Global minimum corporate income tax​

In December 2021, the Organisation for Economic Co-operation and Development (OECD) published the document Tax Challenges Arising from the Digitalisation of the Economy - Global Anti-Base Erosion Model Rules (Pillar Two) (hereinafter: OECD Model Rules).

The OECD Model Rules are contained in Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (hereinafter: Directive) with some adjustments for the Member States of the European Union.

The Directive was adopted to implement the OECD Model Rules in a manner as close as possible to a global agreement and to ensure that the rules implemented by Member States under the Directive are qualified within the meaning of the OECD Model Rules.   Due to its complexity, the Directive was introduced into the Croatian tax system through the Global Minimum Corporate Income Tax Act (Official Gazette No. 155/2023: hereinafter the Act). 

The application and scope of the Act

• The Act applies to constituent entities that are members of an MNE group or a large-scale domestic group whose annual income, in the consolidated financial statements of the ultimate parent entity, in at least two of the four fiscal years immediately preceding the model fiscal year amounts to EUR 750,000,000.00 or more, including income from excluded entities.
• ​The minimum effective taxation of profit is ensured by applying the rules for the payment of top-up tax, which are established in accordance with the provisions of the Act, namely:

• The application of these rules determines the amount of the top-up tax which ensures that the effective taxation of profits is at least 15%. Collection of qualified domestic top-up tax under a) takes precedence over other rules. 
• ​​​​Top-up tax constitutes the income of the state budget of the Republic of Croatia.  

The Act contains several complex areas: 

1. Specific rules for the identification of potential taxable persons, included and excluded entities.

2. The rules for determining the qualifying income (loss) of each participating entity, in order to determine the total qualifying income (loss) of the group in the territory of the country (jurisdiction) - GloBE rules.

3. The determination of the recognised (covered) profit taxes of each entity and the total tax paid by the group in the country (jurisdiction).

4. The rules for the calculation of the effective tax rate.

5. The rules for payment of top-up tax.

6. Administrative obligations of the MNE and large-scale domestic group, obligations of the Tax Administration and the method of payment and collection of top-up tax.

7. Transitional rules.

8. The obligation to draft specific ordinances, to publish safe harbour agreements and to apply the OECD rules.

The Act entered into force on 31 December 2023, and the ordinance for the application of the Act will be adopted by the end of 2025.

Qualifying international agreement on safe harbours

The Act stipulates that when determining the amount of the top-up tax liability, the adopted appropriate OECD models and rules relating to the application of the rules for the payment of the top-up tax liability in the Act shall be taken into account to the extent that this is in accordance with the provisions of that Act.

The Minister of Finance will prescribe the uniform application of the OECD model and rules by the end of 2025. 

The Act provides that, at the decision of the constituent entity, the agreed qualifying international safe harbour agreements relating to the application of country-by-country reporting, the undertaxed profits rule and the qualified domestic top-up tax standard shall be applied for the purposes of applying this Act. 

It is also stipulated that the Minister of Finance shall publish on the official Tax Administration website the agreed Safe Harbour Agreements and subsequently agreed qualifying international safe harbour agreements which shall apply mutatis mutandis for the purposes of this Act.
 

​Qualifying international safe harbour agreements to be applied when determining the tax liability under this Act are published at the following link: 

I. Safe Harbours and Penalty Relief: Global Anti-Base Erosion Rules (Pillar Two) 

Page 6:

"Transitional CbCR Safe Harbour​ 

1. During the Transition Period, the Top-up Tax in a jurisdiction for a Fiscal Year shall be deemed to be zero where:

a. the MNE Group reports Total Revenue of less than EUR 10 million and Profit (Loss) before Income Tax of less than EUR 1 million in such jurisdiction on its Qualified CbC Report for the Fiscal Year; or

b. the MNE Group has a Simplified ETR that is equal to or greater than the Transition Rate in such jurisdiction for the Fiscal Year; or

c the MNE Group’s Profit (Loss) before Income Tax in such jurisdiction is equal to or less than the Substance-based Income Exclusion amount, for constituent entities resident in that jurisdiction under the CbCR, as calculated under the GloBE Rules.

