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Business Group Taxation in Croatia and the Implications of the EU Framework Adoption

Related companies are often taken for granted when some economic decisions are announced. M&A activities conducted by large enterprises are also closely monitored as a precautionary measure of prospect anti-competition behaviour. As far as the EU is concerned much greater advances have traditionally been made in the common policy regarding the indirect taxation. However, the freedom of capital movement has recently promoted the long-ago proposed reforms in the common policy on direct taxation. A more than a decade after being proposed the directive regarding related companies’ income distribution and mergers and divestitures’ taxation have been adopted in the 1990ies and amended in 2003 and 2005, respectively. Recent proposals regarding income tax harmonisation concern tax base and tax rate harmonisation as well as SMEs’ taxation in the parent company country. SME networking is especially encouraged by various tax incentives across the EU. Furthermore, the EU legal framework promotes SME cross-border networking through business forms of a European Company, European Cooperative Society and European Economic Interest Grouping. The concept of separate business entities’ networking has evolved in recent Croatian business practice as well, as an efficient means against the global competition pressures. Nevertheless, it is rarely spoken about whether the taxation framework represents a stimulus or an obstacle to the business group formation and continuance. Little is also known of whether the EU accession would subsequently result in a different business group taxation framework for Croatian enterprises or not. The key to understand various taxation practices for related companies is to realise the different stances in financial reporting and taxation within national legislations. Although business groups as defined for the purposes of financial reporting are often equalised with the business groups as defined for purposes of taxation, these two concepts rarely share common features in positive taxation practices. Starting from the comparative EU income tax legislations regarding related companies, this paper aims to estimate the related companies’ business taxation framework in Croatia and to evaluate if it is favourable or unfavourable for business groups establishment and activity. It would deal with separate vs. group taxation, tax loss treatment, inter-corporate dividends, royalties and interest payments as well as some transfer pricing rules. Having in focus the key EU directives concerning related business entities, the paper would also try to evaluate what regulatory and institutional adaptations would be necessary in Croatia and if and to what degree the fiscal freedom regarding group taxation would apply after the EU joining.

related companies' taxation ; corporate income tax harmonisation ; inter-corporate transactions ; EU accession ; Croatia

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