Real Estate Taxation System in Croatia
Buying a property is a big investment for which many people save for years or take out loans from banks so they can take advantage of the opportunity and buy a property that meets their preferences. When buying a property, you need to react very fast because market prices can change quickly. In addition to the cost of the property itself, it is necessary to reserve funds that the buyer is required by law to pay to the state. This represents taxes, specifically a property tax, about which you can read more below.
About property tax generally
According to the Real Estate Tax Act, any acquisition of ownership of real estate in the Republic of Croatia is considered as a real estate turnover. Acquisition refers to the sale of real estate, exchange, inheritance, donation, entry and withdrawal of real estate from a company, acquisition of real estate in liquidation or bankruptcy proceedings, based on court or law decisions, etc.
The law covers land (agricultural, construction and other land) and buildings, whether residential, commercial, all other buildings and parts thereof. It is important to note that in the event that two owners decide to exchange their real estate, the law views the exchange as two purchases and each participant in the exchange is actually the acquirer of the real estate and pays taxes on the value of the real estate acquired by the exchange.
Taxpayers, tax base and tax rate
The real estate taxpayer is considered to be the real estate acquirer, and in the case of a exchange as mentioned in the previous paragraph, each participant in the exchange pays the tax on the value of the real estate he acquires.
In case the ideal part of the property is acquired, the taxpayer is each acquirer separately. Since the taxpayer is always the person acquiring the ownership of the real estate, it is not possible to transfer the same obligation to the seller of the real estate by purchase agreement even though the seller has decided to pay it.
The tax authority will ask the buyer to pay the tax, not the seller. Therefore, if the purchase agreement states that the seller is the one who has assumed the obligation to pay the tax, then the seller guarantees jointly and severally for the payment of tax from the buyer.
The very moment when the tax liability arises is the moment when purchase agreement is concluded, that is, when the judgment or decision for real estate acquired pursuant to the decision of a court or other body becomes final.
A special situation occurs when a property is acquired by a foreign person. Therefore, it is important to distinguish between EU citizens and third-country nationals. From 1 February 2019 all European citizens acquire the right of ownership of the property in the same way as they acquire it for a Croatian citizen.
The exception is that European citizens cannot acquire ownership of real estate located on agricultural land. For all other real estate, the procedure is followed as if the property was purchased by a Croatian citizen and the buyer is also required to pay the property tax.
Third-country nationals are subject to general (valid legal work) and special prerequisites (reciprocity and related consent) to acquire ownership of real estate in Croatia. A prerequisite for acquiring property rights is the prior approval of the Ministry of Justice. At the same time as a potential buyer receives approval from the relevant ministry, a property tax is also determined.
From 1 January 2019, a uniform 3% tax rate applies to the sale of all types of real estate, i.e. land, buildings and parts thereof. The tax base is the market value of the property at the time when the tax liability arises.
The tax authority determines this basis from the acquisition document if the total amount of compensation given or paid by the acquirer is approximately equal to the prices that are achieved or can be achieved on the market. The total amount of compensation also includes taking over the debts of the former owner. For example, a buyer buys an apartment for the price of 300,000 HRK, but in addition to the price of the apartment, the buyer is obliged to pay the seller's debt in the amount of 100,000 HRK. In this case, the tax base is the total amount paid by the buyer to the seller (the total fee for the purchased property) and the tax rate is applied to the tax base of 350,000 HRK.
It may be that the seller wants to sell the property as quickly as possible and then sells it at a price lower than the market price. In this case, the tax authority compares the prices on the market with the fee paid by the buyer to the seller, or in case there is no comparative information for this type of real estate, the expert carries out the expert evaluation of the real estate. Then the tax base is not determined on the basis of the total fee paid by the buyer to the seller but on the value of the real estate on the market. The taxpayer is obliged to pay the determined amount of tax within 15 days from the date of submission of the decision on determining the property tax.
As for the right to a tax refund, that right is vested in the person who paid the tax and was not required to pay it or payed more than it was required.
Inheritance of real estate
In addition to buying, real estate can also be acquired through inheritance. Then the taxpayer is the person who inherits the property.
If the heir chooses to relinquish the property or assign the inheritance to another person during the legacy debate, then that person does not pay the tax but is paid by the person who, by transferring the inheritance, will become the ultimate heir of the property.
If the property is acquired under a donation contract, then the taxpayer is the donor or any other person who has acquired the property without paying any compensation.
The Real Estate Tax Act lists three types of real estate tax exemptions, namely general exemptions, exemptions for turning real estate in a company, and exemptions for inheritance, donation and other acquisition free of charge. General exemptions apply to:
- the Republic of Croatia, local and regional self-government units, state bodies, institutions whose sole founder is the Republic of Croatia, or units of local and regional self-government, foundations, all legal entities whose sole founder is the Republic of Croatia, the Red Cross and non-profit legal entities registered to provide humanitarian assistance under a special regulation;
- Diplomatic or consular missions of a foreign country subject to reciprocity and an international organization for which an exemption from payment of property tax has been agreed by an international treaty;
- Persons acquiring real estate in the process of recovering confiscated property and land consolidation;
- Exiles and refugees acquiring real estate by exchanging their real estate abroad;
- Citizens who purchase an apartment building or apartment (including land) on which they have a tenancy right or with the consent of the tenancy right holder under the regulations governing the sale of apartments occupied by a tenancy right. The same applies to protected tenants who purchase an apartment building or apartment in which they reside under a rental agreement;
- Persons acquiring real estate in accordance with the regulations governing the conversion of social ownership to other forms of ownership;
- Spouses, descendants and ancestors constituting the upright line, and adopted persons and adoptive parents who are in a relationship with the recipient and acquire property from him under a lifetime maintenance contract;
- Persons who acquire separate portions of these or those properties through the co-ownership or division of joint ownership, regardless of the ratios before and after the co-ownership or division of joint ownership.
The second category of exemption, i.e. turning the real estate in a company, presupposes the transfer of ownership of the property from a member of the company to a newly established company or to an existing company. Tax is not paid in the case of mergers and acquisitions of real estate, as well as their separation. The following are exempt from inheritance taxes, donations and other forms of acquisition free of charge:
- The spouse, descendants and ancestors who form the upright line, and the adopted persons and adoptive parents who are in a relationship with the deceased or the donor;
- Legal and natural persons to whom the Republic of Croatia or the unit of local and regional self-government donates, that is, gives real estate free of charge for compensation or for other reasons related to the Homeland War;
- Former spouses when arranging their property relations.
Reporting tax liability
By 2017, each property acquirer was required to report the occurrence of a tax liability to the competent office of the tax authority. Nowadays, this procedure is much simpler, and the registration of the occurrence of a tax liability is considered to have been delivered to a notary public or to a court deciding on the disposal of real estate, and they will submit those documents to the tax authority.
Otherwise, if the services of a notary public or a court are not used, the taxpayer completes the application itself and submits it to the tax authority.