Croatia: Changes In Croatian Legislation: Third Chapter Of The Tax Reform

The Croatian government is working relentlessly on the recovery of the Croatian economy. Two rounds of tax reforms already took place in 2017 and 2018 respectively, with a third chapter being opened currently. As of January 1, 2019, a total of 80 laws and bylaws have been amended, most of them related to tax issues. We are hereby summarizing an overview of selected legislation that has so far raised most interest.

Closely abiding by the National Reform Program issued in 2016, the Croatian Government continues with its efforts to alleviate tax burdens from citizens and entrepreneurs and to give a healthy recovery of the Croatian economy. Croatia is facing a substantial issue with workforce deficit, due to heavy emigration of Croatians towards countries with more attractive tax structures and better paid salaries. A large number of laws and regulations has therefore been amended in the area of taxes, contributions, fiscalisation, island economy, energy sector and real estate.

Personal Income Taxes and Contributions

  • 2019 brings certain changes regarding salaries:
  • The highest employment tax rate of 36% will now apply to annual taxable base higher than 360,000 HRK (30,000 HRK monthly), instead of the previously applicable 210,000 annually (17,500 monthly). This change is effective for all payments made after January 1, 2019, which means also for December 2018 salaries paid in January 2019.
  • Employers can now pay additional annual 5,000 HRK of non-taxable award to their employees. The purpose of the award is not directly specified, and it can be paid out in monthly fractions. This change has already entered into force as of December 1, 2018 and many employers have taken advantage to pay higher Christmas allowances.
  • The amount of the minimum net salary has been increased from 2,751 HRK to 3,000 HRK and the new Act on minimum net salary has been issued.
  • Contributions paid on top of the gross salary (the so-called Gross II) are decreased by 0.7%. The contribution for unemployment (1.7%) and contribution for safety at work (0.5%) have been abolished, whereas the contribution for health insurance has been increased by 1.5%. These changes, as well as minimum salary novelty, are effective for all salary calculations after January 1, 2019.
  • Scholarships will no longer represent an obstacle for children to qualify themselves as supported family member for tax deduction purposes.

Value Added Tax

  • As of January 1, 2020, the general VAT rate shall be decreased from 25% to 24%.
  • Reduced rates of 13% and 5% have had their application extended: certain food (meat, fish, eggs, fruits and vegetables) as well as baby diapers are from January 1 onwards taxed with 13% instead of 25%, whereas medicine, books, newspapers and magazines, regardless of their format (e.g. electronic) are reduced to 5%.
  • The amount of 300,000 HRK of delivered goods or rendered services within a year remains unchanged as a threshold for the mandatory registration as a VAT payer; however, the obligation to register shall occur during the year in which a threshold has been reached (previously the obligation was to register in the following year).
  • VAT payers from now on will have the obligation to submit an incoming invoices ledger along with the VAT return, in electronic format.
  • 50% of input VAT on purchase of vehicles for personal use can be deducted regardless of the purchasing value. Previously, the value limit was set to 400,000 HRK.
  • Foreign entrepreneurs in possession of a Croatian VAT ID number and those who invoice goods or services to a Croatian taxpayer will not be able to transfer the tax obligation as it was the case until now, but they will have to charge the Croatian VAT to the Croatian customer.

Other changes

  • The Real Estate Transfer Tax has been further decreased to 3%. The government hopes that by this measure there will be less avoidance of registration of property transfers and that finally the land registries across country shall reflect the actual state.
  • A withholding tax of 20% for transactions not subject to a Double Tax Treaty or similar agreement and paid to persons resident in the so-called tax heavens has been extended to apply to interests, dividends and royalties. A 15% WHHT is now due on fees paid to foreign performers (sportsmen and sportswomen, artists etc.)
  • Accounting records in paper format can now be converted to electronic form, for tax and audit purposes, maintaining the requirements of readability and integrity of their origin and content.
  • OPZ-STAT reporting is now due once per year as opposed to the quarterly reporting in force before 2019.
  • The licencing of accountants which was supposed to take effect as of January 2019 has been abolished, in accordance with the EU recommendations for ensuring of quality of standards and services through voluntary certifications and not through formally imposed licencing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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