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Croatia Publishes Tax Reform Laws Including ATAD Measures

On 30 November 2018, Croatia published a series of laws in the Official Gazette for the implementation of several tax reform measures. The laws and the main measures are summarized as follows:

The Law on Amendments to the Profit Tax Act

The Law includes amendments to implement the interest limitation and controlled foreign company (CFC) rules of the EU Anti-Tax Avoidance Directive from 1 January 2019. The main points of the interest limitation include:

  • The deduction of net interest expense is restricted to 30% of EBITDA or a EUR 3 million safe harbor limit;
  • Excess interest expense may be carried forward up to three years, subject to the same limit;
  • The interest limitation does not apply to taxpayers that are not part of a group or to taxpayers that are a financial company; and
  • An exclusion is provided in respect of loans used to finance long-term infrastructure projects.

The main points of the CFC rules include:

  • A CFC includes a legal entity or permanent establishment in another country, whose profits are subject to low or no taxation where the following conditions are met:
    • In the case of an entity, the taxpayer directly or indirectly holds itself, or with associated enterprises, more than 50% of the foreign entity's capital, voting rights or rights to profit; and
    • The actual corporate tax paid by the foreign entity or PE on its profits is less than the difference between the corporate tax that would have been paid in Croatia under its tax law and the actual corporate tax paid on the profits (i.e., less than half of the Croatian tax rate);
  • When the conditions for a CFC are met, undistributed profits of the CFC must be included in the Croatian taxpayers taxable income where the CFC profits are derived from, interest or other income from financial assets, licensing and other IP income, dividends, financial leasing, insurance, banking and other financial activities, and from sales and services acquired from related companies and sold to related companies with little or no added value;
  • Certain exemptions from the CFC rules apply, unless the country of the CFC is listed on the EU list of non-cooperative jurisdictions, including where:
    • The income types specified above make up one-third or less of the total revenue of the CFC; or
    • The CFC carries on a substantive economic activity supported by staff, equipment, assets, and premises, as evidenced by relevant facts and circumstances;
  • In determining if companies are related for the purpose of the CFC rules, a 25% direct or indirect ownership threshold applies.

In addition to the ATAD measures, the Law also includes a defensive measure in relation to the EU list of non-cooperative jurisdictions. The measure provides for a 20% tax on all service payments and certain other income paid to residents of listed jurisdictions, unless Croatia has an applicable tax treaty with the jurisdiction.

The Law on Amendments to the General Tax Act

The amendments to the General Tax Law include measures to:

  • Further define residence for individual tax purposes;
  • Block access to content of foreign businesses carrying on economic activity through the internet if the business fails to comply with regulations, resulting in an unreasonable tax advantage;
  • Update the definition of permanent establishment (PE) to harmonize it with existing tax treaties and the 2017 OECD Model Convention, including in relation to dependent agent PEs and the fragmentation of business to avoid a PE;
  • Update rules on the attribution of profits to a PE, taking into account the functions performed, assets used, and risks assumed through the PE; and
  • Introduce several new provisions in relation to improving electronic administration.

The Law enters into force on 1 January 2019

The Law on Amendments to the Value Added Tax (VAT) Act

The Law includes amendments to the VAT Act to:

  • Reduce the standard VAT rate from 25% to 24% effective 1 January 2020;
  • Amend the scope of supplies subject to the reduced 5% and 13% VAT rates, including the addition of fresh meat, fish, fruits, and vegetables within the scope of the 13% rate;
  • Amend the VAT registration rules so that registration is required if the registration threshold (HRK 300,000) is exceeded in the previous or current calendar year in order to prevent avoidance;
  • Introduce a monthly electronic account submission requirement to monitor supplies and prevent fraud, except for taxpayers allowed to file for VAT in paper form; and
  • Introduce simplified VAT procedures for small undertakings supplying broadcasting, electronic, and telecommunication services where the supplies do not exceed HRK 77,000 (~EUR 10,000).

Aside from the reduction of the standard VAT rate, the amendments apply from 1 January 2019.

The Law on Amendments to the Contribution Act

The amendments to the Contribution Act include:

  • Abolishing of the contributions for unemployment insurance (1.7%) and health protection at work (0.5%); and
  • Increasing the general health insurance contribution from 15.0% to 16.5%.

The changes generally result in an overall reduction in social security contributions from 37.2% to 36.5%.

The Law enters into force on 1 January 2019.

The Law on Amendments to the Real Estate Tax Act

The Law includes a reduction in the real estate transfer tax rate from 4% to 3% effective from 1 January 2019. It also includes that contracts that were concluded and became valid up to 31 December 2018 remain subject to the 4% rate.

The Law on Amendments to the Law on Administrative Cooperation in Tax Matters

The Law includes amendments to better align the Law on Administrative Cooperation in Tax Matters with EU Directives in relation to exchange of financial account information, as well information for the prevention of VAT fraud.

The Law generally enters into force eight days after it was published in the Official Gazette, although certain aspects will not enter into force until 1 January 2021.

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