Tax changes according to the new tax reform

On May 24, 2023, the Government of the Republic of Croatia presented a new tax reform. The amendments to the tax regulations should be in force from January 1, 2024.

According to the presented tax package, the following changes are:

  1. Income Taxes on Natural Persons Act
  2. Local Tax Law
  3. Law on Financing Local and Regional Self-Government Units
  4. Contributions Act
  5. Law on Fiscalization in Cash Transactions
  6. Income Tax Law
  7. VAT Law
  8. Law on Tax Counseling
  9. Law on Administrative Cooperation in the Field of Taxation

In anticipation of slowing economic growth and easing inflationary pressures, improving tax relief is scheduled for early 2024. A reduction in the VAT rate would be appropriate if the Vat rate reduction contributed to a retail price reduction. Alternatively, the possibility of increasing the real purchasing power of citizens is to lower the tax burden on income.

The plan is to increase the fiscal autonomy of municipalities and cities and to increase fiscal decentralization.

Reducing the burden of wages through income tax?

The Government plans to reduce the wage burden by lowering income tax. Specifically, they will delete the notion of the personal deduction base and increase the amounts of the personal deduction for dependents by applying a coefficient to the basic personal deduction.

  • Personal deduction for the dependent = Coefficient x Basic personal deduction

Additionally, the Government raises the threshold for applying a higher income tax rate from EUR 47,780 to EUR 50,400.

Further changes in income tax concern the increase of fiscal autonomy of local self-government units, where municipalities and cities would be able to independently prescribe the tax rate for annual taxes on income from independent work, independent activity and other income.

The law prescribes other elements of taxation: personal deduction, non-taxable receipts, and the tax rate application threshold as other parameters. The Government also plans to abolish the income tax surtax.

Reducing the wage burden through a reduction in the pension insurance base?

The Government also plans to reduce the wage burden by lowering the pension insurance base. They intend to decrease the pension base (Pillar I) by a maximum of 300 euros for:

  • gross wages up to 700 euros – fixed allowance up to 300 euros
  • wages from 700.01 to 1.300 euros – gradual reduction of relief.

For pensioners, this would mean an increase in the net amount of pay, especially for those with the lowest incomes, which refers to 53.5% of the total number of taxpayers not subject to income tax (1.52 million people out of a total of 2.84 million taxpayers).

In addition, this allowance does not reduce the future pension amount. Still, the total monthly base will be used to determine the pension rights based on generational solidarity without deduction for the allowance.

The Government of the Republic of Croatia states that a two measures combination would lead to a wage increase.

Tax treatment of tips, donations, depreciation and optional shares

The Government of the Republic of Croatia intends to change the tax treatment of tips. Under the proposed plan, they will set the amount of non-taxable tips at 3,360 euros. Any tip amount exceeding the non-taxable portion will be subject to taxation as the final second income, with a rate of 20%.

Also, there should be changes in donations, depreciation and optional allocations of shares.

For donations, the existing possibilities of donating for general use purposes in the amount of more than 2% of the previous year’s revenue are specified (if there are programs and decisions of the competent ministries).

The Government plans to increase the value of assets eligible for depreciation calculation to 650 euros. They have also announced the equalization of the optional allocation of shares with the optional allocation of shares. This change will enable the allocation of shares in the company through the tax treatment of capital income, aiming to stimulate employees.

Fixed dates of payment of income tax according to the annual calculation and income tax according to the annual calculation

The Government plans to introduce a fixed payment date for income tax based on annual calculations. Specifically, the payment for income tax according to the yearly total will be due on February 28, while the payment for income tax based on the annual analysis will be due on April 30. These dates will replace the previous practice of payment based on the date of application.

Withholding tax

Withholding tax is abolished for market research and business consulting, dividends for the area of the European Economic Area, and increases to non-cooperating jurisdictions from 20% to 25%.

Value Added Tax

The Government simplifies the procedure for correcting the tax base. VAT charges the supplier only if they can collect all or part of the due receivables that have been outstanding for over a year.

The Government reduces the tax base within six months if entrepreneurs exercise due care or take actions to collect the due claim (such as enforcement proceedings, court action, settlement reached, etc.). In addition, the threshold for entry in the VAT register increases from 39,816.84 euros to 40,000 euros.

Law on Tax Counseling

It simplifies the acquisition of the status of tax advisor and abolishes the majority ownership conditions for a tax advisory company establishment. It allows for the free cross-border provision of services to tax advisers from all OECD member countries as representation before administrative courts in tax disputes.

Law on Administrative Cooperation in the Field of Taxation

The amendments to the Law on Administrative Cooperation will enable the implementation of the Multilateral Agreements of the competent authorities on autonomous proportionality and introduce a Council Regulation on measures to strengthen administrative cooperation in the VAT field.

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