Business taxation in Croatia (Copyright Natasa Zunic Kovacevic)

Business taxation in Croatia (Copyright Natasa Zunic Kovacevic)

• 1.
  La Tassazione dellePMI in Italia e Europa: Modelli a Confronto Business taxation in Croatia: Attracting Foreign Investments in Post-Accession Era Prof. Žunić Kovačević Nataša Faculty of Law University of Rijeka
• 2.
  Introducing note • SMEsector - diverse with respect to its size and sector composition. • the SME sector - mostly includes minor traders, self-employed, small business proprietors, firms run by owners. • eemphasizing the opportunities for a SME’s in the lower tiers of the supply chain - a traditional approach - a change of paradigm • since there is evidence of changes in such patterns because there is the increasing involvement of SMEs as foreign investors. • SME’s are internationalising their operation as a reaction to competitiveness pressure, need for reducing costs. • EU - nearly 99 per cent of all enterprises are SMEs • Croatia - 2014 there was an increase in the total number of business entities in Croatia in relation to 2013/ by 3.2% • 99.7% of business entities come from the small and medium enterprise sector • an increase in the number of small enterprises (3.3%), • decline in the number of medium enterprises (3.7%), and • an increase in the number of large enterprises by 1.1% Rovigo, January 27, 2017 222.1.2017.
• 3.
  • EY Surveyon FDI: the most attracting EU countries for FDI are Germany, UK, France, Netherland and Poland, top countries by FDI projects are UK, Germany, France, Spain and top countries by FDI job creation are UK, Poland and Germany. • SMEs - the driving force behind economic growth • But - limited access to capital market financing • SMEs - vital for the Croatian economy, too • Yet access to finance remains a challenge/ In this situation capital markets can provide a viable alternative Rovigo, January 27, 2017 322.1.2017.
• 4.
  SMEs in Croatia SMEs- defined finally in consistence with the European definition from January 2016 -the main factors determining whether an enterprise is an SME are: staff headcount and either turnover or balance sheet total. -Small Business Development Promotion Act differentiates micro, small and medium business entities:
• 5.
  Micro, small andmedium business entities are physical and legal entities that • Micro • annually on average employ less than 10 employees and • achieve total annual revenue equivalent up to EUR 2,000,000.00, i.e. have value of long-term assets equivalent up to EUR 2,000,000.00. • Small • aannually on average employ less than 50 employees and • aachieve total annual revenue equivalent up to EUR 10,000,000.00 or have balance sum if they are profit tax payers, i.e., have long-term assets equivalent up to EUR 10,000,000.00 if they are income tax payers. • Medium • aannually on average employ between 50 and 249 employees, and • aachieve total annual revenue equivalent from EUR 10,000,000.00 to EUR 50,000,000.00 or have balance sum if they are profit tax payers, i.e., have long-term assets equivalent from EUR 10,000,000.00 to EUR 43,000,000.00 if they are income tax payers • •
• 6.
  Taxation issues ofSMEs and attracting foreign investments Short history background on taxation issues • the Croatian business taxation - two broad stages: • The first or early stage started 1991 - the state’s independence; the collapse of the state owned enterprise sector and a lack of large privately owned enterprises; tax system • Post-accession era - as second stage - global financial crisis; deficit and public debt problems; taxation becomes extremely important - tax changes become more frequent • The last tax reform - in force from january 2017 - brings many changes in taxation - the principles of simplicity and decrease of entrepreneurial tax burden
• 7.
  • the numberof taxes that have to be paid during a year (2016) - about 19 • as in previous years, • significantly higher than in, for example, Germany (9 taxes) or Slovenia (10 taxes) • but in those countries it also takes considerably more time to prepare and pay taxes, and the profit tax rates are higher . • The total tax burden of entrepreneurs increased from 18.4% in 2014 to 20% in 2015. The major tax burdens in Croatia: • are value added tax, • income tax, • profit tax- corporate income tax, • and surtax.
• 8.
  Tax reform amendmentsin force from January 2017 • New VAT rates for certain types of supplies • Small taxpayers whose taxable supplies do not exceed threshold may also apply for VAT registration, however, once registered, such taxpayers will be obliged to remain in the VAT system for the next three years, instead of currently prescribed five years • Small taxpayers who pay VAT on supplies subject to reverse charge - supplies from the taxpayers that have no establishment, domicile or habitual residence in Croatia may submit VAT returns in paper form
• 9.
  Amendments to theCorporate Income Tax Act • generally applied to tax periods from 1 January 2017 • Decrease of the tax rate - reduced the CIT rate of 20% to 18% • Additionally, introduced a reduced CIT rate of 12% for taxpayers who have realized revenue of less than HRK 3 million in previous tax period. • A possibility to determine the tax base based on a cash principle is introduced for taxpayers who have realized revenue less than HRK 3 million in the previous tax period. • Taxpayers who are also VAT payers will be entitled to choose cash principle determined tax base if they have, based on VAT legislation, already chosen to pay VAT based on collected income.
• 10.
