European Tax Handbook 2018

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3 European Tax Handbook 2018 Why this book? The 2018 European Tax Handbook includes surveys on 49 countries and jurisdictions. The surveys have been updated to reflect the laws applicable in A chapter on the European Union (together with the most important tax directives), as well as descriptions of seven of the most important Swiss cantons, are included. Countries covered: Albania, Armenia, Austria, Azerbaijan, Belarus, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, European Union, Finland, France, Georgia, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, Ireland, Isle of Man, Italy, Jersey, Latvia, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malta, Moldova, Monaco, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Russia, Serbia, Slovak Republic, Slovenia, Spain, Sweden, Switzerland (and selected cantons), Turkey, Ukraine, United Kingdom. Title: European Tax Handbook 2018 Editors: Larisa Gerzova, Adrián Grant Hap, Ivana Kireta, Magdalena Olejnicka, Andreas Perdelwitz, Marnix Schellekens, Kristina Trouch, Ruxandra Vlasceanu Date of publication: June 2018 ISBN: (print), (ebook) Type of publication: Book Number of pages: 1,202 Terms: Shipping fees apply. Shipping information is available on our website. Price (print): EUR 375 / USD 470 (VAT excl.) Price (subscription): EUR 260 / USD 330 (VAT excl.) Price (ebook): EUR 260 / USD 330 (VAT excl.) Order information To order the book, please visit You can purchase a copy of the book by means of your credit card, or on the basis of an invoice. Our books encompass a wide variety of topics, and are available in one or more of the following formats: IBFD Print books IBFD ebooks downloadable on a variety of electronic devices IBFD Online books accessible online through the IBFD Tax Research Platform IBFD, Your Portal to Cross-Border Tax Expertise

4 Editors: Larisa Gerzova Adrián Grant Hap Ivana Kireta Magdalena Olejnicka Andreas Perdelwitz Marnix Schellekens Kristina Trouch Ruxandra Vlasceanu IBFD Visitors address: Rietlandpark DW Amsterdam The Netherlands Postal address: P.O. Box HE Amsterdam The Netherlands Tel.: IBFD All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written prior permission of the publisher. Applications for permission to reproduce all or part of this publication should be directed to: permissions@ibfd.org. Disclaimer This publication has been carefully compiled by the IBFD and/or its author, but no representation is made or warranty given (either express or implied) as to the completeness or accuracy of the information it contains. The IBFD and/or the author are not liable for the information in this publication or any decision or consequence based on the use of it. The IBFD and/or the author will not be liable for any direct or consequential damages arising from the use of the information contained in this publication. However, the IBFD will be liable for damages that are the result of an intentional act (opzet) or gross negligence (grove schuld) on the IBFD s part. In no event shall the IBFD s total liability exceed the price of the ordered product. The information contained in this publication is not intended to be an advice on any particular matter. No subscriber or other reader should act on the basis of any matter contained in this publication without considering appropriate professional advice. Where photocopying of parts of this publication is permitted under article 16B of the 1912 Copyright Act jo. the Decree of 20 June 1974, Stb. 351, as amended by the Decree of 23 August 1985, Stb. 471, and article 17 of the 1912 Copyright Act, legally due fees must be paid to Stichting Reprorecht (P.O. Box 882, 1180 AW Amstelveen). Where the use of parts of this publication for the purpose of anthologies, readers and other compilations (article 16 of the 1912 Copyright Act) is concerned, one should address the publisher. ISBN (print) ISBN (ebook) ISSN NUR 826

5 Table of Contents European Union 9 Appendices: Merger Directive 37 Parent-Subsidiary Directive (recast) 45 Interest and Royalties Directive 53 Albania 59 Armenia 71 Austria 87 Azerbaijan 111 Belarus 133 Belgium 151 Bulgaria 189 Croatia 209 Cyprus 223 Czech Republic 243 Denmark 265 Estonia 291 Finland 311 France 337 Georgia 375 Germany 391 Gibraltar 417 Greece 433 Guernsey 461 Hungary 477 Iceland 507 Ireland 527 Isle of Man 557 Italy 571 Jersey 605 Latvia 621 Liechtenstein 645 Lithuania 659 Luxembourg 685 Macedonia 715 Malta 727 Moldova 749 Monaco 771 Montenegro 783 Netherlands 795 Norway 825 Poland 849 Portugal 873 Romania 905 Russia 927 Serbia 957 Slovak Republic 973 Slovenia 995 Spain 1011 Sweden 1041 Switzerland and selected cantons 1067 Turkey 1115 Ukraine 1141 United Kingdom

6 Sample Content Croatia Corporate Taxation Abbreviations Abbreviation English definition Croatian definition ZD Contributions Law Zakon o doprinosima ZFJLPRS Law on Financing Local Self-Government and Administration Units Zakon o financiranju jedinica lokalne i područne (regionalne) samouprave ZPDV VAT Law Zakon o porezu na dodanu vrijednost ZPDob Corporate Income Tax Law Zakon o porezu na dobit ZPnaPN Immovable Properties Tax Law Zakon o porezu na promet nekretnina ZDPOI Law on Government Support for Education and Training Zakon o državnoj potpori za obrazovanje i izobrazbu ZSZ Free Zones Law Zakon o slobodnim zonama ZZDVO Law on Science and High Education Zakon o znanstvenoj djelatnosti i visokom obrazovanju ZPIUIO Investment Promotion Law Zakon o poticaju investicija i unapređenju investicijskog okruženja Introduction In Croatia corporate taxpayers are subject to a national profits tax, social security contributions, value added tax, tax on the transfer of immovable property and excise taxes. Local authorities collect inheritance and gift taxes, taxes on cars, boats and cottages, entertainment tax, and some other minor taxes. From 1 July 2013, Croatia is a Member State of the European Union. The currency is the Croatian kuna (HRK). 