December 2016
Corporate Income Tax p 2 / Value Added Tax (VAT) p 3 / Personal income tax p 4
PwC’s Tax Direct
Dear readers,
the issue of the ‘tax reform’ has lately been discussed quite a lot in Croatia.
The Parliament adopted on 2 December 2016 the proposed changes to the
package of tax regulations and the decisions on this were published in the
Official Gazette No. 155/2016 of 9 December 2016. The changes will come
into effect on 1 January 2017, except for some whose coming into effect has
been postponed for 1 January 2018 and 1 January 2019 and those which
will be applied on tax periods which started in 2016 (this could, actually, be
considered as a retroactive application of regulations, which is in principle
forbidden, but in this case goes in favour of taxpayers). We think that an actual ‘reform’ took place for
small-sized entrepreneurs (mainly due to a decrease of the corporate income tax rate from 20% to
12%), while larger entrepreneurs are much less affected by the changes than many have hoped for.
In the text below we provide you with an overview of the most significant changes in the three main
tax regulations, with a special comment on some of them. We underline that the Ministry of Finance
is still to publish amended rulebooks, which should stipulate the implementation of certain changes.
www.pwc.hr/tax
Corporate Income Tax
The main change in the corporate income
tax system relates to a decrease in the
regular tax rate from 20% to 18% and
the introduction of a reduced corporate
income tax rate of 12% for the taxpayers
who in a tax period realize revenue lower
than 3 million HRK. Corporate income
tax prepayment for 2017, based on the
corporate income tax return for 2016, can
be determined by applying those reduced
tax rates, 18% or 12%. Many clients have
already asked us whether the introduction
of reduced corporate income tax rates has
an impact on the reversal of temporary
tax differences from previous periods in
the future and on potentially recognized
deferred tax asset. The changes to the
tax rates certainly have an impact on that
because the temporary tax differences will
be reversed at reduced rates so the value of
deferred tax asset is hence lower.
A tax relief for reinvested profit is abolished
as of 1 January 2017. In the tax return
for 2016 (i.e. for any tax period which
started in 2016, for those taxpayers whose
fiscal year differs from the calendar year),
taxpayers will still be able to use this tax
relief. In addition, the taxpayers who
used the tax relief in previous periods will
still have to fulfil conditions which were
stipulated at that time in order not to lose
the tax relief subsequently.
Tax reliefs for assisted areas will apply
only to those local self-government units
categorized in the first group based on the
level of their development pursuant to a
special regulation on regional development
and to the City of Vukovar (so, tax reliefs
will no longer apply to areas categorized in
the second group).
The ratio of tax allowable and tax nonallowable expenses related to personal
cars and entertainment also changes. The
portion of these expenses which are tax
non-allowable will amount to 50% for both
types of expenses (so far it has amounted to
30% for the expenses incurred in relation to
personal cars and 70% incurred in relation
to entertainment). The changes to the
treatment of expenses incurred in relation
to personal cars are to be applied as of 1
January 2018, while the changes to the
treatment of entertainment expenses are to
be applied as of 1 January 2017, which goes
in favour of taxpayers.
The possibility of recognizing expenses
for tax purposes on the account of value
adjustment and write-off of outstanding
receivables for delivered goods and supplied
services (applicable as of 2016, i.e. when
preparing a tax return for tax periods which
started in 2016) is expanded.
It is stipulated in a clearer way that these
expenses are permanently deductible if
a settlement has been reached with the
debtor - corporate income taxpayer who is
not a related person, in case of bankruptcy,
arbitration or conciliation, based on a
special regulation.
• The new regulations introduce tax
recognition of write-offs related to
time-bared receivables up to 200 HRK
from unrelated individuals whose debt
was not incurred through performing
crafts and similar activities if the total
determined receivable per individual on
the last day of the tax period is not higher
than that amount.
• In addition, the law introduces a
possibility of permanent tax deductibility
of expenses from write-offs of receivables
recognised from an unrelated person if
a taxpayer proves that costs of initiating
a procedure to collect the receivable
are higher than the amount of the
receivable itself or if it proves that it
took the necessary actions with due care
and diligence of a prudent businessman
with the aim of collecting the receivable,
whereby he determined the final inability
to collect the amount of the receivable
being written off.
• Moreover, for the purpose of accelerating
the debt reduction procedure, the new
regulations introduced a provision
encouraging credit institutions to
implement the debt reduction procedure
during 2017, which relates to bad
debt or difficult-to collect receivables
determined as on 31 December 2015,
whereby the total expense of a writeoff of the receivable, without initiating
court or enforcement proceedings or
other proceedings aimed at receivable
collection, is recognised as tax deductible
expense. This can be applied only in the
tax return for 2017 (or for the tax period
which begins in 2017, for taxpayers
whose fiscal year is different than the
calendar year). In other words, it is a
one-off measure.
