Associations in the tax and customs systems

Find out when associations are liable to pay corporate tax and when they are liable to pay value added tax

Corporate tax is not charged in relation to generated revenue, but rather in relation to profit realised in the course of business operations.
Under the Corporate Tax Act, non-profit organisations are not liable to pay corporate tax.

The category of those liable to pay corporate tax includes companies and other legal and natural persons engaged in economic activity, independently and permanently, for the purpose of generating revenue, profit or other economically assessable benefits. Article 2(6) of the Corporate Tax Act provides that state institutions, institutions of regional self-government units, institutions of local self-government units, state institutes, religious communities, political parties, trade unions, chambers, associations, arts associations, associations of volunteer firemen, associations of technological culture, tourist boards, foundations and trusts, sports clubs, sports societies and federations are not liable to pay corporate tax.

However, pursuant to Article of the 7 Corporate Tax Act, if the listed non-profit organisations perform a certain economic activity and if non-taxation of that activity would lead to the acquisition of unjustified market advantage, they are required to apply for entry in the Register of Taxpayers kept by the Tax Administration within eight days from the day of initiation of that activity in order to determine corporate tax liabilities arising from performing a certain economic activity. 

The competent tax administration is determined according to the location of the registered office of the non-profit organisation.

If the organisation does not apply for entry in the Register, the Tax Administration will, at its own initiative or at the proposal of other taxpayers or interested persons, issue a decision imposing on the organisation the obligation to pay corporate tax for that activity.  

Non-profit organisations that have been entered in the Register of Taxpayers on the basis of a decision of the Tax Administration are nevertheless not considered liable to pay corporate tax levied on the difference between revenue and expenditure realised in the course of performing non-economic and non-profit activities for which they were founded. Such non-profit organisations are considered liable to pay corporate tax only for the profit realised by performing the economic activity in relation to which the competent tax authority has issued a decision.

In other words, if a non-profit organisation, in addition to economic activity, generates revenue stemming from membership fees, donations and gifts, for that part of the revenue and for the positive difference between the revenue and expenditure, it is not liable to pay corporate tax.
 

Corporate tax base

Non-profit organisations that have been subjects of a decision imposing obligation to pay corporate income tax for the performance of a certain economic activity can determine the corporate tax base according to accounting regulations on the basis of their business records, or, under certain conditions, in a lump sum.

The starting value for determining the corporate tax base applicable to corporate taxpayers who determine the corporate tax base according to accounting regulations, is the difference between the realised revenue and expenditure arising from economic activity in the tax period (usually a calendar year), adjusted for certain items that increase and for certain items that decrease the corporate tax base. The difference between revenue and expenditure (the so-called “accounting profit”), calculated when determining the corporate tax base, is increased pursuant to Article 7 of the Corporate Tax Act.

According to the said Act, the corporate tax base is increased, among other, for the following items:
  • 50 percent of entertainment expenses, which include expenses related to hospitality, gifts, vacation costs, recreation, sports, leisure, car, boat and aircraft rental, vacation homes, and other similar expenses incurred for the purpose of accommodating business partners and offering them corporate gifts
  • 30 percent of expenses incurred in connection with own or rented motor vehicles and other means of personal transport of managers, executives and other employees, with the exception of expenses related to insurance of personal vehicles and other means of transport, expenditures for the annual road motor vehicles tax, and expenditures based on the interests for financing the purchase of cars and other means of personal transport which are considered fully tax deductible expenses; as of 1 January 2018, the percentage increase of the corporate tax base for transportation expenses was increased to 50 percent instead of the current 30 percent
  • amount of depreciation in excess of the highest amounts that can be allowed as tax deductible
  • expenses for fines and offences
  • all other expenses not directly related to the realisation of profit, in case when there is no liability to pay corporate tax for those expenses. 

The difference between revenue and expenditure (the so-called “accounting profit”), when determining the corporate tax base, is reduced pursuant to Article 6 of the Corporate Tax Act. According to the said Act, the corporate tax base can be reduced, among other, for the following items:
  • revenue from dividends or profit participation realised on the basis of capital shares of other companies
  • amount of depreciation not recognised in the previous tax periods as tax deductible. 

The starting point for determining the corporate tax base applicable to corporate taxpayers subject to lump sum taxation is the amount of realised income. The possibility of determining the corporate tax base in a lump sum cannot be taken advantage of by the non-profit organisations which, in the course of performing economic activity in the previous tax period, generated revenue in the amount greater than the one prescribed for remaining outside the scope of the VAT regime, i.e. over HRK 230,000 (as of 1 January 2018, the threshold for being required to apply for entry in the VAT Register was increased to HRK 300,000), nor the non-profit organisations that perform only the activity on the basis of which they are liable to pay corporate tax or generate more than 50% of total revenue on the basis of that activity alone.

