Business of non-residents throughpermanent business unit

It is well known that some citizens hold large amounts of money in the bank accounts, while due to high inflation and low interest rates savings in the bank are currently not profitable.

Namely, by holding money in the bank savers do not generate any returns, while inflation at the same time reduces the value of money saved, because with the money saved, savers can buy less and less products and services day by day, and this trend will continue in the future.

To preserve the value of money, real estate investments provide good security against inflation and represent tangible, durable value.

A good example is investment in vacation properties that can later be rented.

By renting holiday properties the investors generate regular income, and it should also be noted that the real estate market has recently achieved positive economic growth and thus increases the value of the property and the possibility of earning money when selling the property.

Apart from domestic investors, foreign investors realise a positive trend by investing in the domestic real estate market (for vacation). Before starting to provide accommodation services, foreign investors are obliged to regulate their tax status in the Republic of Croatia.

Their tax status depends on the way they provide accommodation services, whether they are taxpayers in
the country of residence, and whether they are persons from other EU Member States or third countries.

A business unit of a non-resident is a permanent place of business through which a non-resident foreign entrepreneur performs activities in the Republic of Croatia, completely or in part.

Companies today are increasingly operating in the markets of several different countries, and due to the growth and expansion of multinational companies, as well as problems with cross-border activity and its
increasingly complicated taxation, there are situations of international double taxation or double non-taxation.

As a result, because of the expansion of the business boundaries of a company outside the country of
residence, there is the possibility of establishing a permanent business unit through which an entrepreneur may carry out activity completely or in part without registering any legal form of activity in that country.

Since the permanent business unit is a complex concept and raises doubts about the determination and taxation of profits due to the competition of the legal authority in taxation of the same taxpayer, as well as in general due to the problem of international double taxation, the Organisation for Economic Cooperation and Development has regulated this issue through a Model contract on the avoidance of double taxation on income and capital with the aim of avoiding double taxation, preventing tax evasion and the correct distribution of taxation rights between Contracting States, and it especially regulates the permanent business unit as well as operating profit.

The specific objective of such regulation is to avoid the taxation of a taxpayer by two tax authorities so that entrepreneurs are not “punished” for their interest in doing business abroad.
Thus, through a permanent business unit, a foreign company may legally carry out its activity in the Republic of Croatia for a certain period without conducting registration at the commercial Court.

Namely, a permanent business unit is registered with the competent tax administration office.
Such taxpayers are obliged for tax purposes for all benefits related to income generated in the Republic of Croatia for which the Republic of Croatia has the right to tax.