2. The terms set out above have the following definitions:

Simplified Covered Taxes is a jurisdiction’s income tax expense as reported on the MNE Group’s Qualified Financial Statements, after eliminating any taxes that are not Covered Taxes and uncertain tax positions reported in the MNE Group’s Qualified Financial Statements.

Simplified ETR is calculated by dividing the jurisdiction’s Simplified Covered Taxes by its Profit (Loss) before Income Tax as reported on the MNE Group’s Qualified CbC Report.

Transition Period covers all of the Fiscal Years beginning on or before 31/12/2026 but not including a Fiscal Year that ends after 30/6/2028.

Transition Rate means:

(a) 15% for Fiscal Years beginning in 2023 and 2024;

(b) 16% for Fiscal Years beginning in 2025; and

(c) 17% for Fiscal Years beginning in 2026.​"

Page 8:​

Source of information

1. The terms set out below have the following definitions:

Qualified CbC Report means a Country-by-Country Report prepared and filed using Qualified Financial Statements.

Total Revenue means an MNE Group’s Total Revenues in a jurisdiction as reported on its Qualified CbC Report.

Profit (Loss) before Income Tax means an MNE Group’s Profit (Loss) before Income Tax in a jurisdiction as reported on its Qualified CbC Report.

Qualified Financial Statements means:

a) the accounts used to prepare the Consolidated Financial Statements of the UPE (to mirror the requirement under Article 3.1.2);

b) separate financial statements of each Constituent Entity provided they are prepared in accordance with either an Acceptable Financial Accounting Standard or an Authorised Financial Accounting Standard if the information contained in such statements is maintained based on that accounting standard and it is reliable; or

c) in the case of a Constituent Entity that is not included in an MNE Group’s Consolidated Financial Statements on a line-by-line basis solely due to size or materiality grounds, the financial accounts of that Constituent Entity that are used for preparation of the MNE Group’s CbC Report.​"

Page 13-14:

Treatment of Certain Entities and Groups​"

Special Rule for Joint Ventures

Special Rule for Tax Neutral UPEs

2. The Transitional CbCR Safe Harbour shall not apply in the UPE jurisdiction where the UPE is a Flow-through Entity unless all the Ownership Interests in the UPE are held by Qualified Persons.

3. Subject to paragraph 2, where a UPE is a Flow-through Entity or subject to Deductible Dividend Regime, the Profit (Loss) before Income Tax (and any associated taxes) of the UPE shall be reduced to the extent where such amount is attributable to or distributed as a result of an Ownership Interest held by a Qualified Person.

4. For purposes of paragraphs 2 and 3, a Qualified Person means:

(a) in respect of a UPE that is a Flow-through Entity, a holder described in Article 7.1.1 (a) to (c) of the Model Rules; and

(b) in respect of a UPE that is subject to Deductible Dividend Regime, a holder described in Article 7.2.1 (a) to (c) of the Model Rules.

Special Rules for Investment Entities and their Constituent Entity-owners

​5. Where an Investment Entity is resident in a jurisdiction for CbCR purposes (the Investment Entity Jurisdiction):

(a) subject to paragraph 6 below, the Investment Entity is required to make a separate GloBE calculation under Articles 7.4 - 7.6;

(b) the Investment Entity Jurisdiction and the jurisdiction of residence of any Constituent Entity Owner may continue to benefit from the Transitional CbCR Safe Harbour; and

(c) the Profit (Loss) before Income Tax and Total Revenue of the Investment Entity (and any associated taxes) shall be reflected only in the jurisdictions of its direct Constituent Entity-owners in proportion to their Ownership Interest.

