CHANGES OF TAXATION LEGISLATION AND TAX BENEFITS FOR CRAFTSMEN AND SMALL INVESTORS
Latest amendments of taxation legislation primarily refer to income tax and value added tax with various benefits for small investors and craftsmen.
The tax base of a resident is the total amount of earned income (salary), the self-employment income, the income from property rights and assets, the investment income, the income from insurance and other income earned in the home country and abroad (principle of world income), reduced by the personal deduction. The tax base for non-residents is the total amount of income earned in the home country, reduced by the personal deduction for non-residents.
The amendment of the Income Tax Act increases the monthly personal deduction, i.e. diminishes the tax base, from 1800.00 to 2200.00 kunas, whereby for people domiciled in areas of particular state interest, the prescribed personal deduction amounts up to 3840.00 kunas per month. The personal deduction can be further increased by the maintenance of close family members, payments for health insurance up to the value of mandatory health insurance contributions, donations in kind or in cash within the country assigned to the account of associations and other persons who perform these activities according to special rules or assigned for cultural, educational, scientific, medical, humanitarian, sports or religious purposes, up to 2% of the annual income presented in the previous year.
The income tax is payed by the rate at:
– 12% on the tax base up to HRK 2,200.00 per month, that is 26,400.00 kunas per year,
– 25% on the tax base which exceeds the amount of HRK 2,200.00 up to 8,800.00 per month, which is the subsequent 79,200.00 kunas of annual income, and
– 40% on the tax base which exceeds the amount of 8800.00 per month, that is, the part of the annual income that exceeds HRK 105,000.00 a year.
Such system of calculating the income tax at a progressive rate and the prescribed deduction favours small investors. These changes have been introduced in order to obtain the equal distribution of the tax burden in proportion to the solevency of the taxpayers.
A new tax rate of 12% was introduced on the 1st of March 2012 on dividend income and profit sharing. Such rate is relatively low, taking into account the comparative law.
However, there is an exemption from tax provided for income from dividends and profit shares up to the amount of 12,000.00 kunas per year, in order to protect small shareholders. The tax on dividends at a rate of 12% is also applied to foreign shareholders, but because of the various agreements on the avoidance of double taxation and the EU directives, in most cases, foreign owners will be fully exempted from paying the income tax or obliged to pay lower rates.
In Croatia there is no income tax on interest income on deposits in either domestic or foreign currency, term deposits and deposits at call in kunas or foreign currency that individuals have in banks, saving banks and savings and loan associations, regardless of the amount of interest realised. Small investors and craftsmen do not pay income tax nor on savings and other deposits.
In Croatia there’s no obligation to pay taxes on capital gains realized from the sale of stocks and shares, if such sale does not represent a business activity of the taxpayer. So, if an individual purchases or otherwise acquires stocks or business shares of the company X, and then sells them at a price several times higher, profits from such transactions are not considered taxable gains.
The most interesting exemption is certainly the full exemption from the payment of profit tax due to the increase of the share capital, provided by the Profit Tax Act. Namely, the capital gain is not assessed in case when dividends and profit share are used for the capital increase (reinvested earnings) or if the dividends and profit shares are realised under “ESOP” programs (Employee Stock Ownership Plan).
The Income Tax Act also includes the special tax exemption up to 100% for persons with residence in areas of special interest who exercise self-employment until the 2022, provided that they employ more than two full-time workers.
People who exercise self-employment may reduce the tax base of the income tax for the amount of payed salaries and contributions for new workers with whom they have concluded the employment contract for indefinite period.
The self-employment income can be further reduced by the costs of research and development up to 100% of the costs spent and declared.
The rate of value added tax has also been changed and instead of a unique rate, rates of 25% and 10% have been introduced. From the 1st March 2012 the lower VAT rate applies to edible oils and fats from vegetables and animals, baby food, water supply, and white sugar. Starting from the 1st January 2013 the reduced tax rate of 10% is applied to the catering services, namely – food preparation and service of drinks, wine and beer in accomodation objects. The application of this reduced tax rate should affect catering prices, therefore the full effect is expected in the tourist season.