Income Tax in Croatia
Personal Income Tax
A taxpayer for PIT purposes is every physical person deriving income. Resident taxpayers are subject to worldwide taxation in Croatia. Non-resident taxpayers are liable to pay tax in Croatia on Croatian-sourced income. Under certain circumstances, an individual can either voluntarily or obligatorily become a corporate income tax (i.e. profit tax) payer instead of a PIT payer.
Personal income tax rates
Croatia has progressive tax rates that are applicable to the taxable base in the process of annual assessment of tax liability. The following types of income form part of the so-called 'annual income' that is subject to the process of annual assessment of tax liability:
· employment income
· self-employment income, and
· other income that is not deemed 'final other income'.
Taxable base is calculated by applying prescribed tax deductions and tax allowances (i.e. non-taxable parts of income) to the total amount of annual income.
The following tax rates and tax bands are used on an annual basis (i.e. in the process of annual assessment of tax liability) to calculate PIT liability:
Annual Tax Bands
The following types of income form part of the so-called 'final income' that is not subject to the process of annual assessment of tax liability:
· income from property and proprietary rights
· income from capital
· income from insurance
· other income from the refund of social contributions, and
· other income on the basis of the difference between taxpayer’s assets and reported sources of assets.
Consequently, the difference between annual and final income is that the final income does not enter into the process of annual assessment of tax liability and the tax paid on the final income is deemed finally paid tax (i.e. it cannot be subject to additional taxation regardless of the amount of other types of income taxable at the annual level). On the other hand, the annual income is entered into the process of annual assessment of tax liability so the tax prepayments are not necessarily the final tax to be paid on that income in the tax year in question.
Cities and municipalities in Croatia may levy an additional tax, the so-called surtax. The decision on the amount of the surtax rate lies with the city or municipality officials and is levied according to the individual's place of residence or habitual abode in Croatia. For taxpayers who live in towns where surtax is levied, their income is subject to the surtax.
Surtax rates in Croatia range from 0% to 18% (the highest surtax rate is for Zagreb, the capital of Croatia). The base on which surtax is calculated is the amount of PIT liability.
A resident taxpayer is an individual who has in Croatia his/her:
· residence (if an individual owns/rents accommodation without interruption for at least 183 days over two consecutive calendar years; however, permanent stay in the accommodation is not necessary) or
· habitual abode (if the circumstances suggest that an individual permanently resides in that place or region for a period of at least 183 days over two consecutive calendar years).
A resident taxpayer is also an individual who does not have residence or habitual abode in Croatia, but is employed with the government service and receives a salary based on this appointment.
A non-resident taxpayer is an individual who has neither residence nor habitual abode in Croatia, but sources income subject to Croatian personal income tax.
The following payments/reimbursements are not included in taxable income (whether paid to a local employee or an expatriate assigned to a Croatian entity but only if the expatriate is sent on a business trip to perform services on behalf of the Croatian entity to which the expatriate has been assigned):
· reimbursement of accommodation expenses on a business trip, up to the amount of actual expenses
· reimbursement of travel expenses on a business trip, up to the amount of actual expenses
· reimbursement of travel expenses to and from work by local public transport, up to the amount of actual expenses according to the price of single or monthly tickets
· reimbursement of travel expenses to and from work by inter-city public transport, up to the amount of actual expenses according to the price of monthly or single tickets
· daily allowances for business trips within Croatia, up to HRK170 (in addition to actual travel and accommodation costs)
· daily allowances for business trips abroad, up to specified amounts (varies by country; in addition to actual travel and accommodation costs)
· allowances for the use of a private car for business purposes, up to HRK2 per kilometer driven.
The following payments/reimbursements are not included in taxable income if paid to a local employee:
· annual awards cumulatively to HRK2,500 (usually paid for Christmas, during holidays, and so on)
· jubilee payments from HRK1,500 to HRK5,000 depending on the years of service
· other payments up to prescribed amounts
· education provided by the company and connected with the company
· specific work outfits labelled with the name or logo of theemployer (or income payer)
· compulsory health checks and general health checks, if provided to all employees
· Croatian compulsory social security contributions provided by the employer.
