United States: United States and Croatia Sign Their First Income Tax Treaty

Tax News and Developments December 2022

In brief

On 8 December 2022, the United States and Croatia signed their first convention for the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income (“Treaty”). With this development, Croatia becomes the latest, and the only remaining, European Union (“EU”) member state to sign its first tax convention with the US. 


The execution of a Treaty by the United States and Croatia is an important and welcome development which will affect many individuals, multi-national companies (e.g., Croatian IT businesses), particularly those providing services in the United States. The Treaty will enter into force after both contracting parties have approved it in accordance with their internal legislative procedures (i.e., after the United States Senate gives its advice and consent and after it is ratified in the Croatian Parliament). 

The Treaty in More Detail


In general, the Treaty reduces rather than eliminates withholding taxes on dividends. The Treaty rate is capped at 15%, unless the beneficial owner of the dividends is a company which has held a direct interest of at least 10% of the aggregate vote and value of the company paying the dividends for the twelve-month period ending on the date on which the entitlement to the dividends is determined, in which case the maximum rate under the Treaty is reduced to 5%.

Dividends paid to pension funds (and/or voluntary pension insurance schemes based on individual capitalized savings in Croatia) qualify for a full exemption from source country dividend withholding tax, provided they are not derived from the carrying on of a trade or business by the pension fund in the other contracting state.


In general, the Treaty eliminates withholding taxes on interest payments. However, withholding tax on interest payments are capped at 15% rather than eliminated for:

  • interest arising in Croatia that is determined with reference to receipts, sales, income, profits or other cash flow of the debtor, to any change in the value of any property of the debtor or to any dividend, partnership distribution or similar payment made by the debtor 
  • interest arising in the United States that is contingent interest of a type that does not qualify as portfolio interest under the law of the United States.

A special 10% interest rate is provided for companies that are a resident of a contracting state and function as a headquarter for a multinational corporate group consisting of the headquarter company and its direct and indirect subsidiaries. 


The Treaty limits the withholding tax rate on royalties to 5%. 


The United States reserved in the Treaty the right to impose the so-called "BEAT" tax under US Internal Revenue Code section 59A ("Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts") on the profits of a company resident of Croatia that are attributable to a US permanent establishment or on US companies. 

Limitation on Benefits

The Treaty is based on the 2016 US model tax convention and contains a complex limitation on benefits clause that is now standard in recently negotiated treaties with EU member states.  The application of the Treaty is generally limited to "qualified persons" as defined in Article 22 of the Treaty. Generally, companies whose principal class of shares are regularly traded on a recognized stock exchange and whose primary place of management and control is in the contracting state of which it is a resident will qualify for the treaty benefits. Their 50% subsidiaries will also qualify. Companies which are not "qualified persons" may still be entitled to benefits of the Treaty if they are at least 95% owned by seven or fewer persons that are equivalent beneficiaries that, among other criteria, are defined as resident of any state entitled to all the benefits of a comprehensive tax treaty between such state and the United States, respectively Croatia, from which Treaty benefits are sought. In contrast, some other treaties define the term equivalent beneficiary in reference to a resident of a member state of the European Union or of a European Economic Area state or a party to the North American Free Trade Agreement, as provided for in some other treaties such as in the case of the US income tax treaties with Malta or Bulgaria). 

Next Steps

The United States and Croatia will be bound by the Treaty once the Treaty is approved in accordance with the national legislation of each contracting party. Under the Croatian Constitution, tax treaties need a simple majority approval by the Croatian Parliament to become binding. It is expected that the Croatian Parliament will vote on the Treaty in early 2023. In contrast, the timeline in the United States is not known yet and the ratification could potentially be delayed for a few years based on pending and recently approved treaties. For example, the tax treaties with Hungary (signed in 2010) and Poland (signed in 2013) are still pending ratification in the US Senate, most recently due to BEAT reservation concerns mentioned above. Under the United States Constitution, tax treaties require the advice and consent of the US Senate, with a two-thirds majority vote of approval.

In the meantime, owners and businesses with investments or links in both the United States and Croatia should consider opportunities and efficiencies resulting from the certainty of the tax rules following the expected entry into force of the Treaty.

Copyright © 2023 Baker & McKenzie. All rights reserved. Ownership: This documentation and content (Content) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms). The Content is protected under international copyright conventions. Use of this Content does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All Content is for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulations and practice are subject to change. The Content is not offered as legal or professional advice for any specific matter. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any Content. Baker McKenzie and the editors and the contributing authors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The Content may contain links to external websites and external websites may link to the Content. Baker McKenzie is not responsible for the content or operation of any such external sites and disclaims all liability, howsoever occurring, in respect of the content or operation of any such external websites. Attorney Advertising: This Content may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Content may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. Reproduction: Reproduction of reasonable portions of the Content is permitted provided that (i) such reproductions are made available free of charge and for non-commercial purposes, (ii) such reproductions are properly attributed to Baker McKenzie, (iii) the portion of the Content being reproduced is not altered or made available in a manner that modifies the Content or presents the Content being reproduced in a false light and (iv) notice is made to the disclaimers included on the Content. The permission to re-copy does not allow for incorporation of any substantial portion of the Content in any work or publication, whether in hard copy, electronic or any other form or for commercial purposes.