Croatia: Tax Authorities Becoming More Vigilant in Taxing Foreign Directors

A foreign director of a Croatian subsidiary may incur tax liabilities in Croatia even if he or she spends no time in Croatia, and there has been a noticeable increase in activity on the part of the Croatian tax authorities in taxing these arrangements.

When setting up the corporate structure of a Croatian company, a tailor-made contractual relationship is required with any non-resident foreign management board member (director). An appropriate legal structure is usually built around the frequency and duration of the foreign director’s stay in Croatia and the scope of his or her tasks. Most frequently, companies choose between engaging a director under (i) a service agreement that is limited in scope and duration of services provided and offers no protection under the employment laws, and (ii) an employment (management) agreement that, depending on the negotiations between the parties, may or may not offer complete protection under the employment laws.

Relevant case law clearly states that it is the content of the agreement and the actual work performed rather than how the contract is named that matters. A director will be considered to be an employee if the important elements of the employment relationship (such as monthly salary, permanent work tasks, and/or work under the direction of an employer) are included in an agreement irrespective of what the parties name that agreement (for instance, “service agreement”).

In cases when a director does not spend time or perform daily business tasks in the Croatian company, but his or her position includes only a formal nomination within the group (which is often the case in multinational companies), parties very rarely enter into a local agreement. Such an approach is in line with local law, since all rights and obligations are regulated at the group level.

The choice of an appropriate form of engagement has significant tax consequences. Different tax treatments and procedures apply to service and employment agreements. Special attention should be paid to scenarios where no agreement is entered into with a non-resident foreign director. If the director is a resident of a country that is not in the European Union or a country with which Croatia has not entered into a social security treaty (e.g., Canada), payment of mandatory contributions to the Croatian tax authority may nevertheless be triggered. Evidence verifying payment of contributions in the home state (if applicable) must be presented to the tax authority upon registration with the court registry in order to avoid accumulated costs and penalties. It is often this step that is overlooked by companies and their advisors. However, the Croatian tax authority actively monitors foreign appointments in the court registry and may send out a payment demand to a foreign director, sometimes years after the event. The demand is sent to the individual director, not the company, although the notification may trigger significant compliance issues at a group level, as well as personal tax implications in the director’s state of residence.

Comment

International companies should take these potential legal and tax liabilities into account before engaging a foreign director as a management board member of a Croatian company. An inadequate choice of contract may trigger (undesired) protection under the employment laws or additional tax expenses for the company.

Written by Dora Gaži Kovačević of Wolf Theiss and Roger James of Ogletree Deakins

© 2019 Wolf Theiss and Ogletree, Deakins, Nash, Smoak and Stewart, P.C.