In addition, income tax is not paid on the following items:
· interest on positive balance on giro accounts, current accounts, and foreign currency accounts up to 0,5% per anum;
· interest on investment bonds;
· gains realized from the sale of a financial property (investment and securities), if not considered the individual's business activity;
Dividends and profit shares if:
· Those were earned up to and including 31 December 2000 and in the period from 1 January 20015 to 28 February 2012;
· Those receipts were generated pursuant to an ESOP program (that is, based on employee shareholding);
· The dividends and profit shares are used to increase the share capital of the company;
· if certain conditions are met, the alienation of real estate or property rights; and
· receipts from non-refundable EU funds and programmes for the purpose of education and professional training, up to the prescribed amounts.
Voluntary pension insurance premiums paid on behalf on an employee by his/her employer with the employee's consent, to a voluntary pension fund registered in Croatia pursuant to the regulations on voluntary pension insurance, up to HRK 500 per month in the tax period or the total of HRK 6,000 per annum are not subjet to individual income tax.
Deductions from Income
In calculating taxable income, every resident taxpayer is entitled to deduct the following from his/her monthly gross salary.
· A basic monthly personal allowance of HRK2,600 for each month for which tax is being
· Additional allowances if the taxpayer supports qualifying family members; to be a supported family member the individual cannot earn or receive more than HRK13,000 of receipts per year, including receipts which are not subject to taxation.
· Employee compulsory social security contributions (if paid in Croatia based on a valid employment agreement with a local company or if paid abroad in a country with which Croatia has concluded a totalization agreement based on a valid employment agreement with a foreign employer (provided the relevant totalization agreement forms for exemption from Croatian social security contributions are obtained) or EU social security contributions (paid in the Member State in which the taxpayer has remained socially insured).
· Additional deductions are available for all taxpayers for donations up to 2 percent of their previous year’s income as evidenced in the previous year's annual personal income tax return.
· If both spouses pay personal income tax, it is possible to share additional allowances for children and other dependents of the immediate family.
Croatian domestic tax law indicates that foreign earned income, which is taxed abroad, is also taxable in Croatia but a tax credit for taxes paid abroad may be applied to reduce tax otherwise payable in Croatia; however, the amount of tax credit may not exceed the amount of Croatian tax payable on that foreign income.
Employment income includes all receipts such as salaries and other payments in cash or in kind (except non-taxable payments up to the prescribed amounts) and pensions paid on the basis of the employment relationship.
Employers may give employees certain benefits that qualify as non-taxable. The following are the most common:
· Reimbursement of travel expenses for coming to work (the actual cost incurred by public transportation, i.e. monthly ticket for public transportation).
· Daily allowance for business trips in Croatia (up to HRK 170 per diem), plus travel and accommodation expenses.
· Daily allowance for business trips abroad (the allowed sums are defined by a special decision and depend on the country of the trip), plus travel and accommodation expenses.
· Reimbursement for use of the employee’s personal car for business purposes (up to HRK 2 per kilometre).
· Cash granted to employees upon retirement (up to HRK 8,000).
· Disability grant (up to HRK 2,500 per annum), death benefit upon the death of an employee (up to HRK 7,500), and death benefit upon the death of the employee’s close family members (up to HRK 3,000).
· Occasional awards paid at Christmas, Easter, for vacation, etc. (up to HRK 2,500 per annum).
· Awards to children until the age of 15 (up to HRK 600 per annum).
· Awards to employees for 10, 15, 20, 25, 30, 35, 40, etc. years of service (up to prescribed amounts).
· Severance payments paid under certain conditions (up to prescribed amounts).
· Premiums for voluntary pension paid and borne by the Croatian employer into a Croatian voluntary pension fund for its employees are tax free up to HRK 500 per month (i.e. a total of HRK 6,000 per year).
