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Withholding tax (“WHT”) treatment from 1 July 2013 (Croatian Accession to the EU)

Tax Alert, May 2013

WHT taxation is governed by the provisions of the Corporate Income Tax and corresponding Regulations (“Act” and "Regulations") and provisions of Agreements on Avoidance of Double Taxation (“Treaties”).

Upon Croatian accession to European Union ("EU"), which is expected to be on 1 July 2013, certain provisions of the Act and Regulations, which derive from the EU Directives and relate to WHT treatment of payments made between EU Member States, will come into force.

The main change affects certain payments between related companies seated in the EU, which would be exempt of WHT.

Provisions of the EU Directive, included in the Act, require that related parties must:

  • have one of forms to which the common system of taxation is applied to, and which is valid for to the parent companies and subsidiaries of different EU Member States;
  • be, for tax purposes, considered as a resident of a EU Member State in accordance with the laws of that country and not be considered as a resident outside of the EU in accordance with Treaties concluded with non-EU countries; and
  • be a subject to one of the taxes for which the common system of taxation applicable to parent companies and related parties of different EU member states is applied (included in the Appendix of the Regulations).

Specifically, changes will affect the following payments which are subject to WHT:

Payment of interests and royalties made between related parties of different EU Member States
Upon Croatian accession to EU, WHT will not be paid on interest and royalties payments made between related parties seated in different EU Member States if the following conditions are met:

  • the payer has a direct minimum share of 25% in the capital of the recipient, or
  • the recipient has a direct minimum share of 25% in the capital of the payer or
  • a third party has a direct minimum share of 25% in the capital of the recipient and the payer, with such shares relating to companies from EU.

Above stated minimum conditions should be fulfilled continuously for at least 24 months.

WHT exemption will apply only if the recipient is considered as beneficial owner of the interest or royalties.
However, WHT exemption would not apply for:

  • payments of interest or royalties, which in its essence represent distribution of profit or return on capital,
  • interest payments on loans, which carry the right to participate in debtor’s profit,
  • interest payments on loans that gives loan provider the right to exchange his right on interest with the right to participate in debtor’s profit,
  • payment from loans which do not contain provisions regarding the repayment of the principal, or if repayment of principal is due after 50 years, and
  • interest payments and royalties made for the purpose of tax evasion and tax avoidance.

Payment of dividends and shares in profit between related parties of different EU member states

Upon Croatian accession to EU, dividends and share in profits made to related parties seated in other EU Member States will be exempt from WHT, if such related company holds at least 10% share in the capital of the payer continuously over the period of at least 24 months.

WHT will be paid if determined that payment of dividends or shares in profit are made for the purpose of tax evasion or tax avoidance.

Proof of met conditions

The payer will prove met conditions with a certificate of relevant Tax Authority for each payment of interests, royalties, dividends or share in profit made to related party seated in other EU Member States.

If met conditions are not proved with the respective certificate at the time of payment, the payer will be obligated to asses and pay WHT.

WHT on payments of interests, royalties, dividends and shares in profit made to non-resident company seated outside of the EU

Provisions from the EU Directives will not be applicable for payments of interests, royalties, dividends and shares in profit made to companies seated outside of the EU. For these payments, WHT liability will be determined in accordance with the provisions of the Act and corresponding Regulations which are currently in force and the provisions of the applicable Treaties.

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