Croatia: UK And Croatia Signed Double Taxation Avoidance Agreement

Croatia and the UK have signed an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains. The Agreement was duly signed on January 15th, 2015 and it shall enter into force when both countries complete their Parliamentary procedures and exchange a diplomatic note, which is expected by the end of 2015.

The Agreement applies to persons who are residents of one or both Contracting States in regards to (i) the taxes on income and on (ii) capital gains imposed on behalf of a Contracting State, irrespective of the manner in which they are levied. The Agreement is expected to have an impact on increase of direct investments between Croatia and UK.

Furthermore, legal entities who conduct international transport of goods between UK and Croatia pay income tax only in their resident State. Same also applies to the corporate income tax in general, including income from international shipping and air transportation, provided however that the company does not have a permanent establishment (PE) in other State. In that case, the company’s PE shall be liable for tax in the State where the services were provided.

Furthermore, according to the agreement a 5% withholding tax rate shall be applicable in the Source State, on interest and royalty payments. With regards to dividends, a 5 % withholding tax rate shall apply, provided that the beneficiary has a controlling interest (directly or indirectly) of at least 25% in the share capital of the dividend paying company. A 15% rate will apply in the case where the dividends are paid out of income (including gains) which is derived directly or indirectly from immovable property by an investment vehicle which distributes most of this income annually and whose income from such immovable property is exempted from tax. In a different case, a 10% withholding tax shall apply.

Conclusively, board members, artists, sport professionals and workers can pay their income tax within the contractual State where the income is created, whereas the pension income is taxed in the State where the beneficiary is resident.

Equal treatment towards companies of both countries is also stipulated in the Agreement as the principle, and the procedure of mutual cooperation with the usage of diplomatic channels, which would contribute to a more effective problem solving.

The Agreement will have a significant impact on transactions between UK and Croatia, even though the UK restricted free movement of workers from and to Croatia for 7 years as of July 1st, 2013. As previously said, the main goal is to make an economic impact on the Croatian and UK companies