· Presents in kind up to the value of HRK 400.
If any of these benefits exceed the prescribed limits, the difference is considered to be salary and is subject to PIT, surtax, and employer’s and employee’s social security contributions.
The taxable base for employment income is equal to receipts less expenditures (i.e. employee’s social security contributions) and applicable personal allowances (see the Deductions section).
Tax rates applicable to the annual taxable base for employment income are provided in the Taxes on personal income section. Monthly tax bands are provided in the table below.
Monthly Tax Bands
Generally, tax calculation, withholding, and prepayments’ obligations, as well as all reporting obligations arising in respect to the realised income, lie with the income payer. However, there are cases (e.g. when income is realised directly from abroad) when this general rule is not applicable.
Self-employment income (annual income)
Taxable self-employment income includes income from:
· small business (craft) and activities equivalent thereto
· independent professions (doctors, lawyers, consultants, artists, and similar) under certain circumstances, and
· agriculture and forestry activities as defined by the PIT regulations.
Individuals realising self-employment activity are obligated to keep business books and evidences.
The taxable base for self-employment income is equal to business receipts less business expenditures and applicable personal allowances (see the Deductions section). Note that the relevant regulation specifically prescribes what is to be regarded as business receipts and business expenditures.
Taxpayers who earn self-employment income make monthly tax prepayments in accordance with annual tax returns that they are required to file at the year-end. Tax rates applicable to the taxable base for self-employment income are provided in the Taxes on personal income section. Tax liability is further increased for surtax. A tax loss may be determined in respect of self-employment activities as well as other activities for which income is determined on the basis of business books. It can only be deducted from the income on the basis of which it has been determined. Tax loss can be carried forward for up to five successive years. Derogations from the described tax compliance process are possible in case of a taxpayer realising self-employment activity who is not subject to VAT pursuant to the VAT Act and whose annual receipts from this activity do not exceed the amount prescribed by the VAT Act for the mandatory registration in the VAT system (HRK 300,000). The tax will be paid as a lump sum on the basis of the tax administration's assessment. Such taxpayer is not obligated to file an annual tax return in respect of this income. Self-employed individuals are subject to social security contributions in accordance with special rules.
Other income (annual income)
With the new PIT Act that entered into force on 1 January 2017, two categories of other income are introduced: (i) annual other income and (ii) final other income.
Annual other income is considered to be realised on the basis of the following:
· Receipts received by the members of the supervisory, management, or other similar bodies of legal entities.
· Royalties paid pursuant to a special act governing copyright and related rights.
· Receipts arising from the activities of athletes.
· Receipts received by travelling salesman, agents, referees and sports delegates, interpreters, translators, tourist workers, consultants, expert witnesses, and similar activities.
· Receipts in kind, the use of buildings, means of transportation, favourable interest rates on credits, and other similar privileges granted by the payers of these receipts to natural persons other than their employees.
· Rewards to pupils during practical work and apprenticeship above tax-free amount.
· Receipts of pupils and students in full-time education for the work via pupil and student associations, pursuant to special regulations above tax-free amount.
· Scholarships to pupils and students for full-time education at secondary, two-year post-secondary, and higher schools and universities above tax-free amount.
· Scholarships paid to athletes pursuant to special regulations for the improvement of their sport skills above tax-free amount.
· Cash rewards for sport achievements and compensations to athletes pursuant to special regulations above tax-free amount.
· Other unspecified receipts paid or given to natural persons by legal entities and natural persons (liable to profit tax or income tax based on self-employment activity) and other payers.
The taxable base for other income is equal to receipts less expenditures. Expenditures shall be recognised in the amount of 30% of the receipts acquired on the basis of:
· Royalties paid pursuant to a special act governing copyright and related rights, including considerations for delivered works of art paid to the persons engaged in artistic or cultural activities.
· The work of professional journalists, artists, and athletes who are insured on that basis and pay compulsory insurance contributions pursuant to a ruling.
