Corporate tax in Croatia

Summary

Corporate income Tax Rate (%) 20
Capital Gains Tax Rate (%) 20
Branch Tax Rate (%) 20
Withholding Tax (%)
Dividends 12
Interest 15
Royalties from Patents, Know-how, etc. 15
Fees for Market Research, Tax Advice,
Business Advice and Auditor Services
15
Service Fees (Other Than Those Mentioned
Above) Paid to Persons in Blacklisted
Low-Tax Countries
20
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward 5

Taxes on corporate income and gains

Corporate income tax. Resident companies are subject to tax on their worldwide income. A company is resident in Croatia if its legal seat or its place of management and supervision is located in Croatia. Branches of foreign companies are subject to tax only on their profits derived from Croatia.

Tax rate. The rate of corporate income tax is 20%.

Tax incentives. Tax exemptions and other tax reliefs are available in accordance with the Croatian Corporate Income Tax Act and special legislation regulating incentives. For example, the Invest­ment Promotion Act provides incentives for investments in new business activities and new workplaces.

Capital gains and losses. Capital gains and losses from the sale of assets are considered regular taxable income and tax-deductible expenses, respectively. No separate capital gains tax applies; capi­tal gains are subject to the regular corporate income tax rate of 20%. Specific rules apply to unrealized gains and losses on cer­tain types of assets. Depending on the type of asset, such gains or losses may be not taxable or not tax deductible, and may be recog­nized for tax purposes in the period of the realization of the asset.

Administration. The regular tax year is the calendar year, but a company may apply for a different tax year.

Annual tax returns must be filed by the end of the fourth month following the tax year.

Companies must make monthly advance payments of tax. In prin­ciple, each monthly advance payment is equal to 1/12 of the tax due for the preceding year before the decrease of the tax base for tax incentives (excluding multiyear tax incentives). The balance of tax due must be paid by the end of the fourth month following the tax year. If the total of the advance payments exceeds the tax due for the year, the company may claim a refund.

Dividends. Dividends are taxable at a rate of 12%.

Foreign tax relief. A foreign tax credit is available to resident com­panies for foreign tax paid on income earned directly or through permanent establishments abroad. The amount of the credit is the lower of the Croatian corporate tax payable on the foreign income and the foreign tax paid.

Determination of trading income

General. The corporate income tax base is determined in accor­dance with the accounting regulations (Croatian Financial Report­ing Standards [CFRS]/International Financial Reporting Standards [IFRS]), adjusted for certain items that increase or decrease the tax base.

The following items decrease the tax base:

  • Revenues from dividends and profit shares under certain con­ditions
  • Unrealized profits from value adjustments of shares if they were previously taxed
  • Revenues from collected written-off receivables that were taxed in previous periods
  • Depreciation expenses carried forward from previous periods
  • Tax incentives in accordance with special laws
  • Reinvested profits, other than those realized in the banking or nonbanking financial sector, under certain conditions
  • Expenses from previous tax periods that were previously taxed (that is, expenses that had been nondeductible)

The following items increase the tax base:

  • Depreciation expenses exceeding the maximum allowable amounts (excess may be carried forward).
  • Penalty interest paid between related parties.
  • Privileges and other benefits granted to individuals and legal persons to execute certain actions in favor of the company.
  • Nondeductible interest on loans between related parties.
  • The costs of forced collection of tax and other levies.
  • Unrealized losses from value adjustments of shares, if these were included in the expenses.
  • Unrealized losses from value adjustments of depreciable assets except in the case of extraordinary damages.
  • Seventy percent of entertainment expenses resulting from a business relationship with a business partner, including related value-added tax (VAT). These expenses include the following: — Gifts, regardless of whether they include the mark of thecompany or product

