Are Loss-Makers Funding the State Budget Until Summer?

Entrepreneurs who, according to the recommendation of the European Commission, would be allowed to offset tax losses are being done a disservice by Croatia extending the deadline for submitting corporate income tax returns until April 30 of this year. This postpones the payment of corporate income tax paid in previous years to loss-makers from 2020.

In circumstances where the European Commission issues a Recommendation on the national treatment of corporate losses encouraging member states to allow entrepreneurs who were profitable before the pandemic to carry forward and offset tax losses from 2020 and 2021 against taxes they paid before 2020, Croatia is doing these entrepreneurs a disservice by extending the deadline for submitting corporate income tax returns until June 30, 2021.

A good example of affected entrepreneurs comes from the tourism sector, where entrepreneurs regularly made profits before the pandemic, but during the pandemic in 2020, most operated at a loss. Their corporate income tax returns for 2020 will show, probably without exception, a loss. This means they will be entitled to a refund of corporate income tax for 2020 (paid as an advance in January and February 2020; from March onwards, most realized the possibility of reducing advance payments to zero).

They would have acquired the right to a refund of overpaid tax by April 30, 2021, had the Ministry of Finance not extended the deadline for submitting corporate income tax returns through amendments to the Regulation on the Implementation of the General Tax Law. The Regulation stipulates that public revenue obligations and rights (payments/refunds) determined based on the corporate income tax return are due on June 30, 2021.

For whom are the deadlines?

In other words, even if you submitted your corporate income tax return before the extended deadline of June 30, 2021 (for example, April 30 as in all previous years), the Tax Administration will not process the return and recognize your right to a refund of overpaid corporate income tax for 2020 until June 30, 2021. Thus, the money remains in the state budget account for those additional two months. Entrepreneurs who operated at a loss in 2020 due to the pandemic will not have a tax obligation based on the corporate income tax return for 2020 and will not have tax advances determined for the next period. It is clear that they do not need an extension of the deadline. Entrepreneurs who made a profit in 2020 presumably do not need a special incentive in the form of a deadline extension for submitting corporate income tax returns?

Finally, it should be noted that the Tax Administration interprets that all corporate income tax returns submitted before (before the regular) deadline of April 30 and before the announcement of amendments to the Regulation on the Implementation of the General Tax Law on March 12, 2021, were processed immediately, while those submitted after the announcement of the amendments will not be processed until June 30, 2021.

The logic of the Ministry of Finance and the Tax Administration is unusual: to recognize a more favorable treatment for entrepreneurs without pre-known criteria. Who could have predicted such a measure from the Ministry of Finance in March without a crystal ball and decide to submit a tax return before (before the regular) deadline of April 30?

A Cold Shower for the Young

At the end of 2019, a new measure from the Ministry of Finance aimed at retaining young people in Croatia was pompously presented: the state will refund the entire amount of income tax and surtax paid by all workers up to 25 years of age, and from 26 to 30 years of age – half of that amount. The only limitation related to the refund concerning the age of workers is the amount of the tax refund: tax is refunded at a rate of 20% (24% in 2020), up to a tax base of 360,000 kuna per year. After the announcement that all tax refunds to young people would be paid by the end of May, it was monitored day by day which counties, even which districts, would come next. However, many were met with a cold shower and a new, previously unknown ‘condition’ for the tax refund.

Instead of a refund decision, some workers received a notice from the Tax Administration that procedures for collecting claims based on income from employment/other income are being conducted against the payer of the income (employer) and that the decision on determining the annual income tax for 2020 will not be issued until the completion of the mentioned procedures being conducted against the payer(s) of income. We can freely say that the notice is incomprehensible not only to workers and employers but also to those engaged in finance.

What is it really about?

Tax Administration officials explained, exclusively orally, that the notice was sent to workers whose employers took advantage of the possibility of installment payments of tax obligations due to special circumstances (the COVID-19 pandemic). They will receive a tax refund for the entire 2020 only when the employer pays all tax installments from their salaries.

Let us recall, entrepreneurs could request a deferral of tax obligations due from March 20 to June 20, 2020. After the due date of the deferred tax obligations, they could request an installment payment, up to 24 installments, without interest. The installment payment could cover a maximum of three salaries, i.e., three monthly obligations for income tax and surtax (for March, April, and May 2020). For the remaining nine months of 2020, the tax was fully and timely paid. However, some workers will not see a single kuna of tax refund for 2020 until 2022.

Entrepreneurs who were either closed or whose revenues fell by 50% could be completely exempt from paying tax obligations (which were due from April 1 to June 20, 2020). When the question arose about how this would affect the tax refund for workers, the Tax Administration issued an opinion: the worker will acquire the right to a refund of overpaid income tax, which was calculated from the salary, regardless of whether the tax was paid or written off due to special circumstances.

A ‘Simple’ Solution

There are no published instructions or opinions from the Tax Administration on how the installment payment of tax from the third salary affects the overall annual income tax calculation. By not clearly regulating this issue, the Tax Administration ultimately placed workers of entrepreneurs who coped better with the crisis and did not need to seek exemption from payment in a less favorable position. At the moment when they were utilizing measures introduced due to the COVID-19 crisis, employers could not know that they would affect their workers in this way, and it is questionable whether everyone would have applied for an installment payment had they had all the information.

The Tax Administration therefore, also orally, offers employers a ‘simple’ solution: for their workers to receive a refund, they need to pay all tax obligations at once! It is hard to shake the impression that the state budget could not bear the measures that the Ministry of Finance once offered to entrepreneurs and is trying to replenish the empty treasury in this way, to the detriment of young workers.

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