Mazars Tax News - December 2022

News from the Republic of Croatia

Interest rate on loans between related parties

The new Decision on the interest rates on loans between related parties was adopted for 2023 and it defines that such interest rate should amount to 2,4% which represents a decrease compared to the previous year, when it amounted 2,68%.

Contribution base for compulsory insurance

On its website Tax Authority has published the draft of the Decision on amounts of base for calculating compulsory insurance contributions for 2023, which established the highest monthly base for calculating contributions of 8.203,08 EUR (61.806,11 HRK) or 98.436,96 EUR (741.673,28 HRK) per annum. Minimum monthly base for calculating contributions will amount to 519,53 EUR (3.914,40 HRK). In addition, the minimum monthly basis for contributions for management staff employed in the company in which they perform this full-time function, will amount to 888,67 EUR (6.695,68 HRK).

Law on Extra Profit Tax

On December 16, 2022, Croatian parliament has adopted Law on extra profit tax, which, as such, is a one-time tax planned for 2022. It follows from the above that payers of Extra Profit Tax are Corporate Income Tax payers determined in accordance with the special regulation on Corporate Income Taxation if the following two conditions are met during the tax period:

• generated revenues are exceeding HRK 300 million (cca 39,8 mil. EUR),
• the taxable profit was determined in the amount higher than 20% compared to the average taxable profit from the four previous periods (the period from 2018 to 2021 fiscal year).

In continuation is an overview of the key provisions of the Law.

Tax rate and deadlines for submission of tax returns

The Extra Profit Tax rate would be 33%, which means that the taxpayer will first pay Corporate Income Tax at the rate of 18% and additionally pay an Extra Profit Tax at the rate of 33% on the realized "Extra Profit".

Extra Profit Tax is calculated for the tax period that began on January 1, 2022.

If the taxpayer’s tax period differs from the calendar year, the calculation and payment period will be adjusted according to the provisions on the submission of the Corporate Income Tax Return. The deadlines for submission of return and paying the tax liability are the same as the deadlines for submission of Corporate Income Tax return and paying the Corporate Income Tax.

In case the taxpayer does not submit a tax return and does not prove that it is not liable to pay Extra Profit Tax, the Tax Authority is authorized to determine the Extra Profit Tax liability by assessment.

Determination of the basis for Extra Profit Tax

The basis for the calculation of the Extra Profit Tax is the positive difference of the taxable profit of the tax period and the average taxable profit generated in the four previous tax periods increased by 20%, while the taxable profit must be reported on positions 36 and 39 of Corporate Income Tax return.

Moreover, if the taxpayer reported a tax loss in one of the previous tax periods, the negative amount or zero reported on positions 36 and 39 of Corporate Income Tax return, this will not be taken into account when calculating the average taxable profit.

The basis for the calculation of the Extra Profit Tax must be corrected for corrections of revenues or tax liabilities determined by tax audit.

When determining the amount of total income, income resulting from the write-off of liabilities by creditors in pre-bankruptcy and bankruptcy proceedings should be excluded, as well as income in bankruptcy proceedings resulting from the sale of assets to settle debts to creditors and income or profit from the sale of long-term tangible or intangible assets to an unrelated person (in the case of a related person, provided that the same has been implemented by October 31, 2022), which was used in the process of production or supply of services. Also, profit or loss from the sale or other disposal of shares and shares of subsidiaries, sold or disposed of after two years from acquisition, is not taken into account (in the case of a related person, provided that the same has been implemented by October 31, 2022).

In addition, when determining the basis, unrealized losses of financial assets whose change in fair value is recognized through the profit and loss account, and for which the tax base has been increased on positions 22 of the Corporate Income Tax return, except for loans and receivables, may be excluded.

Beneficiaries of tax relief according to the Investment Promotion Act reduce their liability for extra profit tax by applying a rate that also reduces their corporate income tax liability according to the regulation on investment promotion in the same tax period.

Prescribed exemptions

The Law prescribes an exemption for newly established independent entrepreneurs who submit their first tax return for 2022.

Also, an exemption is prescribed in the event that the taxpayer have not reported taxable profit on positions 36 and 39 of Corporate Income Tax return in all four previous tax periods or in all periods of activity that are shorter than the same period.

In addition, an exemption is prescribed for Corporate Income Tax payers who end their business without first transferring their activities to other taxpayers if they are submitting the last Corporate Income Tax return.

Solidarity contribution

The Law stipulates that, if the person liable for Corporate Income Tax does not generate income in the amount above HRK 300 million, but fulfils the conditions related to the payment of the solidarity contribution according to Regulation 2022/1854, the same will be liable to pay the solidarity contribution according to the Regulation (minimum 33%).

Law on prevention of undeclared work

On December 16, 2022, the Croatian Parliament passed the Law on prevention of undeclared work, which, among other things, stipulates that the contractor is jointly liable for the obligations that his subcontractor as an employer has towards his workers. It is also stipulated that the contractor is released from liability if undertake all appropriate actions in order to request and receive from its subcontractor before the start, i.e. during the performance of the works or the provision of services:

• a list of all workers employed in the execution of the contract on the provision of services between the contractor and subcontractor,
• for each individual worker employed to execute the contract: identification data of the worker, date of start and end of performance of works and services, and information on the worker's salary,
• for the duration of the contract between the contractor and subcontractor, for each individual worker, at least once a month, proof of payment of salary and contributions

Other news

OECD Pillar Two

The Organization for Economic Cooperation and Development (OECD) announced on December 12, 2022, the application of measures from the so-called Pillar Two, which prescribes a minimum profit tax rate of 15% for multinational groups with a consolidated revenues of at least 750 million euros. The new rules will reduce the risk of base erosion and profit spillovers and ensure that the largest multinational groups pay an agreed global minimum rate of corporate income tax, regardless of where they are based or in which country or jurisdiction they operate.

The directive must be transferred into the national legislation of EU member states by the end of 2023. In this way, the EU will be the leader in the application of G20/OECD global agreements related to the Second Pillar.

On 8 October 2021, nearly 140 OECD/G20 countries of the inclusive Base Erosion and Profit Shifting (BEPS) framework reached a landmark agreement on international tax reform, as well as a detailed implementation plan.

The reform of the international rules on profit tax consists of two pillars:

• Pillar 1 covers the new system of assigning the right to tax the largest multinational companies to the jurisdictions in which profits are made. The key element of this pillar will be a multilateral convention. Technical work on its details is underway
• Pillar 2 contains rules aimed at reducing opportunities for base erosion and profit shifting, to ensure that the largest multinational groups of companies pay a minimum rate of corporate income tax. This pillar is now legally incorporated into the EU directive, which was unanimously adopted by all member states.

Therefore, on December 22, 2021, the commission presented a proposal for a directive whose goal is to implement the 2nd pillar in a manner that is consistent and compatible with EU law.