Non-profit organisations that are corporate taxpayers and intend to pay corporate tax in a lump sum, must submit an application for the payment of tax in a lump sum to the Tax Administration no later than 15 days after the start of the tax period. Also, within the same time frame, taxpayers subject to lump sum taxation are required to inform the competent branch office of the Tax Administration if they no longer intend to determine the corporate tax liability in a lump sum but according to accounting regulations instead.

For the purposes of determining the tax liability, corporate taxpayers subject to lump sum taxation keep a simple record of the amount of revenue generated from economic activity, which must contain at least the date, invoice number, value of goods or services provided, and the total value of all deliveries. There is no formally prescribed format for keeping records.

The amount of the lump sum tax base and liabilities are determined depending on the amount of revenue generated from economic activity:
 
 
Revenue from economic activity Tax base Amount of annual lump sum tax in HRK
85,000.00 12,750.00 1,530.00
115,000.00 17,250.00 2,070.00
149,500.00 22,425.00 2,691.00
230,000.00 34,500.00 4,140.00
 
 

Corporate tax return/report

Liability to pay corporate tax is determined after the end of the calendar year.

Taxpayers that determine the corporate tax base according to accounting regulations, have to determine the corporate tax liability no later than 30 April of the current year for the previous tax period.

As regards business entities operating for less than one year, the corporate tax liability is determined no later than four months after the end of the period for which the generated profit is determined. For example, if a taxpayer started business operations in the middle of the year, in July, they are required to file a corporate tax return for the corresponding business period in the previous year (for the period July – December).

Also, if a business entity ceases to operate during the year (e.g. liquidation proceedings are carried out in May), it is required to file a corporate tax return within four months for the period from the beginning of the calendar year to the end of business operations (in this case for the period January – May, by 30 September at the latest).

The corporate tax return is submitted on the prescribed PD Form. In addition to the Form, corporate taxpayers are required to submit financial statements (balance sheet and profit and loss account) to the Tax Administration. When a non-profit organisation is liable to pay corporate tax only for a part of its activities, i.e. only for the economic activity, the corporate tax return is submitted on the prescribed PD Form as well, but the organisation is required to enter only data pertaining to the economic activity for which separate accounts are kept. In addition to the corporate tax return, reports prepared in accordance with special regulations for non-profit organisations are also submitted. However, the Tax Administration may request the taxpayer to submit other documents in line with the general tax regulations.

Corporate tax return forms can be purchased at any specialised bookstore that sells Official Gazette printed matter, or downloaded from the Tax Administration’s website

Forms.

Taxpayers can file the return on a form that they compile themselves on a computer and print out on paper, but the form must be identical in content to the prescribed PD Form. The corporate tax return is submitted to the competent tax administration designated for the place where the registered office of the non-profit organisation is located, and can also be sent electronically via the e-Tax Administration system.

The taxpayer that determines the corporate tax base in a lump sum is required to submit an annual report to the Tax Administration using the PD-PO Form no later than 15 days from the end of the tax period for which the report is submitted, which is 15 January of the current year for the previous tax period. The PD-PO Form can be downloaded from the Tax Administration website. 

The report is to be submitted to the tax administration competent for the place where the registered office of the non-profit organisation is located

Forms.

 

Payment of withholding corporate tax

Withholding corporate tax is a tax applied to the profit made by a non-resident in the Republic of Croatia, provided that the non-resident is a legal person (a non-resident is a legal person whose registered office is located abroad). The person required to pay withholding corporate tax is the domestic paying agent who pays to a foreign recipient interest fees (except bank interest and commodity loan interest), fees for the use of copyright and other intellectual property rights, and fees for market research services, tax and business consulting services, auditing and similar services.

Withholding corporate tax is paid at the rate of 12, 15 or 20 percent, or in line with a treaty for the avoidance of double taxation. The tax liability is due at the time of payment of the fee for which the withholding corporate tax is prescribed.

If the recipient of the fee for which payment of the withholding corporate tax is prescribed is a resident of a country with which the Republic of Croatia has signed a treaty for the avoidance of double taxation, then the provisions of such international agreement take precedence over domestic law.

