Rules and Obligations of Advance Profit Payout

Tax regulations and the Companies Act (Official Gazette No. 111/93 – 40/19) prescribe the conditions for the advance payment of profits for the current year. The terms of payment differ for a limited liability company (LLC), a simple limited liability company (LTD), and a joint-stock company.

Namely, LLC and LTD can pay the advance payment to the owners of the company for the current year already in that year, while the owners’ joint-stock company can expect the payment of the advance after January 1st next year, in this case, after January 1st, 2022.

To make an advance payment of profits, LCC and LTD must compile a provisional income statement. If it shows a profit, the payment can be made up to the amount stated in the income statement.

For a joint-stock company the obligation prescribed by the ZTD is valid, which states that the owner is obliged to enter 25% of the realized profit into the legal reserves, so when paying the advance, the profit in LTD is the amount of determined profit in the temporary profit and loss account before payment should be reduced by the amount entered in the legal reserves and the owner should be paid the determined amount of profit reduced by that amount.

The condition of payment to the joint-stock company is that the provisional profit and loss account for the current year shows the profit and that the company made a profit in the previous year. If they meet these conditions, the dividend advance can be paid up to a maximum of half of the profitless amount that must be entered in the company’s legal and/or other reserves, and up to 50% of the profit realized in the current year.

When paying an advance to a resident natural person, the company must calculate and pay a capital income tax advance at the rate of 10% plus surtax if prescribed, while a non-resident natural person must calculate and pay capital income tax at the rate of 10% or the rate from the agreement on avoidance of double taxation if the Republic of Croatia has signed such an agreement with the country in which the recipient is resident.

In the case of a non-resident legal entity, withholding income tax is calculated and paid at the rate of 10%, unless otherwise prescribed by an international agreement on the avoidance of double taxation. If the international agreement on avoidance of double taxation prescribes a reduced rate or exemption from taxation, the recipient is obliged to submit a certified form of Request for reduction of tax liability, exemption from tax liability, or refund of overpaid tax on fees for activities performed in Croatia under the Agreement on Avoidance of Double Taxation Of the Republic of Croatia and the country of residence of the legal entity.

The advance payment report is made via the JOPPD form on the day of payment or the next working day.

If an advance payment of profit has been paid to the owner, and a profit in the amount of less than the paid advance payment has been determined during the year, the difference cannot be converted into another form of a claim (eg advance payment for next year, loan to the owner, etc.). The resulting difference is considered income from the capital based on the exemption of the owner-natural person and is subject to taxation at a rate of 30% plus surtax (if prescribed).

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