On this world, nothing is certain except death and taxes, as famously said by Benjamin Franklin. However, many people forget about certainty and fail to inquire about the exact property tax, only to be surprised by a payment order that quickly arrives at their new address.
Many people overlook the property transfer tax in their financial planning, especially when purchasing their first property. In the first half of 2021 alone, we had at least 4,000 new homeowners. A record-breaking 4,739 applications were submitted to the APN (State Agency for Property Affairs) for subsidized housing.
Are you among those who will soon receive a property transfer tax bill from the Tax Administration?
What is the property tax in Croatia?
The property transfer tax is 3% of the market value of the property at the time of the tax liability, unless the property is subject to VAT (more on that later).
“The buyer is responsible for paying the 3% property transfer tax,” explains Ivan Varat, a real estate advisor from San Patrik Real Estate.
“After the verification of the property purchase agreement, the notary automatically sends the information to the Tax Administration, which then calculates the amount of tax and sends the tax assessment to the buyers’ address”, says – Ivan Varat, real estate advisor.
bought an apartment for a price of 100,000 euros, which is approximately 700,000 Croatian kuna (for simplicity), the property transfer tax you will need to pay amounts to 21,000 kuna (3% of 700,000).
“The Tax Administration determines the market value usually based on the purchase price stated in the purchase agreement, if the purchase price corresponds to the prices achieved or achievable in the market, in accordance with Articles 9 and 12 of the Real Estate Transfer Tax Act,” explains legal expert Ivančica Bobek.
If the Tax Administration has any doubts about the stated amount in the purchase agreement, they will assess your property based on their own tables or recent comparable sales values in your area. If you are dissatisfied with the determined property tax amount, you can file an appeal, as explained below.
Are you liable for property tax?
If you have purchased, inherited, or acquired property in any other way, excluding cases where value-added tax (VAT) is applicable, you are liable for property transfer tax.
The system is designed so that both property transfer tax and VAT are not paid; only one of these taxes is paid.
You are also required to pay tax when exchanging properties. All participants in the property exchange pay tax for the property they acquire.
In the case of property donation or other acquisition without compensation, the recipient of the gift also pays property transfer tax.
If the property is acquired based on a lifelong support agreement, the acquirer of the property is obliged to pay property transfer tax, with the tax amount being reduced by 5% for each year of support, starting from the day of signing the lifelong support agreement.
Payment of property tax in installments
Often, younger people forget about the property tax when buying an apartment. It also happens that the real estate agency through which they obtained the apartment does not mention this cost, assuming it is a well-known fact.
Many hope for tax forgiveness by reading outdated information on the internet or come across articles announcing the abolition of property transfer tax. But none of that happens…
“The Tax Administration allows the payment of tax in 24 installments, with an interest rate of 5.75%,” says Vjeko Peretić, a credit specialist from Pro Group.
When is property tax not paid?
There are precisely defined cases in which buyers are exempt from paying taxes according to the Real Estate Sales Tax Act. For example, when buying a newly constructed property.
“The most common case of tax exemption is when a buyer purchases a property from a company that is obligated to charge VAT on it. Additionally, tax is not paid in the case of inheritance, gifting, or lifelong maintenance, but only in the direct line.” – Ivan Varat, San Patrik Real Estate
In cases of inheritance and gifting, the real estate tax is not paid by spouses, descendants, ancestors in the direct line, as well as adopted children and adoptive parents who are in that relationship with the deceased or donor. This also applies to grandparents, so when gifting, it is necessary to explicitly state in the contract, for example, that a grandfather is gifting a property to a grandchild, and the Tax Administration verifies the information by inspecting birth records.
Here are other situations and exceptions where real estate transfer tax can be avoided. Check if you are among them!
- Individuals acquiring property through the process of restitution of confiscated property and land consolidation.
- Displaced persons and refugees acquiring property by exchanging their properties abroad.
