Croatia amends Corporate Income Tax Act and VAT Act

Croatia/October 2015

Corporate Income Tax Act Amendments

The amendments in the Croatian Corporate Income Tax Act introduce changes in the regulation of small entrepreneurs as well as impact the tax benefits for reinvested profit.

In order to be subject to profit tax as opposed to corporate income tax, small entrepreneurs now must have an annual revenue of at least HRK 3 million.  The previous threshold for small entrepreneurs was HRK 2 million.

Furthermore, the tax exemption for reinvested profit of an entrepreneur can now only be under the following conditions:

•reinvested profit has to be invested only in long term assets which must be obtained under market conditions;

•the beneficiary must maintain the same number of employees for a minimum of 2 years after the tax benefit period;

•the investment must be realized during the tax period for which the tax application is submitted.

Those tax benefits cannot be used cumulatively with the benefits from the Investment Promotion and Development of Investment Climate Act.

Additionally, withholding tax is not paid on profit payments to foreign entities for profits earned before February 29th, 2012.

Value Added Tax Act

The 2015 amendments of the VAT Act affect the VAT due payments as well as real estate transactions.

Entrepreneurs are now allowed to settle VAT obligations after their invoices have been paid, provided that they do not exceed HRK 3 million in revenue per year. Before this amendment, VAT tax obligation became due immediately upon the issuing of an invoice. This amendment is important because of the many defaults of debtors in Croatia and the goal of this amendment is to ease off the tax obligation for small entrepreneurs.

Additionally, there has been a significant change affecting the construction industry, since the VAT Act had to be harmonized with the EU legislation. VAT is now calculated based on the usage of the real estate.

If an entrepreneur is registered as a VAT payer and sells constructed real estate which is either not in use, or has been commercially used for less than 2 years, then VAT of 25% is charged. On the other hand, if the seller sells constructed real estate which has been used for more than 2 years, or is an agricultural or other land plot (other than constructed real estate), only the real estate transfer tax (5%) is due, pursuant to Real Estate Transfer Tax Act.

It is worth noting that VAT and real estate transfer tax are not cumulative. Hence, no transfer tax is levied if VAT is applied.

David Jakovljevic, LL.M
Tax & Legal Advisor
Eurofast, Croatia Office

+385 1 7980 646+385 1 7980 646