1. Corporate Income Tax 1.1. Type of tax system Corporate profits are subject to profit tax at the company level. Dividends paid by companies subject to profit tax are not subject to any further taxation in the hands of resident or non-resident corporate shareholders Taxable persons Taxable persons are legal entities or natural persons permanently and independently engaged in a business for the purpose of making a profit, income, revenue or other economically measurable benefits (article 2 of the ZPDob). Permanent establishments of non-resident enterprises are also taxable persons (see section 6.2.). General and limited partnerships are treated as separate taxpayers (article 2 of the ZPDob). Silent partnerships and civil partnerships are transparent for tax purposes, i.e. their partners are taxed individually on their share of the profits for the purposes of profits tax or income tax, as the case may be. The most common forms of business organization are the limited liability company (d.o.o.) and the corporation (d.d.). This survey is restricted to the taxation of these entities (hereinafter: companies ) and to similar foreign-incorporated entities Residence Entities whose legal seat or place of effective management and control is located in Croatia are residents for Croatian tax purposes (article 3 of the ZPDob) Taxable income General Resident taxpayers are taxable on their worldwide profits (article 5 of the ZPDob). The taxable base is computed on accrual basis. The profit and loss account kept in accordance with the law on accountancy and financial reporting is adjusted for tax purposes Exempt income The most important types of exempt income are dividends and other earnings from shares in legal entities (article 6 of the ZPDob) Deductions Expenses incurred for the purpose of earning income are generally deductible (article 7 of the ZPDob). 209

7 Croatia Corporate Taxation Business entertainment and promotional expenses (e.g. expenses for gifts, holidays, sporting activities and recreation) are deductible up to 50% of their amount. Expenses incurred for motor vehicles, vessels and aircraft used by managers or employees of a company are deductible up to 50% of their amount. However, full deduction is allowed if the expenses are deemed to constitute part of the salaries or wages of the managers or employees. Insurance costs, interest costs and paid tax on motor vehicles, vessels and aircraft are fully deductible. Payments of voluntary pension insurance premiums on behalf of employees to domestic pension funds are deductible, up to the annual amount of HRK 6,000 per employee. Donations are deductible up to 2% of the gross income realized in the previous year. There is no limit, however, if the donation was incurred under a special programme of the relevant ministry. Non-deductible expenses include (article 7 of the ZPDob): expenses arising from damaged, lost or perished assets that exceed certain amounts; excess interest paid to non-residents (see section 7.3.); fines and other payments of a punitive nature; and dividend payments Depreciation and amortization Depreciation of assets is taken on a straight-line basis according to the useful life of assets as defined in the law (article 12 of the ZPDob). The rates are as follows: Asset Rate (%) Buildings 5 Machinery and equipment 5/20/25/50 Intangible assets 25 Other fixed assets 10 Accelerated depreciation allows for the above depreciation rates to be doubled. Assets with an acquisition cost of less than HRK 3,500 may be written off immediately. Non-depreciable assets include land, forests and similar renewable natural resources, historical monuments, works of art and financial assets Reserves and provisions The following allocations to reserves and provisions are deductible (article 11 of the ZPDob): reserves for severance payments; reserves for unused holidays; reserves for the costs of renewing natural resources; provisions for costs during guarantee periods; reserves for the costs of instituted lawsuits (except interest on sued amounts); and obligatory reserves of banks and insurance companies for potential losses up to prescribed amounts Capital gains Capital gains derived by a company from the sale of any capital assets are generally included in its ordinary profits (section 3 of the ZPDob). However, gains from the company s own shares (treasury shares) are not taxed Losses Ordinary losses Losses may be carried forward for 5 years (article 17 of the ZPDob). Earlier losses are set off before later losses. No carry-back is allowed Capital losses Capital losses may be set off against ordinary income (section 3 of the ZPDob) Rates Income and capital gains The corporate income tax rate is 12% for taxpayers whose revenue in the taxable period does not exceed HRK 3 million and 18% for taxpayers whose revenue in the taxable period is equal to or exceeds HRK 3 million (article 28 of the ZPDob). Capital gains are taxable as ordinary profits Withholding taxes on domestic payments In general, there are no withholding taxes on payments to resident companies. For withholding taxes on payments to non-resident companies, see section Incentives Accelerated depreciation See section Reduced profits tax A taxpayer may be taxable at a reduced profits tax rate or be exempt from profits tax altogether, depending on the level of investment and the number of new employees linked to the investment, for a period of 10 years commencing in the year in which the investment begins (article 9 of the ZPIUIO). The following table displays the currently required amounts of investment (amounts in euro, as in the law) and the minimum number of new employees for each reduced rate: Investment (EUR million) Number of employees Rate (%) Up to and over

8 Corporate Taxation Croatia The amount of the tax relief is calculated as a difference between the amount of tax established by the application of the standard profits tax rate and the amount of tax payable by the application of the reduced rate. The total relief is limited to the region of the investment project, and may not exceed the amount provided by the Law on investments. The accumulation of incentives is allowed Tax-free zones Users of tax-free zones pay corporate income tax according to the region in which a tax-free zone is situated. Taxpayers conducting business activities in North- Eastern Croatia (HR 01) are taxed according to the following rates (article 37a of the ZSZ): 50% of the statutory corporate income tax rate for the period ; 75% of the statutory corporate income tax rate for the period ; and the statutory corporate income tax rate (see section ) from Taxpayers conducting business activities in Central and Eastern Croatia (HR 02) and Adriatic Croatia (HR 03) are taxed according to the following rates (article 