Taxation of the payment of dividends and shares in the profit of a Croatian company regarding German tax residents

In today’s practice, it is often the case that companies doing business in the Republic of Croatia are owned by natural or legal persons resident in the Republic of Germany.

The following is an overview of the tax rates applicable to the taxation of dividend payments in case where the owner of a Croatian company is a legal or natural person and a German tax resident.

I. Taxation of the company’s profit – in general

The operating profit of a company with a turnover of up to 995.421,06 EUR in annual income is taxed at a rate of 10%, and the profit of a company with a turnover of more than 995.421,06 EUR is taxed at a rate of 18%.

The annual financial and tax calculation of the company is concluded at the end of April of the current year for the previous tax (calendar) year.

The determined profit can be used for the needs of the company’s operations (therefore there is no payment of dividends / profit share) or it can be paid to the founding members according to their share in the capital.

If, by decision of the company members general meeting, the company’s net profit is retained for the needs of the company, it is not paid to the shareholders, therefore there is no further taxation.

If, by decision of the company members general meeting, the net profit is paid to the members of the company, the application of the tax rate differs depending on whether the shareholder is a legal or natural person and depending on whether the provisions of the Double Taxation Treaty apply.

II. Taxation of the payment of net profits to shareholders

1.Payment of profits to a legal entity

When the net profit is paid to a legal entity that is not a resident of the Republic of Croatia, there are two possible options in the application of tax regulations regarding taxation, and the taxpayer chooses the one that is most favorable for him.

In order to apply the benefits in the payment of net profit, it is necessary to meet the prescribed conditions.

1.1. Taxation of net profit payment according to domestic regulations (Croatian Income Tax Law)

– the withholding tax rate which is applied to the payment of dividends or profit shares is 10%.
– exceptionally, withholding tax on dividends and profit shares is not paid when dividends and profit shares are paid to a company that has a form of one of the subjects to the common system of taxation, which applies to parent companies and associates from different EU Member States, if the recipient of the dividend or profit share has at least 10% of the
capital of the company paying the dividend or profit share and if the lowest percentage of shares referred to in point 1 is held without interruption for 24 months.

The above mentioned option is not automatically applicable, but must be proven by the prescribed documentation.

1.2. Taxation of net profit payments by applying the provisions of the Double Taxation Treaty between the Republic of Croatia and Germany

– income tax rate is 5% of the gross amount of dividends if the actual beneficiary is a company (but not a company of persons) that directly owns at least 10% of the capital of the company that pays dividends.

To apply the rate from the Treaty, the dividend recipient must submit to the payer (Croatian company) the prescribed claim form confirmed by the German Tax Administration (Finanzamt).

Payment of profits to a natural person

Either domestic regulations or the provisions of the Double Taxation Treaty may also apply here.

The tax rate provided by domestic regulations (Income Tax Law) is 10%.
The tax rate provided for in the Double Taxation Treaty may not exceed 15%.

In conclusion, taxation will be carried out according to the domestic regulations since the prescribed tax rate is more favorable for the dividend recipient.

In conclusion, it is important to note that according to the provisions of the Treaty, double taxation is avoided by including the tax paid in the Republic of Croatia.