Business taxation in Croatia attracting foreign investments in post accession era. Presentation delivered at the University of Ferrara, Rovigo campus, on January 27th 2017. All rights reserved by the author.

1. La Tassazione delle PMI in Italia e Europa: Modelli a Confronto
Business taxation in Croatia: Attracting Foreign Investments in
Post-Accession Era
Prof. Žunić Kovačević Nataša
Faculty of Law University of Rijeka

2. Introducing note
• SME sector - diverse with respect to its size and sector composition.
• the SME sector - mostly includes minor traders, self-employed, small business proprietors, firms
run by owners.
• eemphasizing the opportunities for a SME’s in the lower tiers of the supply chain - a traditional
approach - a change of paradigm
• since there is evidence of changes in such patterns because there is the increasing
involvement of SMEs as foreign investors.
• SME’s are internationalising their operation as a reaction to competitiveness pressure, need
for reducing costs.
• EU - nearly 99 per cent of all enterprises are SMEs
• Croatia - 2014 there was an increase in the total number of business entities in Croatia in
relation to 2013/ by 3.2%
• 99.7% of business entities come from the small and medium enterprise sector
• an increase in the number of small enterprises (3.3%),
• decline in the number of medium enterprises (3.7%), and
• an increase in the number of large enterprises by 1.1%
Rovigo, January 27, 2017 222.1.2017.

3. • EY Survey on FDI: the most attracting EU countries for FDI are Germany,
UK, France, Netherland and Poland, top countries by FDI projects are UK,
Germany, France, Spain and top countries by FDI job creation are UK,
Poland and Germany.
• SMEs - the driving force behind economic growth
• But - limited access to capital market financing
• SMEs - vital for the Croatian economy, too
• Yet access to finance remains a challenge/ In this situation capital
markets can provide a viable alternative
Rovigo, January 27, 2017 322.1.2017.

4. SMEs in Croatia
SMEs - defined finally in consistence with the European definition
from January 2016 -the main factors determining whether an
enterprise is an SME are: staff headcount and either turnover or
balance sheet total.
-Small Business Development Promotion Act differentiates micro,
small and medium business entities:

5. Micro, small and medium business entities
are physical and legal entities that
• Micro
• annually on average employ less than 10 employees and
• achieve total annual revenue equivalent up to EUR 2,000,000.00, i.e. have value of
long-term assets equivalent up to EUR 2,000,000.00.
• Small
• aannually on average employ less than 50 employees and
• aachieve total annual revenue equivalent up to EUR 10,000,000.00 or have balance
sum if they are profit tax payers, i.e., have long-term assets equivalent up to EUR
10,000,000.00 if they are income tax payers.
• Medium
• aannually on average employ between 50 and 249 employees, and
• aachieve total annual revenue equivalent from EUR 10,000,000.00 to EUR
50,000,000.00 or have balance sum if they are profit tax payers, i.e., have long-term
assets equivalent from EUR 10,000,000.00 to EUR 43,000,000.00 if they are income tax
payers
•
•

6. Taxation issues of SMEs and attracting foreign investments
Short history background on taxation issues
• the Croatian business taxation - two broad stages:
• The first or early stage started 1991 - the state’s independence; the collapse of the state
owned enterprise sector and a lack of large privately owned enterprises; tax system
• Post-accession era - as second stage - global financial crisis; deficit and
public debt problems; taxation becomes extremely important - tax
changes become more frequent
• The last tax reform - in force from january 2017 - brings many changes in taxation - the
principles of simplicity and decrease of entrepreneurial tax burden

7. • the number of taxes that have to be paid during a year (2016) -
about 19
• as in previous years,
• significantly higher than in, for example, Germany (9 taxes) or
Slovenia (10 taxes)
• but in those countries it also takes considerably more time to
prepare and pay taxes, and the profit tax rates are higher .
• The total tax burden of entrepreneurs increased from 18.4% in 2014
to 20% in 2015. The major tax burdens in Croatia:
• are value added tax,
• income tax,
• profit tax- corporate income tax,
• and surtax.

8. Tax reform amendments in force
from January 2017
• New VAT rates for certain types of supplies
• Small taxpayers whose taxable supplies do not exceed
threshold may also apply for VAT registration, however,
once registered, such taxpayers will be obliged to remain
in the VAT system for the next three years, instead of
currently prescribed five years
• Small taxpayers who pay VAT on supplies subject to
reverse charge - supplies from the taxpayers that have
no establishment, domicile or habitual residence in
Croatia may submit VAT returns in paper form

9. Amendments to the Corporate Income Tax Act
• generally applied to tax periods from 1 January 2017
• Decrease of the tax rate - reduced the CIT rate of 20% to 18%
• Additionally, introduced a reduced CIT rate of 12% for taxpayers
who have realized revenue of less than HRK 3 million in previous
tax period.
• A possibility to determine the tax base based on a cash principle is
introduced for taxpayers who have realized revenue less than HRK
3 million in the previous tax period.
• Taxpayers who are also VAT payers will be entitled to choose cash
principle determined tax base if they have, based on VAT legislation,
already chosen to pay VAT based on collected income.

