Although Croatia is not an OECD member country, the provisions of the relevant Croatian tax legislation are generally based on the OECD Transfer Pricing Guidelines.
Transfer pricing rules are prescribed by Article 13 of the Corporate Income Tax (CIT) Act and by Article 40 of the CIT Bylaw.
Who is affected?
Pursuant to the relevant provisions (art 13 of the CIT Act and art 40 of CIT bylaw), in the case of mutual business between related parties, if the agreed prices or conditions differ from the prices or conditions which would have been agreed between non-associated parties, the whole amount of the profit that would be realized if the business relations were performed between non-associated parties shall be included in the associated parties’ tax bases.
Apart from cross-border transactions, transactions between resident associated entities are also under transfer pricing rules if one of the parties:
- has a privileged tax status or is subject to profit tax at a rate lower than the stipulated rates or is exempt from the payment of profit tax, or
- is entitled to carry forward the tax loss from previous tax periods in the given tax period.
Related Party Definition
The definition of associated parties is very broad and includes persons that directly or indirectly participate in the management, control, or capital of the other party. The Croatian CIT law does not include any threshold percentage for the definition of associated entities.
Transfer Pricing Methods & Data
The Act and the Regulation prescribe the use of different methods for determining whether the prices are agreed at arms’ length. Generally, the same methods as those prescribed by the OECD are applicable, including:
– CUP method – resale price method – cost-plus method – profit –split method and – TNMM
It is worth noting that internal data and traditional methods are preferred by Croatian Tax Authorities.
Transfer Pricing Audit and Penalties
There is currently no special audit procedure specific to transfer pricing that differs from the regular tax audit procedure. However, the tax authority has published the Guidebook for Surveillance of Transfer Pricing which is designed for internal use but is also available to all taxpayers. The number of audits related to transfer pricing has increased in the past few years and substance is over form. Tax authorities exhibit an aggressive approach related to large management fee payments or other intra-group payments that indicate high transfer pricing risk.
There are no specific penalties related to transfer pricing. Fines go up to HRK 200,000 (approx. EUR 27,000) for a company and up to HRK 20,000 (approx. EUR 2,700) for the responsible individual within the company. Penalty interest would also be calculated from the date when the tax was due until the date when the tax is paid. For gravest tax violations, the penalty can even reach the amount of HRK 500,000 for the legal entity.
There is no specific deadline for the preparation of the transfer pricing documentation prescribed by the legislation. The law requires that the transfer pricing documentation is available and is submitted to the tax authorities upon their request in a tax audit. The transfer pricing study should be available at the same time of the submission of the annual tax return which is at the end of the 4th month from the taxpayer’s year end (30th of April for the majority of companies).
Statute of Limitation Period
The general statute of limitations expires at the end of the third year following the year in which a tax return should have been filed. However, the general statute of limitations may be prolonged and recommences after each intervention by the tax authority with respect to a filed tax return. The absolute statute of limitations is 6 years; however, attention should be paid on relevant amendments regarding the extension of the limitation period.