Croatian tax administration has initiated an action aimed to identify hidden employment cases among increasing population of sole entrepreneurs.
In that respect, the Croatian tax administration has sent out questionnaires to sole entrepreneurs operating in a low tax regime, asking them to explain their business model and their relationship with their main clients (aspects such as dependence, control, working hours, equipment, fee arrangement, etc.).
If the tax administration would determine a case of hidden employment, the likely scenario would be that they would charge the sole entrepreneur with taxes and social security contributions that would be due if the fees they have received under such arrangement would be considered as salary (employment income). If the tax administration would not be able to collect such amounts from the sole entrepreneur directly, the tax administration will likely use available legal options to collect such amounts from the deemed employer.
Currently the focus of the Croatian tax administration is on domestic arrangements. However, similar actions may be expected for cross-border arrangements, especially in case the deemed employer that is based in the EU (given that in such case the Croatian tax administration should have legal grounds to collect at least social security contributions from an EU based employer).
Conclusion / Mazars Croatia comment:
Companies should review their arrangements with sole entrepreneurs based in Croatia to determine whether such arrangements have qualifications of hidden employment (in substance or in appearance) and take appropriate action to minimize the risk for their contractors. If needed, Mazars Croatia can help companies in that respect.