CROATIA Law and Practice Contributed by: Iva Basarić, Marija Gregorić and Matija Skender, Babic & Partners
of EUR1,000,000.01), the corporate profit tax rate is 18%. Additional Taxes In addition to corporate profit tax, companies doing business in Croatia may be subject to VAT and may, depending on the circumstances, also be subject to various other taxes and parafiscal levies (monument annuity, tourist community fee, Croatian Chamber of Commerce membership fee, etc). 9.2 Withholding Taxes on Dividends, Interest, Etc Croatian corporate profit tax laws require the cal - culation and withholding of tax on dividends, profit, interests and royalties relating to copyright and other intellectual property (IP) rights (eg, patents, trade marks, designs, know-how, etc) paid to foreign (ie, non-Croatian) legal entities. Withholding Tax Rates As a general rule, the withholding tax rate is set at 15% for all taxable transactions except payment of dividends and profit, for which the applicable with - holding tax rate is 10%. As a measure for fighting tax evasion and avoidance, Croatian corporate profit tax law has also introduced a punitive withholding tax rate of 25% for all taxable transactions, including pay - ment of compensation for services such as market research, tax and business consulting, and auditing services, when paid to persons having their head - quarters, place of effective management or supervi - sion of business in countries placed on the EU list of non-cooperative jurisdictions for tax purposes (eg, Russia, Guam, Panama), unless otherwise provided in individual double taxation treaties. Exemptions Specifically with regard to interest, withholding tax will not be levied on interest paid: • for commodity loans for the procurement of goods used for the performance of a business activity of the taxpayer; • for loans given by a foreign bank or other financial institution; and • to foreign legal persons that hold bonds (both state and corporate).
The withholding rates set by Croatian law may be fur - ther reduced or even eliminated subject to either dou - ble taxation treaties (Croatia currently has 70 double taxation treaties in force) or special rules provided for the taxation of dividend, profit, interest and royalty payments made between affiliated companies in dif - ferent EU member states. In both cases, a minimum percentage of share/stock ownership requirement and a holding period requirement may apply. The General Anti-avoidance Rule As a means of battling tax fraud/evasion (including the prevention of treaty shopping), Croatia has also implemented a general anti-avoidance rule under which certain tax benefits, available either through a treaty or domestic law (eg, withholding tax exemp - tion or reduction), will not be extended to the tax - payer if the Croatian authorities determine that the taxpayer created arrangements (eg, business trans - actions, activities, schemes, agreements, obligations or events) or a series of arrangements, without valid commercial reasons reflecting the economic reality (or in other words, if the arrangements were created for the purpose of tax fraud or tax evasion). 9.3 Tax Mitigation Strategies Manoeuvring space for tax mitigation is fairly limited due to various anti-evasion regimes implemented in Croatia and the scrutiny by the Croatian Tax Adminis - tration. In this regard, strategies utilising intercompany debt are restricted, as interest is subject to the market interest rate rule, the thin capitalisation rule and the interest limitation rule. Furthermore, strategies utilising intercompany services and licence fees are subject to OECD transfer pricing rules and are heavily scruti - nised by the Croatian Tax Authority. Among the tax mitigation strategies currently used by companies in Croatia is the carry-forward of tax loss - es, where the accumulated tax losses may be utilised within five years following the year in which the losses were incurred and set off against taxable profits. In addition, Croatian companies may also reduce the tax rate or tax base by utilising generous tax incentives for capital expenditures (eg, construction costs for fac - tories and acquisition costs for manufacturing equip - ment) and R&D expenditures (the development and significant improvement of products, manufacturing
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