Withholding corporate tax is paid at the rate of 20 percent on all types of services for which a fee is paid to persons who have their registered office or place of effective management (i.e. principal place of business) in countries that are considered tax havens or financial centres, except EU Member States, and the country has to be included in the List of Countries issued by the Minister of Finance and published on the websites of the Ministry of Finance and the Tax Administration of the Republic of Croatia.
 

Deadlines for corporate tax payment

Corporate taxpayers that determine the tax base according to accounting regulations, pay an advance corporate tax payment during the year based on the corporate tax return submitted in the previous calendar year.

The monthly amount of the advance corporate tax payment is calculated by dividing the annual corporate tax liability by the number of months of operation in that year.

The monthly advance payments are due on the last day of the current month for the previous month. Advances are paid only after the first tax return has been filed.

The annual corporate tax liability is due no later than 30 April of the current year for the previous year.

The annual corporate tax liability is compared with the advances paid in order to determine the difference that still needs to be paid, or to determine the possible overpayment in relation to the finally determined liability for the calendar year.

In the event that an overpayment was determined on the basis of the advances paid in relation to the liability for that year, the taxpayer can, upon final calculation, request a refund of the overpaid corporate tax, or use the overpaid amounts as advances for the upcoming tax period.

Corporate taxpayers subject to lump sum taxation pay an advance corporate tax according to the decision of the Tax Administration which determines the annual lump sum tax base, annual lump sum tax liability and lump sum amounts of the corporate tax advance.

The monthly amount of the lump sum corporate tax is calculated by dividing the annual lump sum tax liability by 12 (twelve months), or by the proportional number of months in the tax period in which the taxpayer performed economic activity. The advance corporate tax payment is paid quarterly before the last day of each quarter, in the amount of three monthly advances.

The difference between the annual lump sum tax to be paid or refunded is determined on the basis of the report, i.e. the PD-PO Form. Depending on the amount of revenue generated in the tax period, the tax base, the annual lump sum tax liability and the amounts of the corporate tax advance are determined in relation to the taxpayer. The lump sum amount of the corporate tax liability is compared with the advances paid in the same tax period in order to determine the difference to be paid or refunded.

The taxpayer is required to pay the difference that still needs to be paid to meet the annual lump sum corporate tax liability on the day of submitting the said report, i.e. no later than 15 January of the current year for the previous year.

In the event that an overpayment was determined, the taxpayer is refunded for the overpaid lump sum corporate tax for the previous tax period at their own request, or they can use the overpaid amounts as advances for the next tax period.
 

Separate accounts for economic activity

The Act on Financial Operations and Accounting of Non-Profit Organisations (Official Gazette 121/14) lays down the obligation for a non-profit organisation to organise accounting (bookkeeping) uniquely for all business events using one general ledger as a single and complete record of all business events.

Example: a non-profit organisation has a fleet of five vehicles, three of which are intended for non-economic activities, and two are used in the performance of economic activities aimed at raising funds to finance the objectives of the non-profit organisation. Non-deductible expenses amount to 30 percent of expenditures related to the two vehicles used in the performance of economic activities (but not for all five vehicles), so it is in the interest of the non-profit organisation to provide in its single record data on expenditure for vehicles broken down according to the purpose for which the vehicles are used.

Of course, in many cases it is very difficult to accurately separate expenditures for economic activities from expenditures for non-economic activities. In doing so, natural parameters should be used whenever possible, and financial parameters should be used only exceptionally. For example, if the activity takes place in the same premises, heating costs are best broken down according to the criterion of usable area of business premises used for economic activity and usable area used for non-profit activity.
 

Value added tax

Most non-profit organisations are not subject to value added tax (VAT).

As a rule, companies and natural persons who perform entrepreneurial and economic activities, i.e. those who sell goods or provide services to their customers for a fee, are considered taxable persons for the purposes of value added tax.

Value added tax is a form of indirect tax on consumption that is levied, in the name and on behalf of the state, on end consumers by entrepreneurs who sell goods and provide services subject to VAT to consumers.

As a rule, non-profit organisations are not engaged in entrepreneurial activity, which means they are usually not subject to value added tax.

A non-profit organisation becomes liable to pay value added tax if the value of delivered (sold) goods and provided services that are not exempt from VAT exceeds the amount of HRK 230,000 per year.

As of 1 January 2018, the threshold for being required to apply for entry in the VAT register was increased to HRK 300,000 (instead of HRK 230,000).

