Croatia: The Insider´s Choice for Tax-Advantaged Residence and Yachting in Europe

Croatia is generally a high-tax country, but it offers unique advantages for persons who receive certain income, for example a foreign pension, bank interest and capital gains. Croatia also offers important tax advantages to yacht owners. These fiscal advantages as well as its astonishing and well preserved nature and rich cultural heritage make Croatia one of the most attractive locations for residence and retirement in Europe. As these advantages are not well known, Croatia offers the possibility of tax-free residence and yachting in a country not perceived as a "tax haven," thereby keeping a low profile.

Croatia was one of the two largest states in the former Yugoslavia. When Croatia declared independence in 1991, a four-year war with Serbia followed. Although most of Croatia remained untouched by the war, the nation retains a reputation as a war zone. This has distracted attention from the Croatia's clear seas, over 1,000 islands, romantic fishing villages, beautiful beaches, vineyards, Roman remains and medieval towns.

Croatia is now a sovereign state and in 1992 became a member of the United Nations. Unfortunately, independence brought to power a government that badly mismanaged the economy. But elections in 2000 brought in a new free-market-oriented government determined to attract foreign investment. The political, social and economic situation is rapidly improving. Croatia has joined the World Trade Organization, the NATO Partnership for Peace Program and signed the Stabilisation and Association Agreement with the EU.

Croatia is divided between the Latin-influenced coast and an interior that is more Central European. The official language is Croatian, although English is spoken widely, particularly in larger cities. The capital is Zagreb with about 800,000 inhabitants.

Before separation from Yugoslavia, Croatia had a well-developed tourist industry attracting about 10 million visitors annually. War devastated tourism, and while the industry is now recovering, Croatia offers excellent opportunities before the crowds return.

Croatia occupies an area only slightly larger than Switzerland, but has a spectacular 6,000 km. coastline on the Adriatic Sea with 1,185 islands, of which only 66 are inhabited. This coast is considered to be the most beautiful in Europe with innumerable bays, inlets, coves and beaches. Most islands receive more than 2,600 hours of sun a year. Besides a beautiful coast and countryside, there are many historic places such as Pula, Split, Korcula, Trogir, Hvar or Dubrovnik. On the Adriatic coast alone there are five UNESCO World Heritage sites.

Persons physically present in Croatia or maintaining a home there for more than 182 days/year are considered tax-resident and generally taxed on worldwide income. However, important exemptions apply, which make Croatia very attractive for personal residence.

Foreign nationals who stay longer than three months in Croatia must obtain a residence permit. A yacht moored in a Croatian marina or an apartment, rented or owned, is sufficient to obtain one. Possession of a resident permit does not necessarily mean you are tax resident.

You are tax resident in Croatia based on physical presence if you stay for at least 183 days under circumstances that indicate your visit is not temporary. The 183-day visit may overlap calendar years.

You are tax resident based on maintaining a home in Croatia if you have accommodation there at your exclusive and continuous disposal for at least 183 days under circumstances that indicate you intend to keep and use that accommodation. Again, this period may overlap calendar years. Your length of stay is not important, nor does it matter if the accommodation is owned or rented.

Such "deemed residence" is very attractive for foreigners who wish to maintain legal residence in Croatia without having to be physically present for a minimum period.

It is possible to be tax resident both in Croatia and in another country. Proper planning may be essential in such circumstances to avoid unforeseen tax consequences.

A permanent residence can be granted to the following persons:

• A foreigner who is married to a Croatian citizen at least one year.
• A foreigner who is married at least one year to a foreigner with the permanent residence permit.
• A foreigner who is employed in Croatia for a period of not less than three years continuously.

Exceptionally, permanent residence can be given to other foreigners because of the special personal reasons or the business purposes for which there is an economic or other important interest in Croatia. A permanent residence is also given to a child under 18 years accompanying the parent.

A Croatian citizenship can be acquired by origin, by birth, by naturalization and according to international treaties. A foreign citizen can acquire Croatian citizenship by naturalization if the following main prerequisites have been met:

• He has had his foreign citizenship revoked or he submits proof that he will get a revocation if he would be admitted to Croatian citizenship. If the foreign country does not allow the revocation or is asking for prerequisites which cannot be met, a statement stating that he will renounce foreign citizenship if he acquires Croatian citizenship is sufficient.
• He had a registered place of permanent residence in Croatia for a period of at least five years continuously before the filing of the petition.
• He is proficient in the Croatian language and Latin script.

