Procedure for determining the residence of natural persons for tax purposes

Since the Republic of Croatia became part of the European Union’s single market in July 2013, the movement of people, both nationals of other Member States in the direction of the Republic of Croatia and Croatian nationals in the direction of other Member States, has intensified.

The people migrations are motivated by various reasons, short-term, long-term or permanent leaving of the place of residence for the purpose of carrying out a job, managing assets, starting a job, by the reason to settle down in another MS or similar reasons.

While the freedom of movement of persons in the EU’s single market is guaranteed by the EU law, each Member State’s tax laws aim to collect the tax revenue either from its own citizens or from nationals of other Member States.

Therefore, it is in the interest of every EU citizen who owns property in the Republic of Croatia or earns some kind of income in another Member State to know the basic rules of taxation determined by domestic and international tax laws.

The most important term in this complex framework of tax law belongs to the definition of the concept of tax residency. Determining tax residency is important in order to determine the rights and obligations of citizens regarding the place and manner of declaring their annual income, applying (more favorable) tax rates, optimizing tax liabilities and avoiding double taxation.

The terms tax resident or non-resident are defined in Croatian law by the Law on income tax.
This Law states that a resident is a natural person who has a residency or habitual residence in the Republic of Croatia and a natural person who does not have a residency or habitual residence in the Republic of Croatia and who is employed by the state service of the Republic of Croatia and receives a salary on that basis.
A non-resident is a natural person who has neither a residency nor a habitual residence in the Republic of Croatia and earns taxable income in the Republic of Croatia under the provisions of the aforementioned Law.

The term residence is not the same as the term for residence in accordance with the Law on Residence. Thus, the fact that someone is a national or has a registered residence in a particular country does not necessarily mean that he or she is a tax resident of that state.
The taxpayer has residency in the place where he has a house/apartment owned or possessed for a continuous period of at least 183 days in one or two calendar years, and to reside in this house/apartment is not necessary.
A permanent residence is considered to be a permanent or time-related stay of at least 183 days in one or two calendar years.

The basic rule is that the tax resident is obliged to pay tax on “world income”, while the non-resident in the Republic of Croatia is obliged to pay tax only on the income he earns in the Republic of Croatia.

Furthermore, it is a very important fact that there are bilateral International double taxation treaties between the individual Contracting Parties (the Republic of Croatia applies double taxation treaties with more than 60 countries), so if there are doubts about determining residency, the rules of those treaties apply.

The provisions of international treaties for tax authorities do not necessarily mean their automatic application, but merely provide the legal framework for dealing with individual tax issues which affect citizens of Contracting States.
Thus, each citizen individually, in order to consume the rights from the Treaty, must actively participate in the tax procedure, regulate his tax status in each country where he earns income or owns property, in good faith inform tax authorities about important facts relevant to taxation, provide evidence of paid tax in the other Contracting State to avoid double taxation etc.

For example, the tax administration will reduce a resident’s tax liability on income earned in the other Contracting State and thus avoid double taxation if so provided by the Treaty and under condition that the taxpayer provides a proof of income tax return in the other state.