Taxing authority and tax law
Tax authority: Ministry of Finance
Tax law:
- The Corporate Income Tax Act (the “CIT Act”)
- The Corporate Income Tax Bylaw (the “CIT Bylaw”)
Relevant regulations and rulings
Article 13 of the CIT Act and Article 40 of the CIT Bylaw prescribe arm’s length pricing as the basic principle to be followed, define the methods allowed and documentation required to support prices between related parties.
In general, arm’s length pricing is required only for cross-border transactions between related parties. However, in line with the Amendments to the CIT Act that are in force as of 1 July 2010, the obligation to comply with transfer pricing rules is extended to transactions between domestic entities if one of the entities is either in a tax loss position or in a special tax status (paying tax at lower rate or is exempt from paying corporate income tax). Note that this is in line with the (non-binding) official opinion of the Tax Authorities issued prior to the amendments of the legislation were introduced, i.e., this is applied for the periods before 1 July 2010. At present, neither the CIT Act nor the CIT Bylaw provide extensive guidance or instruction to taxpayers with regard to meeting the transfer pricing requirements.
OECD guidelines treatment
Although Croatia is not an OECD member country, the provisions of relevant Croatian tax legislation are generally based on the OECD Transfer Pricing Guidelines. Furthermore, the Ministry of Finance issued instructions for the tax officials performing transfer pricing audits. The instructions are also based on the OECD Transfer Pricing Guidelines.
Priorities/pricing methods
The Croatian CIT regulations do not provide detailed rules on how to arrive at the market price that should be applied in related-party transactions. However, the CIT Act prescribes the methods that a taxpayer can use to determine the market price: Resale Minus, Comparable Uncontrolled Price (“CUP”), Cost Plus, Profit Split and Transactional Net Margin Method. The relevant legislation states that the CUP method has priority over the other methods.
Transfer pricing penalties
Fines up to HRK200,000 (approximately EUR 28,000) for a company and up to HRK 20,000 (approximately EUR 2,800) for the responsible individual within the company, per offence, may be imposed in respect of any underestimation of the corporate income tax liability. Penalty interest would also be calculated from the date when the tax was due until the date when the tax is paid.
Penalty relief
There are no specific provisions concerning penalty relief.
Documentation requirements
According to the CIT Bylaw, a taxpayer should perform (and provide documentary evidence of) the following activities in the process of proving that market prices have been applied in transactions with any related parties:
- List of related parties and specification of transactions with them
- Identification of the transfer pricing method applied (description of the method chosen for determining the transfer prices and a statement justifying the reasons for choosing the particular method)
- Comparable search — description of data, methods and analysis used for determination of transfer prices. Specification of assumptions and evaluations used in the process of determining transfer prices (in line with the principle of unbiased transactions), with reference to comparability, functional analysis and risk analysis
- Documentation of all calculations based on the selected method (such documentation should enable a comparison with the prices applied by other comparable taxpayers)
- Update of the transfer pricing documentation to reflect adjustments made due to changes in relevant facts and circumstances
- Prepare other documentation substantiating the analysis and determination of transfer prices
The taxpayer must maintain data and information concerning related parties and the business transaction conducted between them.
Documentation deadlines
There is no specific deadline for the preparation of the transfer pricing documentation prescribed by the legislation. The law requires the transfer pricing documentation to be available and to be provided to the tax authorities upon their request in a tax audit. The documentation should be available in the Croatian language.
Statute of limitations on transfer pricing assessments
The general statute of limitation for determination of tax liabilities and rights in a particular tax period expires at the end of the third year following the year in which a tax return should have been filed (e.g., as the 2010 corporate tax return has to be filed by 30 April 2011, filings for 2010 become statute-barred on 1 January 2015). However, the general statute of limitations may be prolonged and recommences after each intervention by the tax authority with respect to a tax return which has been filed. The absolute statute of limitations expires after six years. Therefore, filings for 2010 become statute-barred absolutely on 1 January 2018.
Return disclosures/related-party disclosures
No specific disclosures are required in the annual tax return.
However, Croatian tax authorities regularly request information on transfer pricing methods used after the CIT return has been filed.
Audit risk/transfer pricing scrutiny
In past few years the tax authorities have increased the frequency of transfer pricing audits. As they still have limited experience in transfer pricing, there are many disputes, as well as requirements for supporting explanations with respect to related party charges and additional documentation. However, there is a noticeable trend towards increased awareness of transfer pricing problems among the tax authorities’ officials.
The tax authorities are in particular focused on examining documentation on service fees charged by related parties. Tax inspectors tend to challenge service costs based on the argument that the available documentation is insufficient to prove the benefit arising to the Croatian company from the respective services. They also challenge the appropriateness of the prices applied in such transactions.
Generally, the transfer pricing audit risk can be considered high.
APA opportunity
Currently there is no legal basis for APAs in Croatia.
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