37a of the ZSZ): 50% of the statutory corporate income tax rate for the period ; 75% of the statutory corporate income tax rate for the period ; and the statutory corporate income tax rate (see section ) from Taxpayers conducting business activities in the tax-free zones of the City of Vukovar are taxed according to the following rates (article 37a of the ZSZ): 0% for the period ; 25% of the statutory corporate income tax rate for the period ; 75% of the statutory corporate income tax rate for the period ; and the statutory corporate income tax rate (see section ) from The Ordinance on the tax incentive procedure for tax-free zones is published by the Ministry of Finance. Fifty per cent of the profits of taxpayers conducting business activities in the other tax-free zones is exempt from profits tax (article 36 of the ZSZ) Regional incentives Regional incentives apply for activities performed in category I and II territories of special state care (section V.A of the ZPDob). These are regions where the development index is less than 75% (category I) or between 75% to 100% (Category II) of the average development index for Croatia. Taxpayers performing business activities in category I territories are taxed at 50% of the statutory corporate income tax rate Other Taxpayers may benefit from the following additional deductions in respect of their research and development costs as follows (article 111a of the ZZDVO): 150% of eligible costs for fundamental research; 125% of eligible costs for applied research; and 100% of eligible costs for development research. In addition, the following special allowances (state aid) are available in respect of expenses for general education, special education and professional training (article 3 of the ZDPzaOiI): large enterprises can reduce their taxable base by 50% of eligible costs for general education and training of employees, and by 25% of eligible costs for special education and training of employees; small and medium-sized enterprises can reduce their taxable base by 70% of eligible costs for general education and training of employees, and by 35% of eligible costs for special education and training of employees; taxpayers who meet the requirements for regional state aid according to special regulations can increase the above allowances by 10%; taxpayers engaged in maritime transport can reduce their taxable base by 100% of eligible costs for special education and training; taxpayers falling under the above-mentioned categories can reduce their taxable base by 10% in respect of young employees, employees with disabilities, long-time unemployed persons, etc.; and taxpayers who own facilities where the training of professional craftsmen is conducted can reduce their taxable base by the amount of payments for apprentices during training, depending on how many apprentices are employed Administration Taxable period The tax year is the calendar year (article 32 of the ZPDob). A tax year different from the calendar year may be used if approved by the tax authorities. The tax year may not exceed the period of 12 months and it may not be changed during the next 5 years Tax returns and assessment The taxpayer must file a profits tax return for each taxable period. The tax return, along with proof of payment of tax, must be filed with the tax authorities within 4 months of the end of the taxable period (article 35 of the ZPDob). Electronic filing is required for large and medium-sized companies, as defined under the applicable rules. VAT payers with exports and taxable supplies exceeding HRK 800,000 in the preceding year are also required to file electronically Payment of tax Monthly advance payments of tax are made based on the previous year s tax return (article 34 of the ZPDob). Taxpayers who started business activities in the fiscal year do 211

9 Croatia Corporate Taxation not make advance payments until they submit their first tax return. The taxpayer may request a refund if excess tax has been paid; alternatively, excess tax may be carried over to the next tax period Rulings Tax rulings may be obtained with respect to the following issues (sections of the ZPDob): determination of input VAT deduction; tax treatment of investment projects representing amounts exceeding HRK 20 million; determination the taxable base in cases of mergers, divisions, partial divisions, transfers of assets and exchanges of shares; application of tax treaties; and tax treatment of business activities not comparable to business activities conducted in Croatia. In general, a tax ruling is considered to be a binding opinion issued by the tax authorities based on specified facts and circumstances. 2. Transactions between Resident Companies 2.1. Group treatment There is no special group treatment in Croatia Intercompany dividends Dividends derived by resident companies from other resident companies are exempt from profits tax (article 31e of the ZPDob). 3. Other Taxes on Income There are no other taxes on corporate income. 4. Taxes on Payroll 4.1. Payroll tax No payroll taxes are imposed on companies, other than the social security contributions Social security contributions Employers are obliged to pay social security contributions on gross wages and salaries (excluding fringe benefits) of the employees at the following rates (article 13 of the ZD): 15% for health insurance; 1.7% for unemployment insurance; and 0.5% for injury insurance. Pension contributions are payable by employees, but are withheld by employers at a rate of 20% on gross wages and salaries. With effect from 1 January 2015, an incentive to promote the employment of young workers applies. Under this incentive, a total exemption from the employer s social contribution relating to employees (aged up to 30) under a permanent contract is granted (article 7 of the ZD). For this group of employees, employers do not have to pay social contributions (15% for health insurance, 1.7% of unemployment insurance and 0.5% for injury insurance). This also applies for employees seconded to work abroad. The incentive applies for a period of 5 years per young worker. For social security contributions payable by employees, see Individual Taxation section Taxes on Capital 5.1. Net worth tax No net worth tax is imposed in Croatia Real estate tax Local real estate taxes, determined by each municipality or town, are levied on the country cottages and the use of