INTEREST on received loans – according to tax regulations in the Republic of Croatia in 2024

In 2024, the tax regulations of the Republic of Croatia set clear guidelines regarding the calculation of interest on loans, especially between related and unrelated companies. Key aspects are regulated by the Law on Profit Tax and bylaws that define minimum and maximum interest rates, all for the purpose of preventing tax irregularities and optimizing the taxation system.

Interests between related companies

Affiliated companies are those that have direct or indirect ownership or management links, often within the same group. Due to the potential abuse of internal loans within groups, Croatian tax regulations require transparency in the calculation of interest between these entities.

Interest rates on loans between related parties from Art. 14th century 3 of the Law on Profit Tax according to the Decision on Interest Rates published in the Official Gazette (Nar. Nov., No. 177/04. – 114/23.) for the year 2024 is 3.25%. This rate serves as a minimum or maximum depending on the circumstances:

Minimum interest rate: When a commercial company gives a loan to a related person who is a non-resident, the interest rate must not be lower than 3.25%. If the interest rate is lower or the loan is interest-free, the difference between the agreed interest rate and 3.25% must be added to the lender’s income tax base.

Maximum interest rate: If a related company gives a loan to a domestic trading company, the non-resident must calculate an interest rate of at least 3.25%. If the interest is higher, the excess above that rate will not be recognized as an expense and will not be a tax-recognized expense for the recipient of the loan.

Special rules also apply to related entities within Croatia in situations where one of the companies enjoys tax benefits (e.g. it pays profit tax at rates that are lower than the prescribed rate or is exempt from paying profit tax due to the fact that it operates in subsidized areas) or on the other hand, it transfers tax losses from previous years. In such cases, the prescribed interest rate is also applied in order to prevent tax manipulations.

Additionally, the provisions of Article 8 of the Law on Profit Tax are applied to loans received from shareholders – members of the company.

Article 8 refers to interest on loans received by the company from shareholders who hold at least 25% of shares or voting rights in the company. If, in the tax period, the loans of such a shareholder (shareholder) exceed four times the amount of that shareholder’s share in capital or voting rights, which is determined in relation to the amount and the duration of the loans in the tax period – then the interest calculated on that part of the principal amount that exceeds quadruple the amount of the share to be a non-taxable expense.

Interests between unrelated companies

There are no specific prescribed interest rates for loans between unrelated companies. The parties are free to negotiate the interest rate, but it must be commercially justified and in accordance with market conditions. However, there are a few general guidelines:

Interest must be market-based in order to be tax-recognized as an expense or income.
In case the interest is too high, the tax administration can intervene and adjust the tax base.
Which means that a company that receives a loan from an UNRELATED (legal entity), whether it is a resident or a non-resident, can contract the same:

interest free
or a “market” interest rate can be agreed

LOAN RECEIVED FROM AN INDIVIDUAL

If a trading company receives a loan from a NATURAL PERSON (citizen), it can be:

interest free
with the agreed interest

If the interest is contracted, then it should be taken into account that, in accordance with Article 26 paragraph 1 of the Law on Obligations (Official Gazette 35/05 to 155/23), it cannot be higher than the statutory default interest rate, which would mean that it is the maximum allowed by law the interest rate between persons of whom at least one is not a trader (citizens and other persons) for the first half of 2024 was 11.25%, i.e. for the second half 10.875%

If the interest on the loan received from a natural person is contracted, then the company receiving the loan/interest payer (at the time of payment) is obliged to calculate and withhold tax on CAPITAL INCOME, which in 2024 is 12%.

On the other hand, if a trading company gave an interest-free loan to a natural person, then that receipt would be considered a receipt in kind and other income would be taxed.

If the interest is paid to a NON-RESIDENT – it is necessary to take care of the WITHHOLDING TAX.

NOTE – The lender, a INDIVIDUAL or LEGAL PERSON, a member of the company (owner of a business share), can make a decision to waive the loan, then it will be recorded in favor of INCOME or an increase in CAPITAL RESERVES.

Conclusion

Interest on loans in 2024, especially between related companies, is subject to strict tax rules to prevent abuses and optimize the tax base. The interest rate of 3.25% serves as a protective measure against the manipulation of transfer prices within groups, while loans between unrelated companies remain flexible, provided that the interest rate is market-based. These measures ensure a fair distribution of tax liabilities and transparency in business relations.

Author, Admin – FINACRO doo