Passive income taxation in Croatia

[zeroflag]

I'm thinking about moving to Croatia from another EU country and living on passive income coming from a stock portfolio. I'd like to realize capital gains by selling shares (once or twice I year, so no active trading) and receiving dividends mainly from US companies.

I'm interested in the tax implications of this. I don't want to get a job or form a company, I'd like to remain a private, personal investor and generate passive income.

I've just learnt that Croatia didn't have a double taxation treaty with the US up until this point so US dividends were taxed with a rate of 30%. But the upcoming treaty is going to reduce this to 15%. Anyone can confirm this?

United States and Croatia sign their first income tax treaty

On 8 December 2022, the United States and Croatia signed their first convention for the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income. With this development, Croatia becomes the latest, and the only remaining, European Union member state to sign...

www.globalcompliancenews.com

My understanding is that capital gains on shares are taxed with a rate of 10% (or 12%?) but there is a tax exemption after a 2 years holding period.

There is also a local municipal surtax which can be up to 18% depending on the city. But the base of this is not the full amount but the taxed amount. Anyone knows if this is applicable to both dividends and capital gains?

Is there any additional social or health care contribution tax which affects dividends and capital gains?

 

[Jerry1911]

I've just learnt that Croatia didn't have a double taxation treaty with the US up until this point so US dividends were taxed with a rate of 30%. But the upcoming treaty is going to reduce this to 15%. Anyone can confirm this?

See https://home.treasury.gov/system/files/131/Treaty-Croatia-12-7-2022.pdf

It was taxed with 30% but you would be exemptfrom paying tax on dividends in Croatia (the 12% + local surtax). There was also a similar thing for Croatian LLCs owning US stocks - the 30% US WHT would count as an expense.

My understanding is that capital gains on shares are taxed with a rate of 10% (or 12%?) but there is a tax exemption after a 2 years holding period.

Correct, and it's 10%, not 12%. It was 12% up until last year, or something like that.

There is also a local municipal surtax which can be up to 18% depending on the city. But the base of this is not the full amount but the taxed amount. Anyone knows if this is applicable to both dividends and capital gains?

Correct, and yes, it's applicable to both dividends and cap gains.

Is there any additional social or health care contribution tax which affects dividends and capital gains?

No.

By the way, keep in mind that there's no case law regarding private foundations, trusts and place of effective management in Croatia.

 

[zeroflag]

Thanks for the reply.

So if I live in Zagrab where the surtax is 18%. And I make 100$ capital gains within 2 years, I'll pay 10$ tax + 1.8$ surtax. But if I hold more than 2 years and only sell after, I pay 0 tax and 0 surtax?

If Starbux pays me 100$ dividends and the USA withheld 30$ (let's say there is no double tax treaty) then I'll still need to pay the 18% surtax on the 30$ ( 30 * 18/100 = 5.4$) to Zagrab?

 

[Marzio]

I'll still need to pay the 18% surtax on the 30$ ( 30 * 18/100 = 5.4$) to Zagrab?

No since the surtax taxable base comes from the HR dividends taxation.

It will be $7 tax + $1.26 surtax

 

[Jerry1911]

So if I live in Zagrab where the surtax is 18%. And I make 100$ capital gains within 2 years, I'll pay 10$ tax + 1.8$ surtax. But if I hold more than 2 years and only sell after, I pay 0 tax and 0 surtax?

Correct

If Starbux pays me 100$ dividends and the USA withheld 30$ (let's say there is no double tax treaty) then I'll still need to pay the 18% surtax on the 30$ ( 30 * 18/100 = 5.4$) to Zagrab?

No. See what Mazio wrote.

 

[zeroflag]

It will be $7 tax + $1.26 surtax

Where does this 7% come from?

 

[Marzio]

Where does this 7% come from?

$100 - $30 WHT = $70

$70 * 10% HR dividends tax = $7

 

[zeroflag]

Oh I see, it makes sense.

I wonder how it would look like if there was already a double tax treaty between the US with a cap of 15% max. Then I would receive 85$ from the US.
My understanding is that the treaty would prevent me paying taxes in HR if the tax was already paid in the US, which might eliminate the surtax.

 

[pipona]

By the way, keep in mind that there's no case law regarding private foundations, trusts and place of effective management in Croatia.

Is this a potential benefit or drawback? Please forgive my ignorance. Would Croatia be an attractive place from which to run an offshore company because the authorities wouldn't hassle you and claim it's effectively managed there?

 

[Onassis]

Would Croatia be an attractive place from which to run an offshore company because the authorities wouldn't hassle you and claim it's effectively managed there?

No, as there are also CFC rules for individuals. You may register a company abroad and set up a branch office as the corporate tax is quite low - 10% up to 1M EUR of revenue. This is preferred, as setting up a local company would make you subject to the slow and inefficient Croatian justice system, whereas the branch office wouldn't have legal personality.

There is also a special economic zone in the city of Vukovar which offers 0% corporate tax, with the requirement of hiring a minimum of 5 employees who have an address in the city.

Regarding trusts and foundations, seek legal advice and/or tax rulings.

 

[Marzio]

Didn't know about the Vukovar option!

 

[Evi]

And the director needs to be employed in the company registered in Croatia? So it is not only CIT but also all taxes from the salary have to be paid? Or being employed is not obligatory and is possible to take out all the income as dividends?