10. Amendments in tax incentives
• abolished the reinvested profit relief that was applied
from 2012
• there are changes in tax incentives for supported areas:
taxpayers who perform business activities in the field of
municipalities classified in the I. group of level of
development and who employ more than 5 employees
for an indefinite period (with more than 50% of
employees who have residence and stay in the
supported area in the I. group, or in the city of Vukovar),
pay 50% of the prescribed CIT rate

11. • The amended CITA introduces the possibility of concluding an advance
pricing agreement between the taxpayer and Ministry of Finance – Tax
Authority and tax authorities of other countries - where related parties or
permanent establishments are residents- in the area of transfer pricing and
contractual relations between related parties.
• Advance pricing agreement - binding for the taxpayer and Ministry of
Finance, Tax Authority
• Costs - born by the taxpayer

12. New PITA
• entered into force as of 1 January 2017
• New tax brackets, rates and personal allowances
• three tax brackets, PIT rates 12%, 25% and 40% replaced
with two new tax brackets and rates:
• tax rate of 24% will be applied to taxable income up to HRK 210.000
(approximately EUR 28.000)
• tax rate of 36% will be applied to taxable income exceeding HRK
210.000.
• Basic personal allowance has been increased from
HRK 2.600 to HRK 3.800.
• Allowance for supported family members has been
increased as well

13. Tax preferential treatment of SMEs
• Tax preferences are mostly present for the incorporated
SMEs
• preferential / lower tax rate is the mostly used form
of privileged tax treatment for SMEs
• practical implementation of such preference is not easy and do not
brings simplicity.
• Reduced rate is provided on the size definition – as
criterion, as it is in most countries.
• This size definition is used in terms of total annual income
• Question: whether it is needed to provide reduced rate for SMEs as
the standard rate is relatively low

14. • Other tax incentives offered for SMEs usually are not reserved
just for them, but offered for all enterprises:
• Protective interest was incentive in Croatia and it was almost
first implementation of it in the region and wider/ in the period
1994-2001/

15. • Act on Investments Promotion and
Enhancement of Investment Environment:
• incentives for microenterprises, tax and custom
advantages, incentives for eligible costs of new jobs
linked to the investment project, incentives for eligible
costs of training linked to the investment projects,
incentive measures for development and innovation
activities, incentive measures for the business support
activities, incentive measures for the high added value
service, incentive measures for capital costs of the
investment project, and incentive measures for labour
intensive investment projects

16. • All mentioned incentives may be used by foreign and domestic
investors
• investing at least 150.000 EUR (50.000 EUR for micro entrepreneurs) and
• creating at least 5 new jobs (places of employment) for workers (3 for micro
entrepreneurs).
• These incentives relate to manufacturing and processing activities, development
and innovation activities, business support activities, and high-added value
activities.
• The minimum period for maintaining the investment is
• five years for large enterprises and
• three years for small and medium-sized enterprises after the completion of the
investment.
• the period of investment must equal or exceed the period the incentive measure is provided under the
Act

17. • Thirteen free zone locations are currently in Croatia
• The main benefits for users are the exemption from customs duties
on imports of goods and lowering 50% of the CIT rate and
exemption from this tax for the first five years for investment in the
construction of infrastructural facilities in the zone of more than 1
million Kuna’s- (approximate 130.000 Euro)
• they were tax-free (exempt from CIT payments) during the first five years of
business dealings in the Free Zone, but till the end of 2016 year.

18. • Complete suspension of tax holidays - mostly connected with
Croatia's accession to the EU
• accelerated depreciation used – allowed for the depreciation
rate to be doubled.

19. The other tax incentives exist which are not classic
investment allowances
• tax base deductions for certain costs and tax loss
relief:
• rregarding tax base deductions - additional allowances reducing
the tax base are possible for costs of research and development
(R&D) projects as well as for education and training costs of
employees
• tax loss relief - tax losses may be carried
forward for up to five consecutive years
• The carry- back of losses is not permitted

20. The impact of tax procedural rules on attracting foreign investments
• Tax procedural rules - seen as vehicles to attract foreign
investments
• advance tax rulings - 2015 - Croatian General tax Act finally
introduced
• the special status of the taxpayer
• Ordinance on the methods of granting and the abolition of
the special status of the taxpayer for the purpose of
promoting voluntary compliance entered into force in 2016

21. Concluding remarks
• Croatia - as a typical transition country - a relatively large number of
CITincentives
• with tax holidays as the predominant form - abolished in after
accession stage
• various tax incentives - instruments of stimulating economic
activity and attracting foreign investments
• numerous international studies - indicate the existence of key
obstacles to the development of the small and medium
enterprise sector in Croatia Obstacles to the development of the
small and medium enterprise sector
• regulatory framework, entrepreneurial education and transfer of results of
research to the small and medium enterprise sector are identified as the
weakest components

22. Concluding remarks
• The presence of the same obstacles over a number of years
indicates a lack of long-term structural reforms needed to
encourage productivity and entrepreneurship in order to initiate
economic growth,
• Preferential tax treatment for SMEs is under criticism, especially in
theory and academic literature, but even though most tax systems
apply such regimes.
• Croatia apply different tax reliefs for SMEs and attracting foreign
investments, more or less most are classical forms.
• It is known that such measures have no or have a little impact in
short terms, especially in times of crises but there are founded
expectation that in the longer term might enhance growth.