Changes in Tax regulations

Tax Alerts, November 2014

At the session held on 30 October 2014 Croatian Government discussed following draft Bills:

Draft Bill of the Act on changes and amendments to the Personal Income Tax Act

The draft announces the following key changes to the Personal Income Tax Act:

Increase of personal allowance and monthly tax brackets
  • Increase of basic monthly personal allowance from HRK 2,200 to HRK 2,600
  • Increase of basic monthly personal allowance for pensioners from HRK 3,400 to HRK 3,800
  • Changes of the tax brackets as follows:

    - 12% on income up to HRK 2,200
    - 25% on income in the range from HRK 2,200 to HRK 13,200
    - 40% on income above HRK 13,200
  • Increase of basic monthly personal allowance for taxpayers living / residing in the area of local self-government classified under I. group per level of development and in the area of city of Vukovar: HRK 3,500
  • Increase of basic monthly personal allowance for taxpayer living /residing in the area of local self-government classified under II. group per level of development: HRK 3,000
Taxation of interest from savings from 1 January 2015

Interest on savings paid out after 1 January 2015 will be subject to taxation at the tax rate of 12% plus city tax. Tax liability will be withheld at the moment of payment of interest and considered as final. The draft Bill prescribes certain exemptions from taxations of interest, such as: interest on bonds, receipts based on assets on life insurance with a savings competent, current account interest if itdoes not exceed the lowest interest rate on savings deposits and does not exceed 0,5% per annum.

Taxation of capital gains from 1 January 2016

Realized capital gains from financial assets will be subject to tax at a 12% tax rate. Tax base will be calculated as the difference between the contractual sale price of the financial assets, i.e. market value and purchased value. The following will be exempted from taxation: disposal of financial assets between spouses, next of kin; and for financial assets sold three years or over from purchase date.

Abolition of annual HRK 12,000 tax relief for dividends and shares in profit

The prescribed non-taxable part of dividend and shares in profit income up to HRK 12,000 annually that taxpayer could have used via annual tax return. Abolition of the relief will be applicable to the 2015 annual income tax return.

Implementation of specific process for determination of annual personal income tax and surtax

For the taxpayer, A new provision removes the requirement for taxpayers who have the obligation to file the annual income tax return, or have the option to file the annul income tax return on a voluntary basis to file annual income tax return personally as this obligation will be taken over by the Tax Authority.

Under this provision, the Tax Authority would, based on data available in the Tax Authority’s system, issue a temporary tax resolution that would state the annual income and the tax liability debt/credit. The temporary tax resolution would be issued by 31 May of the current year for the previous year (i.e. would be sent to taxpayer by 31 May) and the taxpayer would be entitled to file an appeal by 30 June should they find that the data in the tax resolution is incomplete or incorrect. No further remedy would be allowed following the response to such appeal.
The special process would not apply in the following scenarios:

  • To taxpayers realising income from self-employment
  • If the Tax Authority does not hold information on the taxpayer's realised income
  • To taxpayers that do not have a filing obligation and their annual income tax return, if filed, would result in tax debt.
Assessment of income tax on other income at the 40% rate

A tax rate of 40% is implemented for receipts determined as a difference between asset value and the proved means for the asset acquisition. This relates to assets subject to the Tax Authority audit of a taxpayer’s source of income for assets.

Draft Bill of the Act on changes and amendments to the Act on contributions

The draft announces the following key change to the Act on contributions:

Exemption from payment of the employer’s contributions for employees below age 30 with whom an employment agreement for indefinite period of time is concluded

Under provisions of this draft the issue of social security contributions for individuals up to age 30 with whom employer concludes employment agreement for indefinite period of time is to be resolved in the way that for these employees there will only be liability for assessing pension insurance contributions (I and II pillar). Employer who concludes employment agreement for indefinite period of time with employees below age 30 will have no obligation to assess employer’s contribution i.e. contributions for health insurance, contributions for unemployment and contributions for work related injuries, in the period of 5 years from concluding such agreeement.

Draft Bill of the Act on changes and amendments to the Corporate Income Tax Act

The draft announces the following key changes to the Corporate Income Tax Act:

Decrease of tax base for income from dividends and profit shares

In order to avoid double non taxation of profits, the CIT Act is going to be synchronised with the Council Directive 2014/86/EU of 8 July 2014 which amended the Council Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States. Specifically, the amendments to the CIT Act prescribe that the CIT base can be reduced for income from dividends and shares in profit which were not treated as tax deductible expenses by their payer. Furthermore, the amendments of the CIT Act also specifically define the tax and legal status of the dividends and profit shares payer.

Tax exemption for reinvested profits

In addition to existing requirement to increase the share capital, the following two new requirements are proposed for the reinvested profits to be tax exempt:

  • Investing in long term assets in tax period in which the tax base is decreased and
  • Preservation of the existing jobs for at least two years following the year when the profit reinvestment was performed

Taxpayers should meet the new requirements for using the reinvested profits tax exemption in the 2015 corporate income tax return.

