New Round of Changes to Tax Rules in 2024

In 2024, Croatia introduced another round of changes to its tax rules, with further novelties announced for 2025 aimed at fair taxation of property and bringing order to the residential rent market.

Key 2024 changes included the abandonment of city taxes and a further relaxation of the tax base by increasing tax-free personal deductions and the threshold for a higher tax rate. Corporate taxation has undergone some changes in terms of withholding tax rules. Further adjustments have been made to VAT regulations, the fiscalization of invoices, local taxes, and the rules regulating procedural matters.

The article also outlines enhanced administrative cooperation in tax matters, aligning Croatian laws with EU directives and global standards.

In the area of corporate taxation, Croatia has abandoned the withholding tax on consulting and market research services. The withholding tax rate has been increased from 20% to 25% for non-cooperative jurisdictions, as per the EU list. EU directives are applied to the European Economic Area (Norway, Iceland, Liechtenstein) concerning exemptions from withholding tax on interest and royalties. Finally, following the introduction of the euro as the official currency in 2023, the threshold for application of the lower corporate profit tax of 10% is rounded to EUR 1 million.

Personal income taxation has been affected by the cancellation of the city tax that was previously charged on top of the personal income tax liability (based on the rates unified at the state level). Instead, local authorities are now authorized to set personal income tax rates (within the prescribed range) to cover the financial needs of local communities. The capital – Zagreb – applies the highest tax rates of 23.6% (up to the monthly threshold now set at EUR 4,200) and 35.4% (above the monthly threshold of EUR 4,200). Aimed at increasing the net effect of salaries, tax-free personal deductions and the threshold for higher tax rates have been raised in 2024.

New specific rules relating to tips have been introduced, providing for a certain tax-free portion – personal income tax is not payable on tips up to EUR 3,360 annually. Exceeding amounts are taxed at 20%.

The amendments have also ensured equal treatment of income from bonds with other debt securities and money market instruments issued by the Republic of Croatia.

Changes in the area of social security contributions involved the reduction of the monthly base for pension insurance for workers with gross salaries below EUR 1,300.

In terms of value added tax, Croatia has simplified corrections of the VAT base, allowing adjustments of VAT liability in cases of non-payment or discounts. The threshold for VAT registration is rounded to EUR 40,000, with the announcement of a further increase (to EUR 50,000 in 2025).

In the area of fiscalization of invoices (real-time reporting to the tax authorities), protocols for exchanging data on tips, error messages, and handling errors have been introduced.

The tax on vacation houses has been increased to range from 0.60 to 5.00 EUR per square meter. The government also announced it will replace the tax on vacation houses with a tax on immovable property with the expectation to positively affect the residential property market. 

In terms of tax procedures, the novelty concerns tax advisors who are now authorized to participate in tax administrative matters before administrative courts. The performance of tax advisory practices is relaxed in a way that the condition of a 51% ownership by tax advisors in a tax advisory company is abolished. At the same time, tax advisors from OECD member states or countries adhering to the Capital Movement Liberalization Code are allowed to temporarily provide tax advisory services in Croatia. However, there are penalties prescribed to prevent unauthorized representation and the use of the term “tax advisory.”

Finally, as regards administrative cooperation in tax matters, Croatia has established a legal framework for the implementation of the Multilateral Competent Authority Agreement on Automatic Exchange of Information Concerning Tax Avoidance Arrangements and Opaque Offshore Structures. Also, a legal framework is established to implement the Multilateral Agreement on Automatic Exchange of Income Information via Digital Platforms. It is worth mentioning that, as of 2024, Croatia has ensured the application of the EU regulation that has introduced a centralized electronic system for payment information for VAT fraud prevention.

By Tamara Jelic Kazic, Partner, and Dragan Tripalo, Tax Consultant, CMS

This article was originally published in Issue 11.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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Publish date : 2024-12-19 02:37:00

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