· The receipts of non-residents arising from artistic, entertainment, sport, literary and visual art-related activities, and the activities connected with the press, radio, and television shows.
Tax levied on other income is withheld by a payer of income at the rate of 24%, increased for surtax, without provision for taxpayers to claim personal allowances. In case the amount of other income does not exceed HRK 12,500 in the fiscal year, it will not be subject to annual tax rates (i.e. it will not be taxed at a rate of 36% on an annual level).
Normally, other income is subject to social security contributions from receipt, levied at 10%, and on top of receipt, levied at 7.5%.
Note that a taxpayer realising other income may, upon request, determine one’s income in the manner prescribed for self-employment activities.
Income from property and property rights (final income)
Taxable income from property and property rights includes income from the following:
· Rentals and leases.
· Property rights.
· Disposal of property and property rights.
· Disposal of specific property categories (i.e. of waste) as in accordance with specific regulations.
In specific circumstances, individuals realising income from property and property rights may be subject to social security contributions in accordance with special rules.
Income from property and property rights is not subject to social security contributions.
Rentals and leases
The taxable base for income from property on the basis of rental or lease of movables and immovables can be decreased by 30% for expenditures. Tax payments are made according to the assessment issued by the tax administration. The tax rate is 12%, and no personal allowance is allowed. Tax liability is further increased for surtax.
The taxable base for income from property rights can be decreased by the amount of expenditures actually incurred, for which the taxpayer has proper and credible documentation. The expenditures are recognised based on a report that the taxpayer needs to file with the tax administration within 15 days as of year-end of the year for which the report is filed. The taxpayer needs to pay tax liability within 15 as of receipt of assessment. The tax rate is 24%, and no personal allowance is allowed. Tax liability is further increased for surtax.
Disposal of property and property rights
The taxable base for income from disposal of property and property rights can be decreased by the procurement value (increased by a rise in producer prices of industrial products) and disposal costs. Tax payments are made according to the assessment issued by the tax administration. The tax rate is 24%, and no personal allowance is allowed. Tax liability is further increased for surtax.
Disposal of waste
The taxable base for income from disposal of waste can be decreased in accordance with specific regulations. Tax payments are withheld by the income payer. The tax rate is 12%, and no personal allowance is allowed. Tax liability is further increased for surtax.
Income from capital (final income)
Income from capital includes the following:
· Interest income (excluding: late payment interest; interest realised on the basis of court assessments and assessments issued by bodies of local and regional government; interest realised on the basis of positive balance on giro, current and foreign currency account realised from banks, savings institutions and other financial institutions up to the level of interest such payers pay for a vista deposits assuming such interest is lower than the lowest level of interest paid for fixed-term deposits and assuming it is not higher than 0.5% per year; interest from bonds; receipts realised on the basis of yield from life insurance with savings element and yield from voluntary pension insurance).
· Withdrawal of assets and use of services by the members of legal entities for their private purposes at the expense of the current year's profit (note that this is also applicable in case of individuals who earn self-employment income that is subject to corporate income tax/profit tax).
· As of 1 January 2016, capital gains income realised from disposal of financial assets acquired as of 1 January 2016 and alienated within two years as of the date of acquisition when such alienation is not done between spouses, immediate family members, divorced spouses who are disposing of the assets in connection with the divorce, or when disposal is not in connection with financial assets' inheritance.
· Income realised by members of a Board from grant of own shares or stock options based on purchase of own shares at a favourable price under certain circumstances.
· Dividends and shares of profit when paid out of profits realised in the period from 1 January 2001 through 31 December 2004 and as of 1 March 2012; there are certain exemptions (e.g. if dividends and shares of profit have been used for the purpose of increasing the company’s registered capital, if receipts are realised from investments into Croatian Homeland War Veterans’ Fund).
The taxable base depends on the type of income from capital. No personal allowance is allowed when calculating tax prepayments at the rates stated below. Tax calculation, withholding, and prepayments’ obligations, as well as all reporting obligations arising in respect to the capital income, lie with the income payer (unless income is realised directly from abroad) except for capital gains income.