Taxpayers will not be able to simultaneously use the tax exemption for reinvested profits and the tax exemption under the Investment Promotion and Development of Investment Climate Act for the same long term asset investment.

Registering for CIT

Due to the harmonization of CIT Act with the announced amendments to the VAT Act, entrepreneurs will be obliged to register for CIT if they realise total annual income of HRK 3 million instead of 2 million as currently prescribed.

In addition to the above mentioned condition, entrepreneurs that are personal income taxpayers will be obliged to register for CIT if they meet two, instead of the currently prescribed single of the following three conditions:

  • Their long term assets exceed HRK 2 million
  • They employed more than 15 employees in previous tax period
  • Their income in the previous tax period exceeded HRK 400 thousand

The above mentioned criteria will apply to the 2015 CIT liability assessment.

The period after which it is possible to repeat the change the way of taxation or the tax period is reduced from 5 to 3 years.

Other amendments

The liability to calculate withholding tax on payments of dividends and shares in profit to foreign entities (except to private individuals) based on profits realised up to 29 February 2012 is abolished.

The provisions on tax deductibility of long term asset value adjustment are further explained. Value adjustment of long term assets is a tax deductible expense up to the amount of annual depreciation determined under the CIT Act.

It is proposed that entities which are not CIT payers should register with the Tax Authorities within 8 days if they start to perform the business activity. In this way, the Tax Authorities would not be obliged to issue a resolution anymore, if such entities incur a CIT liability.

The amendments to the CIT Act additionally prescribe that tax incentives will, in addition to the state incentives regulations, be approved in line with the small value grants.

Draft Bill of the Act on changes and amendments to the Value Added Tax Act

Please find the overview of the major amendments to the VAT Act below.

Filing of the annual VAT return (PDV-K Form)

In order to reduce administrative burden for taxpayers, the Government intends to abolish filing of the annual VAT return (PDV-K Form) is proposed. The first year for which the filing will not be required is 2015, meaning that PDV-K form for 2014 has to be filed.

The cash accounting scheme

It is proposed that as of 1 January 2015 taxpayers whose supplies of goods and services in previous calendar year did not exceed HRK 3.000.000 (VAT excluded) may charge and pay the VAT upon collection of receivables, i.e. may opt for the cash accounting scheme. At the same time it is specified which supplies may not be included in the cash accounting scheme, as well as what are the requirements and responsibilities of taxpayer who is applying the scheme.

Adjustment of VAT deductions for stock of goods

Under the provisions of the current VAT Act, taxpayer has to adjust VAT deductions for capital goods (goods which, in terms of the accounting legislation, fall under non-current assets of the taxpayer), if the deducted VAT is higher or lower than one on which the taxpayer was entitled. The adjustment of VAT deduction has to be performed when conditions applicable to the VAT deductions have changed. The amendments to VAT Act suggest that the adjustments will also be applicable to stock of goods, which the taxpayer purchased for its business proposes.

Extended responsibility of a taxpayer for the payment of unpaid VAT

Amendments to the VAT Act extend the responsibilities of a taxpayer who procured goods or services as regards its liability for payment of the VAT. Taxpayer - customer will, inter alia, be liable for settlement of VAT to the Tax Administration when it fails to pay to its supplier at least the amount of the VAT stated on the invoice within the deadlines for the settlement of liabilities stipulated by the relevant laws.

Suspension of VAT identification number

Under provisions of the current VAT Act, the Tax Administration may refuse the allocation or it may cancel already allocated VAT identification number. Amendments to the VAT Act propose that the Tax Administration should also be allowed to suspend the VAT identification number in case of suspicion on its abuse. The suspension would not be regarded as cancellation and the Tax Administration would be able to reactivate or cancel the VAT identification number if a taxpayer, within one year, does not provide evidence for revoking the suspension.

Taxation of real estate

As of 1 January 2015 the supply of buildings or parts thereof and of land on which they stand, before the first occupation (or use) or where less than 2 years have passed from the date of the first occupation (or use) to the date of the next supply, as well as the supply of construction property, performed by taxpayer will be subject to VAT.

The supply of previously occupied reconstructed buildings or parts thereof and of land on which they stand will also be considered as taxable supply, in case if the costs of reconstruction in previous two years were higher that 50% of its selling price.
Detailed information on these amendments is available via the following link.

Reduced VAT rate on certain medicaments

It is proposed to apply a reduced VAT rate of 5% on the medicaments prescribed by a doctor, which have the approval from the competent authority for medicaments and medicinal products, even if they are not included on the list of the Croatian Health Insurance Institute.

Taxation of telecommunication, broadcasting and electronic services

As of 1 January 2015 supplies of telecommunication, broadcasting and electronic services provided by the EU suppliers to non-taxable persons will be taxable in the Member State of the customer. Until then those services will be taxable in the place of the supplier’s establishment. In order to avoid multiple VAT registrations in each Member State identified as Member State of the consumption, suppliers can opt for Mini One-Stop Shop scheme which enables them to file only one VAT return and pay the VAT for all Member States of consumption at one place.

It is anticipated for the changes and amendments to be in force from 1st January 2015.

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