An Agreement to Avoid Double Taxation between Croatia and the United States of America was signed on December 7, 2022, by the US Undersecretary for Economic Growth, Energy and Environment Jose W. Fernandez and the Croatian Minister of Finance, Marko Primorac, in Washington, D.C. The signing of this agreement represents a big step forward in the future business relations between Croatia and the USA aiming to achieve the common goals and to simplify the business operations of companies on the territory of both countries.
The signing of the agreement was achieved after several years of efforts on the part of both countries. Preparations started as early as 1995, but the negotiations hadn't officially started at that time.
Double taxation is the result of multiple taxation of taxable transactions and by its nature we can distinguish between economic and legal double taxation. Legal double taxation occurs when one person pays tax twice for the same income, while in economic cases, several participants pay tax for the same transaction. Likewise, double taxation can occur within one country, but also between several countries at the international level. Precisely for this reason, countries mutually sign agreements on the avoidance of double taxation to strengthen cooperation and prevent an excessive tax burden on taxpayers.
One of the most common cases of double taxation can be seen when a company pays tax on profits, and then its shareholders also pay tax on dividends paid out of taxable profits. Furthermore, it is often the case, for example within the European Union, when a resident lives in one member state and works in another. There are also cases of double taxation, which is why there are numerous agreements among EU members that define tax obligations, rates, and other details in order to make it clear exactly what the obligations are upon the occurrence of a taxable transaction.
Agreements on the avoidance of double taxation are specific for each of the signatory countries and regulate income and property taxation in different ways, define which taxes are the subject of the agreement, i.e. who has the right to tax, what will be the tax distribution, maximum tax amounts, rates, and other significant parameters.
The newly signed agreement will be applied after the process of consultation and approval for ratification in the US Senate and the Croatian Parliament. It will prevent excessive taxation by reducing the withholding tax imposed by the source country for taxable income, so it will regulate the exemption from withholding tax of dividends paid to pension funds as well as the exemption of interest from this withholding tax. Withholding tax rates on dividends and royalties will be also reduced.
Mutual business between countries will be facilitated, thus employment opportunities will increase and companies will be able to enter each other's markets more easily. Clearly defined taxation rules will enable a higher level of transparency with the tax authorities and facilitate faster and simpler resolution of potential disputes. An important thing is that the rules of the American and Croatian pension and tax systems will be harmonized. It is obvious that the signing of this agreement is of significant benefit to both Croatia and the USA, which will only strengthen mutual relations and enable better long-term cooperation.
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