Who Loses and Gains from Renting Villas, Rooms, and Apartments?

In recent weeks, the media has reported on the total costs of fiscal and parafiscal levies for apartment landlords following legal changes. However, as we were informed, an error crept in at the very beginning, which the media continued to repeat. Namely, someone included the costs of internet travel agencies (English: online travel agency, OTA) that landlords pay as a commission for bookings made through the agencies where they advertise their accommodation. However, when it comes to fiscal and parafiscal obligations, we can only include VAT on the commission, not the commission itself.

Cost Calculation

This was pointed out by the president of the association Save Small Family Renters (SMOI) Vedran Tomić, and his associate Marina Đukanović sent us a calculation of fiscal and parafiscal costs that includes only VAT on the commission to agencies, not the commission itself. In this calculation, in addition to state levies, there are data on other costs that landlords must pay. If we look at all of them (state levies, commissions paid to agencies, utilities, consumables, cleaning, advertising…), and add depreciation and our own labor, we will see that there is no profit, and a loss is even possible. For example, for a 60 square meter apartment with four beds and one extra bed, the income tax is 400 euros (100 euros per bed, excluding the extra), and the property tax of five euros per square meter (from 0.6 to eight euros, depending on the local government unit) for those 60 square meters amounts to 300 euros. The commission paid to agencies (OTA) should be treated separately. If the mentioned apartment generates an annual income of 10,000 euros, and Đukanović states that at least half of that is achieved by landlords with the help of agencies (thus 5,000 euros), the commission is 15% (in this case, 750 euros). This item goes into regular expenses, but landlords also pay VAT on that commission (not the agencies), which adds an additional tax burden of 187.5 euros. Thus, the total fiscal cost is 887.5 euros. Just in terms of tax, the landlord pays 8.9% of the total income. Next are the parafiscal costs. One is the tourist membership fee, which amounts to 5.98 euros, so in our case for four beds and one extra (2.99 euros), it is 26.91 euros. Let’s add the tourist (stay) fee of 280 euros (70 euros per bed, excluding the extra) and the RTV fee of 127 euros, increased utility fees of 240 euros, and additional reserve costs of 600 euros – in total, this amounts to 1,273.91 euros in parafiscal costs, and their share in 10,000 euros of income is 12.7%.

If we sum the total fiscal and parafiscal costs, it amounts to 2,161.5 euros, or their share in income is 21.61%. And that’s not all: from other costs, landlords in procurement and payment of utilities, materials, cleaning, and others must pay VAT, which according to SMOI’s calculation amounts to around 900 euros, so the total cost for state levies rises to 3,059.4 euros or 30.6% of total income. Only then do other costs follow: the aforementioned commission to online travel agencies of 750 euros, operational business costs (utilities, consumables, cleaning, advertising, etc.), which reach, as stated in SMOI, 2,700 euros, and regular annual maintenance of 900 euros (services, replacement of inventory and equipment, etc.). This totals 4,350 euros in costs. When we add fiscal and parafiscal levies, it already reaches a serious 7,411.5 euros. According to this calculation, the landlord of one apartment is left with 2,590.60 euros. This is what remains before depreciation and the value of their own labor, but if we include depreciation, which is around 2,500 euros, and the value of their own labor of 1,500 euros, there is really no calculation, at least according to the data sent to us by SMOI.

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Vedran Tomić, president of the association Save Small Family Renters (SMOI)

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Property Tax

Perhaps someone else has a different calculation, but in what has been presented to us, everything has been taken into account. The question is whether someone will present ordinary (non-tax) costs as higher or lower, but we must not forget that everything has become more expensive in recent years. An important factor is certainly in which local government unit the landlord is, or how high the property tax is (in our example, it is five euros per square meter, but it can also be 0.60 euros as in most local government units, and even eight euros). We also know that the season has been longer in recent years, so the apartment in our example could earn a few thousand euros more, but it is certain that small landlords are not the happiest due to the latest tax solutions.

