Changes to tax regulations that come into effect on 1 January 2024 will affect many businesses.
Take a look at the most important changes in regulations related to personal income tax, corporate income tax and value-added tax that were announced during 2023, and most of them will come into effect on 1 January 2024.
Tax updates overview
- Personal income tax
- Corporate income tax
- Value-added tax
- Public Country-by-Country Reporting (Public CbCR)
Personal income tax
- The municipal tax on personal income applicable to all types of income will be abolished.
- Local government units will determine personal income tax rates (employment and self-employment income, as well as other income that is not considered final). Tax rates can vary in the following ranges:
- Personal income tax rates on final incomes will be increased - income from property and property rights will be taxed at the rates of 12% and 24%, income from capital at the rates of 12%, 24% or 36%, and other income that is considered final at the rates of 10%, 20% or 36%, depending on the type of income. For example, when taxing interest or dividend income, the personal income tax liability will be determined by applying a 12% rate (without the municipal tax) instead of the current 10% rate (increased by municipal tax).
- The concept of personal allowance base will be abolished, so the basic personal allowance will amount to EUR 560 per month, while personal allowances for dependent family members/children will also increase as a result of the personal allowance increase.
- The annual tax base threshold, according to which the annual personal income tax is paid at a lower tax rate, will be increased from EUR 47,780 to EUR 50,400, i.e., from EUR 3,982 to EUR 4,200 monthly.
- Tips exceeding the specified amount of EUR 3,360 annually will be considered final other income taxable at a rate of 20%.
- The tax treatment of a stock grant/stock option and shares will be equalised.
- Interest as well as capital gains earned from investments in debt securities issued by the Croatian government or local and regional government units will be non-taxable.
Corporate income tax
- Certain amounts will be rounded to whole numbers for the taxpayers’ benefit (e.g., the threshold for determining fixed assets will be EUR 665 and the threshold for applying the reduced income tax rate of 10% will be EUR 1 million in revenue).
- Additional provisions have been introduced on the tax treatment of donations whereby donations of up to 2% of the previous or current year’s revenues are considered a tax-deductible expense (to date, only previous year’s revenue was used as the reference value).
- Withholding tax provisions have been amended and have already been effective since 12 October 2023:
- withholding tax on market research services, tax and business consulting, and audit services has been abolished;
- the withholding tax rate on dividends, interest, royalties, performances of foreign entertainers, as well as on market research, tax and business consulting and audit services has been increased from 20% to 25% if the payment recipient is an entity from a country included in the EU list of non-cooperative jurisdictions for tax purposes;
- when applying the EU Directive on the taxation of interest and royalty payments made between associated companies of different Member States, it will be possible to apply the withholding tax exemption even if at the payment date the specified condition of a minimum holding in the other company’s share capital for an uninterrupted period of 24 months has not been met, provided that the taxpayer submits an appropriate guarantee to the Tax Administration (to date this was only possible for dividends);
- the possibility of applying provisions regarding the exemption of withholding tax payment on dividends/shares in profits, interest and royalties based on the EU Directives has been extended to companies that are tax residents of the European Economic Area (Iceland, Norway and Liechtenstein), and, based on the proposed amendments to the Rulebook, the Swiss Confederation is also included.
- The deadline for settling the tax liability will be the last day of the deadline for filing the tax return. Therefore, for taxpayers whose tax year ends on 31 December, the deadline for settling the tax liability as per the corporate income tax return will be 30 April of the following year, regardless of when the tax return was filed.
Value-added tax
- The general provisions on the tax base correction in case of cancellation of supplies, subsequent discounts and bad debts between taxpayers have been amended. Previously, a supplier was allowed to correct the VAT base provided that the customer corrected the input tax and informed the supplier of such correction in writing, or that the customer confirmed in writing that they did not have the right to input tax deduction.
- According to the amendments to the Act, the supplier may notify the customer of the correction (reduction) of their VAT base and VAT liability (while the customer is required to correct their input tax simultaneously). This makes it easier for suppliers to correct the VAT base and the VAT liability, because the correction no longer depends on the other party’s will to correct the input tax and notify the supplier of such correction in writing.
