Buying a franchise in Croatia: taxes on fees paid to an overseas franchisor

When you join a franchise network through an overseas franchisor, the agreed fee is not necessarily the final cost. Beyond the amount on the invoice, you need to establish your Croatian tax obligations and check whether the contract requires the franchisor to receive the full amount after all taxes. This is not something to leave until your first payment: a tax review before signing could change your assessment of the offer’s financial viability.

1. Establish who you are paying and what you are actually buying

First, request full details of the contracting party and the payment recipient: their name, registered office, country of tax residence and relevant tax identification details. If another company in the same group issues the invoice, ask for an explanation of its role and the legal basis for charging you. A familiar brand name alone does not tell you which entity matters for tax purposes.

Next, break down what the fee covers. It may include the right to use a trade mark, the transfer of business know-how, training, consultancy or other services. The label ‘franchise fee’ is not enough for an accountant to determine the tax treatment of each payment reliably.

For the review, prepare:

• the draft agreement and schedules describing the rights and services;
• a schedule of one-off and recurring payments;
• a sample invoice showing the issuer’s details;
• an explanation of any billing through related companies;
• the clauses covering taxes, deductions and gross-up payments.

The substance of the transaction matters more than its label. Do not artificially split the fee simply to secure a more favourable tax outcome. If the agreement genuinely covers several separate supplies, their descriptions and valuations should be commercially justified and documented.

2. Check VAT and withholding tax separately

Croatia has no specific franchise legislation or mandatory standardised pre-contractual franchise disclosure document. A franchise agreement is an innominate contract — one not specifically defined by law — governed primarily by the Croatian Civil Obligations Act. However, freedom of contract does not remove obligations under tax legislation.

For VAT, the key legislation is the Croatian Value Added Tax Act. Cross-border business-to-business services may be subject to the reverse charge: the Croatian recipient accounts for VAT instead of the overseas supplier. The precise procedure depends on the type of supply, the parties’ tax status and other relevant circumstances. An invoice without foreign VAT therefore does not automatically mean there are no Croatian VAT obligations.

Your accountant should check whether you need a VAT identification number, which returns you must submit and whether you are entitled to deduct input VAT. Being issued a VAT identification number does not automatically give you the right to deduct input VAT. If you have no deduction entitlement, or it is restricted, the VAT accounted for may increase your actual cost.

Withholding tax under the Croatian Corporate Income Tax Act must be checked separately. Certain payments to overseas legal entities, including fees for particular intellectual property rights, may require you to calculate and remit withholding tax. Do not assume that every element of a franchise package receives the same treatment.

If Croatia has an applicable double taxation treaty with the recipient’s country, it may affect the tax treatment. Access to treaty relief depends on meeting the conditions and providing the appropriate documentation, not simply on the address shown on the invoice.

3. Agree who bears any additional tax cost

Read particularly carefully any clause requiring the franchisor to receive the agreed fee ‘without any deductions’. This wording may mean that you must increase, or ‘gross up’, the total payment so that the franchisor receives the full agreed amount after withholding tax.

Distinguish between two situations: tax is withheld from the agreed fee, or you bear its cost on top of that fee. These do not represent the same price for you, even if the basic fee quoted in the offer is identical. The contractual allocation of the cost does not change the statutory obligation to calculate and remit the tax.

Before signing, propose that the agreement clearly specifies:

• whether the fee is stated before or after any withholding tax;
• whether there is a gross-up obligation and when it applies;
• which tax certificates the franchisor must provide and by when;
• what happens if documentation needed for tax relief is delayed;
• how payments are adjusted after an error is identified.

Do not accept an unlimited obligation to cover ‘all of the franchisor’s taxes’. A lawyer should distinguish taxes connected with your payment from tax liabilities arising from the franchisor’s own business.

4. Prepare an illustrative calculation before the first payment

Ask your accountant for a written breakdown of one initial payment and one recurring payment. For each, they should show separately the agreed fee, the amount received by the franchisor, any withholding tax, the VAT liability and the scope for deducting input VAT. Show the final cost separately from the timing of cash outflows.

Also test a less favourable scenario: what happens if the documentation needed to apply a double taxation treaty is not available by the payment date? Do not decide on your own to delay payment or claim relief without checking the conditions.

Agree who will obtain the documents, monitor their validity and authorise payments. Repeat the review whenever the fee recipient, type of service or contractual terms change.

Practical takeaway: before signing, secure a description of each fee, a tax calculation and a clear contractual allocation of costs. Only then can you compare the true cost of domestic and overseas franchise offers.