Croatia: VAT legislation changes – Impact on non-resident businesses

Croatia: VAT legislation changes – Impact on non-resident businesses 

Within the third round of tax reform, the Croatian Government recently proposed further tweaks to the taxation system. Once the law amendments are approved by the Parliament, the changes will produce effects from 1 January 2019. 

Here we highlight the main changes to the Croatian VAT legislation, which may have impact on foreign entrepreneurs doing business in Croatia. 

1.  Abolishment of general reverse charge mechanism on inbound B2B supplies

Based on the current rules, Croatian VAT on B2B supplies made by a person not established in Croatia is payable by the recipient of the supply (applying the reverse charge procedure). This applies even where non-resident supplier has a valid Croatian VAT ID number. Non-resident supplier should in that case report such supply to the Croatian Tax Authority (by filing “INO-PPO” form).

In line with the proposed changes of the VAT Act, reverse charge procedure will not apply (on certain types of supplies) if the non-resident supplier has a valid Croatian VAT ID number. This means that the supplier will need to pay the Croatian VAT at the applicable rate. INO-PPO reporting will consequently be abolished since such supplies will be reported in a Croatian VAT return of the supplier.

Impact of the above may be examined on an example of a German entity that buys goods in Croatia and sells them on to another Croatian entity (customer):

• Based on the current rules, the Croatian customer needs to account for Croatian VAT when purchasing the goods from the German entity. If the German entity has a Croatian VAT ID number (obtained due to some previous intra-Community acquisition of goods in Croatia), the Croatian customer is still liable to apply the reverse charge. Since the German entity has a Croatian VAT ID number, it should report the supply via INO-PPO form.
• After 1 January 2019, provided the supplier is VAT registered in Croatia, the reverse charge will not apply and the supplier (German entity) will be liable to charge and pay Croatian VAT to the Croatian Tax Authority and report it in its Croatian VAT return.     

2. Change of triangulation simplification rules 

Conditions for application of the triangulation simplification, as currently defined by the Croatian VAT legislation, are more restrictive than rules in other EU countries.  

Based on the current Croatian VAT Act, triangulation simplification may be used in cases where party B (intermediate supplier) is neither established nor registered for VAT purposes in Croatia. On the other hand, provisions of the EU VAT Directive only require that party B is not established in the destination country (the country of the final customer). 

Based on the proposed amendments, Croatian rules on triangulation simplification will more closely align with the provisions of the EU VAT Directive, meaning that it will be possible to apply triangulation simplification even if party B is registered for VAT purposes in Croatia. 

3. Refund of Croatian VAT to non-EU resident entrepreneurs  

As of 1 January 2019, conditions for procedure of refund of Croatian VAT to non-EU resident entrepreneurs will align with those applicable to refunds to EU resident entrepreneurs. 

Based on the current provisions of the VAT Act, refund of VAT to non-EU residents is possible if they do not perform supplies of goods or services in Croatia, except the following:

• supplies of services for which, under the reverse charge rules, the VAT liability is shifted to the customer; or
• specific exempted (zero-rated) transportation services and services ancillary thereto.

In line with proposed amendments, non-EU entrepreneurs will be able to request refund of the Croatian VAT even if they performed supplies of goods subject to reverse charge mechanism.

If you wish to receive more details on the impacts of the tax reform in Croatia or you need advice on any Croatian tax matter, feel free to contact us.