arbitration and mediation.
- The above mentioned provision is applicable to the 2016 corporate income tax return assessment.
One-off tax incentive applying to bad loans at banks
- Financial institutions will be able to write-off receivables that had been identified by 31 December 2015, based on the Decision on the Classification of Credit Placements and the Classification of Non-balance Sheet Obligations of Financial Institutions; write-off expenses will be treated as tax deductible without the requirement to undertake the standard prescribed collection actions.
- The above measure is applicable to the 2017 corporate income tax assessment and only to receivables which comply with certain specifics.
Relief for reinvested profits abolished
- Although the relief for reinvested profits has been abolished, the taxpayers that applied the relief in earlier periods will have to continue to meet the criteria for the ongoing recognition of the relief.
Reduced tax uncertainty about related party transactions
- Through the so-called Advanced Pricing Agreement institute, an agreement on setting transfer prices between the Tax Authorities and the taxpayers will be available and the possibility of later challenges to the applied transfer pricing model by the Tax Authorities will be avoided.
- The above mentioned document will have to be obtained prior to the commencement of transactions.
New rules on deductibility of related party interest
- In addition to the rate of 5.14% prescribed by the Minister of Finance, it will now also be possible to assess the interest rate on loans between related parties for tax purposes in accordance with the general arm’s length principle.
Repeated offences will be penalized with higher fines
- If the Tax Authorities fine the taxpayer and/or the taxpayer's responsible person for a repeat of a previously already identified offence, the fine will be higher and will range from HRK 3,000 to HRK 300,000 for the taxpayer and from HRK 3,000 to HRK 30,000 for the taxpayer's responsible person.
In addition to all of the above, the new Act delivers other changes, which we briefly presented in our previous Tax News (e.g. tax assessment on the cash flow basis, flat rate tax payment etc.). In case you have additional questions, feel free to contact us.
Amendments to the VAT Act will come into force in three stages; the majority will be in force from 1 January 2017, while some provisions will be applicable from 1 January 2018 or 1 January 2019.
We emphasize that the general VAT rate remains 25% and there will be no changes to the application of the reduced 5% rate.
The most significant changes from 1 January 2017 include:
- Increase of VAT rate from 13% to 25% on catering services and white sugar made from sugar cane and sugar beet.
- The list of goods and services to which the reduced rate of 13% applies is changed (child car seats, electricity, public service of municipal waste collection, urns and coffins, seedlings, fertilizers and pesticides and other agrochemical products and animal food (excluding pet food) are added to the list).
- Simplification of the option to tax otherwise VAT exempt supply of real estate (the option to tax will also be available for the taxpayers who deduct input VAT on pro-rata basis, but only if the real estate will be used for the activity for which they can fully deduct input VAT).
- The inclusion of services which, under the accounting regulations fall under fixed assets, in the definition of an economic good for the purposes of input VAT adjustment.
- Clarification that the service invoices should state the type and quantity or extent of the services provided.
- The Tax Authorities can challenge the taxpayer’s deduction of input VAT if established that, based on the objective circumstances, the taxpayer knew (or should have known) that, due to fraudulent activities, a part or all VAT on the delivery it received will remain unpaid.
The following three changes enter into force on 1 January 2018:
- 50% input VAT deduction on purchases or rentals of cars and other means of transport, including the procurement of all related goods and services. Input VAT however will be deductible only up to purchase value of HRK 400,000 per vehicle.
- The threshold for entry into VAT system increases from HRK 230,000 to HRK 300,000.
- The deferral of VAT upon imports of certain machinery and equipment worth more than HRK 1,000,000 will be allowed.
From 1 January 2019 provisions on taxation of vouchers will apply.
General Tax Act
The most important changes in the General Tax Act (“GTA”) are related to the tax statute of limitations and the correction of the tax returns.
- The new provisions of the tax statute of limitations state there will be a single statute of limitations period of six years. The legislation will no longer differentiate between the absolute and the relative statute of limitations.
- As the relative statute of limitations will be abolished, the new GTA provides a period of three years in which a tax audit can be initiated. However, in certain cases, such as suspected abuse, tax audit will be allowed throughout the six year period
- Taxpayers may now correct their tax returns no later than three years after the filing deadline, i.e. a correction of the tax return will no longer be limited to a period of one year.
Real estate transfer tax
The most important change to the real estate transfer tax (“RETT”) is the reduction of the RETT rate to 4%. In addition, RETT tax exemptions for first time buyers are abolished.
Taxpayers will no longer be required to report real estate transactions to the Tax Authorities. Rather, the reporting will be performed by the relevant state authorities (notaries, courts and other decision-making authorities).
Personal income tax
Changes to the tax system from 1 January 2017:
- Increased the standard monthly allowance from HRK 2,600 to HRK 3,800 for all taxpayers
- New tax brackets and rates:
- Tax rate of 24% applies to monthly income below HRK 17,500
- Tax rate of 36% applies to monthly income above HRK 17,500
- Increased dependents and disability monthly allowance multipliers:
- Adult dependent - 0.7 (HRK 1,750)
- 1st child - 0.7 (HRK 1,750)
- 2nd child - 1.0 (HRK 2,500)
- 3rd child - 1.4 (HRK 3,500)
- Partial disability - 0.4 (HRK 1,000)
- 100% disability - 1.5 (HRK 3,750)
- The current social security contributions exemption for authors and artist income, as well as retiree casual work or other income is abolished. Social security contributions on the above income types will be payable at lower rates:
- Contributions for pension insurance at an overall 10% rate
- Health insurance contributions at a 7.5% rate
- Advance payments for other income tax will be subject to a 24% tax rate instead of the current rate of 25%. However, synthetic taxation of other income will be implemented so that other income will be taxed on an annual basis by applying progressive tax rates of 24% and 36% (note that the new Act leaves some uncertainties about the annual taxation of other income and these may be resolved with the introduction of the new Personal Income Tax Regulations)
- Personal income tax liability is decreased by 50% for retirees, individuals in the PP1 area and the City of Vukovar (applies to pensions and employment income only)
- Decreased difference between the minimum salary and the minimum base for the social security calculations – increased from 0.35 to 0.38