Commercial activity in the Republic of Croatia may be conducted through various organizational forms, (types of companies)
There are two main organizational forms for performance of entrepreneurial activity: COMMERCIAL COMPANY and CRAFT.
The Law on Commercial Companies stipulates the following forms / types of commercial companies:
- Public commercial companies (j.t.d.)
- Limited partnership (k.d.)
- Economic interest grouping (G.I.U.)
- Joint-stock company (d.d.)
- Limited liability company (d.o.o.)
- Simple limited liability company (j.d.o.o.)
Each of the above listed types has specific rules and methods of management.
Limited liability company (d.o.o.) in Croatia
Most frequent form of commercial activity of small entrepreneurs is a limit liability company (d.o.o.).
Incorporation of a limited liability company requires share capital of HRK 20,000.00 (approximately 2,700.00 €), which amount may be freely used after incorporation. Share capital may be paid in money, goods and rights. Incorporation and registration of the company is being performed at the competent commercial court.
In case a limited liability company is being incorporated by a single person, such company is incorporated pursuant to establishment deed and in case company is being incorporated by several persons, such company is incorporated pursuant to articles of incorporation. Both forms of incorporation documents are being notarized and they stipulate company name and seat, activities, rights and obligations of shareholders and bodies of the company (management, supervisory board and other) and other elements significant for functioning of such company.
Commercial company is liable for its obligations with its entire assets.Shareholders in capital companies are not liable for obligations of the company (except in case of misuse).
Shareholders may act as members of management board or may employ a shareholder, which is not an obligation.
Commercial companies are under obligation to keep double-entry accounting. In respect to profit tax, entrepreneurs may decide to become taxpayers of profit tax per charged realization (issued invoices regardless of collection) or pursuant to monetary principle in case total income is up to HRK 3,000,000.0 (approximately 406,000.00 €). Regardless of the form of payment of profit tax selected by entrepreneurs, in case total income is up to HRK 3,000,000.00, profit tax is paid per rate of 12% and in case income is higher, tax rate amounts to 18%. In case shareholders pay the remaining net profit, such payment is subject to tax per rate of 12% plus surtax.
Simple limited liability company (j.d.o.o.)
In case of simple limited liability company (j.d.o.o.) lowest amount of share capital isHRK 10.00 and must be paid in money. This form is especially suitable for service activities that do not require significant investment into equipment. In relation to d.o.o., lower initial incorporation costs are an advantage. However, at the end of the year at least ¼ of realized profit after taxation must be reserved. Such company may have a maximum of three shareholders and only one member of the management board.
Simple Limited Liability Company may be transformed into limited liability company by increase of share capital from mandatory reserves, which leads to further expenses (public notary, auditor).
Joint-stock company (d.d.)
Joint-stock company is a commercial company in which shareholders (stockholders) participate with contributions in the share capital divided into shares.Joint-stock company becomes a legal entity upon registration in the court registry. Shareholders are not liable with their assets for obligations of the company. Basic enactment of the joint-stock company is memorandum of association. It stipulates organization of the company. Lowest amount of share capital for incorporation of a joint-stock company is HRK 200,000.00 (approximately 27,000.00 €). Joint-stock company must have a management and supervisory board and must hold sessions of the assembly of the company.
CRAFT is a commercial activity linked with the person of a craftsman. Craftsman is a physical person who independently and permanently performs one or more commercial activities in order to realize profit that may be realized through production, trade or services in the market.
We differentiate the following types of crafts:
- Free craft, performance of which is not conditioned by passing of expert or craftsmen examination.
- Connected craft,performance of which is conditioned by passing of expert or craftsmen examination
- Privilegedcraft, which may be performed by a craftsman only on the basis of a privilege, i.e. permit issued by a competent ministry, i.e. another authority whose competence is stipulated with special regulation, depending on the activity.
In order to perform activity of free, connected and privileged craft, craftsmen must obtain a craft certificate. In order to perform privileged craft, craftsmen must also obtain a privilege, i.e. permit.
Crafts are being registered with competent state administration offices in counties or City of Zagreb. Incorporation costs are low and amount to approximately HRK 500.00 (approximately 67.00 €).
Owner of the craft, i.e. physical person is liable with all his/her assets for liabilities of the craft.
Craftsmen may pay lump-sum tax, income tax or profit tax. Craftsmen may declare income tax in a lump-sum in case they are taxpayers of not value added tax (hereinafter: VAT) and in case they did not realize total annual turnover from commercial activity in the previous period exceeding the amount stipulated for mandatory registration in VAT system (HRK 300,000.00). Craftsmen who are taxpayers of lump-sum tax do not have to keep business records, except records on turnover (KPR form) indicating issued invoices and collection per such invoices. Craftsmen are most frequently taxpayers of income tax for which they are under obligation to keep single-entry accounting.
Craftsmen who voluntarily or “mandatorily“(in case realize total annual turnover from commercial activity in the previous period exceeding HRK 3,000,000.00 /approximately 406,000.00 €/ or other conditions) decide to become taxpayers of profit tax are under obligation to keep double-entry accounting like commercial companies.
VALUE ADDDED TAX (VAT)
Each entrepreneur may decide to be registered in the VAT system or to remain outside of the VAT system as long as it is legally permitted. An entrepreneur that voluntarily decides to be registered in the VAT system is under obligation to remain within the VAT system for the period of three years, regardless of the realized value of deliveries.
Each legal entity or a physical person who realize deliveries of goods and services up to the value of HRK 300,000.00 is considered to be a small entrepreneur and is not under obligation to be registered in the VAT system as long as value of deliveries of goods and services in the previous year do not exceed value of HRK 300,000.00.
In case a small taxpayer receives a service from the EU, such taxpayer must register for VAT purposes and obtain VAT identification number. Once such taxpayer receives invoice from the EU taxpayer, it charges VAT and is under obligation to pay since it is not a VAT taxpayer and input VAT may not be recognized. Entrepreneurs within the VAT system charge appropriate VAT on their deliveries but also qualify for recognition of input VAT on received invoices.
Pursuant to the valid and existing Law on Value Added TAX, VAT is being charged and paid per rate of 25%, i.e. per reduced rates of 13% (for instance, accommodation services, bed and breakfast, full board, half-board, certain newspapers and magazines and other)and 5% (for instance, bread, milk, medicines, books and other).
Each of the above-described legal forms for performance of commercial activities has certain advantages and disadvantages. Taking into consideration frequent changes and amendments of legal provisions that govern incorporation of various organizational forms of commercial activities and tax law, future entrepreneur should seriously consider their future commercial activities and study several main factors; market in which commercial activity is planned; planned turnover in the initial phase of commercial activities; consideration of the entire tax burden, and only then decide on selection of legal form for performance of commercial activity.