Investments Can Nominally Reduce the Tax Base by Up to One Hundred Percent

Most entrepreneurs are awaiting the submission of the corporate income tax return in April, so they need to prepare in advance. For example, if the tax obligation is high, the taxpayer may choose to utilize the relief for reinvested profits. However, the rules for using this relief for 2015 are somewhat stricter.

The end of the calendar year is also the end of the business year for many entrepreneurs (companies and sole traders – craftsmen and freelancers). This does not apply to those who have been granted a change of business year by the Tax Administration to another period (but they are relatively few), nor to those who ceased to exist during the year. In business terms, for entrepreneurs, the end of the business year means closing the business books, preparing financial statements, determining business results, and, of course, preparing the corporate income tax return and paying the tax obligation (if any).
Business people are well aware of the obligations that the end of the business year brings. However, as a reminder, we present some basic information about corporate income tax payers in Croatia and the requirements they need to fulfill in that status.

Smaller or Larger Base

Unlike some other countries where certain forms of companies are not necessarily subject to corporate income tax, according to Croatian Corporate Income Tax Law, all companies are subject to corporate income tax, regardless of whether they are capital companies or partnerships, and thus, in terms of fulfilling the requirements of tax regulations, they have the same obligations. It should not be forgotten that some other legal entities that are not companies, as well as some individuals, are also subject to this tax. 
The corporate income tax base is the difference between total income and total business expenses of the taxpayer in the financial year determined according to accounting regulations (Accounting Act, financial reporting standards – Croatian or international, depending on the size of the entrepreneur in question), which is increased or decreased in the manner prescribed by the Corporate Income Tax Law. Thus, the accounting profit or loss of the entrepreneur is generally not equal to the profit or loss for tax purposes. Typical items that increase the corporate income tax base are depreciation expenses exceeding the allowed amounts, representation costs, and personal vehicle usage, various reservation costs, and costs of impairment of receivables and other assets. A typical item that reduces the corporate income tax base is income from dividends, i.e., shares in the profits of other companies.

When Reduced Rates

In Croatia, progressive taxation of profits is not applied; instead, a flat tax rate of 20 percent is applied regardless of the amount of profit earned. However, some taxpayers are exempt from paying corporate income tax (e.g., those conducting activities in special areas, under certain conditions), while others apply reduced rates due to their special status – for example, holders of incentive measures for completed investments. Their nominal corporate income tax rate can be reduced, depending on the amount of investment, by 50, 75, or 100 percent. However, this rate is nominal, and due to the aforementioned various expenses that cannot be recognized for tax purposes (or are only partially recognized) – the effective corporate income tax rate is generally higher than the nominal rate. How much higher depends on various factors for each individual taxpayer. 
The deadline for submitting the corporate income tax return is four months from the end of the business (tax) year. For most taxpayers, this is, therefore, the end of April of the current year for the previous year. Along with the corporate income tax return, several other documents must be submitted, primarily the profit and loss account and the balance sheet as of the last day of the relevant business year.

Input Tax and Refund

Taxpayers pay advance tax payments during the year based on the results of the previous year, except for those whose previous year was their first year of business and those who are using the right to carry forward tax losses. After submitting the tax return, they will have the obligation to pay additional tax or will be entitled to a refund of overpaid tax. Taxpayers who have earned profits from abroad and paid tax there can include that tax in their domestic tax obligation up to the amount of tax they would pay on that profit in Croatia.
If the tax obligation is determined to be high, the taxpayer may choose to utilize the relief for reinvested profits. It should be noted that the rules for using this relief for 2015 are somewhat stricter than in previous years.