— The cost of holidays, sports, recreation and leisure

— Rental of airplanes, automobiles, vacation homes and vessels

  • Fines imposed by competent bodies.
  • Thirty percent of expenses, including related VAT but not in­cluding insurance and interest costs, incurred with respect to owned or rented motor vehicles or other means of personal transportation (for example, personal car, vessel, helicopter and airplane) used by managerial, supervi sory and other employees, if the person al use of the means of personal transportation is not taxed as a benefit in kind.
  • Inventory shortages above the amount prescribed by the Croa­tian Chamber of Economy, if the shortages are not subject to personal income tax.
  • Donations in cash or in kind exceeding 2% of the preceding year’s revenue. The limitation does not apply to donations made in accordance with the competent ministry’s decisions on special programs and actions undertaken outside the regular business activities of the beneficiary. The donations also include financ­ing of health care expenses (surgery, and purchases of medicines or orthopedic devices) for individuals who are not covered by primary, additional or private health insurance. The donations can also include donations of food producers or traders that donate food for social, humanitarian and other helpful purposes or that donate food to people hit by natural disasters. The food donations must be in line with special provisions of the Ministry of Agriculture.
  • Expenses identified in the course of a tax audit, including VAT personal income tax, city tax and obligatory contributions incurred with respect to hidden profit payments, including pay­ments of private costs of shareholders, company members and individuals and persons related to these individuals.
  • Other expenses not incurred for the purpose of earning profit.

The expenses mentioned above, except privileges and other ben­efits granted to individuals and legal persons to execute certain actions in favor of the company and expenses identified in a tax audit, do not increase the tax base if they are subject to personal income tax.

Inventories. Inventories are valued in accordance with CFRS or International Account ing Standards (IAS)/IFRS. In general, in­ventories are valued at the lower of cost or net realizable value. Costs include all acquisition costs, conversion costs and other costs incurred in bringing inventories to their current location and condition. In general, the cost of inventories must be determined using the first-in, first-out (FIFO) or weighted average method.

Losses from value adjustments of inventories are recognized as tax-deductible expenses at the time of disposal of the inventories.

Specific rules deal with allowable limits of inventory shortages.

Provisions. The following provisions are deductible for tax pur­poses:

  • Provisions for severance payments to be paid in the following year according to the prepared plan
  • Provisions for costs of renewing natural resources
  • Provisions for costs incurred during guarantee periods
  • Provisions for costs related to court disputes that have already been initiated against the taxpayer (excluding interest)
  • Provisions for the risk of potential loss in banks, up to the amount prescribed by the Croatian National Bank
  • Provisions in insurance companies, up to the obligatory amount prescribed by the law governing the insurance
  • Accruals for the unused vacation in accordance with account­ing principles

Trade receivables. Value adjustments of trade receivables are de­ductible if the receivables are overdue for more than 60 days as of the end of the tax year and if they are not collected by the 15th day before the filing of the tax return. However, if a tax­payer does not take measures for debt collection (for example, sue the debtor) before the receivables are barred by the statute of limitations, the receivables treat ed as deductible for tax purposes in prior years must be included in taxable income. In addition, value adjustments are deductible for tax purposes in the follow­ing circumstances:

  • The receivables do not exceed HRK5,000 (approximately EUR656) per debtor, other than an individual or related party, or HRK2,000 (approximately EUR262) per unrelated individual if the total receivables per individual do not exceed this amount on the last day of the tax period and if the receivable is written off by 31 December 2013.
  • The company is suing the debtor or a foreclosure is being con­ducted.
  • The receivables are reported in a bankruptcy proceeding of the debtor.
  • The debt has been settled in the pre-bankruptcy or bankruptcy proceedings of the debtor.

Credit institutions may treat as tax deductible the write-off of re­ceivables from unrelated individuals and legal entities that are related to housing provisions and entrepreneurial loans, respec­tively. This is possible if it can be determined that the write-off is done with the goal of protecting the basic life needs of the indi­vidual (for example, prevention of foreclosure on the only real estate in which the loan recipient lives) or not jeopardizing invest­ment developments and entrepreneurial activities of legal entities.

