29 January 2016
The Minister of Finance prescribed the interest rate that is, for tax purposes, considered to be the market interest rate for loans between related parties. The interest rate of 5.14% is applicable for 2016 (“Decision to announce interest rates for loans between related parties” published in the Official Gazette no. 137 of 23 December 2015).
This decision defines the interest rate applicable between related parties that is deductible for the profit tax purposes. Article 14 of the Profit Tax Act prescribes that interests between related parties shall be tax-deductible only up to the amount of the interest rate that would be realised between non-related parties, while the amount of interests exceeding the prescribed interest rate shall be non-deductible. In other words, the following is tax-deductible:
The interest rate that is considered the market rate is prescribed by the Minister of Finance before the beginning of the tax period in which this interest rate will be applied. If the Minister of Finance does not prescribe the interest rate before the beginning of the tax period, the discount rate of the Croatian National Bank is applied.
This market interest rate is applied to loans between related parties in cross-border transactions but also between Croatian resident companies if one of the companies meets the requirements under Article 13 § 5 of the Profit Tax Act, i.e.
This decision was surely motivated by the low discount rate of the Croatian National Bank, thereby breaking a long-standing tradition of applying the discount interest rate of the Croatian National Bank for determining the tax-deductible interest rate between related parties in accordance with Article 37 of the Ordinance on Profit Tax.
In addition to the interest rate applied to loans between related companies, the thin capitalisation rules (i.e. provisions on the debt/equity ratio), should be also taken into account when determining the tax-deductible amount of interest rate.
If you need any further explanations or an analysis of a specific example from your company, please contact us with confidence.
Director, Tax Services
Phone: +385 1 6328 888
Manager, Tax Services
Phone: +385 1 6328 888
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