How Croatia’s new property tax will work

Croatia

Last month it was announced that a property tax would be introduced in Croatia and today Minister of Finance, Marko Primorac, outlined the changes.

As daily Večernji list reports, Primorac says that the reforms aim to increase the fairness of the tax system.

“Property and rental prices are rising sharply due to low taxation, particularly income from rentals, especially short-term rentals. We are also facing a labour shortage,” the minister said.

Primorac highlighted several objectives for this tax reform: “We want to improve the property tax system, adjust the tax burden on income from tourism-related, particularly short-term, rentals, continue reducing the tax burden on labour, encourage the return of Croatian citizens to address demographic goals and labour market needs, standardise health insurance contributions for all market participants, digitise and streamline the tax system, and strengthen tax discipline,” he explained.

He then listed six legal acts that will be amended: the Law on Local Taxes, the Income Tax Law, the Contributions Law, the General Tax Law, the Law on the Tax Administration, and the Value Added Tax Law.

Primorac went through each element of the tax system that is being changed, with the first, and in his opinion, the most important being the improvement of the property tax system.

“The property market has moved in an undesirable direction. Properties are being bought not to solve housing issues but primarily for investment, sometimes even for speculative reasons,” Primorac said.

This has led to rising property prices and left more than 600,000 properties either vacant or used solely for short-term rentals. “The aim of this reform is to reduce imbalances in the property market. While it won’t drastically reduce property prices, which wouldn’t be desirable, it will certainly send a message,” said the minister.

Primorac explained that property tax will not apply to those who use the property or rent it out long-term. The tax will primarily be applied to residential properties but will not apply to properties used for agriculture, production, or non-production activities (in line with the decision on communal fees).

The tax will be payable from the day the property is first used. To be exempt, a property must be rented out long-term for at least 10 months a year.

Properties that are not fit for functional living will be exempt from the tax, as well as those that cannot serve as living spaces. Legal entities will also be subject to property tax, except those that acquire properties as a replacement for unpaid debts; they will have a six-month exemption period. After this period, tax will also be payable on these properties.

Croatia

Property tax will not apply to buildings serving a public purpose or those intended for the accommodation of the elderly. Additionally, local government units (LGUs) will have the authority to exempt socially disadvantaged citizens from paying this tax.

“This doesn’t mean discretionary decisions will be made on a case-by-case basis. Clear criteria must be established, such as income per household member, to determine potential exemptions,” Primorac clarified.

The tax will be calculated based on the status of the property on 31st March. If the property is vacant or rented short-term, the tax will have to be paid. The system allows for simple calculation and payment of this tax. “Anyone who does not have a long-term rental contract by 31st March will not be able to meet the 10-month rental requirement by the end of the calendar year, and those individuals will be subject to taxation,” he explained.

The Tax Administration will oversee the long-term rental agreements. If a property is sold after the tax has been paid, there will be no refund of the tax, and the buyer will be responsible for paying tax the following year.

Fines ranging from €1,000 to €6,000 will be imposed for failing to provide the required data. The state has set the tax range between €0.60 and €8 per square metre, with LGUs deciding how much to charge within that range.

If a municipality or city does not make a decision, the 2024 tax rate for holiday homes will apply, Primorac said. “What does this mean in practice? The tax rate per square metre that was applied to holiday homes will now be used, effectively transforming one tax into another,” he explained.

If an LGU did not apply this tax in 2024, a rate of €0.60 per square metre will be applied.

Part of the revenue from this tax will go to LGUs (80%), while the rest (20%) will go to the state budget. The tax will be introduced from 1st January 2025, but to follow all the procedures, LGUs will exceptionally have until the end of February 2025 to make their decisions. “From the second year onwards, decisions must be made by 15th December of the current year for the following year.”

Primorac also addressed the tax on apartments. “The tax burden on long-term rentals is currently around 8.4%, while for short-term rentals, it’s about 2%. In other words, short-term rentals are under-taxed, while long-term rentals are taxed significantly more.

This, along with the lack of property tax, has contributed to the negative consequences, making it difficult to arrange long-term rentals,” he said. Primorac announced that the minimum tax threshold for short-term rentals will be increased, with the criterion being the tourism development index, which is divided into four categories.

For properties rented short-term in the most developed tourist destinations, a minimum of €150 per bed and a maximum of €300 per bed will be charged.

He went on to discuss further tax relief for labour. This will be achieved by increasing the non-taxable portion of salaries, expanding the number of taxpayers subject to lower income tax rates, lowering the upper limit for determining income tax rates, and increasing the amounts of certain non-taxable incomes.

The personal allowance will increase from €550 to €600, as will the allowances for dependants and disability. The higher income tax rate will now apply to a base of €60,000 per year, up from the previous €50,400.

As a reminder, some key elements of the tax reform are already known.

Prime Minister Andrej Plenković announced that municipalities will be able to set minimum income tax rates of up to 20%, smaller towns up to 21%, larger towns and county centres up to 22%, and the City of Zagreb up to 23%.

The upper limits will be capped at 30% for municipalities, 31% for towns, 32% for larger towns and county centres, and 33% for Zagreb. The lower limits will remain at 15% for lower rates and 25% for higher rates.

Particular attention has been given to the property tax. Plenković clarified that properties rented short-term or left vacant will be taxed between €0.60 and €8 per square metre, with the tax rate and possible exemptions being determined by local authorities.