TAX AND FISCAL LAWS RELATING TO NOT-FOR-PROFIT ORGANIZATIONS IN CROATIA
Prepared by:
The term not-for-profit organization
encompasses all organizations organized and operated with a purpose other than
an economic activity or making profit for private gain. With respect to the
manner of their financing they could be classified as follows:
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budget beneficiaries – organizations financed
exclusively from the state budget or budgets of local administration or
self-government bodies
-
not-for-profit organizations in the narrow sense –
organizations funded by various forms of grants, donations, subsidies,
membership fees, contributions etc.
Not-for-profit organizations
supported by sources other than state or local budgets, are:
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private citizen associations,
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political parties,
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chambers,
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trade unions,
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sports associations, clubs and other associations,
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professional associations, communities and federations,
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social welfare-humanitarian associations and
organizations,
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religious communities,
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youth associations and organizations,
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health institutions with non-budgetary funding (health
centers, hospitals, clinics, and other health organizations),
-
other legal entities founded in accordance with
specific regulations and with the purpose other than making profit.
This paper refers to not-for-profit organizations in the
narrow sense -- associations, trusts, foundations and other private
institutions not financed exclusively by the state, which is how the term is
generally understood in an international context.
According to Article 2, Paragraph 10 of the Profit Tax
Act (People’s Bulletin, no. 35/95 and 106/96) not-for-profit organizations
founded with a purpose other than making a profit are exempted from profit
taxation. The same applies to the institutions performing activities limited
to the purpose for which they are set up.
The By-law on Profit Tax (People’s Bulletin no. 7/96, 142/97, and
17/98) further defines not-for-profit organizations and institutions as:
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the Republic of Croatia and state administrative
bodies, local administration and self-government entities and their bodies;
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institutions according to the Law on Institutions
(People’s Bulletin no. 76/93);
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religious communities, political parties, trade unions,
chambers, and private citizen associations;
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trusts and other funds organized for charitable,
humanitarian, scientific, cultural or similar purposes; and
-
other not-for-profit organizations and institutions not
corresponding to any of the aforementioned not-for-profit organizations and
institutions, entitled to that status by a special decision issued by the Tax
Administration.
Institutions and not-for-profit organizations engaged
in profit-making activities become liable for tax on the profit generated by
those activities. The By-law on Profit Tax provides additional criteria for
tax liability. Until December 31, 1997, not-for-profit organizations and
institutions financed or co-financed directly from a budget (state, county,
municipal or communal) as well as trusts and funds organized for charitable,
humanitarian, scientific, cultural and other similar purposes, were exempted
from profit taxation under the condition that the income generated by the
economic activities be used exclusively for carrying out jobs and tasks or
accomplishing the purposes for which the organization was established.
Until
December 31, 1997, not-for-profit organizations and institutions earning
profit from a regular economic activity in an amount which exceeds 50,000.00
kuna were obligated to calculate and pay profit tax for the difference between
the total profit earned and the tax-free profit amounting to 50,000.00 kuna.
As a result of amendments and changes to the By-law on
Profit Tax of January 1, 1998 the taxation status of not-for-profit
organizations suffered significant changes. Namely, not-for-profit
organizations and institutions regularly engaged in profit generating economic
activities, besides their principal activity, are liable for tax on the total
profit generated by those activities, and not only for the difference between
the generated profit and a determined lump amount of the exempted profit. The
By-law does not define a criteria for the regularity of the engagement in an
activity. It also fails to regulate tax exemption for those not-for-profit
organizations and institutions financed directly from a budget (state, county,
municipal or communal). In addition, the By-law has no provisions in relation
to the trusts and funds organized for charitable, humanitarian, scientific,
cultural and other similar purposes, which use all the profit earned from
economic activities exclusively for carrying out the principal purpose for
which they were organized.
