The term flat-rate craft is often used in unofficial communication to denote the legal form of a registered activity performed by a natural person, although the Crafts Act does not recognize such a form of craft. It is a derivative that simultaneously denotes the legal form of conducting a specific economic activity and the method of settling tax obligations based on that.
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According to the Crafts Act, a natural person may, if they meet the prescribed conditions, obtain a permit for conducting a craft from the relevant county office for economic affairs. A craft can be registered for any permitted economic activity in the field of production, trade, and services. The Crafts Act recognizes free, related, and privileged crafts.
To perform free, related, and privileged crafts, a craftsman must have a craft license, and for performing privileged crafts, they must also have a privilege. Any activity that can be a craft can be performed as a home industry or secondary occupation instead of registering a craft, provided that the annual income does not exceed ten average salaries earned in Croatia from January to August of the previous year. For 2017, this annual limit amounts to 77,390 kuna.
Higher Limit from 2018
Thus, the regulations governing the operation of craftsmen do not recognize flat-rate crafts. Flat-rate taxation of crafts is an option regulated by the Income Tax Act and allows a craftsman whose annual income does not exceed the threshold for mandatory entry into the VAT system to pay income tax in a flat amount instead of determining tax liability based on business records. In 2017, the criterion for income that allows flat-rate taxation amounts to 230,000 kuna, and from 2018, this limit increases to 300,000.
More than 25 thousand craftsmen chose flat-rate taxation in 2017, under which they do not have to pay prescribed contributions monthly, but rather annually based on the achieved flat-rate income. Lawyers, doctors, athletes, journalists… are disadvantaged by this choice.
A craftsman whose income in the previous year did not exceed the VAT threshold prescribed for the current year can choose flat-rate taxation at the beginning of the tax year and notify the Tax Administration about it. If they opt for this option, they will no longer keep business records prescribed for determining achieved income, but only a record of collected receipts to prove that they did not exceed the prescribed threshold in the current year. If this happens, for example, on a date in September 2017, they determine that they have reached receipts of 230,000 kuna, from the first day of the following month (in this example, from October 1), they must start keeping tax accounting prescribed for determining income from self-employment and pay tax on the achieved income at a rate of 24 percent and 36 percent, depending on the amount of the annual tax base.
Attractive Model
Flat-rate taxation of income tax has several advantages. A person who has chosen flat-rate taxation pays income tax on a flat-rate determined amount of annual income at a rate of 12 percent plus local surtax. Special regulations classify flat-rate income into four groups, according to the amount of income, so the annual tax obligation ranges from 1,530 to 4,140 kuna, resulting in a monthly tax obligation of 127.50 to a maximum of 345 kuna (in 2018, a fifth group will be added).
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The second fiscal benefit is the lower burden of mandatory contributions. If the craft activity is the only or main one, the taxpayer must insure themselves on that basis and then pays contributions for their personal insurance on a base determined by a factor of 0.4, rather than a factor of 0.65, as determined for craftsmen who keep business records. This automatically reduces their contribution expenses by about 40 percent. Fiscal savings are evident.
Flat-rate taxation of craft activities is particularly attractive to individuals who perform craft activities or home industry or freelance work as a secondary activity, alongside employment or retirement. They are also required to pay prescribed contributions, but not monthly, rather annually based on the achieved flat-rate income. The rates of mandatory contributions for secondary activities are set at 50 percent of the rates prescribed for individuals whose craft is their main occupation, and the base on which these reduced rates are calculated is the annual flat-rate income.
With the application of these rules, the annual amounts of mandatory contributions range from 2,231.25 kuna for the lowest flat-rate class to 6,037.50 kuna for the highest. Retirees who pay income tax in a flat amount are completely exempt from paying contributions. Flat-rate taxation of income from craft activities is undeniably an attractive model for conducting and taxing economic activities through personal labor. According to available data, more than 25 thousand craftsmen chose this method of taxation in 2017. So if that is the case, what is the problem?
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The problem lies in the tax limitation according to which flat-rate taxation is allowed only for craftsmen and farmers, but not for individuals performing freelance activities. According to existing regulations, freelancers include lawyers, notaries, doctors and dentists in private practice, top athletes and artists, journalists, translators, and similar professions of individuals registered as taxpayers based on these activities. They are not allowed flat-rate taxation of income. The benefit granted to craftsmen is not permitted for freelancers.
