Croatia tax: New VAT Act will affect nonresidents

Croatia's new VAT Act, which becomes effective on 1 January 2010, makes significant changes to further harmonize Croatian VAT legislation with EU rules in anticipation of Croatia's accession to the EU. The new rules contain provisions that will affect nonresidents making supplies and acquisitions in Croatia.

According to the amended rules, foreign enterprises that do not have a head office, residence, business establishment, subsidiary or other business unit in Croatia will be required to register for VAT purposes and appoint a tax representative authorized to carry out functions related to the calculation of tax and payment on behalf of the nonresident. The tax representative will have to be a Croatian taxpayer and will need to guarantee the payment of tax. The Minister of Finance will be issuing regulations for the implementation of this rule.

The new VAT Act provides for the availability of VAT refunds to foreign enterprises that do not have a head office or place of residence, business establishment, subsidiary or other business unit in Croatia and that do not carry out any supplies of goods and services in Croatia in the relevant tax period. However, a refund will be available only under the condition of reciprocity, i.e. that Croatian taxpayers are entitled to a VAT refund to the same extent in the country where the applicant is resident.

The place of supply rules also will be changed under the new Act. The existing VAT Act prescribes that domestic enterprises performing services whose place of supply is deemed to be the place where the recipient is resident also applies when the services are provided to a nonresident person that is not an enterprise (i.e. the place of supply is the place where the individual has his/her habitual abode). The new Act prescribes that services provided to nonresident individuals will be subject to VAT under the general rule (i.e. where the supplier is located). Additionally, if services are provided by a nonresident enterprise to individual customers in Croatia, the foreign enterprise will be required to register for VAT in Croatia.

Further, the following services will be deemed to be supplied at the place where the head office of the recipient is located: the provision of access to and transport or transmission through distribution systems for natural gas and electricity and other directly related services, telecommunications services, radio and television broadcasting services and electronically provided services.

Other notable changes in the new VAT Act include the following:
- The VAT exemption for banks, savings and credit organizations and insurance/reinsurance companies will be abolished; an exemption will be available only in respect of specific financial and insurance transactions. As a result, the specified financial and insurance services will be exempt from VAT regardless of the provider, and financial institutions will be able to use the VAT refund to the extent related to taxable supplies.
- Enterprises making supplies that are partly VAT exempt and partly taxable can deduct input VAT only with respect to taxable supplies. Deductible input VAT related to the taxable supplies is calculated at year-end as a ratio of the total VAT-able and total exempt output supplies. The Ministry of Finance is expected to issue regulations for implementation of these rules before the end of 2009.