Basic facts about Croatian Corporate Income Tax as at 1 June 2019
Lexology, June 7, 2019
1. Introduction
Within the past few years and starting with 2016, the corpus of Croatian tax laws including the one regulating corporate income tax has undergone a number of changes and rates adjustments. Because a comprehensive presentation of the entire Croatian tax system exceeds the scope of this paper, the article aims at providing a brief presentation of some of the most distinctive features of corporate taxation as at 1 June 2019.
The basic principles for the taxation of the profit from business are provided for in the Corporate Income Tax Act (Official Gazette No. 177/04, 90/05, 57/06, 146/08, 80/10, 22/12, 148/13, 143/14, 50/16, 115/16, 106/18) and the Corporate Income Tax Ordinance (Official Gazette No. 95/2005, 133/2007, 156/2008, 146/2009, 123/2010, 137/2011, 61/2012, 146/2012, 160/2013, 12/2014, 157/2014, 137/2015, 115/2016, 1/2017, 2/2018, 1/2019).
2. Entities subject to tax
The Corporate Income Tax Act applies to enterprises that carry out business activity for the purpose of making profit. The following persons must pay corporate income tax in Croatia:
- a company and other legal or physical person resident in Croatia permanently and independently engaged in an economic activity for the purpose of realising profit, income, revenue or other assessable economic benefits;
- a permanent establishment of a non-resident entrepreneur in Croatia;
- a physical person realising an income pursuant to the personal income tax regulations, if declaring an intention to pay the corporate income tax instead of a personal income tax;
- a physical person realising an income from craft or similar activities if:
(i) total inflow in the preceding tax period exceeded HRK 3 million (€400,000); or
(ii) a person who fulfils two of the three below listed criteria:
- income in the preceding tax period exceeded HRK 400,000 (€53,300);
- the value of long-term assets exceeded HRK 2 million (€266,000);
- during the preceding tax period an entrepreneur employed on average more than 15 employees.
Certain entities such as the State administration organs, the Regional and local self-government units, the Croatian National Bank, tourist boards and sport clubs, even generally exempt from the corporate income tax may exceptionally be subject to corporate income tax for economic activities carried when non-taxation of these activities would result in an unfair tax advantages.
Any other entrepreneur will also be subject to the payment of corporate income tax if they are not liable to pay income tax pursuant to the income tax regulations nor is their profit taxed elsewhere.
3. Computation of taxes
The taxable base is the profit which is defined in accordance with the accounting framework in Croatia (IFRS or CFRS). It is calculated as the difference between revenues and expenditures before a tax assessment and is increased and reduced pursuant to the provisions of the corporate income tax legislation. The tax base of a resident taxpayer is the profit earned in Croatia and abroad while the tax base of a non-resident shall only be assessed on the profit earned in Croatia.
The computation of the taxable base is based on business books and financial reports (balance sheet, profit and loss account). Expenditures which have not been entered accurately and promptly in the business books and which have not been properly documented shall not be recognised as valid.
Accounting profit/loss shall be decreased for the following non-taxable items:
- dividends and other earnings from shares/stakes if qualified for deduction pursuant to the provisions of the Corporate Income Tax Act;
- unrealised gains on shares and stakes if included as an income in the income statement;
- revenues from collected written-off receivables that were included in the taxable base in the previous tax periods and not excluded from the tax base as recognised expenditures;
- depreciation expenses treated as non-tax deductible in the previous periods for which conditions for tax deductibility have been satisfied in the current tax period;
- certain incentives in a form of tax relief pursuant to special laws; and
- reinvested profit, unless the profit was earned in the banking or non-banking financial sector.
Accounting profit/loss shall be increased for the following non-deductible items:
- unrealised losses if these were included as expenditures in the tax base;
- depreciation/amortisation in excess of the prescribed amounts;
- 50% of entertainment expenses;
- 50% of expenses (excluding insurance and interest) arising in connection with owned or leased motor vehicles and other means of personal transportation used by managers and employees, unless they are deemed to constitute a part of salaries and/or wages;
- shortages above the limits determined by the decision of the Croatian Chamber of Commerce or the Croatian Chamber of Crafts and Trades pursuant to the provisions of the Croatian VAT legislation;
- costs of forced collection of taxes and other levies;
- fines imposed by competent bodies;
- default interest between related parties;
- privileges and other forms of economic benefits granted to an individual or a legal entity;
- donations exceeding 2 per cent of realised revenues in the previous year;
- interest on loans provided or guaranteed by a foreign direct shareholder or a party related to the shareholder where the loan exceeds four times the capital of that shareholder;
- costs determined in the course of tax inspection including applicable VAT, personal income tax, city surtax and social security contributions in relation to hidden distributions of profits and withdrawals by shareholders and self-employed persons subject to payment of corporate income tax and with those persons other related parties;
- interest on loans provided by related parties above the arm’s length rate principle;
- value adjustment and write-off of receivables where certain conditions have not been met;
- value adjustments of inventory;
- value adjustments of financial assets;
- certain provisions (i.e. other than those specifically prescribed by the corporate income tax legislation as being tax deductible); and
- other expenses not related to earning of profits and other increases of the taxable base not included in the accounting profit / loss.
4. Tax rates
The standard corporate income tax rate amounts to 18% of the taxable income. The beneficial tax rate of 12% applies to entrepreneurs with an annual turnover amounting to less than HRK 3 million (€400,000). The Government provides for certain tax incentives and relives in order to stimulate investments in Croatia which may be found in a number of special laws such as in:
- the Corporate Income Tax Act;
- the Training and Education Incentives Act;
- the Scientific Activities and Higher Education Act;
- the Investment Promotion and Improvement of the Investment Environment Act;
- the Free Trade Zones Act;
- the Special State Care Areas Act;
- the Renewal and Development of the City of Vukovar Act.
5. Tax period
In general, the tax period is the same as the calendar year. Upon a taxpayer’s request, the Tax Administration Office may allow the business year to differ from the calendar year provided that a tax period may not exceed a 12 month period and may not be changed in the following three years. In certain cases (liquidation/bankruptcy, merger/de-merger, spin off, transfer of the seat) the Corporate Income Tax is assessed for a part of a calendar year.
6. Corporate Income Tax return
The Corporate Income Tax return must be submitted to the Tax Administration Office not later than four months after the expiry of the period for which the corporate income tax is assessed (until the end of April if the business year is a calendar year). A taxpayer who is, in accordance with the Croatian Accounting Act, classified as a large or medium-sized entrepreneur, as well as all entrepreneurs registered for the VAT are obliged to submit the corporate income tax return in an electronic format. A corporate income tax return must be supported by the balance sheet and profit and loss account.
7. Payment of corporate income tax advances
Taxpayers liable to pay corporate income tax are obliged to prepay their taxes. Pre-payment which is payable monthly by the end of the following month is calculated on the basis of the corporate income tax return for the previous year.
Taxpayers who started business in a tax period are not required to make corporate income tax advances until submitting the first corporate income tax return. Any corporate income tax shortfalls at the end of the year must be self-assessed by a taxpayer and paid until the submission of the corporate income tax return.