Cross - Border Work and Tax Liabilities in Croatia

Cross – Border Work and Tax Liabilities in Croatia

The Tax Administration recently called on all citizens residents of the Republic of Croatia to voluntarily report foreign income they have earned in this or previous years but have not reported them so far. Namely, through the exchange of data between the Croatian Tax Administration and the Tax Authorities of other countries, it’s noticed that many citizens did not fulfill their obligation and reported foreign income.

All those persons who live and work abroad but remained Croatian tax residents must declare income from abroad. Also, all citizens who are tax residents of the Republic of Croatia who live and work in Croatia, but receive income from abroad (e.g., dividends, interest, income from renting a real estate) must declare income from abroad.

As several questions about the status of tax resident/non-resident in the Republic of Croatia have appeared in public, the Tax Administration has published an additional clarification regarding the determination of tax residency.

Below is an overview of key issues through liabilities and rights in the tax payment process of income earned abroad.

How can I know if I am a tax resident or a non-resident?

Based on general rule, the status of a resident defines the place of residence, while the General Tax Law states that the residence of an individual is where his family resides (spouse, children, extramarital partner), and for a single taxpayer or if the family residence cannot be determined, the residence is in the country from which he/she predominantly go to work or in which he/she predominantly stays. If you have moved abroad with your family and registered your residence abroad, you will be considered as a Croatian tax non-resident, although you may have registered residence in Croatia as well.

I deregistered my residence, I do not live in Croatia, why am I not automatically registered as a tax resident of the country where I live and work?

Although the Tax Administration has certain information in its systems, it still does not have the information on the change in the status of a tax resident/non-resident until the individual independently reports the change. In case of going abroad, whether permanently or temporarily, it is necessary to report the departure to the Ministry of the Interior and fill out and submit the TI form to the Tax Administration to change the resident status to a non-resident.

How is a calculated tax on income earned abroad and what represents the Double Taxation Agreement?

Tax on income earned abroad is calculated in the same way as income earned in Croatia. However, the Double Taxation Agreement usually prescribes in Article 23 the method of avoiding double taxation – the credit method or the exemption method. If your foreign income is earned in the country with which the credit method is prescribed in the Agreement, the tax to be paid in Croatia will be calculated as the difference between the tax you have to pay in Croatia and the tax you have already paid in the country where you work. If the tax in the country where you worked is calculated in a higher amount than your liability in Croatia, you will not pay anything more. Please note that you are also not entitled to a tax refund, as the tax has not been paid in Croatia in the first place. However, if you have paid less tax in the country where you worked than your tax liability in Croatia, you will pay the difference in income tax. In order for that, the Tax Administration could calculate the tax you previously paid in the country of work, you will also need a certificate from the Foreign Tax Authority on the tax paid. With the exemption method, there is no additional collection of foreign income tax, as all income is exempted from taxation in Croatia.

When to report foreign income in Croatia?

The basic principle is that income earned abroad is taxed in Croatia within 30 days of receipt (via the JOPPD form). But if you have already paid income tax abroad, you need to pay income tax in Croatia once a year, by 31 January of the current year for the previous year. If the income tax was paid abroad, the Tax Administration should be informed within 8 days from the day of the first receipt in the current year through the Statement on deferral of tax payment (so-called INO-STATEMENT).

What benefits does the Tax Administration offer regarding voluntary income tax returns?

In addition to not charging default interest and misdemeanor penalties, the Tax Administration offers some other benefits related to voluntary filing. Namely, all those who submit a voluntary return will be able to calculate the tax liability in one of two ways that will result in a more favorable tax liability. One is the application of tax rates, tax brackets, and regulations for the year 2022, and the other is the application of tax rates, tax brackets, and regulations that were in force for each year in which the income was generated, according to the data available to the Tax Administration. Voluntary application has its advantages, but also its disadvantages. Although in the year 2022 lower tax rates and wider tax brackets are in force than the ones in previous years, the Tax Administration will add up the total income at once, which means the inability to use the personal allowance for previous years and the fact that total income automatically goes into a higher tax bracket. Therefore, we recommend that you consult with tax experts before voluntarily applying and find out which tax calculation is more favorable for you.

How can I dispute the decision of the Tax Administration regarding double taxation?

If there is a reasonable presumption that the tax liability is incorrectly calculated or that the tax liability has been determined even though the individual meets all the conditions for the status of a tax non-resident, the decision of the Tax Administration may be disputed. Please note that the status of a tax resident/non-resident can be changed retroactively by providing the Tax Administration with evidence and facts about the same.

What is the legal deadline within which the Tax Administration can send such decisions?

The legal deadline by which the Tax Administration can send such decisions is six years, i.e., the statute of limitations occurs after six years. The condition that must be met for the statute of limitation to occur is that in the meantime no action has been taken with a particular case. Therefore, if a person is a tax resident who has been living and working abroad for years and has not reported foreign income in Croatia so far, he or she can do so at once through a voluntary declaration of foreign income. In case of voluntary submission, the Tax Administration will not charge default interest or initiate misdemeanor proceedings, and the income to be reported is valid only for the years from 2016 to 2021.

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