EMCC European Monitoring Centre on Change

Tax incentives

Croatia
Phase: Anticipation
Type:
  • Access to finance
  • Support for digitalisation
  • Fostering innovation
  • Support of companies' growth
  • Support of internationalisation
  • Support of SMEs
Last modified: 29 June, 2021
Native name:

Porezne povlastice

English name:

Tax incentives

Coverage/Eligibility

Firms of all sizes that invest in technological modernisation, production process change, or business enlargement and internationalisation are eligible for the grant application, provided that their investment is higher than €50,000 for micro enterprises and higher than €150,000 for other companies and provided that a certain number of job positions (a minimum of three in a micro enterprise, and five for the other enterprises) are opened within three years from launching the investment. The investment must be made in assets that are subject to depreciation. Furthermore, incentive measures can be used by enterprises registered in the Republic of Croatia investing in fixed assets the minimum amount of €50,000 together with creating at least 10 new jobs for ICT system and software development centres and €500,000 for investment projects in modernising and increasing business process productivity. 

Main characteristics

For micro enterprises, the income tax rate is reduced to 50% of the statutory income tax rate for five years from the initial investment, provided that a minimum of three new jobs have been created. 

For larger investments of up to €1 million, the income tax rate is reduced to 50% of the statutory income tax rate for 10 years from the start of the investment, provided that the enterprise creates a minimum of five new jobs due to the investment project, and within one year from the beginning of the investment.

The number of newly employed is 10 for ICT system and software development centres. 

For investments of between €1 and €3 million, the income tax rate is reduced to 75% of the statutory income tax rate for 10 years from the start of the investment, provided that enterprise creates a minimum of 10 new jobs due to the investment project, within one year from the beginning of the investment. For investments above €3 million, the income tax rate is reduced to 100% of the statutory income tax rate for 10 years from the start of the investment, provided that enterprise creates a minimum of 15 new jobs due to the investment project, within one year from the beginning of the investment.

An applicant can be approved for the tax credit without actually creating new jobs if they submit proof that they have invested in modernisation of the technological process and if they keep the same number of workers during the entire period of tax credit usage.

The total amount of tax incentives is calculated in absolute terms as the difference between the tax amount according to the Act on company income tax and the amount calculated under to the Act on encouraging investments. Certain rules need to be fulfilled regarding the investment:

  • the investment project must be pursued exclusively in the business premises of the grant beneficiary and
  • it must be an investment in assets that are subject to depreciation only.

Regional and local governments are not directly involved in this programme but the can provide help in construction of infrastructure projects, primarily by giving the land without charges or for a small amount. Furthermore, they can supply electricity network, water, sewage system and/or build an adequate road network to the location of new investment. This does not happen very often in Croatia, but there are some positive examples in Western and Northern part of the country.

Funding

  • Local funds
  • National funds

Involved actors

National government
Funding; the Ministry of Entrepreneurship and Crafts is in charge of grant approval for the SME sector, while the Ministry of Economy approves the grants to large enterprises.
Regional/local government
Regional and local governments are not directly involved in this programme but the can provide help in construction of infrastructure projects, primarily by giving the land without charges or for a small amount.

Effectiveness

According to the previous Investment Promotion Act, effective from October 2015 till the end of November 2017, there has been a total of 658 applications for the use of grants for investment projects by small, medium and large enterprises. Of these, 123 applications relating to large enterprises, and 535 applications to small and medium-sized enterprises. By June 2017, 48 companies' applications had been withdrawn, while 24 applications were rejected. The planned investment ceiling for a total of 586 investment projects (approved projects and projects under development) amounts to HRK 29.8 billion (€ 3.97 billion), with the planned opening of 17,615 new jobs. Of this, HRK 13.3 billion (€ 1.77 billion), and 6,908 new jobs refer to investment projects by large enterprises, while HRK 16.5 billion (€ 2.20 billion), with the planned opening of 10,707 new jobs, are related to small and medium-sized investment projects. According to the data by the Croatian National Bank (2019), the increase in capital investments might make a considerable contribution to economic growth in 2019. The results in the first three quarters of 2019 suggest that the investment growth rate in 2019 might stand at 8.2%, almost twice the rate of 4.1% recorded in 2018. Most of the investment in Croatia are from Austria, Netherlands, Germany, Hungary in financial intermediation, trade, real estate and telecommunication.  

