Knjigovodstveni servis B.D.M.

Beside the main reason – spending part of the year in the attractive Mediterranean zone – an equally important reason for acquiring real estate is its economic use through rentals to other guests.

Until February 1st 2009, when the Stabilization and Association Agreement entered into force, each sales contract entered by a foreign buyer had to be submitted to the Ministry of Justice to obtain its consent for acquiring properties. Their decision making was endless. Therefore, numerous foreign citizens decided to take the „easier way out˝ and set up a limited liability company (a Croatian legal entity).  

 

This newly established company would become the full owner of a property with the purpose of performing economic activities through rental of their property to guests.

 

The first condition that needs to be fulfilled is registering the activity of “accommodation services” at the Commercial court’s registry.

 

The second condition, which caused substantial displeasure to many founders of companies that own properties, is the issue of CATEGORISATION of a facility – an apartment or a holiday house.
Namely, in Croatia, the property rental activity, provided either to domestic or foreign guests, is considered an activity of hospitality.

 

In order to be able to perform the activity of hospitality, a natural person or a legal entity must be registered at the proper registry and have a proper resolution for it.
Besides the aforesaid Commercial court registration, the conditions for obtaining the stated resolution are: a proof that the interested legal entity has the right to use the facility, that the facility where the activity is going to be performed fulfills the required minimal technical conditions prescribed for a certain category and that the building itself fulfills the conditions provided by a special regulation.
In this case the special regulation requires that the occupancy permit for the building be issued in accordance with the intended purpose – performance of economic activities.

 

If the economic purpose isn’t mentioned in the occupancy permit (but only eg. the residential purpose), the Tourism Office, as the body authorised for issuing  decisions of minimal technical conditions, is obligated to reject the application for categorisation of the facility.

 

The problem arises from the fact that most of the properties have a regular occupancy permit – of residential purpose.

 

In case hospitality services are provided without the aforementioned registration and approval, during an audit an authorised inspector may ban any further services until the determined faults are eliminated (until the categorisation is obtained), for a minimum of 30 days. This is done by “sealing” all entrances into the house or the apartment.
This is to be done even if there are guests staying at the facility. Guests are then forced to leave the premises, regardless of the stage of their holiday at the moment they are found on the premises. The next step is “sealing” the facility, by which the ban of performing the activities starts to concretely apply.

 

This is followed by a fine in the amount of 10.000,00 to 150.000,00 kuna for a legal entity, plus 5.000,00 to 15.000,00 kuna for the responsible person within the legal entity (i.e. the company Board member).

At the end, we would like to point out another important fact: although after February 1st 2009,  as far as the purchase of properties is concerned, although same conditions apply to citizens of the European Union and to Croatian citizens, direct rental by foreign owners won’t be possible until Croatia enters the European Union as a full member.

 

Thus, the only solution for undisturbed performance of property rental activities, where the properties have the occupancy permit with residential purpose, is reallocation of the facility and obtaining categorisation as a postulate for renting in accordance with the law.

 

In relations to renting apartments and vacation houses, amended Law on Income Tax of July 1st 2010 prescribes that tax payers, who have apartments and vacation houses recorded in their long term assets, have to achieve income as high as at least 5% of their purchase value, through rentals of those units. In case the economic entity doesn’t achieve that income throughout the fiscal year, all the expenditures resulted in connection with the use of those units (each individually), such as: overhead expenses, amortization etc. cannot be treated as tax deductible expenditures, but the tax basis should be increased for the amount of all these expenses.

 

Next to the annual tax return form, and for this purpose, it is obligatory to submit an overview of data for each and every property asset to tax authorities, which has to contain the prescribed information: type of asset, its purchase value, achieved income on the basis of using this asset, amortization amount and the amount of all other related costs which incurred due to its usage, specified by the type of expenditures.