The Deputy Prime Minister and Minister of Finance Marko Primorac revealed on Tuesday that as part of the continuation of tax relief, an increase in the basic personal deduction to 600 euros is being considered, raising the threshold for entering the VAT system to 50,000 euros, as well as tax exemptions for returnees.
Speaking at the conference ‘Sustainable Tax System: Policy, Practice, and Perspectives’ organized by the American Chamber of Commerce in Croatia (AmCham), Primorac reminded of the tax changes that came into effect on the first day of this year, which included the abolition of surtax and granting greater autonomy to local units in determining income tax rates, as well as increasing the basic personal deduction from 530 to 560 euros.
Noting that these are proposals from the Ministry of Finance that are still under discussion and not definitive, Primorac announced that he would continue to increase that deduction, which should amount to 600 euros in the future. Personal deductions for dependents and disability will also be increased.
Primorac assessed AmCham’s proposal to raise the deduction to 840 euros as “very ambitious,” given the need to finance local self-government units. Additionally, the threshold for small entrepreneurs to enter the VAT system will be raised from the current 40,000 to 50,000 euros. According to Primorac, this should allow about 7,500 taxpayers to exit the system.
Additional incentive for the return of our emigrants
Without providing specific details, Primorac announced that from January 1, 2025, there should also be an increase in the amount of non-taxable income that employers can pay to workers.
Among the measures being considered is the abolition of reciprocity in VAT refunds to entrepreneurs from third countries, as well as the stipulation of provisions on VAT neutrality established in tax audit cases.
Primorac also announced measures to encourage the return of Croatian citizens from abroad.
– We are working on a model proposal that will enable tax exemption for citizens returning to Croatia. I believe this is good, constructive, and will provide an additional incentive for the return of our emigrants – he stated.
Primorac reiterated that the Croatian tax system, in terms of profit and income taxation, is quite competitive. He noted that Croatia had an implicit tax rate on labor of 26.9% in 2021, which is 10.9 percentage points lower than the EU average. On the other hand, Croatia leads in consumption taxation, which is a conscious choice, given the large number of foreign tourists coming to Croatia, who thus “de facto” cover part of the tax burden.
In the area of VAT, Primorac announced the project Fiscalization 2.0, which will change the existing reporting method through digitalization, meaning that the issuance of electronic invoices will also be extended to the “B2B” segment. He assessed that this project represents a “significant step forward” in terms of administrative relief, and should lead to the abolition of a number of forms in the area of VAT, with estimated savings at the system level amounting to around 120 million euros.
AmCham: Lowering income tax rates, increasing the threshold for applying the higher rate….
AmCham presented the minister with a proposal for further tax reform and relief aimed at further increasing wages and citizens’ income. In addition to the previously mentioned increase in the personal deduction to 840 euros, they also suggest reducing income tax rates – the lower one to 10% and the higher one to 20%, as well as increasing the threshold for applying that higher income tax rate from the current 4,200 to 5,000 euros per month.
It should be noted that with the tax changes effective from January 1 of this year, which abolished the surtax, local units have the autonomy to determine income tax rates, but within limits set by the state. They can set the lower rate in the range of 15 to 23.6%, and the higher rate in the range of 25 to 35.4%.
– Despite the fact that we are indeed seeing significant tax relief on labor year after year, we believe there is still room for further relief – stated the Executive Director of AmCham Croatia Andrea Doko Jelušić.
Among other things, the Chamber also proposes setting monthly and annual limits for calculating contributions for health insurance.
– The more a person earns, the higher the contribution. On the other hand, we know that health services are not always available, nor are all medications through HZZO – stated Doko Jelušić.
AmCham’s proposal is also to raise the threshold for entering the VAT system to 50,000 euros, which, according to Minister Primorac’s announcement, is very likely.
Unfavorable tax treatment of stock option compensation
Petra Megla from KPMG Croatia emphasized that Croatia is facing a labor shortage in all industries. Therefore, it is essential to retain highly educated workers who are the drivers of economic growth, while also attracting foreign workers, which should be supported by the aforementioned general reduction in income tax rates, with a special emphasis on the higher rate, which relates to ‘middle-income levels’.
Megla also highlighted the unfavorable tax treatment regarding employee compensation through participation in stock option plans. Stock option compensation involves including workers in the ownership structure, thereby binding them to the company for a longer period, and the current tax rate is 24%.
However, as Megla points out, if one wants to “correctly tax that employee income,” that rate rises to 32%, which exceeds even the highest income tax rate, thus losing motivation for that model, which is often also administratively burdensome. Therefore, it is proposed that the rate be reduced to 12%.
Megla also presented a comparison of contracted gross salary and the corresponding net amount in relation to the ‘new’ EU member states, in which Croatia ranks among the countries with a somewhat unfavorable ratio. For example, a person whose salary in Croatia is 3,120 euros gross, after tax and contribution deductions, is left with approximately 65% of that amount. On the other hand, in the Czech Republic, which is the “brightest example,” the same person would be left with approximately 77% of their salary.
