News from the Republic of Croatia
Act on introduction of euro as official currency in Republic of Croatia, which introduces general provisions that regulate introduction of euro as official currency in Republic of Croatia as well as other provisions that regulate other important questions related to the introduction of euro, has been recently published in official Gazette of Republic of Croatia after it has been adopted by Croatian Parliament on 13 May 2022. The Act will officially enter into force on the first day following the publication of the EU Council decision on the adoption of the euro in accordance with Article 140 (2) of the Treaty on the Functioning of the European Union.
In this regard, we give an overview of tax/accounting implications discussed within the Act and the guidelines published on web pages of Ministry of Economy and Sustainable Development.
At first, it is important to emphasize that preparation for replacement of Croatian kuna with euro includes 3 different periods, i.e. preparation period (from the moment of adopting the decision on adoption of euro and until introduction of the euro as official currency), period of both currencies in circulation – “dual currency circulation period” (period of 14 days after the introduction of euro as official currency) and period after dual currency circulation period.
a) Preparation period
Preparation period will start after the Council of the European Union adopts a decision of introduction of euro in Republic of Croatia. Afterwards, the Government of the Republic of Croatia will adopt a decision where it will announce a date when euro will be officially introduced, fixed rate of conversion, date when dual circulation currency period starts and ends as well as date of start and end of dual prices expression period.
Dual prices expression
Period of voluntary dual prices expression starts the day after the Council of the EU announces its decision and regulation of introduction of euro and fixed rate of conversion of kuna into euro. After fixed exchange rate of kuna and euro become known, the companies can start voluntary expressing their prices in kunas and euros.
Furthermore, obligatory dual prices expression period will start at the first Monday in the month that follows the month in which period of thirty days will pass from the day of announcement of decision and regulation of the Council of the EU and it will finish 12 months after the date of introduction of euro. For instance, if decision and regulation of the Council of the EU is adopted in July 2022., deadline of 30 days will pass in August and obligation of dual prices expression will start at the first Monday of September (i.e. September 5th 2022).
Dual prices expression will be governed by the Act on introduction of euro as official currency in Republic of Croatia, Act on consumer protection as well as Rulebook on the manner of displaying the retail price and the unit price of products and services.
Obligation of dual expression of prices will be introduced with the intent of prevention of unjustified increase of prices, unfair calculation and easier adjustment to the prices expressed in euros. According to available information, obligation for dual expression of prices will be strictly related to business conducted directly with end consumers (B2C). On that note, companies will be obliged to dually express the total amount of goods and services in their offers, advances, and consumer contracts.
In doing so, the conversion of prices will be performed exclusively at a fixed exchange rate in the form of a direct quotation EUR / HRK.
Furthermore, dual prices expression is obligatory for all forms of sales to consumers. In accordance with currently available information, dual expression does not include trade agreements, i.e. invoices between businesses (B2B), internal invoices within same company and various records and reports that will be sent to public institutions.
Also, there are some exceptions to the obligatory dual expression of prices:
- totems of gas stations (with prices of derivatives), aggregates and electric charges,
- sales via machines,
- other as prescribed by the Act.
Fixed exchange rate set by the EU Council, which in most cases consists of six digits, will be used for conversion of kunas into euros. Practically, in case of Croatia, this means that the fixed exchange rate will consist of an integer followed by five decimal places. Moreover, when converting prices from kuna into euro, the fixed exchange rate should be used in full.
After the conversion, the result obtained is rounded to two decimal places with an accuracy of one cent, and based on the third decimal place, as follows:
- if the third decimal is less than five (number from 0 to 4), the second decimal remains unchanged (the amount in cents remains the same);
- if the third decimal is equal to or greater than five (numbers 5 to 9), the second decimal is increased by one (the amount in cents is rounded to the higher cent).
b) Dual currency circulation period
Regarding the dual currency circulation period, it will last for 14 days after the date of introduction of euro as official currency in Croatia. In that 14-day period, it will be possible to simultaneously use both kunas and euros as a mean of payment in the cash transactions. This period will start on the date of introduction of euro in 00:00 and will end at the 14th day in 23:59. For instance, if the date of introduction of euro will be January 1st, 2023, the period of dual currency circulation will be period from January 1st 2023 in 00:00 until January 14th 2023 in 23:59.
Furthermore, in these 14 days, payment recipients (for example retailers, legal entities with public authority and all other companies) will be obliged to return change in euros even though buyer will pay in kunas.
Exceptionally, if recipient of payment is not able to return change in euros, it will be able to return change in kunas and euros or just kunas.
c) Period after dual currency circulation period ends
In the period of 12 months after the date of the introduction of euro as official currency in Croatia, banks will convert kunas in euro by applying initially set fixed exchange rate. In relation to that, banks will be obliged to apply regulation on the prevention of money laundering and terrorist financing.
After that period, Croatian National Bank will exchange kunas for euro with application of fixed exchange rate in following manner:
- bank notes, without time constraints,
- coins, up to three years after the date of introduction of euro.
