There are all kinds of things going on in the new Government at the moment. The media are full of pompous announcements, we see titles ˝screaming˝ from all sides, controversies won’t stop, everyone wants to say their opinion (and of course, everyone feels competent to do so) and elaborate on the budget for 2012. So, why should we be an exception?

On their fifth session that took place 26^th January 2012, the Government has published its Proposal of Measures and Guidelines for Drawing up a 2012 Croatian Budget. Since the media are often contradictory on this issue, sometimes inaccurate and often not quite clear in announcing new actions and measures, let’s try to ˝walk through˝ them together. Primarily through the part targeted at entrepreneurs.

Prime Minister Milanović described the basic starting point on creating the Proposal very eloquently:

-  awareness of a high level of uncertainty, which is omnipresent in Croatian economy and life in general, and

-  deep economic crisis, which is impossible to come out of without achieving economic growth. How? Through activating the maximum investment potential possible.

What are the measures the Government wants to head toward the economic growth with? First of all, it has been declared that the economic growth in a country with a little over 4 million inhabitants isn’t and can’t be based on expenditure, but all available resources have to be directed toward export of goods and services, large investments and finding substitute for excessive import.

Accordingly, certain legislative changes regarding tax policy have been set, as first corrective measures for creating conditions for a change in direction. They are:

-  In the category of income tax – the amount of personal deduction is increased (the part of the salary which isn’t subject to taxation), from current 1,800.00 kn to 2,200.00 kn. Consequently, tax classes are changed, for paying tax at different rates (rates won’t be changed, but will remain the same – 12, 25 and 40%).

-  In the category of value added tax – general VAT rate of 23% is increased to 25%, whereas a 10% rate will apply on certain products: oil, fat, food for children and water supply.

-  In the category of mandatory contributions – rate of contribution for mandatory health insurance (paid by employers – so-called contributions on wages) is reduced from 15% to 13%.

Other anticipated ˝novelties˝, intended for competitiveness and solvency of the entrepreneurs are following:

-  Through amendments to the Investment Promotion Act, it is anticipated to introduce tax reliefs on ˝reinvested profit˝. On the other side, profit/dividend ˝taken out˝ by stakeholders from their companies (through so-called net profit/dividend payouts) will be additionally burdened with tax. This is so that by additional taxation, stakeholders’ and shareholders’ tax burden would come close to or even up their employee’s tax burden.

-  Starting 1^st January 2013, VAT on a part of services in the tourist and hospitality industry will be reduced.

-  Deadlines for paying VAT will be extended, from 30 days to 45 days, in a way that in the following 15 months, the deadline will be extended by a day each month.

-  Threshold for entering the VAT system ˝by force of law˝ is raised from current annual turnover in the amount of 85,000.00 kn to annual turnover in the amount of 230,000.00 kn.

-  Reduction of non-tax (popularly called: parafiscal) levies is anticipated: water contribution, fee for the use of public benefit functions of forests and monument annuity.

-  Exemption from paying contributions on wages (contribution for basic health insurance, special contribution in case of injury at work and professional ailment, as well as employment contribution) of newly employed workers is anticipated, for the duration of 2 years (for the purpose of encouraging new employment).

In short, these are the measures covered by the Government’s proposal. We are left with no other choice than to wait and see what happens. Oh, there is one more novelty: the Financial Police, established in 2004, will be shut down.

February, 2012