Tax reliefs for companies in Croatia: which exist and who can use them

Tax reliefs have one thing in common: nobody will offer them to you. A company that does not know about them, or finds out after the investment has already been made, pays full tax although it could have paid less.

This article is an overview of the areas, not a list of amounts. Conditions, rates and deadlines change more often than most regulations, so every relief should be checked in the current law or with an adviser before a decision.

Three kinds of relief

Reliefs work in three different places:

• They reduce the tax base. Part of the income or an additional amount of cost does not enter the base.
• They reduce the rate or the tax charged. Tax is calculated at a lower rate or reduced by a certain percentage.
• They reduce the cost of labour. They relate to contributions and employees’ income tax.

Investment

The Investment Promotion Act allows a reduced profit tax rate over several years for companies that invest in non-current assets and create new jobs.

• The size of the relief depends on the amount invested and the number of new jobs: the larger the investment, the greater the rate reduction, up to full exemption.
• For micro-enterprises lower investment thresholds and fewer new jobs apply.
• There are additional grants for job creation, training and investment in particular activities.

Two things are most often overlooked. First, the application is filed before the investment starts. An investment that began before the application generally does not qualify. Second, the investment and the jobs must be maintained for a prescribed number of years, otherwise the relief is repaid with interest.

Research and development

Companies carrying out research and development projects can additionally reduce the tax base by part of the project’s eligible costs. The additional reduction is larger for fundamental research and smaller for industrial research and experimental development.

This relief is not used only by laboratories. Developing a new product, production process or software that resolves a technical uncertainty can meet the conditions. The conditions are:

• the project is submitted to the competent body, which assesses it
• costs are kept separately and can be proven
• records of work on the project are kept

Without records there is no relief, so they should be set up from the first day of the project, not reconstructed at the end of the year.

Employment

Reliefs related to labour reduce the cost of salary, not profit tax:

• Young employees. For people under thirty employed on a permanent contract, the employer is exempt from the contribution on salary for a prescribed period.
• First employment. A similar exemption, for a shorter period, applies to a person taking up employment for the first time.
• Income tax for the young. For younger employees, income tax on employment income is reduced in full or in part, depending on age. That increases their net pay at no additional cost to the employer.
• Returnees from abroad are entitled to a reduction in income tax for a certain period.
• People with disabilities. There are employment incentives and a higher personal allowance.

We showed how much contributions and tax otherwise make up in the cost of salary in the article on what an employee really costs the employer.

Education and training

Companies investing in the education of their employees can obtain state aid through an additional reduction of the tax base by part of the eligible costs. The share depends on the size of the company and the type of training.

Areas with special status

For companies operating in assisted areas and in the City of Vukovar, reliefs in the taxation of profit are prescribed, subject to conditions on the number of employees and their place of residence. The rules have changed over the years, so they should be checked for the current year.

What is often forgotten

These are not reliefs in the narrow sense, but they reduce tax:

• Tax losses carried forward. A loss from previous years reduces the base of future ones, for a limited number of years. After that the right lapses.
• Donations. Donations for public benefit purposes are recognised as an expense up to a prescribed percentage of the previous year’s revenue.
• Double taxation. Tax paid abroad can, subject to the conditions of a double taxation treaty, be credited against domestic tax.
• Non-taxable payments to employees. The simplest way to pay out more at the same cost. See the separate article.
• Correctly classified costs. A cost wrongly posted as non-deductible needlessly increases the base. More in the article on non-deductible expenses.

Why reliefs are not used

• Too late. The investment has already started, the project has already finished, the employee has already been registered.
• No records. The conditions are met but cannot be proven.
• Fear of inspection. A relief that is properly documented is not a risk. A relief without a basis is.
• Nobody is responsible. The bookkeeping firm posts what it receives. Planning reliefs is not its job, unless that has been agreed.
• The assumption that they are “for the big ones”. Some reliefs have special, lower thresholds precisely for small businesses.

How to approach it

1. Before a larger investment or project, check whether there is a relief and what the condition for it is.
2. Apply on time. For investments and development projects, the order of steps is decisive.
3. Set up records immediately. Costs per project, hours worked, investment documentation.
4. Work out the obligations you are taking on. Maintaining jobs and the investment over several years.
5. Include the relief in the plan, with a scenario in which the conditions are not met.
6. Check once a year. Regulations change, and something that did not apply last year may this year.

A relief is not the goal

An investment that makes no business sense does not become good because it carries a tax relief. The order is the reverse: first a decision that makes sense for the business, and then a check on whether it can be carried out in a way that is more favourable for tax.

If you are planning an investment, a development project or significant hiring, get in touch before you start. We assess the tax and financial effects as part of tax and business advisory.