6. The Investment Entity is not required to make a separate GloBE calculation where an election has not been made under Article 7.5 or 7.6 and all the Constituent Entity Owners are resident in the Investment Entity Jurisdiction.

7. For the purposes of paragraphs 5 and 6, an Investment Entity includes an Insurance Investment Entity.

Special Rule for Net Unrealised Fair Value Loss

8. A Net Unrealised Fair Value Loss shall be excluded from Profit (Loss) Before Income Tax if that loss exceeds EUR 50 million in a jurisdiction.

9. A Net Unrealised Fair Value Loss means the sum of all losses, as reduced by any gains, which arise from changes in fair value of Ownership Interests (except for Portfolio Shareholdings).

Exclusions

10. The following Constituent Entities, MNE Groups or jurisdictions are excluded from the Transitional CbCR Safe Harbour:

(a) Stateless Constituent Entities;

(b) Multi-parented MNE Groups where a single Qualified CbC Report does not include the information of the combined groups;

(c) Jurisdictions with Constituent Entities that have elected to be subject to Eligible Distribution Tax Systems under Article 7.3; and

(d) Jurisdictions that have not benefited from the Transitional CbCR Safe Harbour in a previous Fiscal Year in which the MNE Group is subject to the GloBE Rules, unless the MNE Group did not have any Constituent Entities in that jurisdiction in the previous year.​"

Page 22:

"Simplified Calculations Safe Harbour Framework"​

​Section 1 : Safe-harbours-and-penalty-relief-global-anti-base-erosion-rules-pillar-two​ ​

1. The Top-up Tax (other than Additional Current Top-up Tax) for a jurisdiction shall be deemed to be zero for a Fiscal Year when the Tested Jurisdiction has met the requirements of the:

(a) Routine Profits Test;

(b) De Minimis Test; or

(c) Effective Tax Rate Test.

2. A Constituent Entity may use a Simplified Income Calculation, Simplified Revenue Calculation, or a Simplified Tax Calculation for the purposes of determining whether any of these tests are met in the Fiscal Year.

3. A Tested Jurisdiction meets:

(a) the Routine Profits Test if its GloBE Income as determined under the simplified income calculation is equal or less than the amount that results from computing the Substance-based Income Exclusion for that jurisdiction in accordance with Article 5.3 of the GloBE Rules.

(b) the De Minimis Test if the Average GloBE Revenue of such jurisdiction Income as determined under the simplified income calculation is less than EUR 10 million, and the Average GloBE Income of that jurisdiction is less than EUR 1 million or has a loss in accordance with Article 5.5 of the GloBE Rules.

(c) the ETR Test if the Effective Tax Rate of the jurisdiction as determined under the simplified income and tax calculation, is at least 15% as determined in accordance with Article 5.1.1 of the GloBE Rules.

4. The Simplified Income Calculation, Simplified Revenue Calculation, and Simplified Tax Calculation (together “Simplified Calculations”) are alternative calculations to the GloBE Income or Loss, GloBE Revenue and Adjusted Covered Taxes calculations required under the GloBE Rules, respectively. These calculations will be provided in Agreed Administrative Guidance where the Inclusive Framework on BEPS has determined that adjustment or simplification:

(a) provides for the same final outcomes as those provided under the GloBE Rules; or

(b) does not otherwise undermine the integrity of the GloBE Rules."

​​

 Page 39-40:

Section 2: Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), December 2023 

​"Non-material Constituent Entity (NMCE) Simplified Calculations​"

1. In order to determine the eligibility for the Simplified Calculations Safe Harbour for a Tested Jurisdiction, a Filing Constituent Entity may make an Annual Election to determine the GloBE Income or Loss, GloBE Revenue and Adjusted Covered Taxes of a Non-Material Constituent Entity using the NMCE Simplified Calculations.

