Croatia

  1. A. Transfer pricing documentation requirement
    1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?
    2. What is the content of the documentation that must be prepared?
    3. What is the deadline or timescale for providing transfer pricing documentation to the tax authorities (is it to be provided for example upon filing of the tax returns, at the beginning of a tax audit, or on the specific request of the tax authorities)?
    4. In the event that the documentation is not provided within the applicable timescale, or is incomplete, do documentation-related penalties apply in your jurisdiction? If so, please detail the penalties and the circumstances in which they do and do not apply.
    5. Does the absence or incompleteness of documentation reverse the burden of proof as regards the arm’s length character of the transactions?
    6. In the event that the tax authorities (i) impose documentation-related penalties and (ii) make a transfer pricing reassessment, does the imposition of documentation-related penalties prevent the taxpayer from initiating any mutual agreement procedure which may be contained in an applicable tax treaty (or, for EU countries, the procedure contained in the EU Arbitration Convention) with a view to eliminating any double taxation resulting from the transfer pricing reassessment?
    7. Any other relevant aspect not addressed above?
    8. B. Country-by-Country reporting (“CbCR”)
    9. Did your jurisdiction implement the obligation to file a CbCR? If not, is the introduction of the CbCR in your jurisdiction contemplated and, if so, when?
    10. If the obligation to file a CbCR is in force, what is the tax year from which this obligation applies and what is the deadline for filing the CbCR?
    11. Which taxpayers have to file a CbCR in your jurisdiction?
    12. Is the content of the CbCR fully in line with the OECD model (final report on Action 13 of the BEPS project)? If not, what are the differences?
    13. What is the penalty for failing to file the CbCR on time? Can local subsidiaries of a foreign group suffer the local penalty if the foreign group has not filed the CbCR?
    14. Are there tax treaties in force in your jurisdiction allowing the communication of CbCR with other jurisdictions?
    15. Any other relevant aspect not addressed above?
  2. C. As the case may be, other documentation / filing requirement in relation to transfer pricing?
    1. In your jurisdiction, are there any other documentation / filing requirements in relation to transfer pricing?
    2. If so, what is the content of such documentation / filing requirement? What language(s) are to be used by taxpayers?
    3. What is the deadline for meeting this documentation / filing requirement?
    4. Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?
    5. What is the penalty for failing to meet this requirement on time?
    6. Any other relevant aspect not addressed above?

A. Transfer pricing documentation requirement

1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?

Under the Corporate Profit Tax (“CPT”) Law, business relations between associated persons are only recognised for tax purposes if the taxpayer has, and provides, information about the associated persons and its business relations with those persons, the methods used to determine comparable market prices, and the reasons for selecting a particular method. In that sense, taxpayers are obliged to maintain transfer pricing (“TP”) documentation. This obligation applies to all taxpayers and all intragroup transactions, no thresholds are applicable.

From 1 January 2016, all taxpayers are obliged to report transactions with related parties in a special form and submit it along with the tax return.

2. What is the content of the documentation that must be prepared?

The Croatian tax legislation does not prescribe the exact format/form of the transfer pricing documentation required. While the CPT Law makes general provision as to which transfer pricing methods can be used, the CPT Regulations give more detail as to what the taxpayer must do in order to establish / document whether a transaction was performed at arm’s length, specifically:

  • Collect information about the group, the position of the taxpayer within the group and the analysis of intragroup transactions, i.e. general information which may be the same for other members of the group, as well as specific information relating to the taxpayer;
  • Identify the chosen TP method, describe the data, methods and analyses conducted to determine transfer prices and explain why the particular method was chosen;
  • Compile documentation as to the assumptions and estimates adopted in determining transfer prices (in relation to comparability, functional analysis and risk analysis);
  • Compile and document all calculations performed in applying the chosen transfer pricing method, in relation to the taxpayer in question and the comparable taxpayers;
  • Appropriately update any documentation from previous years that is relied upon in respect of the current year, showing any adjustments which are necessary to reflect material changes of circumstances;
  • Compile documentation that demonstrates the basis, or otherwise supports or is mentioned in the analysis of transfer prices. In practice, in respect of the transfer pricing documentation requirements, the Croatian tax authorities follow the OECD guidelines and EU Joint Transfer Pricing Forum (“EU JTPF”) recommendations

Therefore, the transfer pricing documentation compiled should include, at a minimum, the following:

  • On the group level (master file):
    • History and activities of the group – legal, functional, financial, management and organisational structure;
    • Economic role of the affiliated companies within the group;
    • Intellectual property ownership and use.
  • On the level of the subject / local company (country-specific file):
    • Activities / functions of the company and market;
    • Functional analysis;
    • Usage of intellectual property based on contractual relationships;
    • Financing of the company.
    • Analysis of transactions between related parties
    • Functional analysis of the transactions (definition of functions, risks, economic and financial conditions of the contracts);
    • Analysis of transactions with non-related parties;
    • Analysis of turnover and margin for each transaction;
    • Analysis of transfer pricing methods, with an explanation of the method applied;
    • Documents proving that the selected method reflects the arms’ length principle.
a) Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)?

