Taxation of Capital Gains by Income Tax at a Rate of 12 Percent to Follow

Croatia will introduce taxation of capital gains by income tax at a rate of 12 percent starting next year, and most citizens will no longer have to submit an annual income tax return, as this will be done automatically by the officials of the Tax Administration, according to the legal provisions that come into effect at the beginning of 2016.

Namely, it is customary that at the beginning of the year a series of completely new laws or amendments to some laws come into effect, so with the beginning of 2016, some provisions of the amendments to the Income Tax Act or new laws on accounting, insurance, renewable energy sources, and high-efficiency cogeneration, etc. will come into effect. The amendments to the Income Tax Act were adopted in November 2014, and most of its provisions came into effect at the beginning of 2015, but some, such as the taxation of capital gains, will come into effect on January 1, 2016. Thus, citizens who, for example, buy shares at the beginning of next year and sell them during the year for a profit will have to pay capital gains tax at a rate of 12 percent, plus surtax, by the end of January 2017. The law defines that realized capital gains from the acquisition and disposal of financial instruments and structured products acquired from January 1, 2016, and disposed of within three years will be taxed. This means that citizens will not pay tax if they bought shares this year or if they hold shares purchased next year for at least three years. According to the legal provisions, capital gains tax will apply to instruments that are most commonly traded on the Zagreb Stock Exchange, namely shares and bonds, as transferable securities, as well as certificates, as structured products. In addition, tax will also be paid on profits realized from the disposal of shares in companies, shares in investment entities, money market instruments such as treasury bills, cash bills, and commercial papers, derivatives, etc.

Even at the time of the law’s adoption, especially towards the end of this year, as the start of the capital gains tax application approached, investors and brokers warned of complicated procedures and unnecessarily large administration as well as short payment deadlines. Namely, the law stipulated that citizens must pay tax within eight days of realizing income, and this applies to each individually realized income that is the source of capital income at a rate of 12 percent and without recognizing personal deductions, while realized capital losses would not be recognized during the year, but could only be recognized on an annual basis through a special report. However, the technical government of Prime Minister Zoran Milanović abandoned this about 15 days before the law came into effect and established the obligation to pay on an annual basis. At a telephone session on December 16, the government amended the Income Tax Act by regulation and stipulated that capital gains tax would be paid on an annual basis, and the tax base would be the difference between capital gains and capital losses. According to the Regulation, taxpayers, holders of financial assets will be obliged to calculate, withhold, and pay the advance income tax on capital based on capital gains by January 31 of the current year for all capital gains realized in the previous year, reduced by realized capital losses.

Special Procedure for Determining Annual Tax

Based on the amendments to the Income Tax Act, next year a special procedure for determining annual tax will be applied for the first time, and it is expected that this will facilitate the obligation of most citizens, taxpayers, to submit an annual return. Until now, citizens who expected a refund of overpaid tax had to submit or send an annual income tax return for the previous year to the Tax Administration by the end of February, but from now on, the Tax Administration will do this for most of them. This primarily concerns citizens who receive income from employment, while the obligation to continue submitting an annual income tax return remains for individuals who earn income from self-employment, such as craftsmen, freelancers, and others whose income is determined based on business records. Annual returns will also have to be submitted by taxpayers for whom the Tax Administration does not have data on realized income. The special procedure will not apply in cases where the taxpayer is not obliged to submit an annual tax return, and according to the calculation of annual tax, a payment difference arises. For most “ordinary citizens,” however, the Tax Administration will determine the annual income and the difference for payment or refund and will provide them with a temporary tax decision no later than June 30 of the current year for the previous year. If a citizen finds that the data is not accurate or complete, they will be able to file an objection within one month, no later than July 31, and the first-instance tax authority will decide on it by a decision within 30 days from the date of receipt of the objection. If, however, the citizen does not file an objection, they are obliged to pay the difference in tax determined by the temporary tax decision no later than July 31.

