New corporate income taxes affect foreign property

[crojoe]

Croatian Times

The changes to the corporate income taxes that are expected to take effect on July 1, in addition to Croatian businessmen, will also affect some 70 thousand foreigners who own property in the country.

Claiming the yachts, planes and vacation houses and apartments as business expenses will be possible only in cases in which such purchases generate at least five or seven percent of their cost value in income (seven percent for vessels and planes and five for apartments and houses).

This differentiation between private and corporate property will affect foreign property owners in Croatia.

That is because until February 2009, citizens of the European Union bought houses as firm owners rather than private persons because of a simpler procedure and tax benefits. Many of the firms under which the purchases had been made were "dead" in terms of doing business, the Croatian daily Vecernji List reports.

This year, the state received billion kunas (138.6 million Euros) less in these taxes than last year. They expect a total decrease of 3 billion (416 million Euros) on the yearly basis because of fall in profit of companies.

[mambo]

Foreigners did not buy houses via companies because of the tax breaks, but more because it was the only way they could rent the house.

But...........Croatia needs money, so they will tax these people a bit more, which will certainly have its impact on the housing market. It will become less interesting for foreigners to buy houses, which means less houses need to be build and that means less work.

The expected fall in tax income for companies has little to do with income because of foreign ownership, but more because of less turn over for all the companies in Croatia.
Perhaps lowering spending and plundering would be a better idea.

[crojoe]

"Foreigners did not buy houses via companies because of the tax breaks, but more because it was the only way they could rent the house. "

Even this is not 100% right, as in many peoples cases it was the only way they could buy a house in Croatia. It used to be that foreigners couldn't own a house as an individual for a number of years. Looks like another one of their stupid laws they passed (similar to the no immediate Family for two year for people coming to work in Croatia). I think there will be an out cry soon, especially if there are 70,000 forign house owners as quoted in the article. This would mean that all those owning their house via a company will have to somehow sell it to themselves, and then pay taxes on that income to their company. Of course you won't be able to sell it to yourself for 1 Kuna, as the government determines what the worth of your house is, then make you pay tax to that amount.

[Madgolfer]

This would mean that all those owning their house via a company will have to somehow sell it to themselves, and then pay taxes on that income to their company. Of course you won't be able to sell it to yourself for 1 Kuna, as the government determines what the worth of your house is, then make you pay tax to that amount.

Selling the property to yourself and paying the 5% RET plus legal andother costs maybe an option for many people, but for anyone with agricultural land as part of the property, they would still have to maintain a company.....catch 22.

Its not so bad for the majority of our clients as property prices up this way are a fraction of those at the coast, but even so it will still add up to a few thousand euros a year.

As Mambo says, its just another way of taxing foreigners.

And lets not forget that this also applies to many Croatians as well.......not just foreigners!

[francis]

In the case of the company owen you the money, that payed for the Property,
can the company be folded. and pay the 5% in putting all in your name. ?

[Madgolfer]

A director/owner/investor in a company can take back both their initial investment capital, and any other ongoing investments, tax free.

The "buyer" would normally be liable for the 5% RET, so this cost can really only be put through as a business expense if it was the company that was acquiring the property.

However any legal costs involved can be claimed.

[zvekov]

i will think on this one, a decent accountant/lawyer will be required to ensure there's the right interpretation. It is possible to use real estate as founding capital for a company and when this happens the change of title does not incur the 5% ret. the question is, on dissolution of the company and returning of assets is this transfer also free of the 5% ret?

If land was used as founding capital, and after further investment, loan, human capital, the company now has a house built on it, how will that be treated in dissolutio of the company.. very tricky

[francis]

if the house is a new build, and yet has not got a usage permit
and got a valuation, from a bank of say just a frame, of a house,
could it be took out at that valuation, ?

[Madgolfer]

Zvekov.

It would be the value of the land when it was invested that you would calculate the repayment on surely?

Any increase in value after that point would simply be treated as profit.

What do you mean by "human investment" by the way, time etc?

MG.

[zvekov]

MG, yes, by human capital, i meant i meant time etc... Are you suggesting that if you ut in land as founding capital valued in 2000 at EUR100k. and in 2005 you built a house on it using a loan and adding value to the plot, and in 2010, decided to return the assets of the company back to the owners and the same land (w/o building) value is now EUR200k, but it also has a building on it, which values the entire real estate at EUR 600k. Does this mean on return of assets to the owner will lead to a tax event, when it was just a capital asset? I am not too sure

[francis]

Zvekov That is exactly what i am talking about, but i never took out a loan for the build, not here away
you can see this hole thing, the start of another law, and rules, that will not be explained,
just told to pay.,
i think it may be a good time to see how many, people would like to fold the company here,
and see if it can be looked at bye the EU, as most are not working there company, as its a waste of time trying. i no i would just sale my plots on , and move the money out, and live here with out the bull. but they really going to kill the market here, so thats not going to be easy done

[Madgolfer]

Zvekov.

Imagine that you invested 1000kn in your business. When it came time for you to take back your cash, you would be entitled to take 1000kn tax free. Anything over that would be taxed, agreed interest etc.

I think it is the same principle with land. The calculation of the land value at the time of the original investment is repaid tax free. Any increase in value over that would be taxable.

If you know otherwise I would be very interested to hear.

[zvekov]

ok. lets simplify this MG. You put in land worth EUR100k at the beginning to found the company. You did nothing with the company and ten years later you decide to redistirbut ethe capita l assets back to owners; i.e the land. The land is now worth EUR500k. What happens? Is the company taxed on the land capital gain (EUR400k) ? Or is the same capital asset just redistributed back to the original owner on dissoultion of the company?

[francis]

very good ?
I am the only creditor , of the company
if i liquidate the company, all plots would transfer to myself,
any cost in this ?

[Madgolfer]

I did say that I "THINK" that was the case, i will check and will post later anything I can find out.

If you wanted to close down a company and completely cease trading, then there may be some merit in the argument that you could just take back the title docs, end of story.

Knowing the Cro govt as we all do however......not being used to letting any possible tax slip through their fingers I would suggest that they would want to tax you one way or another on the increased value.

Is this not capital gains tax in one form or another? If not then simply corporate tax on profit. Either way they will see it that you (the investor) has made a gain or profit and want their share.

If you did close the company down and they had no where to actually levy the tax against, I would not be surprised if they then placed a distress restriction on the land should you ever try and sell it on. EG; cannot be sold without outstanding tax liability being settled.

I do see quite a number of properties each year with just such a clause written on the paperwork and even more going through the auction houses having been possessed by the authorities and sold on to recover a tax debt.