At the start of 2025, Croatia is introducing a comprehensive package of tax reforms aimed at reducing the income tax burden, simplifying the property taxation framework, and incentivising the return of the Croatian diaspora. These reforms are accompanied by amendments to the Investment Promotion Act and the State Aid for Research and Development Projects Act, covered in our previous posts, which focus on tax relief and incentives for research and development projects.

1. New Property Tax

The reform introduces a property tax to replace the existing holiday home tax. All property owners, both individuals and legal entities, will now be subject to this tax:

• The tax rate ranges from EUR 0.60 to EUR 8.00 per square metre,depending on the decision of the local authority.
• Additional criteria:The tax amount may vary based on location, age of the property, and available infrastructure. Municipalities and local governments will define precise criteria for each zone or settlement.

This change may affect all property owners in Croatia, particularly in tourist and urban areas where local authorities may set higher rates.

2. New Tax Framework for Tourist Rentals

Za sve iznajmljivače turističkog smještaja uvodi se A per-bed tax ranging from EUR 20 to EUR 300 is being introduced for all tourist accommodation providers, replacing the existing flat-rate tax. The rate will depend on the tourism development index of the area in which the accommodation is located. This measure will particularly affect high-traffic tourist regions, such as coastal counties.

3. VAT Changes

The new reform raises the VAT registration threshold from the current EUR 40,000 to EUR 60,000 in annual turnover. This change provides relief for small business owners, allowing them to remain outside the VAT system for longer and manage their finances with greater ease.

4. Income Tax: Relief for Employees

The income tax changes are aimed at further reducing the tax burden on employees, increasing the personal allowance, and lowering income tax rates:

• The basic personal allowance is increasing from EUR 560 to EUR 600 per month.
• The higher income tax rate threshold is being raised from EUR 50,400 to EUR 60,000 per year.
• A reduction in tax ratesis planned to provide additional relief for employees.

As part of the new tax measures, returning Croatians who are citizens or descendants of emigrants will be exempt from income tax on employment income for the first five years following their return. This measure provides financial support for those choosing to return to Croatia and facilitates their reintegration into the domestic economy.

Minimum Wage Increase and Student Hourly Rate

The Croatian Government has adopted a new regulation increasing the minimum gross wage for 2025 to EUR 970,representing a 15.48% rise compared to 2024. The minimum student hourly rate is also increasing to EUR 6.06:

• Minimum wage:Applicable from 1 January 2025 and covering all workers, excluding supplements for night work, overtime, and work under arduous conditions.

Compensation measures for employers:To ease the transition to the new minimum wage, the Croatian Government has announced financial incentives for employers, including a monthly payment of EUR 130 per worker for the first three months of 2025.

New Contribution Rules

Health insurance contributions (16.5%) will continue to be exempt for first-time employees; however, a significant change applies to young workers:

• The exemption for young workers with up to 5 years of service is being abolished,meaning health insurance contributions will henceforth be payable for this group of workers. Employers already benefiting from this relief retain the right to do so until the five-year period expires.

This measure may affect employer operating costs, particularly in industries with a higher share of young workers, such as the IT sector.

The 2025 tax reform introduces a series of changes aimed at improving Croatia's fiscal framework and ensuring the competitiveness of the economy. These changes present an opportunity for a better fiscal position for employees and smoother integration for returning citizens, while employers can expect additional costs through amendments to contributions and the minimum wage. Feel free to reach out to us for help in assessing the impact of this tax reform on your business in 2025 and beyond.