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In 2024, Croatia introduced another round of changes to its tax rules, with further novelties announced for 2025 aimed at fair taxation of property and bringing order to the residential rent market.

Key 2024 changes included the abandonment of city taxes and a further relaxation of the tax base by increasing tax-free personal deductions and the threshold for a higher tax rate. Corporate taxation has undergone some changes in terms of withholding tax rules. Further adjustments have been made to VAT regulations, the fiscalization of invoices, local taxes, and the rules regulating procedural matters.

The article also outlines enhanced administrative cooperation in tax matters, aligning Croatian laws with EU directives and global standards.

In the area of corporate taxation, Croatia has abandoned the withholding tax on consulting and market research services. The withholding tax rate has been increased from 20% to 25% for non-cooperative jurisdictions, as per the EU list. EU directives are applied to the European Economic Area (Norway, Iceland, Liechtenstein) concerning exemptions from withholding tax on interest and royalties. Finally, following the introduction of the euro as the official currency in 2023, the threshold for application of the lower corporate profit tax of 10% is rounded to EUR 1 million.

Personal income taxation has been affected by the cancellation of the city tax that was previously charged on top of the personal income tax liability (based on the rates unified at the state level). Instead, local authorities are now authorized to set personal income tax rates (within the prescribed range) to cover the financial needs of local communities. The capital – Zagreb – applies the highest tax rates of 23.6% (up to the monthly threshold now set at EUR 4,200) and 35.4% (above the monthly threshold of EUR 4,200). Aimed at increasing the net effect of salaries, tax-free personal deductions and the threshold for higher tax rates have been raised in 2024.

New specific rules relating to tips have been introduced, providing for a certain tax-free portion – personal income tax is not payable on tips up to EUR 3,360 annually. Exceeding amounts are taxed at 20%.

The amendments have also ensured equal treatment of income from bonds with other debt securities and money market instruments issued by the Republic of Croatia.

Changes in the area of social security contributions involved the reduction of the monthly base for pension insurance for workers with gross salaries below EUR 1,300.

In terms of value added tax, Croatia has simplified corrections of the VAT base, allowing adjustments of VAT liability in cases of non-payment or discounts. The threshold for VAT registration is rounded to EUR 40,000, with the announcement of a further increase (to EUR 50,000 in 2025).

In the area of fiscalization of invoices (real-time reporting to the tax authorities), protocols for exchanging data on tips, error messages, and handling errors have been introduced.

The tax on vacation houses has been increased to range from 0.60 to 5.00 EUR per square meter. The government also announced it will replace the tax on vacation houses with a tax on immovable property with the expectation to positively affect the residential property market. 

In terms of tax procedures, the novelty concerns tax advisors who are now authorized to participate in tax administrative matters before administrative courts. The performance of tax advisory practices is relaxed in a way that the condition of a 51% ownership by tax advisors in a tax advisory company is abolished. At the same time, tax advisors from OECD member states or countries adhering to the Capital Movement Liberalization Code are allowed to temporarily provide tax advisory services in Croatia. However, there are penalties prescribed to prevent unauthorized representation and the use of the term “tax advisory.”

Finally, as regards administrative cooperation in tax matters, Croatia has established a legal framework for the implementation of the Multilateral Competent Authority Agreement on Automatic Exchange of Information Concerning Tax Avoidance Arrangements and Opaque Offshore Structures. Also, a legal framework is established to implement the Multilateral Agreement on Automatic Exchange of Income Information via Digital Platforms. It is worth mentioning that, as of 2024, Croatia has ensured the application of the EU regulation that has introduced a centralized electronic system for payment information for VAT fraud prevention.

By Tamara Jelic Kazic, Partner, and Dragan Tripalo, Tax Consultant, CMS

This article was originally published in Issue 11.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The ongoing war in Ukraine has sparked governments to take defense seriously. The Lithuanian government is no exception here – as of 2025, Lithuania is set to increase defense spending.

Unsurprisingly, the new Defense Fund Package was approved by the Parliament on June 20, 2024, which includes proposals to increase the national defense spending to 3% of gross domestic product for the period of 2025-2030.

