BENEFICIAL OWNERS REGISTER – MANDATORY REGISTRATION FOR LEGAL ENTITIES
Starting from Monday, 3rd June 2019 year, legal entities must register their beneficial owners with the Beneficial Owners Registry. This obligation is prescribed for companies, subsidiaries of foreign companies, trusts, foundations and institutions not owned solely by the Croatian State.
Joint stock companies (d.d.) must register only starting date of their stock exchange quotations and shares issued to the bearer.
Registration is not imposed on syndicates, employer associations, political parties, chambers and state institutions.
Due date for registration of company data is 31st December 2019 year.
Registry will be maintained by FINA – the Croatian State Financial Agency, and registration will be enabled through FINA web application (with FINA certificate) or physically in FINA subsidiaries, always free of charge.
In case of default to comply with these provisions, penalties may be very high, up to 350.000,00 HRK. As well, all changes of required data must be registered within 30 days of the occurence – if not, penalties may amount up to 70.000,00 HRK.
COMPANY ACT – CHANGES AND AMENDMENTS
The Croatian Companies Act (hereinafter: the ZTD) is the fundamental law regulating the establishment and legal regulation of the existence of companies. At the end of April 2019, the ZTD amendments came into force, which further align with the EU regulations and introduce long-awaited simplification and shortening of the procedures of company founding and closing.
Subject of business
The new regulation abolishes the obligation to register business activities with the Commercial Court register, except for activities that may be registered only based on approval of the supervisory body. Company business activities are now defined by a statute in a joint stock company,while in a limited liability company business activities are determined in a formal decision prepared as a special document and submitted to the Commercial Court along with the Incorporation Act. Should the company owners decide to change registered company business activities, a change of the Incorporation Act is not required, but the Decision is submitted solely to the Commercial Court.
Establishing via the Internet
Perhaps the most significant novelty is the introduction of the possibility of establishing a limited liability company and a simple limited liability company through the Commercial Court web site, using the authentication system, which will be closely regulated by the Minister of Justice within 60 days of enforcement of the changes and amendments to the ZTD. The authentication system will be accessed personally. Company registration will be performed by completing and accepting of the prescribed forms of the Incorporation Act, with the attachment of required documents or electronic copies of the documents. For provision of false or deceiving information, penalties will be imposed in accordance with the Croatian Criminal Code.
That is to say, the establishment of a company at a distance is only possible for those with valid credentials.
Obligation on lower share capital payments
When establishing a limited liability company and a simple limited liability company, from now on, only one quarter of the share capital should be paid in cash, with the total cash payments being at least one quarter of the share capital. The remainder should be paid within one year of the registration with the Commercial Court register.
Company termination in a shortened procedure
Unlike long and expensive liquidation procedures that were inevitable for all companies under the former regulations, the new provisions of the ZTD provide for a possibility of company by a shortened procedure. The decision to terminate the company in a shortened procedure is made by all the company members (owners) and authorised by a notary public. Shortened procedure is possible if all company members declare that the company has no outstanding obligations towards the employees or any other creditors and that they all agree to settle all outstanding company liabilities if it subsequently proves that they still exist.
The decision to terminate a company must be published in the company’s journal and on the Commercial Court website. Also, an application on company termination in a shortened procedure must be filed with the Commercial Court register, by which the Commercial Court shall issue the Decision on company termination in a shortened procedure without liquidation. The Decision will be terminated if, within 30 days of the publication of the Decision, someone states a grounded objection to it.
In a moment when the Decision on company termination comes in full force, parts of the company property are transferred to the company members. Likewise, if it turns out that the company has some outstanding obligations, for these are liable all company members (owners) with all their assets.
DIVIDENDS AND PROFIT SHARES – PAYOUT TO NON-RESIDENTS
With the preparation of the annual financial statements are completed operational accounting procedures related to the previous business year and company determines its financial result. Companies that have made profits in a previous business period are most often willing to pay dividends and profit shares to their owners (company members). However, for making profit share payments in line with regulations and in order to avoid high rates of Withholding tax on profit and personal income, one should obtain the prescribed documentation and submit it to the relevant subsidiary of the Croatian Tax Authority.
