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Taxation of net profit payments to legal and natural persons, residents of the Republic of Germany

The realized net profit that the company established in the Republic of Croatia realizes by performing activities/services and decides to pay to the members of the company / founder is taxable by corporate tax after withholding (for legal persons) or the income tax from the capital (for natural persons).

Members of the company who are tax residents of the Republic of Croatia, are fully subject to domestic tax legislation, while the situation is more complex for legal and natural persons who are not residents of the Republic of Croatia, because in these cases the provisions of the International contract for the avoidance of double taxation must be also considered. This is especially important in the cases when a law prescribed is more favourable for taxpayer, the dividend recipient or profit share.

In this way with The international contract on the avoidance of double taxation between the Republic of Croatia and FR of Germany a tax rate of 5% of the gross amount of the dividends is foreseen if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends.

In all other cases, when the beneficial owner of dividends is a natural person or a company that owns less than 10% of the capital of the company paying the dividends, the tax rate amounts 15% of the gross amount of dividends.

In the latter case, it is obvious that for a recipient of the dividends, that is a natural person or a company that does not own at least 10% of the capital of the a paying company, it is more favourable to apply national (Croatian) law according to which a tax rate of 10% is prescribed.

A resident of the Republic of Germany who earns income / revenue from dividends in or from the Republic of Croatia is obliged to report this income / dividend to the tax authorities of his home country.

It is important to emphasize that the purpose of The international contract on the avoidance of double taxation is to recognise the tax paid at the source country in order to prevent double taxation in the residence country of the dividend recipient.
The agreement between the Republic of Croatia and the Republic of Germany generally stipulates that the tax for a resident of the Federal Republic of Germany is determined by excluding income from the Republic of Croatia and property located in the Republic of Croatia, which can be taxed in the Republic of Croatia.

For dividend income, those rule apply only if these dividends are paid to a company (but not a company of persons) resident in the Federal Republic of Germany from a company resident in the Republic of Croatia, of which at least 10% of the capital is directly owned by a German company and when these dividends are not deducted when determining profits of the company paying them.
From the day when the Republic of Croatia joined the European Union, it is regulated that the withholding tax on dividends and profit shares don’t have to be paid when dividends and profit shares are being paid to a company that has one of the formations to which the common taxation system applies, which applies to parent and affiliated companies from different EU Member States, if the recipient of the dividend or profit share has the least 10% share in the capital of the company which pays a dividend or profit share and if it has the lowest percentage of shares in a continuous period of 24 months.