Legislation implementing the EU Anti-Tax-Avoidance directive (ATAD) in Croatia has become effective as of 1 January 2019.
Limitation of tax deductibility for net borrowing costs.
Under the new measures tax deductibility of net borrowing costs (i.e. the difference between interest income and interest expense) is limited to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA). However, a safe harbor threshold was set at EUR 3 Mio. The restriction does not apply to financial institutions.
Net borrowing costs that are not deducted can be carried forward for three years, subject to the same annual limitation. For the purposes of these rules, the term “borrowing costs” means interest on all forms of debt, as well as other economically similar expenses, and expenses incurred in connection with the fundraising. Borrowing costs include:
- remuneration due according to profit participating loans;
- amounts disbursed under alternative financing arrangements, e.g. Islamic finance;
- interest due under finance leases;
- foreign exchange gains and losses on borrowings; and
- guarantee fees for financing arrangements
When calculating the net borrowing costs, the taxpayer may exclude loans used to finance long-term public infrastructure projects if the project operator, borrowing costs, assets, and income emanate from the EU. A long-term public infrastructure project is defined as a project that provides, upgrades, operates or maintains large-scale assets deemed by a member state to be in the general public interest.
Special rules for controlled foreign companies (CFCs).
The legislation introduces controlled foreign companies rules so that specific types of income derived from non-resident controlled companies will be added to the taxable profit of the Croatian resident controlling company when the controlled companies’ income is low-taxed. A CFC is defined as a foreign entity or a permanent establishment abroad that meets the following conditions:
- in the case of a foreign entity, the taxpayer, alone or jointly with associated persons, has a direct or indirect participation of more than 50% of the capital or voting rights, or has the right to receive more than 50% of the profit of that entity; and
- the corporate income tax actually paid abroad by the entity or the PE is lower than half of the corporate income tax that would be payable on these profits if they were earned in Croatia.
These rules will not cover cases in which a controlled company undertakes significant economic activity involving staff, equipment, property and buildings. The CFC rules also will not apply if the value of the passive income (interest, royalties, license fees or any other intellectual property income) is less than one third of the foreign controlled company total revenues. However, the CFC rules will always apply when the foreign controlled company is based in a jurisdiction from the EU list of non-cooperative jurisdictions for tax purposes (mehr dazu in unserem Beitrag vom 27.7.2018).
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