TAX NEWS - 2010

Croatia Tax: Changes proposed to Croatia corporate Tax and Croatia personal income tax codes

A number of amendments to Croatia's Corporate and Personal Income Tax Acts are expected to be passed by Parliament and become effective as from 1 July 2010.


Croatia Corporate tax changes

- To prevent trading in loss carryforwards, enterprises that change their legal status or materially change their business activities (within the last two years) would not be permitted to utilize previous loss carryforwards.

- Payments of voluntary pension insurance premiums would be deductible up to HRK 500 monthly per employee (total HRK 6,000 annually per employee).

- Expenses that are not related to business activities would not be deductible and expenses incurred on vessels and aircraft would be restricted.

- A mandatory 20% withholding tax would apply to payments for services rendered by entities registered in countries, other than EU Member States, with an average corporate tax rate of less than 12.5%.

- If annual profits are insufficient to cover the payment of advance dividends or profit shares and the advance payment is not refunded to the enterprise, the difference between the actual profit and the advance payment would be regarded as taxable personal income.

- Transfer pricing documentation requirements would apply to related party transactions in Croatia if one of the parties is entitled to tax relief or the use of loss carryforwards.

- An electronic filing requirement would be introduced for mid and large-sized enterprises.


Croatia Personal income tax

- The tax rates on employment income would be reduced as follows: 12% on monthly taxable income up to HRK 3,600; 25% on taxable income of HRK 3,600 to HRK 10,800; and 40% on taxable income exceeding HRK 10,800. The basic personal tax-free monthly allowance would remain unchanged at HRK 1,800.

- The tax rates on income from property and property rights from rentals, leases and insurance would be reduced from 15% to 12%.

- The tax rates on income from capital would be increased from 35% to 40% on the withdrawals of assets and on interest, and from 15% to 25% on awards of own shares or participations in share purchase plans.

- Transitional tax rates would be prescribed for 2010 for filing purposes: 13.5% on taxable income up to HRK 43,200; 25% on taxable income from HRK 43,201 up to HRK 108,000; 30% on taxable income from HRK 108,001 up to HRK 129,600; 37.5% on taxable income from HRK 129,601 up to HRK 302,400; and 42.5% on taxable income exceeding HRK 302,401.

- Voluntary pension insurance fund premiums paid by the employer on behalf of an employee would be treated as nontaxable income up to HRK 500 per month (HRK 6,000 per annum).

- An individual would be entitled to a tax deduction for qualifying expenditure up to HRK 6,000 for 2010. For such deductions to be accepted, the expenditure would have to be paid before the revised act becomes effective.

- Various allowances, except for the general allowance and the R&D allowance, would be abolished.

- A Croatian resident receiving foreign income would be required to file an annual tax return only if the tax on the income was not paid at the time the income was received or if the tax paid did not correspond with the Croatian tax liability. If required to file an annual return, an individual would only have to report employment income and income for which the filing requirement exists (currently all sources of income must be declared).