Croatian transfer pricing (TP) laws do not make a direct reference to the OECD Transfer Pricing Guidelines (OECD Guidelines), but in practice, the Croatian Tax Administration does follow them. Currently, the TP regulations are incorporated within the Profit Tax Act and Profit Tax Ordinance.
Arm’s Length Principle
Under the domestic legislation in force in Croatia, the transactions between related parties are governed by the arm’s length principle. Article 13 of the Profit Tax Act stipulates that the transactions between related parties must be carried out under the same conditions and terms that would have been applied between independent entities in similar circumstances. If prices or conditions would differ from those that unconnected parties would have agreed upon, the taxpayer should make appropriate adjustments to their profit to achieve market-based results.
Related Party Definition
In Croatia, companies are considered related parties in which one exercises influence or control over another. This covers a situation in which an entity has majority shareholding or control, where parties are parent-subsidiary (mother-daughter), a consortium member, or each has over 25% of the shares in another. It also covers companies related through business arrangements like profit transfer agreements or cooperation agreements filed at the court. These relationships are regulated to ensure that arrangements between companies involved comply with the arm’s length principle and are on reasonable market terms.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Croatia are:
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
When selecting the method, taxpayers take into consideration the advantages and disadvantages of the method, the appropriateness of the method, the reliability of the information, or the comparability of the transactions. Generally, the traditional methods are considered more appropriate – CUP, CPM, and RPM methods.
Comparability Analysis
Croatia follows the OECD Transfer Pricing Guidelines for comparability analysis. When selecting comparables, there is a preference for domestic data first, and then international comparables. Secret comparables are not used for transfer pricing assessments. Croatian legislation allows the use of an arm’s length range and statistical measures, such as the interquartile range and median, when necessary. Comparability adjustments are required in line with OECD TPG.
Documentation Requirements
Transfer pricing documentation requirements in Croatia are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the Croatian tax authorities:
- Master File;
- Local File, and
- Country-by-Country (CbC) report
Master and Local File
Companies that undertake transactions with related entities have the requirement to maintain annual transfer pricing documentation. This includes information at the group level, such as the group’s history, organizational and legal structure, role of affiliated entities, and ownership of intellectual property. Documentation at the local company level should include a description of the company’s business activities, the market in which the company is undertaking its business, the use of intellectual property (based on contracts), and its capital structure. In addition, companies must include an analysis of related-party transactions, such as functional and risk analysis, comparison with non-related party transactions, turnover and margin data, and the transfer pricing method used—along with evidence that the chosen method meets the arm’s length principle.
Country-by-Country Reporting
Croatia has adopted the EU Directive on Country-by-Country (CbC) reporting, which applies to multinational enterprise (MNE) groups with consolidated revenue of at least €750 million in the previous year. If the ultimate parent company is tax-resident in an EU country, it must file a CbC report with its tax authority within 12 months after the fiscal year ends.
If the parent is outside the EU and does not meet certain conditions—like not having a CbC obligation, a proper exchange agreement, or if there is a systemic failure—then an EU-based group company must file the report unless a surrogate parent company files it on behalf of the group. The report must include country-level data on revenue, profit, taxes, employees, capital, retained earnings, and tangible assets.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Advance Pricing Agreements (APA): Taxpayers can apply for an Advance Pricing Agreement (APA) or an advance tax ruling to gain clarity on the tax treatment of future transactions. An APA can be either unilateral (between the taxpayer and the Croatian tax authority) or bilateral/multilateral (also involving the tax authorities of other countries where affiliated companies are located). APAs are valid for up to five years and must be agreed upon before the relevant transactions begin. Similarly, an advance tax ruling is a written opinion issued by the tax authority at the request of a resident or non-resident taxpayer. It can only be issued for real, planned transactions and not for hypothetical situations. The transaction must not have started yet, and there must not be an ongoing tax inspection on the matter.
Mutual Agreement Program (MAP): In Croatia, the Mutual Agreement Procedure (MAP) helps resolve tax disputes to avoid double taxation under tax treaties. Taxpayers have three years from the first notice of a disputed action to request MAP. The process can run alongside domestic remedies, but MAP can’t override final court decisions. Taxpayers typically have three years from the first notification of the action resulting in taxation not in accordance with the tax treaty to request MAP assistance, though specific time limits may vary depending on individual tax treaties.
Approach to Transfer Pricing Audits
The Croatian Tax Authority (CTA) actively conducts detailed transfer pricing audits, focusing primarily on large taxpayers. Triggers for these audits include significant profit declines, ongoing losses, and affiliations with multinational groups. In practice, the CTA often utilizes secret comparables during these audits. Taxpayers are expected to provide transfer pricing documentation promptly upon request.
Penalties
In Croatia, legal entities can face fines between HRK 20,000 and 500,000 for tax-related recordkeeping failures. Penalties apply if records are incomplete, inaccurate, untimely, not retained as required, or not provided when requested by the tax authority.
Taxation at a Glance
Croatia’s tax system consists of state taxes (corporate income tax, personal income tax, Value Added Tax); county taxes (inheritance and gifts tax, road motor vehicles tax, tax on vessels, and tax on slot machine games); and city or municipal taxes (surtax on personal income tax, consumption tax, tax on holiday homes, tax on the use of public lands and real estate transfer tax).
In Croatia, the currency is the Euro (EUR). The official name of the Croatia tax authority is the Croatian Tax Administration.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 10%, 18% |
VAT | 25% |
Withholding tax on dividends to non-residents | 10% |
Withholding tax on interest to non-residents | 15% |
Withholding tax on royalties to non-residents | 15% |
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