Croatia

There are no group taxation provisions in Croatia.

Transfer pricing

Prices between a Croatian entity and its foreign related parties must be set at fair market value (the arm’s-length principle). Provisions on transfer pricing are also introduced in transactions between domestic related parties if one of the parties has:

• beneficial tax status (i.e. reduced tax rates) or
• entitlement to carry forward tax losses from previous years.

If the prices between related entities are different than those between non-related entities, the tax base must be calculated with prices that would have been charged between unrelated companies. In order to analyse and determine the market value of the related party’s transaction and to confirm their arm's-length nature, the following methods can be used:

• Comparable uncontrolled price.
• Resale price.
• Cost plus.
• Profit split.
• Net profit.

Advance pricing agreements (APAs)

The possibility of concluding an APA between the taxpayer and the tax administration and administrative bodies of other states where related entities involved in transactions with domestic taxpayers are residing is available. The APA determines certain criteria (e.g. methods, comparables, adjustments, key assumptions) applicable to future transactions in order to determine transfer prices for such transactions during a certain period.

Country-by-country (CbC) reporting

Croatia harmonised its legislation with Action 13 of the OECD’s Base Erosion and Profit Shifting (BEPS) plan by introducing CbC reporting requirements. These provisions are implemented in the Act on Administrative Cooperation in the Field of Taxation and the Rulebook on Automatic Exchange of Information in the Field of Taxation. Taxpayers (members of multinational enterprises whose global consolidated turnover exceeded EUR 750 million in previous year) are required to submit to the tax administration the following reports and information:

• CbC report Notification, or
• CbC report.

Local companies/branches that are not ultimate parents are obligated to notify the tax administration:

• whether they are a surrogate parent company that will file a CbC report instead of the ultimate parent company, or
• they are a constituent entity of the group.

This is done through CbC report Notification, which also includes information on the taxpayer responsible for submission of the CbC report (either the ultimate parent or surrogate parent), its identity, and its tax residence.

CbC report Notification is submitted electronically to the tax administration together with the annual CIT return, and the deadline to file CbC report Notification is the same as for a CIT return (i.e. four months upon the financial year-end). After first submission of the CbC report Notification, annual re-submission is not required. Instead, CbC report Notification is submitted only in case of change of any information submitted in the CbC report Notification that was previously submitted.

Public CbC reporting

Amendments to the Accounting Act in July 2023 introduce the provisions of Council Directive (EU) 2013/34/EU concerning the obligation to file reports on profit tax (public CbC reporting). The Directive aims to enhance corporate tax transparency and the accessibility of income tax information to the public by jurisdiction.

The Accounting Act introduces the obligation to report on income tax information for the financial year commencing on or after 1 January 2024. The report shall be submitted no later than 12 months after the end of the respective year, and the obligation applies to:

• Standalone entities and ultimate parent entities whose revenue, or consolidated revenue, for the previous two consecutive periods exceeds EUR 750 million and that have not been established in or have their fixed places of business or permanent business activity only in the Republic of Croatia.
• Medium-sized and large entities controlled by a non-EU ultimate parent.
• Branches with a non-EU parent (if the ultimate parent does not have a medium-sized or large subsidiary) with their net revenue exceeding EUR 8 million.

The reporting obligation for medium-sized and large entities and branches does not apply if the ultimate parent or a standalone entity has prepared a report on income tax information that has been published and made accessible to the public free of charge in an electronic reporting format that is machine-readable on the website of that ultimate parent or of that standalone entity in at least one of the official languages of the European Union and if the report identifies the name and the registered office of the subsidiary or the branch governed by the law of the Republic of Croatia or another member state.

The reporting obligation does not apply to financial institutions since they are subject to separate reporting requirements.

Thin capitalisation

Interest on loans from a shareholder or a member of a company holding at least 25% of shares or voting power of the taxpayer will not be recognised for tax purposes in relation to the amount of the loan that exceeds four times the amount of the shareholder’s share in the capital or their voting power. Interest on loans obtained from financial institutions is exempt from this provision. Loans from a shareholder or a member of a company are considered to be:

• Third-party loans if guaranteed by a shareholder.
• Loans from related parties.

Interest rate charged between related parties

The Croatian CIT Act and CIT Rulebook stipulate specific rules for the deductibility of interest expenses charged by related parties, as well as income charged to related parties for the purposes of CIT. Accordingly, regardless of the actual market interest rate, tax-deductible interest expense and tax-deductible interest income in the tax period shall be determined by applying the provisions of Article 14 of the CIT Act and Article 37 of the CIT Rulebook.

According to the aforementioned Article of the Act, market interest rate (i.e. the market interest rate for taxation) shall be determined and published by the Minister of Finance before the beginning of the taxation period to which it will apply, taking into consideration that this is an interest rate realised in comparable circumstances or that would have been realised between unrelated parties. The Minister of Finance establishes this market interest rate as the arithmetic mean of the average interest rates on loan balances approved for a period longer than one year to non-financial companies, which the Croatian National Bank published in the current calendar year. Accordingly, the Minister stipulated an interest rate of 2.4% for 2023.

Besides the market interest rate prescribed by the Minister of Finance, taxpayers can opt to determine the interest rate between related parties in a way stipulated for determining the fees agreed between unrelated parties in general (i.e. in accordance with the arm’s-length principle), under the condition that the same modality of determining interest applies to all financial agreements that taxpayer has with related parties.

Controlled foreign companies (CFCs)

The CFC rule is applied in Croatia since 1 January 2019. A CFC is any subject located in another country whose income is not subject to taxation in that county:

• if the taxpayer alone, or together with related parties, participates directly or indirectly with more than 50% of the voting rights or is the direct or indirect owner of more than 50% of the capital or is entitled to more than 50% of the realised profit of specific entity, and
• the actual tax paid in another member state is lower than the difference between the CIT that would be charged to the entity or PE according to the CIT Act and the actual CIT paid by the entity or PE.