Abolition of the surtax has made the most complex tax in the country even more expensive

Investors in stocks, investment funds, or cryptocurrencies are slowly preparing for the most stressful part of the year – the declaration of capital gains tax, which bears the unofficial title of the tax with the most complex calculation in Croatia. Due to this complexity, this tax has long been a target of criticism from the investment community, which believes it has caused significant damage to the domestic capital market, driving away a good portion of small investors who often traded and thus created the much-needed liquidity for the domestic stock exchange.

The income tax on capital gains, as this levy is officially called, has been in effect since 2016, specifically for profits earned that year from trading financial instruments. As in previous years, it must be reported by the end of February. With the latest tax amendments, the rate has again increased from 10% to 12%, the same as it was in its ‘original’ form. Taxable profits include those from trading stocks, including shares in limited liability companies, as well as from trading cryptocurrencies, shares in investment funds, financial derivatives, and from the proportional part of the liquidation mass in the event of the liquidation of an investment fund. In addition to trading, profits arising from the exchange, gifting, or other forms of transfer of securities are also taxable.

Who and when pays the tax?

It should be emphasized that the tax must only be paid if less than two years have passed between the purchase and sale of stocks, shares in an investment fund, or cryptocurrencies. The intention of the legislator is to demotivate speculative short-term investment and encourage longer-term holding of financial instruments. The tax does not need to be reported if it involves the sale of securities between spouses, first-degree relatives, and other close family members. Additionally, profits from sales due to divorce or inheritance of financial assets are also tax-exempt.

On the other hand, investors do not need to report the calculation of this tax if they transferred shares from one voluntary pension fund to another during the previous calendar year or exchanged securities for similar securities of the same issuer, provided that the relationships among members and the issuer’s capital do not change. The tax authority is also not interested in the acquisition of financial instruments in cases of status changes, provided that there is no cash flow in all cases and that the sequence of acquiring financial assets is ensured.

A stock split of a particular company is also not taxable if it does not involve a change in the basic capital or cash flow. The exchange of shares between investment sub-funds within the same umbrella fund, or the exchange of shares between investment funds managed by the same management company, provided that the sequence of acquiring financial assets is ensured, also does not need to be reported, nor does the redemption of shares in the Fund for Croatian War Veterans and their family members. Finally, it should be noted that profits from investing in government bonds are not subject to capital gains tax.

The tax is paid on all capital gains reduced by realized capital losses in the same calendar year (provided that the capital losses were realized in less than two years) and for the corresponding trading costs. Trading costs include broker, depository, or exchange fees. If the total loss incurred in the previous year exceeds the profit, there is no obligation to report the tax. Additionally, the tax is not reported if the total capital gain is less than 15 euros. The tax declaration must be made on the JOPPD form.

Example calculation for Zagreb

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Mirela Relković, predsjednica Udruženja računovođa HGK

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The latest tax changes that abolished the surtax have somewhat increased the tax burden, at least for investors living in Zagreb. As explained by Mirela Relković, president of the Association of Accountants of the Croatian Chamber of Commerce, if we take a profit of 10,000 euros as an example, before January 1 of this year, the tax had to be calculated at a rate of 10% plus an 18% surtax. – For the city of Zagreb, the tax amounted to 1133.79 euros plus 18% surtax, which would amount to 204.08 euros, making the total tax burden 1337.87 euros. From January 1, 2024, there is no more surtax, and the tax on the payout is 12%, which for the city of Zagreb, according to the income tax rate, would now amount to 1363.64 euros in tax. Considering the abolition of the surtax and the introduction of income tax, we have an increase of 25.77 euros – explains Relković.

In practice, an investor should independently keep records of when and at what price they bought and sold each security. If they have bought a stock or shares in an investment fund multiple times, the tax calculation must be based on the FIFO (First In, First Out) principle. This specifically means that the calculation includes profits realized on securities that were purchased earlier. Trading records are also sent to investors by brokerage firms or investment fund management companies, with the caveat that the data is provided in good faith and they are not responsible for any errors. If an investor trades through multiple brokers, they must collect records from all of them and then calculate whether they are obligated to submit a tax declaration.

Mirela Relković states that profits must be paid exclusively to accounts opened in commercial banks – current or checking accounts. – Exceptionally, income tax is not paid on dividend payments and profit shares during the period from 2000 and from 2005 to 2011 – says Relković.

Without sweet words

The capital gains tax is a consequence of the desire (not to say pressure) from the European Commission to impose more taxes on wealth in Croatia, given the considerable tax burden on income from work. Since property taxation in Croatia is still a politically sensitive issue, the legislator found a solution to meet Brussels’ demands by taxing profits from trading financial assets.

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Ivana Gažić

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Ivana Gažić, president of the Management Board of the Zagreb Stock Exchange, has no kind words for this tax. – A particular problem with the calculation of capital gains tax arises if an investor has multiple different instruments, such as stocks, shares in investment funds, and cryptocurrencies. For accurate tax calculation, the investor must keep detailed records of when and at what price they bought or sold a particular financial instrument, and then report all of this on the JOPPD form. In general, the capital gains tax is very complex for small investors. Many investors who once frequently traded stocks on the Zagreb Stock Exchange have withdrawn due to this, transferring their money to the American stock exchange or investing in cryptocurrencies because that trading is much harder to track – emphasizes Gažić.

Regarding the yield, the head of the Zagreb Stock Exchange adds that the tax authority has never published data on how much is collected annually from this tax. – In my opinion, it is a symbolic amount, and the damage that the tax has caused to the capital market is significant – believes Gažić. We sent an inquiry to the tax authority about the annual amount collected from the capital gains tax, but no response was received by the time of publication.

The proposal for the capital market development strategy mentions that the method of calculating capital gains tax should be simplified. However, Ivana Gažić says she is not overly optimistic that the tax authority will heed this remark. – I have much greater hopes for the proposal regarding investment accounts, according to which profits earned from investments up to, for example, 5000 euros would not be taxed provided that the profits are not withdrawn. According to initial reactions, the legislator has reacted quite positively to this initiative – claims the head of the Zagreb Stock Exchange.

By issuing government bonds and treasury bills, the state has brought about 30,000 citizens to the capital market for the first time, enabling them to earn safely and solidly, of course, compared to savings in banks. Now it is time to start popularizing investments in stocks and investment funds.