The Defense Fund Package consists of four parts: an extension of the banks’ solidarity contribution, a corporate tax increase, changes in excise duties, and the introduction of the concept of security contributions (insurance premium tax). The Parliament also adopted the so-called Defense Fund Law.

Corporate Tax

From January 1, 2025, both the standard and the reduced rate of corporate tax will increase. The amendment to the Law on Corporate Income Tax increases the standard (15%) and preferential (5%) corporate tax rates applicable to small businesses by one percentage point, to 16% and 6%, respectively. The increase in corporate tax rates is accompanied by an increase in the taxation of dividends by up to 16% and an increase in the taxation of qualifying profits from the commercialization of patentable inventions and software up to 6%.

The proposal was to increase the standard corporate tax rate up to 17%, however, Economy and Innovation Minister Ausrine Armonaite said that higher corporate tax rates would be detrimental to economic growth and investment climate.

Another change is related to the abolishment of tax benefits for healthcare and life insurance companies. Income from services provided by healthcare institutions that are financed by the Compulsory Health Insurance Fund will be taxable income. The income from services provided by healthcare institutions will be attributed to taxable income and the costs for generating this income will be tax deductible. A similar change will apply to the insurance sector, which means a higher proportion of the income will be subject to corporate tax.

Starting January 1, 2025, limitations to the acquisition and lease costs of cars will apply that will be linked to the vehicle’s CO2. For example, a proportion of up to EUR 75,000 of the purchase price of a company car may be deducted from income with carbon dioxide (CO2) emissions of 0 grams per kilometer and EUR 10,000 with carbon dioxide (CO2) emissions exceeding 200 grams per kilometer.

Excise Duties

This measure concerns increasing excise duties on alcohol, tobacco, and fuel.

The most significant increase was in the excise duty on ethyl alcohol, which will be between EUR 2,837 and EUR 3,262 for the years 2025-2026, and EUR 3,751 in 2027.

The excise duty on e-cigarette liquids was increased by one and a half times more than the government had planned: the rate will increase by 150% each year.

A EUR 0.06 (part of excise duty + VAT) increase per liter of fuel for excise duty on petrol, diesel, green farmer diesel, and transport oil gas shall apply. It is expected that fuel prices will increase by EUR 0.07 per liter next year.

Some of these excise duties are set to increase annually until 2028-2030. As decided by the Parliament, 4.1% of excise revenue will be transferred to the Defense Fund in 2025, 7.1% in 2026, and 7.4% in 2027.

Banks’ Solidarity Contribution

The Parliament also adopted a law amending the Law on Temporary Solidarity Contribution, which stipulates that the bank solidarity contribution that was supposed to be temporary, will continue to be levied for one more year, i.e., banks will continue to pay the contribution in 2025.

The contribution for 2025 will be calculated based on the net interest income for 2019-2022, the same as it was for 2024.

It is expected that the banks operating in Lithuania will contribute EUR 50-70 million to the Defense Fund.

Security Contributions

The Defense Fund package should also include a security contribution concept, which provides for a 10% contribution to be applied to insurance contracts, excluding life insurance and personal civil liability insurance.

The latter concept has been submitted for public consultation and a draft law on its implementation is yet to be drafted and voted on separately.

The tax changes that are set to take effect in Lithuania as of 2025 represent a significant shift in the country’s fiscal policy, with a clear focus on strengthening the national defense. While the increase in taxes may not be a favorable move for businesses, it is with the understanding that the current geopolitical situation necessitates prioritizing national security.

By Arunas Sidlauskas, Partner, and Abigail Protcenko, Junior Associate, Widen

This article was originally published in Issue 11.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Debt pushdown structures have become a prevalent strategy in Estonia for company acquisitions. However, up until now, the absence of clear regulatory guidance has left companies and their legal advisors navigating uncertain terrain, particularly concerning the tax implications. The (at the time of writing) soon-to-be-published guidance on the taxation of debt pushdowns is poised to provide much-needed clarity.

The typical debt pushdown scenario involves investors establishing a separate entity to secure a loan for acquiring a target company. Following the acquisition, the acquisition vehicle merges with the target company, transferring the loan obligation to the target company, which then services the debt using its commercial revenue. This strategy has become so common in Estonia that banks often require it as a condition for financing acquisitions.

