What Would Croatian-American Agreement on Double Taxation Imply?

By 15 September 2020

As Novac/Marina Klepo writes on the 14th of September, 2020, last week, US Ambassador Robert Kohorst presented the Croatian Government with a proposal for a draft agreement on avoiding double taxation between the United States and Croatia, a document that the two countries have now been negotiating for a quarter of a century. But just what would the Croatian-American agreement bring, and what are the details?

After the US ambassador met with Finance Minister Zdravko Maric at the Banski dvori, they reported that the long anticipated Croatian-American agreement would provide "additional legal security to taxpayers, especially those with dual citizenship, prevent double tax payments and protect them from possible discriminatory practices."

Cooperation between the Croatian and US tax services will be established in order to resolve possible ambiguities and misunderstandings during the implementation of the Croatian-American tax agreement itself. Negotiations between the two sides are scheduled for the end of the year, with Croatia being represented by the Ministry of Finance. When asked when this Croatian-American agreement could enter into force, Minister Maric was reluctant to state a time frame, emphasising that it doesn't depend only on the Croatian side.

''We've been waiting for this moment for a long time, we're going to do everything to make it happen as soon as possible,'' said the Minister of Finance. The first negotiations on the avoidance of double taxation between Croatia and the United States began back in 1995, and a year later, standard model agreements were exchanged. However, the official start of negotiations didn't take place. The most probable time for signing such a Croatian-American agreement seemed to be in 2008, just before Croatia's accession to NATO, when US President George W. Bush also visited Croatia, but it didn't happen even then.

There were several initiatives after that, primarily on the Croatian side, and the last one was launched two years ago by the American Chamber of Commerce in Croatia (AmCham), which also presented the publication "Arguments in favour of signing a double taxation agreement between Croatia and the United States". The conditions for a higher phase of negotiations, both on signing an agreement on avoiding double taxation and on abolishing visas, are now clearly ripe.

Given that double taxation is the most harmful thing to would-be investors, agreements to avoid such practices are an important tool for protecting investors and foreign direct investment. In its analysis, the US Chamber of Commerce states, among other things, that avoiding double taxation would lead to increased investment between the two countries, that existing cumulative tax rates in the US are higher than in Croatia and that they have a disincentive effect on Croatian companies.

An additional reason for this step is the fact that the current situation encourages companies on both sides to operate through subsidiaries registered in other countries, which means additional financial expenditures. The agreement would bring the greater and cheaper transfer of knowledge and experience, especially for small and medium-sized companies and companies in the IT sector, and ultimately "better tax treatment of US citizens who work, reside or own real estate in Croatia."

When rxplaining what double taxation means, for example, for a company in Croatia that is 100 percent owned by an American company, AmCham states that it must pay 18 percent income tax in Croatia and interest, fees and dividends, so the total amount paid to the American owner is significantly less than it would have been if the Croatian-American agreement had been signed. The same applies to the operations of Croatian companies in the United States.

"The burden is even greater than the above example, because in the United States, all three tax rates are 30 percent deductible for countries that haven't signed an agreement. This is especially true for Croatian IT companies, which are very much present over on the US market,'' reads the AmCham analysis.

As for the most common example of economic double taxation, it has been stated that the company pays income tax, and then the tax is paid by the shareholders on the dividend paid from that taxed profit. One country can tax income according to the criterion of its origin, and the other on the basis of residence. Agreements usually deal with the fact that the country in which the taxpayer is resident doesn't collect income tax that has already been subject to taxation abroad or grants a tax deduction in the amount of tax paid abroad. In the case of companies, a dividend deduction system, imputation systems or separate tax rates are most commonly used.

According to the Croatian Chamber of Commerce, Croatia currently has 63 double taxation agreements in place, including with all EU countries except Cyprus, most of which have been in force since Croatia's accession to the EU. The only exceptions to that, meaning agreements which came before Croatia joining the bloc are the agreements with three European countries - Portugal, the United Kingdom and Luxembourg.

These agreements differ in the scope and tax rates agreed upon, with some regulating only income tax and some covering both income and assets. Each agreement specifies exactly which taxes in the signatory countries are the subject of the agreement and defines who has the right to tax, how those taxes are distributed or what the highest amount of taxation stands at. As an example, the Croatian Chamber of Commerce cites the agreement between Croatia and the Czech Republic, which defines that a state in which a dividend is paid to a resident of another state has the right to collect tax on that dividend, but in the maximum amount of 5 percent gross dividend.

When it comes to the United States, which has 68 double taxation agreements, Croatia is the only European Union country with which it still doesn't have such an agreement.

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