Croatia's government sent a package of nine tax reform bills to Parliament on Friday, which bring a series of tax breaks and changes, which are expected to result in some 2.8 billion kuna (€377 million) in tax relief to businesses and employees.

Perhaps the most significant changes to directly affect average Croatians relates to the decision to cut the VAT rate for over-the-counter drugs from 25 to 5 percent, and to raise non-taxable salary bonus amount from 2,500 kuna (€336) to 7,500 kuna (€1,000).

Under existing regulations, the VAT to prescription medicines is 5 percent, while the general 25 percent rate is applied to all over-the-counter drugs.

In addition, the government plans to reduce VAT to copyright for writers, composers, and artists to 13 percent, which will also be applied to some foods, like meat, fish, fruits, vegetables, eggs, as well as to baby diapers.

The non-taxable bonus income will be increased threefold – from the current 2,500 kuna, to 7,500 kuna per year, which usually includes one-time payments like Christmas bonuses or vacation allowances.

“What we propose is to revise the total amount of annual non-taxable bonus payments. These are usually Christmas bonuses, vacation allowances, Easter bonuses, and the like. What we plan to do is not only increase the non-taxable amount, but also the scope of this regulation, to apply to any bonus however the employer chooses to call it, we will not meddle in that,” Finance Minister Zdravko Maric said.

The regulation will be changed immediately, so that it can come into force by December 1, allowing employers to reward their employees by this Christmas time.

Other changes include reducing tax rate applied to dividends from shares held by company workers, from 36 percent in the first draft of the bill, to 24 percent.

The 24 percent income tax bracket would be expanded to include all salaries up to 30,000 kuna (€4,000) – previously only applied to salaries up to 17,500 kuna (€2,355) – with all income above 30,000 kuna per month taxed at 36 percent rate.

The amended law on contributions – extra taxes paid for by everybody employed – includes abolishing two mandatory contributions, the 1.7 percent contribution for financing the employment bureau services, and the 0.5 percent contribution for workplace health protection. However, the contribution for public health service would be increased to 16.5 percent from the current 15 percent.

“These measures will reduce the overall cost of contributions on salaries from 17.2 percent to 16.5 percent. This means some 900 million kuna (€121 million) in savings for employers, and also an extra 1.35 billion kuna (€182 million) of funding for the public health service,” Maric said.

The package of bills sent to Parliament on Friday will be the third round of tax relief legislation, after two previous sets of revised regulations and tax breaks had been adopted over the past two years, estimated to total 3.8 billion kuna (€511 million) in tax relief for citizens and businesses, Maric said.

(€1 = 7.43 kuna)

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