Areas of Strength

• Croatia reports on tax expenditures across VAT, personal income taxation (PIT) - including social security contributions (SSC) - and corporate income taxation (CIT). Recent reforms have rolled back or phased out tax expenditures deemed no longer effective, notably SSC exemptions for young employees.
• Croatia has made progress in digitalisation of tax administration. It has near-universal e-filing for VAT and CIT, a robust digital tax portal (‘ePorezna’), and is rolling out the project ‘Fiscalisation 2.0’, which will introduce mandatory e-invoicing and real-time reporting by 2026-27.
• The VAT compliance gap is below the EU average, at nearly 8% in 2023. It dropped compared to the previous year in the context of strong VAT revenue growth, fiscal digitalisation, and targeted anti-fraud measures.

Areas for Improvement

• Croatia does not estimate CIT or PIT tax gaps. If the country did, it could shed more light on areas to focus on to close compliance gaps, especially in light of the relatively large shadow economy. Nevertheless, top-down estimates provided by the JRC point to a relatively low CIT tax gap. It could therefore be particularly beneficial to estimate PIT tax gaps, or to complement existing CIT gap estimates with audit-based estimates.
• The VAT rate gap has been increasing and is above the EU average. Croatia’s total VAT policy gap, at 36.6% of notional ideal revenue (NIR) in 2023, is well below the EU average of 51%. However, within the policy gap, the VAT rate gap has been increasing and stands above the EU average. The large rate gap also needs to be viewed in the context of Croatia’s particularly high standard VAT rate.
• There may be scope to further simplify the tax system. In corporate taxation, conditions for tax expenditures can be complex and may discourage businesses from applying them, and also add burden for the tax administration, for example under the Investment Promotion Act. Relatedly, as part of its Recovery and Resilience Plan (RRP), Croatia recently reformed tax expenditures related to R&D, including by increasing deductible amounts and simplifying procedures.
• Despite progress in the use of digital tools, VAT administration could be further improved. For example, Croatia does not maintain a dedicated e-commerce taxpayer register, leaving oversight of online sellers less systematic at a time when platform and cross-border transactions are expanding.

Tax Complexity

Croatia ranks 19^th out of the 27 Member States in the Tax Complexity Index (‘TCI’), where a higher rank corresponds to lower tax complexity. The TCI is based on the Global MNC Tax Complexity Project, a joint research project of Deborah Schanz (LMU Munich) and Caren Sureth-Sloane (Paderborn University). The TCI 2024 places Croatia 26^th among the Member States with regards to Tax Framework Complexity, and 9^th with regards to Tax Code Complexity. This may indicate that whereas the structure of the tax regulations is somehow efficient (particularly in the area of transfer pricing, according to the authors), there is clear room to improve the tax processes carried out by the tax authorities (notably in the area of enactment, according to the authors).

The full Commission Staff Working Document of the Mind the Gap Report - Challenges and opportunities for tax compliance and tax expenditure in the EU regarding Croatia can be found here.

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