Under Croatian tax legislation all transactions between associated persons must be documented; no thresholds are applicable.

b) What is the definition of “associated enterprises” for the purposes of this requirement (in particular, are transactions between a permanent establishment and its head office in the scope of the documentation requirement)?

Under Croatian corporate tax legislation, resident and non-resident persons are regarded as associated:

  • Where one of them directly or indirectly participates in the management, control or capital of the other;
  • Where the same persons participate, directly or indirectly, in their management, control or capital.

Note, however, that the transfer pricing rules also apply to intragroup transactions between resident companies if one of them:

  • Is subject to corporate profit tax at a rate below the standard rate, or is exempt from corporate profit tax; or,
  • Has tax losses carried forward.
c) For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD?

Croatian Tax Authorities accept documentation prepared in line with the EU TPD recommendations.

d) For all countries (and, in particular, OECD countries), is the content of the documentation similar to that described in the revisions to chapter V of the OECD transfer pricing guidelines (final report on Action 13 of the BEPS project)? If not, are taxpayers entitled to choose between the local requirements and the OECD approach?

See above. Croatian tax legislation does not prescribe exact form of documentation, but rather scope of information that have to be enclosed. A taxpayer may choose to apply any approach provided that it fulfils Croatian legislation requirements.

e) Do taxpayers which are not established in your jurisdiction need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer in your jurisdiction to provide information which is located in another state?

The tax authorities can require the taxpayer to submit all business books, records, business documentation or other documents held by the taxpayer or any other person in possession of required documentation, keeping in mind the principle of efficiency under which the tax audit should be restricted to essential facts that could increase or decrease tax liability.

Additionally, under international cooperation agreements, the tax authorities may request the relevant information from the authorities in other jurisdictions.

f) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?

Generally, the tax authorities accept regional benchmark studies, but it is recommended to submit local benchmarks, if possible.

g) If comparable studies are to be provided in general, are safe harbours / specific circumstances exempting taxpayers from preparing benchmark studies (such as the EU Joint Transfer Pricing Forum guidelines on low value adding services1Report called “Guidelines on low value adding intra-group services” adopted by the European Union Joint Transfer Pricing Forum during the meeting of 4 February 2010. or revisions to chapter VII of the OECD transfer pricing guidelines about low value adding intra-group services) in your jurisdiction or are there situations in which tax authorities do not request benchmark studies? If so, in which circumstances taxpayers are exempted from benchmark studies?

There are no safe harbours provided for by Croatian legislation. No taxpayer is exempted from benchmark studies.

In practice, Croatian Tax Authorities may on a case-by-case basis accept to exempt taxpayer from benchmark studies.

In the document “Manual on transfer pricing audit”, published by the Ministry of Finance, it is stated that the “normal” mark-ups for the internal services between relating companies may vary between 3% and 8%. The mark-ups outside of this range should trigger detailed analysis of intra-group costs. Mark-up within this range does not mean that the whole calculation is correct and that it will be automatically accepted by the tax authorities. However, in practice, the mark-ups within the stated range are usually acceptable, under the condition that the cost base is correctly calculated and supported by an appropriate documentation.

The document refers to the intragroup services generally, with no distinction between low value adding services and high value adding services. However, in case of intragroup management services that comprise different types of services (such as IT, legal, accounting), a separate analysis of each type of service is recommended to assess the appropriate mark-up.

The other example where no benchmark is required is intragroup financing where the prescribed interest rate is applied. Interest rates are published annually (for 2017 the interest rate is set at 4,97%), but taxpayers may also use different rates if these are determined in the same way and using the same method for transfer prices (i.e. market interest rates).

h) What language(s) are to be used by taxpayers in submitting the transfer pricing documentation?

The documentation should be submitted in the Croatian language. However, if the taxpayer submits documents in a foreign language, the tax authorities will set a deadline for the taxpayer to submit verified Croatian translations.

3. What is the deadline or timescale for providing transfer pricing documentation to the tax authorities (is it to be provided for example upon filing of the tax returns, at the beginning of a tax audit, or on the specific request of the tax authorities)?

The CPT legislation does not prescribe any specific deadline for submitting transfer pricing documentation. There is no legal obligation to submit transfer pricing documentation together with the regular tax returns. Transfer pricing documentation should be kept and maintained by the taxpayer, ready to be delivered to tax authorities upon request (usually in the course of tax audit).

From 1 January 2016, all taxpayers are obliged to report transactions with related parties in a special form and submit it along with the tax return.