The profit tax base is not defined as the difference
between the income produced by carrying out an economic activity and tax
exempted business expenses resulting from the activity in question, but as the
difference between equity capital at the beginning and the end of the
tax period. Business books are conducted in accordance with special
regulations pertaining to not-for-profit organizations. Regarding the
transactions connected to economic activities, not-for-profit organizations
are required to file income tax returns with a Tax Administration office at
the end of each fiscal year. If there are no economic activities, only those
not-for-profit organizations with income or property worth more than 5,000 DEM
are required to file returns. The income tax return is filed on a prescribed
PD form with balance of accounts as well as a profit and loss statement
attached to it. The documents in question should be prepared in accordance
with the Law on Accounting. In case an economic activity generates a loss, the
organization in question is allowed to transfer that loss into the following
accounting period. The loss transferred to the following year is subject to
interest. The tax loss may be transferred from one year to another for
up to 5 years.
Not-for-profit organizations are financed by various
forms of subsidies, donations, subsidies, grants, etc., provided by their
members or other legal or physical persons. The resources generated in this
manner are not subject to taxation if devoted to financing a purpose other
than producing income. On the
other hand, if the funds received are spent to finance an economic activity
carried out by a not-for-profit organization rather than on a non-profit
activity then the funds obtained without compensation, in the form of
donations, gifts or grants will be subject to taxation as a part of the total
revenue generated by that economic activity.
In
accordance with the Law and the By-law on Income Tax, a taxpayer will not be
entitled to an income tax deduction with respect to donations or sponsorships
he or she supplied, unless the recipient provides the donor or sponsor with an
adequate reciprocal favor in the form of promotional services related to the
donor’s company, product or emblem. When no reciprocal favor exists,
donations are not tax deductible regardless of the nature of the recipient’s
organization (humanitarian association, religious society etc.).
However,
pursuant to specific legal regulations, there are two cases when donations up
to certain amount, are considered tax deductible expenses.
First, in the case of donations to free-lance artists or nonprofit
organizations engaged in creative activities. Second, in the case of donations
to sports associations, institutions or commercial associations carrying out
sports activities.
In compliance with the provisions of Article 21 of the
Law on free-lance artists’ rights and promotion of cultural and creative
work (People’s Bulletin no. 43/96, and 44/96) all outflows of resources
having monetary value (cash, goods, services) for the benefit of legal
entities or physical persons engaged in creative or cultural activities and
dedicated to accomplishing those activities are considered tax deductible
expenses, under the condition that there are no reciprocal favors by the
recipients. The income tax base for physical persons, or the profit tax base
for legal entities which are not predominantly owned by the state or local
administration and self-government entities, as well as public enterprises,
will be reduced by the corresponding amount of the gift.
In accordance with Article 21, Paragraph 2 of the Law
on the rights of free-lance artists, an individual may deduct up to 5,000.00
kuna annually, while a legal person may deduct up to 15,000.00 kuna. In
special cases, individuals or legal persons may deduct larger amounts upon
obtaining a certificate by the Minister of Culture stating that the funds in
question will be spent on cultural or artistic programs. The certificate is
issued upon a request submitted by a taxpayer – supplier of goods.
Donors, whether legal or physical persons, must
provide evidence of the amounts paid to the giro account of the free-lance
artist or nonprofit organization. This
evidence should include a statement of the giro account, a copy of the
transfer order, the deed of the donation, the donation agreement, the decision
issued by the legal entity’s authorized body, written documentation of the
goods and services rendered including their market value and, in the case of a
gift worth over 5,000.00 or 15,000.00 kuna, a certificate of the Minister of
Culture. Pursuant to Article 2,
Paragraph 1 of the Law on the Rights of Free-Lance Artists, donations received
from legal or physical persons of up to 20,000.00 kuna annually are not
considered to be income produced by free-lance activity and free-lance artists
are not obliged to register such donations received on their giro account as
business income in their business books, nor are they requested to include
such donations in their annual income tax return, which has to be submitted at
the end of each taxation period.
Pursuant
to Article 22 of the Law on Rights of Free-Lance Artists, the tax-free portion
of an artistic author’s fee for a work of art is 25% , provided that the
work of art has been certified by an authorized professional artistic
association or an authorized agency upon collection of the author’s fee.
2.2.
