In 2025, Croatia will implement a new tax reform package to address key challenges in the current system, including rising real estate prices, increased revenues from short-term rentals, and adjusting tax burdens to stimulate labour and investment. The tax reform includes amendments to six laws to establish a more equitable and efficient tax system. These changes aim to improve real estate taxation, boost revenues from short-term rentals, reduce the tax burden on labour, and encourage investments and the return of Croatian emigrants.
The Six Laws Included in the Tax Reform Package Are:
- The Local Taxes Act – Key for implementing the real estate tax and adjusting local taxes.
- The Income Tax Act – Introducing changes to income taxation with a focus on labour tax relief and encouraging the return of emigrants.
- The Contributions Act aims to equalize contributions for all stakeholders in the labour market.
- The General Tax Act – Updated to ensure more effective implementation of new measures and digitization of the tax system.
- The Tax Administration Act – Ensuring the enforcement and supervision of new tax obligations and the system.
- The Value-Added Tax (VAT) Act – Raising the VAT entry threshold to €50,000, which is expected to reduce the number of taxpayers.
These changes will significantly impact the tax burden for both individuals and businesses. They will focus on the taxation of real estate and rental income, labour tax relief, and stimulating economic activities through a modernized tax system.
Challenges in Real Estate and Rental Taxation
Over recent years, Croatia’s real estate market has seen a significant price rise, increasing vacant properties and properties used for short-term rentals. Foreign investments have further driven price growth, with real estate becoming a primary investment vehicle, often used for quick profits rather than for resolving housing issues. This reform introduces stricter criteria for the taxation of real estate and rental income, aiming to reduce imbalances in the market and encourage long-term rentals.
Tax Rates for Short-Term Rentals
One of the fundamental changes relates to the taxation of short-term rentals, particularly in tourist-developed areas. The tax will be calculated based on the tourism development index, with rates ranging from €150 to €300 per bed for the most developed destinations, while less developed areas will see lower rates. Before this reform, authorities calculated lump-sum taxes for short-term tourist rentals at significantly lower rates based on location and property categorization. Previously, the tax per bed ranged from €19.9 to €199. The goal is to equalize the tax burden between short-term and long-term rentals, thereby encouraging long-term rentals as a more stable form of property usage.
Incentives for Emigrant Return and Labor Tax Relief
As part of the reform, the government promotes the return of Croatian citizens who have lived abroad. Plans are in place to exempt all returnees who have resided abroad for at least two years from paying income tax. This measure aims to relieve pressure on the labour market and encourage emigrants to return home.
Additionally, the reform brings significant labour tax relief through reductions in tax rates and increases in the personal tax deduction. The personal deduction increases from €560 to €600, and the threshold for applying a higher income tax rate rises to €60,000.
Equalizing Health Insurance Contributions
Since 2015, employers in Croatia have benefited from a subsidy through the exemption from paying health insurance contributions for employees under 30. However, this exemption represents foregone revenue for the Croatian Health Insurance Fund (HZZO), funded by budget resources. The exemption benefits employers rather than employees, as it doesn’t lead to a higher salary for the young worker.
This measure has been abolished since the labour market has changed significantly over the past decade. The number of employers benefiting from this exemption increased significantly between 2015 and 2023, with the cost reaching €385 million in 2023. Despite its abolition, employers currently using this measure will be able to continue doing so until the end of the five years. However, starting January 1, 2025, the exemption will no longer apply to new employees. The exemption for first-time employment will remain in place for one year, offering financial relief to employers during the initial employment period. Furthermore, young workers will benefit from income tax refunds, as individuals under 25 do not pay income tax.
Digitization and Administrative Streamlining
As of January 1, 2025, the threshold for entering the VAT system will increase to €50,000. Previously set at €40,000, this adjustment positions Croatia among the EU member states with the highest VAT entry threshold. This measure is administratively streamlining, as VAT is neutral for businesses, and the higher threshold reduces the number of taxpayers.
Additionally, businesses that previously were not subject to fiscalization (such as kiosks) will now be required to issue fiscalized receipts. The reform also includes measures to combat illegal activities, especially gambling. Transactions with unlawful gambling operators will be blocked, aiming to restrict access to such services in Croatia.
Conclusion
This comprehensive tax reform package brings about significant changes to stimulate economic growth, promote long-term rentals, and reduce the tax burden on labour. Through these measures, Croatia aims to create a more balanced and sustainable tax system that better serves the needs of both businesses and citizens. At Confida Croatia, we are ready to assist you in understanding and adapting to these changes.
Contact us today for personalized consulting and support in aligning your business with the new tax regime!
