Tax specifities and differences between Germany and Croatia

This article lists the tax specifics, i.e. the differences between the Federal Republic of Germany and the Republic of Croatia in terms of real estate levies, inheritance taxes and tax liabilities depending on the taxpayer’s residence. The differences in the tax arrangements of these two countries are not negligible, thus we present some of them.

Real estate levies

In the Republic of Croatia, property owners do not pay the annual real estate tax, unless it is a holiday home, but a fee is paid in the form of a utility fee, which must be determined by a decision on the utility fee. In addition to the monthly amount of the utility fee determined in one point of the operative part of the decision, the annual amount of the utility fee must be indicated in the second point of the operative part.

If you are a natural person and an owner of a holiday home (building, part of a building or apartment that you use occasionally or seasonally), you pay the tax on holiday homes annually.

The tax amounts from 0,66 to 1,99 EUR per square meter of usable area, depending on the decision of the municipality or city in which the home is located. This would mean that, if your property has, for example, 100 m2 of usable area, you will pay an annual tax on your holiday home in the amount of between approximately 65,00 to 200,00 EUR.

However, it should be noted that in accordance with the Croatian Real Estate Sales Tax, real estate transfer tax must be paid, i.e. the person liable to pay the tax is the acquirer of the real estate. This tax is paid at the rate of 3% of the established interest rate (market value) of real estate transfer tax.

This would mean that if you buy real estate in the Republic of Croatia, you have to pay this tax. Please note that there is a possibility that buyers, whether natural or legal persons, may be obliged to pay VAT if they buy a new property or property that has been in use for less than 2 years, however in that case they would not pay real estate transfer tax. In Germany, this tax, depending on the federal state, liesbetween 3.5 and 6.5%.

Furthermore, in Germany it is necessary to pay an annual real estate tax. Real estate tax is a property tax and every homeowner in Germany is required to pay it. It is charged for ownership as well as construction on the plot. Each property owner must pay real estate tax every three months, unless otherwise agreed. The basis for this taxation is the unit value, which is determined by the tax administration.

Real estate tax in Germany covers all real estate owned by a person, regardless of whether it is a house or an apartment in which the person is permanently resident or a holiday home.

Inheritance tax

In Croatia, you pay inheritance and gift tax if you received or inherited the following as a gift:

• cash, pecuniaryclaims and securities
• movable property if its individual market value exceeds 6.636,14 EUR on the day of determining the tax liability.

If, as an heir, you renounce the inheritance or cede it in theinheritance proceedings, the tax is paid by the person to whom the inheritance belonged or was ceded to, and must be paid at the rate of 4%.

Furthermore, if you have acquired real estate by inheritance or gift, it issubject to the real estate transfer tax, which, as already stated, amounts to 3% of the established real estate transfer tax rate.

As for real estate, it should be noted that if value added tax is paid on gifted real estate, you are not obliged to pay real estate transfer tax.

You are also entitled to an exemption if you inherited property, received it as a gift or otherwise acquired it free of charge and you fall into one of the following categories:

• spouse or non-marital partner, formal or informal life partner, descendants and ancestors who form a vertical line and adoptees and adoptive parents who are in this kind of relationship with the deceased or the donor
• natural persons to whom the Republic of Croatia or local and regional self-governments donate, i.e. give real estate for of compensation or for other reasons in connection with the Croatian War of independence
• former spouses, former non-marital partners and former formal and informal life partners when arranging their property relations.

We also note that some of these exceptions are also applicable to the inheritance of movable property.

In Germany, anyone who takes over an inheritance pays an inheritance tax.

This inheritance can be money, a company or property. When calculating inheritance tax, the amount of inheritance and the degree of kinship are important. There is a certain non-taxable amount for inheritance, up to which the inheritance tax does not have to be paid.

Non-taxable amounts ensure that related remaining family members can inherit a significant amount tax-free, and the amount of inheritance tax is determined by the inheritance tax rate depending on the inheritance. Also depending on the degree of kinship, the inheritance tax class applies.

Tax in relation to residency

As a rule, the state in which you are resident for tax purposes may tax your total worldly income, whether it is income based on work or unearned income. This includes salaries, pensions, benefits, income from real estate and other sources, as well as capital gains from the sale of real estate realized anywhere in the world.

Pursuant to the Agreement on Avoidance of Double Taxation concluded between the Republic of Croatia and the Federal Republic of Germany, a resident is a person who according to the laws of that state is subject to taxation based on his residence, domicile, place of administration or some other characteristic of similar significance which includes that state, its provinces and its local bodies.

If the person is a tax resident of both Contracting States, then the following applies:

a) the person is considered to be a resident of the State in which he is domiciled; and if he is domiciled in both States, he shall be deemed to be a resident of the State which he has the closest personal and economic ties with (center of vital interests);

b) if it is not possible to determine in which State he has a center of vital interests or if he is not domiciled in any State, he shall be deemed to be a resident of the Contracting State in which he has his habitual residency;

c) if he has an habitual residency in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;

d) if the person is a national of both States or is not a national of either State, the competent authorities of the Contracting States shall settle the question by a mutual agreement.

The purpose of international agreements on the avoidance of double taxation, which are bilateral and apply to taxpayers residents in the Contracting States, is to avoid the effect of double taxation and, as a rule, do not lead to a double tax liability for the taxpayer. In principle, the provisions of one such treaty determine the right of the contracting states to tax a particular type of income and to apply double taxation avoidance methods (counting in tax paid abroad or exemption).

Therefore, depending on the conditions above, you can be considered as a resident of one or another country, as a result of which you will be taxed in your country of residence, so it is advisable to befamiliar with the tax provisions of both countries to determine which tax system best suits your needs.

We recommend that you consult a lawyer or tax advisor in the country whose taxation is important to you for more detailed advice.