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Country - Croatia
Taxes
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A. AVAILABLE INVESTMENT STRUCTURES
Which legal structures can be used for an investment in real estate in Croatia?
Investors wishing to invest in real estate in Croatia can structure their acquisition in various ways: either through direct acquisition of the real estate or through an indirect acquisition via a Croatian corporation.
B. TRANSFER TAXES, NOTARY FEES AND OTHER ACQUISITION COSTS
How is the purchase of a real estate asset taxed?
The acquisition of real estate assets (where not subject to VAT), by way of purchase, exchange or otherwise, is subject to real estate transfer tax. If the building is subject to VAT, the tax is only payable on the land element of the transaction.
5% real estate transfer tax is payable on the market value of the transferred property; however, the tax authorities also have a right to perform their own assessment of value.
Exemptions from real estate transfer tax apply to the following:
- the transfer of real estate made as a contribution into the registered capital of a company;
- the transfer of real estate owned by a company as part of a merger, division or restructuring process.
Do any specific rules for transfer taxes apply if the asset is a shopping centre or another asset used for retail activities?
No.
How is the purchase of shares in an SPV holding real estate taxed?
There is no special tax on the purchase of shares in an SPV holding real estate.
Who normally pays the transfer taxes, the buyer or the seller?
Generally, real estate transfer tax is paid by the buyer. However, the seller is regarded as a guarantor for the payment.
Are there any other costs related to the purchase of real estate assets or SPVs?
There is a fee for the registration of a transfer of ownership at the Land Registry, as well as fees for the notary public and other advisers.
C. TAXATION OF CURRENT INCOME
How is income generated from the letting of real estate taxed in Croatia?
(a) Direct investment
Rental income from real estate in Croatia is subject to taxation (personal income tax or corporate profit tax) at a progressive tax rate of between 15% and 45%.
In general, tax is levied on rental income after the deduction of expenses (for example, depreciation).
(b) Indirect investment through a Croatian corporation (i.e. a non-transparent entity)
Tax is levied on the rental income after deductions of expenses (including interest, depreciation and administrative costs) at a rate of 20%.
How can income generated by investment be transferred to a foreign investor?
Once applicable taxes have been paid the income can be freely transferred. There is no withholding tax on dividends.
Are there local taxes on the possession of real estate assets?
Local taxes are payable on privately owned holiday homes.
The tax rate ranges from HRK 5 to 15 per square metre, depending on location.
Holiday home tax is not payable on homes that are unusable (for example, due to earthquake, fire, etc.).
D. DEPRECIATION
What are the basic rules for the depreciation of real estate assets?
The basis for depreciation is the original acquisition cost, with the depreciation rate usually being based on the normal useful life of the asset. Generally the depreciation rate for buildings is 5%.
Can land be depreciated?
No. Land is considered to have a continuous useful life and so no depreciation is allowed.
Can a participation in an SPV holding real estate be depreciated?
No. However, the participation can be subject to a write-down to fair value, provided that it has permanently reduced in value.
E. VAT
Is the purchase of real estate assets subject to VAT?
In general, the purchase of a property built on or after 1 January 1998 from a registered VAT payer is subject to 22% VAT (this usually applies to the building element only, since the land is subject to real estate transfer tax).
F. LEVERAGE, THIN CAPITALISATION RULES
Are there rules which limit the deductibility of interest for third party (bank) financing?
As long as the loan made by a third party is not secured by a shareholder in the borrowing company, back-to-back interest should be fully deductible.
Are there thin capitalisation rules in Croatia and if so, how do they work?
Interest on loans from a shareholder in a company holding at least 25% of the taxpayer's shares or voting power will not be recognised for tax purposes, if the amount of the loan exceeds four times the amount of the shareholder's share in the capital or voting power.
Does Croatia apply withholding taxes on interest paid to foreign financing banks or to foreign shareholders?
Cross-border interest payments from a Croatian company to a foreign shareholder are subject to a 15% domestic withholding tax, unless the relevant double tax treaty relieves this. Interest payable to banks is exempt from withholding tax.
Croatia has an extensive double taxation treaty network.
G. TAXATION OF CAPITAL GAINS
How are capital gains deriving from the sale of real estate assets taxed in Croatia?
(a) Assets held by a foreign investor (individual) directly
Capital gains are subject to personal income tax at a general rate of 25%.
Double taxation treaties may stipulate that the gains from the sale of real estate are taxed in the foreign investor's country of residence.
(b) Assets held by a foreign investor (corporation) directly
If the foreign investor maintains a permanent establishment in Croatia, income is subject to Croatian corporate profits tax.
Double taxation treaties may stipulate that the gains from the sale of real estate are taxed in the foreign investor's country of residence.
How are capital gains deriving from the sale of shares/holdings in a corporate entity taxed in Croatia?
Capital gains on the sale of shares realised by individuals are not taxable in Croatia.
Capital gains deriving from the sale of shares realised by corporate investors who are Croatian tax residents are normally subject to corporate profits tax.
Double taxation treaties may stipulate that gains from the sale of shares are taxed in the foreign investor's country of residence, but may also provide for them to be taxed in the country where the corporation is based, if the assets of this corporation consist mainly of real estate.
| Content provided by: TPA Horwath, Wirtschaftstreuhand und Steuerberatungs GmbH, Vienna. |
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