Corporate Income Tax Rulebook amendments from 1 January 2025

The amendments to the Corporate Income Tax Rulebook (OG 16/2025) effective from 1 January  2025, bring significant changes to the approach and scope of the transfer pricing documentation.

In addition to standard methods, that have been applicable for years, taxpayers can now use additional methods in determining if transfer prices comply with market principles. The importance of functional analysis has been elevated, transfer pricing documentation requirements have been expanded, and it is specifically stated that Croatia will follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations when interpreting transfer pricing rules.

These amendments aim to further align Croatian regulations with the OECD Guidelines.

The five specified methods for transfer pricing analysis outlined in the Corporate Income Tax Act as well as the hierarchy of their application, remain unchanged. However, taxpayers may apply additional pricing methods if the standard methods listed in Article 13, paragraph 3 of the Corporate Income Tax Act (comparable uncontrolled price method, resale price method, cost plus method, profit split method, and transactional net margin method) are not appropriate under the given circumstances. In such cases, the prices determined using these methods must comply with the arm's length principle, and it is necessary to explain why the standard methods are considered less appropriate than the alternative method applied.

The new tax amendments require a precise definition of transactions, specifying that all business and financial relationships between related parties must be considered. This includes functions performed, risks assumed, and assets utilised, while taking into account the circumstances under which the transactions occur. This provision emphasises the importance of functional analysis and the circumstances of the transaction. Consequently, tax audits are expected to focus on determining the substance of the transaction first, followed by assessing the market nature of the fees charged between related entities.

A key change involves expanding the transfer pricing documentation requirements. Prior to the amendments, the Corporate Income Tax Rulebook did not specify detailed requirements regarding the form and content of transfer pricing documentation. Under the new amendments, taxpayers must provide the following two groups of information upon request from the Tax Administration: 

1. Comprehensive information at the level of the multinational group of companies - ownership and organisational structure, descriptions of business operations and the supply chain (covering  the 5 main products or services, as well as any other products or services accounting for more than 5% of total revenue), details of service agreements, a brief functional analysis, information on business restructurings, acquisitions, and disposals, descriptions of intangible assets and financial activities, consolidated financial statements, etc. 
2. Comprehensive information about the domestic company - detailed description of the domestic company, information on its management strategy, a description of its business and business strategy, an overview of material related party transactions (including transaction amounts, although no materiality threshold is defined to determine what constitutes significant transactions), related party agreements, comparability analysis and functional analysis for material transactions, the selection and application of transfer pricing methods (including any comparability adjustments), and annual financial statements.

It is important to note that the information in item 1 corresponds to the information required to be included in the Master File report on transfer pricing according to the OECD Guidelines. Hence, it can be concluded that these amendments to the Corporate Income Tax Rulebook require part of the Master File report content, i.e. the specified Group information to be included in the local report.

Although the Tax Administration has previously considered the OECD Guidelines in practice, the recent amendments to the Corporate Income Tax Rulebook explicitly state that the OECD Guidelines will be used to interpret the transfer pricing rules in the Corporate Income Tax Act and Rulebook.

These amendments, which align with the OECD Guidelines, will have a significant impact on the interpretation of transfer pricing rules. These documents now explicitly require the OECD Guidelines to be used as a reference when interpreting tax laws related to transfer pricing. This ensures consistency with internationally recognised standards, helping to reduce potential disagreements between tax administrations and multinational corporations.