As Croatia prepares to implement a new real estate tax, Ilej & Partners in cooperation with Karanovic & Partners Partner Franka Baica, BDV Legal Partner Vladimir Batarelo, and CMS Partner Tamara Jelic Kazic talk about its objectives, potential impacts, and how property owners and investors should respond.
Returning Real Estate to the Residential Market
“The primary objective of the real estate tax is to promote a more equitable tax structure among property owners and to equalize the tax burden between short-term and long-term rentals, thereby encouraging long-term rentals as a more stable form of property usage,” Baica explains. “By targeting unutilized properties, the government intends to encourage sustainable property development and stabilize the real estate market, which could potentially lead to lower prices as well as broadened accessibility of housing. Furthermore, one of the objectives is to generate more revenues for local governments.”
Batarelo highlights the layers of the reform. “First, municipalities retain their autonomy to set rates, with the range adjusted from EUR 0.60-5.00 to EUR 0.60-8.00 per square meter. Significantly, municipalities will now receive 80% instead of 100% of revenue, with 20% going to the state budget. This might prompt moderate rate increases to maintain current revenue levels,” he explains. He notes that the reform makes the tax mandatory across all municipalities. “Tax administration data shows 95 local government units currently don’t implement it. These municipalities must introduce the tax, retaining the freedom to set rates within the range, defaulting to EUR 0.60 if they don’t act.” According to him, “the legislation aims to address approximately 600,000 vacant residential units and standardize property taxation across Croatia.” Given the moderate rate changes, he expects “the market impact to be more administrative than financial for areas already implementing the tax.”
Jelic Kazic adds that “the main objective of the new real estate tax is to improve the housing situation and correct the market imbalances by returning vacant real estate and short-term rentals to the residential real estate market.” However, she warns that the reform is “being implemented without a comprehensive housing strategy,” and that, in the absence of precise calculations, it is “impossible to estimate the effect of these changes to the real estate market, especially considering that other non-tax measures may be implemented at a later stage.”
R.E.thinking Investment Strategies
“By taxation of properties that are either rented out for short-term or vacant, the government expects the new tax should stimulate the property owners to put their unused or rarely used properties to a functional use,” Baica observes. “The overall investment landscape may turn to projects that offer consistent returns rather than quick gains, potentially leading to more stable and responsible investment practices.”
Batarelo notes that “both foreign and domestic investors will face the same rules, with the main change being consistent application across Croatia. The rate structure remains relatively moderate, so the impact should focus more on compliance and documentation requirements than increased costs.” Moreover, he adds that the exemption for long-term rentals of 10 months or more “provides planning opportunities for investors who may want to restructure their holdings.”
Jelic Kazic points out potential shifts in investment preferences, adding that “the tax liability will depend on the square footage of the real estate; this may result in less investment in larger houses. Lessors, especially foreign investors, may opt for smaller apartments to reduce their tax burden.” She notes that while more real estate may become available for targeted groups, overall investment in the sector might decrease.
Can Taxation Alone Achieve the Goal?
Baica expresses cautious optimism about increasing housing availability for young families. “If the reform effectively restricts short-term rentals and enhances the affordability of real estate, it could lead to a greater focus on housing projects for young families. The generated revenue could fund public housing initiatives or subsidies for first-time homebuyers, further fostering accessibility,” she explains. “However, achieving this goal depends on the efficacy of the implementation and how the local government will prioritize the use of tax revenues.”
Batarelo offers a pragmatic viewpoint. “As a tax practitioner, I have to be realistic about what tax measures alone can achieve. Given the moderate rate changes, any direct impact on housing availability will likely be limited. However, the standardized implementation across all municipalities, including those that previously had no such tax, combined with clearer enforcement mechanisms, might encourage some property owners to either sell or rent out currently vacant properties,” he posits. “The long-term rental exemption could particularly help create more stable rental options. But this is just one piece of a broader housing policy puzzle.”
Jelic Kazic, however, remains skeptical. On the one hand, “it is certain that some owners will start renting out their vacant real estate, and the rental market may improve to an extent. However, data on the vacant real estate in Croatia is not reliable because of a lot of illegal renting, and legalizing these arrangements will only seemingly increase the market share of long-term rentals,” she says. “On the other hand, the proposed tax effect will probably not motivate those who hold real estate as a long-term investment.”
Potential Rise in Prices
However, there might be unintended consequences. “While the tax aims to regulate the market, it may inadvertently lead to increased property values as well as higher rental prices, especially in areas heavily burdened by the new taxes,” Baica cautions. “Property owners might be compelled to raise rents to offset added costs, potentially aggravating housing affordability unless the market adjusts effectively.”
Focusing on risks, Batarelo adds that “the most immediate impact might be felt in municipalities that previously did not levy the tax. In these areas, we might see some adjustment in property values to reflect the new tax burden.” His take is that “the revenue-sharing mechanism, where 20% goes to the state budget, could affect local government policies. There is also a risk that some owners might attempt to pass on costs through increased rents, although the long-term rental exemption might help mitigate this.”
Jelic Kazic highlights challenges for certain properties. “An unintended consequence could be a sudden increase in rent prices as lessors will try to compensate for the loss of profit from switching to long-term rentals. In addition, some real estate is simply not suitable or attractive for long-term rentals, mainly due to their location – for example, rural areas where real estate is usually rented on a short-term basis.” According to her, this means that owners of such properties are forced to choose between selling them or paying taxes that may make renting unprofitable.
Preparation Is Key
All three agree that property owners and investors need to take strategic steps to prepare for the upcoming tax changes. “Property owners and investors should proactively assess their current assets and potential liabilities,” Baica advises. “By better understanding the tax implications and necessary adjustments, they should develop a strategic approach that includes diversifying investment portfolios.”
Jelic Kazic underscores the importance of awareness as well. “The best way to prepare is to be aware of the upcoming changes. Basically, a taxpayer will be any domestic or foreign, natural or legal person who owns real estate in Croatia, which is not used for permanent living arrangements.”
Finally, Batarelo stresses three aspects to keep in mind. “First, documentation – the requirements for proving exemption status, particularly for primary residences, are quite specific. Second, timing – the March 31, 2024 reporting deadline is crucial, and the penalties for non-compliance are significant. Third, structure – particularly for our clients with multiple properties, we are reviewing whether their current holding structure optimizes their position under the new rules,” he explains.
This article was originally published in Issue 11.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
