Mazars Tax News - November 2022
News from the Republic of Croatia
Proposal of the Law on Extra Profit Tax
On November 17, 2022, the Draft of the final proposal of the Law on Extra Profit Tax (“Extra Profit Tax”) was published, 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,
• 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 proposed Law. Please note that there are still ongoing discussions regarding this proposal of the Law, while changes are possible.
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".
Example:
Year | 2018 | 2019 | 2020 | 2021 | 2022 |
Profit | 100.000,00 | 180.000,00 | 120.000,00 | 200.000,00 | 400.000,00 |
Taxable profit | 2.000,00 | 4.000,00 | 3.000,00 | 5.000,00 | 20.000,00 |
Calculation of average profit:
Year | 2018 | 2019 | 2020 | 2021 | Average |
Taxable profit | 2.000,00 | 4.000,00 | 3.000,00 | 5.000,00 | 3.500 |
Increased by 20% |
|
| 4.200,00 |
|
|
Calculation of Extra Profit Tax in 2022.
Year | Amount |
Taxable profit | 20.000,00 |
Profit tax rate (18%) | 3.600,00 |
Base for Extra Profit Tax* | 15.800,00 |
Extra profit tax (33%) | 5.214,00 |
Total tax | 8.814,00 |
Tax burden | 44,07% |
*base calculated as a positive difference between the taxable profit in 2022 (10 million kuna) and the average profit of the previous 4 years increased by 20% (4,20 million kuna) | |
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.
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, which was used in the process of production or supply of services. Also, according to our understanding of the current proposal of the Law, when determining the basis for calculating Extra Profit Tax, carried tax losses are not taken into account.
Prescribed exemptions
The Proposal of the Law prescribes an exemption for newly established independent entrepreneurs who submit their first tax return for 2022. Also, 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 Proposal of 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%).
Rulebook on Amendments to the Rulebook on Value Added Tax
In the Official Gazette (Official Gazette 133/2022), on November 11, 2022, the Rulebook on Amendments to the Rulebook on Value Added Tax was published.
According to the above, VAT is calculated and paid at a rate of 0% on the supply and installation of solar panels for private residential buildings, premises that are mostly (more than 50%) used for housing and public and other buildings that are mostly (more than 50%) used for activities of public interest, as well as the supply and installation of solar panels near such facilities, areas and buildings.
According to that, the necessary equipment and works are taxed at a VAT rate of 0%, which includes the equipment group photovoltaic panels, inverter, battery (optional), building structure and cable distribution, solar collectors, hot water tank, circulation pump and the works and services, i.e., execution of assembly works, design and obtaining of permits and connection to the electric power distribution network.
In addition, to the supply of heating from thermal stations (including fees related to that supply) performed in the period from the date of entering into force of the Law on Amendments to the Law on Value Added Tax ("Official Gazette", number 113/22) until 31st of March 2023, VAT is calculated and paid at a reduced rate of 5%. The same applies to the supply of firewood, pellets, briquettes and wood chips.
Other News
Right to deduct input VAT
The Republic of Croatia, as an EU member state, is obliged to apply the jurisprudence of the EU Court competent for the interpretation of the provisions of Council Directive 2006/112/EC, which are implemented in the VAT Law. In connection with the above, the important judgment of the Court of the EU was ruled in case C-9/20 Grundstücksgemeinschaft Kollaustraße 136.
The rendered judgment states the following: " Article 167 of Council Directive 2006/112/EC of 28 November 2006 on the common system of valued added tax, as amended by Council Directive 2010/45/EU of 13 July 2010, must be interpreted as precluding national legislation which provides that the right of input tax deduction arises at the time the transaction takes place if, pursuant to a national derogation under point (b) of the first paragraph of Article 66 of Directive 2006/112, such as amended by Directive 2010/45, the tax becomes chargeable to the supplier of goods or services only when the remuneration is received and has not yet been paid.”
The Tax Authority referred to the ruled judgment in its official opinion stating that when a taxpayer, who applies the regular taxation scheme or VAT cash accounting scheme, receives an invoice for the provided supply by the taxpayer who applies the VAT cash accounting scheme, can deduct input VAT only when taxpayer pays the invoice to that supplier. Thereby, that EU Court's decision is not limited to a specific case.
The position of the European Commission is that Article 167 of the VAT Directive links the moment of the right to VAT deduction and the moment of the obligation to calculate that VAT. It is not possible to deviate from this rule unless the VAT Directive provides such possibility. Furthermore, the VAT charged on the supply of goods and services performed by taxpayers who apply the VAT cash accounting scheme from Article 66 point (b) of the VAT Directive can only be deducted by their customers if the suppliers receive that VAT from them as a part of the payment for performed supplies.
The application of the above is applicable in practice from December 1, 2022.
Agreement between the Republic of Croatia and the Republic of Cyprus - Elimination of double taxation
In the period from November 1 to November 3, 2022, the delegations of the Republic of Croatia and the Republic of Cyprus concluded negotiations on the conclusion of the Agreement on the elimination of double taxation with respect to income and property taxes and the prevention of tax evasion and tax avoidance. With that respect, the entry into force of the Agreement itself is expected soon.
The entry into force of the subject Agreement will lead to numerous reliefs and improvements, such as:
- various tax reliefs for all types of income,
- improvement of conditions and increase of mutual exchange of goods and services,
- improvement of financial investment conditions,
- increase in the economic activities of the states concerned.
With the conclusion of the negotiations, both countries will start their own internal procedures that enable the signing of the Treaty and its subsequent confirmation in the respective countries' parliaments.
We would additionally note that, upon entry into force of this Agreement, the Republic of Croatia will have signed treaties on the avoidance of double taxation with all member states of the European Union.
