Small Entrepreneurs Face Complications in Doing Business in the EU

Although the Value Added Tax Act, effective from July 1, 2013, did not change the amount of taxable annual turnover as a threshold for mandatory entry into the VAT system, the position of small entrepreneurs has changed in relation to the VAT regulations that were applied until June 30, 2013. Business entities that did not have deliveries exceeding 230,000 kuna in the previous calendar year are not required to be VAT payers unless they request it themselves.

For these business entities that are not VAT payers, the term ‘small entrepreneurs’ has become customary. Small entrepreneurs are not registered in the VAT payer registry, they do not charge VAT on their outgoing invoices, and they are only obliged to state the article of the law from which this arises in a note. From July 1, 2013, invoices must refer to Article 90, paragraph 2 of the VAT Act. Small entrepreneurs do not have the right to input tax, so in tax terms, they have a status equal to that of final consumers.

Purchases from EU Countries

The threshold for entering the VAT system has not changed, but there have been some novelties for small entrepreneurs. Namely, from July 1, 2013, a small entrepreneur is considered a taxpayer in the case of acquiring goods from another EU member state, provided that in the previous or current year they have acquired goods worth more than 77,000 kuna (threshold for acquisition), or if they have waived the threshold for acquisition. For example, if they acquired goods worth 40,000 kuna from another EU member state in 2013, and in the same year intend to acquire another 40,000 kuna, thus exceeding the prescribed threshold for acquisition with the second transaction, they are obliged to register for VAT purposes before that second transaction and request a tax number registered in the VIES database from the Tax Administration. This is not an entry into the VAT payer registry, but only a registration for the purpose of conducting transactions in the EU single market, in order to achieve the fundamental principle of VAT payment according to which goods are taxed in the country to which they are dispatched.

If we are talking about an entrepreneur who had acquisitions of goods from other member states amounting to more than 77,000 kuna in 2012, they must register for VAT purposes upon the first acquisition of goods they make after July 1, 2013.

Services Without a Threshold

The same obligations apply to a small entrepreneur who acquires services from suppliers in another EU member state or from a third country for which the place of taxation is determined according to the seat of the service recipient. The threshold for acquisition does not apply to services, so the entrepreneur is obliged to pay VAT to the Croatian budget on every service that is taxed in Croatia. Just like with the acquisition of goods from other EU member states, for that month, the small entrepreneur is obliged to submit a VAT form to the Tax Administration. If the services are received from other EU member states, then along with the VAT form, the VAT-S form must also be submitted. If the services are received from third countries, only the VAT form is submitted.

Therefore, even though they are not a permanent VAT payer, the small entrepreneur is obliged to submit the prescribed VAT forms for the months in which they incur a VAT payment obligation based on incoming acquisitions of goods from the EU, or acquisitions of services from EU member states and from third countries. This is an important novelty from July 1, 2013. Of course, the small entrepreneur does not have the right to input tax, and the VAT paid is an expense that increases the purchase price of the goods purchased or services received. Given that the reports submitted to the Tax Administration must be based on tax records, this automatically includes the obligation to maintain special records for received deliveries of goods and services for which suppliers from other EU member states or from third countries have transferred the obligation to calculate VAT to the Croatian entrepreneur.

Abroad, They Are Not ‘Small’

There are also novelties in cases where a small entrepreneur provides a service to a client based abroad, either in another EU member state or in a third country, and it is a service that is taxed according to the seat of the service recipient. The small entrepreneur does not charge VAT, but the outgoing invoice will not refer to the fact that they are a small entrepreneur (they will not refer in the note to Article 90, paragraph 2 of the VAT Act), but will transfer the obligation to pay VAT to the service recipient in the other country (Article 17, paragraph 1 of the VAT Act and the English term ‘reverse charge’). This is because the service provider is only considered a small entrepreneur in Croatia, but when selling those services in the foreign market, they are treated equally to other entrepreneurs.

Therefore, the outgoing invoice does not refer to the fact that they are a small entrepreneur, but transfers the tax obligation to the foreign buyer. The described novelties are important only for small entrepreneurs who have business relationships with suppliers of goods from other EU member states or with suppliers and buyers of services abroad. For small entrepreneurs who operate only in Croatia, with all customers and suppliers domestically, there are no changes.