The foreigner who has the Croatian permanent residency permit and is married to a Croatian citizen can acquire Croatian citizenship by naturalization although he does not meet the above requirements. Also, a foreign citizen whose admission to Croatian citizenship would be of interest for Croatia can acquire Croatian citizenship by naturalization without satisfying the above requirements. Croatian citizenship can also be acquired by the spouse of this person. The Ministry of the Interior shall issue an opinion on the existence of an interest in the admission to Croatian citizenship.

Newcomers to Croatia may wish to rent accommodations before purchasing real estate. However, property prices are low by Western European standards, particularly on the islands where beautiful stone houses are built in the traditional style.

Foreign persons can purchase real estate in Croatia providing that they get an approval by the Ministry of Foreign Affairs. Such approval may take up to six months, but it can easily be avoided if the property is bought by a Croatian company, which can be entirely owned and controlled by a foreign person. Using a company for this purpose also avoids a 5% transfer tax on subsequent sale of the property.

Although the purchase of real estate is straightforward, it is nevertheless advisable to use a lawyer to assist with the transaction. After the lawyer checks the land registry and prepares the contract, the parties sign the contract and the notary certifies the signatures. Following that, the estate agent or attorney requests for the registration of the property on behalf of the buyer.

The Constitution of the Republic of Croatia, which went into effect in 1991, establishes Croatia as a parliamentary democracy and guarantees the right and inviolability of private property. Also, rights acquired through capital investment are constitutionally guaranteed. Free transfer and repatriation of profits and capital are guaranteed to foreign investors. Asset forfeiture is possible only following a final court decision

Croatian residents normally pay personal income tax of 15% for monthly salaries up to 2,500 kunas (approximately US$ 300); 25% for monthly salaries between 2,500 and 6,250 kunas; and 35% for monthly salaries of more than 6,250 kunas (approximately US$ 750). With surtaxes and social security deductions the total tax burden on salaries can easily exceed 50%.

However, if you do not receive a salary, consultancy fees or similar income in Croatia, the tax situation is much more favorable. The following income is tax-free:

• Interest payments on loans, investments, deposits with financial institutions, public loans and securities and similar income.
• Pensions received from abroad.
• Capital gains from trading securities and other financial assets.
• Capital gains from real estate if you occupied the real estate, held the property more than three years or sold it to your spouse or members of your immediate family.
• Inheritance and gifts are exempted from taxation in the first line of succession, and in other cases there is a single rate of only 5%.

Property tax (property not used for business only) applies for holiday houses located in Croatia as well as cars and yachts registered in Croatia.

Value added tax (VAT) of 22% was introduced in 1998 and applies for most goods and services. Bread, dairy products, medicines and books are currently exempt as well as tourist accommodation services, e.g. hotel rooms, yacht charter.

Corporate income tax is paid at a single rate of 20%. This tax is reduced to 10% for companies operating in Croatian tax-free zones, or even to 0% provided the investment is in tax-free zone infrastructure. Additional tax incentives apply to companies that invest at least 10 million kunas (US$1.2 million) and employ at least 30 Croatian workers. Also, favorable depreciation rates can significantly lower a tax base.

Capital gain is taxed at rate of 20%.

There is withholding tax on dividends, royalties and interests, but they can be avoided or lowered to 5% (for dividends) using companies incorporated in countries with which exist favourable double-taxation treaties.

Croatia has signed bilateral double-taxation treaties with Albania, Austria, Bulgaria, Canada, China, Czech Republic, Greece, Hungary, Latvia, Lithuania, Macedonia, Malta, the Netherlands, Poland, Romania, Russian Federation, Slovakia, South Africa, Switzerland, Turkey and Ukraine. It has taken over double-taxation treaties signed by the former Yugoslavia with Belgium, Denmark, Finland, France, Germany, Italy, Norway, Sweden and the United Kingdom. A new double-taxation treaty is signed but not yet in force with Italy. Treaties with Estonia, India, Indonesia, Kuwait, Mauritius and United Arab Emirates are expected soon

A Croatian holding company is exempt from paying income tax on dividends which makes Croatia a good jurisdiction for holding companies. With its unique tax advantages and an extensive tax treaty network, Croatia offers interesting possibilities for international tax planning.

Croatia is also a very attractive place for yacht owners who wish to keep their yachts in Europe, but not within the EU to save the VAT on the purchase price. Yacht owners can moor their yachts in Croatia indefinitely without paying Croatian import duties or VAT. Spare parts and additional yacht equipment remain duty-free and VAT-free if the yacht is under a foreign flag. Since Croatia is not a EU member, you do not have to pay VAT on a yacht purchased within the EU if the yacht is registered and exported out of EU territory. Yacht owners with Croatian residence permits can sail into EU waters for up to six months annually without paying VAT on a yacht.