Tax depreciation. Depreciation is calculated by using the straight-line method. The following are the maximum annual depreciation rates prescribed by the Corporate Income Tax Act.

Asset Rate (%)
Buildings and ships over 1,000 gross registered tons 10
Primary herd and personal cars 40
Intangible assets, equipment, vehicles (except personal cars), and machinery 50
Computers, computer hardware and software, mobile telephones and computer network accessories 100
Other assets 20

The deduction for tax depreciation cannot exceed the expense for accounting depreciation. If maximum allowable tax depreciation exceeds accounting depreciation, the accounting depreciation prevails for tax purposes. If accounting depreciation exceeds maximum allowable tax depreciation, the excess may be deducted in future periods.

Depreciation expenses for personal cars and other vehicles used for personal transportation are deductible up to the amount cal­culated on the purchase cost of HRK400,000 (approximately EUR52,452) per vehicle. The limitation does not apply to vehi­cles used exclusively for rental or transportation activities.

Depreciation of assets that are not used in the performance of ordinary business activities is not deductible for tax purposes.

If the accounting records of a taxpayer include vessels, airplanes, apartments or resort houses and if the taxpayer uses these assets in its regular business activities, the depreciation of such assets may be claimed as deductible expenses for tax purposes if the following conditions are met:

  • The taxpayer is registered for the activity of renting such assets.
  • The revenue realized from the use of the vessels and airplanes is at least 7% of the purchased value of the vessels or airplanes.
  • The revenue from the use of apartments and resort houses is at least 5% of the purchase value of the apartments or resort houses.

Relief for losses. Tax losses may be carried forward for five years, but they may not be carried back.

The legal successor may lose the right to a loss carryforward after a legal change (business combination) and/or change in owner­ship of the company of more than 50% if one of the following circumstances exists:

  • The taxpayer did not perform its business activity for the two tax periods before the occurrence of the legal change and/or change in ownership.
  • Within two tax periods after the occurrence of the legal change and/or change in ownership, the business activity of the tax­payer substantially changes.

Groups of companies. Croatia does not allow consolidated returns or provide any other tax relief for groups of companies. Each company within a group is taxed separately.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Value added tax 5 / 13 / 25
Real estate tax, on the value determined by the tax authorities 5
Social security contributions, paid by:
Employer 17.2
Employee 20
Personal income tax; the withholding liability lies with the employer
Up to HRK2,200 per month 12
From HRK2,200 to HRK13,200 per month 25
In excess of HRK13,200 per month 40
Municipal surcharge; varies among cities; the rate for Zagreb (the capital city) is 18% 0 to 18

Miscellaneous matters

Foreign-exchange controls. The Croatian currency is the kuna (HRK).

The Croatian National Bank is responsible for foreign-exchange regulations.

The Foreign Exchange Act generally imposes restrictions on pay­ments abroad that do not have a legal basis. No restrictions are imposed on transfers of paid-in share capital, dividends, profits, interest, royalties, fees for know-how and similar payments.

Under the Foreign Exchange Act, Croatian resident companies may acquire foreign securities, provide long-term and short-term loans to nonresident companies, acquire real estate abroad and engage in certain other specified transactions. Such transactions are allowed if they are reported to the Croatian National Bank.

Natural persons may make direct investments abroad, acquire foreign securities, provide long-term loans to nonresidents, acquire real estate abroad and provide short-term loans to nonresidents who are related parties (family members).

Transfer pricing. Croatia has transfer-pricing rules that apply to transactions between Croatian residents and nonresidents. Under these rules, the tax authorities may adjust the taxable income of Croatian taxpayers derived from transactions with foreign related companies if they deem the prices and agreed conditions to be different than arm’s-length prices and conditions. In such circum­stances, taxable income is increased (or expenses decreased) by the difference between prices stated in the financial statements and arm’s-length prices. These rules also apply to transactions between two Croatian residents if one of the related parties has special tax status (pays corporate income tax at reduced rates) or has a tax-loss carryforward.

