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There are many international firms already established in Croatia, including Siemens, Tuborg Carlesberg and Levi Strauss, and the government is keen to encourage further investment both in spite of and because of the current situation. Local feeling is that the investment climate is improving and the political risk is decreasing because Croatia has re-taken the so-called occupied territories.
What follows is a brief outline of the main tax considerations for potential investors.
Foreign and domestic investment are treated equally. Foreign investors are constitutionally guaranteed the right to repatriate after-tax profits, capital and rights acquired by the investment of capital, subject only to the proviso that all legal obligations in Croatia have been met.
Forms of possible investment
Foreigners may take part in any form of legal entity known to Croatian law, either with or Croatian participation. These forms include joint stock companies, limited liability companies or limited or unlimited partnerships.
(a) Establishing a company or subsidiary
The establishment of joint stock or limited liability companies has been the most popular way of investing. The Croatian Companies legislation provides for equal treatment of local and foreign trading entities, provided only that the foreign entity set up a Croatian subsidiary and that there is reciprocity between Croatia and the home country of that foreign entity, ie that a Croatian entity would be permitted to establish a similar presence in the foreign entity's home country.
Both resident and foreign entities are subject to profit tax at the rate of 25 per cent. Resident entities (those with their head office and management in Croatia) are taxed on their world-wide income and foreign ones (head office and management outside Croatia) on their Croatian source income. Entities with foreign participation are treated in the same way as entities which are wholly-owned by Croatians.
Taxable income is total revenue less total expenses in generating that revenue, subject to certain adjustments.
(b) Joint Ventures
Where a foreign investor is a shareholder or partner in a Croatian entity, the resulting joint venture is subject to the same provisions of company law as a solely Croatian entity.
There are, however, significant advantages for the investor and the entity in tax terms. Profit made by the foreign investor is taxed at half the basic rate of profit tax, ie 12.5%.
The investment can be in the form of cash, a physical contribution in kind, such as plant and machinery, or a non-physical contribution such as intellectual property rights and licences. If the investment is in the form of a contribution in kind (or the company is obliged to use a cash investment to purchase such equipment/goods), the import of equipment and goods will be duty free if the investment:-
(1) is for a minimum of 5 years;
(2) constitutes more that 20% of the company's capital; and,
(3) it has been approved by the Customs Authorities.
(c) Representative Offices
Representative Offices are not taxable entities (with the exception of having to pay employers contributions on remuneration paid to employees), but cannot carry on economic activity aimed at profit. Their role is limited to representation, marketing and other preparatory activities, such as the provision of information and the conclusion of contracts on behalf of their parent companies.
(d) Investments in Shares
There are a number of ways to purchase shares in Croatian companies.
The Croatian Privatisation Fund sells shares from its portfolio through the Zagreb Stock Exchange, by public bidding and, for discounted purchase of public debt, by auction.
Pension Funds and Banks will offer share from their portfolios either through public bidding or by direct negotiation with a potential purchaser.
Individuals may also sell shares on the Stock Exchange, through public bidding or by direct negotiation.
There is no taxation of either dividends or capital gains arising from the ownership of shares in the Croatian Tax System.
Other corporate taxation issues which may be of general interest to potential investors include:-
Save where there is a specific agreement for the avoidance of double taxation, the Croatian tax authorities will taken into account any profit tax paid abroad and deduct that amount from any profit tax due on the same earnings in Croatia. Where there are specific agreements, the terms of the agreement will apply.
VAT will come into force in Croatia on 1 January 1997 at a flat rate of 22% and will be payable on the sale of goods and buildings, the provision of services and the importation of goods. There are certain exemptions including banking, insurance and educational services. Until 1 January, the sales taxes on goods and services will continue to apply.
There is a 5% tax on the sale of immovable property, based on the market value of that property at the time of assessment (within 30 days of the report of the sale).
There is a lump-sum, "firm tax" of up to 500DM per annum payable by each entity which is subject to profit tax. This is determined by, and payable to, local authorities.
This Article has been written with the assistance of Inzenjerski Biro Revizija, Zagreb.
The content of this article is intended to provide general information on the subject matter. It is not a substitute for specialist advice.
If you require any further information on Croatia, please call David Attrill or Gyula Hock at Price Waterhouse, Budapest, tel ++ 36 1 269 6910, fax ++ 36 1 269 6938,
or enter text search 'Price Waterhouse Budapest' and 'Business Monitor'.
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