Croatia Tax: VAT rules amended

The new VAT Act and regulations, which became effective on 1 January 2010, make significant changes to further harmonize Croatian VAT legislation with EU rules in anticipation of Croatia's accession to the EU. The rules affect nonresidents making both supplies and acquisitions in Croatia.


Appointment of VAT representative

Under the VAT (Value Added Tax) legislation, an enterprise carrying out deliveries of goods or services in Croatia, without having a registered office, business unit, permanent residence or habitual abode in Croatia, will be treated as a Croatian VAT payer, unless the Croatian service recipient is liable to self-assess and pay VAT ( i.e. if the reverse charge mechanism applies). The rule also applies where a foreign enterprise acquires goods in Croatia and makes further deliveries in Croatia. The foreign enterprise is required to register for VAT purposes and appoint a tax representative (who is a Croatian taxpayer) authorized to carry out functions related to the calculation of tax and payment on behalf of the nonresident. The regulations further require that the tax representative have a power of attorney from the foreign enterprise. The tax representative then must submit an application for tax representation to the tax authorities and request that the foreign enterprise be registered in the register of VAT payers. The tax representative is liable for the payment of tax, penalty interest and any other penalties in respect of transactions carried out in Croatia, and is jointly liable for the calculation and payment of foreign enterprise VAT (Value Added Tax).


Place of supply rules

The place of supply of services that are taxed in accordance with the reverse charge has changed to the effect that the services provided to nonresident customers who are not taxable persons are taxed at the place where the supplier is located and not where the recipient has its registered residence.

As an exception to general rule, the VAT Act provides that the reverse charge will apply where certain services are provided to a nonresident taxable person. In that case, the place of taxation is the place where the service recipient is located. The following services have been added to the list of services falling within the scope of services subject to the reverse charge mechanism:

- Provision of access to, and of transport or transmission through, natural gas and electricity distribution systems and the provision of other services that are directly linked to such services;
- Radio and broadcasting services;
- Telecommunications services;
- Electronically supplied services; and
- Intermediation services in relation to the services above.


VAT exemption for financial institutions

The VAT Act abolishes the exemption for banks, savings and credit institutions and insurance/reinsurance companies. An exemption is available only in respect of specific financial and insurance transactions. As a result, specified financial and insurance services will be exempt from VAT regardless of the provider, and financial institutions will be able to obtain a VAT refund to the extent the services are related to taxable supplies. The regulations define in more detail the financial and insurance transactions services that are generally exempt for all enterprises under the new VAT Act.


Input VAT deduction for enterprises with VAT-able and exempt deliveries

Enterprises making supplies that are partly VAT-exempt and partly taxable can deduct input VAT (Value Added Tax) only with respect to the taxable supplies. For enterprises with specific financial transactions that are VAT exempt, the regulations allow a deduction of 2% of the input VAT (Value Added Tax) from all input invoices in calendar year 2010.