More for Mountainous Areas

Revenue from income tax is a joint revenue of the state and local units, and from next year, 35 cities and municipalities in mountainous areas should receive slightly more from this tax, approximately 58 million kuna annually, while the counties in which they are located will receive 12.5 million kuna less. Namely, with the beginning of 2016, amendments to the Law on Financing Local and Regional Self-Government Units will also come into effect, which provides for changes in the distribution of income from income tax. These amendments increase the share of local units in mountainous areas in income tax revenue from 60 to 70.5 percent, and they are also entitled to an additional share of 10 percent, which is intended for financing capital projects in their area. This increase is accompanied by a reduction in other positions, primarily the share of counties in which these municipalities and cities are located, from 16.5 percent to 12 percent, and they are also losing the position for equalization assistance for decentralized functions. The entire revenue of local units is the consumption tax paid by caterers, and a reduction of this tax from the beginning of 2016 is expected by Zagreb caterers. Namely, until now, a maximum rate of this tax of three percent was prescribed in Zagreb, and by the decision of the City Assembly, from January 1, 2016, the rate is reduced by one percentage point to 2 percent.

The Accounting Act Also Defines Micro Entrepreneurs

With the beginning of the year, the new Accounting Act comes into effect, although some of its important provisions, such as the new chart of accounts and licensing of accountants, will come into effect with a delay of one or two years. The new Act finally defines entrepreneurs who are most numerous in the Croatian market – micro entrepreneurs. The Act classifies entrepreneurs based on the amount of total assets, income, and average number of employees and stipulates that micro entrepreneurs are those who do not exceed the threshold indicators in two of the three prescribed conditions – total assets up to 2.6 million kuna, income up to 5.2 million kuna, and an average of up to 10 employees during the business year. The same applies to small and medium-sized entrepreneurs, who must not exceed two of the three conditions, small – total assets up to 30 million kuna, income up to 60 million kuna, average number of employees 50, and medium – total assets up to 150 million kuna, income up to 300 million kuna, and an average of 250 employees. Those who exceed at least two of the three conditions prescribed for medium-sized entrepreneurs fall into the category of large entrepreneurs. The new Accounting Act, among other things, defines accounting documents and business records and their preparation and storage, prescribes annual financial reports and their auditing, as well as a unique framework chart of accounts. However, considering the comments from entrepreneurs and the Croatian Employers’ Association that the new chart of accounts requires more time for the adaptation of IT systems, the government on December 10 postponed the application of the unique framework chart of accounts for one year, until January 1, 2017. A year later, on January 1, 2018, the provision on licensed accountants will come into effect, for which a special law will also need to be adopted. The Accounting Act defines that “if an entrepreneur entrusts the performance of accounting tasks and functions to other legal or natural persons, they must be licensed to perform these tasks based on a special law.”

New Rules for Insurers

With the beginning of 2016, the new Law on Renewable Energy Sources and High-Efficiency Cogeneration, as well as the new Insurance Act, will come into effect, although some of its provisions that allow for gradual adaptation came into effect as early as April of this year. The new Insurance Act is exceptionally comprehensive, with as many as 464 articles, and it fully incorporates EU legal acquis into the insurance sector. The Act, among other things, prescribes new rules for solvency, supervision, and risk management, increases the role of the Croatian Financial Services Supervisory Agency (Hanfa), introduces new reporting requirements, so insurance companies will be obliged to prepare and publish a report on solvency and financial condition on their websites every year, etc. It also stipulates that insurers must organize their business taking into account all measurable risks to which the company is exposed, have resources to cover the required solvency capital and minimum required capital, apply a new method for calculating technical reserves, etc. The new law also expands the activities that insurers can perform at vehicle technical inspection stations. Until now, insurance representation companies could only perform accident insurance and liability insurance for the use of motor vehicles at technical inspection stations, and in the future, they will also be able to provide insurance for road vehicles, goods in transport, legal protection costs, and assistance insurance.