By Ksenija Cipek, Head of Tax Risk Analysis, Ministry of Finance, Tax Administration, Croatia
The government of the Republic of Croatia, on September 30, adopted a decision to initiate proceedings to conclude a convention with the United States on the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income.
The Croatian Minister of Finance later announced that the tax administration would begin preliminary talks in October regarding negotiations for the conclusion of the convention.
The need for tax treaties
Double taxation agreements are an extremely important legal institution, as they enable one of the basic principles of taxation, which is to not pay tax twice on the same income.
Countries conclude bilateral tax conventions with aims such as removing tax-related barriers to cross border trade and investment, but also to prevent tax fraud and tax avoidance.
States apply existing, common models for double taxation treaties, typically the OECD or UN Model Tax Convention.
The Republic of Croatia uses the OECD Model Tax Convention and has in force 66 tax treaties, including treaties with all European Union Member States.
The Republic of Croatia uses the OECD Model Tax Convention and has in force 66 tax treaties, including treaties with all European Union Member States.
However, even though the Republic of Croatia is a Member State of the European Union and NATO, it does not have a tax treaty with the United States of America.
The lack of such an agreement creates significant problems for entrepreneurs, companies, and citizens on both sides as they suffer the burden of double taxation.
The issue of avoiding double taxation between the Republic of Croatia and the US has not yet been resolved although the procedures for initiating negotiations and concluding an agreement began many years ago.
Republic of Croatia government decision
To finally remove the burden of double taxation between the two countries, the government of the Republic of Croatia adopted at its 12th Session a decision to initiate proceedings for a convention between the government of the Republic of Croatia and the United States on the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income.
The government also adopted a draft convention as the basis for conducting the negotiations
The government of the Republic of Croatia has proposed the conclusion of the tax convention to improve the conditions and increase the mutual exchange of goods and services, and to increase the level of overall economic activity of both countries.
The conclusion of the convention is a necessary sequence of the overall activities undertaken by the Republic of Croatia to increase the degree of mutual economic cooperation between the Republic of Croatia and the United States.
As a basis for negotiations and for the purpose of concluding the convention, the Republic of Croatia has developed the draft Convention on Avoidance of Double Taxation and Prevention of Tax Evasion with Respect to Taxes on Income. The model was developed by the Republic of Croatia according to its own tax policy and is based on the US model and the OECD Model Tax Convention.
The government also selected the delegation to represent the Republic of Croatia in conducting negotiations.
The Croatian Minister of Finance has also announced that the tax administration would begin preliminary talks in October regarding negotiations for the conclusion of the convention.
Draft tax convention
The signing of the tax convention will provide numerous reliefs to residents of the contracting states regarding the taxation of income and profits, will encourage foreign investment in the Republic of Croatia, will open opportunities for increasing mutual exchange of goods and services, and increase the level of mutual economic cooperation between Croatia and the United States.
The signing of the tax convention will provide numerous reliefs to residents of the contracting states regarding the taxation of income and profits, will encourage foreign investment in the Republic of Croatia, will open opportunities for increasing mutual exchange of goods and services, and increase the level of mutual economic cooperation between Croatia and the United States.
The fight against tax evasion through the exchange of information will be encouraged.
The fundamental issues to be regulated by the tax convention are:
Croatian construction and similar companies are allowed not to pay income tax in the United States if these activities last less than 12 months. Operating profit is taxed in the country of residence of the company, except in cases where there is a permanent establishment.
Croatian airlines and shipping companies, which perform international transport of goods between Croatia and the US, would pay corporate income tax exclusively to the Republic of Croatia.
Passive income tax rates are reduced as compared to the existing rates prescribed by domestic laws. Also, the issue of taxation of real estate income, profit from the alienation of property, income from employment, compensation of board members, income of athletes and artists, pensions, income from civil service and other income that is not explicitly defined by the previous provisions of the draft convention.
The draft agreement also regulates the provisions on the elimination of double taxation (methods), the provisions governing the equal treatment of companies of the contracting states in various tax situations, the procedure of mutual agreement for the purpose of resolving tax disputes, and the exchange of information as an effective measure of combating tax evasion and provisions regarding entitlement to benefits.
Promoting investment
The conclusion of an agreement on the avoidance of double taxation between the Republic of Croatia and the US will provide significant benefits to companies and investors on both sides.
The tax treaty will have a special tax effect on Croatian exporters, mostly from the IT sector, which will save up to 30 percent of their earnings from the new measures, according to the Croatian Chamber of Commerce.
Croatia will also be more attractive to American investors after the removal of tax barriers in the form of double taxation.
Ksenija Cipek
Ksenija Cipek is based in Zagreb, Croatia. She is a lecturer at the local University of Law, a Member of the European Law Institute, and Member of the Blockchain Chamber of Commerce. Ksenija has over 20 years of experience working at the Ministry of Finance and in tax administration.
She is a highly respected and recognised tax expert who has been heavily involved in lawmaking. She participates at the forums and working groups at the Council of the EU, the OECD, and IOTA, and is a speaker at international conferences.
As a Croatian Tax Administration Project Leader, she established the Compliance Risk Analysis System and provided the idea for automatic VAT returns based on the Risk Analysis System. Ksenija has also authored several books.
Latest posts by Ksenija Cipek (see all)
- Croatia to initiate tax treaty negotiations with the United States - October 28, 2020
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Is there any update on the progress of this treaty with the US on double taxation, particularly with the new Biden administration? Also, i couldn’t tell from the above what category you’d consider a taxable withdrawal from a US 401k account. Does that count as a pension? Would that be considered taxable in croatia as income either today or in the draft treaty? Thanks.
I have the same question as Rob C
are US social security pensions taxable in Croatia?
Negotiations for the Convention between the Government of the Republic of Croatia and the Government of the United States of America on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income began in late 2020, followed by several rounds of negotiations. In order to speed up the process of negotiating and concluding the Convention, negotiations are held remotely via online platforms and all communication between the rounds of negotiations takes place via e-mail. to certain provisions of the Convention. The Republic of Croatia is making extraordinary efforts to conclude and sign the Convention in question as soon as possible, and is fulfilling all its obligations to the United States. At the moment, the American side is analyzing additional answers on the Croatian legal and tax system within its expert bodies, and we expect that a new round of negotiations will take place soon, in which the text of the Convention could be fully harmonized.
Has there been any progress on this problem ?
Has any progress been made on this since 2020 & 2021?