VAT alert in Croatia – change in tour operators' margin scheme regulations for non-EU travel agencies

Starting from January 2021, Tour Operators’ Margin Scheme (TOMS) is no longer applicable to entities that have established their businesses or have a fixed establishment from which they render the services outside the European Union (EU). In this regard, non-EU companies should be aware of the new taxation approach applied to them under the TOMS scheme on Croatian territory.

Please note that TOMS is a unique VAT scheme for entities that buy in and re-sell travel, accommodation, and certain other services related to travel in their own name. It allows those businesses to account for VAT on travel supplies (that are seen as single supply) without having to register and account for VAT in every EU Member State in which the goods and services are supplied. Under Croatian VAT regulations, TOMS applies to B2B and B2C supplies.

The new VAT rules regarding business activities of travel agencies and tour operators from non-EU countries are set to assimilate the competitiveness of non-EU providers under the TOMS scheme and EU providers, as non-EU providers had a significant competitive advantage over EU providers.

Consequently, this means that services provided by non-EU providers of certain “travel services” are subject to Croatian VAT based on the general place of supply rules. For example, the following services supplied by non-EU residents are subject to Croatian VAT, with a right to deduct corresponding input VAT:

• Transportation services in Croatia
• Accommodation services
• Events held in Croatia
• Catering service

As a result, non-EU businesses might be obliged to register for VAT in Croatia to the extent that their travel services are “used and enjoyed” in Croatia.

VAT changes as of April 2022

To mitigate the negative impacts of the growth in energy prices related to households, businesses and farmers, changes to the Croatian VAT Act entered into force as of April 2022.

In line with the above, the following amendments to the VAT Act were introduced:

• Extending the application of a reduced VAT rate of 5% to baby food, edible oils and fats, butter and margarine, supply of live animals, supply of fresh and chilled meat and edible slaughter products, supply of fish and fresh or chilled fish, crabs, molluscs and other aquatic invertebrates, supply of fresh or chilled vegetables, roots or tubers, supply of fresh and dried fruit and nuts, supply of fresh poultry eggs (in shell), seedlings and seeds, fertilizers and pesticides, animal feed, concert tickets, sports and cultural events;
• Extending the application of a reduced VAT rate of 13% to natural gas and heating from heating stations, firewood, pellets, briquettes, wood chips, and menstrual supplies.
• Exceptionally, the supply of natural gas made in the period from 1 April 2022 to 31 March 2023 will be subject to a reduced rate of 5%.

Tax treaty Croatia and the USA

The issue of avoiding double taxation between the Republic of Croatia and the US has not yet been resolved. However, the procedures for initiating negotiations and concluding an agreement began a few years ago.

The lack of such an agreement creates significant problems for entrepreneurs, companies, and citizens on both sides as they suffer the burden of double taxation.

The signing of the tax convention will provide numerous reliefs to residents of the contracting states regarding the taxation of income and profits, will encourage foreign investment in the Republic of Croatia, will open opportunities for increasing the mutual exchange of goods and services and increase the level of mutual economic cooperation between Croatia and the United States.

Croatia is set to join the Euro area on 1 January 2023

On 12 July 2022, the European Union Council officially gave Croatia the green light to adopt the euro on 1 January 2023. With this final approval, Croatia becomes the 20th member of the eurozone with regulation determining a fixed conversion rate between the euro and the Croatian kuna at: 7.53450 Croatian kuna per 1 euro.

For Croatia, adopting the euro will mean easier access to the financial market and more possibilities for investments because many will no longer be exposed to currency risk and stronger global political and economic credibility.

Croatia prepares for the next step in tax reform

As a part of continuous efforts to reduce and simplify taxes, the Croatian government drafted amendments to the Croatian tax acts. Changes in the tax system will be mainly related to Personal Income Tax, where the amounts of “receipts” that can be provided to employees as non-taxable will be increased.

The aforementioned changes are yet to be discussed and probably adopted in the Croatian Parliament at the beginning of October 2022.