The criterion of HRK 230,000 in annual turnover for the current year is determined on the basis of turnover subject to value added tax in the previous calendar year. Such turnover consists of goods delivered and services provided for a fee. Receipt of money without any direct consideration is not subject to VAT. This means that value added tax is not charged on received donations, i.e. contributions for which no consideration is provided, meaning that they are not included in the criteria for determining taxable turnover. Membership fees collected from members of a non-profit organisation in accordance with its statute and other acts, determined on the basis of the same criteria for all members (which does not necessarily mean the same absolute amount), are also not included in the criteria for the calculation of the taxable turnover of HRK 230,000 per year. 
 

The difference between non-profit organisations that are subject to value added tax and those that are not

Non-profit organisations that are subject to VAT are required to charge value added tax on all their taxable deliveries (i.e. goods and services) provided to customers for a fee or free of charge.

In Croatia, most delivered goods and provided services are taxed at a value added tax rate of 25 percent. The amounts they pay into the state budget under tax liability is determined as the difference between the value added tax they charge to customers and the input tax deducted from the invoices of their suppliers (credit method of collecting VAT). Organisations liable to pay VAT are entitled to deduct VAT charged by suppliers from incoming invoices for the purchase of products and services used for performing economic activities, and thus reduce the amounts they pay into the state budget under tax liability.

Non-profit organisations not subject to VAT bear this tax as end consumers. They do not charge VAT to their customers, so their deliverables are usually cheaper for the end user. However, these organisations are not entitled to deduct input tax from incoming invoices for purchased/acquired goods, but bear the charged VAT as part of the price of purchased items or services (e.g. as part of the price of office supplies, acquired fixed assets, etc.). This is why their deliverables cannot be cheaper by the total 25 percent compared to the same organisations that are subject to VAT, because their operating expenses are higher precisely by the VAT contained in the incoming purchase invoices.
 

Application for registration for value added tax purposes

As a rule, a person becomes subject to VAT from 1 January of the calendar year. Exceptions are newly-established organisations that are starting to make taxable deliveries and that can become subject to VAT from the moment of their establishment. Applications for entry in the VAT register are submitted to the competent branch office of the Tax Administration within the deadlines prescribed by Article 186 of the VAT Ordinance apply.

The competent tax administration is determined according to the location of the registered office of the non-profit organisation.

The following organisations are required to submit an application:
  • organisations with a turnover of taxable deliveries in the previous year of more than HRK 230,000 (this amount came into effect on 1 January 2013 and is applied to turnover realised in 2012)
  • organisations with a taxable turnover of less than that prescribed amount, but that, at their own request, wish to be registered for VAT purposes. 

Applications are submitted using the prescribed P-PDV Form, which can be purchased at any specialised bookstore that sells Official Gazette printed matter, or downloaded from the Tax Administration’s official website

P-PDV Form.

The deadline for submitting the application is 15 January for the current year, which means that taxpayers who submit the application by 15 January become taxpayers from 1 January of that year. A taxpayer may also be entered in the VAT register at their own request, in which case they are required to apply the ordinary taxation regime for the following three calendar years. In this case, the taxpayer charges VAT from the date specified in the application, which cannot be a date before the date of submission of the application. The application is considered approved if the Tax Administration does not issue a decision on rejecting the application within 8 days from the day of receipt of the application. After the expiration of that period, the Tax Administration enters the applicant in the VAT register from the date specified in the application.
 

Deadlines for value added tax payment

Taxable persons for the purposes of value added tax pay VAT in monthly or quarterly periods.

VAT is generally paid in monthly periods, and taxpayers whose turnover (value of delivered goods and provided services) amounted to less than HRK 800,000 in the previous year pay VAT quarterly, but they can choose to pay VAT in monthly periods. The criterion of HRK 800,000 in annual turnover also includes value added tax. As regards taxpayers paying VAT monthly, the VAT liability is due on the last day of the month for the previous month (28 or 29 February for January, 31 March for February, and so on). As regards taxpayers paying VAT quarterly, they are required to pay VAT within one month after the end of the quarter (30 April for the first quarter of the year, 31 July for the second quarter, and so on).
 

Exemption from VAT

An association does not pay VAT, and is not entitled to deduct input tax from the following:
  • provision of services and closely related deliveries of goods performed for the benefit of its members in exchange for membership fees paid in accordance with the statute or other rules, provided that such exemption would not distort competition
  • membership fees collected from its members in order to fulfil the tasks laid down in the statute, when the membership fee is defined equally for all members according to a certain criterion; if an association delivers certain goods or provides certain services in exchange for the collected membership fee, then the membership fee is considered a fee paid for those deliveries and provisions, which means that VAT is calculated and paid for them in case the association is registered for VAT purposes; the exemption applies regardless of whether the members of such associations pay membership fees in accordance with the statute, or their activity is based on donations and voluntary contributions
  • donations, voluntary contributions and gifts for the purpose of performing the activity for which the association was established, grants from the state budget and budgets of local and regional self-government units, as well as other funds acquired in accordance with the law for performing the activities for which the association was established; funds can be considered donations, voluntary contributions or gifts only if the association does not provide any consideration for the funds received; when such funds are given in exchange for a consideration, then they are not considered a donation, but rather a fee for the delivery of goods or provision of services.
 

