Croatia - Taxation
In December 2000 the government adopted a package of tax laws including the General Tax Law, the Law on Tax Advising, the Law on Corporate Profit Tax, and the Income Tax Law. In general, the new laws reduced some rates, but widened the tax base. The corporate profits tax was reduced from 35% to 20%. Reduced corporate tax rates of 5%, 10% and 15% are available for companies locating in "special care areas" (62 municipalities and towns deemed to be undeveloped) and in the Vukovar area. The corporate tax rate is also reduced for larger new investments: 7% for investments of at least 10 million Kuna (about $1.56 million); 3% for investments of at least 20 million Kuna (about $3.12 million); and 0% on investments over 50 million Kuna (about $7.8 million). Companies operating in one of Croatia's 12 free trade zones (FTZs) pay half the standard corporate tax rate (10%) or 0% if their investment is more that one million Kuna (about $156,000). There is no separate foreign investment law in Croatia, so branches of foreign companies are taxed the same as domestic companies, though only on profits made in Croatia. There is also a municipal firm tax of up to 2,000 Kuna ($312).
Changes to the Personal Income Tax (PIT) Law, effective from 1 January 2003, increased the number of PIT tax brackets from four to five (counting the personal allowance tax free amount), increasing slightly the bands for the lower rates, but introducing a new highest rate of 45%. The new rates were 0% up to about $2,609 a year (using $1=6.9 Kuna); 15% for the next increment of income up to $5,217 a year; 25% on the next increment to $11,740 a year; 35% on the next increment to $39,364 a year; and 45% on income above $36,522 a year. Croatians are taxed on their worldwide income while foreigners pay only on income realized in Croatia. Deductions from taxable income are allowed for medical and housing expenses. There is a 15% withholding tax on dividend income. Local surcharges on state income taxes range from up to 10% in small municipalities to up to 30% in Zagreb. The inheritance and gift tax is 5%, and there is a 5% real property transaction tax. Property taxes are assessed locally.
The employee's contribution to social security is 20%. By the pension reform legislation effective as of 1 January 2002, 15% goes to the national pension fund and 5% to new private pension funds. The new pension system is mandatory for workers under 40 as of 1 January 2002, and optional for workers 40 to 50 years old. Workers over 50 continue to contribute all 20% to the national pension fund. As of January 2003, the cap on social security contributions by an employee was set at $54,620 per year. The employers' contributions to social security, amounting to 17.2%, go for health and unemployment insurance: 15% for general health insurance, 0.5% for work-related accident insurance, and 1.7% for unemployment insurance.
The main indirect taxes in Croatia are the value-added tax (VAT), with a flat rate of 22%, and excise taxes. Specified goods and services are exempt from the VAT (0% rate). Slot machines are taxed at about $14.50 per month, while winnings from games of chance are subject to the 22% VAT. Per-unit excise taxes are assessed on petroleum products, tobacco, beer, alcoholic drinks, coffee, and non-alcoholic drinks. Luxury goods carry a 30% excise. Producers and importers of vehicles (cars, motorbikes, boats and airplanes) pay excise taxes, while buyers of used vehicles pay a sales tax. Auto insurance premiums are taxed at 15%, for liability insurance, and 10%, for comprehensive insurance. There are local consumption taxes on alcoholic drinks up to 3%.