On Thursday, the government submitted proposals for tax changes to the Parliament, introducing taxation on excessive profit margins of large and medium-sized companies, as well as changes in the taxation of pensions, flat-rate businesses, short-term rentals in tourism, and the VAT Act, which is being aligned with the new EU directive.
The government proposes the introduction of a profit tax on excessive profit margins as a one-time anti-inflation measure for the tax period of 2026. The tax would apply to approximately 1,800 large and medium-sized entrepreneurs, whom the government estimates could influence inflation growth, provided that more than 50 percent of the value of their goods and services is generated in the Croatian market.
– The logic we are following is that in this way we discourage primarily those who are exploiting inflationary movements caused by exogenous factors and the fact that the escalation that occurred at the beginning of the year conditioned very high inflation rates, so they do not exploit it to increase the prices of their products, i.e., to collect excessive margins – said Deputy Prime Minister and Minister of Finance Tomislav Ćorić, presenting the legislative proposal at the government meeting.
The profit margin will be calculated as the ratio of adjusted profit and income reported in the tax return. It will be considered excessive if in 2026 it is at least 15 percent higher than the average margin that the same entrepreneur achieved in the previous three years, from 2023 to 2025. A tax at a rate of 50 percent will be paid on the determined excess margin.
– I would like to point out that part of the amendments to the law concerning excessive trade margins, i.e., taxation, has already shown its preventive role in practice since we presented it, as there has been a sharp reduction in the growth of some prices. This means that those who understood what the provisions of the law would be, which will come into force on January 1 after being adopted by the Parliament, have carefully considered what prices they will set. Therefore, it seems to me that this reform has already shown its preventive effects even before it has been adopted – emphasized Prime Minister Andrej Plenković at the introductory part of the government session.
Changes in Income Taxation
The proposal for amendments to the Income Tax Act plans to abolish the taxation of pensions, or, as stated in the proposal, to increase the percentage of reduction from the previous 50 to 100 percent of the tax obligation on pensions, on which income tax is paid at a lower rate (monthly tax base up to 5,000.00 euros, or annual tax base up to 60,000.00 euros).
The government illustrates this with the example of a retiree with a pension of 800 euros. After applying a personal deduction of 600 euros, the tax base amounts to 200 euros, on which 40 euros of tax is calculated at a lower rate of 20 percent. This amount is now reduced by 50 percent for retirees, so the final tax obligation amounts to 20 euros. According to the proposed amendments, the retiree in this example will not pay income tax.
Regarding the tax treatment of ‘flat-rate taxpayers’, the first five tax brackets will be exempt from increased burdens, up to annual incomes of 40,000 euros. However, it is proposed to change the amount of recognized expenses for individuals whose self-employment is taxed flat-rate, so that recognized expenses gradually decrease with the increase in the amount of realized income through higher tax brackets, from 85 to 70 percent for individuals in the sixth tax bracket (income from 40,000.01 to 50,000.00 euros) and to 55 percent for individuals in the seventh tax bracket (income from 50,000.01 to 60,000.00 euros).
– These tax changes will not affect 83.4 percent of our craftsmen. Likewise, all those flat-rate craftsmen who are in the upper two brackets, i.e., from 40 to 60 thousand euros, who believe that their deductible items should be higher, can start keeping business records and thus clearly address the real situation in their crafts – said Ćorić.
