Withholding tax (WHT) plays a significant role in Croatia’s taxation system, particularly when domestic entities make payments to non-residents. Article 31 of the Croatian Corporate Income Tax Act (“the CIT Act”) prescribes the rules, rates, exceptions, and procedural requirements for applying withholding tax. WHT can be paid either in accordance with local Act, provisions of Double Tax Treaty or appertaining the Directive 2003/49/EZ rulings which are fully transposed into local tax legislation. In order to be able to understand the application of WHT in Croatia, it is important to know its definitions, applicability, rates, obligation and certain exemptions to the general rules. This article provides an overview of those obligations, with special focus on payments made by or to foreign companies.
Definition and Tax Base of Withholding Tax
Under Article 31 of the Act, withholding tax is levied on profit earned by non-residents in the Republic of Croatia. The taxpayer responsible for calculation and payment of the withholding tax is the payer of the compensation, not the foreign recipient. The tax base is defined as the gross amount of compensation paid to the non-resident.
Types of Payments Subject to Withholding Tax
In accordance with the local CIT Act, withholding tax is due on the following payments:
- Interest
- Dividends
- Profit shares
- Copyright or other intellectual property rights, including:
- Patents, licenses, trademarks, design or model rights
- Production procedures, formulas, plans
- Industrial or scientific know-how and similar rights
Exemptions: When Interest Is Not Taxable
As an exemption to the general rule, WHT is not to be paid on the following types of interest:
- interest on commodity loans used to acquire goods required for business activity;
- interest on loans granted by a foreign bank or financial institution;
- interest paid to foreign legal entities holding state or corporate bonds;
- interest related to financial leasing of goods.
Applicable Withholding Tax Rates
The standard and exceptional withholding tax rate is 15%. In addition, a 10% WHT rate is applied on dividends and profit shares as well compensation paid to foreign performers (artists, entertainers, athletes) under contracts with foreign corporate intermediaries.
The maximum 25% WHT rate is applied to all types of fees and services under Article 31 of CIT Act, including, inter alia, market research, tax and business consulting, and auditing services — when the payment is made to entities located in non-cooperative jurisdictions, provided Croatia does not have a double tax treaty with that jurisdiction.
Application of Double Tax Treaties or Directive 2003/49/EC (WHT Directive)
With Croatia’s accession to the European Union, new rules entered into force governing the taxation of interest, royalties, dividends, and profit shares exchanged between associated companies across different EU Member States. These rules, aligned with Directive 2003/49/EC and the Parent-Subsidiary Directive, aim to eliminate double taxation, prevent discriminatory tax treatment, and promote cross-border investment within the EU.
Application of the WHT Directive for interest and royalty payments
In order to be able to benefit from the WHT exemption in accordance with WHT Directive, it is necessary to fulfil certain requirements for the payer and the actual beneficiary, i.e. the relation conditions and the duration of the minimum relation condition.
The term “interest” in line with the CIT legislation includes income from all kinds of debt claims, whether or not secured or profit-participating. This covers:
- income from securities, bonds, and debentures,
- premiums or prizes attached to such instruments.
Penalty charges for late payments, however, are explicitly excluded from the definition of interest.
Furthermore, “royalties” are defined as payments for the use or right to use of:
- copyrights (literary, artistic, scientific works, films, software),
- patents, trademarks, designs, models,
- secret formulas, processes, or industrial/commercial/scientific know-how.
Payments for the use of industrial, commercial, or scientific equipment are also treated as royalties.
For a payer or beneficial owner to fall under the Directive and thus to be exempt from WHT liability, the following preconditions apply:
- the company must have an eligible legal form listed in the Annex of the Profit Tax Ordinance,
- it must be an EU tax resident, not treated as resident outside the EU under a tax treaty,
- it must be subject to corporate tax in its Member State (not exempt).
In addition, payment must be made between related entities, whereby the term “related entities” is deemed as it follows:
- one entity directly holding at least 25% of the other’s capital, or
- a third company directly holding at least 25% of both.
The associated-company relationship must have existed for at least 24 months continuously.
If the 24-month period is not yet fulfilled, payment may still be made without withholding tax if the taxpayer provides an appropriate guarantee as specified by the CIT Act.
Application of the WHT Directive for dividend payments
Croatia exempts withholding tax on dividends and profit shares paid to another EU company when:
- the recipient holds at least 10% of the payer’s capital,
- this shareholding is maintained continuously for at least 24 months.
To qualify, the recipient company must fulfil the following preconditions:
- the company must have an eligible legal form listed in the Annex of the Profit Tax Ordinance,
- it must be an EU tax resident, not treated as resident outside the EU under a tax treaty,
- it must be subject to corporate tax in its Member State (not exempt).
This exemption also does not apply if the primary purpose of the arrangement is tax fraud or evasion.
In case that a certain transaction fulfils all the requirements prescribed by the CIT Act, that are transposed from the WHT Directives (including dividends, profit sharing, interest and royalties), the payer of the funds must prove this to the Croatian tax administration in order to be able to apply the WHT exemption.
Application of Double Taxation Treaties in Croatia: Procedures for Claiming Treaty Benefits
Croatian tax regulations set out detailed procedures for applying the provisions of Double Taxation Treaties (DTT) when income is paid to non-resident taxpayers. These rules define the documentation required, the obligations of resident payers, and the rights of non-resident recipients in cases where withholding tax relief or refunds are available under a treaty.
When Croatia has concluded a double taxation treaty with the country in which the income recipient is resident, the provisions of the treaty apply in accordance with the procedures defined in CIT Act.
Forms Required for Claiming Treaty Benefits
Treaty benefits – such as tax reduction, exemption, or refund – are exercised through specific forms, depending on the type of income being paid. For the application of a reduced WHT rate, the payer must request this by presenting to the Croatian tax administration a prescribed tax form certified by the competent tax authority in country of residence of the payment recipient. If no withholding tax is applied at the time of payment based on the double taxation treaty (i.e. WHT rate is 0%), the non-resident recipient may, instead of submitting the request form, provide only a certificate of tax residency issued by the competent foreign tax authority.
Conclusion
The Croatian provisions implementing EU WHT Directives create a harmonized tax environment for interest, royalties, dividends, and profit shares exchanged between associated companies across the EU and EEA. In addition, Croatia has concluded more than 69 Double Tax Treaties with other states that also regulate the WHT payments to those jurisdictions.
These rules help eliminate withholding taxes under clearly defined conditions, promote cross-border corporate cooperation, and prevent double taxation while maintaining safeguards against abuse and tax evasion.
Author: Ivan Podgorski-Boček, Head Of Tax Advisory Services at Data-Link Unija Consulting d.o.o.
