Israel – Croatia Tax Treaty

Business activity in Croatia

There are many investment opportunities in Croatia. Some key sectors include the car industry, ICT sector, pharmaceutical industry, food industry, metal industry, and tourism. Since Croatia has access to the Adriatic Sea, investors can invest in the tourism industry on the coastline and take advantage of the well-developed rail network.

Furthermore, the tourism sector alone contributed to 20% of Croatia’s GDP in 2022, which is the highest share of tourism revenue in the EU. 

Croatia’s GDP is 200.1 billion USD as of 2021, with a 3.4% annual change. It is expected to reach 132 billion USD by the end of 2023. The Croatian economy is a service-based social market economy, which accounts for 70% of the total GDP.

Bilateral agreements between Croatia and Israel

Several agreements were signed between Israel and Croatia:

1. Agreement on the Avoidance of Double Taxation
2. Agreement on Mutual Promotion and Protection of Investments

Reciprocal Promotion and Protection Of Investments

In 2000, a bilateral agreement between Israel and Croatia entered into force, for the purpose of creating favorable conditions for investors of either country. The two countries wanted to produce a mutually beneficial environment by increasing cooperation.

To read the agreement in English, click here.

Convention on the Prevention of Double Taxation

The agreement between the Governments of Israel and Croatia regarding the avoidance of double taxation was signed in 2006 and entered into force on January 1, 2008.

To read the agreement in English click here.

Applicability of the MLI

Croatia and Israel have signed the MLI, which means that there is an automatic exchange of information between the two countries. Croatia and Israel signed the MLI in 2017. It was ratified in 2019 by Israel, and Croatia ratified the treaty in 2021.

In cases where a treaty to prevent double taxation exists between countries, the MLI takes precedence over it, meaning the provisions outlined in the MLI will have decisive authority

Residency for tax purposes in Croatia

Residence of an individual

For tax purposes in Croatia, an individual taxpayer is considered a resident if they fulfill either of the following conditions:

1. Real Estate Ownership- If an individual owns or has control over real estate in Croatia continuously for a period of at least 183 days in one or two consecutive calendar years, they will be considered a resident taxpayer.
2. Physical Presence- If an individual is physically present in Croatia for at least 183 days in one or two consecutive calendar years, they will be classified as a resident taxpayer. Temporary interruptions in the stay, up to one year, are not considered significant in determining residency status.

On the other hand, individuals who neither own nor control real estate in Croatia nor are physically present in the country for at least 183 days in one or two consecutive calendar years will be regarded as non-resident taxpayers.

To read about how an individual is considered a resident of Israel, click here.

Residency of a company

In Croatia, a company is deemed a tax resident if it is either incorporated under Croatian law or if its place of effective management is located within Croatia.

If a company is legally incorporated in accordance with Croatian law, it is automatically regarded as a tax resident. As a tax resident in Croatia, the company is obligated to pay taxes on its global income in accordance with the tax regulations and laws of Croatia.

To learn about how a company is considered a resident of Israel read here.

The tax system in Croatia

Croatia’s Tax Authority is called “The Croatian Tax Administration.”

Income taxation: 20 – 30%

Taxation of companies and branches: 10%-18%

VAT: 25%

Capital gains tax: 10%

Withholding Tax

Inheritance tax and estate tax in Croatia

In Croatia, the inheritance of the spouse and descendants are freed from inheritance tax. Meanwhile, the inheritance of other heirs is taxed at a flat rate of 4%. Additionally, the tax base is the market value of the estate minus the debts and expenses related to the inherited assets.

Furthermore, in Croatia, a real estate transfer tax is levied on properties that are sold, gifted, or inherited, and the new owner must pay a 3% real estate tax.

Relocation

Today, Croatia is home to around 2,000 Jews and ten Jewish communities. These communities are located in Cakovec, Daruvar, Dubrovnik, Osijek, Rijeka, Slavonski Brod, Split, Virovitca, Koprivnica, and Zagreb, and all of them are affiliated with the Coordinating Committee of The Jewish Communities in the Republic of Croatia. The largest is in Croatia’s capital, Zagreb. The community there hosts a concert hall and a large synagogue with services on Shabbat and for the Holidays.

Croatia encourages the immigration of individuals to its terroitory by tax incentives. Specifically, Croatia has issued a “digital nomad visa” in its Croatian Foreigners Act. This allows people who conduct their work digitally to live in Croatia while being exempt from any income taxation. This tax exemption came into force in 2021 and made Croatia one of the most nomad-friendly jurisdictions in the world.

Real estate taxation in Croatia

In 2019, Croatia decreased the real estate transfer tax from 4% to 3%, meaning the total cost of buying a property in Croatia will be lower. There is a VAT of 25% when the property is sold, which is paid by the company that owns the real estate. There is also a Capital Gains Tax levied when a property is sold within three years after purchase. On the difference in sale price, the tax rate is 25%. If it is sold for the same or lower price, then there is no Capital Gains Tax.

For more information on real estate rental taxation abroad, click here.

Transfer of funds from Israel to Croatia

In accordance with Section 170(a) of the Income Tax Ordinance in Israel, certain money transfers from Israel to Croatia require the approval of an assessor on behalf of the Tax Authority.

For more information on money transfers abroad, click here.

Types of business entities in Croatia

Business activity in Croatia can be conducted within the framework of multiple types of business entities, the most common of which in Croatia are:

1. Private Limited Company (d.o.o.) – This is a company in which one or more legal entities invest stakes in the total capital, which has been contractually set beforehand. Owners of these companies may be either domestic or foreign legal entities and natural persons, and they must have a management board and a general meeting.

2. Simple Limited Company (j.d.o.o.) – This is a subcategory of a private limited company and is the most common form in Croatia. It can be created in a simplified procedure and contain a maximum of three members.

3. Public Limited Company (d.d.) – This type of company is based on capital, as shareholders invest in authorized capital that is divided into shares. It may have only one shareholder, and the company is liable for its debts and assets, while shareholders are not liable for debts.

4. General Partnership (j.t.d) – This is a popular business entity where two or more individuals join with the intent of conducting business as a going concern. All partners have unlimited and joint liability to cover the partnership’s debts with all of their assets. These entities operate under a common company name.

Incentive laws in Croatia

Croatia is considered an attractive country for investors. This is because there are structural reforms and tax incentives promoted by the local government. In accordance with the Croatian Company Act, both local and foreign investors are treated equally.

Croatia has implemented multiple incentive measures for investment projects in the country. These projects include production and manufacturing activities, development and innovation activities, business support activities, and activities of high-value-added services. Incentives in Croatia include tax incentives for micro-entrepreneurs, tax incentives for small and large enterprises, grants for capital costs of the investment project, and grants for labor-intensive investment projects. These projects and incentives are all regulated by Croatia’s Investment Promotion Act.

In 2019, Croatia implemented the Investment Promotion Act. This law provides many incentives and benefits to stimulate foreign direct investment in Croatia through tax relief, grants, and subsidies for qualifying investment projects. This act has stimulated economic growth in Croatia.

Croatian Double Tax Treaties