Furthermore, a possibility is introduced
that the taxpayer determines the interest
charged between related parties in a way
stipulated for determining the fees agreed
between unrelated parties in general,
i.e. in accordance with the arm’s length
principle, under the condition that the same
modality of determining interest applies to
all financial agreements that taxpayer has
with related parties. The introduction of
this possibility is very beneficial to taxpayers
since it allows them to determine on their
own what the market interest is in the
relations between related entities, which
is in accordance with requirements on the
application of the arm’s length principle in
business activities with related taxpayers.
Until now, the regulations have stipulated
what is deemed market interest rate in
relations between related entities and that
interest rate did not necessarily correspond
to actual market interest rates.
A possibility of concluding an advance
pricing agreement (the so-called APA)
between the taxpayer and the Tax
Administration is introduced.
Taxpayers who in the previous tax period
did not realize revenue higher than 3
million HRK can pay corporate income
tax on a cash basis. If they are also VAT
taxpayers, they can realize that right only
if for VAT purposes they apply the taxation
procedure based on collected receivables.
Unfortunately, the amendments to the
Act are not very clear on that issue, so
additional guidance is expected in the
amendments to the Rulebook.
A possibility of lump-sum tax payment
is introduced for those non-profit
organisations whose primary activities are
not economic ones and which did not realize
income from performing economic activity
in the previous period higher than the
amount stipulated for registering within the
VAT system. In that way, keeping business
records is made easier for entities which are
primarily non-profit organisations.
1 It would be more correct if the lawmaker had used only the term debt ‘relief’ (which is the point of the provision), and not the term debt ‘write-off’.
2 | PwC Croatia, Tax Direct, 12/2016
Value Added Tax (VAT)
2017.
The following changes are
effective as of 1 January
2017:
2018.
The following changes are
effective as of 1 January
2018:
An exemption from VAT is stipulated for
medical care, dental technician services
and supplies of teeth/denture prosthetic
devices done by dental technicians and
dentists regardless of the legal form of their
business. This exemption existed in the past
as well, but the fact that it applies regardless
of the legal form of the service supplier was
not explicitly mentioned. It would be logical
that this provision was applied in that way
since the VAT taxation system is governed
by functional and not institutional principle,
but various interpretations of this provision
existed.
The right to 50% input VAT deduction for
the purchase of personal cars and related
supplies is introduced.
The new regulations introduce the
possibility of applying VAT option when it
comes to the loans and credits granted in
relation to delivered goods and supplied
services, regardless of whether these loans
and credits are granted occasionally (this
option was allowed before only if the loans
and credits were granted only occasionally).
A threshold for entering into the VAT system
has been raised from 230,000 to 300,000
HRK.
VAT rate for the supply of child car seats,
electricity, urns and coffins, seedlings and
seeds, agrochemical products (fertilisers,
pesticides and similar), animal feed (except
for pet food) and for municipal waste
collection services is reduced from 25% to
13%.
VAT rate for catering industry services and
supply of sugar is raised from 13% to 25%.
A possibility of applying VAT option with
respect the supply of real estate being in
use for more than two years and the supply
of non-construction land when the buyer
has the right to deduct the total amount of
input VAT based on that supply is defined
more clearly. This possibility was stipulated
earlier as well, but the text of the provision
was not clear so it was interpreted in a way
that the VAT option could be used only when
the buyer could deduct VAT in its entire
business activity. In our opinion, such an
interpretation did not have sense, it was not
based on the law and was contrary to general
VAT principles and the EU VAT Directive.
Small taxpayers who registered with the
VAT system although they were not required
to do so must stay registered for the next
three instead of five calendar years as it has
been stipulated so far.
3 | PwC Croatia, Tax Direct, 12/2016
A non-cash VAT settlement is introduced
in relation to import of machinery and
equipment from the Annex IV of the Act
with the value higher than 1,000,000 HRK
by means of filing a regular VAT return
where the taxpayer will show the VAT
liability and immediately deduct this VAT
as input VAT. The taxpayer will previously
need to obtain a resolution issued by the
Customs Administration in order to do so.
2019.
The following changes are
effective as of 1 January
2019:
The provisions on the VAT treatment of
vouchers, i.e. value carrying coupons
(single purpose or multi-purpose) have
been introduced to the Act. Thus, the tax
treatment of issuing and using vouchers is
made clearer although the same principles
have already been applied (based on the
rulings issued by the European Court of
Justice).