For years, the Estonian tax authority has hinted at the possibility of taxing debt pushdown structures, frequently collecting information on such transactions yet rarely, if ever, following through with taxation. Despite no known instances of taxation, the persistent scrutiny and requests for information created an atmosphere of uncertainty for investors, leading to some acquisitions falling through.

Debt pushdown structures attract the attention of the Estonian tax authority because they effectively allow investors to service the acquisition loan using the pre-tax income of the acquired entity. Since Estonia only taxes corporate income upon profit distribution, loan principal and interest payments reduce the potential taxable base. The tax authority has long sought to tax these structures, arguing they provide an undue advantage compared to when investors service similar loans using taxable dividends from the acquired company. It is the lack of a clear basis for taxation that led the tax authority to begin developing its guidelines.

Under Estonian tax law, the transfer of a loan during a merger and its subsequent servicing are not taxable events. Consequently, there has been a general understanding that potential taxation of debt pushdown structures could only arise under general anti-abuse rules and in specific instances. However, when the tax authority released its draft guidelines to select interest groups at the start of the consultation process, it became evident that the scope of proposed taxation had been significantly expanded.

In the initial draft, the tax authority adopted a broad and stringent stance, classifying all debt pushdown structures within corporate groups as aggressive tax planning and proposing universal taxation. For non-group debt pushdowns, the guidelines identified several characteristics of the acquiring entity that could trigger taxation, such as the absence of employees or assets, a relationship with the financier, or a short interval between the entity’s establishment and its merger with the target company. This approach faced substantial criticism.

The primary and widespread criticism centered around the tax authority overstepping its bounds by infringing on the competence of the legislator, effectively attempting to create a new object of taxation. According to existing law, debt pushdowns are not inherently taxable unless they contravene anti-avoidance rules, which necessitate that tax avoidance be one of the primary objectives of the parties involved in using the debt pushdown structure. However, the initial guidelines disregarded this principle, instead proposing objective criteria for imposing tax without considering the intent behind the transactions.

Through the consultation process and multiple revisions, the tax authority has reworked its approach in the (at the time of writing) forthcoming guidelines. The central principle in these updated guidelines is that debt pushdown structures established for legitimate business purposes will remain exempt from tax. Debt pushdown structures can serve various purposes beyond tax advantages, such as effective risk management, securing acquisition financing, or achieving cost savings. Therefore, tax will only be imposed when obtaining a tax advantage is the primary – or one of the primary – objectives of using the structure.

Although the objective criteria outlined in the initial draft may still be used to assess potential intentions, they do not, on their own, conclusively demonstrate an intent to gain a tax advantage. This crucial distinction underscores the need to evaluate each case based on its specific circumstances. Accordingly, the (at the time of writing) upcoming guidelines fulfill their intended purpose of clarifying the practical considerations the tax authority will apply when interpreting existing anti-avoidance rules, without introducing any fundamental changes to the underlying objects of taxation. Importantly, debt pushdown structures remain a viable and legitimate mechanism for company acquisitions, as long as they are implemented with sound commercial rationale and not primarily for tax avoidance purposes.

By Egon Talur, Partner, Karli Kutt, Specialist Counsel, and Taaniel Sivonen, Associate, Cobalt

This article was originally published in Issue 11.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Slovenian Financial Administration has recently provided clarification on the tax treatment of share buybacks conducted through intermediaries. This article offers valuable insights for companies and tax professionals navigating the complexities of corporate restructuring and employee incentive programs.

A sale of shares is usually considered a sale of capital. Under certain conditions, Slovenian tax law provides for a 50% capital gains exemption on the sale of shares. Only 5% of the exempt capital gain is added back to taxable income. Slovenian tax law also contains a special provision on deemed dividend income. It applies in cases of acquisition of own shares. The value of shares paid on acquiring company shares is taxed as a deemed dividend and is fully tax-exempt for the seller under the Slovenian Corporate Income Tax Act. Similar to the exempt portion of capital gain, 5% of the exempt dividend income is added back to taxable income. In summary, capital gains and deemed dividend income have distinct tax treatments, and it is more beneficial for the seller for the income to have the tax treatment of a dividend rather than capital gain.

