Activity of non-residents by a permanent business unit

It is known that some citizens have large amounts of money in bank accounts, while due to high inflation and low interest savings in the bank is currently not worth it. By keeping money in the bank, they are not making a profit, while at the same time inflation is reducing the value of the money saved because they can buy fewer and fewer products and services every day with the money they save, and this trend will continue in the future. To preserve the value of money, real estate investments are a good hedge against inflation and represent tangible and lasting value. A good example is investing in vacation homes that can be rented out later. Investors earn a regular income by renting vacation homes, and it should also be noted that the real estate market has recently achieved positive economic growth, increasing the value of the property and the possibility of earning the money when selling the property. In addition to domestic investors, foreign investors achieve a positive trend by investing in the domestic real estate market (vacations). Foreign investors are obliged to settle their tax status in the Republic of Croatia before providing accommodation services. Their tax status depends on how they provide accommodation services, whether they are taxable in their country of residence or whether they are persons from other EU Member States or third countries.

A non-resident business entity is a permanent business entity through which a non-resident foreign entrepreneur carries out activities in the Republic of Croatia in whole or in part.

Today, trading companies increasingly operate in the markets of several countries, and due to the growth and expansion of multinational companies, as well as problems with cross-border activity and their increasingly complicated taxation, there are situations of international double taxation or double non-taxation. Consequently, there is the possibility of establishing a permanent business entity through which a company can carry out all or part of its activities without registering a legal form of activity in that country.

Since the permanent business entity is a complex concept and raises doubts about the determination and taxation of profits because of the competition of the judicial authority for the taxation of the same taxpayer, as well as, in general, because of the problem of international double taxation, the Organization for Economic Cooperation and Development has regulated this issue through a Model Treaty for the Avoidance of Double Taxation of Income and Capital, which aims to avoid double taxation, tax evasion and the correct allocation of taxation rights between the Contracting States and which regulates, in particular, the permanent business entity and operating profits. The specific objective of this regulation is to avoid the taxation of a taxpayer by the two tax authorities, so that entrepreneurs are not “penalized” because of their interest in doing business abroad.

Thus, a foreign commercial company may carry out its activities in the Republic of Croatia through a permanent business unit for a certain period of time without being registered with the Commercial Court. Indeed, a permanent business unit is registered with the competent body of the tax administration.

These taxpayers are liable for tax on all profits earned in the Republic of Croatia for which the Republic of Croatia has a right of taxation.