public land (articles 34 and 35 of the ZFJLPRS). The tax ranges from HRK 5 to 15 per m 2, depending on the municipality or town. 6. International Aspects 6.1. Resident companies For the concept of residence, see section Foreign income and capital gains A resident company is taxable on its worldwide income and capital gains. Foreign-source dividends are not taxable in Croatia. Taxable foreign-source income is included in taxable income. This applies even if the income is derived through a permanent establishment abroad Foreign losses Losses incurred by foreign permanent establishments are deducted from the income of the Croatian head office and may be carried forward for 5 years (article 17 of the ZPDob) Foreign capital There are no taxes on capital Double taxation relief In the absence of a tax treaty, unilateral relief is granted in the form of an ordinary tax credit for income taxes paid abroad (article 30 of the ZPDob). For a list of tax treaties in force, see section

10 Corporate Taxation Croatia 6.2. Non-resident companies Legal entities whose legal seat and place of effective management and control is outside Croatia are non-residents for Croatian tax purposes Taxes on income and capital gains A non-resident company is subject to profit tax only if it carries on a business in Croatia through a permanent establishment (PE) (article 15 of the ZPDob). A building site or installation project constitutes a PE after 6 months. The taxable base is only the profits and capital gains derived from sources in Croatia. Profits are attributed to a PE in the amount equal to the profits that the PE might be expected to make if it were a separate and independent entity engaged in the same or similar activities under the same or similar conditions. In determining the profits, expenses that are incurred for the purposes of the PE are deductible, including general management and administrative expenses incurred in Croatia or abroad Taxes on capital There are no taxes on capital Administration Profit tax of a permanent establishment of a non-resident company is assessed after the end of the calendar year, and is subject to the filing and payment requirements discussed in section Withholding taxes on payments to nonresident companies Dividends Dividends (and other participations in profits) paid to nonresident companies are subject to a withholding tax of 12% (article 31 of the ZPDob). The tax does not apply to distributions of profits earned before 31 December Under the domestic law implementing the provisions of the EU Parent-Subsidiary Directive (2011/96), dividends and other profit distributions paid by Croatian subsidiaries to non-resident EU or Swiss parent companies are exempt from withholding tax in Croatia if (i) the parent company has held at least 10% (25% in case of Switzerland) of the capital of the subsidiary for an uninterrupted period of at least 24 months, and (ii) such distributions were not considered as deductible expenses in the Member State from which the dividends are paid (article 31b of the ZPDob) Interest A 15% withholding tax is generally levied on interest paid to non-residents (article 31 of the ZPDob). However, no tax is levied on interest from bonds, loans granted by a foreign bank and equipment sales on credit (including financial lease). A higher rate of 20% applies to interest paid to legal entities situated in non-eu countries that have an average corporate tax rate lower than 12.5%, and that do not have a tax treaty signed with Croatia (article 31a of the ZPDob). The list of countries meeting this criterion is published by the Ministry of Finance. Under the domestic law implementing the provisions of the EU Interest and Royalties Directive (2003/49), interest payments by Croatian subsidiaries to non-resident EU or Swiss parent companies are exempt from withholding tax on interest, provided that the recipient company is (i) resident in another EU Member State or Switzerland, or such a company s permanent establishment is situated in another EU Member State or Switzerland, (ii) subject to a corporate income tax listed in the Directive and (iii) an associated company of the paying company (article 31 of the ZPDob). Two companies are associated companies if (a) one of them holds directly at least 25% of the capital of the other or (b) a third EU company holds directly at least 25% of the capital of the two companies. In both cases, an uninterrupted holding period of at least 2 years is required Royalties A 15% withholding tax is levied on royalties paid to nonresident companies (article 31 of the ZPDob). For the treatment of royalties paid to non-resident EU or Swiss parent companies, see section A higher rate of 20% applies to royalties paid to legal entities situated in non-eu countries that have an average corporate tax rate of less than 12.5%, and that do not have a tax treaty signed with Croatia (article 31 of the ZPDob). The list of countries meeting this criterion is published by the Ministry of Finance Other A 20% withholding tax is levied on fees for all types of services made to companies resident in a non-eu country that has a general or average nominal corporate income tax rate lower than 12.5%, and have not concluded a tax treaty with Croatia (article 31 of the ZPDob). The list of countries meeting this criterion is published by the Ministry of Finance Withholding tax rates chart The following chart contains the withholding tax rates that are applicable to dividend, interest and royalty payments by Croatian companies to non-residents under the tax treaties in force as at the date of review. Where, in a particular case, a treaty rate is higher than the domestic rate, the latter is applicable. Dividends Interest 1 Royalties Individuals, Qualifying companies companies 2 (%) (%) (%) (%) Domestic Rates Companies: /15/20 0/15/20 Individuals: 12 n/a 0/40 25 Treaty Rates 213

