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Published in:
2017 | OriginalPaper | Chapter
5. Taxation and Development in Croatia
Author : Nataša Žunić Kovačević
Published in: Taxation and Development - A Comparative Study
Publisher: Springer International Publishing
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Abstract
Although Croatia does not provide incentives for investment in developing countries, it does employ some measures to attract investment into its own jurisdiction. These include tax and customs relief for companies making investments for a specified period to provide jobs and to make other contributions to the Croatian economy. It is expected that with accession to the European Union (EU) the practice of providing investment incentives will diminish. Croatia taxes its residents on worldwide income and provides a foreign tax credit to avoid double taxation. Although there are no explicit incentives for investment in developing countries, the tax exemption for dividends paid to a Croatian corporation may have the effect of encouraging such investment if other favorable conditions are present.
Synopsis
Individuals and corporations resident in Croatia are taxed on worldwide income. For residents there is a credit for foreign taxes paid to a foreign corporation limited to the amount of tax that would have been paid in Croatia. Non-residents are taxed only on income from Croatian sources.
There is an exemption for dividends paid to a Croatian resident corporation or any other legal entity. Dividends paid to a nonresident entity are subject to a 12 % withholding tax, unless the rate is reduced by treaty or the distribution is exempt from tax under the EU Parent-Subsidiary Directive. A withholding tax at the rate of 15 % is imposed on interest (with some exceptions), royalties and other payments relating to the exploitation of intellectual property rights.
For payments made to residents of jurisdictions deemed to be tax havens or to have harmful tax regimes (other than EU members) with a corporate tax rate lower than 12.5 %, the withholding rate on the above payments is increased to 20 %. This increased withholding applies only when the country is listed and by the Ministry of Finance and this list published on the appropriate website.
Although Croatia does not provide tax incentives for investment in developing countries, it does employ measures to attract investment within its own jurisdiction. There are tax and customs advantages provided to micro- and other enterprises that invest a minimum amount for a specified period, create new jobs for workers, and make other contributions to the Croatian economy. Investments in certain Free Zone Areas enjoy the benefits of exemption from customs duties and a corporate income tax rate reduction of 50 %. There is a complete tax exemption for all profits that are reinvested in the project until they are distributed in a manner that reduces the total amount of investment.
The practice of providing regional tax holidays, distinct from the capital investment incentives described above, has ended with Croatia’s accession to the European Union. It is expected that the general practice of providing investment incentives will diminish in order to meet EU expectations.
Croatia imposes corporate tax at the rate of 20 % on taxable profits.