Tax reform in Croatia

published on 28. December 2020 | reading time approx. 3 minutes

Legislative amendments that are part of the fifth round of tax reform, which is expected to enter into force on 1 January 2021, should boost employment and wages in Croatia.

   
     
The proposed amendments are expected to result in a tax revenue loss of HRK 2 billion a year but the Croatian Government expects them to have a positive effect for citizens and the economy. The fifth tax reform round includes changes to income tax, profit tax, VAT, and fiscalisation in cash transactions.

I. Income tax

In 2021, the income tax rates applied in the taxation of annual and final income and
the flat-rate taxation of activities will be reduced:

•  tax rate of 24 percent is reduced to 20 percent 
• tax rate of 36 percent is reduced to 30 percent
• tax rate of 12 percent is reduced to 10 percent.

   
Reducing the rate from 12 percent to 10 percent will reduce the tax and surtax on income earned from self-employment in flat-rate taxation, as well as the tax and surtax on income paid when paying out profits from companies. Taxation is abolished at an annual rate of 24 percent of taxpayers who earned additionalincome on the basis of other income up to the amount of five times the amount of the personal deduction base. All incomes for which the annual income tax is determined enter the threshold of HRK 360.000, below which the tax will be paid at a rate of 20 percent, and above which at a rate of 30 percent.
   

II. Value added tax

The threshold for the application of the taxation procedure according to the collected fees is increased to HRK 15 million per year instead of the current HRK 7.5 million. Taxpayers who wish to start applying the taxation procedure according to the fees collected from 1 January 2021 may submit a written statement to the competent branch office of the Tax Administration by 20 January 2021 at the latest.

 
The possibility of applying the VAT calculation category to imports is expanding. VAT on import shall be deemed to have been paid if the taxpayer entered in the register of VAT payers declares it as an obligation in the VAT return, and for such method of calculation and payment of VAT, the Customs Administration has previously issued him an approval for payment of VAT and on import via VAT return.

 
The VAT exemption for small consignments imported into the European Union with a value of less than 22 euros is abolished. When selling goods at a distance of up to HRK 1.125, by a non-EU taxpayer through the use of an electronic interface to a non-EU taxpayer, the supplier will be considered a taxpayer who enables the sale via an electronic interface and will be obliged to charge VAT.
   

III. Profit tax

For all taxpayers who earn up to HRK 7.5 million per year, the tax rate is reduced from 12 percent to 10 percent. Income taxation at the rate of 10 percent will be applied for the first time for the profit realized in 2021. The withholding tax rate on the payment of dividends and profit shares is reduced from 12 percent to 10 percent on the payment of profits to foreign shareholders and members of the company who are not natural persons. The withholding tax rate for performances by foreign performers is reduced from 15 percent to 10 percent.

 
A tax-deductible expense of a credit institution is the amount of write-off of receivables (principal and interest expressed in income) from an unrelated natural or legal person, which were previously impaired and reserved in accordance with the regulations of the Croatian National Bank. This indirectly discourages credit institutions from selling these receivables to receivables repurchase agencies. The amount of the written-off liability is not considered taxable income or receipt by the debtor and has no effect on, for example, the income threshold according to which the income tax rate is determined.
    
Other legislative amendments in place from 1st January 2021 are covering the following areas:

I. Cash Transaction Fiscalisation Act

According to the already valid regulations, from 1 January 2021 on fiscal accounts containing JIR and ZIK, a QR code will be mandatory, with the help of which citizens will be able to more easily check the fiscalisation of accounts with the Tax Administration. From the same date, also according to the already valid regulations, the obligation to carry out the procedure of fiscalisation of sales through selfservice devices begins.
The only novelty in this law is that the Minister of Finance will prescribe in an ordinance the provisions relating to the amount of the cash maximum according to certain categories of taxpayers, which has so far been defined in the law itself.
  

II. Enforcement Act

From 28 November 2020 (with the entry into force of the latest amendments to the Enforcement Act - EA) for the first time the following are paid into the protected account of the (enforced) worker:

• Christmas allowance, holiday allowance, etc. occasional rewards, cash lump sums to cover the cost of feeding workers, cash rewards for work results and other forms of additional remuneration of workers, rewards to workers for completed years of service up to the prescribed amounts up to which they are not considered taxable receipts.

In addition, the following receipts have been added to these EA amendments (which are also exempt from enforcement and are paid into the employee's protected account):

• daily allowances for business trips at home and abroad, daily allowances for field work at home and abroad and daily allowances for business trips, daily allowances paid to workers from the EU budget to perform their jobs, in connection with the employer's activities (up to the prescribed amounts up to which are not considered taxable receipts);
• maritime allowance and maritime allowance on ships of international navigation up to the prescribed amounts up to which they are not considered taxable receipts;
• awards for pupils and students;
• costs of co-financing the purchase of textbooks for students;
• sports scholarships for athletes with disabilities;
• other receipts listed in the amended provision of Art. 172 from the EA.

III. Minimum wage

At its session on October 29, 2020, the Government passed a Decree on the amount of the minimum gross salary for 2021 in the amount of HRK 4.250, which increases the minimum net salary to HRK 3.400. In 2019, the minimum gross salary amounted to HRK 4.062,51, and the net salary to HRK 3.250 per month.
  

IV. Management Board

The monthly basis for calculating contributions, for full-time work to an insured person who is also a member of the company's management board or the company's executive director or cooperative manager, cannot be lower than 65 percent of the average monthly gross salary paid in the Republic of Croatia in the first eight months from previous year. Therefore, for the periods from January 2021, it will amount to HRK 5.967,65 instead of HRK 5.682,30, as it was in 2020.