Legal Framework: Transfer pricing regulations play a pivotal role in ensuring fair and transparent transactions between related entities, especially in multinational business operations. Croatia, like many other countries, has established stringent guidelines regarding transfer pricing to prevent tax evasion and ensure the integrity of the tax system.The foundation of transfer pricing regulations in Croatia lies within the Profit Tax Act 13 and the Profit Tax Ordinance, particularly Article 40.
Definition of Related Parties: Croatia adopts a broad definition of “related parties,” encompassing entities where there is direct or indirect participation in management, control, or capital. Further elaboration is provided in Article 46 of the General Tax Act, covering majority shareholding, consortiums, and entrepreneurial contracts.
Documentation Requirements: In line with OECD guidelines, taxpayers in Croatia are required to prepare both a Master File and a Local File, which should be made available to tax authorities upon request. These files serve to provide comprehensive documentation regarding the company’s transfer pricing practices and related transactions. In addition to the Master File and Local File, taxpayers must fulfill an additional obligation known as PD-IPO. This requirement entails the submission of a summarized table containing essential information pertaining to intragroup transactions for the tax year. PD-IPO is submitted alongside the annual tax return. It’s worth noting that all OECD transfer pricing methods are considered acceptable, following hierarchy, within the Croatian regulatory framework, provided that proper documentation is in place to support the chosen method’s suitability.
Thin Capitalization Rules and Intragroup Financing Activities
Thin capitalization rules are in place aiming to prevent excessive interest deductions. Additionally, when there is financing activity between related parties, specific interest rates published annually by the Ministry of Finance can be used. As an alternative to the interest rate set by the MoF, taxpayers have the option to establish the interest rate between related parties according to the methodology used for determining fees between unrelated parties in line with the arm’s-length principle. However, this option comes with the condition that the same method of interest determination is consistently applied to all financial agreements held by the taxpayer with related parties.
Country-by-Country Reporting (CbCR): CbCR requirements are mandatory for taxpayers who are part of MNEs with a global consolidated turnover exceeding EUR 750 million in the previous year. Entities meeting this criterion must submit a CbC report either a simple CbC report notification, to the tax administration, depending on their role within the Group (UPE, surrogate, constituent, etc.).
Public CbC Reporting:The Accounting Act introduces the obligation to report on income tax information for the financial year commencing on or after 1 January 2024, under specific circumstances.Public CbC Report concerns Croatian entities, members of a Group exceeding EUR 750 million consolidated revenue which are either UPE’s, or medium-sized/large entities controlled by a non-EU ultimate parent, or Branches with a non-EU parent with net revenue exceeding EUR 8 million.
Compliance Procedures: Failure to comply with transfer pricing documentation requirements can result in significant penalties for taxpayers in Croatia. If a taxpayer fails to report accounts, evidence, business documentation, or other requested documentation to the Croatian Tax Administration (CTA), they may face fines ranging from EUR 600 to EUR 40,000.
However, timely provision of transfer pricing documentation is crucial to avoid such penalties.
For more information, please contact our Transfer Pricing experts at tp@privelpartners.gr.