11 Croatia Corporate Taxation Dividends Interest 1 Royalties Individuals, Qualifying companies companies 2 (%) (%) (%) (%) Treaty With: Albania Armenia Austria Azerbaijan Belarus Belgium / Bosnia and Herzegovina Bulgaria Canada Chile /15 8 5/10 9 China (People s Rep.) Czech Republic Denmark Estonia Finland France Georgia Germany Greece Hungary Iceland India Indonesia Iran Ireland Israel / Italy / Jordan Korea (Rep.) Kosovo Kuwait Latvia Lithuania Luxembourg /10 5 Macedonia (FYR) Malaysia Malta Mauritius Moldova Montenegro Morocco Netherlands Norway Oman Poland Portugal Qatar Dividends Interest 1 Royalties Individuals, Qualifying companies companies 2 (%) (%) (%) (%) Romania Russia San Marino Serbia Slovak Republic Slovenia South Africa Spain , Sweden Switzerland Syria Turkey Turkmenistan Ukraine United Kingdom 0/10/ / Many treaties provide for an exemption for certain types of interest, e.g. interest paid to the state, local authorities, the central bank, export credit institutions or in relation to sales on credit. Such exemptions are not considered in this column. 2. Unless stated otherwise, the rate in this column applies if the recipient company holds directly or indirectly at least 25% of the capital or the voting power of the paying company, as the case may be. 3. The zero rate applies if the recipient company holds directly or indirectly at least 25% of the capital of the company paying the dividends for at least two years and such dividends are not liable to profit tax in Armenia. 4. A 10% holding is required. 5. The lower rate applies to interest from loans granted by banks. 6. A holding of 10% of voting rights or 20% of capital is required. 7. A 20% holding is required. 8. The lower rate applies to interest from loans granted by banks and insurance companies. 9. The lower rate applies to equipment rentals. 10. The lower rate applies if (i) the recipient company holds directly at least 25% of the capital of the paying company continuously for at least 1 year, or (ii) if the recipient is a pension fund or other similar institution, subject to further conditions. 11. The lower rate applies to interest from loans granted by banks. 12. The zero rate applies, inter alia, to interest paid by public bodies. 13. Treaty concluded between Croatia and the former Serbia and Montenegro. 14. Treaty concluded by the former Yugoslavia. 15. The rate applies if the Russian company owns at least 25% of the capital in the Croatian company and the value of the holding is at least USD 100, Under the Protocol, the withholding tax rate on interest and royalties is reduced to zero 5 years after the entry in force of the treaty (i.e. from 20 April 2011). 17. The rate applies if the beneficial owner is a company which is a resident of the United Kingdom and controls, directly or indirectly, at least 25% of the capital of the company paying the dividends. 18. A most favoured nation clause may be applicable with respect to interest and royalties. 214

12 Corporate Taxation Croatia 7. Anti-Avoidance 7.1. General There is a general anti-avoidance rule, according to which the tax authorities are allowed to ignore the legal form of a transaction between taxpayers and to look to the actual substance of the transaction Transfer pricing If prices or other conditions between related parties do not conform to the arm s length principle, the tax authorities may make an adjustment (article 13 of the ZPDob). In general, enterprises are deemed to be related if there are management, control or capital relations between them. The arm s length price is determined according to the following methods: the comparable uncontrolled price method, the cost-plus method, the resale price method, the profit-split method or the transactional net margin method. Interest paid or accrued between related parties must correspond to interest as would have been agreed between unrelated parties. Excessive interest payment is not deductible. Transfer pricing rules also apply to transactions between related domestic entities if one of the entities is entitled to tax relief or has a right to carry forward tax losses from previous tax years Thin capitalization Interest paid or accrued on a loan is not deductible if (i) the loan is granted by a shareholder or member owning more than 25% of the share capital or voting power of the company and (ii) the loan exceeds the amount of four times the shareholder s or member s share in the capital or voting rights (article 31a of the ZPDob). The thin capitalization rules do not apply to loans granted by banks or other financial institutions Controlled foreign company There is no CFC legislation. 8. Value Added Tax 8.1. General VAT is levied at each stage of the production and distribution process of goods and services. The input tax on purchases is deductible from the output tax. Taxable persons are obliged to submit VAT returns electronically Taxable persons Taxable persons are individuals and legal entities engaged in taxable activities (article 6 of the ZPDV). Any importer or exporter of goods is also a taxable person, as well as an entrepreneur receiving services performed by a non-resident. Government bodies, central and local authorities and self-governing bodies, political parties, trade unions and chambers of commerce are considered to be taxable persons if they perform business activities and if the non-taxation of such activities would lead to unfair competition. Taxpayers whose supplies did not exceed the threshold of HRK 300,000 in the preceding calendar year are exempt from VAT. Individual entrepreneurs engaged in business activities whose total gross income in the preceding year did not exceed HRK 3 million (not including VAT) may opt to apply a cash accounting regime, under which the VAT is chargeable at the time of payment (article 125i of the ZPDV) Taxable events Taxable transactions include (i) the supply of goods and services for consideration within Croatia, (ii) the selfsupply of goods and services and (iii) the importation of goods (articles 7 and 8 of the ZPDV). Taxable transactions also include the self-supply of goods and services, e.g. the transfer of goods from a business for private needs and the use of services of one s own enterprise for private needs. Taxable transactions also include the supply of goods and services by legal entities for the benefit of the shareholders and members of their immediate families for no consideration or with a personal discount. Similarly, any supply free of charge or at a personal discount, irrespective of who the recipient is, is also a taxable transaction Taxable amount The taxable amount is the sales price of goods and services supplied including costs of transportation, insurance and packaging (article 33 of the ZPDV). The taxable base for imported goods is the customs value, increased by the customs duty and other charges and special taxes payable in the course of customs clearance. In the case of a reimportation of goods that have been exported to be processed in a foreign country, the taxable amount is the consideration for the processing. If there is no consideration for the processing, the taxable amount is the increase of value that results from the processing Rates The standard VAT rate is 25% (article 38 of the ZPDV). A 13% reduced rate applies to the following activities (article 38 of the ZPDV): services of accommodation or accommodation with breakfast, full or half board in all kind of commercial hospitality facilities and to agency commissions for such services; children seats; electrical energy; public service of collecting waste; concerts; and 215

