Already in the summer, we had been eagerly awaiting the final version of the fourth round of tax reform that was voted through the Parliament of the Republic of Croatia on 29 November 2019, and published in the Official Gazette no. 121/2019 on 11 December 2019. Although there have been several iterations of the proposal (the changes in different versions of the Amendments to the Income Tax Act proposal relating to tax relief for young people were of particular interest) media publications have covered in a quality manner these changes, and we present the most important ones hereinafter.
Income Tax Act
The minimum wage was passed by the Government of the Republic of Croatia on 6 November 2019. Regulation increasing the minimum wage, whereby it is increased from the current gross of HRK 3,750.00 to HRK 4,062.51 in 2020. The minimum net wage for 2020 will amount to HRK 3,250.01.
Increase in basic personal allowance from HRK 3,800 to HRK 4,000.
A 2020 change in personal allowance will result in an increase in the monthly net wages for those employees whose personal allowance was lower than the monthly net wage. The monthly amounts for dependents remain unchanged.
The financial impact of this measure is approx. HRK 500 million and already affects the December 2019 wages paid in January 2020.
Tax relief for young people
As already announced, in order to stop the outflow of highly qualified young people from the Republic of Croatia, the possibility of reducing the annual tax liability is introduced, namely:
- 100% for young people aged up to 25 and
- 50% for young people aged 26-30
This tax relief on the basis of employment is worth up to HRK 360,000 of the annual tax base. The reduction in the annual income tax is used for the entire tax period in which the taxpayer reaches a certain year of life; therefore, the basis is the year and not the date of birth of the person.
The financial impact of the income tax reduction measure is approximately HRK 700 million.
Supplementary and additional health insurance – non-taxable
Allows employers to cover the costs of supplementary and additional health insurance for employees without tax up to the amount to be determined subsequently by the Ordinance on Income Tax and on the basis of authentic documentation. The amendment to the Ordinance on Income Tax is expected in early 2020.
Use of personal allowance when calculating the wage at a previous employer
The issue of using a double personal allowance (at the previous and new employer) and the whole range of administrative issues that this entails would be solved by the amendment to the Income Tax Act. The employer and payer of wages will now be entitled to access information from the former employee’s tax card at the time of payment to the former employee and will be able to use the employee’s personal allowance at the last wage after making a check of their tax card through the e-Tax Administration system.
Extension of income not covered by the dependent family members’ census (HRK 15,000)
A special note to parents whose children receive income such as student service is that when, during the tax period, the child exceeds the income amount of HRK 15,000, the parent is not obliged to change the information on the tax card immediately, but they will not be allowed to use the increase in allowance (necessary to notify the employer) for the period in which the base was exceeded.
Value Added Tax Act
Certainly, the biggest change relates to the repeal of the provision based on which the VAT rate, starting from 1 January 2020, was to be reduced from 25% to 24%. In accordance with the announcements, and due to the introduction of some other non-taxable fees and a reduction of tax rates, this provision is repealed and the basic VAT rate remains at 25%.
Reduction of the VAT rate on food services
A reduction on the services of preparing and serving of meals and confectionery within and outside of the catering facilities is introduced again (3 years following its repeal) at a rate of 13%. In the previous periods when a reduced VAT rate was applied to food services (2013-2016), it was solely in situations of preparing and serving meals within the catering facility, which is why catering facilities had a double taxation system depending on whether the service was provided within the facility or delivery was organized. The provision is still similar, i.e. the reduced rate is defined solely to deliveries that include the serving of meals (i.e., in the restaurant itself and during catering), whereas in case of food delivery, the VAT rate remains at 25% since it does not include the service of serving meals.
The new provisions define a reduced rate of 13% solely on preparing and serving of meals and confectionery, while the serving of beverages continues to be charged at a rate of 25%.
Increase of the taxation limit against fees collected
From 1 January 2015, the possibility of paying VAT against collected consideration was introduced for all entrepreneurs who had realized the value of deliveries less than HRK 3 million in the previous year. As of 1 January 2020, this threshold will rise to HRK 7.5 million.
It is possible to report a change to the taxation model to the Tax Administration until and including 20 January 2020.
We would also like to draw attention to the fact that, in case you will achieve deliveries of less than HRK 300 thousand in 2020, and you have applied for registration in the VAT register in previous periods based on your own request, there is great likelihood of exiting the VAT taxation system starting in 2021.
It is necessary to submit an amended request by 15 January 2021 for all the above-mentioned.
Non-taxable transfer of own business assets
It is important to mention the new provisions of Article 7a) of the VAT Act, which define the conditions under which taxpayers do not consider the transfer of their own business assets to another member state under a transfer of goods arrangement as a delivery of goods with a fee.
