In December 2021, the Organisation for Economic Co-operation and Development (OECD) published the document Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two) (hereinafter: OECD Model Rules).

The OECD Model Rules are contained in Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (hereinafter: Directive) with some adjustments for the Member States of the European Union.

The Directive was adopted to implement the OECD Model Rules in a manner as close as possible to a global agreement and to ensure that the rules implemented by Member States under the Directive are qualified within the meaning of the OECD Model Rules.   Due to its complexity, the Directive was introduced into the Croatian tax system through the Global Minimum Corporate Income Tax Act (Official Gazette No. 155/2023: hereinafter the Act). 

The application and scope of the Act

• The Act applies to constituent entities that are members of an MNE group or a large-scale domestic group whose annual income, in the consolidated financial statements of the ultimate parent entity, in at least two of the four fiscal years immediately preceding the model fiscal year amounts to EUR 750,000,000.00 or more, including income from excluded entities.
• ​The minimum effective taxation of profit is ensured by applying the rules for the payment of top-up tax, which are established in accordance with the provisions of the Act, namely:

   a) the rule for determining qualified domestic top-up tax (QDMTT) under which the top-up tax is calculated and paid for the excess of profit of all         low-taxed constituent entities located in the Republic of Croatia ;

    b) the income inclusion rule (IIR) under which the parent entity of a multinational enterprise group or large-scale domestic group calculates                 and  pays its allocable share of top-up tax in respect of the low-taxed constituent entities of the group ; ​

             c) the undertaxed profits rule (UTPR) under which a constituent entity of a multinational enterprise group is subject to a top-up tax equal to its                       share of top-up tax not collected under the IIR for low-taxed constituent entities of the group .

• The application of these rules determines the amount of the top-up tax which ensures that the effective taxation of profits is at least 15%. Collection of qualified domestic top-up tax under a) takes precedence over other rules. 
• ​​​​Top-up tax constitutes the income of the state budget of the Republic of Croatia.  

The Act contains several complex areas: 

1. Specific rules for the identification of potential taxable persons, included and excluded entities.
2. The rules for determining the qualifying income (loss) of each participating entity, in order to determine the total qualifying income (loss) of the group in the territory of the country (jurisdiction) – GloBE rules.
3. The determination of the recognised (covered) profit taxes of each entity and the total tax paid by the group in the country (jurisdiction).
4. The rules for the calculation of the effective tax rate.
5. The rules for payment of top-up tax.
6. Administrative obligations of the MNE and large-scale domestic group, obligations of the Tax Administration and the method of payment and collection of top-up tax.
7. Transitional rules.
8. The obligation to draft specific ordinances, to publish safe harbour agreements and to apply the OECD rules.

The Act entered into force on 31 December 2023, and the ordinance for the application of the Act will be adopted by the end of 2025.