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Personal income tax amendments in 2021 implemented since January

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Croatia entered 2021 with a new set of tax reforms of which the most important determinants are reduction of income tax rate and the corporate income tax rate for entrepreneurs. Personal income tax amendments certainly brought the most discourse between employees as it contributed to changes in their salaries. Most of these changes took effect in the beginning of the year, while some effects of the reform might be visible in the middle or end of the year. The following is a summary of the changes brought about by this round of tax reform, more precisely changes in personal income tax.

One of the tax reforms that seemed the most interesting to the citizens is the amendment of the personal income tax rate given that the outcome would be higher salaries and pensions. These changes reduced the tax rates from 24% to 20%, and from 36% to 30%. There are no changes when it comes to tax bases which means that the rate of 20% is applicable to tax base of up to HRK 30.000,00 per month, instead of previous 24%, and a rate of 30% to the base above HRK 30.000,00 instead of previous 36%.

These changes in tax rates would mean an increase in net wages of the employees, depending of course on the exact amount of the salary, benefits and residence tax. For example, a person without dependent members living in Zagreb where the residence tax is 18% with a gross salary of HRK 6.000,00 would receive about HRK 40,00 higher net salary. Employee with a gross salary of HRK 10.000,00 would receive about HRK 190,00 higher net salary, gross salary of HRK 12.000,00 around HRK 260,00 etc. The higher the amount of gross salary is, so does the amount of net salary that the employees would receive at new, lower rates increases.

In addition, these changes will also apply on taxation of additional income based on other income up to the amount of five times of the amount of personal deduction base. Tax rate for this was 24% for additional income of HRK 12.500,00 but from this year taxation of such income is abolished.

Another important change defined by this round of reforms will certainly be significant to young employees up to 30 years. Amendments to the Income tax also regulate tax relief of young employees by reducing income tax liability by 100% for people under 25 and by 50% for those from ages 26 to 30. However, these changes will be applied in the middle of 2021 when the Tax Administration finalizes annual income tax calculations and refunds the amounts on accounts, whether in 50% or 100% depending on their age. Ministry of Finance estimated these refunds at about HRK 700 million, but exact amount will be known in July.

To summarize, the effect of changes to personal income tax and reduction of tax rates will definitely be beneficial for employees as their salaries will rise, but also for employers as the procedures of taxation of certain items are simplified for calculation and reporting. The Ministry of Finance estimated financial effects of these changes at HRK 2 billion. Given that this tax is income of local units, hence the government decided to take over the reduction of this income.

For further information, please contact Petra Dzankic, our Accountant and Payroll Specialist in Zagreb, at petra.dzankic@eurofast.eu.

Eurofast is a regional business advisory organisation employing local advisors in over 23 cities in South East Europe & Middle East (SEEME). The Organisation is uniquely positioned as one stop shop for investors and companies looking for professional services in South East Europe & Middle East.

Petra Dzankic
Payroll & Accounting Specialist
Eurofast Zagreb
petra.dzankic@eurofast.eu

11/3/21