- Protected tenants who purchase residential buildings or the apartments they reside in based on a lease agreement, as well as citizens who purchase residential buildings or apartments in which they had a right of tenancy.
- Individuals acquiring property in accordance with regulations governing the conversion of social ownership into other forms of ownership, including spouses, unmarried partners, formal and informal life partners, descendants, ancestors, adopted children and adoptive parents who are in that relationship with the recipient of maintenance and acquire property from them based on a lifelong maintenance agreement or a agreement on maintenance until death.
- Individuals who, through the division of co-ownership or the division of joint ownership, acquire specific parts of real estate, regardless of the ratios before and after the division of co-ownership or joint ownership.
Property Transfer Tax for First Property
In short, if you haven’t found out by now, the exemption from tax on the first property has been abolished as of January 1, 2017.
The reason is a European directive according to which all real estate buyers should be in an equal position.
It is a fact that over the years, the real estate transfer tax rate has been reduced to the current 3 percent. The government announced complete abolition at one point, but that proposal did not reach the Parliament.
As a substitute measure and an incentive for young people solving their housing issues, the state has introduced a model of subsidizing installment payments for housing loans.
Purchasing Real Estate through a Company
It is not uncommon for real estate to be purchased through a company, where it is included in the capital of a business entity, and no real estate transfer tax is paid. The costs of the property are considered business expenses, reducing the company’s profit and lowering taxes.
Another case is when an individual establishes a business entity, usually a limited liability company, solely for the purpose of indirectly acquiring ownership of real estate as the owner of shares in that company.
It is common for foreign nationals to be unable to purchase real estate in Croatia, so they bypass regulations in this way.
However, the problem with such purchases is that the owner of the company is obligated to take care of the business of that company, which may not have any business activities but is required to submit tax returns, annual financial reports, pay taxes, engage an accountant, and there are other costs and quasi-fiscal levies.
Furthermore, problems arise when it becomes necessary to separate the real estate from the company for any reason. In such cases, it is necessary to initiate a procedure for reducing the share capital of the company before the Commercial Court, which requires an appraisal of the value of the real estate by a court-appointed expert, and again, this is an expense for the owner.
Does the Seller Pay Tax when Selling Real Estate?
The seller of real estate should pay tax in two cases, specifically the income tax on property. One situation is when the purchased property is sold before the expiration of two years from the purchase, at a price higher than the purchase price. In simple terms, when selling for profit. In such cases, tax is paid at a rate of 24 percent (increased by the surtax), but only on the difference between the purchase and sale price of the property.
The second case in which a taxpayer may fall into the tax trap is if they sell or otherwise dispose of more than three similar properties within a period of five years.
Reporting Real Estate Transactions
The tax obligation arises at the moment of concluding the contract. Recently, notaries are the ones who are obligated to submit a copy of the contract to the Tax Administration on your behalf.
If, however, someone has drafted a document that has not been notarized, they are still obligated to report such real estate transactions to the competent branch of the Tax Administration, based on the location of the property, within 30 days.
Is it worth appealing a tax assessment?
It is possible to file an appeal against a tax assessment issued by the Tax Administration within 30 days of receiving the assessment.
Filing an appeal is worthwhile if the Tax Administration’s assessment is clearly unrealistic or significantly deviates from the market value of the real estate.
In case the appeal is rejected, it is possible to initiate an administrative dispute before the Administrative Court of the Republic of Croatia, which no longer suspends the enforceability of the tax assessment. However, if successful, the tax assessment issued by the Tax Administration is annulled.
However, the only way to challenge the Tax Administration’s assessment in administrative proceedings is to conduct an appraisal by a court-appointed expert in the field of construction, who should determine the market value of the real estate.
The risk of such a procedure is the payment of costs in case of failure to prove the case, so when deciding whether to initiate such proceedings, one should consider the prospects of the procedure and consult with experts.
Author: Ivana Alfier, Stanarica.hr
