Reduced personal income tax rates, decrease in the corporate income tax rate for certain entities, introduction of One Stop Shop regime and the digital nomad residence permit – these are the most important elements of the Croatian Tax Reform 2021 which could be important for decision makers.
Reduction of personal income tax rates
As one of the most important elements of the Croatian Tax Reform 2021, starting from 1 January 2021 the personal income tax rates were reduced from 24% to 20%, and from 36% to 30%. The reduced personal income tax rates are applicable for employment, self-employment income as well as income from freelance activities such as author’s fees.
A reduced income tax rate of 10% (previously 12%) is levied on capital income based on dividends and profit shares, rental income, as well as capital gains and income from self-employment taxed at a flat rate.
Reduction of corporate income tax rates and withholding tax on dividends
Another important element of the Croatian Tax Reform 2021 is the reduction of the corporate income tax rate from 12% to 10% for taxpayers with revenue up to HRK 7.5 million (roughly EUR 1 million). This tax amendment took effect on 1 January 2021 as well. The corporate income tax rate of 18% remains in force for all taxpayers earning annual revenues of more than EUR 1 million.
The latest amendments to the Croatian Corporate Income Tax Act also prescribe a reduction of the following withholding tax rates:
- From 12% to 10% for payments of dividends and profit shares to foreign legal entities. This evens out the tax rates on dividend and profit shares that are paid to legal entities with the tax rates on dividends and profit shares paid to natural persons.
- From 15% to 10% for payments of fees for performances of foreign performers – artists, entertainers and athletes, when the fee is paid by a Croatian or a foreign payer based on a contract with a foreign person that is not a natural person.
Other fees subject to withholding tax (e.g. consulting services, royalties, etc.) remain taxed at a rate of 15%.
Non-cash payment of VAT on imports
According to the changes to the Croatian Tax Reform 2021, VAT payers with the right to deduct input tax in full are now able to use the non-cash payment of VAT on imports for all imported goods, regardless of their type and value, by recording the import VAT as a liability in their VAT return and simultaneously as a right to deduct input VAT. To be able to use this option, the taxpayer has to submit the request by completing the customs declaration appropriately for the release of goods for free circulation.
Introduction of OSS as part of the Croatian Tax Reform 2021
The Croatian Tax Reform 2021 has also fully implemented Council Directive (EU) 2017/2455 of 5 December 2017 in the Croatian Value Added Tax Act. According to the implemented directive, the application of the special taxation regime for telecommunications services, radio and television broadcasting services and electronically performed services was expanded from 1 July 2021. The OSS (One Stop Shop) regime in Croatia now also applies for distance sales within the EU, i.e. the supply of goods within a Member State via electronic interfaces and for services supplied by taxpayers established within the EU, but not based in the Member State of consumption.
Changes to the taxation of travel packages sold by non-EU travel agencies
Croatia is one of the first EU Member States to introduce new rules for the taxation of travel agencies based outside the EU. Pursuant to the changes in the Croatian Tax Reform 2021, from 5 January 2021 when a non-EU travel agency sells services performed by other persons in its own name, the Tour Operators‘ Margin Scheme (TOMS) is not applicable. Instead, in cases when a non-EU travel agency sells services related to travel (accommodation or transportation) for which the place of taxation is in Croatia, the non-EU travel agency is obliged to register for VAT purposes in Croatia. Also, non-EU travel agencies registered for VAT purposes in Croatia must appoint a tax representative in Croatia.
Digital nomad residence permit and income taxation
The Croatian Tax Reform 2021 has also introduced the so-called digital nomad residence permit. It means that as one of only 32 countries all around the world, Croatia officially started granting temporary residence permits to digital nomads as of 1 January 2021. The introduction of this permit adds a new option for non-EU nationals to live and work in Croatia up to one calendar year. To obtain such status, applicants have to prove their financial independency, i.e. prove that their regular income amounts to at least HRK 16,907.50 (EUR 2,256.44) per month, or HRK 202,890 (EUR 27,077.27) per year, plus an additional 10% increase per family member.
For taxation purposes, the income of persons having acquired digital nomad status in Croatia stemming from their employment activity with the foreign employer shall not be taxable in Croatia. Therefore, obtaining digital nomad status offers the following benefits:
- No tax is paid in Croatia on such income;
- There is no reporting obligation for such income in Croatia;
- There is no obligation to pay social security contributions (travel or private health insurance is necessary).
If you would like to know more about any elements of the Croatian Tax Reform 2021, please visit the homepage of Tax Advisory TUK Ltd., the exclusive representative of WTS Global in Croatia.