Tax Reform: The Real Winners Are Those with Capital and Assets

Nine tax laws that make up the package of regulations for the new round of tax reform are currently undergoing public consultation. When considering the effects of tax reform on the taxation of citizens’ income and the amount of income available for personal consumption, the proposed amendments to the Income Tax Act should be linked to changes in the Contributions Act and the Local Taxes Act. In relation to contributions, net wages for workers with a monthly gross salary of up to 1300 euros will increase, while there will be no changes in the burden of contribution obligations for gross salaries above that amount. However, the impact of the proposed changes in the income tax system is much more complex.

In income taxation, there are two key novelties: the local surtax is abolished, and the scope for determining the rates of income tax is changed, but not for all sources of income. For so-called active incomes, i.e., incomes earned in the labor market, tax rates will be determined by local units, while the rates at which final incomes are taxed will still be determined by the state, and according to the proposal, these rates will not change.

What Can Local Units Do?

For three sources of income classified as annual incomes, namely income from salaries and pensions, income from self-employment, and other income, tax rates will be determined by local units. These provisions of the Income Tax Act are expected to come into effect on October 1, 2023, so that local units can make decisions on the tax rates for annual incomes by the end of the year, and these decisions will apply from January 1, 2024. If a local unit does not make a decision, the currently prescribed rates of 20% and 30% will apply.

Concurrently, the amounts of the bases taxed at lower or higher tax rates are changing. From the current 47,780.28 euros, which are taxed at a lower rate on an annual basis, this amount will increase to 50,400 euros, or on a monthly basis from the current 3,981.69 to 4,200 euros. The difference in the tax base above these amounts will be taxed at a higher tax rate. Thus, tax brackets are determined by the state, while tax rates will be determined by local units.

Ranges are prescribed within which local units can decide on the height of tax rates, but two income tax rates are still retained. In this regard, as compensation for the abolition of the surtax, local units are allowed to set a lower tax rate up to the level obtained by replacing the previous surtax with a correspondingly higher tax rate. When determining the higher tax rate, which is paid by very few citizens, the mathematics is somewhat more restrictive; the highest allowed tax rate is less than one percentage point lower than the product of the current tax rate increased by the surtax.

And Pensioners and ‘Self-Employed’?

All other rules for taxing annual incomes remain unchanged, and local units cannot influence them. Thus, pensioners will continue to pay tax with a 50% reduction, workers under 25 years of age will receive a 100% refund of the income tax paid at the lower tax rate, and those under 30 years of age will receive a 50% refund of the tax paid at the lower rate.

Recipients of second income and royalties will pay an advance on income tax at the lower rate determined by the local unit, rather than all paying at the rate of 20%. An exception is the second income from tips, which will be taxed at a rate of 20% for all recipients. As before, in the annual income tax settlement, annual incomes will be taxed according to the tax tariff that will have the following characteristic: tax brackets will be the same for all taxpayers, and tax rates will depend on the residence of the income recipient.

For Some, Significant Savings

The real winners of the tax reform are recipients of final incomes. Individuals earning capital income and income from property and property rights will continue to pay tax according to the currently prescribed tax rates, i.e., 10% or 20%, and only in the case of excluding property and other income based on the return of contributions at a rate of 30%, but from January 1, 2024, without the obligation for surtax. With the abolition of the surtax, the obligation to increase income tax for the previous surtax for all sources of income ceases, not just for annual incomes, for which local units can replace the abolition of the surtax with higher tax rates. Thus, for example, income from dividends and shares in profits, for which taxpayers residing in Zagreb currently pay 10% tax increased by an 18% surtax, which cumulatively gives a tax burden of 11.8%, from January 1, 2024, will only pay 10% income tax.

On an annual income of 50,000 euros, the savings from the Zagreb surtax will amount to 905.40 euros. The same benefit will apply to flat-rate entrepreneurs, property rental owners who pay income tax on property according to the decision of the Tax Administration, individuals earning income from stock grants and options, and from January 1, 2024, also from the granting of shares in limited liability companies.