Croatia
is a civil law country with three primary forms of not-for-profit,
nongovernmental organizations (NPOs):
Associations
Foundations
Funds
Other
not-for-profit legal forms, which are outside the scope of this Note
due to their limited interaction with U.S. grantmakers, include
political parties, minority councils, trade unions, economic interest
associations, institutions, and religious organizations.
B.
Tax Laws
NPOs
are generally exempt from paying profit tax, including on foreign
grants and donations. Tax is imposed, however, if the NPO engages in
for-profit activity and exemption from the tax would, in the view of
the Tax Administration, confer upon the NPO an “unjustified
privileged position” in the market. Businesses and other legal
entities may deduct donations to NPOs for a broad range of public
benefit activities up to 2% of gross income, although the threshold
may be raised under certain circumstances and by the approval of the
relevant ministry.
VAT
is required to be collected by entities, including NPOs, that have
turnover exceeding 230,000 kuna (approximately $38,000) in a given
year. Certain transactions are exempt from VAT, including purchases
of goods and services made by charity or public benefit NPOs for the
benefit of their members, if it does not affect market competition.
Croatian
law creates three NPO legal forms: associations, foundations, and
funds. Associations are far more numerous than foundations and
funds.
Association
An
association is a voluntarily established organization of natural or
legal persons formed and operated to advance purposes stated in its
founding charter (also called a constitution or statute) without the
intention of gaining profit. [Law
on Associations Art. 2(1), 11(3)]
An association is governed by its members, either directly or through
elected representatives. [Law
on Associations Art. 6(1)] It can seek “to protect and
promote issues of public or mutual interest, environmental, economic,
humanitarian, informative, cultural, ethnic and national,
educational, social, professional, sports, technical, health care,
scientific and other interests and goals,” but not unlawful
purposes. [Law
on Associations Art. 2(1), 18] An association, unlike a
foundation or a fund, is not restricted to generally beneficial or
charitable purposes. [1]
Foundation
A
foundation is property permanently assigned to serve some "generally
beneficial" or "charitable" purpose. [Law
on Foundations Art. 2] "Generally beneficial" includes
cultural, educational, scientific, spiritual, moral, sports, health
care, and environmental purposes. "Charitable" is defined
as support to persons in need. [Law
on Foundations Art. 2] The beneficiaries need not be the general
public; a foundation is considered generally beneficial even if its
activities benefit only members of a particular profession,
nationality, religion, or other group. [Law
on Foundations Art. 2] The foundation cannot be created for
unlawful or immoral purposes, or “if there is no serious reason
for the establishment of a foundation, particularly if the purpose of
the foundation is obviously lacking seriousness.” [Law
on Foundations Art. 6] A foundation is generally created by a
donor's "letter of establishment" and administered by a
director or a governing body pursuant to rules set forth in the
foundation's charter (also called a statute). [Law
on Foundations Arts. 12-13, 18-21] A foundation may be
established by one or more domestic or foreign, physical or legal,
persons.
Fund
A
fund is a foundation with a fixed lifespan no greater than five
years. [Law
on Foundations Arts. 2, 32] Property assigned to the one-time
fulfillment of a generally beneficial or charitable purpose does not
qualify as a fund. [Law
on Foundations Art. 32] A regular foundation can be converted
into a fund under certain circumstances. [Law
on Foundations Art. 33]
Unless
otherwise specified, references to "foundations" in this
Note include funds.
B.
Public Benefit Status
There
is no particular legislation which regulates assignment of public
benefit status to not-for-profit organizations. As a rule, public
benefit NPOs are recognized only through their activities.
Foundations and funds can be established as PBOs but only if the
purpose of establishment fits to prescribed criteria. [Law
on Foundations Art. 2]
IV.
Specific Questions Regarding Local Law
A.
Inurement
An
association cannot perform any activities for the purpose of gaining
profit for its members or third parties. Any profit that the
association generates must be used exclusively to advance the
purposes set forth in its charter. [Law
on Associations Art. 5] The law does not regulate the
compensation, awards, or expense reimbursements by the association.
A
foundation's property can be used only to advance the foundation's
purposes, which must be generally beneficial or charitable. [Law
on Foundations Art. 16] The value of the property must not be
decreased or wasted in the course of advancing the purpose. [Law
on Foundations Art. 16] The property should be managed consistent
with the foundation's Letter of Establishment or its charter. [Law
on Foundations Art. 31] A foundation's director is entitled to
appropriate compensation plus reimbursement of expenses. [Law
on Foundations Art. 13] Members of a foundation's governing body
cannot be persons to whom the benefits of a foundation are assigned.