The scenario in question involves a Slovenian taxpayer selling shares in a non-resident subsidiary, with the ultimate goal of the subsidiary acquiring its own shares for employee rewards or equity participation. Due to temporary capital constraints, the shares are initially purchased by an intermediary company acting on behalf of the subsidiary.

At the heart of this arrangement lies a critical question: whether the income received by the selling shareholder should be treated as capital gains or as dividend-like income. The answer depends on the economic substance of the transaction, which is a fundamental principle of Slovenian tax law. The substance-over-form doctrine in tax law allows the financial administration to look beyond the legal form of a transaction and examine its actual substance. Essentially, it focuses on the true economic intention behind a transaction rather than just adhering to its formal legal structure.

The financial administration emphasizes that while they generally respect validly concluded legal transactions, they will scrutinize the economic reality behind complex arrangements. In this case, two key factors will determine the tax treatment:

Economic Ownership: Despite the formal transfer to an intermediary, does the subsidiary effectively become the true economic owner of the shares? This assessment will consider factors such as the existence of option agreements, the relationship between parties, and the management rights exercised by the intermediary.

Capital Adequacy: Does the subsidiary have sufficient resources and profit reserves to acquire its own shares within the same tax period? This is crucial, as the timing of the transactions impacts the economic substance assessment.

If these conditions are met – establishing the subsidiary’s economic ownership and capital adequacy – the payment to the selling shareholder may be treated as dividend-like income rather than a capital gain. This classification can have significant tax implications, potentially allowing for exclusion from taxable income under certain circumstances.

However, the financial administration cautions that they will closely examine all facts and circumstances surrounding such transactions. They will be on alert for sham arrangements or potential abuse of tax rules, particularly in cases involving cross-border elements where hybrid treatments might be sought.

For companies considering share buybacks through intermediaries, this guidance underscores the importance of careful planning and documentation. Ensuring that the economic substance aligns with the desired tax treatment is crucial. Companies should be prepared to demonstrate: (a) the clear intention and purpose behind the share buyback; (b) the relationship and agreements between all parties involved; (c) the subsidiary’s capital position and ability to acquire the shares; and (d) the timing and execution of all related transactions.

While this clarification provides a framework for understanding the tax treatment of such arrangements, it is important to note that each case will be assessed on its individual merits. It is advisable that companies engaging in complex share buyback structures seek professional advice in order to navigate the often-complex landscape of Slovenian tax law.

As corporate structures and employee incentive programs continue to evolve, we can anticipate further refinements to tax guidance in this area. Companies operating in Slovenia or with Slovenian subsidiaries should monitor these developments to ensure compliance and optimize their tax positions in share buyback scenarios.

By Janja Ovsenik, Tax Partner, and Lucijan Klemencic, Tax Director, Law Firm Senica & Partners

This article was originally published in Issue 11.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In recent years, many countries have revised their tax legislation to improve and stabilize their national economies. The Republic of North Macedonia is among the countries with one of the lowest corporate tax rates in Europe, set at 10%, making it an attractive destination for investment. However, as a nation still undergoing transition and in need of new investments, the new Macedonian government believes that further reducing the tax rate will create better opportunities to attract new investments, which is crucial for improving and stabilizing the economic situation.

This summer, the new government of North Macedonia included in its program a proposal to reduce the corporate tax rate from 10% to 5% for multinational companies that generate over EUR 50 million in net profits. The goal of this policy is to create even more favorable conditions and attract foreign investments from high-profit companies, which would contribute to the overall economic growth and development of the country.

North Macedonia’s economy requires reforms that will stimulate progress across all sectors. The new government believes that low tax rates will motivate multinational companies to transfer their profit centers to North Macedonia, where they can consolidate their earnings. Such investments are expected to lead to significant changes, starting with an increase in budget revenues, the creation of new jobs, improvements in infrastructure, technological development, increased production, and consequently, GDP growth.