13 Croatia Corporate Taxation edible oil and grease, baby food, water supply (except bottled and packaged water for market supply). A 5% rate applies to (article 38 of the ZPDV): bread and milk, certain types of books, scientific journals, medicines and public showings of films; and newspapers and magazines published daily or periodically unless they are used for advertisement only Exemptions Important exemptions include services of banks, savings and loan institutions; insurance and reinsurance companies; renting of housing premises; education; public welfare; and medical care activities (articles 39 and 40 of the ZPDV). The supply of buildings and the land on which the buildings stand, as well as the supply of construction land, before the first occupation, is exempt from VAT Non-residents Non-resident entrepreneurs engaged in taxable transactions in Croatia are taxable in the same manner as residents. They are required to appoint a tax representative for VAT purposes, who will be liable for the payment of tax and penalty interest. Other non-residents can obtain, upon application, a refund of Croatian VAT on goods (except oil derivatives) purchased in excess of HRK 500. The deadline for this refund is 6 months from the date of the issue of the invoice. 9. Miscellaneous Taxes 9.1. Capital duty There is no capital duty on the formation or expansion of capital, nor on the issue of securities, debentures or loan agreements Transfer tax Immovable property A person or a legal entity acquiring immovable property is liable to a 4% immovable property transaction tax (articles 9 and 10 of the ZPnaPN). In the case of a property exchange, however, both parties are liable to tax. The taxable base is the market value of the property at the moment of acquisition. The tax authorities may adjust the market value if the reported value does not correspond to current prices. The acquisition of a newly built building is subject to VAT and therefore immovable property transaction tax is not levied. However, the value of land that belongs to the property is always subject to the immovable property transaction tax. An existing building that is reconstructed or renovated by a building enterprise is treated as a new building Shares, bonds and other securities The transfer of securities is not subject to transfer taxes Stamp duty Stamp duties are levied on documents and acts involving public bodies Customs duty In the European Union, customs law is harmonized and applies only to movements of goods between the European Union and third countries. Customs duties, as possibly other taxes (for example VAT (see section 8.3.)), are imposed on the import of goods into the EU Customs Union. The EU Customs Union consists of the EU Member States, as well as Monaco, the Channel Islands, the Isle of Man and the areas of Akrotiri and Dhekelia (Cyprus). Turkey, San Marino and Andorra have separate customs agreements with the EU. The basis for calculating the customs duty is the customs value, which is generally the sum of the price paid for the goods and any related insurance and shipping costs. A percentage (tariff), which depends on the type and origin of the good being imported, is then applied to the customs value to determine the customs duty payable. The applicable tariff can be found in the Common Customs Tariff (Council Regulation (EEC) No. 2658/87 of 23 July 1987). EU customs legislation comprises the Union Customs Code (Regulation (EU) No. 952/2013), the Common Customs Tariff, the Customs Duty Relief Regulation and various international agreements. The Union Customs Code, supplemented by the Delegated Act and Implementing Act, replaced the Community Customs Code (Regulation (EEC) No. 2913/92) as from 1 May One of the main differences between the Union Customs Code and the Community Customs Code relates to the mandatory use of the last sale amount for valuation purposes (i.e. the sale price immediately before the goods are brought into the territory of the European Union). Previously, a first sale for export valuation basis was possible, under which duties were imposed on the manufacturer-to-middleman transaction price (which is generally lower than any subsequent sales) Excise duty Croatia levies excise duties on domestically produced or imported alcohol, alcoholic beverages, tobacco and energy products and electricity. 216

14 Estonia Individual Taxation Abbreviations Abbreviation English definition Estonian definition SMS Social Tax Act Sotsiaalmaksuseadus TMS Income Tax Act Tulumaksuseadus Introduction Individuals are subject to national income tax and land tax. Municipalities are authorized to introduce local taxes, most notably advertising tax. The importance of the local taxes, however, is very small. Social security contributions are payable by sole proprietors. For VAT and miscellaneous indirect taxes, see Corporate Taxation sections 8. and 9., respectively. From 1 January 2011, the currency is the euro (EUR). 