recent tax developments 1/2023

Conversion of the share capital of companies

Following the introduction of the euro as official currency in the Republic of Croatia, Croatian corporations are required to convert the nominal value of their statutory capital and of shares into euro.

The following summarizes the most important requirements and legal amendments.

The Act on the introduction of the euro as the official currency in the Republic of Croatia stipulates that companies are obliged to recalculate the existing amounts of share capital and its parts attributable to stocks or shares by applying a fixed conversion rate from kuna to euro. The amounts obtained in this way must be adjusted at the same time with the prescribed minimum amounts of the share capital and its parts in the manner regulated by the Companies Act.

Joint-stock companies are obliged to apply with the registry court for the registration of the described changes within one year from the date of introduction of the euro, while limited liability companies are obliged to do the same within 3 years from the date of introduction of the euro.

Furthermore, the Act on Amendments to the Companies Act prescribes the lowest amount of share capital for a joint-stock company. Instead of the previous HRK 200,000, the share capital now amounts to EUR 25,000, and the lowest nominal amount of one share, which was previously HRK 10, is now one euro.

The lowest amount of share capital of a limited liability company is EUR 2,500 instead of the previous HRK 20,000. The nominal amount of each business share may not be less than EUR 10 instead of the previous HRK 200.

Finally, the lowest amount of share capital of a simple limited liability company now amounts to one euro instead of the previous HRK 10, which is the same amount as the lowest nominal amount of one business share in such a company.

Consequences of non-compliance

Failure to meet the deadlines prescribed by the Act on the introduction of the euro as the official currency in the Republic of Croatia shall lead to the occurrence of reasons for the termination of the company, and the court will ex officio remove the company from the Commercial Register.

Change of the arm’s length interest rate

The Official Gazette no. 151/2022 of 7 December 2022 includes the arm’s length interest rate for related party financing. The new interest rate for tax purposes has been for 2023 set at 2.4 % and shall as well apply to existing loan agreements.

The reduction of the interest rate has impact on the tax deductibility of interest expenses for inbound related party financing as well as revenue recognition for outbound related party financing. The same applies to related party financing between domestic entities if one of the related parties has a preferential profit tax status (applies a lowered than the prescribed profit tax rate or is exempt from corporate profit taxation) or is entitled to use tax losses carried forward from previous tax periods.

Exceptionally, for purpose of determining the arm’s length nature of related party financing, taxpayer can, in addition to the published interest rate, use a different interest rate provided however that it can prove that such interest rate is in line with the arm’s length principle and that it applies it to all financing agreements.

Home office flat rate

As a result of changes to the Labor Act, work at a separate location (home office) was among other things provided with a definition. In addition, the Income Tax Ordinance stipulates the possibility of a tax-free payment of a new monetary flat rate compensation to cover the costs of employees for such work of up to EUR 3.98 per day of working from home, or a maximum of EUR 66.37 per month.

We are happy to assist you in case of further questions.