2. A Non-material Constituent Entity is an Entity, including its Permanent Establishments, that is not consolidated on a line-by-line basis in the UPE’s Consolidated Financial Statements solely on size or materiality grounds and is considered a Constituent Entity in accordance with Article 1.2.2, provided that:

a. the Consolidated Financial Statements are those that are described in paragraphs (a) or (c) of the definition provided under Article 10.1.1;

b. the Consolidated Financial Statements are externally audited; and

c. in the case of an Entity with a Total Revenue that exceeds EUR 50 million, its financial accounts that are used to complete the CbC Report are prepared in accordance with an Acceptable Financial Accounting Standard or an Authorised Financial Accounting Standard.

3. Using the NMCE Simplified Calculations means applying all of the following calculations with respect to a Non-material Constituent Entity for purposes of applying the tests under the Permanent Safe Harbour:

a. under the Simplified Income Calculation, the GloBE Income of a Non-Material Constituent Entity is equal to the Total Revenue as determined in accordance with the Relevant CbC Regulations;

b. under the Simplified Revenue Calculation, the GloBE Revenue of a Non-Material Constituent Entity is equal to its Total Revenue as determined in accordance with the Relevant CbC Regulations; and

c. under the Simplified Tax Calculation, the Adjusted Covered Taxes of a Non-Material Constituent Entity is equal to its Income Tax Accrued (Current Year) as determined in accordance with the Relevant CbC Regulations.

4. Relevant CbC Regulations means the Country-by-Country Reporting regulations of the UPE Jurisdiction or of the surrogate parent entity jurisdiction if a Country-by-Country Report is not filed in the UPE Jurisdiction. If the UPE jurisdiction does not have CbC requirements and an MNE Group is not required to file a CbC Report in any jurisdiction, Relevant CbC Regulations shall mean the OECD BEPS Action 13 Final Report and the OECD Guidance on the Implementation of Country-by-Country Reporting.​

​II. Tax Challenges Arising from the Digitalisation of the Economy - Administrative Guidance on the Global AntiBase Erosion Model Rules (Pillar Two), July 2023 Inclusive Framework on BEPS
 

​Page 80:

 "Standards for a QDMTT Safe Harbour"

​1. A QDMTT complies with the requirements of the QDMTT Safe Harbour if it meets the QDMTT Accounting Standard, the Consistency Standard, and the Administration Standard. 

2. A QDMTT meets the QDMTT Accounting Standard if the QDMTT legislation adopts one of the following:

(a) provisions that are equivalent to Articles 3.1.2 and 3.1.3 of the GloBE Model Rules; or 

(b) the Local Financial Accounting Standard Rule. 

3. Under the Local Financial Accounting Standard Rule:

(a) the QDMTT shall be computed based on the Local Financial Accounting Standard of the QDMTT jurisdiction where all of the Constituent Entities located in that jurisdiction have financial accounts based on that standard and: 

i. are required to keep or use such accounts under a domestic corporate or tax law; or

ii. such financial accounts are subject to an external financial audit;

(b) the Local Financial Accounting Standard is a financial accounting standard permitted or required in the QDMTT jurisdiction by the Authorised Accounting Body or pursuant to the relevant domestic legislation that is an:

i. Acceptable Financial Accounting Standard; or

ii. Authorised Financial Accounting Standard adjusted to prevent Material Competitive Distortions; and

(c) in case where not all Constituent Entities located in the jurisdiction meet the requirements of subparagraph (a) or the Fiscal Year of such accounts is different to the Fiscal Year of the Consolidated Financial Statements of the MNE Group, the QDMTT shall be computed based on the provisions that are equivalent to Articles 3.1.2 and 3.1.3 of the GloBE Model Rules.

4. A QDMTT meets the Consistency Standard if the computations under the QDMTT are the same as the computations required under the GloBE Rules, except where the QDMTT Commentary explicitly requires the QDMTT to depart from the GloBE Rules. The Consistency Standard is met notwithstanding ​that the QDMTT:

(a) does not include or has a more limited Substance-based Income Exclusion;

(b) does not include or has a more limited De Minimis Exclusion; or

(c) has a minimum tax rate above 15% for purposes of applying the Top-up Tax Percentage to the Profits or Excess Profits for the jurisdiction. 