[Law
on Foundations Art. 21] Members of this body are entitled to
reimbursement of necessary expenses but not ordinarily to
compensation. [Law
on Foundations Art. 22] If the foundation’s charter permits
it, members of the body can be compensated, but only from the
foundation's income, not the principal, and only with the approval of
the Ministry of Administration. [Law
on Foundations Art. 22] Neither compensation nor reimbursement of
expenses to members of a foundation’s governing body is
permitted if it would significantly impede realization of the purpose
of a foundation. [Law
on Foundations Art. 22]
B.
Proprietary Interest
An
association is permitted to return donations and assets upon
dissolution if its founding charter allows it. The same is true for
foundations, though their property is in theory “permanently”
assigned. [Law
on Foundations Art. 27]
C.
Dissolution
Under
Croatian law, the assets of a dissolved NPO are generally distributed
according to the NPO's founding document.
Upon
an association’s dissolution, its assets are distributed
according to the charter. [Law
on Associations Art. 34(1)] The law requires that the charter set
forth a plan for distributing property in the event of dissolution,
but does not restrict the terms of the plan. [Law
on Associations Art. 11(3)] Thus, nothing in the law prevents an
association from transferring its property to an individual, a
for-profit entity, or another non-charitable transferee. [2]
However, there are two exceptions: first, assets received from state
or local governmental authorities must be returned to the
governmental entity; and [Law
on Associations Art. 34(2)] second, if an association is
terminated by a court ruling or bankruptcy, the court can, in its
discretion, convey the assets to an organization pursuing similar
purposes. [Law
on Associations Art. 34(4)]
Upon
dissolution of a foundation, its assets are ordinarily distributed in
accordance with its Letter of Establishment or its governing charter,
or, if that is not possible, to another foundation pursuing similar
purposes. If neither of those distributions is possible, the property
is assigned to a generally beneficial or charitable purpose that is
similar to the will of the founders of the terminated foundation.
[Law
on Foundations Art. 27] Nothing in the law prevents a founder
from directing the transfer of the property to individuals or
for-profit entities.
In
summary, Croatian law does not mandate that the assets of an NPO,
upon its dissolution, be distributed to not-for-profit organizations
advancing charitable, religious, scientific, literary, or educational
purposes, or to a government instrumentality.
An
association is generally permitted to conduct those activities that
advance the purposes set forth in its charter. [Law
on Associations Art. 5(1)] Activities that do not advance those
purposes may lead to misdemeanor penalties. [Law
on Associations Art. 39(1)] An association is not restricted to
generally beneficial or charitable purposes. It must be formed
without the intention of making a profit, but it can engage in
for-profit activities so long as the profits are devoted exclusively
to advancing purposes set forth in its charter. It can attempt to
influence legislation, but must not participate in a political
campaign for public office.
A
foundation must pursue generally beneficial or charitable purposes.
It can undertake for-profit activities relating to its property as
well as certain fundraising activities. It can attempt to influence
legislation, but must not participate in a political campaign for
public office.
2.
Public Benefit Activities
Specific
NPO activities are recognised as activities of general significance
and, consequently, are entitled to some tax and other minor benefits.
These activities are in the areas of culture, education, science,
health, humanitarian aid, ecology, and social welfare. There are
additional NPO activities that can generally be considered as public
benefit, such as the protection of human rights, the environment and
children, but they are not entitled to any specific benefits.
3.
Economic Activities
An
association must be formed “without the intention of gaining
profit.” [Law
on Associations Art. 2(1)] It may, however, “engage in
activities for the purpose of gaining profit,” but any
resulting profit must be devoted exclusively to advancing the
purposes set forth in the association’s charter. [Law
on Associations Art. 5(2)] The law also expressly forbids an
association from undertaking any activities, whether for-profit or
not-for-profit in nature, for the purpose of providing profits to its
members or third parties. [Law
on Associations Art. 5(4)] Other provisions of Croatian law
regulate an association’s participation in particular forms of
for-profit activity. [4]
A
foundation can conduct economic activities related to its property -
for instance, lease its land or license its patents. It can also
organize certain fundraising activities: humanitarian shows,
occasional lotteries, production and sales of publications and
badges, and the like. [Law
on Foundations Art. 16] For a foundation, as for an association,
the law does not seem to limit the proportion of resources devoted to
for-profit ends.
E.
Political Activities
The
law does not restrict an NPO's attempts to influence legislation. An
NPO can publish its views, criticize state officials and state
actions, lobby legislators concerning legislation, and encourage
members and others to communicate with public officials. Nothing in
the law limits the proportion of an NPO’s budget that it can
devote to attempts to influence legislation.