In Croatia as a civil law country there are no trust entities and trust law as such does not exist.

The obligation not to disclose banking secrets is provided for by the Banks Act of the Republic of Croatia. Banking secret violation is sanctioned by fines from 50,000 to 500,000 kunas for the bank and from 5,000 to 50,000 kunas for the president, members of the board of directors and responsible persons. Furthermore, a person who discloses a banking secret will be punished by 15,000 to 120,000 kunas in fines or up to one-year imprisonment.

• That the Dalmatian dog from the film "101 Dalmatians" was named after Dalmatia, in which most of the Croatian Adriatic is located.
• That the first public theatre in Europe was opened in 1612 on the island of Hvar, in the town which "Conde Nast Traveler Magazine" entered at the fifth place on its Top Ten list of best island towns in the world.
• That by the end of the third century AD, the Roman emperor Diocletian decided for construction of his palace the place where the city of Split is located today. The Palace of Diocletian is one of the best known integral architectural and cultural constructions in the world, which, due to its preservation and beauty, UNESCO entered in its registry of World Cultural Heritage in 1979.
• That in the small town of Trogir, 30 km away from Split, founded in 3^rd century BC, there is one of the best preserved Romanesque-Gothic complexes in the world. Trogir is an excellent example of a medieval town built on and conforming with the layout of a Hellenistic and Roman city and it is therefore also on the World Cultural Heritage list of UNESCO.
• That, before Newton’s discovery, the town of Dubrovnik, which has been on the World Cultural Heritage list of UNESCO since 1979, owned a telescope which was constructed by Marin Getaldic (1568-1626), the greatest Croatian scientist of that time.
• That the necktie has its origin in Croatia (in Croatian: Kravata, English: Cravat, French: Cravate, German: Krawatte, Italian: Cravatta, Spanish: Corvatta) and that the word "cravat" came from the word "Croat" (Hrvat in Croatian); so called because worn by Croats in the French army during the Thirty Years’ War. In their own way, with the cravat, the Croats have started conquering the world from the coasts of the Adriatic Sea from 17^th century. The consequences of that conquering are today felt around the necks by 600 million businessmen worldwide.
• That Marco Polo (1254-1324), an adventurer, merchant and one of the best known world travelers, whose book "The Travels of Marco Polo" is the first tourist book in the world, comes from Korcula on Korcula island in Croatia.
• That in 1458 Benko Kotruljevic from Dubrovnik wrote one of the first books on world economic literature, "On Trading and the Perfect Merchant", and that he was the first to establish the basis of modern double-entry book-keeping.
• That Shakespeare’s Twelfth Night was staged in Dalmatia.
• That the writer Vladimir Nabokov always spent his summers in Opatija as a boy.
• That Agatha Christie spent her second honeymoon in Dubrovnik and Split.
• That James Joyce was a teacher of English in Pula from 1904 and 1905, in the town that has existed for three millennia with one of the best preserved Roman amphitheatres worldwide.
• That the Duke of Windsor and Wallis Simpson spent their vacations in Dalmatia.
• That Luka’s pit ("Lukina jama"), the tenth by depth in the world (1392 m), is located in Croatia on Velebit Mountain.
• That the founder of San Marino, a small independent republic in the northeast of Italy, was the sculptor Marin from the village Lopar from the island of Rab.
• That the ball-point pen was invented by a Croat, Eduard (Slavoljub) Penkala (1871-1922), that it bears his name and is in daily use.
• That the names of two Croats are on the map of the Moon – names of scientists J. R. Boskovic and A. Mohorovicic.
• That the two winners of the Nobel Prize in chemistry came from Croatia – Lavoslav Ruzicka (1939) and Vladimir Prelog (1975).
• That Nikola Tesla (1856-1943), the father of alternative current electricity and technology of wireless communications, after which the unit for magnetic induction is named, was born in Croatia, and that he refused to receive the Nobel prize he had to share with T. A. Edison.
• That Anthony Maglica, the owner of a well-known company Mag-Lite, comes from Zlarin island from Dalmatia. Mag-Lite flashlights are among the ten most famous American export products, used by astronauts and deep sea explorers, amongst others.
• That the White House where the US president lives in the US capital city is built from the famous natural white stone found mainly on the island of Brac.