Namely, due to the absence of this provision, situations in which taxpayers shipped their own e.g. supplies to another member state with the intention of delivering to another taxpayer but were forced to pay storage due to e.g. non-working days or the inability to deliver, were taken into account as a delivery of goods with a fee. In such situations, the tax inspection of such deliveries required the calculation of Croatian VAT, even though the delivery was ultimately a B2B transactions within the EU. The basis of such treatment was the fact that the goods were temporarily stored until final delivery.
These new provisions of the Act undoubtedly define that under transfer of goods arrangement not subject to VAT are considered to be transactions for which the following has been fulfilled (the following conditions cumulatively):
- the taxpayer or a third party on their behalf, ships or transports goods to another member state with the intention of delivering those goods subsequently or upon arrival to another taxpayer in that member state who is entitled to take ownership of those goods in accordance with an existing arrangement between the two taxpayers;
- the taxpayer who ships or transports the goods does not have a registered office, place of residence, habitual residence nor a permanent establishment in the member state to which the goods are sent or transported;
- the taxpayer for whom the delivery of goods was intended is registered for VAT purposes in the member state to which the goods are sent or transported, and their identity and the VAT identification number assigned by that member state are recognized for that taxpayer at the time when the shipment or transport is initiated;
- the taxpayer who sends or transports the goods records the transfer of goods in the summary VAT returns, stating the identification number of the taxpayer acquiring the goods which are being shipped or transported;
- the transfer of assets to the acquirer must take place within a period of 12 months;
- the keeping of separate records is required to enable the Tax Administration to supervise such transactions.
Therefore, situations where the goods are transported to the end customer, but the delivery is temporarily suspended (e.g. due to the situation of non-receipt of the advance payment) and stored with the carrier (on temporary storage) for a period of less than 12 months, after which the goods are returned the member state from which they originate, shall not be considered as delivery.
These provisions are certainly praiseworthy given the business practice frequently involved in the transactions of rapid requests for delivery of goods to the end customer, when the inability of the end customer to pay for these goods occurs.
QR code / supporting documentation
1 April 2020 – obligation to issue invoices for supporting documents (bids, orders, etc.) issued at the moment prior to issuing the fiscalized invoice. Fiscalization of these supporting documents does not exclude the obligation to fiscalize the delivery invoices and will connect the Tax Administration system with the issued and fiscalized invoices. It is imperative to define a software solution that will be consistent with the implementation of the new Act
on 1 April 2021. – an obligation to issue a QR code on each issued fiscalized invoices.
Profit Tax Act
Reduction of the profit tax rate by 94% for all entrepreneurs in the Republic of Croatia
In line with the announcements, the profit tax rate will be reduced from 18% to 12% starting from the declaration of profit tax for 2020 for the entrepreneurs with earnings of less than HRK 7.5 million in the previous year. In line with these changes (that is, by increasing the limit of the reduced profit tax rate from HRK 3 million to HRK 7.5 million).
In line with the new rate, the advance profit tax payment for 2020, which is calculated in the profit tax form for 2019, will also apply a new rate of 12% for all entrepreneurs with a profit of less than HRK 7.5 million.
These entrepreneurs, earning less than HRK 7.5 million, also have the opportunity to set the profit tax base as of 1 January 2020 using the monetary model.
Value adjustments and write-off of receivables
Previously, one of the conditions for recognizing value adjustments of trade receivables was that they related to profit tax payers. Based on current changes, tax deductible expenses encompass all receivables “if those receivables have been charged through court proceedings or enforced, if they have been declared in bankruptcy proceedings against the debtor or if a settlement has been reached with a debtor who is not an affiliated party, in accordance with a special regulation in the case of bankruptcy, arbitration and mediation.”
Pursuant to these changes, the write-off of obsolete receivables from profit tax proprietorships was carried out, if they are unaffiliated parties; therefore, this category will be able to write off receivables up to HRK 5,000 in taxes.
Donation expenditures for medical purposes
Tax deductible expenditures of up to 2% of the total profit of the previous year, relating to paid medical expenses of natural entities, now also include the costs of transportation and accommodation in healthcare institutions.
Harmonization of provisions relating to the liquidation of company
The provisions relating to the shortened liquidation procedure, as defined in the Companies Act, has made it possible to accelerate the liquidation procedure for entrepreneurs with no outstanding commitments. Therefore, seeing as the liquidation process is shortened, each member of the company is required to severally settle their commitments to others.
In practice, some interpretations suggested that such shortened liquidation procedures do not entail the obligation of compiling the final balance sheet, and therefore, there is no final calculation of profit tax. The new provisions only emphasize the obligation to compile the final financial statements, as well as the final calculation of profit taxes upon the conclusion of the liquidation procedure.
Extension of anti profit-shifting rules
In line with EU directives, which are based on the OECD’s BEPS (Base erosion and profit shifting action plan) project, as of 1 January 2022, the provisions relating to hybrid mismatch (as governed by the BEPS Action 2 guidelines) shall be included. Afterwards, the local legislation will be aligned with these guidelines.