As of January 1, 2024, amendments to the Corporate Income Tax Act and its accompanying regulations have introduced significant changes to the tax treatment of donations in terms of corporate income tax, VAT, and personal income tax. Alongside new criteria for recognizing donation expenses, businesses must report these expenses as part of their corporate income tax returns. This article outlines the key changes and provides practical guidance for managing donations in compliance with the updated rules.
Criteria for Recognizing Donation Expenses
As of the beginning of 2024, amendments to the Corporate Income Tax Act (Official Gazette No. 114/23) and the Corporate Income Tax Regulations (Official Gazette No. 156/23) have come into effect, revising the conditions for recognizing donations as tax-deductible expenses.
Recognizing Expenses Up to 2% of Revenue
Businesses can now deduct cash and in-kind donations as expenses, up to 2% of the Revenue earned in the previous or current tax period. This change is particularly beneficial for newly established businesses without Revenue in the prior year, as they can calculate the donation limit based on current-year Revenue.
Eligible donations must support purposes of general interest, such as:
• Cultural, scientific, and educational activities,
• Health and humanitarian needs,
• Sports, environmental, religious, and other socially beneficial objectives.
Recipients of donations can include associations, government bodies, local government units, or other organizations conducting these activities under specific regulations.
Businesses can choose the previous or current year reference period, which provides a more favourable basis for calculating the limit. Taxpayers can repeatedly use the current year as the reference period in subsequent years, as this choice has no time restrictions.
Recognizing Expenses Above 2% of Revenue
Taxpayers can recognize donations exceeding the 2% revenue limit as tax-deductible only if they meet specific conditions. These donations must be allocated to projects of strategic importance, as defined by regulations or strategies of relevant ministries.
The process involves:
• Approval by the competent ministry with consent from the Croatian Government,
• A confirmation from the donation recipient detailing the donation,
• A report submitted by the recipient to the competent ministry by March 31 for the previous year.
Special Status of Food Donations
Food donations made under the Agriculture Act (Nar. nov., no. 118/18 – 152/22) are subject to special tax treatment. The tax deductibility of these donations is not limited by the donation amount but rather by their purpose—preventing food waste and protecting the environment.
Food donation recipients can include organizations engaged in social, humanitarian, or similar activities and individuals affected by natural disasters. Businesses must present reliable documentation confirming the donation’s purpose to qualify.
New Forms for Reporting Donation Expenses
For tax periods beginning on or after January 1, 2024, businesses must use new forms for filing corporate income tax returns:
• Form PD – the standard corporate income tax return,
• Form PD-NN – an additional annexe for recording donation expenses.
These forms require detailed reporting of donation expenses, including the purpose, amount, and recipient information.
Tax Treatment of Donations for Health Purposes
The costs of donations for the medical needs of individuals—such as treatment, medication, or orthopaedic aids—remain tax-deductible within the 2% revenue limit. The conditions include:
• Credible documentation,
• Payment to the recipient’s bank account or a healthcare institution.
Unlike the Personal Income Tax Act, which allows it, the Corporate Income Tax Act prohibits donations for medical purposes from being made to personal bank accounts.
Conclusion
The amendments to tax regulations, effective January 1, 2024, provide greater flexibility in recognizing donation expenses, particularly for newly established businesses. However, they also introduce additional obligations, such as precise documentation and detailed data submission via new forms.
Businesses should carefully evaluate the new criteria and use the options that best suit their circumstances, particularly when selecting the reference period for calculating the donation limit. Introducing more precise rules and standardized forms contributes to transparency and consistency in applying donation tax incentives.
