On October 12, 2023, provisions of the Amendments to the Profit Tax Act (Official Gazette 114/23) related to tax withholding came into effect.
Here are the critical updates:
Amendment to Article 31, Paragraph 6 of the Profit Tax Act states that starting from October 12, 2023, there is NO longer an obligation to pay tax withholding on market research services, tax and business consulting, and audit services paid to foreign entities. This exemption does not apply to payments to individuals from countries listed as non-cooperative jurisdictions by the EU.
An exemption from tax withholding is now permitted for interest, copyright royalties, dividends, and profit shares paid to companies that are tax residents of the European Economic Area (Norway, Iceland, and Liechtenstein) under the same conditions as prescribed for companies tax residents of EU member states (Article 37. f of the Act).
According to Article 31.b, Paragraph 1 of the Act, tax withholding remains inapplicable to payments of interest and copyright royalties between related companies from different EU member states under the conditions stipulated in Article 31. a, Paragraph 4.
Interest and copyright royalties qualify for this exemption when a company from another EU member state pays them to the actual beneficiary or a business unit of a company based in Croatia located in another EU member state. These conditions apply as long as the minimum requirements specified in Article 31.a., Paragraph 4. of this Act are met continuously for at least 24 months.
A new feature is that taxpayers who do not meet the minimum 24-month holding requirement can still qualify for tax-free payments of interest and copyright royalties by providing an appropriate guarantee, the acceptance conditions of which will be prescribed by the Minister of Finance through a Regulation.
The tax withholding rate for fees and services paid to individuals with their domicile or place of actual management or control of business in countries listed as non-cooperative jurisdictions by the EU, with which Croatia does not apply a double taxation avoidance agreement, has been increased from 20% to 25%.