As Croatia is setting the stage for the currency switch, the Parliament has voted the Act on the introduction of the euro as official currency in Croatia which provides a clear set of rules to ensure the smooth currency transition for the economy, while aiming to protect the consumers.

Basic principles of the currency switch

The Act rests on five basic principles as a legal frame for process of implementing and using euro as official currency:

• Principle of consumer protection: The consumer must not be in a financially less favourable position than he would have been if the euro had not been introduced.
• Principle of prohibition of unjustified price increase: When introducing the euro, it is forbidden for to increase the price of goods or services to consumers without a justified reason.
• Principle of continuity of legal instruments: The introduction of the euro must not affect the validity of already existing contracts and other legal instruments in which the national currency is specified.
• Principle of efficiency: All activities related to the introduction of the euro are carried out in such a way as to ensure that the procedure is as simple as possible with as few costs as possible.
• Principle of transparency and information: Information about the introduction of the euro should be clear, comprehensible, accessible, legible and visible.

When it comes to business entities, the most important implications of the currency switch concern primarily showing of prices, invoicing, recording of business events, preparation of financial statements and tax returns, especially in the transition period.

Conversion of HKR to EUR 

The conversion of the values from Croatian kuna to euro is carried out using the fixed conversion rate 7.53450 HRK for 1 EUR, as confirmed by the decision of the EU Council.

After the calculation, the result is rounded to two decimals, and based on the third decimal.

Dual price showing 

Dual price showing assumes the presentation of prices using both HRK and EUR in relations with customers (e.g., in retail, on price lists, offers and invoices and other documents).

The dual price showing obligation only applies in relations with end customers (B2C sales/transactions) and does not apply in relations between business entities. Thus, invoices between business entities, price lists and similar documents used in transactions in which only business entities participate can remain denominated in HRK until the currency switch, which means until euro becomes the official currency.

Mandatory dual price showing will start from 5 September 2022 and will apply until 31 December 2023.

Mandatory dual price showing also applies to the employer-employee relationship. Namely, the employer is obliged to present the final net payment to the employee in both currencies.

Bookkeeping 

Business events related to the period after the currency switch, i.e. the introduction of euro as official currency must be recorded into business books in EUR. Balances in HRK transferred from business books for 2022 must be converted into EUR using the set fixed exchange rate.

Tax returns and financial statements 

The corporate income tax return, as well as the financial statements for 2022 shall be prepared and submitted in HRK since the relevant business events in 2022 occurred before euro became the official currency.

If you would like to know more about any details of the Croatian currency switch, please visit the homepage of Tax Advisory TUK Ltd., the exclusive representative of WTS Global in Croatia.

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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.

The post Highlights of Croatian Tax Reform 2021 appeared first on WTS Klient | adótanácsadás | könyvelés | bérszámfejtés | HR szolgáltatások | digitális megoldások | állami támogatások.