Although there are significant risks involved, the new policy aims to maintain budgetary stability. The reduction in the tax rate is inversely proportional to the number of investments in the country. Both parties stand to benefit from this change: foreign investments will aid economic development, and the companies themselves will receive highly favorable conditions for operating in this region. Not only will their costs decrease, but their profits will also increase. If the saved funds are reinvested, leading to further profits, economic growth, overall budget revenues, and company earnings will see a long-term positive effect.

From a legal perspective, such a tax reduction raises questions related to regulatory transparency and legal predictability. Investors seek stability when choosing investment destinations. To ensure the long-term success of this policy, mechanisms must be in place to guarantee tax benefits without serious consequences. Therefore, the new government’s program does not foresee that the reduction in the corporate tax rate will come at the expense of other taxes. In other words, the rates for other taxes will not increase as part of the new tax policy. Improving the position of one group should not complicate the situation for another within the economic cycle. This approach demonstrates the confidence that the new government has in these reforms. The low tax rate is not expected to harm the current economic situation; on the contrary, it is believed that it will create new opportunities for success, market stability, and room for prosperity. By creating favorable conditions in the field of economic development, the shadow economy is demotivated and made unprofitable.

Furthermore, in addition to easing the situation for multimillion-dollar companies, small and medium-sized enterprises will be motivated to invest in their growth to reach a more favorable tax category.

Despite the risks associated with taking these steps, the new government aims to follow the examples of countries such as Ireland, Estonia, Hungary, and Cyprus, which offer significant incentives for investors and have proven successful in attracting multinational companies to locate their branches or relocate their headquarters to their territories. The fact that this tax policy has been successful in other countries is another reason to adopt these changes.

This specific tax policy represents a thoughtful and strategic decision by the government of North Macedonia, aimed at strengthening the country’s position as an attractive investment destination. This reform could increase foreign investor interest, boost competitiveness, and create new opportunities for business development and economic growth. The changes, supported by a stable and predictable legal framework, lay the foundation for stabilizing and developing the national economy, motivating and attracting foreign companies, and fostering a healthy competitive atmosphere with a constant drive for investment in profitable businesses.

By Ivica Jevtic, Partner, and Sara Ivanovska, Associate, JPM Partners

This article was originally published in Issue 11.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Romania remains an attractive jurisdiction for many foreign investors across various industries, but it faces challenges related to fiscal administration and predictability. A notable example is the introduction of a new taxation regime for large companies, which became effective on January 1, 2024. Naturally, this initiative triggered several reactions from the business community. Initially, efforts were made to prevent the enactment of such legislation or to propose amendments to mitigate the envisaged fiscal impact. Subsequently, in response to the law’s implementation, companies have begun analyzing different restructuring scenarios to establish optimal business structures that would allow them to continue operating while neutralizing the fiscal burden.

The legislative amendments applicable from this year affect: i) large companies with a turnover exceeding EUR 50 million, ii) companies activating in the oil and gas sector with an annual turnover exceeding the same threshold, and iii) companies activating in the bank sector, irrespective of the annual turnover. This article focuses on the provisions affecting the first two categories of taxpayers.

The minimum turnover tax (MTT) applies to companies with an annual turnover exceeding EUR 50 million. Unlike the corporate income tax, which is due on the recorded fiscal profit, this new tax functions primarily as a tax on revenues. The calculation starts with the annual turnover, from which non-taxable income, investments in assets, and asset depreciation are deducted. To this base, a 1% tax is applicable. The MTT is compared with the corporate income tax (calculated using the 16% corporate income tax rate applicable on fiscal profit), and in case the MTT is higher than the normal corporate income tax, companies are required to pay MTT.

One major disadvantage of the MTT is that it disregards the company’s profitability. This tax is mandatory even if a business ends the year with a loss, potentially placing a disproportionate burden on certain industries. For instance, industries or sectors where profit margins are significantly lower than 6.25% of turnover are severely impacted by this measure.

In this context, business owners have considered splitting their activities, where feasible, while ensuring that the restructuring process complies with legal regulations.

Moreover, the MTT has raised concerns about tax fairness, as the EUR 50 million turnover threshold appears to have been established arbitrarily, without any clear justification.

A positive aspect of the MTT is that it allows companies to deduct investments in assets under construction and the depreciation of assets from their taxable income. However, this benefit seems disproportionate when compared to the overall financial impact of the tax.

