Double Tax Treaty between Croatia and Kosovo Enters into Force

Croatia and Kosovo have been historically involved in a good economic and political relationship and are continuing to strengthen the commercial exchange. Croatia sees Kosovo as a good opportunity for export and significant investment, in areas such as construction and infrastructure, whereas Kosovo perceives Croatia as one of the most important strategic partners for their entrance into NATO and the EU. The economic cooperation has now become even easier after the Agreement on avoidance of double taxation between the two countries entered into force as of the beginning of 2018.

Discussions regarding the conclusion of the agreement between Croatia and Kosovo on avoidance of double taxation were ongoing for many years, but since 2014 the pace had quickened particularly given the increasing intensity in economic cooperation. A large number of Croatian companies are currently present in Kosovo either directly through their subsidiaries or representative offices, or indirectly through partners and distributors.. Finally, in March 2017, the double tax agreement was signed and in November 2017 legally confirmed in the form of an Act by the Croatian Parliament.
The Agreement introduces numerous tax reliefs in a variety of income types, and it has set the stage for the boost of exchange of goods and services. It additionally contains a clause on the exchange of information with a purpose of fighting fiscal evasion, in light of the OECD’s Base Erosion and Profit Shifting (BEPS) project.

The maximum withholding tax rates between the two countries are agreed as follows:
• 5% on dividends, if the real beneficiary is a company (except for a partnership) that owns at least 25% of the capital of the company paying the dividend;
• 10% on dividends in all other cases;
• 5% on interests;
• 5% on income from royalties.

The Agreement defines in detail all relevant terms such as resident, permanent establishment, affiliated companies, dividend, interest, property, a vast range of income (profit, salary, income from real estate, board member’s fees, royalties, students, etc.), removing thus a significant portion of misinterpretation or misuse of the information contained therein. One particularity related to the definition of the permanent establishment is connected with the construction industry: a construction site or a construction or installation project shall be considered as a permanent establishment only if it lasts more than twelve months. The Agreement furthermore introduces a clause on the profit from international transportation, regulating the use of profit from the operation of ships, aircrafts of road vehicles in international transportation. The rest of the provisions follow the standard structure and principles of the OECD model.

Croatian companies operating in Kosovo finally get the opportunity to enhance their commercial presence in this non-EU country. Numerous efforts from both sides resulted in a favourable agreement on avoidance of double taxation which will open new prospects for Croatian entrepreneurs. Kosovo is heavily investing in its infrastructure, telecommunication and construction industry and has great potential for important projects in the energy sector. It is also very interested in attracting investors from Croatia, strengthening thus the political partnership assisting Kosovo’s efforts in joining NATO and the European Union.

For more information, feel free to contact:

Silvia Cancedda, Client Relationship Advisor
David Jakovljevic, Tax and Legal Advisor
Eurofast Croatia

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