A company may apply one of the following methods for estab­lishing an arm’s-length price:

  • Comparable uncontrolled price method
  • Resale price method
  • Cost-plus method
  • Profit-split method
  • Transactional net margin method

Before the beginning of each tax year, the Ministry of Finance sets the market interest rate for related-party loans. If the rate is not published, the relevant rate is the Croatian National Bank discount rate.

Debt-to-equity ratios. Under thin-capitalization rules, interest on loans received from foreign shareholders owning 25% or more of the shares, capital or voting rights of the borrower, on loans guar­anteed by such shareholders or on loans received from related parties, is not deductible if the loan balance exceeds four times the shareholders’ share in the equity of the borrower.

Prepayments of dividends. If the dividends or profit shares are prepaid to an individual during a tax year and if the realized profit at the end of a tax year is insufficient to cover such prepay­ment, the prepayment is considered to be income sub ject to per­sonal income tax. The taxpayer must maintain documentary evi­dence of dividend prepayments and submit it with the tax return.

Tax treaties

Croatia has entered into double tax treaties on avoidance of double taxation with many countries (see the withholding rate table below).

Croatia has signed tax treaties with Egypt and Luxembourg, but these treaties have not yet become effective.

Croatia has adopted the double tax treaties entered into by the former Yugoslavia with Finland, Norway and Sweden.

The withholding tax rates for payments by Croatian companies under Croatia’s double tax treaties and under the former Yugo-slavia’s double tax treaties adopted by Croatia are listed in the table below.

Croatia became a member of the European Union (EU) on 1 July 2013. As of that date, provisions of the Interest and Royalty Directive and Parent-Subsidiary Directive adopted by Croatian corporate income tax legislation became applicable to payments to recipients within the EU.

  Dividends

%

Interest

%

Royalties

%

Albania 10 10 10
Armenia 0/10 (a) 10 5
Austria 0/15 (b) 5 0
Azerbaijan 5/10 (x) 10 10
Belarus 5/15 (c) 10 10
Belgium 5/15 (d) 10 0
       
Bosnia and Herzegovina 5/10 (e) 10 10
Bulgaria 5 5 0
Canada 5/15 (f) 10 10
Chile 5/15 (g) 5/15 5/10
China 5 10 10
Czech Republic 5 0 10
Denmark 5/10 (h) 5 10
Estonia 5/15 (i) 10 10

 

