Croatia: Croatia enters its third chapter of tax reform
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The Croatian government has worked relentlessly on the nation's economic recovery, having already completed two rounds of tax reform in 2017 and 2018, with a third round to commence in 2019.
As of January 1 2019, a total of 80 laws and bylaws have been amended, most of them related to tax issues. The legislative changes that have raised the most interest are discussed in this article.
By way of context, the Croatian government continues to alleviate tax burdens on citizens and entrepreneurs, closely following the National Reform Programme issued in 2016. Croatia is facing substantial issues due to a workforce deficit as large numbers of Croatians migrate towards countries with more attractive tax structures and better paid salaries.
As a result, a large number of laws and regulations have been amended around taxes, contributions, fiscalisation, island economy, the energy sector and real estate.
Personal income taxes and contributions
The year 2019 will bring a variety of changes to salaries. These include:
The highest personal income tax rate of 36% will now only apply to an annual income higher than HRK 360,000 ($54,750), instead of the previous HRK 210,000. This change is effective for all payments made after January 1 2019, which also includes December 2018 salaries paid in January 2019;
Employers can now pay an additional HRK 5,000 annually in non-taxable awards to their employees. The purpose of the award is not directly specified, and it can be paid out in monthly fractions. This change entered into force on December 1 2018, and many employers have taken advantage of this to pay higher Christmas allowances;
The minimum net salary has been increased from HRK 2,751 to HRK 3,000, and a new law on a minimum net salary has been issued;
Contributions paid on top of the gross salary (Gross II) will be decreased by 0.7%. The 1.7% contribution for unemployment and 0.5% contribution for safety at work has been abolished, whereas the contribution for health insurance has increased by 1.5%. These changes, as well as the minimum salary novelty, are effective for all salary calculations after January 1 2019; and
Scholarships will no longer represent an obstacle for children to qualify themselves as supported family members for tax deduction purposes.
Value added tax
From January 1 2020, the general VAT rate shall be decreased from 25% to 24%;
Reduced rates of 13% and 5% have had their application extended. Certain foods such as meat, fish, eggs, fruits and vegetables, as well as baby diapers, will be subject to taxes of 13% instead of 25%, whereas medicine, books, newspapers and magazines, regardless of their format (e.g. electronic) are reduced to 5%;
Delivered goods or rendered services totalling HRK 300,000 a year remain unchanged as a threshold for registration as a VAT payer. However, the obligation to register shall occur during the year in which the threshold has been reached (previously the obligation was to register in the following year);
VAT payers will have the obligation to submit an incoming invoices ledger along with the VAT return in electronic format;
Up to 50% of the input VAT on vehicle purchases for personal use can be deducted, regardless of the purchasing value. Previously, the value limit was set to HRK 400,000; and
Foreign entrepreneurs in possession of a Croatian VAT ID number and those who invoice goods or services to a Croatian taxpayer will not be able to transfer the tax obligation, but they will have to charge the Croatian VAT to the Croatian customer.
The real estate transfer tax has been further decreased to 3%. The government hopes that with this measure, there will be less avoidance in registering property transfers, and that land registries across the country will finally reflect their actual state;
A withholding tax (WHT) of 20% for transactions not subject to a double tax treaty or similar agreement, and those paid to persons resident in so-called tax havens, has been extended to apply to interests, dividends and royalties. A 15% WHT is now due on fees paid to foreign performers (sportspeople, artists, etc.);
Accounting records in paper format can now be converted to electronic form for tax and audit purposes, maintaining the requirements of readability and integrity of their origin and content;
OPZ-STAT reporting is now due once a year, as opposed to the quarterly reporting in force prior to 2019; and
The licencing of accountants which was supposed to take effect as of January 2019 has been abolished, in accordance with the EU recommendations for ensuring quality of standards and services through voluntary certifications (and not through formally imposed licencing).
The above list is not a comprehensive overview of all changes introduced in 2019, but a mere selection of what we consider the most interesting and important.