Thinking Beyond Borders for Croatia

Thinking Beyond Borders for Croatia

January 2021 

Key message  |  Income tax  |  Social security  |  Compliance obligations  |  Other issues

An individual’s liability to Croatian personal income tax (PIT) is determined by their tax residence status and the source of their income. PIT is levied at progressive rates on an individual’s taxable income for the year.

Key message

Extended business travelers are likely to be subject to PIT on employment income relating to their Croatian workdays (unless the individual qualifies for relief under the dependent personal services article of an applicable double tax treaty).

Income tax

Liability for income tax

An individual can be a tax resident taxpayer or a tax non-resident taxpayer. A resident taxpayer is taxable in Croatia on worldwide income while a non-resident taxpayer is taxable on income from Croatian sources only. A resident taxpayer is an individual who has, in Croatia, their:

  • residence (if an individual owns/rents accommodation without interruption for at least 183 days over 2 consecutive calendar years; staying permanently in the accommodation is not necessary)
  • habitual abode (if the circumstances suggest that an individual permanently resides in a place or region for a period of at least 183 days over 2 consecutive calendar years).
  • If an individual simultaneously has residence in Croatia and abroad (owns/rents accommodation without interruption for at least 183 days over 2 consecutive calendar years in Croatia and a second state), their residence will be in the state where their family resides. If an individual is single, it is considered that the individual has permanent residence (and accordingly tax residence) in the state from which they mostly travel to work or in which they mostly stay.

A resident taxpayer is also an individual who does not have a residence or habitual abode in Croatia but is employed with a government service and receives a salary based on this appointment.

A non-resident taxpayer is an individual who has neither residence nor habitual abode in Croatia but earns income from Croatian sources, which are subject to Croatian PIT.

Extended business travelers are likely to be considered non-residents of Croatia for tax purposes unless they enter Croatia with the intention to remain for more than 183 days over a period of 2 consecutive years.

Personal income tax is not payable on receipts of an individual earned on the basis of self employment or conducting work for an employer which is not registered in Croatia, if the individual has digital nomad status (a third-country national who is employed or conducts work via communication technology for a party that is not registered in Croatia).

Tax trigger points for employment income

There is no threshold/minimum number of days that exempts an employee from the requirements to file and pay PIT in Croatia. If an individual qualifies for relief pursuant to the dependent personal services article of an applicable double tax treaty, no PIT liability arises.

Types of taxable income

For extended business travelers, the types of income that are generally subject to PIT are employment income (encompassing benefits-in-kind) and other types of income that they might earn referable to work performed in Croatia.

Tax rates

Taxable income of both a resident taxpayer and a non-resident taxpayer is taxed at progressive rates of 20 percent and 30 percent. City surtax may also be applicable, and it is calculated based on total PIT payable, applying the relevant city surtax rate. The highest city surtax rate is in Zagreb, at 18 percent.

Social security

Liability for social security

A business traveler from a European Union (EU) member state is exempt from paying Croatian social security contributions provided an A1 form has been obtained from the relevant authorities of that member state.

If a business traveler comes from a country/jurisdiction with which Croatia has concluded a totalization agreement, and the relevant exemption forms are obtained to confirm the payment of obligatory insurance abroad, no Croatian obligatory social security contributions are required. Otherwise, depending on the case, the individual would need to at least pay health insurance contributions, where the level of contributions is assessed directly by the tax authorities. The fixed health insurance contribution liability as assessed by the tax authorities is approximately 75 Euros (EUR) per month irrespective of the individual’s income received.

Individuals who have digital nomad status are exempt from the health insurance contribution liability.

Employees’ compliance obligations

Individuals receiving income directly from abroad must report such income to the tax authorities within 30 days of receipt of the income via submission of a JOPPD form. An annual PIT return, if one is required to be submitted, is due at the end of February of the following year. Resident taxpayers are obliged to submit an annual PIT return for income received from abroad only if during the year PIT advances were not paid or were paid in an amount lower than the amount prescribed by the PIT legislation.

Extensions are granted only in exceptional circumstances. 

Compliance obligations

Employer reporting and withholding requirements

There are no compliance obligations for foreign employers for business travelers coming to Croatia unless the business travelers are EU citizens who become subject to Croatian social security contributions.

If a business traveler travels abroad from Croatia and remains subject to PIT in Croatia, their Croatian employer is required to withhold obligatory employee social security contributions and to pay employer social security contributions at rates specifically prescribed for business travelers. The employer is also required to ensure appropriate PIT withholding.

Other issues

Work permit/visa requirements

Provided that a third country/jurisdiction national does not have the status of a posted worker, the third country/jurisdiction national will be required to obtain either a confirmation of work, or a work and stay permit prior to commencement of work in Croatia.

A confirmation of work can be issued for a period of up to 30 or up to 90 days in a calendar year, depending on the type of work that will be performed by the foreign national.

A work and stay permit can be issued for a period of up to 1 year. The process of obtaining the same differs depending on the basis on which the work and stay permit is being sought. Namely, a Croatian employer wishing to hire a foreign national would first need to undertake a labour market test with a view of determining whether the position in question can be filled by unemployed individuals in Croatia. Only if the labour market test shows that there are no suitable candidates on the Croatian labour market, a work and stay permit could be issued for a foreign national. There is no need to conduct a labour market test if a particular employment position is listed in the decision of the Croatian Employment Office as a position for which there is a shortage on the Croatian labour market, as well as in particular cases listed in the Croatian Law on Foreigners (e.g. intra-corporate transfers, employment of directors, etc).

