• The Third Round Of Tax Reforms In The Republic Of Croatia

    By Ksenija Cipek


    Authors: Ksenija Cipek and Iva Uljanić Škreblin - Ministry of Finance, Tax Administration.

    1. Introduction

    Tax reform in Croatia began in 2016 by amending 13 tax laws and 3 customs laws. The objectives of the reform were to strengthen the investment climate, to increase the disposable income of citizens and consequently to increase consumption through the increase of the non-taxable part of income, to reduce the tax burden on wages through new tax brackets and tax rates, through changes in the system of profit tax by introducing possibility of paying the lump sum tax and by applying the cash principle in calculating profit, and through changes in VAT system by increasing the threshold for entering in the VAT system and other changes. Some provisions entered into force on January 1, 2017, while some came into force on January 1, 2018. Tax reform continued in 2017, and a new round of tax reform has just ended with the adoption of a set of tax laws at the 10th session of the Croatian Parliament held on November 21, 2018. The most important changes are discussed below.

    2. Changes in the VAT system

    Amendments to the Value Added Tax Act implements the provisions of Council Directive (EU) 2017/2455 of December 5, 2017 amending Directives 2006/112/EC and Directive 2009/132/EC with regard to certain obligations of VAT for the supply of services and the sale of goods in distance sales, with effect from January 1, 2019. It derives from the obligation of the Republic of Croatia, as a full member of the European Union, to implement and apply European legislation. The aforementioned amendments simplify the legal provisions to reduce the burden of meeting the tax obligations arising from the application of a special taxation procedure for electronic services (telecommunications services, radio and television broadcasting services and electronically supplied services to non-taxable persons) performed by taxpayers based in the European Union or in the Republic of Croatia but without a head office in the Member State of consumption. The general rule is that the place of performing telecommunications services, radio and television broadcasting services and electronically supplied services to non-taxpayers is considered to be the place where those persons have their seat, residence or habitual residence. A threshold of HRK 77.000 (approx. 10.000 Euros) is imposed for taxpayers who provide electronic services to other Member States in the value of less than HRK 77.000, in order to apply the simplification, since in this case the place of performing electronic service considers the country or Croatia. The application of the above threshold is optional for taxpayers, i.e. taxpayers may decide not to apply the prescribed threshold and that electronic services performed in other Member States will be taxed at the place of consumption or the Member State of consumption, which is due to two calendar years (if the option is chosen, oblige the taxpayers to apply that option two calendar years).

    In Croatia, the standard VAT rate of 25% is applied, and a reduced VAT rate of 13% and 5%. Regarding the regressive effect, with new legislative changes, a reduced 5% VAT rate applies to all medicines, the 13% reduced rate is extended to the taxation of certain goods and services such as: baby diapers, deliveries of live animals, certain food types, services and related copyrights of authors, composers and performers who are members of the relevant collective rights organizations performing this activity under special copyright and related rights and with the prior approval of the central state authority for intellectual property. Legislative changes also prescribe a reduction in the standard VAT rate from 25% to 24% since January 1, 2020.

    Amendments have also been made in the part of the taxpayer's obligation to enter the VAT system. Up to these latest changes in VAT, the obligation to register in the register of VAT payers as of January 1 of the current year was valid for taxpayers whose value of supply of goods or services in the previous calendar year was higher than HRK 300.000 (approx. 40.000 Euros). With the purpose of preventing the avoidance of registration in the register of VAT payers, this amendment made also obligatory for taxpayers who, in the current calendar year, realize deliveries worth more than HRK 300.000 to register in VAT register.

    The law was supplemented by the new provisions on the obligation to submit, electronically, special records on receipted invoices in order to provide data for monitoring the flow of goods. This data has already been available to taxpayers, and the submission of the same through electronic tax administration services facilitates administrative burdens. New evidence is expected to ensure a reduction in possible fraudulent activities in the VAT segment.

    The amendments also relate to the abolition of the reverse charge mechanism so far as it is doubtful who can and under what conditions apply it. However, the application of the transfer of tax liability in the country is stipulated in the delivery of concrete steel and iron, products of concrete and iron (armature).

