OFFENSES – The collection of fines increases the corporate tax rate from ten to eighteen percent

Depending on the legal form in which it operates in the market of goods and services, the activities it performs, its size, whether it conducts sales and purchases only in the domestic market or also in foreign markets, whether it employs workers, and other influences, many regulations apply to the operations of entrepreneurs. The normative framework of entrepreneurial business is not only tax regulation but also other regulations, which is why it happens that an entrepreneur commits an offense or misdemeanor during business operations for which an administrative sanction is prescribed.

According to the fundamental definition from the Offenses Act, an administrative sanction is determined for behaviors that violate or threaten public order, social discipline, and social values guaranteed and protected by the Constitution of the Republic of Croatia, international law, and laws, and protection against such behavior is not achieved through criminal coercion. A misdemeanor is a violation of legal provisions without serious consequences, but it is punishable, usually by monetary fines. Offenses and misdemeanors are behaviors contrary to legal obligations, are not criminal acts, and their consequence is usually the obligation to pay a monetary fine.

Fines for legal entities

In most regulations, the amount of the fine for the committed offense is differently determined for entrepreneurs who conduct business through a company or other legal entity compared to entrepreneurs who operate as self-employed individuals. For companies and other legal entities, administrative sanctions for the same offense are prescribed for both the legal entity and the responsible person in that legal entity, but in different amounts.

Monetary fines for offenses imposed on legal entities are not tax-deductible expenses when determining the corporate tax base. The fine is objectively a business expense, recorded as a business expense, and reduces the financial result of the tax period in which the obligation arose, but when determining corporate tax, the tax base must be increased by the amount of the offense fine.

In the PD form, which the company and other corporate tax payers submit to the Tax Administration, a special section is provided for recording monetary fines that increase the tax base. This achieves the effect of a non-tax-deductible expense, which is why corporate tax is paid on the amount of the offense fine at a rate of 10 or 18 percent, depending on the size of the entrepreneur measured by total revenue.

Fines for the responsible person

Monetary fines for offenses imposed on a natural person who is responsible for the legality of business operations in the legal entity are the obligations of the natural person. The responsible natural person is usually the one who is registered in the commercial register or another prescribed register as the person authorized to represent the company or other legal entity. The administrative fine imposed on a natural person is the obligation of that person, but in practice, it is common for the company and other business entities to voluntarily pay the fine imposed on the responsible person of the legal entity. Payment of the fine for the responsible person of the legal entity is, in tax terms, equated with the payment of salary or another source of taxable income.

If the responsible person is employed in the company that pays the administrative fine instead of that person, the net amount of the fine should be increased by income tax and surtax, for contributions from salary and contributions on salary, and paid on behalf of and for the account of the natural person on the day the fine is paid. In tax records and reports on paid salaries, it should be treated as if the responsible person received a net salary equal to the amount of the administrative fine, only the net amount instead of being directed to the current account of the natural person is directed to the account specified by the administrative order.

If the responsible person is not employed in the business entity that pays their administrative fine, the income is considered other income for tax purposes. Salary and other income are tax-deductible expenses when determining the corporate tax base.

It can be settled, but…

If the responsible person is also a member of the company, depending on the decision of the company’s assembly, it is possible to settle the administrative fine from retained earnings or consider it a payment of profit advance. In that case, the net amount of the monetary fine should be increased by capital income tax and any surtax if prescribed by the municipality or city of residence of the natural person to whom the profit is indirectly paid.

In practice, there are examples where the company pays an administrative fine for parking in an unauthorized area or for traffic offenses imposed on an employee authorized to use an official vehicle. Sometimes this is justified by objective reasons such as traffic congestion, insufficient parking spaces at the location where the employee was sent to perform a task, the short time in which the employee was instructed to perform the task, etc. These circumstances do not affect the tax nature – payment of fines for traffic offenses is considered salary for the natural person who operated the vehicle.

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