Tax Guide for US Expats Living and Working in Croatia
Who Is Liable For Income Taxes in Croatia
Residents are subject to income tax in Croatia on their worldwide income. Nonresidents are subject to income tax on their Croatian-source income only.
A resident taxpayer is an individual who has a permanent or temporary place of residence in Croatia. A nonresident taxpayer is an individual who does not have a permanent or temporary place of residence in Croatia, but derives Croatian-source income that is subject to tax in Croatia.
An individual is considered to have a place of permanent residency if he or she owns a place of abode or has one at his or her disposal for an uninterrupted period of 183 days. An individual does not need to stay in the place of abode to meet the 183-day threshold. If an individual stays in Croatia for at least 183 days, he or she is considered to have a temporary place of residence in Croatia. In both cases, the 183-day period may span more than one calendar year.
Income subject to tax. Residents are subject to income tax on the following types of income:
- Income from employment
- Income from self-employment
- Income from capital
- Income from property and property rights
- Income from insurance
- Other income
Nonresidents are subject to tax on the same types of income as residents. However, they are taxed only on income sourced in Croatia. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Employment income includes receipts in cash or in kind provided by employers under current, past and future employment relationships. Employers may make certain types of payments that are free of tax to employees. These include voluntary pension insurance premiums, reimbursements of business trip expenses, daily allowances, Christmas bonuses, severance payments and similar payments, all up to certain prescribed amounts. Employment income is subject to tax.
Self-employment and business income. Individuals performing small business activities (sole trader activities) in their own name and at their own risk are subject to income tax on income derived from these activities, which is known as income from self-employment. Business income is subject to tax.
Under certain conditions, self-employment and business income can be taxed under the rules applicable for corporate taxation (at the corporate tax rate of 20%).
In principle, all income attributable to business, including gains from the sale of property (other than gains derived from the sale of financial assets) used in a business, is subject to income tax.
Capital income. Interest income received from lending activities is taxable at a prepayment (withholding) rate of 40%. Interest income on bank savings is not taxable. Dividends and profit shares are not considered income if they are distributed from profits of 2005 and subsequent years. Dividends and profit shares distributed from profits of 2001, 2002, 2003 and 2004 are subject to income tax at a prepayment rate of 12%.
Income from property and property rights. Income from leasing of immovable and movable property is taxed at a prepayment rate of 12%, after a deduction of 30%, representing notional expenses.
Income from property rights is taxed at a prepayment rate of 25%. The actual expenses incurred are deductible for tax purposes. They are recognized based on the documentation supporting the expense and may be claimed in the annual tax return only (not at the prepayment stage). In general, income from the disposal of property and property rights is taxed at a prepayment rate of
25%. However, capital gains derived from the sale of real estate are not taxable if the real estate meets either of the following conditions:
- It was held more than three years.
- It was used by the owner or dependent family members for lodging.
If a person sells more than three real estate or property rights in a five-year period, such person is required to register the business and is taxed in accordance with the rules described in Self-employment and business income.
Income from insurance. Income from insurance is generally not taxable. However, if life insurance premiums are considered tax-deductible expenses in the determination of taxable income, the insurance income equal to the amount of such premiums is taxed at a prepayment rate of 12%. In addition, payments made out of voluntary pension insurance schemes, which are based on tax-free premiums made by employers on behalf of employees, are also taxed as insurance income at the prepayment rate of 12%.
Other income. Other income includes all types of income that cannot be included in one of the above categories, such as directors’ fees. Other income is taxed at a prepayment rate of 25%, without the right to deduct personal allowances.
Capital gains and losses.
Capital gains derived from the sale of financial property are not subject to income tax.
Deductions
Deductible expenses. Compulsory social contributions payable on a specified type of income are deductible in determining taxable income. Personal expenses incurred to produce income from employment are not deductible.
Personal allowances. Resident and nonresident taxpayers may claim a basic personal allowance of HRK 1,800 per month. Retired persons may claim a personal allowance of HRK 3,200 per month.
Resident taxpayers may also increase personal allowances by the following:
- 50% of the basic personal allowance for a dependent spouse and ascendants
- 50% of the basic personal allowance for the first dependent child, 70% for the second, 100% for the third, 140% for the fourth and increasing percentages for each additional child
- 30% of the basic personal allowance for a dependent invalid child or other family member or for an invalid taxpayer
To be considered a dependent family member, the individual’s annual earnings may not exceed HRK 10,800. A dependent family member is not required to live in the same household as the taxpayer.
Resident taxpayers may also claim deductions for donations up to the amount of 2% of income earned in the preceding year.
Business deductions. All business-related expenses are deductible from gross income for taxpayers who keep business books. Living or personal expenses are not deductible. Seventy percent of representation costs and 30% of business car costs are not deductible.
Per diem allowances and travel costs are not taxable up to certain amounts specified by the tax regulations.
Relief for losses. Tax losses may be carried forward for five years. Nonresidents may carry forward only losses incurred in Croatia. Losses may not be carried back.
B. Other taxes
Wealth tax. Croatia does not levy wealth tax on net property. However, tax is levied on certain types of property, including vacation houses (up to a maximum tax of HRK 15 per square meter per year), cars (up to a maximum tax of HRK 1,500 per year), motorbikes (up to a maximum tax of HRK 1,200 per year), and boats and yachts (up to a maximum tax of HRK 5,000 per year).
Estate and gift taxes. A tax is imposed on movable and immovable property, including cash, monetary claims and securities received by inheritance or donation at a rate of 5% on the fair market value of the property transferred. Certain transfers of property are tax-exempt, depending on the relationship between the transferee and the transferor and on the type of property. In addition, transfers of movable property are exempt if the fair market value of the property is less than HRK 50,000 or if the transfer is subject to VAT.
C. Social security
Employment income is subject to health and social security contributions at the rates of 17.2% for employers and 20% for employees.
Other income is subject to health and social security contributions at the rates of 15% for payers and 20% for recipients.
Capital income, income from insurance and income from property and property rights are generally not subject to health and social security contributions.
We have been preparing US income tax returns for US Citizens and permanent residents living in Croatia for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Croatia and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Croatia tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Croatia Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in Croatia, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Croatia.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a consultation by phone, skype or email