    Legislative changes are aligned with the European Commission's requirements with regard to the abolition of the threshold value for car tax and the right to prepaid for vessels and aircraft related to the use of private cars for which 50% of the overpayment was made, enabled under the conditions that the value of these funds does not exceed HRK 400.000 (approx. 35.000 Euros).

    All amendments to the VAT Act will enter into force on January 1, 2019, with the exception of the standard VAT rate cut to 24%, which enters into force on January 1, 2020.

    3. Changes in the Profit Income Tax System

    The obligation to amend the Profit Income Tax Act stems from the obligation to align with the Council Directive 2016/1164 / EEC of July 12, 2016 on the establishment of rules against tax avoidance practices that directly affect the functioning of the internal market (OJ L 193/1, 07.19.2016.); (ATAD). Taking into account the OECD recommendations and other identified needs, the Anti-tax Avoidance Directive (ATAD) introduces new rules to prevent the transfer of profits, and refer to:

    1. The General Rule on Avoidance or Abuse
    2. Interest Restrictions Rule
    3. Rule on Controlled Foreign Companies
    4. Hybrid Mismatch
    5. Exit Taxation

    It was envisaged that these rules will enter into force on January 1, 2019, except for exit taxation which will enter into force on January 1, 2020. However, before the entry into force of that Directive, the said Directive has also been amended by Council Directive 2017/952 of May 29 ,2017 amending Directive 2016/11/EEC as regards hybrid non-conforming countries (OJ L 144, 7.6.2017). (ATAD 2) and which, in addition to content modification, postponed the application of provisions relating to hybrid mismatch until 2020 and 2022.

    Consequently, compliance with the provisions effective on January 1, 2019 (Interest Restrictions Rule and Controlled Foreign Companies) is in place, while the general anti-abuse rule has already been implemented in the Profit Income Tax Act and has been in effect since 2016.

    4. Changes in the Personal Income Tax System

    In order to significantly increase the salaries of Croatian labor market workers, especially workers in the high technology sector, and thus prevent the outflow of highly skilled workers from the country, the tax brackets for the 36% tax rate increases. Thus, from January 1, 2019, income tax is paid at the rate of 24% to the monthly tax base up to HRK 30.000 (approx. 4.000 Euros) and at a rate of 36% on a monthly tax base exceeding the amount of HRK 30.000. This applies to income which includes income from non-employment, self-employment and other income, while income from property and income from capital is considered a final income (taxed with final tax).

    Instead of the current six sources of income, the income from insurance was exempted so the new amendments contain five sources of taxable income: the receipt of the employment, self-employment, property, capital and other receipts. The insurance income was considered to be income based on expenditures that in the previous tax periods represented tax relief, so the tax was subject only to the amount of the tax relief used for which the tax base was reduced. The reason for the cancellation of the insurance income is the strengthening of voluntary pension savings and the higher the income from insurance than the paid and tax-recognized premiums of voluntary pension insurance. The insurance fund does not consider neither paid nor tax-acknowledged life insurance premiums, in order to equalize the tax treatment of the same with the voluntary pension insurance premiums.

    5. Changes in the taxation of the transfer of real estate

    From January 1, 2019, the real estate tax rate is reduced from 4% to 3%.

    6. Amendments to the General Tax Code

    From January 1, 2019, the topic of binding rulings is no longer limited. Deleting topics that have hitherto been defined for binding opinions are trying to encourage more frequent use of this institute. However, it is still necessary for the subject of binding opinions to be fulfilled as a prerequisite for future and intended transactions, which is consistent with the terms of previous tax considerations, which is most often used to describe this institute.

