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13.2.1. Main Rules

The tax deductibility of financing costs in Croatia is subject to the following three limitations:

  • A debt-equity ratio/ thin-capitalization rule - Interest payments on loans advanced by shareholders controlling 25% or more of the capital or voting rights of the borrower are not deductible if the debt exceeds four times the capital of the borrower (debt-equity ratio of 4:1);
  • Maximum interest rate - Deducible interest on related party debt is limited to that paid at a maximum interest rate set by the government. Effective 1 January 2021, the interest rate on related party debt is set at 3% (3.42% for 2020). The related party interest rate is the minimum interest rate applicable for interest income on cross-border financing between related parties when the Croatian resident is a lender and as a maximum rate for the deduction of interest expense on such cross-border financing when the Croatian resident is a borrower. The rate also applies for loans between resident related parties if one of the parties is in a favorable tax position. From 2017, the taxpayer may elect to disregard the maximum rate and apply another rate. In that case, however, the taxpayer must prove that the rate applied is at arm’s length. Any excess interest is non-deductible for tax purposes; and
  • Earning stripping-based interest deduction barrier - Additionally, effective from 1 January 2019, in line with the EU Anti-tax Avoidance Directive (ATAD), the deduction of borrowing cost is restricted to 30% of EBITDA or EUR 3 million safe harbor limit, whichever is higher. The excess interest expense can be carried forward for up to three years, subject to the same limit.

Loans from banks or other financial institutions, including loans used for financing long-term infrastructure projects are not subject to the interest restriction rules.