The Croatian parliament has passed a set of changes to the nation's Value Added Tax (VAT) rules as well as to rates for corporate and personal taxes for the coming year.
The new tax regime raises the threshold for corporations to apply a 12% tax rate, while cutting the tax burden for young employees beginning their careers. In addition, the regime revises various revenue-generating models, working schemes, employee-employer relationships and tax benefits.
Details on Croatia's new tax regime are as follows:
Corporate tax
In the area of corporate taxation, a lower tax rate of 12% applies to taxpayers with annual income below HRK 7,500,000 (EUR 1 m). Also, for self-employed individuals, the threshold for obligatory entrance to the corporate taxation system is now HRK 7,500,000. Furthermore, to be able to pay taxes on a "cash basis", a company must not exceed annual revenue of HRK 7,500,000.
Other changes being introduced in Croatia include new provisions on exit taxation and hybrid mismatches; shortened deadlines for filing tax returns for liquidation, bankruptcy proceedings and mergers; and changes in acquiring and evaluating rights in the case of mergers, acquisitions and divisions.
Personal income tax
Changes have been made to the Croatian tax code that benefit young employees. Specifically, taxpayers who are 25 years old and younger are now entitled to a 100% reduction in taxes for earnings from employment up to HRK 360,000 (EUR 48,000).
Individuals between 26 and 30 years of age will receive a 50% tax reduction for earnings from employment up to HRK 360,000 (EUR 48,000).
In addition, in a bid to help citizens finance healthcare, the new regime offers non-taxable compensation for supplementary and additional health insurance.
Also, non-taxable monthly personal allowance is increased to HRK 4,000 (EUR 535).
Lastly, changes to the tax code attempt to fill loopholes and address income generated through tax benefits that are inconsistent with the aims of Croatia's tax laws.
Value Added Tax
The new regime cancels a previous amendment that would have reduced the VAT to 24%. In 2020, the VAT will remain 25%.
But a reduced VAT of 13% will now apply to food services and catering.
Certain supplies for public-interest activities such as healthcare and culture will receive VAT exemptions. Undertakings can apply for these exemptions even if they are not for-profit businesses (as opposed to the rules applicable until end of 2019).
In a bid to harmonise VAT rules concerning trade within the EU, the new code implements changes to EU VAT legislation regarding the simplification of the rules for call-off stock arrangements and new rules for cross-border chain transactions. Also, a VAT identification number will now be a condition for receiving an exemption for the intra-EU market supply of goods.
To provide further relief to small and medium entrepreneurs, the new regime has increased the optional cash accounting scheme for annual supplies from HRK 3 million (EUR 400,000) to HRK 7,500,000 (EUR 1 m).
Other
Croatia has identified and will regulate against certain practices that allowed for tax avoidance, such as: attempts by employers and entrepreneurs to alter how employees do their work or to implement organisational forms that allow them to be taxed at lower rates; and attempts by entrepreneurs to use associated companies to pay tax at lower tax rates.
When detecting any of the practices listed above, Croatian tax authorities will implement audits, which will be given high priority.
Also, Croatia will give its taxpayers the ability to voluntarily disclose any unreported income generated abroad and the right to pay personal income taxes and mandatory social contributions on this income when it is reported, regardless of when the revenue was actually generated.
In line with EU Directive 2018/22, Croatia has implemented a mandatory disclosure rule, particularly in regard to cross-border arrangements, which now must be reported to the Croatian tax authority. In this case, either the taxpayer or the individuals who designed the original cross-border arrangement (i.e. tax advisors) are responsible for disclosing the information.
Lastly, in regard to fiscalisation, the QR code will be a mandatory element of every invoice beginning 1 January 2021. Supporting documents will be included in any fiscalisation obligation as early as 1 April 2020.
These changes represent significant reform to Croatia's tax regime. For more information how these new regulations could affect your business in Croatia, contact your regular CMS advisor or local CMS experts.
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