Problems with Intercompany Profit Distributions in Croatia

According to Article 10 para. 2 subpara. b of the Austro-Croatian Double Taxation Convention, cross-border intercompany profit distributions are exempted from source taxation. As a result, profits generated in the years 2001 to 2004 in a Croatian subsidiary and distributed in 2005 to its Austrian parent company are to be relieved from source taxation in Croatia.

Provided that the legal conditions of Article 10 para. 2 subpara. b are met, the obligations imposed by this provision are absolute and unconditional. It would therefore be an infringement of the Convention if, after a tax exempt profit distribution has been made in conformity with treaty law by the subsidiary, the Croatian tax authority required – irrespective of the treaty rule – the payment of a 15 % source tax as set out in domestic law and then refused to refund such tax on the grounds that – because of the subsequent tax payment enforced by the tax authority in disregard of the treaty provision – the distribution exceeded the distributable profits of the subsidiary.

In order to achieve compliance with treaty law, the taxpayer (the Austrian parent company) is entitled to file a request for the initiation of a mutual agre...25.1.2008