The Government Sent 15 Laws to Parliamentary Procedure Containing Amendments to the Tax Reform

The government sent 15 laws to parliamentary procedure from its session on Thursday, which contain amendments for a comprehensive tax reform, which is expected to come into effect on the first day of 2017.

In relation to the initially proposed changes in the VAT system, according to Prime Minister Andrej Plenković, the general VAT rate is maintained, as well as the lowest rate. Thus, the lowest rate of 5 percent will continue to apply to bread, milk, medicines, orthopedic aids, and books, the Prime Minister emphasized. Finance Minister Zdravko Marić added that from the beginning of 2017, the reduced VAT rate of 13 percent would be expanded to include the supply of electricity, municipal waste disposal, child car seats, funeral equipment, and agricultural input materials – seedlings, seeds, animal feed, etc. The reduced rate of 13 percent, however, will no longer apply to hospitality services and the supply of white sugar, which will thus be taxed at a rate of 25 percent from the beginning of next year. From the beginning of 2018, it is proposed, among other things, to raise the threshold for mandatory entry into the VAT system from the current 230,000 to 300,000 kuna.

Zdravko Marić revealed what the tax reform brings, sending 15, possibly 16 legislative proposals into procedure

The main changes in income tax include a proposed reduction of tax rates from 25 to 24 and from 40 to 36 percent, along with an increase in the personal deduction, which would be at a uniform level of 3,800 kuna for all. Corrections for dependents are also planned, with significant progression for children, said Finance Minister Zdravko Marić, who estimates the impact of changes in the income tax system at 1.4 to 1.5 billion kuna.

In corporate taxation, a reduction of the general tax rate is proposed – from 20 to 18 percent, and for entrepreneurs with annual revenues below three million kuna to 12 percent. It is also proposed to abolish incentives for reinvested profits, lump-sum taxation of non-profit organizations, etc. Additionally, small taxpayers (with annual income up to three million kuna) would be allowed to determine their tax base according to the cash model, meaning they are protected if they have a certain number of unpaid invoices, explains Marić.

As a one-time measure in 2017, it is proposed that credit institutions write off partially recoverable and fully unrecoverable placements, determined in accordance with the Decision on the Classification of Placements and Off-Balance Sheet Obligations of Credit Institutions of the Croatian National Bank, as of December 31, 2015.

In the contribution system, the biggest novelty is the introduction of the obligation to pay contributions for pension and health insurance on other income, but at half-reduced rates (pension 10 percent and health 7.5 percent). It is also proposed to reduce the difference between the minimum wage and the lowest base and to abolish exemptions from paying contributions, e.g., for copyright, for delivered artistic works or income of retirees.

According to the new law on real estate transfer tax, the rate of this tax would be reduced from 5 to 4 percent, and the exemption from payment for the purchase of the first property that resolves one’s housing issue would be abolished. A novelty is that citizens would no longer be required to report real estate transactions, but the tax obligation would be determined ex officio, emphasizes Marić, adding that the revenue from this tax would henceforth go entirely to local units.

In line with the reduction of the real estate transfer tax rate, the Ministry of Finance proposes a reduction of the inheritance and gift tax rate from 5 to 4 percent with the new local tax law, and a novelty is the payment of tax on motor vehicles during registration at technical inspection stations. It is also proposed to abolish the company or name tax for all entrepreneurs.

By transforming the utility fee into a so-called simple property tax from 2018, the payment of tax on holiday homes and monument rents will also be unified. A novelty is that, in addition to the existing coefficients (square footage, zone, and business purpose), two new coefficients are proposed for calculating the tax – age (year of construction) and condition of the building. The vast majority of citizens will not pay a higher tax than the previous utility fee, explain those from the finance department.

The Parliament has also received a proposal for a new general tax law, which abolishes the relative statute of limitations and introduces a uniform statute of limitations of six years. A system of warnings for minor so-called petty offenses is also being developed, which, emphasizes Marić, aims to act preventively.

Amendments to the Fiscalization Act would remove the term “small fiscalization taxpayer,” who from 2017 would have to issue invoices via electronic payment devices.

The new law on administrative fees provides for the establishment of the e-Fees system within the e-Citizens project, which would allow administrative fees to be paid electronically regardless of their amount. For fees up to one hundred kuna, the option of payment via state stamps would remain.

Among the legislative proposals regulating the tax reform are also amendments to the excise duty law, the special tax on motor vehicles, tax consultancy, administrative cooperation in the field of taxes, as well as the tax and customs service.