Taxation of dividends / Amendments of the Income Tax Act
Lexology, November 13, 2013
1. Introduction
By the decision of the Croatian Constitutional Court (CC) dated 18 September 2013 and published in the Official Gazette on 27 September 2013, the CC abolished the Act on Amendments of the Income Tax Act (Amendments 2012) as of February 2012 in a part relating to retroactive taxation of dividends to be paid out from the profit realised after 31 December 2000 (art. 16 par. 3).
In response to the decision of the CC, at the session held on 27 September 2013, the Croatian Parliament adopted the Amendments to the Income Tax Act (Amendments 2013). Although it was expected that the Amendments 2013 shall comply with the decision of the CC, it is the author’s opinion that the Amendments 2013 still breach the prohibition of retroactive application of the law, being one of the fundamental principles of the Croatian Constitution.
2. Historical overview
In the past twenty years, the Croatian tax law provided for utterly different solutions concerning taxation of the income from capital (taxation of dividends and shares in profit, jointly “Dividends”). Before January 2001 no taxation applied. From 1 January 2001 until 31 December 2004 Dividends were subject to taxation of 15% (later decreased to 12%). In the period from 1 January 2005 until 1 March 2012 no taxation of Dividends applied except in relation to Dividends from the profit earned between 1 January 2001 and 31 December 2004 that were paid out on or after 1 January 2005.
3. Retroactive taxation of Dividends
Faced with the large public debt and state budget deficit, in February 2012 the Croatian Parliament majority ruled by the left oriented Social Democratic Party (SDP) adopted in an urgent procedure the Amendments to the Income Tax Act introducing retroactive taxation of Dividends from the profit earned between 1 January 2001 and 1 March 2012 that are to be paid out to shareholders after 1 March 2012. The introduced dividend taxation rate which applies to the annual income exceeding HRK 12,000 amounts 12%. It may be noted that the Dividends relating to the profit gained within the same period (between January 2005 and March 2012) undergo different tax regime, status of which exclusively depends on fact whether the Dividends had been paid out to the shareholders before 1 March 2012, in which case no taxation applies or after 1 March 2012, in which case Dividends are subject to 12% taxation rate (including possible surtax).
4. Decision of the CC
Following the request for assessment of the constitutionality of the Amendments 2012 (in particular art. 16 par. 3) the CC found the disputed article contrary to the art. 3 of the Croatian Constitution. The CC took a standpoint that such a taxation regime discriminates the same categories of tax payers (i.e. shareholders receiving dividends before 1 March 2012 and shareholders receiving dividends after 1 March 2012) and breaches the principles of legal certainty and equality. The CC found such a retroactive application of the law without justifiable grounds inadmissible.
5. Amendments 2013
Following the decision of the CC, the Croatian Parliament adopted in September 2013 the amendments to the Income Tax Act. The Amendments 2013, which were published in the Official Gazette No. 125/13 have been in force since 19 October 2013. In the attempt to comply with the remarks of the CC, the Amendments 2013 bring the novelty in respect to taxation of Dividends, in that exempted from application of dividend tax shall be only the Dividends that are paid out to shareholders on the basis of the shareholders’ decision which had been rendered between 1 January 2005 and 1 March 2012. Taking into account that the decision of the CC abolishes art. 16 par. 3 od the Amendments 2012 starting from 27 September 2013 as the day of the Decision’s publication in the Official Gazette, there is sufficient room to argue that exempted from taxation shall also be payments of Dividends to be paid out on the basis of the shareholders’ decision rendered between 27 September 2013 (as the day of abolishment of the Amendments 2012) and 19 October 2013 (as the day of entry into force of the Amendments 2013).
6. Conclusion
Despite expected, the Amendments have not solved the issue of retroactive taxation of Dividends to be paid out from the retained profit earned between 1 January 2005 and 1 March 2012 in that, the Amendments 2013 still provide for a retroactive taxation of Dividends from the profit that was gained during the years when no dividend tax applied (1 January 2005 - 1 March 2012).
Such retroactivity inevitably brings additional uncertainty in the Croatian tax law, which should aim at establishing stable and safe environment for attracting foreign investors. Taking into account the above said, a new request for assessment of constitutionality of the Amendments 2013 with the Constitution may be expected.