Tax treatment of the world income of a foreign resident in the Republic of Croatia

Sources of residents’ taxable income may be: income from employment,  self-employment, property and property rights, capital and other income as defined by Article 5 of this Law, generated in the country and abroad (the world income principle).

Residents may also be foreign individuals who live in the Republic of Croatia on the basis of a temporary residence certificate that does not have to be obtained exclusively on the grounds of working in the country. Thus, in such situations, those private individuals are considered to be taxpayers as per the world income principle. More details in the text below.

When it comes to taxation of foreign individuals’ income in the Republic of Croatia, several factors are to be taken into account, the most significant being the below-listed:  

1. duration of work in the Republic of Croatia, 

2. centre of vital interest,

3. country of the source of income, 

4. (non)existence of bilateral agreement on avoidance of double taxation with the  worker’s origin country.

The world income principle is applied on residents, implying the unlimited income tax obligation. 

On the other hand, only income generated in the country (respectfully, in Croatia) is taken into account in the process of taxation of non-residents, i.e. the country income principle is applied on them.

Both residents and non-residents pay income tax according to the following categories:

• 20% up to kn 360,000.00 per year (up to kn 30,000.00 per month),
• 30% up to kn 360,000.00 per year (over kn 30.000,00 per month)

Determination of residency status

The process of determination of the residency status for tax purposes is regulated by the provisions of Article 43 of the General Tax Act, when it comes to countries with which Croatia does not apply the Agreement on the Avoidance of Double Taxation (NN 42/20), that regulates the tax payer’s residency and habitual residence.  

"Within the meaning of those provisions, it shall be considered that a taxable person has a permanent residence where he owns an apartment or he has one in his possession for at least 183 days in one or two calendar years, whereby the actual stay in the apartment shall not be required. If the taxpayer holds permanent residence both in the Republic of Croatia and abroad, it is considered that he holds permanent residence in the country (Croatia)."

However, the residency status is not determined only on the basis of the length of the individual’s stay in the country, but also on the basis of the taxpayer’s vital interests, related for instance to possessing a real property in which the taxpayer’s close family lives. 

Importance of bilateral agreements 

The purpose of bilateral agreements is to determine which country is entitled to collect tax from the taxpayer, who is a resident of a different country, in relation to particular subject of taxation, respectfully, to determine which country is entitled to collect tax in case when one country’s resident generates income or profit in another country. The rule is that the tax is paid in the country of residence, whereas the agreements, exceptionally, entitle the country-signatory of the agreement to collect income tax, i.e. revenue tax and property tax from resident of another country.

If Croatia has entered into the Agreement on the Avoidance of Double Taxation with another country, the residency status is defined according to provisions of the signed bilateral Agreement, whereby an individual is considered a resident of a country if he has a permanent residence in that country, temporary residence, vital interest etc. 

After it is determined who is whose resident taxpayer, the Agreement on the Avoidance of Double Taxation determines the country of taxation of the subject taxpayer’s income, as well as the rate of taxation, and the method applied on the already paid tax (exclusion or inclusion).

The model of exclusion is defined for Germany, for example. Therefore, no difference must be paid in Croatia. 

The method of inclusion is defined for many other countries (Austria, Czech Republic etc.). Therefore, the difference between the rate applied in the country must be paid. However, a problem arises when the taxpayer has generated income in a country, where no tax is calculated on the particular tax form. In that case, the taxpayer must pay the whole tax amount in Croatia, where such tax form is applied.  

If a bilateral agreement has been signed…

Agreements on the Avoidance of Double Taxation define allocation of rights to taxation among the countries-signatories. The allocation may refer to the source country’s or residence country’s waiving the right to taxation, or to sharing the right by both countries. 

The country with an exclusive right to taxation is usually the country of residence. Nevertheless, all agreements are different, with their own provisions and produce exclusive legal effects. 

If according to the agreement for individual receipts, the exclusive right to taxation is given to the source country (for instance, salaries), so that Croatia as the country of residence may take the subject receipt into account when calculating the residual income tax, the resident taxpayer does not have to pay income tax advances on those receipts, neither is he obliged to submit annual tax report. However, if he submits annual tax report on a voluntary basis, he is obliged to report the total income (in the country and abroad). In that case, in calculation of final tax obligation in the annual tax report, the method of exclusion with progression shall be applied on income exempted from taxation.

If a bilateral agreement has not been signed…

In cases where no double taxation agreement has been concluded with another country (e.g. Australia, Argentina, USA etc.), double taxation is resolved by applying the rules on foreign taxation in accordance with the Income Tax Act.

Therefore, double taxation is not applied in the true sense of the word, even if there is no applicable agreement on the avoidance of double taxation. Namely, the taxes paid abroad are anyhow calculated according to local taxation legislation, but the burden on the taxpayer is lower, and the calculation technique is easier, when the provisions on avoidance of double taxation are applied, and it is also easier to communicate and exercise rights with the taxation authorities. 

An example from the practice: No bilateral agreement with the USA  

In this particular case, since the Republic of Croatia does not apply the Agreement on Avoidance of Double Taxation with the United States, residency and tax liability are determined according to domestic tax regulations.

Therefore, if a private individual is a non-resident and earns income from abroad, such income will not be taxed in the Republic of Croatia, but any income earned in the Republic of Croatia will be taxable in accordance with domestic tax regulations.

However, if it is determined that a private individual has a permanent or habitual residence in the Republic of Croatia in accordance with the provisions of the General Tax Act and becomes a resident of Croatia, he will pay income tax in the Republic of Croatia on total income at home and abroad, plus surcharges on the income tax. In that case, the taxpayer may in the prescribed manner include into the domestic income tax also the tax paid abroad corresponding to the domestic income tax on the basis of the submitted annual tax report, in accordance with Article 80, paragraph 5 of the Income Tax Act of the Republic of Croatia.

It is important to note that the tax paid abroad can be calculated only on the basis of a certificate from a foreign tax authority or an authorized person about the tax paid abroad.

Instead of a conclusion

The key difference between the existence and non-existence of an agreement between the members in relation to the income of a resident foreign individual:

When the income originates from a country with which Croatia has concluded and applies an agreement on avoidance of double taxation, the risk of double taxation ceases, because the country of residence has the exclusive right to tax, so the taxpayer will calculate and pay the income tax advance within 8 days of receipt, and shall not have to file a tax report solely on the basis of that receipt. The issue of preventing double taxation is resolved immediately during the tax period because the source country will not have the right to tax (only the country of residence), whereas in the situation, where there is no such agreement, the method of calculation can only be based on annual tax report, so that the income and a difference, if any, are calculated at full rates.