       
  Dividends Interest Royalties
  % % %
Finland 5/15 (c) 0 10
France 0/15 (j) 0 0
Georgia 5 5 5
Germany 5/15 (k) 0 0
Greece 5/10 (l) 10 10
Hungary 5/10 (l) 0 0
Iceland 5/10 (m) 10 10
India (aa) 5/15 (i) 10 10
Indonesia 10 10 10
Iran 5/10 (l) 5 5
Ireland 5/10 (n) 0 10
Israel 5/10/15 (o) 5/10 5
Italy 15 10 5
Jordan 5/10 (p) 10 10
Korea (South) 5/10 (l) 5 0
Kuwait 0 0 10
Latvia 5/10 (l) 10 10
Lithuania 5/15 (q) 10 10
Macedonia 5/15 (c) 10 10
Malaysia 5/10 (r) 10 10
Malta 5 (s) 0 0
Mauritius 0 0 0
Moldova 5/10 (l) 5 10
Morocco 8/10 (w) 10 10
Netherlands 0/15 (b) 0 0
Norway 15 0 10
Oman 0 5 10
Poland 5/15 (c) 10 10
Portugal (aa) 5/10 (m) 10 10
Qatar 0 0 10
Romania 5 10 10
Russian Federation 5/10 (y) 10 10
San Marino 5/10 (l) 10 5
Slovak Republic 5/10 (l) 10 10
Slovenia 5 5 5
South Africa 5/10 (l) 0 5
Spain 0/15 (t) 0 0
Sweden 5/15 (u) 0 0
Switzerland 5/15 (c) 5 0
Syria 5/10 (m) 10 12
Turkey 10 10 10
Turkmenistan (aa) 10 10 10
Ukraine 5/10 (l) 10 10
United Kingdom (aa) 5/15/10 (z) 5 5
Yugoslavia (v) 5/10 (l) 10 10
Non-treaty countries 12 15 15
    a) The 0% rate applies if the recipient (beneficial owner) is an entity that directly or indirectly holds at least 25% of the payer. The 10% rate applies to other dividends.
    b) The 0% rate applies if the recipient (beneficial owner) is an entity that directly holds at least 10% of the payer. The 15% rate applies to other divi­dends.
    c) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 25% of the payer. The 15% rate applies to other dividends.
    d) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly or indirectly at least 10% of the payer. The 15% rate applies to other dividends.
    e) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 25% of the payer. The 10% rate applies to other dividends.
    f) The 5% rate applies if the recipient (beneficial owner) is an entity that directly or indirectly controls at least 10% of the voting power of the payer, or holds directly at least 25% of the payer. The 15% rate applies to dividends paid by investment corporations that are resident in Canada but are owned by non­residents and in all other cases.
    g) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 20% of the payer. The 15% rate applies to other dividends.
    h) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 25% of the payer or if the recipient (beneficial owner) is a pension fund or similar institution that provides insurance services or pension benefits. The 10% rate applies to other dividends.
    i) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 10% of the payer. The 15% rate applies to other dividends.
    j) The 0% rate applies if the recipient (beneficial owner) is an entity that directly or indirectly holds at least 10% of the payer. The 15% rate applies to other dividends.
    k) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 10% of the payer. The 15% rate applies to other dividends.
    l) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 25% of the payer. The 10% rate applies to other dividends.
    m) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 10% of the payer. The 10% rate applies to other dividends.
    n) The 5% rate applies if the recipient (beneficial owner) is an entity that directly controls at least 10% of the voting power of the payer. The 10% rate applies to other dividends.
    o) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 25% of the payer. The 10% rate applies if the recipient (ben­eficial owner) is an entity that holds directly at least 10% of the payer and if the entity is a resident of Israel. The 15% rate applies to other dividends.
    p) The 5% rate applies if the recipient (beneficial owner) is an entity that holds at least 25% of the payer and if this ownership is not achieved for the pur­poses of exploiting these provisions. The 10% rate applies to other dividends.
    q) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 10% of the payer. The 15% rate applies to other dividends.
    r) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 10% of the payer. The 10% rate applies to other dividends.
    s) The 5% rate applies if the dividends are paid by a Croatian resident to a Maltese resident (beneficial owner). If dividends are paid by a Maltese resi­dent to a Croatian resident (beneficial owner), the applicable rate is the rate used to tax the profits out of which the dividends are paid.
    t) The 0% rate applies if the recipient is an entity that holds directly at least 25% of the payer. The 15% rate applies to other dividends.
    u) The 5% rate applies if the recipient is an entity that directly holds at least 25% of the voting power of the payer. The 15% rate applies to other dividends.
    v) This treaty applies to Montenegro and Serbia.
    w) The 8% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 25% of the payer. The 10% rate applies to other dividends.
    x) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 25% of the payer and its respective share in capital amounts to at least EUR150,000. The 10% rate applies to other dividends.
    y) The 5% rate applies if the recipient (beneficial owner) is an entity that holds directly at least 25% of the payer and its respective share in capital amounts to at least USD100,000. The 10% rate applies to other dividends.
    z) The 5% rate applies if the recipient (beneficial owner) is an entity that con­trols directly or indirectly at least 25% of the payer. The 15% rate applies if the dividends are paid out of income (including gains) derived directly or indirectly from immovable property by an investment vehicle that distributes most of this income annually and if this income is exempt from tax. The 10% rate applies to other dividends.

(aa) This treaty is effective from 1 January 2016.