The tax rates applicable to the taxable base are the following:
· Income from interest, dividends, capital gains: 12%.
· Income from grant of own shares or stock option based on purchase of own stock at a favourable price: 24%.
· Income from withdrawals of assets and use of services: 36%.
Capital losses can be deducted only from capital gains realised in the same tax year.
Tax liability is further increased for surtax.
When it comes to capital gains income, obligation of keeping records, determining income from capital gains, tax calculation, tax prepayments, and reporting obligations lie with the financial assets holder, who may arrange it with the company/individual/Central Depository & Clearing Company Inc. to take over all obligations except for tax payment obligation. In case of capital gains realised on the basis of disposal of participation in capital of limited liability companies, a taxpayer is obligated to report the disposal to the tax administration and shall be obligated to pay tax on the basis of the tax assessment issued by the tax administration.
Income from capital is not subject to social security contributions.
Income from insurance (final income)
Income from insurance is the amount of receipts received in respect of paid tax-free premiums for savings-type life insurance and voluntary pension insurance. The taxable base equals the amount of realised income (i.e. no personal allowance is available when calculating tax prepayments for insurance income). Tax is levied at the rate of 12%, increased for surtax. Tax calculation, withholding, and prepayments’ obligations, as well as all reporting obligations arising in respect to other income, lie with the income payer. Income from insurance is not subject to social security contributions.
Other income (final income)
With the new PIT Act that entered into force on 1 January 2017, two categories of other income are introduced: (i) annual other income and (ii) final other income.
Final other income is:
· income received on the basis of the repayment of I. Pillar pension contributions paid over the annual cap, where tax is levied at the rate of 36%, or
· income determined as a difference between taxpayer’s assets and reported sources of assets, where tax is levied at the rate of 36%; total tax liability is additionally increased by 50%.
No personal allowance is allowed.
Note that this type of other income has to be determined in a special procedure undertaken by the tax administration. Tax liability is further increased for surtax. Final other income is not subject to social security contributions from receipt.
Corporate Tax Rate
Corporate income tax. Resident companies are subject to tax on their worldwide income. A company is resident in Croatia if its legal seat or its place of management and supervision is located in Croatia. Branches of foreign companies are subject to tax only on their profits derived from Croatia.
Tax rates. The standard rate of corporate income tax is 18%. A lower corporate income tax rate of 12% applies to taxpayers that realized revenue of less than HRK3 million in the preceding tax period.
Tax incentives. Tax exemptions and other tax reliefs are available in accordance with the Croatian Corporate Income Tax Act and special legislation regulating incentives. For example, the Investment Promotion Act provides incentives for investments in new business activities and new workplaces.
Capital gains and losses. Capital gains and losses from the sale of assets are considered regular taxable income and tax-deductible expenses, respectively. No separate capital gains tax applies; capital gains are subject to the regular corporate income tax rates of 18% or 12%. Specific rules apply to unrealized gains and losses on certain types of assets. Depending on the type of asset, such gains or losses may be not taxable or not tax deductible, and may be recognized for tax purposes in the period of the realization of the asset.
Administration. The regular tax year is the calendar year, but a company may apply for a different tax year. Annual tax returns must be filed by the end of the fourth month following the tax year. Companies must make monthly advance payments of tax. In principle, each monthly advance payment is equal to 1/12 of the tax due for the preceding year before the decrease of the tax base for tax incentives (excluding multiyear tax incentives). The balance of tax due must be paid by the end of the fourth month following the tax year. If the total of the advance payments exceeds the tax due for the year, the company may claim a refund.
Dividends. Dividends are taxable at a rate of 12%.
Foreign tax relief. A foreign tax credit is available to resident companies for foreign tax paid on income earned directly or through permanent establishments abroad. The amount of the credit is the lower of the Croatian corporate tax payable on the foreign income and the foreign tax paid.