As Poslovni Dnevnik/Marija Brnic writes, back during previous years, analysts assessed that the signing of the Croatia-USA double taxation agreement, which will finally result in the avoidance of having to pay tax on income in both nations to both nations, will not result in a sudden rush of American investors to Croatia, nor will it open up new businesses for Croatian companies on the American market. What it will primarily do is result in considerable benefits for companies that are already operating, as they will be less burdened by tax payments. It will also increase their level of competitiveness overall.
However, circumstances have changed somewhat over more recent years, and it seems that the number of those who will benefit from the settlement of fiscal relations between these two countries on each side of the Atlantic Ocean will be more significant. What will this mean exactly, and who will benefit the most from the signing of the historic Croatia-USA double taxation agreement?
Climbing the ladder
The USA was not among the major investors in Croatia for a very long time, but that has changed quite significantly in recent years. Steve Bubalo, an American entrepreneur with Croatian roots, has the longest investment experience here. He invested in the Vrana agricultural farm near Biograd in Zadar, as well as in rural tourism in Baranja, and one of his big takeovers was certainly Barr’s takeover of Pliva back in 2006, which was then taken over by the Israeli company Teva.
After Croatia joined the EU back in July 2013, and especially over the last few years, more serious investments followed, such as IBM’s investment in the Technical Support Centre in Zagreb, two years ago New York’s One Equity Partners invested 200 million dollars in Infobip, and this summer, Goldman Sachs, together with the Japanese SoftBank, invested 500 million euros in the remarkable Rimac Group.
At the same time, in Savski Marof, the start of work on the new production facility of the American company Pfizer for the production of innovative biological drugs, in which it is investing 100 million euros, was marked. The USA is thus climbing the investment ladder, and from 1993 to the end of the second quarter of this year, more than 595 million euros had been invested in Croatia, and thanks to the latest investments successfully ticked off, it took 15th place on the list of investors in this country.
It’s also interesting to note that Croatian investments over in the USA over the past three decades, in Croatian circumstances at least, aren’t insignificant. They amount to more than 73 million euros, and among those Croatian companies that started production in the USA is, for example, Podravka. HS Produkt from Karlovac has also been among the main exporters for years, along with Pliva.
Trade has also been growing in recent years, especially in the last year on the back of US LNG imports. In terms of trade, Croatia is mainly focused on the market of the EU and neighbouring non-EU countries, but thanks to LNG terminal on Krk, the USA has moved up to the seventh place among the main trade partners.
In the first nine months of 2022, imports from the USA into Croatia amounted to more than 2.07 billion euros and at the annual level they increased by 703%, and goods from Croatia were exported for 349 million euros (marking a decrease of 17%).
According to AmCham’s estimates, the Croatia-USA double taxation agreement will have a positive effect on the transfer of knowledge, due to the costs of withholding taxes on the provision of certain services and royalties, and the costs of labour taxation, which is particularly important for the IT sector and small and medium-sized enterprises.
Croatian companies that establish subsidiaries over in the USA are currently subject to federal and state income tax, and dividend payments are subject to a 30% tax. Since the corporate tax rate in Croatia stands at 12 or 18%, AmCham estimates that the cumulative US tax rate is very discouraging for Croatian companies.
A company in Croatia owned by a larger American company pays profit tax at the rate of 18%, and according to the parent company in the USA, it must make three payments per year, for interest and royalties, and then for dividends, it pays withholding tax at rates of 12 and 15 %, and only the net after-tax amount can be paid to the US parent company.
This Croatia-USA double taxation agreement will make it possible to get rid of these payments once and for all, and make it so that the full amount is paid to the parent company, which makes Croatia more attractive as an investment and business destination overall.
“This is a significant step for the business community both in the USA and Croatia, which for many years advocated the initiation of negotiations on the signing of such an agreement. This step is particularly important for AmCham and its members, given that it prepared the initial arguments for the conclusion of the agreement back in 2018 and brings together companies that are most involved in trade and investment flows between Croatia and the USA,” said Andrea Doko Jelusic, the executive director of AmCham Croatia.
The conclusion of this historic (and long-awaited) agreement will bring a lower financial burden for companies, and here on the Croatian side, it will be especially interesting for the IT sector, as well as for the food and pharmaceutical industry, while on the American side, it will open space for cooperation with small and medium-sized companies that haven’t been represented in Croatia until now.
The Croatian Chamber of Commerce (HGK) also welcomes the signing of the Agreement on the Avoidance of Double Taxation between Croatia and the USA, and points out that, although there’s still some time to go before its full implementation, it is to be expected that it will have a positive impact on the overall economic relations between the two countries, mutual trade, and will especially facilitate mutual investments.
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