Gifts and donations

Gifts and donations for which a non-profit organisation does not provide any consideration to the donors are not taxable. A non-profit organisation may receive donations in cash, goods, services and other forms of tangible assets that have market value, and it does not pay tax on received donations.

Corporate taxpayers can include in their operating expenses, which reduce their tax base, donations in kind or in cash made for cultural, scientific, educational, health, humanitarian, sports, religious and other purposes to associations and other persons who perform these activities in accordance with special regulations, amounting to maximum two percent of total revenue generated in the previous calendar year.

Persons liable to income tax can, on the basis of non-profit donations, increase their personal deduction (personal deduction is a non-taxable part of income) by the amount of donations, but not more than two percent of total income earned in the same calendar year.

Tax relief for donations is prescribed not only for legal and natural persons engaged in economic activity, but also for all natural persons earning income from employment or other income. So, for example, a person who earns income only from employment, and makes a donation for one of the listed non-profit purposes during the year, can submit the ZPP-DOH Form in a special procedure for determining the annual income tax in order to exercise the right to an increased personal deduction for the amount of expenditure related to donations, and thus reduce the tax base (but only up to 2% of income used to calculate the annual income).

By way of exception, a personal deduction above 2% may also be granted on the basis of donations, provided that they are made in line with the decisions of competent ministries on the implementation and financing of special programmes and actions, and not for the regular activities of recipients of donations. In this case, it is necessary to obtain a certificate from the competent ministry, depending on the purpose for which the donation was made. The amount of a tax deductible donation is thus practically unlimited, with a prior certificate obtained from the competent ministry which clearly shows the purpose and programme for which the donation will be used. Which ministry is competent depends on the purpose for which the donation is made and the activity of the organisation for which the donation is intended. If the donation exceeding two percent of total income is made for sports, it is necessary to obtain a certificate from the Ministry of Science and Education; if the donation is intended for health institutions, a certificate from the Ministry of Health will be required, etc.
 

Income tax / contributions for compulsory insurance

Persons liable to income tax are natural persons. However, a non-profit organisation is subject to income tax when it pays remuneration taxed with withholding income tax to natural persons. A non-profit organisation is liable to pay contributions from and on salaries when it pays its employees, with whom it has an employment relationship, salaries and gives other monetary and non-monetary compensation that is considered salary from employment in tax terms. Also, a non-profit organisation is liable to pay contributions from and on the base on the grounds of other income paid to a natural person.

Membership fees and taxes

The funds acquired by the association through the collection of membership fees, the purpose of which is fulfilling the tasks laid down in the statute, constitute the assets of the association. Such membership fee is not taxable by any tax. This also applies to associations liable to pay VAT. They do not apply VAT to the funds collected from membership fees.

By way of exception, if associations deliver certain goods or provide certain services in exchange for the collected membership fee, then the membership fee is considered a fee paid for those deliveries and provisions, which means it is subject to VAT (in case the association in question is registered for VAT purposes). However, there is also an exception, prescribed by Article 39 of the VAT Act.

That provision states that services and closely related deliveries of goods which non-profit legal persons, whose objectives are political, trade unionist, religious, patriotic, philosophical, charitable or in other way non-profit in nature, perform to their members in their common interest in exchange for membership fees determined in accordance with the rules of those persons, are exempt from VAT, provided that such exemption would not distort competition.

Recording of business events must be based on authentic, proper and true accounting documents. This means that an association must issue a certain document for the received membership fee. The regulations do not specify which document that is, so it can be, for example: an invoice, a confirmation of payment, a payment slip, etc.

In order for that document to be proper and authentic, it must contain at least the following information:
  • name, address and PIN (OIB) of the association
  • place and time of compiling the document (e.g. Zagreb, 05/02/2015)
  • type and number of the document (e.g. payment slip no. 6/2015)
  • an indication that it relates to the payment of the membership fee, and the period to which it refers (e.g. membership fee for 2015)
  • name and surname (business name) of the membership fee payer
  • total amount of paid membership fee.