Payments to non-resident legal entities
Prior to payments of dividends profit shares to foreign legal entities, it is important to determine whether there is any international treaty regulating avoidance of double taxation with the non-resident’s country. By entering the European Union, Croatia has taken over and signed double taxation treaties (DTT) with numerous countries. These treaties usually regulate application of a reduced Withholding tax rate on payments of dividends and profit shares and define a method of double taxation avoidance. Application of a reduced Withholding tax rate based on the existence of a double tax treaty is allowed through verification of the prescribed forms by the tax authorities of both contracting countries. In case when a payer does not possess verified forms for reduction of tax rate, it applies the Withholding tax rate prescribed by the Croatian Profit Tax or Croatian Personal Income Tax (12%). Refund of the overpaid tax may be realised by submission of verified forms to the Croatian Tax Authority.
Within the European Union, taxation of dividend and profit share payments between taxpayers from two different member countries can in most cases be completely avoided by obtaining documentation proving the tax residency of the recipient and its holding of at least 10 % share in the Croatian company over the last 24 months.
All documentation should be delivered to the Croatian Tax Authority subsidiary, according to the payer’s seat.
Payments to non-resident physical persons
As in the case of payments to legal entities, the existence of a double taxation treaty between the Republic of Croatia and resident country of the receiver allows reduction of the Withholding Tax rate and prevention of double income taxation.
Reduced tax rates may be applied once the payer possesses prescribed forms for reduction of tax liability, verified by both contracting countries. Payers not possessing verified forms at the time of dividend and profit share payment are obliged to apply the tax rate on capital income prescribed by the Croatian Corporate Profit Tax (12%). Only by submitting to the Tax Authority, the forms verified by both signatory countries, receivers may apply for a refund of overpaid tax.
CONVERSION OF RECEIVABLES INTO COMPANY SHARE CAPITAL
Business entities need to obtain a certain capital with the purpose of development of their business activities and this need continues over the entire company life cycle.
Capital is invested in a company at the moment of incorporation, but also in later periods. It can consist of money, things and rights.
One way of investing in company share capital is certainly the conversion of somebody’s receivables. These may be receivables in the form of loans granted, receivables for goods sold etc.
Receivables qualifying for conversion into share capital are those that are certain to bring future economic benefits that may be expressed in a company balance sheet, solvent and acceptable as a means of fulfillment of company liabilities. Receivables must also be transferable and liquid. It is not important if receivables are outstanding or not yet due.
In case of conversion into share capital of a receivable towards that same company, creditor becomes the company itself. As it is also the debtor, its liability ceases in unification of these two characteristics. The obligation is abolished and the share capital is increased.
The receivable has to be defined in the Decision on the share capital increase, which is a formal decision to change the Incorporation Act and must contain:
- Determination of the receivable to be converted into the company share capital – its amount, basis, debtor and due date. If the receivable includes contractual or default interest, these may also be a part of the conversion, but it must be explicitly determined in the Decision;
- Person from whom the receivable is acquired;
- Total amount of business shares acquired by such investment and their individual amounts; and
- Deadline for registration of converted receivable as a company share capital.
In order to enable the share payment through a receivable conversion, the creditor must transfer the receivable. Legal basis for this is the Cessation Agreement in writing, as it is going to be attached to the application to the Commercial Court registry for registration of share capital increase. The Agreement should contain the provision that the transfer is made for the purpose of investment in the company share capital, thereby making the investor pay for the acquired business shares. The Agreement should contain a clear definition of rights invested into the company. The cessor must notify the debtor on signed Cessation Agreement.
If a contractual interest rate arises on the receivable, interest should be calculated by the day of the Decision on the share capital increase (see above) and included in the value of the receivable. In case of already outstanding receivables, penalty interest shall be calculated until the date of the Decision on the share capital increase. However, the interest do not have to be the subject of the conversion, so only the principal of the receivable can be converted, in which case the interest becomes the new independent creditor’s receivable towards the debtor.
Value of the receivable may be determined in full sum, but only if the claim is completely liquid. When the capital increase procedure is carried out for the purpose of converting receivables from the company to equity, most often due to the impossibility of collecting from the company, special care should be taken, as the circumstances may indicate that the company is unable to pay its obligation. Then comes into question the appropriateness of the receivable for conversion into share capital and it is necessary to critically examine whether the receivable is at all chargeable and in what part.
The value of the receivable is assessed by a certified court accounting appraiser, on which an elaboration is issued, and then is not required audit of the conversion into share capital. If the company decides that the audit is still carried out, the auditor must use a valuation made by an independent certified court expert in accounting.
Should you need more information on the subjects mentioned above, please feel free to contact us.
Biljana Stanković, Certified Tax Advisor
Venkomir Horvatić, Country Manager