No specific penalties are prescribed in respect of transfer pricing documentation. Generally, the taxpayer is subject to penalties in the range of HRK 5,000 – 300,000 (approximately EUR 670 – 67,000) if it:

  • Does not keep business books and other records in accordance with the mode of taxation or does not ensure that information is available, legible and credible;
  • Does not respond to a request made by the tax authorities;
  • Does not deliver the requested business books, records and other documentation to the tax authorities.

In the same circumstances, the responsible person of the taxpayer is subject to a penalty in the range of HRK 3,000 – 30,000 (approximately EUR 490 – 4,000).

5. Does the absence or incompleteness of documentation reverse the burden of proof as regards the arm’s length character of the transactions?

Generally, the burden of proof is borne:

  • In relation to facts establishing a tax liability, by the tax authority;
  • In relation to facts reducing or eliminating a tax liability, by the taxpayer.

In practice, if the transfer price is challenged / reassessed (which may be for various reasons, including the absence or incompleteness of transfer pricing documentation), the tax authorities must thoroughly justify and document their calculation of the market price and the transfer pricing adjustment, to avoid undermining the taxpayer’s right to an efficient appeal.

The implementation of document-related penalties does not prevent the taxpayer from initiating a mutual agreement procedure under an applicable tax treaty.

7. Any other relevant aspect not addressed above?

Not applicable.

B. Country-by-Country reporting (“CbCR”)

1. Did your jurisdiction implement the obligation to file a CbCR? If not, is the introduction of the CbCR in your jurisdiction contemplated and, if so, when?

The Law on Administrative Cooperation in Tax Matters, in force from 1 January 2017, introduced CbCR in Croatia for tax year 2016 and following.

2. If the obligation to file a CbCR is in force, what is the tax year from which this obligation applies and what is the deadline for filing the CbCR?

For the first year, the deadline will be 30 June 2018. Afterwards, CbC reports have to be filed within 12 months from the last day of the fiscal year to which the CbC report relates.

3. Which taxpayers have to file a CbCR in your jurisdiction?

Multinational Enterprises (MNEs) having total consolidated group revenue over EUR 750m have to file CbC reports in Croatia, if:

  • the ultimate parent entity is Croatian tax resident,
  • constituent entity is Croatian tax resident, and the ultimate parent entity is not obliged to file CbC report in the country of its tax residency,
  • Croatia does not have a treaty allowing the exchange of the CbC Reports that came into force within 12 months from the last day of Fiscal Year for which CbC report is filed,
  • There has been a failure in the system of the jurisdiction of tax residence of the ultimate parent entity or surrogate entity, and Croatian tax authorities informed Croatian constituent entity about that systemic failure.

CbCR may be filed by the ultimate parent company or a surrogate parent company appointed according to the legislation.

4. Is the content of the CbCR fully in line with the OECD model (final report on Action 13 of the BEPS project)? If not, what are the differences?

Yes, the content of CbC report is in line with the OECD model.

5. What is the penalty for failing to file the CbCR on time? Can local subsidiaries of a foreign group suffer the local penalty if the foreign group has not filed the CbCR?

The taxpayer is subject to penalties of HRK 2,000 – 200,000 (approximately EUR 266 – 26,600) for not filing the CbC report within prescribed deadline.

Only the local taxpayers who are obliged to file CbC report are subject to penalty. Penalties for the responsible person of the taxpayer are announced to be implemented in the Law.

6. Are there tax treaties in force in your jurisdiction allowing the communication of CbCR with other jurisdictions?

On 6 July 2017 Croatia signed the Multilateral Competent Authority Agreement on the Exchange of CbC Reports. Currently, Croatia has 28 active relationships for the automatic exchange of CbC reports – with EU countries. The possibility of exchanging CbC reports with non-EU countries is announced to be incorporated in the Law.

7. Any other relevant aspect not addressed above?

No.

C. As the case may be, other documentation / filing requirement in relation to transfer pricing?

1. In your jurisdiction, are there any other documentation / filing requirements in relation to transfer pricing?

From 1 January 2016, all taxpayers are obliged to report transactions with related parties in a special form and submit it along with the tax return (Form PD_IPO).

2. If so, what is the content of such documentation / filing requirement? What language(s) are to be used by taxpayers?

The general content of PD-IPO form are data on received/granted loans with related persons and data on supply of goods and services with related persons.

3. What is the deadline for meeting this documentation / filing requirement?

PD-IPO form has to be submitted together with tax return (generally no later than 30 April, for the taxpayer closing its tax year on 31 December).

4. Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?

This obligation apply to all taxpayers.

5. What is the penalty for failing to meet this requirement on time?

There is no special penalty provided for. Penalties mentioned at answer A.4 apply.

6. Any other relevant aspect not addressed above?

No.