    In recent years, it has been noted that business entities, especially those registered outside the territory of the Republic of Croatia, provide their services to Croatian citizens by avoiding the fulfillment of the conditions that are regulated by the regulations of the Republic of Croatia for the purpose of performing certain activities. In this way, unreasonable tax benefits are realized, and business in contravention of the regulations may in some cases also cause severely compensable damage to the social community. In order to prevent this occurrence, the provisions prescribe the possibility for the competent authority to prohibit such a business. Since in the above-mentioned cases the service is most often provided through internet sites, the provisions of the law regulate the implemented work by blocking access to the contents of the Internet address. The legal basis is represented by EU Regulation 2015/2120 of the European Parliament and of the Council of November 25, 2015 on the establishment of measures concerning access to the Internet and amending Directive 2002/22/EC on universal service and users' rights relating to electronic communications networks and services and Regulation (EU) No. 531/2012 on roaming in the Union's public mobile communications networks, which provides that it may be blocked if necessary and only as long as is necessary for the respect of EU legislative acts or national legislation compatible with EU law subject to a provider of services access to the Internet or the respect of measures that are in conformity with EU law and which are enforced by such EU legislative acts or national legislation, including court orders or orders of public authorities that have been assigned the appropriate powers.

    The definition of a permanent business unit is change in order to include the elements necessary for the proper application of the existing double taxation agreements and the realization of the contractual rights of the Republic of Croatia. At the same time, the definition includes elements of the new OECD Model of the 2017 Income and Capital Contract, and the amendments relate to limiting the scope of exemptions for specific preparatory and ancillary activities, extension of the dependent agent definition, a new rule governing the division of business to avoid the emergence of a permanent business unit. In determining the profit of a permanent business unit a new contemporary definition is used.

    In order to modernise the issuance of tax documents, in accordance with the Tax Administration Information System Development Strategy, one of the goals of digitization of the Tax Administration in its fullest sense, and the strengthening of digital services towards taxpayers and citizens, it is necessary to reduce the burden of unnecessary visits in the Tax Administration, and also reduce the cost of the Tax Administration when sending and preparing paper outbound documents to taxpayers and citizens. In this way, the two-way electronic communication between the Tax Administration and taxpayers will be fully realized. It is stipulated that taxpayers who electronically communicate with the tax body at a time and for lower amounts of tax may use a system with lower levels of identification.

    7. Amendments to the Fiscalization Act

    Taxpayers of fiscalization are not determined depending on whether they are obliged to issue an account or not, but all are considered to be taxpayers until a separate provision determines who is not considered a taxpayer to issue an invoicel. This is necessary to prescribe the obligation of the fiscalization of self-service devices (not issuing bills). Namely, performing the business of selling goods or services through self-service devices can not be successfully monitored without the implementation of fiscalization. Fiscalization of sales through the self-service device does not mean issuing a fiscalized invoice to a buyer, but the registration of the goods or services sold through the self-service device, and this application will be executed through the software installed on the self-service unit and the electronic tax administration system. In order to allow sufficient time for taxpayers to pay for sales through self-service devices, these provisions would apply from January 1, 2021.

    8. Amendments to the Contributions Act

    With new changes in the system of compulsory contributions, the system is considerably simplified by the abolition of two contributions: the contribution for compulsory insurance in the case of unemployment of 1.7% and healthcare contributions at work by 0.5%. At the same time, the contribution for health insurance increases from 15% to 16.5%, which aims to contribute to the rehabilitation of financial difficulties in the health system. By abolishing the two contributions, the total wage burden of contributions decreases from 37.2% to 36.5%. With regard to the above mentioned total remuneration of entrepreneurs, the burden for employers are reduced by 0.7 percentage points, which according to the projections is HRK 900 million, thus opening up the space for employers to increase salaries to workers.

    9. Instead of conclusion

    It is clear that the third round of tax reform is aimed at further decreasing tax burden for entrepreneurs and citizens and increased competitiveness. The first tax reform, started in 2016, released significant resources that remain available to entrepreneurs and citizens. This review underscored key changes to tax laws, although amendments to the Law on Administrative Cooperation in Taxes were also made and a new Law on Excise Duty was issued.

    Reference: http://www.sabor.hr/sjednica-sabora; November 24, 2018.

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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

Ksenija Cipek

Ksenija Cipek is based in Zagreb, Croatia and she is a lecturer at the local University of Law and a Member of European Law Institute. Ksenija has over 20 years experience working at the Ministry of Finance and the Tax Administration. She is a highly respected and recognised tax expert who has been heavily involved in lawmaking. Ksenija is also an author and books writer.

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