ZAGREB, Dec 20, 2020 - Croatia is entering 2021 with a fifth round of tax reform under which the two income tax rates will be reduced from 24 to 20% and from 36 to 36%, while the profit tax rate for businesses with an annual income of less than HRK 7.5 million would be cut from 12 to 10%.

The fifth round of tax reform, which will reduce the tax burden by an estimated HRK 2 billion, is governed by the amended laws on income tax, profit tax, VAT, fiscalisation in cash transactions and local government financing, which come into force on January 1.

Lower income tax rates - higher income for about 900,000 taxpayers

The amended Income Tax Act will result in higher wages or pensions as the lower rate will be reduced from 24 to 20% and the higher rate from 36 to 30%. The basic non-taxable monthly income remains at HRK 4,000, while monthly incomes of up to HRK 30,000 will be subject to the 20% tax rate instead of the 24% as has been the case so far and monthly incomes of above HRK 30,000 will be taxed at 30% instead of the present 36%.

Should employers use these lower tax rates to increase their workers' wages, that would mean an increase in net monthly pay of between several dozen kuna to up to 2,000 kuna, depending on pay rates, benefits for dependants and local tax rates.

Lower taxes for youth

The amended Income Tax Act also provides for tax relief for young people of up to 30 years old. Young people aged up to 25 years will be exempt from income tax and those aged between 26 and 30 will be entitled to an income tax cut of 50%.

Profit tax rate reduction

Under the amended Profit Tax Act, as of January 1 the profit tax will be reduced from 12 to 10% for businesses with an annual income of up to HRK 7.5 million. The lower rate will also apply to all non-profit organisations that pay a lump-sum tax rate, to dividend payments and to performances by foreign performers. 

For businesses with an annual income of more than HRK 7.5 million, the profit tax rate remains at 18%.

(€1 = HRK 7.5)

As Darko Bicak/Poslovni Dnevnik writes on the 27th of March, 2019, the president of the board of EY Croatia talks about the state of the country, the challenges and perspectives of the Croatian economy, and the need to promote successful stories, which they push forward through the Entrepreneur of the Year event.

Even though it has nominally existed for thirty years in the market economy, it's still necessary to properly promote entrepreneurship and entrepreneurs in the Republic of Croatia, and for this reason, the global consultancy company Ernst & Young (in Croatia, EYCroatia) is organising, for the fifth time in Croatia, the Entrepreneur of the Year project.

Why it's still necessary to promote entrepreneurship and what the general situation is with the prospects of the Croatian economy was discussed by Berislav Horvat, the president of the board of EY Croatia.

All analyses of the Croatian market show that the lack of workforce is the main challenge of Croatia's economic development. Do you see this as a short-term challenge that will, more or less, be resolved relatively quickly, or as a factor that will have more and more of an impact on the structure and development of the Croatian economy?

The labour shortage is definitely one of the major challenges facing the Croatian economy. The problem is no longer financing and a lack of capital, but just a lack of a workforce entirely. This problem will not be resolved that quickly and will represent a limiting factor for further business growth.

Although entrepreneurs and companies operating in Croatia mostly do have growth plans, the lack of a workforce could be a key obstacle. This applies to companies in various industries, from tourism and hospitality, construction and industrial production, to the IT sector.

Have other countries in ''New Europe'' encountered such challenges, and how did they solve them, or are Croatian specifics at play here, too?

Croatia isn't an exception here. Other European countries have been met with the same problems, where people were emigrating, but with growth and development, the demand for labour increased, so wages rose, which led to people returning. For us, the most important thing is to create a stable business environment that will enable entrepreneurs and companies to invest because that's a prerequisite for further employment.

On the side of the state, it's crucial to further reduce income tax and abolish the highest tax rate. This would increase the net salaries of employees, Croatia would become more attractive, and those who left Croatia would have a reason to return to it. I believe that wage growth in Croatia is a key factor that will affect the return of some of the people who have left.

New technologies, the so-called 4.0 industry, is increasingly affecting the global economy. Where is Croatia there?

We've noticed that in Croatia, companies are increasingly investing in digitisation. We, with a lot of companies, are working on a digital strategy to improve business or cost savings and this is definitely the direction in which companies need to develop. We hope that we'll soon be able to see the results of the announced state-level measures related to the digitisation of public administration, for example, the digitisation of the process of opening up companies.

How did 4.0 reflect on the work and client requests in consulting companies such as yours?

Clients are quite interested in what's going on abroad and how outsourcing companies are dealing with digitisation and the challenges it brings. They're looking for examples and the best practices. We adapted to the market situation by bringing an entire digital team to us last year. Now we can respond to market demands and provide a more rounded service.

In addition to advice, we can offer the implementation of complete digital solutions. This means that in addition to the tips of digitising today, we also provide a service for designing and programming web pages and other digital content. Clients are no longer just looking for advice, but a full service, which allows us to be innovative.

EY is organising the fifth EY Entrepreneur of the Year project. How has this program influenced the perception of entrepreneurship in Croatia and what benefits are there for participants, especially for the winners?

A lot has changed in these five years since we started the program. Before that, there wasn't much talk about entrepreneurship, startups and other interesting topics [we see] today. I believe that by putting out good entrepreneurial stories to the public, we've contributed to this shift in focus and helped our entrepreneurs become more socially accepted.

By participating in the program, entrepreneurs are given the opportunity to present themselves, their businesses and their successes, while the winner of each year is taken to Monaco in June to the world selection of EY Entrepreneurs of the Year. In those five days of various events, the entrepreneurs can connect and exchange experiences and gain a unique opportunity to present themselves to the whole world.

Make sure to follow our dedicated business page for much more.

Click here for the original article by Darko Bicak for Poslovni Dnevnik