Interest Rates and Taxes: Interest Rates on Intercompany Loans Set at 3.25% for 2024

The granting and receiving of loans (advances) between companies is not uncommon. Even more frequent are loans between companies and individuals, whether they are members or employees of the company. A loan agreement does not have to be in written form. The parties agree on the amount of the loan, the repayment period, the interest rate, and any other possible costs; they can agree on security instruments, so a written form of the contract is desirable due to potential disputes. It is not mandatory to agree on interest; interest-free loans are permitted, but the parties must consider the tax characteristics of interest as compensation for the service of using someone else’s money.

For intercompany loans between companies that are Croatian tax residents, there are no prescribed restrictions, provided that the companies are not related. Charged interest is business income for one taxpayer and a business expense for another in the same amount, which is neutral for the state. However, if it concerns related parties, one of which is a resident and the other a non-resident, the lender is obliged to calculate interest at the rate that would be realized between unrelated parties at the time of granting the loan, and the borrower is recognized for tax purposes up to the amount of that interest rate.

Privileged Tax Status

The interest rate applicable to loans between related parties for each calendar year is determined by the Minister of Finance and is set at 3.25% for 2024. This interest rate also applies to loans between related parties that are Croatian residents if one of them is in a privileged tax position. A corporate income taxpayer is considered to be in a privileged tax status if they have carried forward tax losses from previous tax periods, if they pay corporate income tax at lower rates than the prescribed general rate, and if they are exempt from corporate income tax.

If a lower interest rate than 3.25% is agreed upon between such corporate income taxpayers, the taxpayer who granted the loan must increase the corporate income tax base by the amount up to the prescribed interest rate. Conversely, if a higher interest rate than the prescribed one is agreed upon, the taxpayer who owes interest cannot recognize the difference above the prescribed rate as a tax-deductible expense.

When and How Much Tax is Paid

The Corporate Income Tax Act also prescribes restrictions regarding the recognition of expenses for a company that receives a loan from a shareholder or a member of the company who holds at least 25% of the shares or stakes in capital or voting rights, provided that the loan exceeds four times the amount of that shareholder’s or member’s stake in capital or voting rights. Only the interest on the part of the loan that exceeds four times the shareholder’s or member’s stake in capital is not tax-deductible, with the implementation regulations on corporate income tax detailing the method of calculating non-deductible expenses.

In addition to the corporate income tax regulations, the income tax regulations are also relevant in credit relations between a company and an individual. When an individual grants a loan to a company and earns interest on that basis, the company must withhold 12% income tax on capital upon the payment of interest. The 12% rate applies regardless of the residence or usual residence of the Croatian resident individual, and the paid income is reported by the company in the JOPPD form submitted to the Tax Administration. If the individual lender is not a Croatian resident but a resident of one of the 67 countries with which Croatia applies a double taxation avoidance agreement, the provisions of that agreement apply, provided that the income payer has the prescribed documentation.

Company Loan to an Individual

In the reverse relationship, when a company grants a loan to an individual, the prescribed minimum interest rate is used to assess whether the credit service was provided at a fee lower than the market price. If the agreed interest is 2% per year or more, it is considered that the market price has been agreed upon. If, however, an interest-free loan or a loan with an interest rate lower than 2% is agreed upon, it is considered that the individual receives a benefit in kind.

A benefit in kind is considered income in tax terms, or if the individual is not employed, other income of the recipient, so the lender is obliged to calculate and pay contributions and income tax each month according to the tax rates prescribed for annual income. From January 1, 2024, these rates will vary by municipalities and cities.