Tax preferences regarding donations to sports activities
Pursuant
to the provisions of the Law on Sport (People’s Bulletin no. 111/97) legal
persons subject to profit tax may deduct expenses for all outflows of goods
bearing monetary value (cash, goods, services) and donated without
compensation to organizations, institutions and commercial associations
engaged in sporting activities. The tax-deductible amount cannot exceed
500,000.00 kuna annually. Taxpayers subject to income tax
may deduct up to 50,000.00 kuna regarding donations to sports
activities. Such donations are considered to be expenses which can be deducted
from their tax base amount. However,
the Minister of Finance can approve larger amounts of tax deductible income or
profit in the case of sponsoring national teams.
Generally, not-for-profit organizations are allowed to
perform activities for which they
are registered, provided that their primary purpose is not making profit.
Regulations related to the registration procedure of not-for-profit
organizations lack a clear definition of permitted economic activities. In
practice, a restrictive principle with respect to registering associations is
generally applied: associations including economic activities in their
registration documents are often denied registration or required to delete the
proposed activities from their forms, thus eliminating the possibility of
doing them. According to this approach, associations should only carry out
activities relating to spare time, leisure, amusement, pursuing special
interests, humanitarian activities and the like. For example, an association
wishing to offer Esperanto courses was not allowed to do so because it was
considered to be a commercial activity. In addition, offices authorized to
register associations lack uniform standards regarding the definition of an
economic activity.
In
practice, not-for-profit organizations are generally not permitted to engage
in economic activities. Limitation of economic activities to a certain
percentage of the entire engagement of an organization is not applied as a
principle. However, in exercising
this restrictive principle regarding permitted activities, there are some
exceptions. For instance, the
small number of associations included in the value-added tax system indicates
that a considerable portion of these associations’ activities is of a
commercial nature.
The
status of not-for-profit organizations in the value-added tax system is not
consistently determined. For example, some not-for-profit organizations are
not considered subject to the value-added tax, while others are under certain
circumstances.
In
accordance with Article 6 of the Law on Value-Added Tax
(people’s Bulletin no. 47/95), state authorities, state and local
self-government and administration bodies, political parties, chambers and
trade unions are not subject to value-added tax because they are not engaged
in entrepreneurial activity. In
other words, they are not considered entrepreneurs. According to Article 2
Paragraph 3 of the Law, an entrepreneur is a legal or physical person pursuing
independently and regularly an income-generating activity. The above-mentioned
organizations perform their activities independently and regularly, but the
third condition – offering certain deliveries for the purpose of making
income – is not satisfied because the principal purpose of the activities
carried out by these organizations is fulfillment of particular interests and
goals of their members or of the state not making a profit.
These
organizations are eligible for value-added tax exemptions for their
deliveries, but not for deductions of the value-added tax (preliminary tax)
contained in the purchase invoices received. In other words, the value-added
tax calculated in vendors’ invoices represents a portion of their purchasing
expenses. However, they
can be subject to VAT with respect to certain activities. In the case
of starting an economic market-competitive activity, the tax exemption for
such activity would create certain advantages. Therefore, the Tax
Administration issues a decision establishing value-added tax liability
exclusively for that particular activity. The decision is issued by the Tax
Administration based on their own estimation of acquired conditions or upon
the suggestion of another taxpayer or interested party, in which case, the
authorized chamber should support the suggestion.
With respect to business activities subject to
taxation, not-for-profit organizations are granted the right to deduct the
value-added tax amount from the purchases connected to the taxed activity.
That means dividing the total amount of the calculated value-added tax on
suppliers’ invoices (preliminary tax) into two parts: a deductible portion
related to the entrepreneurial activity, and a non-deductible portion related
to carrying out statutory activities.
