Frequently asked questions regarding withholding tax

What is withholding tax?

Crowe Croatia: Withholding tax (“WHT”) is a tax imposed to profit generated by a non-resident in the Republic of Croatia. WHT is calculated and paid by the domestic payer of fee subject to WHT, and the base for calculating this tax is the gross amount of the fee that the domestic payer pays to the non-resident – foreign recipient.

Which payments are subject to WHT according to Croatian legislation?

Crowe Croatia: Payments subject to WHT and relevant WHT rates are prescribed by the Corporate Profit Tax Act and are defined in more detail by Corporate Profit Tax Bylaw.

According to the Corporate Profit Tax Act, the following payments are subject to WHT:

• Interest payments are subject to 15% WHT rate
• Distribution of dividends and profit shares are subject to 10% WHT rate
• Royalties and other intellectual property rights payments are subject to 15% WHT rate
• Market research services payments are subject to 15% WHT rate
• Tax and business consulting services payments are subject to 15% WHT rate
• Auditing services payments are subject to 15% WHT rate
• Payment of fees to foreign performers (artists, sportsmen, entertainers) are subject to 10% WHT rate.

If any of the above fees are paid to companies having their head office or place of effective management, or supervision of business in the countries listed on the EU list of non-cooperative tax jurisdictions, and with which countries the Republic of Croatia does not a Double Tax Treaty, WHT is paid at a rate of 20%.

Nonetheless, as the Corporate Profit Tax Bylaw defines in detail what does and does not fall into the individual categories listed above, it is advisable to check whether the payments that your company will pay to non-residents fall into one of the categories listed above.

For example, you will notice that interest on merchandise loans for the procurement of goods used for the performance of business activity of the taxpayer, interest on loans from foreign banks or other financial institutions, interest paid to foreign holders of government or corporate bonds and interest paid for the financial lease of goods are not subject to WHT.

We have established that according to the Corporate Profit Tax Act and Bylaw, the company must pay withholding tax, now what?

Crowe Croatia: WHT rate can be reduced or eliminated depending on whether the fees are paid to residents of countries with which the Republic of Croatia has a Double Tax Treaty or not. Therefore, after you have determined the type of compensation based on which the company must pay WHT, it is important to determine whether the Republic of Croatia has concluded a Double Tax Treaty with the country to which the fee subject to WHT will be paid.

The application of the exemption or reduction is not automatic and requires certain administrative actions before payment.

In order to apply reduced/ zero WHT rate, Croatian payer of compensation subject to WHT should possess (and submit to the Croatian Tax Authorities) certain documentation, as prescribed by the Corporate Profit Tax Bylaw.

Are there special rules for fees subject to WHT which are paid to related companies?

Crowe Croatia: European Union directives prescribe certain exemptions with respect to payments to related companies within the European Union.

Thus, interest and royalty payments between a Croatian company and related company from other EU member state are not subject to WHT (provided that the related company is the beneficial owner of such interest or royalties). Before performing the payment of interest and royalties, the company must collect the prescribed documentation and obtain a certificate from the Croatian Tax Authorities.

WHT tax is also not paid when distributing dividends and profit shares to a related company that owns at least 10% of shares of the paying company (in a continuous period of 24 months). The prescribed documentation must be submitted to the Croatian Tax Authorities within 15 days from payment date.

What is the base for calculation of WHT and how the calculation is performed?

Crowe Croatia: Since we have already established that the profit of a foreign company in the Republic of Croatia is subject to WHT, the paying company withholds the amount of WHT from the total fee paid abroad. In that case, fee recipient receives the agreed fee reduced for the amount of WHT. However, the payer of the fee and fee recipient can define that the cost of WHT is borne by the payer. In this case, WHT is calculated on the total compensation amount at the recalculated rate.

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