1. Individual Income Tax 1.1. Taxable persons Taxable individuals are those who are residents in Estonia. Individuals are resident in Estonia if (section 6 of the TMS): they have a place of residence there; or they stay in Estonia for 183 days or more during any 12-month period. Individuals have to notify the tax authorities of any circumstances resulting in becoming or ceasing to be an Estonian tax resident. As of 2017, married persons are taxed separately. A child is also taxed separately. Partnerships are separate taxable persons Taxable income General Resident individuals are taxable on their worldwide income (sections 6 and 12 of the TMS), whether received in money or money s worth. In practice, all items of income are taxable, unless exempt by law. There is no separate capital gains taxation, but capital gains are generally included in taxable income and taxed at the general rate. The income of individuals is divided into three categories, i.e. ordinary income, business income and income from the disposal of property (section 12 of the TMS). The net income is calculated separately for business income and income from the disposal of property and thereafter aggregated with ordinary income. Personal allowances and deductions (see section 1.7.) are made from the aggregate income. In addition, sole proprietors are subject to distribution tax on fringe benefits granted (see Corporate Taxation section ) Exempt income The most important exempt items of income are (sections 12, 13, 15 and of the TMS): domestic benefits in kind (see section ); certain pensions (see section ); qualifying employment income earned abroad (see section ); domestic dividends and qualifying foreign dividends (see sections 1.5. and , respectively); certain capital gains (see section 1.6.); state scholarships and other scholarships approved by the government; certain public subsidies and social distributions; alimony payments; insurance proceeds and other payments received under insurance contracts, except the payments from certain pension funds and certain benefits related to property insurance; gifts received from individuals, resident legal entities (see Corporate Taxation section ) and non-resident legal entities if the gift was taxed abroad; and inheritances Employment income Salary Income received by an individual from employment or any equivalent arrangement includes salaries, wages, bonuses and other monetary payments (section 13 of the TMS). Non-monetary payments are deemed to be benefits in kind (see section ). No deductions for expenses are allowed from employment income. Per diem allowances for international business trips and compensation for the use of private vehicles are exempt from tax up to amounts prescribed by the government. Per diem allowances for international business trips that 303

15 Estonia Individual Taxation exceed the prescribed limits and per diem allowances for domestic business trips are taxable as salary. Premiums that the employer pays (for the employee) to certain voluntary annuity pension schemes, as well as payments to acquire investment certificates of qualifying EEA pension funds (for the employee), are annually exempt from tax up to EUR 6,000 or 15% of the employee s taxable salary, whichever is lower (sections 13 and 28 of the TMS) Benefits in kind Benefits in kind (fringe benefits) received by the employee are treated in an unusual way, in that they are taxed in the hands of the employer and not of the employee (sections 12 and 48 of the TMS) (see Corporate Taxation section ). Alternatively, the employer may treat the benefits as the recipient s employment income, which is subject to a withholding tax and is included in the employee s taxable income for individual income tax purposes Pension income In general, pensions are included in taxable income (section 19 of the TMS). Pension payments received from certain annuity pension schemes of pension funds holding a licence in any EEA country are exceptionally subject to a lower income tax rate of 10% by way of a final withholding (sections 4 and 21 of the TMS). Payments received on the basis of certain annuity pension schemes are exempt if: they are received when the beneficiary is older than 55 or when his incapacity to work has been established; and under the insurance contract, payments are made periodically, at least once in 3 months until the death of the beneficiary, and the payments remain the same or increase. For deductions, see section For allowances, see section For contributions to the mandatory funded pension scheme, see section Directors remuneration No special rules apply. Directors remuneration is taxable as employment income (see section ). Tax-exempt per diem allowances and reimbursements for business trips are also available to the members of management and supervisory boards Business and professional income As well as income derived from a trade or business, business income includes income from professional activities (section 14 of the TMS). The persons engaged in any such activities are referred to as sole proprietors. Taxable income of sole proprietors is determined under the cash basis accounting method. In computing taxable business income, individuals engaged in a business may deduct all documented expenses relating to it. In the case of expenses only partly incurred for the business, only that part is deductible. Expenses incurred before an individual is registered as a sole proprietor may be deducted if they are related to the registration or the required authorization. All expenses for the acquisition of fixed and current assets (including land and forest) may be deducted immediately; no depreciation is applicable. No deduction is allowed for (sections 33 and 34 of the TMS): national income tax, except distribution tax on fringe benefits granted (see below); statutory penalties and interest for late payment of tax; certain pollution charges; expenses covered by tax-exempt subsidies; costs of gifts and donations; losses incurred on the sale of property to a related person for a price that is lower than the market price, unless the distribution tax has been paid on the loss; losses incurred on the sale of property that was purchased from a related person for a price that is higher than the market price; certain social security contributions paid in Estonia or abroad; entertainment expenses in excess of 2% of the business income after deducting the allowable expenses; and bribes. Sole proprietors are entitled to open a special tax-free bank account for keeping funds for investment purposes. Any increase in such bank account is deductible from taxable business income; any decrease is added to it. Sole proprietors are also liable to distribution tax on the fringe benefits granted to their employees (see Corporate Taxation section ). The cost of fringe benefits is not deductible, unless the distribution tax on their value has been paid. If the value of a transaction between a sole proprietor and a related person (broad concept) used in the course of business differs from the value which would be used by unrelated persons in similar transactions, the tax authorities may adjust the value of the transaction to the latter amount (i.e. the taxable business income is increased or the deductible costs are decreased). A simplified taxation regime may apply to small entrepreneurs whose income does not exceed EUR 25,000 per annum. Under the regime, the bank automatically forwards 20% from all payments the entrepreneur receives in his separate business bank account to the tax authorities. Such tax substitutes income tax of 20%, social security contributions (social insurance and health insurance contributions) of 33% and the contribution to the mandatory funded pension scheme of 2%. For losses, see section

