Value added tax, or VAT for short, is a modern form of consumption taxation, and has been applied in Croatia since 1st of January 1998.

What exactly is value added tax?

Value added is the difference between the value of sales of manufactured goods and services, and the value of purchases of inputs (but not labor inputs) by which those goods and services are produced. Value added is the value that a manufacturer adds to inputs before selling them as new products. . If the company buys raw materials and equipment in the value of HRK 1,000 and produces products sold for HRK 1,500, the value added is HRK 500.

Now that we have repeated the basics, let’s explain what is profit tax and who are its taxpayers?

Profit tax is a tax paid by companies (j.d.o.o., d.o.o. or d.d.) on realised profits, that is, on the difference between income and expenditures. This tax in other countries is usually referred as corporate/corporation income tax, i.e. legal entities, as opposed to income tax paid by natural persons.

The taxpayer of profit tax is:

1. Company and other legal and natural persons that are residents of the Republic of Croatia and perform their economic activity independently, permanently, and in order to gain profit, income, or revenue, or other business relevant benefits,
2. Domestic permanent establishment of a foreign entrepreneur (non-r​esident),
3. Natural persons who determine their income in the manner prescribed for self-employment activities pursuant to the regulations on income taxation or who are starting to perform a self-employment activity or if they declare that they will pay profit tax instead of income tax
4. Natural persons referred to in item 3 if they generated a total receipt greater than HRK 7,500,000.00 in the previous taxation period
5. By way of derogation, state administration bodies, regional self-government authorities, local self-government authorities, Croatian National bank, state institutions, institutions of units of regional self-government, institutions of units of local self-government, state institutes, religious communities, political parties, trade unions, chambers, associations, artistic associations, voluntary firemen associations, technical culture associations, tourist boards, sport clubs, sport societies and associations, trust funds and foundations, if performing economic activity, whose non-taxation would result in gaining of unjustified privileges on the market, are deemed taxpayers for that activity.
6. Every entrepreneur or his legal successor who is not an entrepreneur listed in items 1 to 5, and who is not an income tax taxpayer pursuant to the regulations on income taxation and whose profit is not taxed elsewhere.

Withholding tax

Domestic payer who pays interest, dividends, profit shares, royalties and other intellectual property rights (reproduction rights, patents, licenses, copyrighted marks, designs or models, manufacturing procedure, production formulas, sketch, plan, industrial or scientific experience, and other similar rights) to foreign persons that are not natural persons, and who pays market research services, tax and business counselling, and auditing services to foreign persons.​

TAX BASE/SUBJECT OF TAXATION

Profit tax

Profit that is assessed according to accounting regulations as the difference between revenue and expenditures before the calculation of profit tax, increased and reduced according to the provisions of Profit Tax Act.

Withholding tax

Gross amount of the fee that the domestic payer (or foreign payer for performances of foreign performers) pays to the non-resident – foreign recipient.

RATE / AMOUNT

Profit tax

The tax rate at which profits are taxed in the Republic of Croatia from 1st January 2021 is:

• 10% if, during the taxation period, revenue has been generated up to HRK 7,500,000.00, or
• 18% if, during the taxation period, revenue has been generated equal to or greater than HRK 7,500,000.01.

Withholding tax

• 15% except for dividends and shares in profit for which the withholding tax is paid at a rate of 10%,
• 20 % on all services and all types of remunerations that are subject to taxation pursuant to this article when paid to persons having their head office or place of effective management, or supervision of business, in the countries placed on the EU list of non-cooperative jurisdictions for tax purposes, with which the Republic of Croatia has no double taxation treaties applicable,
• 10% for performances of foreign performers.

The next term we will clarify is capital gains.

What do they represent?

Increase in the value of assets: land, buildings, machinery, cars, securities (stocks and bonds). They are measured as the difference between the selling price and the price at which the good was previously purchased.

Capital gains tax is a tax on the increased value of assets. In theory, it is generally considered that capital gains should be taxed because they represent one of the possible sources of income. But in practice there are very different approaches to taxing capital gains. In some countries, they are taxed under the same conditions as any other income because it is considered that they can be used for the same purposes as income. In other countries, capital gains tax rates are applied differently from income tax rates, or only some forms of capital gains are taxed. In Croatia, the tax is paid on all capital gains less capital losses incurred in the same calendar year (provided that capital losses relate to assets acquired after 1st January 2016 and that they were realized within 2 years from the date of acquisition) and for the related costs at a rate of 12%. In addition to the 12% capital gains tax, depending on the taxpayer’s place of residence, a surtax is also paid.

Why is the approach to taxing capital gains so different? Taxation of capital gains is associated with a number of problems of a practical and theoretical nature.

VAT in EU countries

European Union countries stick to standard VAT rules, but the application of these rules may vary. In most cases you have to pay VAT on all goods and services at all stages of the supply chain, including sales to the final consumer. This includes the entire production process from beginning to end, e.g. the purchase of components, transport, assembly, delivery, packaging, insurance and dispatch to the final consumer.

VAT rate

Different VAT rates apply, and they depend on the product or service involved in the transaction. There are also special rates set in accordance with the VAT rates that applied in the countries concerned before their accession to the EU.

Each EU country has a standard rate that applies to most deliveries of goods and services. That rate cannot be lower than 15%.

Croatia has one of the highest VAT rates compared to other EU countries.

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Sources:

• https://www.porezna-uprava.hr/HR_porezni_sustav/Stranice/porez_na_dobit.aspx
• https://www.porezna-uprava.r/HR_porezni_sustav/_layouts/15/in2.vuk2019.sp.propisi.intranet/propisi.aspx#id=pro19
• https://www.porezna-uprava.hr/HR_porezni_sustav/_layouts/15/in2.vuk2019.sp.propisi.intranet/propisi.aspx#id=pro23
• http://www.ijf.hr/pojmovnik/dobit.htm
• http://www.ijf.hr/hr/korisne-informacije/pojmovnik-javnih-financija/15/porez-na-dobit/297/oporezivanje-kapitalnih-dobitaka/299/
• https://www.porezna-uprava.hr/pozivni_centar/Stranice/dohodak-od-kapitala-po-osnovi-kapitalnih-dobitaka.aspx
• https://www.racunovodstvo-porezi.hr/sites/default/files/casopisprivitak/ripup07-11-015.pdf
• https://web.erstebroker.hr/documents/002/Uputa-Kapitalna_dobit_Erste.pdf