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Amendments to tax regulations in Croatia from 1 January 2021
The government of the Republic of Croatia held a meeting on Thursday 26 November 2020 to adopt legislative amendments that are part of the fifth round of tax reform, which have come into force on 1 January 2021. These changes should boost employment and wages in Croatia. The fifth tax reform includes the biggest changes to income tax, VAT and profit tax.
Income Tax
The key changes that relate to the reduction of income tax rates include:
- Reducing the rate from 36% to 30%.
- Reducing the rate from 24% to 20%.
- Reducing the rate from 12% to 10%.
Following the new situation related to vaccination costs, an explicit provision was introduced in the Income Tax Act which states that the cost of vaccination against infectious diseases, which the employer provides to its employees, and is in the interest of the employer, is not taxable with income tax.
The provision of the General Tax Law still stands that the costs of testing employees for COVID-19 are considered non-taxable expenses from when these changes came into force on 19 September 2020. The cost of testing before that date is considered income in kind by the employee.
The list of income tax-free receipts is expanded to include:
- Receipts from the title of national compensation for the elderly.
- Receipts of digital nomads, which will be measured by a special regulation.
During the annual calculation of other income, the provision related to taxation at an annual rate of 24% and up to 5 times the amount of the personal deduction base is abolished. This implies that the entire amount of other income will be counted in the total realised annual income of the natural person.
When taxing property income from leases, an obligation is introduced for lawyers to submit certified documents related to the conclusion of lease agreements within 30 days. This is from the date of conclusion and submitted electronically to the competent branch office of the Tax Administration.
This arrangement is similar to the provisions introduced several years ago, when in the case of concluding a contract for the sale of real estate, notaries are obliged to submit such contracts to the Tax Administration.
Value Added Tax
The threshold for the application of the taxation procedure according to the collected fees is increased to HRK15 million per year instead of the current HRK7.5 million (approximately EUR1 million). Taxpayers who wish to start applying for the taxation procedure according to the fees collected from 1 January 2021, may submit a written statement to the competent branch office of the Tax Administration by 20 January 2021 at the latest.
The possibility of applying the VAT calculation category to imports is expanding. VAT on import will be considered to have been paid if the taxpayer entered in the register or VAT payers, declare that it is an obligation in the VAT return. Also, for such method of calculation and payment of VAT, the Customs Administration must have previously issued the taxpayer within approval for payment of VAT and on import via VAT return.
These two key changes should certainly be viewed in the context of the new volume limitation of business activity caused by the COVID-19 pandemic.
Most of the changes relate to remote selling, i.e. e-commerce which is a product of compliance with the EU Directive.
Profit Tax
For all taxpayers who earn up to HRK7.5 million (approximately EUR1 million) per year, the tax rate is reduced from 12% to 10%. This reduction will affect as many as 93% of all entrepreneurs in the Republic of Croatia and is an additional tax relief for many entrepreneurs. Income taxation at the rate of 10% will be applied for the first time for the profit realised in 2021.
The withholding tax rate on the payment of dividends and profit shares is reduced from 12% to 10% on the payment of profits to overseas shareholders and members of the company. The withholding tax rate for overseas performers is reduced from 15% to 10%.
The introduction of the tax-deductible expense of write-off of receivables (principal and interest) with credit institutions, for which a value adjustment was previously carried out in accordance with the regulations of the Croatian National Bank, resonated the most in the media.
Specifically, in recent years, to help ensure the tax-deductible expense of non-performing loans, credit institutions have started selling their receivables to specialised companies for the collection of difficult-to-collect receivables. The aim of this method is to discourage the sale of these receivables and facilitate the position of debtors.
The condition for such tax-deductible expenses is the issuance of a statement to the debtor and the guarantor, on the termination of their obligation in the amount of the write-off.
For any additional questions do not hesitate to contact the Nexia member firm in Croatia:
Dubravka Kopun
Kopun Group, Croatia
T: +385 1 4610-294
E: info@kopun.hr
W: www.kopun.hr
