Due to the numerous tax errors we have observed during our many years of practice, we are publishing this article to inform our clients and help them avoid tax penalties.
When making payments to non-residents relating to interest, dividends, profit shares, royalties and fees for other intellectual property rights (patents, licenses, use of names, signs and designs, and fees for software if it is acquired for sale or further development, while withholding tax is not paid on fees for software if it is purchased for use), it is important to consider several aspects:
- Who is liable to pay tax, who calculates and pays it, and to whom is it paid?
- What is the basis for calculating tax?
- When is tax paid?
- What are the conditions for relief in terms of a lower or zero tax rate?
- How is a tax refund made?
Our article explains in detail the procedures for calculating withholding tax.
The taxpayer paying withholding tax is a domestic payer who pays benefits to non-residents (foreign recipients). The tax base is the gross amount of the benefit, while the payer is responsible for calculating and paying the tax. In practice, this means that the amount of the benefit is reduced by the amount of tax that the payer must withhold and pay into the tax administration account. Withholding tax is paid at a rate of 10% on dividends and profit shares, while a rate of 15% is applied to other previously mentioned benefits.
However, the amendments to the Income Tax Act, which entered into force on 12 October 2023, introduced significant changes. The most important amendment relates to the abolition of the obligation to pay withholding tax on market research services, tax and business consulting, and auditing services paid to foreign persons. Also, exemptions were introduced for interest, royalties, dividends, and profit shares for companies from the European Economic Area (Norway, Iceland, Liechtenstein), as well as between affiliated companies within the EU. At the same time, the withholding tax rate was increased from 20% to 25% for fees and services paid to persons from countries on the EU list of non-cooperative jurisdictions.
In the past practice, many investors from one EU member state who receive income from dividends or interest in another member state faced double taxation - first in the payer's country, and then in the country of their tax residence. Although bilateral tax treaties allow the refund of overpaid tax, these procedures are often slow, expensive and administratively demanding. The lack of standardization among member states further complicates the situation (the European Commission estimates that investors have to fill in more than 450 different forms), which often leads to giving up the right to a refund of overpaid tax.
In order to solve these problems, the Council of the European Union adopted a new directive, known as FASTER (Faster and Safer Tax Excess Relief), which introduces a series of measures to simplify and speed up tax refunds on cross-border investments, reduce administrative obstacles and strengthen the fight against tax fraud.
One of the key innovations is the introduction of a digital tax residency certificate (eTRC), which will enable a standardized and automatic identification of investors across all Member States. This certificate will simplify the application of withholding tax exemptions or refunds of overpaid tax, thereby significantly speeding up the tax procedure for investors. According to the proposed directive, tax authorities will issue digital certificates within one working day of the taxpayer's request, except in the case of technical difficulties. The certificate will be valid throughout the calendar year and can be used for multiple refund applications.
The Directive also provides for two new accelerated procedures for the refund of withholding tax. The first model is the "withholding tax exemption", under which the corresponding reduced tax rate is applied immediately upon the payment of dividends or interest. The second model is based on the "quick refund", where the overpaid tax is refunded within 50 days of the payment of dividends or interest. Member States will be able to decide whether to apply one of these two systems or both, depending on their administrative readiness and market conditions.
FASTER also introduces stricter controls on financial intermediaries, such as banks, investment platforms and other institutions that manage investments on behalf of clients. They will be subject to new standardized reporting obligations, to enable national tax authorities to better monitor transactions and detect suspicious activities. To this end, national registers of authorized financial intermediaries will be established and a single portal will be launched at EU level to facilitate access to this data.
All member states will be required to integrate the new rules into their legislation by the end of 2028, and their full implementation is expected from 1 January 2030. The FASTER Directive represents an important step forward in the modernization and harmonization of tax systems within the EU, while strengthening investor protection and more efficient enforcement of tax regulations.
Sources:
Council of the European Union (2024). Taxation: The Council adopts new rules for withholding tax procedures. Retrieved from https://www.consilium.europa.eu/hr/press/press-releases/2024/12/10/taxation-council-adopts-new-rules-for-withholding-tax-procedures-faster/
PwC Luxembourg. (2023). FASTER: European Commission's Proposal to Streamline Withholding Tax Relief Procedures. Retrieved from https://www.pwc.lu/en/newsletter/2023/european-commissions-proposal-tax-relief-procedures.html
TEB. (2021). Withholding tax on profit. Retrieved from https://www.teb.hr/novosti/2021/porez-na-dobit-po-odbitku/
RRiF. (2021). News in withholding tax payment. Retrieved from https://www.rrif.hr/novosti_u_placanju_poreza_po_odbitku-2298-vijest/