In addition to a confirmation of work or a work and stay permit, some third country/jurisdiction nationals also require an entry visa, which is merely an approval for entering the Croatian territory. An entry visa does not entitle the third country/jurisdiction national to perform any work in Croatia.

Stay and work of EEA nationals

EEA nationals can work in Croatia without obtaining a confirmation of work or a work and stay permit. If the intended duration of their stay exceeds 3 months in a consecutive 180 days, they are required to register their temporary stay in Croatia before a relevant police station in Croatia.

Double taxation treaties

Croatia has currently entered into double taxation treaties with more than 60 countries/jurisdictions.

Permanent establishment implications

A permanent establishment could be created as a result of extended business travel in Croatia if the travel lasts for more than 3 months in any 12-month period, unless the traveler is assigned to a Croatian entity and is subject to Croatian PIT.

Indirect taxes

The standard value-added tax (VAT) rate is 25 percent and applies to most products and services.

A reduced VAT rate of 13 percent applies to:

  • tourist accommodation services
  • full or half board services and the rent of campsites
  • certain newspapers and magazines, otherwise not subject to 5 percent rate, with the exception of newspapers and magazines that consist mainly or entirely of advertisements, or whose main purpose is advertising
  • edible oils and fats, baby food, (public) supply of water (except bottled or otherwise packaged drinking water) and refined (white) sugar
  • tickets for concerts
  • supply of electricity and public service of waste collection
  • urns and coffins
  • seedlings, seeds, fertilizers, pesticides and other agrochemical products
  • animal food except pet food
  • child diapers, child car seats and child food
  • live animals, raw or chilled meat, sausages and other butcher’s products
  • live and fresh fish, crabs, mollusks and other water invertebrates
  • fresh and dried fruit and vegetables and nuts
  • fresh poultry eggs;
  • services and related copyrights of authors, composers and other artists; And
  • preparation and serving of meals.

A reduced VAT rate of 5 percent applies to:

  • bread and milk
  • scientific magazines
  • cinema tickets
  • certain medicines
  • certain medical implants and orthopedic devices
  • books of professional, scientific, artistic, cultural and educational contents
  • certain daily newspapers.

A VAT exemption (with no input VAT recovery) applies to health and welfare services, education services, supplies by charitable organizations, supplies by museums, libraries, theatres, orchestras and other cultural services, financial and insurance services, betting and gambling, rental of residential property, postal services supplied by the Croatian National Post, public radio and television broadcasting and private use of personal motor vehicles, yachts, airplanes etc. when no input VAT was claimed.

Transfer pricing

Croatia has a transfer pricing regime that applies to any transaction between a Croatian company and a foreign related company, inclusive of any charges made to the Croatian company in respect of business travelers.

The transfer pricing provisions also apply to transactions undertaken between two domestic related entities if one of them has a preferential tax position (e.g. entitlement to a reduced corporate profit tax rate, exemption from corporate profit tax, or tax losses available for utilization).

Local data privacy requirements

The Regulation (EU) 2016/679 of the European Parlament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data and repealing Directive 95/46/EC (General Data Protection Regulation) is applicable in Croatia. Some additional privacy requirements are prescribed in the local Law on Enforcement of the GDPR.

Exchange control

There are no limitations for foreign and domestic currency brought into Croatia (for either residents or non-residents). However, amounts in excess of EUR10,000 must be reported to the Croatian Customs Authorities. The Croatian Customs Authorities must report amounts in excess of EUR10,000 to the Office for the Prevention of Money Laundering.

Non-deductible costs for assignees

Non-residents taxpayers are able to deduct from gross income only the basic personal allowance (currently 4,000 Croatian kuna (HRK) per month) and any obligatory foreign country/jurisdiction insurance contributions paid by the individual where an EU Regulation or a totalization agreement on social insurance with the respective foreign country/jurisdiction applies, or any Croatian employee social security contributions, if the individual is subject to Croatian social insurance. Any other costs or expenses are nondeductible.

Resident taxpayers are able to deduct from gross income the basic personal allowance (currently HRK4,000 per month), as well as additional personal allowances for dependent family members, any Croatian employee social security contributions, or any obligatory foreign country/jurisdiction insurance contributions paid by the individual, where an EU Regulation or a totalization agreement or on social insurance with the respective foreign country/jurisdiction applies.

Additional deductions are available for both non-resident taxpayers and resident taxpayers for the following:

  • donations up to 2 percent of the receipts for which, in the current year, an annual PIT tax return has been submitted and annual PIT has been determined or a special procedure took place establishing annual PIT and city surtax liabilities;
  • payments made by Croatian employers to Croatian voluntary pension funds (pillar III pension insurance) on behalf of Croatian employees up to a maximum of HRK500 per month per employee.

If both spouses are tax residents and pay PIT, it is possible to share additional allowances for children and other dependents of the immediate family.

Croatian domestic tax law indicates that foreign-sourced income, which is subject to PIT abroad, is also subject to PIT in Croatia, but a tax credit for PIT paid abroad may be applied to reduce PIT otherwise payable in Croatia; the PIT credited may not, however, exceed of Croatian PIT payable on that foreign income.

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All information contained in this publication is summarized by KPMG Croatia d.o.o. za reviziju, a Croatian limited liability company and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The information contained in this publication is based on the Croatian Personal Income Tax Law (Official Gazette 115/16, 106/18, 121/19. 32/20 and 138/20) and Croatian Social Security Contributions Act (Official Gazette 84/08, 152/08, 94/09, 18/11, 22/12, 144/12, 148/13, 41/14, 143/14, 115/16 and 106/18).