Employees tax-free 1,800 HRK per month, students and pupils 1,600 HRK

Although the monthly tax-free basic personal deduction has been increased since July 1 of this year, the tax-free scholarship has not yet been automatically increased despite announcements.

Written by: mr. sc. Marija Zuber, advisor-editor at the magazine Accounting and Finance
[email protected]

Students attending primary school and children younger than primary school age cannot receive tax-free scholarships. If they receive support for education, such income is, in tax terms, equated with the payment of other income and is taxable at an income tax rate of 25 percent. If students and pupils in regular education receive any monetary income, they are generally considered taxpayers. However, income tax regulations allow students and pupils to receive tax-free income in the form of scholarships, awards for practical work, and prizes in competitions within the education system. For some of these incomes, a limit is prescribed up to which amounts are tax-free, and above that amount, they are taxed, while certain incomes are tax-free regardless of the amount.
Regular secondary school students can receive tax-free scholarships up to 1,600 HRK per month.

Although the tax-free basic personal deduction was increased from 1,600 to 1,800 HRK per month on July 1, 2008, the tax-free scholarship has not been automatically increased. The tax-free scholarship is prescribed by Article 45 of the Income Tax Regulation, which, despite announcements, has still not been amended. If a student receives a scholarship from two or more payers, the tax-free scholarship for them is a total of up to 1,600 HRK per month, and the difference is taxable at an income tax rate of 25 percent. For example, a secondary school student who receives a scholarship for regular education from two payers, each of them 1,000 HRK per month, is obliged to provide the second payer with a certificate or statement about the income they receive from the first payer, so that the second payer can calculate income tax on 400 HRK per month. No contributions for mandatory insurance are paid on scholarships.

Tax-free scholarships can be paid based on the payer’s decision or based on a scholarship agreement made between the payer and the student. The scholarship agreement may or may not contain provisions regarding the obligation of employment or the obligation of further education of the scholarship recipient, as the content of the agreement does not affect the possibility of tax-free payment. The payer must have a certificate from the educational institution as proof that the student is regularly attending school. A student can receive a scholarship for all months of the school year, which lasts from September 1 to August 31 of the following calendar year, including the months of school holidays. Students attending primary school and children younger than primary school age cannot receive tax-free scholarships.

If they receive support for education, such income is, in tax terms, equated with the payment of other income and is taxable at an income tax rate of 25 percent and possible surtax. Thus, the entire amount of such support is taxed as the child’s other income. Regarding contributions for mandatory insurance, the provisions of the Law on Contributions for Mandatory Insurance apply, according to which support for the education of children up to 15 years of age or until the completion of eight years of schooling is exempt from mandatory insurance contributions. The Regulation on Contributions for Mandatory Insurance in Article 39 conditions the exemption from the obligation to pay contributions on the fact that the support is paid to the child of a former worker or the child of a deceased or missing defender of the Homeland War.

For tax-free scholarships up to 1,600 HRK per month paid to students, the tax rules are identical to those for scholarships paid to secondary school students. Students can receive a tax-free scholarship only if they are regularly studying at higher and vocational schools and faculties, and only at the undergraduate level. A student can receive a tax-free scholarship from one or more payers, as their total tax-free income is set at 1,600 HRK per month. Students who achieve excellent results in knowledge and grades at universities, and who are selected for the scholarship award through public competitions accessible to all students under equal conditions, can receive a tax-free scholarship of up to 4,000 HRK per month. The tax-free scholarship of up to 4,000 applies only to one awarded scholarship from one payer and excludes the right to a tax-free scholarship of up to 1,600 HRK per month.

Scholarships above the amount of 1,600 HRK per month or scholarships for gifted students above the amount of 4,000 HRK per month are, in tax terms, equated with other income. The difference above these amounts is monthly taxable at an income tax rate of 25 percent and possible surtax. No contributions for mandatory insurance are paid on scholarships. Scholarships for students in regular education at higher, vocational schools and faculties, at postgraduate studies, and scholarships for obtaining a doctorate, which are paid from the funds of the State Budget, are not subject to income tax regardless of the amount paid to the regular student or postgraduate or postdoctoral student.

According to the Income Tax Law and the Income Tax Regulation, employers, legal and natural persons who take students for mandatory practice and apprenticeship can pay each student in practice a tax-free award for practical work up to 1,600 HRK per month. If a craftsman or legal entity where the student performs the practical part of the teaching pays an award in an amount greater than the tax-free amount, the difference is subject to income tax at a rate of 25 percent, but no contributions for mandatory insurance are paid. Unlike students, students cannot receive tax-free awards for practical work and professional practice. When paying an award for practical work to a student, the entire amount paid is considered other income and is subject to income tax at a rate of 25 percent and possible surtax. Just like the awards paid to students, awards for practical work for students are also not subject to mandatory insurance contributions. Both students and pupils are pension and health insured during professional practice against the consequences of work accidents and occupational diseases, and the obligation to pay special contributions for that insurance is the competent state body.

Awards for students and pupils for results achieved in competitions within the education system and at organized school and university competitions are not subject to income tax. Such income is not subject to income tax or mandatory insurance contributions, regardless of the amount of the award and regardless of who provides the funds. Namely, co-organizers of student and pupil competitions are often units of local self-government, state authorities, chambers, and even non-profit associations that promote the interests of a profession or occupation. They, as co-organizers, often provide funds for awarding prizes to students or pupils. According to the Income Tax Regulation, cumulative payment of tax-free monthly amounts of awards to students for practical work, scholarships for regular education, sports scholarships, and compensation to amateur athletes for several months of the same or previous tax period is allowed. Thus, in one month, a student can receive tax-free scholarships, and a student can receive tax-free awards for practical work for several months back.