Croatia Rehauls Tax System In 2021; Reduces Tax Rates & Increases Thresholds

• Published date: 26 March 2021
• Subject Matter: Tax, Income Tax, Sales Taxes: VAT, GST, Tax Authorities, Withholding Tax
• Law Firm: Eurofast
• Author: Mr Dino Dzaja

Croatia has published a set of 2021 reform Acts, including the Act on Amendments to the Corporate Income Tax, Personal Income Tax, Value Added Tax and Fiscalisation. Our Croatia team's digest of the most important amendment aspects follows below.

Amendments to the Corporate Income Tax Act

The following CIT-related amendments have been introduced:

• Decrease of corporate income tax rate for entrepreneurs with income up to HRK 7.5 million from the previous rate of 12% to a new rate of 10%;
• Decrease of withholding tax on payment of dividends and profit shares to foreign legal persons from 12% to 10%;
• Decrease of withholding tax rate for performances by foreign performers from 15% to 10% (when the fee is paid by a domestic or a foreign payer under a contract with a foreign legal person);
• Credit institutions can treat expenses related to write-off of receivables from non-related natural or legal persons as tax-deductible based on approved credit placements with values in accordance with the special regulations of the Croatian National Bank;
• The taxpayer should perform control and, if necessary, adjustment of transfer prices for each tax period to rationalize the procedures related to transfer pricing and prevent misunderstandings, corrections of tax returns and court or arbitration proceedings.

Amendments to the Personal Income Tax Act

• Personal Income Tax rates will be reduced as follows:
• from 24% to 20% for personal income taxation for taxable income below HRK 30,000;
• from 36% to 30% for personal income taxation for taxable income above HRK 30,000;
• from 12% to 10% for annual and final income (e.g., profit distributions) and lump-sum taxation of activities (e.g., rental of apartments or flats).

Another amendment has been the defining of the tax treatment of the national allowance for elderly people which - from 1 January 2021 - amounts to HRK 800 per month. This allowance would not be regarded as income subject to personal income tax and would not be taken into consideration when determining the right to personal allowance deduction for dependant family members.

Additionally, personal income of digital nomads would not be subject to personal income tax. Digital nomad is a third-country national who is employed or performs business through telecommunication technology for a company or for his own company which is not registered in the Croatia, and does not perform business or provide services to employers in Croatia.

The percentage of increase of personal...