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.