Croatia: Third phase tax reforms
The third phase of the tax reform in the Republic of Croatia was implemented on 1 January 2019. The basic task of the reform was to reduce the tax burden on natural persons and to partially reduce the burden on legal entities.
The key changes according to individual tax laws are given below:
Value added tax
As of 2019, the number goods (previously taxed at a rate of 25%) for which a lower VAT rate (5% or 13%) will apply has been expanded to include the following : medicines that have been approved by a competent body for medicines and medical products (whether or not they are issued on prescription), fresh meat, fish, fruit, vegetables, eggs and baby diapers (nappies). As a result of this, the price of some everyday products will be reduced significantly.
The standard VAT rate is going to be lowered to 24% as of 1 January 2020.
From 1 January 2019, foreign taxpayers who are registered for VAT purposes in the Republic of Croatia will be treated as taxpayers in the Republic of Croatia. VAT reverse charge will not apply if the foreign taxpayer has been assigned a Croatian VAT ID number. Thus, for transactions for which the place of taxation is the Republic of Croatia, it is no longer possible for a taxpayer from the EU, who has a VAT number in the Republic of Croatia, to charge VAT using a Croatian VAT ID number when delivering goods or services to natural persons and to charge VAT using an EU VAT number when delivering to legal entities.
Income and contributions
The biggest amendments to the Income Tax and Contributions Acts relate to salary calculations from 1 January 2019, namely:
- The lower tax bracket has been expanded to include monthly salaries up to Kuna30,000 (approx. EUR4,000) which will be taxed at a rate of 24%. Income tax on salaries over Kuna30,000, will be calculated at a rate of 36%. Although the lower tax bracket has been expanded, the change will not affect a significant number of employees in Croatia.
- The interest rate that is to be used to determine taxable benefit in kind in the case of preferential loans to employees has been decreased from 3% to 2% per annum (i.e. if an employer grants a preferential loan to his employee with an interest rate lower than 2%, he is obliged to calculate benefit in kind).
- Amendments to the Contributions Act prescribe a minimal annual base for the calculation of contributions for members of management boards who are not otherwise insured under the national insurance scheme. Thus management board members, managing directors (CEOs) or liquidators who have not been insured in the amount of this minimal annual base (i.e. 5,491.20 kuna or approx, EUR 730) must pay the difference between this amount and the amount in which they are insured and they must pay the amount themselves.
The property sales tax rate has been reduced from 4% to 3% as of 1 January 2019 and will apply to all contracts signed after 1 January 2019. This change is a continuation of the reduction of this rate; (for contracts concluded on or before 31 December 2016, the rate was 5%, and for contracts concluded between 1 January 2017 and 31 December 2018 the rate was 4%).
General tax act
Restrictions on the scope of binding opinions have been deleted. This means that, upon a taxpayer's written request, the tax authority is authorized to give a binding opinion regarding the tax treatment of future and intended transactions (business events and the activities of the taxpayer, irrespective of their subject matter).
The biggest change relates to the harmonization of the law with the OECD base erosion and profit shifting project (BEPS). According to the amended act, cross-border borrowing costs for business entities from related parties will not be tax deductible if the borrowing costs exceed:
a. 30% of EBITDA or
b. EUR3 million, whichever is higher.
This provision applies exclusively to foreign borrowings approved by related parties. This will come into effect on 1 January 2019, from the filing of tax returns for 2019.
Stanko Kopun and Dubravka Kopun