Tomić claims that the recently published calculation by Finance Minister Marko Primorac regarding the estimated income and occupancy of apartments does not reflect the real picture of actual income from additional activities for most small landlords. The minister presented his calculation at the presentation of the package of tax laws on real estate (occupancy of 200 days with an average apartment price of 200 euros). Tomić emphasizes that it does not encompass all tax and other levies and does not reflect the actual tax burden on small landlords.

Long-term = Short-term Rental

The association Save Small Family Renters conducted a survey among its members, which showed that most of them rent one or two apartments with an average occupancy of between sixty and seventy days. This, says Tomić, is in line with the statistics of the Ministry of Tourism and Sports and the DZS.

– With the most common property tax rate of five euros per square meter and the most common flat-rate tax amount of one hundred euros per bed, the actual fiscal and parafiscal burden on small landlords is around 30%, and with higher property tax and income tax rates, this burden rises above 35%. Compared to the actual tax burden of long-term rentals of 8.4%, it is truly unclear how the accepted package of measures equated the status of long-term and short-term rentals, especially since short-term rentals require higher investments, a categorization process, and a series of other procedures to obtain a rental permit, says Tomić.

Small landlords, who account for more than sixty percent of the tourist offer in Croatia, will try to adapt to the new situation, say SMOI, but the measures taken by Prime Minister Andrej Plenković’s government, they believe, will lead to a reduction in supply and an increase in prices, a decrease in tourist consumption, and many landlords will be deterred from investing in further quality improvements due to fear of further restrictions.

– Although such a blow to family accommodation has not been recorded in a long-standing tradition, which is being drastically reduced by these reforms, we hope that the government will recognize its catastrophic consequences and correct those parts of the tax reform that violate the constitutionally guaranteed rights of small landlords. Our association will submit proposals for the assessment of the constitutionality of the provisions of the Law on Management and Maintenance of Buildings, the Law on Local Taxes, and the Law on Hospitality, in which we believe many citizens and organizations will join us, says Tomić.

Higher Tax After Elections?

He emphasizes that legal landlords do not shy away from fulfilling their obligations to the state, but they are troubled by injustice because they are demonized even though they contribute to the economy, unlike illegal ones, who operate without any tax costs and sanctions. Admittedly, he acknowledges that most local government units have set the flat-rate tax on beds at the lowest possible legal limit, while some have shown particular understanding for small family landlords.

– They will pay the difference between the existing and new, increased rates as part of small value support to local landlords. As negative examples, we can mention large cities such as Zagreb, Rijeka, Dubrovnik, and Split, which have burdened their landlords with higher rates, regardless of whether the ruling party or the opposition is in power. Regarding property tax, most local government units have left this tax at the existing level, and we can still notice that it is at the upper end of the range in larger cities and some places on the Adriatic. The rates at which both taxes will be determined can unfortunately change every year, so considering that they were determined just before the local elections in May, it is realistic to predict their increase next year in many local government units, emphasizes Tomić.

Restlessness Due to the Law on Buildings

As for how the new Law on Management and Maintenance of Buildings affects landlords, Tomić says that since the publication of the first version to date, it has only brought unrest and legal uncertainty among landlords and other residents of the buildings. The relevant Ministry of Construction and the administrative departments of the counties responsible for registering new apartments have not received detailed operational instructions on who and how, says Tomić, collects signatures from the owners of other apartments and who certifies them and how.

– Also, no one knows how immediate neighbors will be determined, and neither managers nor representatives of residents want to take on that thankless task. Due to the disproportionate burden imposed on them by this law, and even the possibility of misdemeanor liability, dozens of representatives of residents in buildings have resigned. All this causes a blockage in registering new apartments, which, in addition to direct damage to small landlords, brings harm to the state budget, the local community, and the entire economy. Reduced supply harms tourists, who can expect higher accommodation prices. We are already noticing that the value of apartments and properties where neighbors are willing to give consent for tourist rental has increased, concludes Tomić.

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