The agreement applies to persons who are residents of one or both contracting states and covers (i) the taxes on income and on (ii) capital gains imposed on behalf of a contracting state, irrespective of the manner in which they are levied. The agreement is expected to facilitate an increase in direct investments between Croatia and UK.
Legal entities conducting international transport of goods between UK and Croatia pay income tax only in their resident state. The same also applies to the corporate income tax in general, including income from international shipping and air transportation, provided that the company does not have a permanent establishment (PE) in the other state. In that case, the company's PE will be liable for tax in the state where the services were provided.
According to the agreement a 5% withholding tax rate will also be applicable in the source state, on interest and royalty payments. With regards to dividends, a 5% withholding tax rate will apply, provided that the beneficiary has a controlling interest (directly or indirectly) of at least 25% in the share capital of the dividend paying company. A 15% rate will apply if the dividends are paid out of income (including gains) which is derived directly or indirectly from immovable property by an investment vehicle which distributes most of this income annually and whose income from such immovable property is exempted from tax. In a different context, a 10% withholding tax will apply.
Conclusively, board members, artists, sport professionals and workers can pay their income tax within the contractual state where the income is created, whereas the pension income is taxed in the state where the beneficiary is resident.
Equal treatment towards companies of both countries is also stipulated in the agreement as the principle, as is the procedure of mutual cooperation with the use of diplomatic channels, which would contribute to more effective problem solving.
The agreement will have a significant impact on transactions between the UK and Croatia, even though the UK restricted free movement of workers from and to Croatia for seven years as of July 1 2013.