- This significant simplification applies to all cases mentioned, based on which a subsequent tax base reduction is possible. However, if the collection of the receivable is not possible, in addition to the supplier's obligation to notify the customer (debtor) of the tax base correction, other prescribed conditions must be met for the supplier to have the right to tax base correction. Thus, the tax base can be reduced only if collecting the full or partial amount of outstanding receivables that had been past due for more than a year is not possible. Such taxpayer can reduce the tax base within six months from the date of the right to tax deduction, if they have performed actions aimed at collecting the receivables past due and if they can provide proof of having taken such actions (they have initiated enforcement proceedings, they have filed a lawsuit in relation to the receivables past due etc.). Unfortunately, these provisions are insufficiently clear as to when the right to tax deduction arises, considering that two conditions apply (the expiration of the one-year period and taking actions aimed at debt collection).
- By submitting a special form, within the deadline for filing the VAT return for the tax period in which the correction was made, the taxpayer must inform the Tax Administration that the VAT base and VAT liability were corrected. However, if the taxpayer has partially or fully charged the supply of goods or services after having reduced the tax base, they are obliged to increase the tax base by the corresponding amount and pay the corresponding VAT amount.
- The amendments also include provisions that apply to customers in the above cases. In particular, a customer is required to correct the input tax deduction if the supplier has corrected (reduced) their tax base and VAT for that particular supply. If the VAT base was reduced due to default, should the customer fail to correct the input tax deduction, even though the supplier has informed them of their tax base and VAT correction, the competent Tax Administration office will issue a tax decision charging the customer for the corresponding amount of the used input tax deduction that they were obliged to correct. The appeal does not delay the execution of the decision.
- The amended provision regarding the tax base and VAT correction also applies to advance payment refunds if no supply occurred after the advance payment was made. The same procedure applies as for the cancellation of supplies or subsequent discounts.
- Payment service providers at the EU level (Central Electronic System of Payment - CESOP) are required to keep records of payees and payments in relation to cross-border transactions aiming to combat VAT fraud. The requirement to keep records only applies to payment services provided in connection with cross-border payments. A payment is considered a cross-border payment when the payer is located in one Member State and the payee is located in another Member State, in a third territory or a third country. The obligation to report to the Tax Administration is the payment service provider’s responsibility, (in most cases for the service provider of the payer but in some cases, it may be for the service provider of the payee).
- Please note that, according to the issued proposal for amendments to the VAT Rulebook, there should also be some minor changes in VAT-related areas. Among other things, the changes would refer to the VAT base correction (on the supplier's side) and to the correction of the input tax deduction (on the customer's side) in the case of correcting incorrectly issued invoices, whereby the correction procedure would be identical to the one specified in the amended Act for the cancellation of supplies and subsequent discounts.
Public Country-by-Country Reporting (Public CbCR)
- The amendments to the Accounting Act introduce the provisions of Council Directive (EU) 2013/34/EU concerning the obligation to file reports on income tax (Public Country-by-Country reporting - Public CbCR). The Directive aims to enhance corporate tax transparency and the accessibility of income tax information to the public by jurisdiction.
- The Accounting Act introduces the obligation to report on income tax information for the financial year commencing on or after 1 January 2024. The report shall be submitted no later than 12 months after the end of the respective year, and the obligation applies to:
- standalone undertakings and ultimate parent entities whose revenue, or consolidated revenue, for the previous two consecutive periods exceeds EUR 750 million, that, in addition to doing business in Croatia, have any form of business activity or permanent establishment outside the Republic of Croatia;
- medium-sized and large entities controlled by a non-EU ultimate parent;
- branches with a non-EU parent (if the ultimate parent does not have a medium-sized or large subsidiary) with their net revenue exceeding EUR 8 million.
- The reporting obligation for medium-sized and large entities and their branches doeS not apply if the ultimate parent or a standalone entity has prepared a report on income tax information which has been published and made accessible to the public free of charge in an electronic reporting format which is machine-readable on the website of that ultimate parent or of that standalone entity in at least one of the official languages of the EU, and if the report identifies the name and the registered office of the subsidiary or the branch governed by the law of the Republic of Croatia or another Member State.
- The reporting obligation does not apply to financial institutions, since they are subject to separate reporting requirements.
- Penalties of up to EUR 13,270 for a legal entity and up to EUR 2,650 for the responsible person in a legal entity are prescribed for omissions in reporting.
- If the entity is subject to audit, the auditor shall state in the audit report whether the report on income tax information was published for the financial year preceding the financial year for which the annual financial statements under audit were prepared.
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