April 23, 2021 – TCN meets the director of the Taxation Services Department at KPMG Croatia, Kristina Grbavac, to discuss the taxation of digital nomads in Croatia.
Croatian tax and immigration legislation were amended in 2020 to welcome digital nomads to Croatia: a digital nomad visa was introduced and income based on the acquired status of a digital nomad became tax-exempt and relieved of the tax reporting obligation in Croatia.
Even though it might look like all tax matters are covered with this exemption, there are still some open questions to be considered by digital nomads.
Kristina Grbavac, director of the Taxation Services Department at KPMG Croatia, discusses the taxation of digital nomads in Croatia.
In which country is a digital nomad a tax resident?
The question of tax residency is important because the country of tax residency has the right to tax worldwide income, while another country has the right to tax income sourced in that country only.
Therefore, digital nomads should first check and regulate their tax (non)residency status in their home country and country from which they are coming to Croatia (if different from their home country).
Based on the Croatian tax legislation, a tax resident is a physical person who has a permanent residence or habitual abode in Croatia, which amongst other includes the following:
- owning or holding a home or flat in Croatia for at least 183 days;
- permanent stay in Croatia for at least 183 days; and
- other factors like his/her family residing in Croatia, not being tax resident elsewhere, etc.
Since there are no specific provisions in the Croatian legislation on the tax residency of digital nomads, the above rules for tax residency would apply to digital nomads too.
Based on the digital nomad visa, digital nomads can stay in Croatia for a year, which is more than 183 days mentioned above; therefore, due to their stay in Croatia, they might become Croatian tax residents.
Should a digital nomad be a tax resident of a country with which Croatia has an effective Double Taxation Agreement and at the same time be a Croatian tax resident, the provisions of the relevant Double Taxation Agreement should be reviewed in order to determine the overall residency.
Therefore, there is no unique answer on the tax residency of digital nomads, but to conclude on someone’s tax residency, his/her specific personal facts should be considered.
If digital nomads would become Croatian tax residents, Croatia would have the right to tax their worldwide income.
Is other income earned by a digital nomad taxable in Croatia?
A digital nomad who only earns income based on which he/she acquired the status of a digital nomad in Croatia, will neither pay tax in Croatia nor will have tax reporting obligations in Croatia.
Furthermore, a digital nomad who would be tax non-resident in Croatia, and his/her only income source in Croatia would be income based on his/her digital nomad status, will also have no tax payment or reporting obligations in Croatia.
However, Croatian tax resident digital nomads who earn other types of income will be taxable in Croatia on these other types of income. Other types of income include all different sorts of income, and the most common examples are dividend income, capital gains, and rental income.
For example, if a Croatian tax resident digital nomad while staying and working in Croatia as a digital nomad receives dividends from shares in non-Croatian companies (e.g. US or German companies) or rental income for renting an apartment to someone else while he/she is in Croatia, that income should be reported to the Croatian tax authorities and tax paid in Croatia.
Therefore, digital nomads should carefully consider whether they earn any other types of income that could be taxable in Croatia.
Is a Croatian digital nomad subject to tax in some other country?
Even though a digital nomad’s income is tax-exempt in Croatia, it does not mean digital nomads do not have to report their income to their home country or some other country in which they resided before.
Therefore, besides checking their tax status in Croatia, digital nomads should carefully check if they have any tax liabilities in the countries they lived before.
Will the work of a digital nomad in Croatia create any tax risk for his/her own company or his/her employer?
This is the question most individuals who work remotely are not aware of, and most individual travellers think that their mobility impacts their personal taxation only.
However, working abroad might create some tax obligations and risks for employers or companies owned by international travellers.
For example and in a very simplified manner, if a digital nomad in Croatia manages his own company’s business from Croatia, his/her company might become taxable on its profits in Croatia.
Furthermore, digital nomads who work for their foreign employers from Croatia might create a taxable presence (so-called taxable permanent establishment) in Croatia for their employers. This would depend on various factors, including their job description, activities, authority to conclude contracts or negotiate their terms, etc.
A taxable permanent establishment is not a term specific for Croatia, but is common in most countries; however, awareness of international travellers on this matter is low and, therefore, many times is the question of the taxable permanent establishment not examined.
Any changes in the tax legislation expected in the future?
Significant changes to the legislation have already been made, which answered the main questions.
However, the idea behind the digital nomad’s initiative was to make the move of digital nomads to Croatia easier, to remove administration obstacles and tax costs that could refrain them from moving to Croatia, and there are still many open questions related to their taxation.
Therefore, it is important to resolve the remaining matters too to allow digital nomads to move to Croatia without being concerned about their taxation.
In the light of that, further changes to the Croatian tax legislation would be expected.
For more on digital nomads in Croatia, follow the dedicated TCN section.