CROATIA Law and Practice Contributed by: Marko Paulinović and Dino Vukoša, Buterin & Partneri
8. Tax 8.1 VAT and Sales Tax
Failure to meet contractual deadlines is commonly sanctioned through contractual penalties for delay, usually calculated on a per-day basis. Construction contracts often provide that once the accumulated contractual penalties reach a specified threshold, the employer is entitled to terminate the contract. In addition to contractual penalties, the employer may also claim compensation for actual damages exceed - ing the agreed penalty, up to the full amount of the loss suffered. 7.5 Additional Forms of Security to Guarantee a Contractor’s Performance In Croatian construction practice, it is common for employers to require performance security and defects liability security, most frequently in the form of a bank guarantee amounting to approximately 5–10% of the contract value. Employers also commonly retain retention sums, typically 5–10% of each interim pay - ment certificate, as security for the contractor’s obli - gation to remedy defects. Other forms of security, such as parent company guar - antees and documentary letters of credit, are used far less frequently but may be agreed in the context of large or financially complex projects. 7.6 Liens or Encumbrances in the Event of Non-Payment Contractors and designers do not have a statutory lien over the real property on which the works are carried out. However, in the event of non-payment they could seek to secure their claim through the registration of a judicial security interest (compulsory mortgage) over the property on the basis of a court order. 7.7 Requirements Before Use or Inhabitation A building may only be used once a use permit has been issued. The use permit is granted following a technical inspection procedure, which confirms that the building has been constructed in accordance with the building permit and that it satisfies the essential requirements applicable to buildings. The land register records whether a use permit has been issued for the building.
Transfer of real estate ownership is subject either to VAT or to real estate transfer tax (see. 2.10 Taxes Applicable to a Transaction ). VAT applies to the sup - ply of new buildings (within two years from the date of first use or occupancy) and construction plots, pro - vided that the seller is VAT-registered. Conversely, real estate transfer tax applies in all cases where the transaction is not subject to VAT. The tax - payer is the purchaser. Where both parties are VAT- registered persons, it is possible to opt for VAT taxa - tion with the reverse-charge mechanism. 8.2 Mitigation of Tax Liability Acquisitions of large real estate portfolios are com - monly structured as share deals rather than asset deals. The acquisition of shares or equity interests in a company, as well as certain corporate status changes (eg, mergers, acquisitions), is exempt from real estate transfer tax, which often results in a more tax-efficient As noted in 6.1 Types of Arrangements Allowing the Use of Real Estate for a Limited Period of Time , commercial real estate is not subject to a municipal real estate tax. However, property owners must pay a communal utility fee, which constitutes a charge for the use of municipal infrastructure (roads, pub - lic garages, green areas, etc). The amount of this fee depends on local regulations. Local authorities may prescribe conditions for partial or full exemptions from the payment of the communal utility fee. 8.4 Income Tax Withholding for Foreign Investors Croatia applies withholding tax on certain payments to foreign investors (non-residents), typically 10% on dividends and profit distributions, and 15% on inter - est and royalties. A maximum 25% rate applies to all types of fees and services listed in the Corporate Income Tax Act when payments are made to entities in noncooperative jurisdictions. All rates may be reduced transaction structure. 8.3 Municipal Taxes
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