Croatia and Luxembourg signed a treaty on the avoidance of double taxation (double tax agreement, DTA) on June 20 2014, which recently entered into force on January 13 2016.
The treaty applies to persons who are residents of one or both of the contracting states in regards to corporate income tax, personal income tax and any type of surtax in line with the general OECD guidelines.
According to the agreement, the profits of a company of one state are taxable only in that state unless the company maintains a permanent establishment (PE) in the other state.
In case a company resident in one state pays dividends to a resident of the other state, the withholding tax applicable cannot exceed:
- 5% of the gross amount of dividends if the beneficial owner holds at least 10% of the capital of the company paying the dividends; or
- 15% of the gross amount of the dividends if no such participation criteria is fulfilled.
In regards to interest withholding tax rates, taxation cannot exceed 10% of the gross amount paid. On the other hand, the withholding tax rate for royalties and copyrights cannot exceed 5% of the gross amount.
As far as income from employment wages and similar remuneration is concerned, such income derived by a resident of one state is taxable only in that state unless employment is exercised in the other state in duration exceeding 183 days within 12 months.
The treaty stipulates that double taxation will be avoided in Croatia by allowing a tax deduction in amount of the tax paid in Luxembourg. The double taxation in Luxembourg will be eliminated by exempting income or capital from Luxembourg tax if tax was paid in Croatia. This elimination is applicable to taxes subject to the treaty with the exception of withholding tax on dividends, interest, royalties and income of artists and sportsmen for which the tax deduction method will be applied.
The agreement will be effective as of January 1 2017.
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