Donations: From 2024, donations for strategic projects without tax limitations

With the amendments to the Corporate Income Tax Act and the Personal Income Tax Act, which come into effect on January 1, 2024, as part of the sixth round of tax reform, entrepreneurs are further encouraged to make donations for non-profit and public benefit purposes.

Taxpayers are allowed to recognize donations made to associations, institutions, state administration bodies, local units, and other non-profit organizations as tax-deductible business expenses up to two percent of revenue earned in the previous or current tax period. Only donations made to domestic recipients, either in cash or in kind, for cultural, scientific, educational, health, humanitarian, sports, religious, ecological, and other public benefit purposes are tax-recognized. The recipient of the donation must be registered to perform these activities. Cash donations must be paid directly to the organization’s account, and for donations in kind, the donor must have a confirmation from the responsible person of the recipient regarding the acceptance of the gift.

Donations for medical treatment

Donations made in kind are considered a supply and are subject to value-added tax at the prescribed rate. The VAT taxpayer is the trading company that donates goods or services, whereby the amount of VAT calculated on the supply is included in the amount of tax-deductible expenses up to two percent of earned revenue, along with the value of the donated goods or services.

Tax-deductible donations up to two percent of revenue from the previous or current year also include those made by trading companies and other corporate income tax payers to individuals for the payment of operational procedures, treatment, procurement of medicines and orthopedic aids, and for covering transportation and accommodation costs in health institutions. Such donations are considered non-taxable income for the individual under personal income tax regulations, whereby the personal income tax regulations no longer require payment to a giro account – it is allowed to pay the donation for health needs directly to the individual’s current account. However, according to the Corporate Income Tax Act, tax-deductible expenses on this basis still require a transfer to the giro account of the individual or organization where the person is treated. ​

What’s new

These tax rules are not new; they have been in effect for years. The novelty is the increase in tax-deductible donations above two percent of revenue, introduced on January 1, 2024, when donations are made for purposes defined by strategic projects that are defined by special regulations or established by the strategy of individual ministries with the consent of the Government of the Republic of Croatia. Donations for strategic projects that meet the set conditions are tax-recognized up to the amount of the donated funds, without limitation.

Donations that meet the described condition are recorded as expenses in the business books of the entrepreneurs, thus reducing profit and, consequently, the tax base for income tax calculation. Donations that exceed the prescribed limits and are not directed towards financing strategic projects increase the corporate income tax base.

Individuals who donate cash contributions for cultural, educational, scientific, health, humanitarian, sports, and religious purposes are in a similar tax position, but the method of achieving this benefit is different.

Similarly for individuals

Individuals have the right to increase their personal deduction for donations made as a non-taxable part of their annual income, whether their annual tax assessment is prepared by the Tax Administration ex officio in a special procedure or whether they, as self-employed income tax payers, submit an annual tax return. In both cases, they have the right to increase their personal deduction for the amount of donations made, but up to two percent of the income for which an annual tax return has been submitted in the current year or a special procedure for determining annual income tax has been conducted.

Income tax payers can also increase their personal deduction from January 1, 2024, for amounts exceeding two percent of current year income if the donation is intended for the realization of strategic projects. Taxpayers who submit an annual tax return indicate the increase in personal deduction for donations made in special sections, while those who do not submit a tax return submit the ZPP-DOH form along with proof of the donated amounts paid.

Regardless of the source of income they earn, individuals cannot increase their personal deduction for donations made to another individual for covering health costs not covered by mandatory, supplementary, or additional health insurance, even after the latest amendments to the Personal Income Tax Act. This tax benefit is available only to corporate income tax payers. Individuals who earn income sources for which they do not have the right to a personal deduction cannot reduce their tax on donations made.