Currently, incentive measures for investment projects in the Republic of Croatia are regulated by the Act on investment promotion (OG, No. 102/15, 25/18, 114/18, 32/20) and pertain to investment projects in:

  • manufacturing and processing activities
  • development and innovation activities
  • business support activities
  • high added value services.

For investment in development and innovation activities, a non-repayable grant shall be approved for the purchase of plant/machinery amounting to 20% of the actual eligible costs for purchasing plant/machinery, in the maximum amount of € 500,000 in equivalent HRK value, provided that the purchased plant/machinery represents high technology equipment.

There are also relatively complicated employment incentives that depend on the county unemployment rate, where higher unemployment rate enables higher incentive rate to eligible costs of jobs creation. The specified amount of the grant refers to the unemployed, who are registered as unemployed with Croatian Employment Service (CES) for at least 6 months, regardless of the length of the work experience and level of education, people older than 50 years registered as unemployed with CES and persons without work experience registered as unemployed with CES. 

However, legal provisions can help attract investors only to a certain point. Croatia has lengthy court proceedings and holds these court proceedings when it is necessary to protect the investments of investors due to legal insecurity. Moreover, regulations in Croatia often change. Until these issues are properly addressed, Croatia is likely to continue to encounter difficulty in attracting and sustaining investments. A favourable economic climate must be built on all levels, that is the government, the state, counties, cities and municipalities. 

Strengths

It is a horizontal measure that benefits all enterprises except those that cannot apply for the tax credit due to sectoral particularities and enterprises that have severe business problems. If newly created jobs are not preserved for the foreseen period, the tax credit beneficiary has to return the entire amount of tax credit. Similarly, in the case of job reductions during the period of the tax credit usage, a beneficiary must return the entire tax credit received together with the corresponding interest accrued whose maximum percentage is capped by a legally binding decree from the Ministry of Finance.

On 23 May 2019, the government of the Republic of Croatia adopted a Decision on the establishment of the National Contact Point as a permanent mechanism for the promotion and implementation of the OECD Guidelines for Multinational Enterprises for Responsible Business Conduct. The National Contact Point is tasked with promoting and providing information on the guidelines and the implementation of guidelines, for contributing to the resolution of issues related to the implementation of the guidelines in specific instances, for the initial assessment of whether the question asked merits further examination, for the provision of good services to assist parties in solving these issues, including access to conciliation or mediation procedures. The National Contact Point consists of two bodies: the Secretariat and the External Body. The Secretariat of the National Contact Point is responsible for coordinating all activities of the National Contact Point, providing administrative support to the work of the External Body, drawing up an annual report on the activities of the National Contact Point to be submitted to the OECD Investment Committee and participating in annual meetings of the OECD Working Group on Responsible Business. The Secretariat of the National Contact Point is made up of one official of the Ministry of Foreign and European Affairs and one official of the Ministry of Economy, Entrepreneurship and Crafts.

Weaknesses

Investing in the modernisation of the technological process allows companies to access credit without creating any new employment. Moreover, although there is an obligation to preserve created job positions for five years in large firms and three years in SMEs, how this is controlled and whether the same workers are employed all the time remains vague. A particular issue in Croatia is constant changes in the structure and application of various laws, particularly those related to the tax system, which causes legal uncertainty. This legal uncertainty is a serious hindrance for investors. Finally, there is also a change in a responsible state body, so instead of previous Agency for investment and Competitiveness, from 1 January 2019, the Ministry of Economy, Entrepreneurship and Craft is in charge of investments processes in Croatia. 

Examples

Ikea, Rugvica, Zagreb.
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