Croatia: reform package for enterprises
For enterprises operating in Croatia, there are some changes in the field of tax and social security. Read everything you need to know here.
The new Croatian government has presented a comprehensive reform package to stimulate the Croatian economy. Most of the tax changes it contains already enter into effect from 2017. We summarise the most important points for you:
1. Fewer tax audits when a Croatian tax advisor is used
An innovation that is particularly attractive to enterprises brings more legal certainty and simplification in the case of tax audits. Enterprises represented by tax advisors licensed in Croatia are given a reduced risk profile by the tax authorities, with immediate effect. There are fewer tax audits, and procedures are speeded up.
TPA Croatia is one of only a few international consultancies that have a Croatian tax advisor's licence.
Our clients therefore benefit from this new special arrangement, simplifying matters when it comes to tax investigations.
2. New income tax regulations
The tax package results from a new income tax law in force since 01/01/2017. The main changes relate to income determination and the progressive tax rates:
- The previous progressive tax rates of 12 %, 25 % and 40 % are replaced by the rates of 24 % and 36 %;
- The new tax rate of 24 % applies up to a basis of assessment of 210,000 HRK, and the 36 % rate above that;
- The tax rate of 12 % will continue to apply for certain types of income such as dividend taxation and rental income.
- The general tax allowance is increased for all taxpayers from 2,600 to 3,800 HRK.
- The child support allowance for dependant relatives is also increased.
- Other reforms relate to allowing tax deductible expenses for the self-employed,
- tax exemptions, and
- data exchange between the authorities.
3. Corporate income tax reduction for enterprises
New corporate income tax scale
- The main changes for entrepreneurs are the reduction in the corporate income tax rate of 20 % to 12 % for enterprises with a turnover of less than 3 MHRK, and
- to 18 % for all other taxpayers.
Cash accounting for SMEs
SMEs with a turnover of up to 3 MHRK now have the option of determining their taxable income by cash accounting if they pay their value-added tax on the basis of payments received.
APA for transfer prices
Another reform is the option to enter into Advance Pricing Agreements (APA) with the tax authorities as regards transfer prices.
Other important changes
- Arm's length terms for loans between affiliated enterprises: taxpayers may also apply a rate of interest that differs from the interest rate published by the Ministry of Finance, which has been 4.97 % since 01/01/2017. This is subject to proof that this is the normal market rate, and is applied to all financing agreements;
- Abolition of relief for reinvested profits;
- Increase in allowable hospitality and entertainment expenses from 30 % to 50 % – leisure activities are no longer classified as hospitality and entertainment expenses;
- Reduction in deductibility of expenses arising from the use of a car from 70 % to 50 %, provided there is no private use – effective from 01/01/2018;
- Simplified deductibility of write-downs of receivables and impairment allowances;
- Option for non-profit organisations as to the method of taxation: determining earnings by accounting, or paying a lump sum.
4. Value-added tax rates are changing
Some VAT changes entered into effect on 01/01/2017 in Croatia; others will apply from 01/01/2018 and from 01/01/2019.
Applicable from 01/01/2017:
- Tax rate of 25 % also applicable to restaurant and catering services;
- Changes in the scope of the reduced rate of 13 %;
- The VAT registration threshold is being increased to 300,000 HRK. In the case of voluntary registration, the minimum VAT continuance period is being reduced from 5 to 3 years;
- Introduction of fines for foreign enterprises registered in Croatia that omit to submit form INO PPO: reporting deliveries of goods and services for which the tax liability transfers to the recipient.
Applicable from 01/01/2018
- Deductibility of 50 % of the input tax for acquisition or leasing of cars, and other goods and services associated with the use of cars: cap on input tax deductibility where the cost of purchase amounts to 400,000 HRK;
- The import turnover tax for the purchase of certain items – with a value of more than 1,000,000 HRK – can be deducted as input tax in the same reporting period. This does not give rise to a liquidity effect.
Applicable from 01/01/2019
- Standardisation and clarification of the VAT treatment of credit notes in compliance with the EU Directive.
5. New social security provisions in Croatia
The following changes should be noted:
- Increase in the minimum basis of assessment for directors and managers to 5,024.00 HRK;
- Limitation period is generally fixed at 6 years (previously 5 and 10 years);
- Extension of times allowed for payment of social security contributions in certain cases;
- Introduction of reduced rates (10 % and 7.5 %) in certain cases;
- Abolition of the previous exemption from contribution in the following cases:
- Remuneration for copyrights and/or similar rights (e.g. royalties);
- Remuneration for supplying works of art;
- Payment of miscellaneous income to pensioners.
6. General fiscal proceedings: uniform time limitation
Standardisation of time limitation
- A uniform limitation period of 6 years is being introduced. This replaces the previous split between the relative (3 years) and absolute (6 years) limitation period.
- The tax authorities are officially required to take account of the limitation periods. If proceedings are time barred, the authorities are obliged to close the proceedings, and expunge any tax liabilities.
Other important changes
- Extension of the time limit for correcting tax returns to 3 years from the submission deadline;
- Expansion of the reporting obligations for banks as regards transmitting data of current accounts and savings accounts of natural persons to the tax authorities;
- Increased penalties for repeated infringements.
7. Important changes to real-estate transfer tax
The principal changes to real-estate transfer tax are:
- Abolition of tax exemption for the acquisition of the first property (e.g. freehold apartment);
- Reduction of the real-estate transfer tax rate from 5 % to 4 %;
- General exemption from real-estate transfer tax where real estate is transferred to the operating assets of an enterprise: it is no longer necessary to increase the share capital;
- Introduction of new exemptions, e.g. in the event of termination of joint ownership.
8. Law on the tax registration of cash transactions
The new tax reform package also includes various changes regarding the recording and reporting of cash transactions, such as the abolition of exceptions, and extension of liability to suppliers of cash register software.
Download TPA Newsletter 2/2017 - Croatia: reform package for enterprises