The additional tax for companies operating in the oil and gas sector (MTT in oil and gas) is owed by legal entities carrying out oil and gas activities, as defined by specific NACE codes listed in the legislation. Similar to the MTT, it applies to companies with an annual turnover exceeding EUR 50 million in the previous year, however, as opposed to the MTT, MTT in oil is levied in addition to the standard 16% corporate income tax.

The MTT in oil and gas rate is 0.5% of the annual turnover, calculated after deducting taxable income, investments in assets under construction, and asset depreciation. As can be noticed, the taxable base is like that for the MTT, with the primary difference being the tax rate.

MTT in oil and gas applies to companies operating in the oil and gas sector, regardless of whether this activity is primary or secondary. A common question in practice is: What percentage of revenues obtained from oil and gas activities would make a company subject to it? Despite the complexity of this issue, the answer is simple and unfavorable to the taxpayer: under the current legislation, in the absence of a specified minimum percentage of revenues from oil and gas activities, a company is required to pay the MTT in oil and gas on its entire revenue in addition to the normal corporate income tax, even in the case when only 0.1% of its total revenue comes from oil and gas activities.

As a final remark, further developments are expected regarding the MTT in oil and gas, aimed at further strengthening the application of this new tax. According to a draft law – currently under public consultation – it is proposed to extend the applicability of the MTT in oil and gas also to non-residents that supply goods or provide services within Romania while engaging in activities in the oil and gas sectors.

By Ramona Chitu, Tax Partner, Tuca Zbarcea & Asociatii

This article was originally published in Issue 11.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Turkiye has witnessed significant tax developments in recent months, including amendments in real estate-related taxation. These changes primarily arise from the need to address budgetary concerns in the current economic climate, which has led to the repeal of certain frequently utilized tax exemption provisions. This article provides an overview of these developments and their implications for taxpayers or investors whose business structures include real estate in Turkiye.

One of the most noteworthy changes which was enacted by Law No. 7456 published in the Official Gazette dated July 15, 2023, is the abolishment of certain tax exemptions related to real estate sales and partial spin-offs. Historically, the Turkish tax system allowed for significant exemptions in the context of real estate transactions, particularly where companies disposed of immovables that had been held for more than two years. These exemptions played a vital role in facilitating corporate restructuring and the transfer of assets without immediate tax burdens. However, Law No. 7456 marks a departure from this approach.

The law has removed several key exemptions, thereby broadening the tax base. The most prominent of this abolishment include the elimination of corporate tax and value added tax exemption on real estate sales. Before July 15, 2023, a partial (50%) corporate tax exemption was applicable for the capital gains obtained through the transfer of immovable held for more than two years. In addition to that, the transfer of these immovables held more than two years were exempt from value added tax. As of July 15, 2023, these exemptions were abolished. However, for immovables already acquired and recorded under assets before July 15, 2023, 25% of the capital gains obtained via their sale might be exempt from corporate tax and value added tax under certain conditions. 

These changes, aiming to broaden the tax base are likely to have a significant impact on corporate real estate transactions, potentially leading to a decrease in the frequency of such sales due to the higher tax burden.

With the same law, immovables were excluded from the scope of a tax-free partial spin-off as of January 1, 2024. Prior to this, companies could spin off parts of their business, including immovables, participation shares held for at least two years, and manufacturing/service enterprises without incurring a tax liability. With this new amendment, spin-offs of immovables will now trigger a taxable event, thus requiring companies to carefully consider the tax implications of any planned restructurings. As an alternative method, it might be possible to transfer immovables associated with manufacturing/service enterprises through a partial spin-off, allowing for a tax-free transfer. However, the conditions for such a restructuring process must be carefully evaluated.

Law No. 7524 published in the Official Gazette dated August 2, 2024, also introduced amendments to the taxation of income derived from immovables by real estate investment funds and partnerships. These amendments are significant for both domestic and foreign investors, as they alter the tax landscape for income generated from real estate investments.

