Mazars Tax News - October 2021

Tax Authority recently issued an opinion regarding the capital gain determination on stocks acquired through the option plan. Namely, the question is how to determine the purchase value of stocks acquired by the option plan (as a rule, the purchase value of such stocks is lower than the market value, which is why it is necessary to pay personal income tax when acquiring these stocks).

In this particular case the stocks were acquired for the USD 50 under an option contract while their market value was at the moment of acquisition USD 200. The difference between the market value of the stocks and the stock price determined by the option contract (i.e. the amount of USD 150=200-50) is taxed by the personal income tax at the rate of 20% and surtax based on the option purchase of stock.

After one month, the acquired stocks were sold and a receipt of USD 300 was realized, so the question arose on how to determine the amount of capital gain, i.e. is the amount of USD 200 taken into account when determining capital gain (their market value at the time of acquisition) or what was actually paid for the acquisition of stocks (USD 50).

In its opinion, the Tax Authority concluded that the tax liability needs to be determined as the difference between the agreed sale price (USD 300) and the purchase value of USD 200. Accordingly, this imply that the capital gain amounts to USD 100 (the difference between the sale price of USD 300 and the purchase value of USD 200).

Tax Authorities' opinion - overview of countries with whom Republic of Croatia confirmed reciprocity in the field of VAT refund to foreign taxpayers

Tax Authority published list of countries with whom Republic of Croatia concluded an agreement on reciprocity in the field of VAT refund.

Apart from the EU Member States where the EU VAT refund system has been established, under which taxpayers can obtain VAT refunds from another Member State under certain conditions (although they are not registered for VAT purposes in that country), VAT refunds are also possible from third countries if a bilateral agreement on reciprocity in the field of VAT refunds to foreign taxpayers has been concluded.

Based on that, it is possible to request a VAT refund from Serbia, Switzerland and the UK, with whom the Republic of Croatia has concluded an Agreement on reciprocity in the field of VAT refund to foreign taxpayers.

Tax Authorities' press release – usage of self-employment (flat rate taxation) contrary to the purpose of the tax regulation

Tax Authority issued a press release in which they mentioned that they have noticed misuses of tax benefits through the self-employment organisational forms (i.e. flat rate taxation). Namely, in certain cases, instead of employment, establishment of self-employment lump sum taxation form have been encouraged where personal income tax is determined based on lump sum while the work performed has characteristic of employment.

In this regard, the Tax Authority concluded that such actions motivated solely by the use of a more favourable method of calculation intended for self-employment (flat rate taxation) represent the usage of tax benefits contrary to the purpose of the tax regulation. With this respect, the Tax Authority reminded the taxpayers on the legal framework related to the subject, i.e. Article 12a of the General Tax Act (misuse of tax benefits contrary to the purpose of the tax regulation) and Article 27a of the Personal Income Tax Act (Characteristics of employment).

In order to verify such actions, the Tax Authority will initiate control procedures by sending an invitation to fill in a questionnaire (Questionnaire NR) on the manner of flat rate self-employment business. Based on the NR form, it will be examined whether there are characteristics of employment and whether tax benefits are used contrary to the purpose of the tax regulation.

Mazars comment:

In this press release, the Tax Authorities pointed out that they focus on self-employment (flat rate taxation forms) with the characteristics of employment which are meant for the misuse of the tax benefits contrary to the tax regulation.

Characteristics of employment for cases of using tax benefits contrary to the purpose of the Personal income Tax Act are determined based on the fulfillment of three criteria:

• behavioral controls - facts that show whether the employer has the right to direct and control what the employee does and how he does the job, through instructions, training or other means,
• financial controls - facts that show whether the employer has the right to direct or control the financial and business aspects of the employee's work,
• parties’ relations - facts that show the type of relationship between the parties.

From the NR Questionnaire, it has been noticed that the Tax Authority focused mostly on the following areas:

• Determining the relationship with the most important payer of the work in the observed period – is there a single payer whose payments account for 50% or more of total receipts (the questionnaire shows that this is the main criterion for further analysis; this still does not mean that this criterion will determine the existence of hidden employment, but that the specific case will be analyzed in more detail);
• Determining the elements of behavioral control (does the payer determines the time, place or manner of work, does the payer gives the instructions on how to do the job, etc.);
• Determining the elements of financial control (does the payer reimburses any other business receipts outside of the agreed fee - sick leave, annual leave, etc., does the payer invests in equipment, tools and materials, etc.);
• The relationship between the parties (what is the duration of the work and whether the duration of the work is related to the implementation of a particular project or several projects in a row, could the business with the payer be terminated without material and financial consequences).

In accordance with all the above, it is recommended to review whether there are relationships with external subcontractors (self employment – flat rate taxation, but also other forms of business), which meet the previously mentioned characteristics of employment.