Subsequent to our article “Taxation of dividends/Amendments of the Income Tax Act” as of November 2013 where we pointed out to unconstitutionality of certain provisions of in September 2013 adopted changes to the Income Tax Act (articles 6 and 8), on its session that was held on 18 June 2014, the Croatian Constitutional Court (CC) declared provisions of articles 6 and 8 of the changes to the Income Tax Act as unconstitutional.
The most intriguing part is that this is the second decision of the CC reached within last 9 months abolishing the application of certain provisions of the Income Tax Act in a part relating to taxation of dividends. In September 2013 the CC for the first time abolished the Act on Amendments of the Income Tax Act as of February 2012 in a part relating to retroactive taxation of dividends to be paid out from the profit realised after 31 December 2000.
Incredibly fast, on the very next session of the Croatian Parliament following the decision of the CC, the Croatian Parliament adopted in an urgent procedure the Amendments to the Income Tax Act (Amendments 2013) which already at a very first sight again appeared to have unconstitutional effects resulting in retroactive application of the law. Pursuant to the Amendments 2013 exempted from the application of dividend tax should have been only the dividends that were paid out to shareholders on the basis of the shareholders’ decision which had been rendered between 1 January 2005 and 1 March 2012 and in the author’s opinion the ones between 27 September 2013 (as the day of abolishment of the Amendments 2012) and 19 October 2013 (as the day of entry into force of the Amendments 2013).
In the procedure the CC concluded that in general when deciding on the tax regime the legislator should enjoy independence provided it respects the principles of proportionate payment of taxes and the principles of equality and equity of the tax system. The CC found the articles 6 and 8 of the Amendments 2013 providing for retroactive application of the law without justifiable grounds inadmissible as being contrary to the art. 14, 48, 51 and 90 of the Croatian Constitution and the article 14 of the Convention for the Protection of Human Rights and Fundamental Freedoms in relation to the article 1 of the Protocol No. 1 of the Convention.
What messages have the Croatian Parliament and the CC sent to the public by their recent practice? Once is sure, the Croatian Government desperately lacks revenues for filling the gap in the state budget and will do anything to accomplish this mission, even it is obvious that the measures and instruments exercised show to be legally inadmissible and entrepreneurial hostile. On the other side, second abolishment of the same law within the last 9 months gives a comfort of having a guardian that takes care of human rights and fundamental freedoms.