Croatia's transfer pricing rules

Afrodita Taci	Anastasia Sagianni

Although Croatia is not an OECD member country, the provisions of the relevant Croatian tax legislation are generally based on the OECD Transfer Pricing Guidelines.

TP rules in Croatia are prescribed by Article 13 of the Corporate Income Tax (CIT) Act (the Act) and by Article 40 of the CIT Bylaw (the Regulation). Under these rules, the prices or conditions of transactions between related parties must be based on the arm's length principle.

Apart from cross-border transactions, transactions between resident associated entities also fall under the TP rules if one of the parties:

• Has a privileged tax status;

• Is subject to profit tax at a rate lower than the stipulated rates;

• Is exempt from the payment of profits tax; or

• Is entitled to carry forward the tax loss from previous tax periods in the given tax period.

The definition of associated parties is very broad and includes persons that directly or indirectly participate in the management, control, or capital of the other party. Unlike some other jurisdictions, the Croatian CIT Law does not include any threshold percentage for the definition of associated entities.

The Act and the Regulation prescribe the use of different methods for determining whether the prices are agreed at arm's-length. Generally, the same methods as those prescribed by the OECD are applicable, including:

• The comparable uncontrolled price (CUP) method;

• The resale price method (RPM);

• The cost plus method (CPM);

• The transactional net margin method (TNMM); or

• The profit split method (PSM).

It is worth noting that internal data and traditional methods are preferred by Croatian tax authorities.

There is no specific deadline for preparing TP documentation, but the law requires that the documents are available and submitted to the tax authorities upon request in a tax audit. Taxpayers should have the documents available at the same time as submitting the annual tax return, which happens at the end of the fourth month from the taxpayer's year end (April 30 for the majority of companies).

There are no special TP audit procedures in Croatia, but the tax authority has published the "Guidebook for Surveillance of Transfer Pricing" that was designed for internal use, but is now also available to all taxpayers.

The number of audits relating to TP have increased in the past few years with tax authorities exhibiting an aggressive approach to large management fee payments or other intra-group payments that suggest a high TP risk.

There are also no specific TP penalties, but standard fines can be as high as HRK 200,000 (€29,000) for a company and up to HRK 20,000 for the responsible individual within the company. Penalty interest would also be calculated from the date when the tax was due until the date when it is paid. For the most severe tax violations, the penalty can reach HRK 500,000 for the legal entity.

The general statute of limitation expires at the end of the third year following the year in which a tax return should have been filed. However, the general statute of limitation may be extended and recommence after each intervention by the tax authority with respect to a filed tax return. The absolute statute of limitation is six years. However, attention should be paid on relevant amendments regarding the extension of the limitation period.

Afrodita Taci (afrodita.taci@eurofast.eu) and Anastasia Sagianni (anastasia.sagianni@eurofast.eu)

Eurofast Croatia

Tel: +385 98 525 758

Website: www.eurofast.eu