UK – Croatian DTA entered into force

On January 8, 2016 the UK HM Revenue & Customs issued a media release announcing that on November 19, 2015 the Agreement between the United Kingdom of Great Britain and Northern Ireland and the Republic of Croatia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains (Hereafter: the new DTA) entered into force.
The DTA will replace the Convention between the Socialist Federal Republic of Yugoslavia and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation with Respect to Taxes on Income, which was signed at London on November 6, 1981.

Based on Article 27 of the new DTA (“Entry into force”) the fact that the new DTA entered into force on November 19, 2015 means that the provisions of the new DTA shall have effect:
(a) in the United Kingdom:

(i) in respect of taxes withheld at source, to income derived on or after January 1, 2016;
(ii) subject to sub-paragraph (a) (i) above: in respect of income tax and capital gains tax, for any year of assessment         beginning on or after April 6, 2016;
(iii) in respect of corporation tax, for any financial year beginning on or after April 1, 2016;

(b) in Croatia:

(i) in respect of taxes withheld at source, to income derived on or after January 1, 2016;
(ii) in respect of other taxes on income and capital gains, to taxes chargeable for any taxable year beginning on or      after January 1, 2016.

Below we will discuss some of the provisions of the new DTA of which we think they might interest our readers.

Taxes covered
Based on Article 2, Paragraph 3 of the new DTA (“Taxes covered”), the existing taxes to which this Agreement shall apply are in particular:
(a) in the case of the United Kingdom:

(i) the income tax;
(ii) the corporation tax; and
(iii) the capital gains tax;

(b) in the case of the Republic of Croatia:

(i) the profit tax;
(ii) the income tax; and
(iii) the local income tax and any other surcharge levied on one of these taxes.

Paragraph 4 of Article 2, subsequently arranges that the new DTA shall also apply to any identical or substantially similar taxes that are imposed after the date of signature of this Agreement in addition to, or in place of, the existing taxes.

Permanent establishment
Paragraph 3 of Article 5 of the new DTA (“Permanent establishment”) arranges that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months

Immovable property
Article 6, Paragraph 1 of the DTA (“Income from immovable property”) arranges that income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.

With respect to immovable property Article 13, Paragraph 1 of the new DTA (“Capital gains”) arranges that gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.

Article 13, Paragraph 2 subsequently arranges that gains derived by a resident of a Contracting State from the alienation of:
(a) shares, other than shares in which there is substantial and regular trading on a Stock Exchange, deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State, or
(b) an interest in a partnership or trust, more than 50 per cent of the value of the assets of which consists of immovable property situated in the other Contracting State, or of shares referred to in subparagraph (a) of this paragraph,
may be taxed in that other State.

Associated enterprises
Article 9, Paragraph 2 of the new DTA (“Associated enterprises”) contains a so-called appropriate adjustment clause.

Dividends
Article 10, Paragraph 2 of the New DTA (‘Dividends”) maximizes the withholding tax a Source State is allowed to withhold over dividend distributions as follows:
(a) 5 per cent of the gross amount of the dividend if the beneficial owner is a company which is a resident of the other      Contracting State and controls, directly or indirectly, at least 25 per cent of the capital of the company paying the dividends (other than where the dividends are paid by an investment vehicle as mentioned in subparagraph (b));
(b) 15 per cent of the gross amount of the dividends where those dividends are paid out of income (including gains)           derived directly or indirectly from immovable property within the meaning of Article 6 by an investment vehicle         which distributes most of this income annually and whose income from such immovable property is exempted             from tax;
(c) 10 per cent of the gross amount of the dividends in all other cases.

Article 10, Paragraph 3 subsequently arranges that a Source State is not allowed to withhold dividend withholding tax over dividend distributions if the beneficial owner of the dividends is a pension scheme.

Article 10, Paragraph 7 of the new DTA contains an anti-abuse clause, which reads as follows: “No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid to take advantage of this Article by means of that creation or assignment.”

Interest
Article 11, Paragraph 2 of the new DTA (“Interest”) maximizes the withholding tax that a Source State is a allowed to withhold over interest payments to 5 per cent of the gross amount of the interest if the beneficial owner of the interest is a resident of the other Contracting State.

Article 11, Paragraph 7 of the new DTA contains an anti-abuse clause, which reads as follows: “No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.”

Royalties
Article 12, Paragraph 2 of the new DTA (“Royalties”) maximizes the withholding tax that a Source State is a allowed to withhold over royalties to 5 per cent of the gross amount of the royalties if the beneficial owner of the royalties is a resident of the other Contracting State.

Article 12, Paragraph 6 of the new DTA contains an anti-abuse clause, which reads as follows: “No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties are paid to take advantage of this Article by means of that creation or assignment.”

Other
Furthermore the new DTA contains provisions regarding a Mutual Agreement Procedure (Article 24) and regarding the Exchange of Information (Article 25).

Click here to be forwarded to the text of the new DTA as available on gov.uk, which will open in a new window.