5. A QDMTT meets the Administration Standard if it meets the requirements provided under the ongoing monitoring process applicable to the GloBE Rules."

N.B.:
Given the fact that Article 60(2) of the Act stipulates that the agreed safe harbour agreements referred to in Article 57 of the Act and the subsequently agreed qualifying international agreement on safe harbours referred to in Article 34(2) of the Act shall be applied when calculating the tax liability, when calculating the qualified domestic minimum top-up tax (QDMTT), this tax liability shall be determined using an accounting standard that meets the conditions set out in items 2 or 3 for QDMTT Accounting Standard. This means that it will not be possible to apply Article 13(4) of the Act with regard to the application of the accounting standard: „For the purposes of applying paragraph 1 of this Article, where a constituent entity is not subject to the application of the International Financial Reporting Standards in accordance with a special regulation, the calculation of excess profit of low-taxed constituent entities in the Republic of Croatia may be based on the corresponding financial statement prepared in accordance with the Croatian Financial Reporting Standards established in accordance with that special regulation applicable in the Republic of Croatia, which shall be corrected in the event of a significant distortion of competition identified in accordance with this Act.“
The provisions of items 2 and 3 set out the QDMTT Accounting Standard, and are comparable with the provisions of Article 17(2) of the Act establishing the acceptable accounting standard for the preparation of financial statements. The Standard may be used to determine qualifying profit or loss if it is not possible to clearly identify the financial accounting net profit or loss of a constituent entity using the accounting standard applied in preparing the consolidated financial statements of the ultimate parent entity.
 
Accordingly, the calculation of the QDMTT may be based on the corresponding financial statement prepared using the HSFI or IFRS provided that the conditions referred to in item 3 b) of the Standard are met. This also applies if the differences arising in the reporting of items relating to the calculation of top-up tax between IFRS and HSFI are of a more significant nature.
 

III. Tax Challenges Arising from the Digitalisation of the Economy - Administrative Guidance on the Global AntiBase Erosion Model Rules (Pillar Two), July 2023 Inclusive Framework on BEPS
 

​ Page 89:

"Transitional UTPR Safe Harbour"

1. The UTPR Top-up Tax Amount calculated for the UPE Jurisdiction shall be deemed to be zero for each Fiscal Year during the Transition Period if the UPE Jurisdiction has a corporate income tax that applies at a rate of at least 20%. 

2. Transition Period means the Fiscal Years which run no longer than 12 months that begin on or before 31 December 2025 and end before 31 December 2026​"

Administrative Guidance 

The Act as well as the Directive should primarily ensure that the OECD Model Rules are implemented in a manner as close as possible to a global agreement, so that the rules are assessed as qualified within the meaning of the OECD Model Rules.

Therefore, the Act stipulates that when determining the amount of the top-up tax liability, the adopted appropriate OECD models and rules relating to the application of the rules for the payment of the top-up tax liability in the Act shall be taken into account to the extent that this is in accordance with the provisions of that Act. This provision indicates the application of the rules agreed at the level of the Inclusive Framework on BEPS (Base erosion and profit shifting) of which the Republic of Croatia is a member.

This assumes that in the Republic of Croatia, in accordance with the Act and the rules agreed at the level of the Inclusive Framework, the adopted Administrative Guidance will also be applied, while other regulations​ will prescribe everything necessary related to the application of the Administrative Guidance ​(deadlines, manner of submitting tax returns, payment of taxes, communication, content of tax returns in the Croatian language, etc.).

The Administrative Guidance to be applied for the purpose of determining the top-up tax liability is available in English: Tax Challenges Arising from the Digitalisation of the Economy