Entrepreneurs in the Least Developed Municipalities to Benefit from 50 Percent Lower Profit and Income Tax

The government has amended the list of local units classified in Group I according to the Law on Regional Development of the Republic of Croatia for 2024 based on the development index. The development index is a composite indicator calculated as a weighted average of various indicators of the achieved level of social and economic development, used to measure the level of development of municipalities and counties, and is calculated every five years. Local units with a development index value below 75 percent of the Croatian average are classified in Group I and thus receive the status of a supported area.

According to the new decision of the Government of the Republic of Croatia, effective from January 13, 2024, there are 72 local units in Group I for the next five years. Based on new indicators, some local units have exited this group, while others have been newly included due to low development index. The municipalities of Brinje, Crnac, Dežanovac, Donja Motičina, Donja Voća, Glina, Kapela, Lećevica, Lovreć, Nova Rača, Proložac, Saborsko, Severin, Staro Petrovo Selo, Špišić Bukovica, Udbina, and Zagvozd are no longer in Group I, while the new municipalities in this group are Borovo, Bošnjaci, Čaglin, Darda, Davor, Dragalić, Erdut, Gorjani, Janjina, Kneževi Vinogradi, Prgomet, Slavonski Šamac, and Sućuraj.

What are the criteria

Entrepreneurs operating in areas classified in Group I according to the level of development are entitled to tax incentives prescribed by the Profit Tax Act and the Income Tax Act, provided they meet additional conditions specified by these regulations. Citizens living in these areas and earning income from employment are also entitled to tax incentives. The city of Vukovar is not on the list of Group I areas, but according to special provisions, entrepreneurs conducting business in its area are exempt from profit tax and income tax from self-employment under prescribed conditions.

For commercial companies and other profit tax payers conducting business in the area of local units classified in Group I and employing more than five employees on a permanent basis, with the additional condition that more than half of the total employed workers reside and actually live in the supported area classified in Group I, the profit tax rate is reduced by 50 percent. Depending on the annual revenue, profit tax payers pay a profit tax of five percent instead of the ten percent rate, and if their revenue exceeds one million euros, they pay profit tax at a halved rate of nine percent instead of the eighteen percent rate. The condition of the prescribed number of employees is considered fulfilled if the worker included in that number has been employed with the taxpayer on a permanent basis for at least nine months in the tax period. The condition of more than half of the employees residing in Group I is considered fulfilled if the employees have had residence and lived in the area of the local unit classified in Group I for at least nine months as well.

How it is calculated

Similar, but milder conditions are prescribed by the Income Tax Act as a tax incentive for craftsmen, freelancers, and farmers who determine income based on received payments and paid expenses. For taxpayers conducting business in the area of Group I tax-supported areas, the income tax determined based on self-employment is reduced by 50 percent, provided they employ more than two workers on a permanent basis and that more than half of the employees have residence and actually live in Group I areas for at least nine months of the year.

A natural person who, in addition to income from self-employment, also earns other sources of annual income calculates their annual tax obligation cumulatively for the total annual income, and from that amount, the 50 percent tax reduction is applied to the amount of the annual tax obligation proportionate to the share of income from self-employment in the total annual income.

Workers and pensioners

The income tax from employment is reduced by 50 percent for citizens who have residence in the tax-supported area of Group I. Employees who actually reside in areas classified in Group I have their tax from salary reduced by 50 percent, and this reduction is applied at the time of salary payment, provided that the data on residence and the right to use the incentive is recorded in the tax card PK held by the employer (on the tax card marked P1).

Employees who have residence in areas that have been classified in Group I since January 13, 2024, should contact the Tax Administration and request the entry of this data in the PK card so that their employer can reduce the income tax at the time of salary payment. If they fail to do this from the beginning of 2024, they will be able to request the use of this incentive in the annual income tax calculation for this year until February 2025. Pension recipients residing in Group I areas also earn income from employment, but their tax from pensions is reduced by 50 percent, so they cannot benefit from both reductions.