Stojić: Investment in Real Estate for Short-Term Rental Has Become a Tax Oasis

Work in Croatia is taxed above average compared to other categories such as short-term rentals, which are currently taxed at around one percent, making investment in real estate for short-term rental a new tax oasis. This was emphasized today at the German-Croatian Economic Forum Hrvoje Stojić, chief economist of the Croatian Employers’ Association.

– There is no room for euphoria, Croatia must work on increasing competitiveness and productivity. We need further tax relief on labor because there are 12 EU countries with lower labor taxes than Croatia. Croatia has an unfavorable tax wedge on salaries above 1500 euros net – said Stojić.

Salaries are rising, but productivity is not

The biggest problem currently facing Croatia is low productivity, which is two to three times lower than the EU average, especially in the manufacturing industry. Only tourism has productivity levels comparable to Germany, while the ICT sector, for example, nearly doubled its productivity compared to Germany from 2019 to 2022. Similarly, productivity is growing faster in the agriculture and food industry sectors. Therefore, there are sectors that have strong dynamics and increase Croatia’s added value, explained Stojić.

The growth of salaries, which is also double-digit in Croatia this year, does not contribute to productivity. Croatia is, in fact, a leader in real salary growth in the EU and the only economy that has recorded a real salary growth of 6 percent for two consecutive years, which is lower than other economies in Eastern EU.

– Either salary growth will have to stabilize, or we will have to significantly increase productivity – warned Stojić, explaining that otherwise Croatia could see higher inflation rates than the rest of the EU.

The decline in the working population and insufficient private sector investment are two more significant challenges currently facing the Croatian economy. The inclusion of women, youth, and older individuals in the labor system, strengthening private sector investments, and creating a more favorable environment for companies in the coming years, especially after 2025 when the wave of EU funds passes, will be crucial to continue and sustain the growth of the Croatian economy, which HUP economists estimate will amount to between 3 and 3.5 percent this year. For comparison, the euro area is expected to grow by only 0.7 percent.

How to achieve greater competitiveness?

Regarding competitiveness, a special discussion was held on this topic during the Forum. Based on his experience, Krešimir Hlede, director of the Croatian branch of the German company Porsche eBike Performance, does not believe that Croatia is at the bottom of Europe in terms of competitiveness. He cited the workforce as an example, as it is easier for them to find programmers in Croatia than in Germany, making Croatia more competitive, and the labor burden is similar in Germany.

– We have our competitiveness; we just need to know how to utilize it – said Hlede.

Croatia is not more competitive than Germany, added Ante Renić, director of VSB Croatia, but he noted that it is not fair to compare with the largest economies in Europe.

– We can compare ourselves with Ireland, which had similar problems as Croatia. They showed a similar path that Croatia could take – to be less bureaucratic and more business-friendly. The energy system in Croatia is dysfunctional because the components of the system do not act in unison or with the same goal, and we are overregulated. It is a capital-intensive industry, and it is not a problem to pay for something, but it is a significant problem that something that can take six months takes two years. The most progress has been made in terms of home solar energy, but that is not what drives the economy. The economy is driven by a large supply of energy in its own area that is not affected by macroeconomic movements, such as fossil fuels. Energy for households must be more expensive, while energy for companies must be cheaper for us to be more competitive, and this would ultimately help those households – explained Renić.

In response, Martina Dalić, president of the management board of Podravka, added that electricity prices for businesses in most EU countries are lower than for households because when you buy something in bulk, the price is lower.

– Despite all the desires for competitiveness, it is essentially about respecting fundamental market relations and laws. When these laws are ignored, various anomalies arise – said Dalić.

Institutional development ‘sine qua non’ of competitiveness

Commenting on the fact that Croatia ranks 18th in terms of private investment share in GDP among 27 EU members, Hrvoje Balen, a member of the management board of Algebra, emphasized that this is a significant opportunity for progress.

– When we compare ourselves with other EU members, Croatia is now a small county among more than 500 counties within the EU, and there are no differences between us. We are looking at how to attract investments in a playground where everyone else is playing. Competitiveness is actually having something that others do not have or offering it faster than others, and we must look at broader frameworks – expressed his opinion Balen, concluding that Croatia must be brave enough to state what kind of country it wants to be, set clear goals (such as the goal of doubling the number of ICT experts by 2030) and work towards achieving them.

Also, if we want to be competitive, Balen believes we must attract and retain people, as there can be no progress without people. Renić, on the other hand, thinks that there can be no progress with old habits and that companies must encourage and invest in innovations.

– The economy must be more liberalized and faster, and this will accelerate development – said Renić.

Dalić emphasized that for competitiveness, economic-political measures must be horizontal and accessible to all.

– When discussing competitiveness, it is fair to separate what a company can do for itself to be competitive; that is the first task of every business entity and their management. The second aspect of this issue is what can be favorably done in the environment, not for the competitiveness of one company, but it is a horizontal question of what characteristics of the entrepreneurial environment are beneficial for the competitiveness of the economy. Besides traditional discussions, such as tax burden issues, I believe that institutional development, or the efficiency of institutions, such as the judiciary and state administration, is a sine qua non of modern competitiveness, as it also influences mentality, the speed of problem-solving, and projects that affect competitiveness – explained Dalić.

How can we catch up with those larger and better than us summarized Hlede:

– One way is to have a fundamentally better product, which I believe Croatia cannot have. The second thing is to inject more resources than others, which will also not happen in Croatia. The third thing is speed and focus, which requires a certain degree of courage, vision, and a state administration that is not afraid to make mistakes if it is going in the right direction, and in that, we can make a serious step.