In addition to the not-for-profit organizations listed
earlier, which are explicitly granted value-added tax exemptions according to
legal regulation, the same applies to not-for-profit organizations engaged in
supplying goods or services with a total value under 50,000.00 kuna annually
(upon deducting the value of tax-exempted deliveries). These not-for-profit
organizations are not obliged to include the value-added tax amount in the
invoices for goods or services supplied, but they are also not eligible for
preliminary tax deductions on their own purchases. Their invoices should
specify that the issuer is not included in the value-added tax system. If they
want, they can apply for changing their taxation status. The application
should be filed with an authorized Tax Administration office. Upon receiving
the application (provided it was received before the end of the current year)
the Tax Administration will issue a decision stating that the not-for-profit
organization in question is included in the value-added tax system starting
January 1 the following year. The decision is considered effective for the
period of the next five calendar years.
According to the provisions of Article 11 of the Law
on Value-added Tax, value-added tax exemption applies to:
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lease services of residential premises;
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medical treatment services provided by health institutions: health
centers, ambulance services, clinics, general and specialized hospitals and
clinics, and medical treatment services provided by a home care health
institution;
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services and deliveries supplied by social welfare institutions;
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services and deliveries supplied by child and youth care institutions;
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services and deliveries provided by religious societies and
institutions;
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services provided by educational institutions and student welfare
institutions; and
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services provided by public cultural institutions: museums, galleries,
archives, libraries, theaters, orchestras and other musical or theatrical,
conservation, or restoration institutions as well as institutions for
protection of cultural monuments.
The lease
of residential premises is tax exempt so long as its purpose is for a
permanent dwelling. Occasional leasing of residential premises for tourist or
business purposes however, is not
tax exempted. This is called a functional tax exemption because it applies to
the service category and not to the person or organization providing the
service.
The other tax exemptions are considered to be of an
institutional character, which means that the institutions or societies
mentioned earlier are eligible for tax exemption, but only if they act in
accordance with the specific regulations determining their activity. All
institutions satisfying these conditions are exempted from value-added tax on
all services and goods delivered, including deliveries performed within the
scope of their supplementary or secondary activity. Consequently, those
institutions will be exempted from value-added tax on the lease of their
property, calculation of interest, delivery of goods produced by a production
unit that is part of the organization (for example students’ workshops in
educational institutions) and the like. Invoices for their deliveries have to
specify the section of the law that stipulates the tax exemption.
However, with the development of the nonprofit sector,
activities concerning child care, education, culture, health and social
welfare are just partially covered by state (public) institutions, while the
other part is covered by private institutions formed in compliance with the
regulations on commercial companies or the regulations on craftsman activity.
The organizations carrying out these activities are required to calculate the
value-added tax on all services and goods they deliver. The same applies to
institutions, that are not eligible for tax exemption pursuant to legal
provisions.
Not-for-profit organizations are, in principle,
included in the value-added tax system. Only those organizations which are
explicitly declared as not being tax liable have their services and deliveries
of goods exempted from VAT. The following organizations are subject to VAT
only if they perform taxable deliveries worth over 50,000.00 kuna annually, or
have applied to be included in the system:
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private citizen associations,
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sports associations, clubs and federations,
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professional associations, societies and federations,
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youth organizations and associations,
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welfare-humanitarian associations and organizations,
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other legal persons founded according to specific regulations and with
a statutory purpose other than making a profit.
Not-for-profit organizations within the value-added
tax system are responsible for:
1)
calculating the amount of value-added tax at a 22% tax rate on the
total value of their deliveries;
2)
keeping records of their accounts receivables, accounts payables and
goods imported;
The
tax included in the suppliers’ invoices is considered a preliminary tax
amount, so long as the invoice was not paid in cash.
As such, the value-added tax is not considered to be an acquisition
cost. Regarding not-for-profit organizations financed in part by
donations, membership fees, and contributions, or partly by income generated
through the delivery of goods and services which are subject to VAT, the
requirement to divide the preliminary tax into deductible and non-deductible
portions is not explicitly prescribed. The deductible portion of the
preliminary tax refers to entrepreneurial activity, while the non-deductible
portion refers to non-entrepreneurial activity of the not-for-profit
organization. There are different views concerning the right of not-for-profit
organizations to completely exercise the eligibility for deduction of the
preliminary tax. Therefore, an explanation by the Ministry of Finance is
anticipated.