The Tax Administration has presented proposed changes to the Corporate Income Tax Law (CIT law) on 4th November 2016. The significant elements are summarized below:

Tax Base

The tax base of corporate income tax will be extended by introduction of the tax incentive for reinvested profits. Accordingly, profits reinvested in long-term assets used in business activities will no longer be exempt from corporate income tax. In accordance with regional tax incentives, the following changes will apply:

  • Incentives for business purposes in the field of second category of local government will be revealed;
  • A 50% of the prescribed corporate tax rate will apply in case of business activities in the first category of local government areas or in the city of Vukovar.

Entrepreneurs with up to HRK 3 million (approx. EUR 399,000) of gross income in the preceding calendar year may select to be taxed in accordance with the cash accounting system. They are also allowed to remit VAT liability based only upon the collection of the consideration for supplies made.

Tax rate

The corporate income tax rate will be reduced from 20% to 18%. The proposal introduces a lower corporate income tax rate (12%) for entrepreneurs with up to HRK 3 million of gross income in the preceding calendar year and for farmers.

Deductible expenses

Business entertainment expenditures (e.g. expenses for gifts, meals and refreshments, holidays, sporting activities and recreation) will be deductible up to 50% of the cost.

Non-profit organizations

Non-profit organizations are generally non-taxable entities if they perform their statutory activities. However, if they engage in profit-making activities, they are responsible to tax. In such cases, they need to pay tax in a fixed amount, given that they are not liable to register for VAT purposes.

Advance transfer pricing agreements (APAs)

According to this proposal, taxpayers may request advance transfer pricing agreements.

The proposal is still under discussion. Once approved by the parliament, the amendments will apply from 1st January 2017.