Croatia: Tax incentives for research and development in Croatia

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Croatia: Tax incentives for research and development in Croatia

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Tax incentives in Croatia for research and development (R&D) projects were granted between 2007 and 2014 based on Articles 111 a. to 111 f. of the Act on Scientific Activity and Higher Education. However, the European Union issued Commission Regulation (EU) No. 651/2014 in June 2014, concerning certain categories of state aid; this used significantly different terminology, definitions, and requirements, and rendered the abovementioned articles invalid. Croatian entrepreneurs found themselves in something of a vacuum for more than three years, awaiting a new legal framework for R&D incentives, as the relevant tax incentive had been abolished on January 1 2015. In July 2018, the Croatian Parliament adopted and published the Act on State Aid for Research and Development Projects, which the government had submitted in January 2018.

In July 2018, Parliament passed the long-awaited Act on State Aid for Research and Development Projects (Official Gazette Narodne Novine No. 64/18), effective from July 26 2018. The Act aims to increase the presence of the private sector in R&D, as well as to increase the overall number of entrepreneurs investing in R&D. Based on this Act, in order to qualify for this incentive, R&D activities must conform to certain criteria:

  • New knowledge (as a purpose of the activity);

  • Creativity (new concepts, ideas, and methods which improve existing knowledge);

  • Uncertainty in terms of outcome;

  • Systematic (planned with track records); and

  • Transferable (outcomes are transferrable as new knowledge) and/or repeatable (it is possible to repeat outcomes).

The state aid for R&D takes the form of tax relief, decreasing the taxable base for income tax for justified R&D project expenses as well as feasibility study expenses.

Subjects eligible to apply for this state aid are legal and natural persons and corporate or personal income taxpayers, and it is available to all business sectors and scientific and technological areas. The Act also indicates specifically which categories of entrepreneurs do not qualify, in line with Commission Regulation (EU) No. 651/2014.

The implementation duration of the project for which the aid is requested may be up to three years from the beginning of the project.

The maximum state aid for particular R&D project categories is:

  • 100% of acceptable project expenses for basic research;

  • 50% of acceptable project expenses for industrial research;

  • 25% of acceptable project expenses for experimental development; and

  • 50% of acceptable expenses for feasibility studies.

Under certain circumstances, state aid for industrial research and experimental development may be increased to a maximum of 80% of acceptable expenses. The level of state aid for feasibility studies may be increased by 10 percentage points for medium-sized entrepreneurs and 20 percentage points for small entrepreneurs.

The total amount of state aid that a beneficiary can receive under this Act is as follows:

  • Prevailingly basic research: up to €300,000 ($346,000) per entrepreneur/per project;

  • Prevailingly industrial research: up to €200,000 per entrepreneur/per project;

  • Prevailingly experimental development: up to €100,000 per entrepreneur/per project;

  • Feasibility studies in the preparation of research activities: up to €50,000 per study, all in Croatian kuna (HRK) counter value.

Within 90 days of the enforcement of the Act, the Ministry of Economy, Entrepreneurship and Crafts will issue relevant ordinances and bylaws regarding: implementing the Act and prescribing the modalities of the application for the state aid in question; eligibility evaluation criteria; the process of granting the aid; required tracking records; and supervision of project implementation, expenses, and similar matters.

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