  Amendments in taxincentives • abolished the reinvested profit relief that was applied from 2012 • there are changes in tax incentives for supported areas: taxpayers who perform business activities in the field of municipalities classified in the I. group of level of development and who employ more than 5 employees for an indefinite period (with more than 50% of employees who have residence and stay in the supported area in the I. group, or in the city of Vukovar), pay 50% of the prescribed CIT rate
• 11.
  • The amendedCITA introduces the possibility of concluding an advance pricing agreement between the taxpayer and Ministry of Finance – Tax Authority and tax authorities of other countries - where related parties or permanent establishments are residents- in the area of transfer pricing and contractual relations between related parties. • Advance pricing agreement - binding for the taxpayer and Ministry of Finance, Tax Authority • Costs - born by the taxpayer
• 12.
  New PITA • enteredinto force as of 1 January 2017 • New tax brackets, rates and personal allowances • three tax brackets, PIT rates 12%, 25% and 40% replaced with two new tax brackets and rates: • tax rate of 24% will be applied to taxable income up to HRK 210.000 (approximately EUR 28.000) • tax rate of 36% will be applied to taxable income exceeding HRK 210.000. • Basic personal allowance has been increased from HRK 2.600 to HRK 3.800. • Allowance for supported family members has been increased as well
• 13.
  Tax preferential treatmentof SMEs • Tax preferences are mostly present for the incorporated SMEs • preferential / lower tax rate is the mostly used form of privileged tax treatment for SMEs • practical implementation of such preference is not easy and do not brings simplicity. • Reduced rate is provided on the size definition – as criterion, as it is in most countries. • This size definition is used in terms of total annual income • Question: whether it is needed to provide reduced rate for SMEs as the standard rate is relatively low
• 14.
  • Other taxincentives offered for SMEs usually are not reserved just for them, but offered for all enterprises: • Protective interest was incentive in Croatia and it was almost first implementation of it in the region and wider/ in the period 1994-2001/
• 15.
  • Act onInvestments Promotion and Enhancement of Investment Environment: • incentives for microenterprises, tax and custom advantages, incentives for eligible costs of new jobs linked to the investment project, incentives for eligible costs of training linked to the investment projects, incentive measures for development and innovation activities, incentive measures for the business support activities, incentive measures for the high added value service, incentive measures for capital costs of the investment project, and incentive measures for labour intensive investment projects
• 16.
  • All mentionedincentives may be used by foreign and domestic investors • investing at least 150.000 EUR (50.000 EUR for micro entrepreneurs) and • creating at least 5 new jobs (places of employment) for workers (3 for micro entrepreneurs). • These incentives relate to manufacturing and processing activities, development and innovation activities, business support activities, and high-added value activities. • The minimum period for maintaining the investment is • five years for large enterprises and • three years for small and medium-sized enterprises after the completion of the investment. • the period of investment must equal or exceed the period the incentive measure is provided under the Act
• 17.
  • Thirteen freezone locations are currently in Croatia • The main benefits for users are the exemption from customs duties on imports of goods and lowering 50% of the CIT rate and exemption from this tax for the first five years for investment in the construction of infrastructural facilities in the zone of more than 1 million Kuna’s- (approximate 130.000 Euro) • they were tax-free (exempt from CIT payments) during the first five years of business dealings in the Free Zone, but till the end of 2016 year.
• 18.
  • Complete suspensionof tax holidays - mostly connected with Croatia's accession to the EU • accelerated depreciation used – allowed for the depreciation rate to be doubled.
• 19.
  The other taxincentives exist which are not classic investment allowances • tax base deductions for certain costs and tax loss relief: • rregarding tax base deductions - additional allowances reducing the tax base are possible for costs of research and development (R&D) projects as well as for education and training costs of employees • tax loss relief - tax losses may be carried forward for up to five consecutive years • The carry- back of losses is not permitted
• 20.
  The impact oftax procedural rules on attracting foreign investments • Tax procedural rules - seen as vehicles to attract foreign investments • advance tax rulings - 2015 - Croatian General tax Act finally introduced • the special status of the taxpayer • Ordinance on the methods of granting and the abolition of the special status of the taxpayer for the purpose of promoting voluntary compliance entered into force in 2016
• 21.
  Concluding remarks • Croatia- as a typical transition country - a relatively large number of CITincentives • with tax holidays as the predominant form - abolished in after accession stage • various tax incentives - instruments of stimulating economic activity and attracting foreign investments • numerous international studies - indicate the existence of key obstacles to the development of the small and medium enterprise sector in Croatia Obstacles to the development of the small and medium enterprise sector • regulatory framework, entrepreneurial education and transfer of results of research to the small and medium enterprise sector are identified as the weakest components
• 22.
  Concluding remarks • Thepresence of the same obstacles over a number of years indicates a lack of long-term structural reforms needed to encourage productivity and entrepreneurship in order to initiate economic growth, • Preferential tax treatment for SMEs is under criticism, especially in theory and academic literature, but even though most tax systems apply such regimes. • Croatia apply different tax reliefs for SMEs and attracting foreign investments, more or less most are classical forms. • It is known that such measures have no or have a little impact in short terms, especially in times of crises but there are founded expectation that in the longer term might enhance growth.