Penalty Tax to Be Introduced for Suspicious Assets

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Government will introduce a special tax rate which will be paid by those who cannot demonstrate how they acquired assets they own.

Citizens whose assets are significantly larger than their incomes and who cannot prove that they had paid taxes on income used to acquire the assets, will have to pay the “penalty tax” of 54 percent, provided Parliament adopts the government’s proposal which is included in the new Law on Income Taxes. The final version of the Law was supported by the government on its recent session, reports Jutarnji List on December 2, 2016.

This is considerably higher than the current 40 percent, which is the highest rate of income tax and which has been applied so far to the “excess” assets. While the new law does not explicitly say that the new “penalty tax” will amount to 54 percent, it can be implied from the text of the legislative proposal. In part of the law which talks about determining the income tax based on the difference between assets and the amount of funds needed for such assets to be acquired, the law states that taxpayers will have to pay the new maximum rate of income tax, which will be 36 percent, increased by 50 percent. That means that the “excess” assets, for which owners cannot prove that they had already paid taxes, would be taxed at the rate of 54 percent.

Simply put, if someone earns a million kuna a year, and their assets are worth 5 or 10 million kuna, and the person cannot prove that the assets were gained from, for example, inheritance, savings, or in some other legal way, the Tax Authority will determine the “penalty tax”. The reason for this decision was not so much the need to fill the government coffers, but the desire to demonstrate that tax evaders will not be able to avoid paying taxes.

Other countries have instituted similar measures. For example, a few years ago Slovenia decided to penalize suspicious assets at a rate of 75 percent. In addition, the measure also brings some elements of populism, which is demonstrated by the fact that it was added to the law between the first and the second parliamentary reading, apparently at the request of MOST.

“This is a penalty tax. However, I expect that it will be rarely used, mainly in cases of those unfortunate people who will not be able to prove that they have inherited or purchased a property in a legal way”, said tax expert Vlado Brkanić.


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