16 Individual Taxation Estonia 1.5. Investment income Dividends paid by resident companies are subject to distribution tax (see Corporate Taxation section ). Distribution tax at the standard rate of 20%, which is paid by the distributing company, is a final tax and the shareholders do not include such dividends in their taxable income. However, if the company has paid the distribution tax at the lower 14% rate (see Corporate Taxation section ), the individual recipient is subject to an additional 7% withholding tax. If a resident individual is a partner in a domestic investment trust (i.e. limited partnership), income tax is paid by the investment trust in proportion to the individual s share in the investment trust. Subsequent distributions on account of such taxed income are tax exempt. Generally, all types of domestic interest and royalties are included in the taxable income (sections 16 and 17 of the TMS). No expenses are deductible with respect to interest and royalties. In the case of rental and royalty income, the taxpayer can choose to declare this income as investment income or as business income. In the case of business income, only the net income after expenses (see section 1.4.) is included in the taxable base, but the same amount is also subject to social security contributions (see section 3.). In the case of investment income, the gross income is included in the taxable base but no social security contributions are levied. For withholding taxes, see section For foreignsource investment income, see section Capital gains There is no separate capital gains taxation, but capital gains are generally included in taxable income and taxed at the general rate (sections 12 and 15 of the TMS). However, the following gains, inter alia, are exempt (section 15 of the TMS): gains from the sale of the taxpayer s own dwelling (house or apartment) that was used by him as his residence until the sale (with restriction to one sale during a 2-year period); gains from the sale of a summer cottage or garden house, provided the taxpayer has owned such property for more than 2 years and the size of the land plot does not exceed 0.25 ha; gains related to the various programmes concerning restitution of expropriated property and privatization of the economy; gains from the sale of movable property which has been in the taxpayer s personal use; and gains from the exchange of shares in the course of mergers, divisions or other reorganizations. From 1 January 2011, capital gains derived from the disposal of financial assets (e.g. shares and securities traded publicly in any of the EEA or OECD countries, or under certain conditions, in other countries; units of investment funds; investment deposits) are not taxable if these assets had been acquired using funds deposited on an investment account opened for such purpose in a credit institution of an EEA or OECD country, and the sales proceeds are transferred back to the investment account. Such gains are taxable only when transferred out of the investment account (as they are assumed to be used for consumption) Personal deductions, allowances and credits The following deductions and allowances are deducted from the aggregate amount of all types of taxable income of resident individuals. If a resident individual receives at least 75% of his taxable income from abroad and part of his foreign income is exempted in Estonia to avoid double taxation, he may only claim such part of deductions and allowances that corresponds to the proportion of his taxable income from Estonian sources to his worldwide taxable income (section 28 2 of the TMS). The proportional deduction restriction does not apply if the resident individual elects to relieve double taxation on his total foreign income by credit system. Deductions and allowances are also granted to residents of the other EEA countries who file a tax return in Estonia and have received at least 75% of their taxable income for the tax year from sources in Estonia (section 31 1 of the TMS). Only such part of deductions and allowances can be deducted that corresponds to the proportion of the nonresident s taxable income from Estonian sources to his worldwide taxable income Deductions The taxpayer may deduct interest paid to credit institutions resident in any EEA country or to financial institutions belonging to the same group as the first-mentioned credit institutions and to EEA registered branches of nonresident credit institutions on a loan or lease for the acquisition or reconstruction (but not the repair) of his own dwelling. The deduction is given for only one dwelling per tax year (section 25 of the TMS). Educational expenses are deductible if they are paid by the taxpayer on his own behalf or on the behalf of his dependants under 26 years for studying in a public educational institution, a licensed private school or a foreign educational institution of equal status (section 26 of the TMS). If the taxpayer has no educational expenses paid on his own behalf or on behalf of his dependants, he may deduct educational expenses made by him on behalf of any resident individual under 26 years. The taxpayer may deduct documented gifts and donations to non-profit organizations approved by the government (including non-profit organizations established in EEA countries that comply with the conditions applicable to respective Estonian organizations). Unemployment insurance contributions are deductible (proportional restrictions (see section 1.7.) do not apply). The total of deductions related to mortgage interest, educational expenses, gifts and donations is limited to EUR 1,200 or 50% of income which is taxable in Estonia, whichever is lower (section 28 2 of the TMS). The deduction of mortgage interest is limited to EUR