Corporate Tax: Flat Rate Possible Only for Non-Profit Organizations

Current direct tax legislation recognizes the possibility of flat payment of income tax and corporate tax. Individuals earning income from self-employment can pay income tax at a flat rate, but only craftsmen and farmers, not individuals engaged in liberal professions. Flat payment of income tax for craftsmen and farmers is possible as long as their income during the year or in the previous year does not exceed 300,000 kuna. Only non-profit organizations, i.e., legal entities not established for the purpose of conducting economic activities, but still engaging in them, can pay corporate tax at a flat rate. For them, the revenue threshold is much higher, amounting to 7.5 million kuna.

According to Article 2 of the Corporate Tax Act, non-profit organizations (state institutions, institutions of regional self-government units, institutions of local self-government units, state agencies, religious communities, political parties, trade unions, chambers, associations, artistic associations, volunteer fire departments, technical culture communities, tourist boards, sports clubs, sports associations and federations, foundations, and endowments) are not subject to corporate tax. These are business entities that, according to special laws, have legal personality and participate in legal transactions, but their purpose is not to generate profit, but to achieve other goals, usually educational, health, social, sports, humanitarian, and other social benefits. These organizations are not subject to corporate tax as long as they exclusively carry out the activities for which they were established.

Mandatory Registration

However, if a business entity registered as a non-profit organization begins to engage in economic activities, it becomes subject to corporate tax. Non-profit organizations can also engage in economic activities in addition to their primary purpose if they have provided for this in their general regulations. In practice, the conduct of economic activities is usually organized to generate funds for the primary activity for which the organization was established. In doing so, non-profit organizations that engage in economic activities must adhere to all special regulations governing business operations in a particular industry (e.g., sanitary-technical conditions, consumer protection, obligation to issue invoices). After it begins to engage in economic activities, the non-profit organization is legally required to submit a request for registration in the corporate tax payer registry to the Tax Administration within eight days.

Strict Taxation

If a non-profit organization does not register in the corporate tax payer registry, the tax authority will, on its own initiative or at the request of a third party conduct a procedure to determine whether the non-taxation of profits from economic activities conducted by a legal entity registered as a non-profit would result in the acquisition of unjustified market advantages. In this procedure, the tax administration determines whether the activity is conducted independently, permanently, and for the purpose of generating profit or other economically assessable benefits. The fact that the income generated is used exclusively for financing the primary activity has no bearing. If the income is generated from the sale or exchange of goods and services, it is a mode of operation identical to that of entrepreneurs established for profit generation. If the tax authority determines that non-taxation of profits would allow the non-profit organization to gain unjustified market advantages, it will issue a decision establishing it as a corporate tax payer.

How Much is Paid

A non-profit organization that generates annual revenue up to 7.5 million kuna from economic activities can choose to determine corporate tax at a flat rate instead of keeping business records. If it opts for this option, it determines the tax base depending on the annual revenue generated from economic activities. If it exceeds the revenue threshold of 7.5 million kuna during the year, the conditions for flat payment of corporate tax cease to apply.

For determining the base for flat corporate tax, a scale of eight classes has been developed, based on the amount of annual revenue. In the first class, the revenue is up to 300,000 kuna, for which 85 percent of expenses are recognized without keeping records, and the corporate tax base amounts to 15 percent of revenue. In the second class, the revenue is higher, from 300,000 kuna to 500,000 kuna, for which 80 percent of expenses are recognized, and the corporate tax base amounts to 20 percent of revenue, and so on up to the last class where revenues are greater than five to 7.5 million kuna, for which 30 percent of expenses are recognized, and the corporate tax base amounts to 70 percent of the revenue generated. This determined tax base applies on an annual basis even when the economic activity is conducted only for part of the fiscal year. Corporate tax is paid at a rate of ten percent.