Personal income tax
Two groups of income have been
introduced: the annual income and the
final income. The annual income is the
income from employment, income from
self-employment and other income which
is not deemed final; the final income is
the income from property and proprietary
rights, income from capital, income from
insurance, other income on the account of
refund of social contributions and other
income on the account of the difference
between taxpayer’s assets and reported
sources of assets. The difference between
these two categories of income is that the
final income does not enter into the annual
calculation and the tax paid on the final
income is deemed finally paid tax (i.e. it
cannot be subject to additional taxation
regardless of the amount of other types of
income taxable at the annual level). On the
other hand, the annual income, as it can be
deduced from the name itself, is entered
into the annual calculation (depending on
the circumstances) so the tax prepayments
are not necessarily the final tax to be paid
on that income in the tax year in question.
The most significant changes to the personal
income tax system refer to the increase of
personal allowances, the changes of tax
rates and the change of tax brackets with
the aim of reducing the tax burden.
The basic personal allowance (portion of
income not subject to taxation) has been
increased to 3,800 HRK and personal
allowances for supported family members
and disability have been increased as well.
As far as the annual income is concerned,
the 12% rate has been abolished, the 25%
rate has been decreased to 24% and the
40% rate to 36%.
As far as the final income is concerned, the
following rates have been decreased: the
25% rate has been decreased to 24% and
the 40% rate to 36%. The rate of 12% will
still be applied to some types of the final
income (for example capital income realised
from interest).
The option of abolishing personal income
tax prepayment in Croatia has been
introduced if the tax prepayments are made
abroad, regardless of the existence of an
agreement on the avoidance of double
taxation.
4 | PwC Croatia, Tax Direct, 12/2016
The introduction of the final income
category will at last enable the actual
implementation of avoidance of double
taxation by crediting the tax paid abroad.
Namely, for the income realized until 31
December of this year, the named tax credit
can be performed only in the annual tax
calculation based on the annual tax return
or in a special proceeding of determining
the annual income tax. The taxpayers
who wanted to avoid double taxation of
certain income sources (i.e. paying tax on
the same income both in Croatia and in
another state), for example income from
capital, by including this income in their
annual tax return or in a special procedure
of determining annual income tax have
found themselves in a situation in which
their income was included in a progressive
taxation scheme as well. The effect of the
tax refund which should have been enabled
by the abolishment of double taxation
was thus often reduced and sometimes
even entirely eliminated. So, in some
circumstances it was more cost-effective to
keep a certain income double taxed than to
initiate the procedure implemented for the
avoidance of double taxation. The changes
that have been introduced should enable
the avoidance of double taxation of the final
income outside the procedure for filing an
annual tax return or a special procedure
of determining the annual income tax. In
this way, these negative effects which have
been present in the implementation of the
avoidance of double taxation procedure will
be eliminated.
The modality of taxation of other income
has also been changed. If that other income
at the annual level does not exceed the
amount of five-time personal allowance
(12,500 HRK), a 24% tax rate applies.
If that amount is exceeded, progressive
taxation at the annual level should be
appropriately applied. Unfortunately, this
is currently not clearly stipulated by the
regulations. Namely, if a person realizes
only other income which at the annual
level exceeds the five-time base amount
for calculation of the personal allowance
(12,500 HRK), it is not clear if the lowest
tax rate of 24% can still be used or only the
higher rate of 36% applies automatically. In
order to be able to interpret those unclear
issues, we need to wait for the publication of
the new Rulebook.
All these changes will come into effect as
of 1 January 2017.
The basic personal
allowance (portion
of income not subject
to taxation) has been
increased to 3,800
HRK
How can we assist you?
Our team is composed of tax, accounting
and audit professionals, who have gained
their experience in tax issues, among
other, through their previous work in the
industry and participating in many tax
procedures involving our clients. We have
good rapport with our colleagues from the
PwC network and we exchange experience
and information with them on a daily basis,
comparing practices in different countries.
Our team
Hrvoje Jelić
Partner
Tel.: +385 (1) 6328 839
[email protected]
We can and are willing to assist you in
interpreting tax regulations introducing
changes to the taxation system as well as
in adapting to these changes. Members of
our team have participated in the activities
of the work groups within the Ministry of
Finance involved in the preparation of this
tax reform. The knowledge concerning
previous practice, other related regulations,
practice in other countries, EU regulations
as well as the rulings issued by the European
Court of Justice can help a great deal in
overcoming unclear issues or questions in
regulations in force or in those which are to
be implemented in the future.
Kornelija Miše Bobinac
We would like to share our knowledge with
you. Please do not hesitate to contact us for
support.
Dunja Vujić
Director
Tel.: +385 (1) 6448 831
[email protected]
Marko Marušić
Director
Tel.: +385 (1) 6328 896
[email protected]
Director
Tel.: +385 (1) 6448 460
[email protected]
Katarina Ivanković
Senior Manager
Tel.: +385 (1) 6448 881
[email protected]
Sanja Jurković
Senior Manager
Tel.: +385 (1) 6328 884
[email protected]
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information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the
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