Under the previous tax regime, income of investment funds and partnerships derived from immovables were exempt from corporate tax. These exemptions were intended to promote the growth of the investment fund sector by providing favorable tax treatment. However, Law No. 7524 has curtailed these benefits by subjecting the income of investment funds from immovables to corporate tax, unless 50% of the income derived from immovables is distributed as dividends by the end of the second month following the submission of the corporate tax return.

The changes introduced represent a shift in Turkiye’s approach to immovable taxation, moving toward a more stringent tax regime. While the immediate impact of these changes may be a reduction in real estate transactions and a re-evaluation of investment strategies, the long-term effects could include a more stable and predictable tax environment. By broadening the tax base, the Turkish government aims to increase revenue and reduce tax avoidance, which could ultimately contribute to greater fiscal stability. In the meantime, companies and investors must navigate this evolving landscape carefully, reassessing their tax strategies to align with the new legal framework.

By Gokce Sarisu Kanmaz, Partner, and Gorkem Haracci Salar, Senior Associate, Balcioglu Selcuk Ardiyok Keki Attorney Partnership

This article was originally published in Issue 11.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Czech Republic (the CR), as an OECD member state, generally speaking, has a tax system comparable to other economies. However, it does have some specificities. While in some areas, the Czech system is less strict (e.g., proving the movement of goods for VAT purposes), in other areas, the current practice in the CR is very formalistic and strict. This is the case, for example, for costs charged in a group between related parties, in particular costs for management services and marketing. Multinational groups unfamiliar with this approach from other European countries may therefore inadvertently get into a dispute with the local tax administration in the CR.

Developments in the Czech Republic Over the Last 30 Years

The current Income Tax Act dates back to 1992 – de facto 30 years of tax practice. It is logical that our system has had to undergo a more dynamic evolution of changes in the interpretation of tax legislation over the past period. Relevant case law has had to take shape gradually. In many cases, things that were acceptable earlier are no longer possible. Entities doing business in the CR must constantly adapt to these developments, otherwise they risk tax overcharges. As a Senior Partner responsible for tax services, I have been able to observe this continuous development in the 26 years of my practice.

Costs of Management Services

The dynamic development of tax practice in the CR also applies to management services provided for multiple entities in a group, which are usually charged to individual subsidiaries on a cost-plus basis.

In the past, it was sufficient to provide a very brief description of such services. The case law has moved the practice in the CR to one of the most formalistic in the whole of Europe, inter alia, by allowing the tax authorities to require audited entities to provide fully detailed evidence of the scope and content of the services received by the local subsidiary in return for the management services paid for. The perception of the tax authorities (supported by the courts) is that these types of services should be treated identically to services from third parties. This approach completely abstracts from the fact that central services substitute local costs that the local subsidiary would have incurred, resulting in savings and a lower reduction in the tax base of the local entity.

For example, if the Czech subsidiary does not have its own CFO position, which is performed in the CEE region, the tax authorities very often require detailed documentation of the activities and outputs that the CEE finance manager has performed for the Czech entity. Tax authorities may require detailed information on the cost base, including the salary costs of the manager, and compare this with the total price charged in order to verify whether the price charged, including the profit margin, is reasonable. This information and data is very often confidential.

Central Marketing Costs

The CR also has significantly stricter current practices in the area of marketing costs. For example, multinational corporations that have centrally processed advertising (TV spots, banners, posters), which are uniformly used by local branches, can be cited. The costs of this central production are allocated by an appropriate allocation key as central marketing costs to the individual countries that draw on these services to the extent and mix required for the market.

Tax authorities in the CR do not accept this system without a detailed overview of specific transactions. As an example, one client – an importer of cars in the CR – paid EUR 4 million for central marketing. This amount was fixed and it was up to our client to decide how much advertising to use in a given year. The Czech tax office did not accept this system on the grounds that our client had not sufficiently documented the use of the service to the amount of EUR 4 million.

Conclusion

The Czech tax authorities’ approach to group costs, particularly for management and marketing services, can be significantly more formalistic than in other jurisdictions. For some costs, the tax authorities in the CR may require an enormous amount of documentation – otherwise they may not recognize all or part of the costs incurred for the purpose of reducing the tax base.

By David Krch, Tax Partner, Havel & Partners

This article was originally published in Issue 11.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.