Accounting and tax matters covered by the Act
Based on the Act, when issuing invoices to consumers there is prescribed obligation to companies, credit institutions, credit unions, institutions for payment operations, institutions for electronic money and providers of financial services to dually present total amount on the invoice by using fixed exchange rate. Also, this obligation refers to public authorities which will be obliged to dually express total amount of the invoice by using fixed exchange rate.
b) Salaries and other compensations
In the period of obligatory dual expression, companies will have to show at least total amount of salary paid to the employee in both euros and kunas. This obligation will also refer to other income as well, i.e. service agreement, Christmas bonus, children gifts, etc.
Exceptionally, for travel orders there will be no obligatory dual expression.
Moreover, Act proposes that after the date of the euro introduction, salary amount in kunas based on the employment contract or other documents will be converted in euro with application of fixed exchange rate. Also, the guidelines has anticipated that there will be no need to change contracts or other acts, rather the amount in kunas in already mentioned contracts will be considered as amount in euro, converted by using fixed exchange rate and in accordance with the rules for conversion.
c) Bookkeeping records
Balances in kuna transferred from the books for the year preceding the year in which the euro was introduced will be converted into euros using a fixed exchange rate and in accordance with the rules for conversion. Business events relating to the period after the euro introduction date will be recorded in business records in euros.
In addition, differences that will occur due to the conversion will be recorded in the business books as financial income, i.e. financial expense.
d) Annual financial statements
Regarding the preparation of annual financial statements, it will be necessary to consider duration of business year, i.e.:
- If business year is equal to the calendar year, annual financial statements for the year preceding the date of introduction of euro will be prepared in kunas.
- If business year is different than calendar year, annual financial statements will be prepared in euros if last day of the financial year occurs after the date of introduction of euro.
Additionally, financial statements where the data will be shown for the first time in euros, comparative figures from previous reporting periods in kunas will be converted in euros with application of fixed exchange rate.
e) Tax returns
In accordance with the Act, tax returns will be submitted in kunas for the accounting period that finishes before the date of the introduction of euro.
Corporate Income taxpayers whose tax period starts on the date before euro introduction, and finishes after the date of euro introduction, will submit their CIT return and all other forms in euros for that tax period.
JOPPD form that will have submission date before the date of the introduction of euro will be submitted in kunas. On the other hand, JOPPD form that will have a submission date after the date of introduction of euro will be submitted in euros.
Additionally, tax return correction will be submitted in currency in which the tax return has originally been submitted.
Tax Authorities’ opinions
Regarding the recent adoptions of amendments to the VAT Act and Rulebook which prescribe provisions concerning the extension of the application of reduced VAT rates, the Tax Authority has additionally issued several opinions in which it commented on the application of the new tax rates.
The Tax Authority has received an inquiry regarding the application of a reduced VAT rate on edible oils that are registered as food supplements such as sycamore oil, black cumin oil and evening primrose oil in accordance with the regulations of the Ministry of Health. Also, the ruling was required on whether the reduction in the VAT rate applies to certified seeds and certified seedlings of pumpkin and industrial hemp.
The Tax Authority issued an opinion commenting on the application of the reduced VAT rate to edible oils, stating that the reduced VAT rate of 5% applies to edible oils and fats, vegetable and animal origin, in accordance with the special regulation on edible oils and fats and olive oil as defined by Regulation (EU) No 182/2011. Regulation (EU) No 1308/2013 of the European Parliament and of the Council of 17 December 2013 establishing a common organization of the market in agricultural products and repealing Council Regulations (EEC) 922/72, (EEC) no. 234/79, (EC) no. 1037/2001 and (EC) no. 1234/2007, KN butter 0405 10 and KN margarine 1517 10.
Furthermore, seedlings and seeds on which a VAT rate of 5% is calculated and paid are defined by Article 38 (2) (u) of the VAT Act and Article 47 (1) (u) of the VAT Rulebook.
According to previously mentioned, the Tax Authority concluded that the scope of application of the reduced VAT rate has not changed compared to goods that are taxed from 1 April 2022 with a reduced VAT rate of 5%, instead of a reduced VAT rate of 13%.
In the second opinion, the Tax Authority commented on the application of a reduced VAT rate of 5% on tickets. In the subject case, the tickets refer to the International Festival which will bring professional hairdressers, vocational hairdressing schools, distributors, and representatives of hairdressing salons, with the aim of conducting a fashion show of hairdressing hairstylists, educational lectures and so on.
According to the VAT Act, from 1 April 2022 VAT is calculated and paid at a reduced rate of 5% on cinema tickets, concert tickets, sporting events and cultural events other than those referred to in Article 39, paragraph 1, item n) of the Act.
In conclusion, the Tax Authority states that, according to the applicable provisions of the VAT Act and Rulebook, the tickets in question are not subject to a reduced VAT rate of 5% but will be taxed at a standard VAT rate of 25%.