An
NPO cannot legally participate in a political campaign for public
office, other than serving as an election observer. Under Croatian
election law, political activity is the exclusive province of
political parties. [Official Gazette No. 120/11]
F.
Discrimination
The
Croatian constitution forbids discrimination based on race, gender,
language, religion, or other stipulated grounds. [Const.
Art. 14] The application of anti-discriminatory principles is
more precisely described in the Law on Combating Discrimination.
[Official Gazette No. 85/08, 112/12] The laws addressing
associations and foundations do not require non-discrimination. The
foundation law expressly authorizes the creation of foundations that
benefit members of a particular national, linguistic, cultural, or
religious group. [Law
on Foundations Art. 2]
G.
Control of Organization
Nothing
in Croatian law prevents a Croatian NPO from being controlled by
another organization. A Croatian association or foundation may be
established (but not owned) by a for-profit entity, which would
continue to control it through governing bodies. A Croatian
association or foundation, likewise, could be controlled but not
owned by an American grantor charity.
V.
Tax Laws
A.
Income and Profits Tax
Associations
and foundations are generally exempt from Croatian profit tax,
including on foreign grants and donations. Taxes may be incurred,
however, if an organization engages in for-profit activity and if
exemption from the tax would give the organization an “unjustified
privileged position in the market.” The law is silent on what
constitutes an “unjustified privileged position,” so the
Tax Administration operates with discretion in this sphere. If an
organization is found to have crossed the “unjustified
privileged position” threshold, that particular for-profit
activity is taxed at the regular business rate of 20%.
B.
Deductibility of Charitable Contributions
Businesses
and other legal entities may deduct donations to NPOs for a broad
range of public benefit activities, including cultural, scientific,
educational, health, humanitarian, sport, religious, ecological, and
other activities up to 2% of gross income. However, the threshold may
be raised if the donation is made on the basis of the decision of the
relevant ministry for the pursuit of specific programs and actions.
C.
Value Added Tax
VAT
is required to be collected by entities, including associations and
foundations, whose turnover exceeds 230,000 kuna (approximately
$38,000) in a given year. [VAT
Act Art. 22] The general VAT rate is 25%. [VAT
Act Art. 10] However, some specific products, including
scientific journals, books and CD-ROMs, milk, bread and medicine, are
subject to a 5% VAT rate, while other products are subject to a 10%
VAT rate. [VAT
Act Art. 10a]
Croatian
law provides a few VAT exemptions relevant to NPOs. The import of
donated goods for the fulfillment of basic human needs, such as food,
medicine and clothes, and the import of donated equipment by
registered humanitarian and charity organizations is exempt, but
exemptions are not applicable to alcohol drinks, tobacco products,
coffee, tea, and vehicles (except ambulances). [VAT
Act Art. 12(12)] As of January 1, 2010, goods and services paid
for out of foreign monetary donations are subject to VAT.
D.
Double Tax Treaties
The
United States and Croatia have not entered into a double-tax treaty.
Individuals and entities paying Croatian profit tax, however, can
receive a credit for profit tax paid elsewhere, up to the amount that
would otherwise be due in Croatia. [Profit Tax Act Art. 30]
[1] Croatian law also
allows foreign NPOs and other entities to engage directly in
activities in Croatia under certain circumstances. A foreign
association can operate in Croatia if it abides by the Croatian Law
on Associations. [Law
on Associations Art. 8] It must first seek registration from the
government’s state administration office. Applying for
registration requires, among other things, providing copies of
registration records from the association’s home country and
the association’s governing statute (translated into Croatian),
as well as identifying the individual who will represent the
association in Croatia. [Law
on Associations Art. 20] If the administration office does
not respond within 30 days, the foreign association is deemed to be
registered. [Law
on Associations Art. 20(3), 17] In addition, foreign legal
entities and individuals (not just associations) can “perform
the activities of social care.” [Law
on Social Care Art. 5] “Social care” is defined as
“public service which carries out measures and programmes
targeted to socially endangered persons and those who have adverse
personal or family situation.” [Law
on Social Care Art. 3]
[2] In practice, the
assets are generally distributed to association members or passed on
to another association.
[3] [4] An association
may publish books and other materials, but only related to its area
of activity, and may sponsor games of chance once a year. [Law on
Games of Chance, Official Gazette No. 87/2009] An association may
also undertake certain activities only after receiving a license,
such as collecting and distributing humanitarian aid and providing
psychosocial services.
