Purchasing a boat or apartment through a company (d.o.o. or j.d.o.o.) can be a justified business decision when the asset is used for a registered business activity, such as charter services or tourist accommodation. However, in practice, the question often arises as to whether such assets may also be used for the private purposes of the owner, director, or employees.
The answer is yes, but subject to clearly defined tax rules.
Private use of business assets is not prohibited. However, if it is not properly recorded and treated for tax purposes, it may result in additional tax liabilities, VAT charges, benefits in kind, and tax adjustments during a tax audit.
When Is the Use Considered Private?
Private use refers to any use of a boat or apartment that is not related to the company’s registered business activity.
For example:
- the owner uses the apartment for a private holiday,
- the director spends a weekend on the boat without a business purpose,
- an employee uses the apartment or boat without paying market-rate compensation,
- family members use company assets without appropriate records.
In all of these cases, the tax treatment of such use must be analysed.
Does the Company Have to Charge a Market-Rate Fee?
One of the most important tax principles is the arm’s length principle.
If an owner, director, or employee uses a boat or apartment for private purposes, the company should charge a fee corresponding to the market value of a comparable service.
For example:
- the use of an apartment during the tourist season should be valued according to the market rental price for a comparable property at that location,
- the use of a boat should be valued according to the market charter price of a comparable vessel for the same period.
If the private use of a boat or apartment is not properly recorded, or if the user is charged a fee that does not correspond to market value, the Croatian Tax Administration may determine a different tax treatment during a tax audit and adjust the tax base, including the assessment of applicable taxes, interest and, where relevant, other public charges, in accordance with the General Tax Act, Corporate Income Tax Act, and tax regulations governing benefits in kind.
When Does a Benefit in Kind Arise?
If an employee or director uses a boat or apartment without paying market-rate compensation, or pays an amount below market value, a benefit in kind arises.
If the beneficiary is an employee, the benefit is treated as salary in kind. If the beneficiary is the owner, it is treated as investment income in kind, while in the case of another individual, such as a family member, it is treated as other income in kind.
Such benefits are subject to the applicable:
- personal income tax,
- and social security contributions.
If the beneficiary is a company owner who is not employed by the company, the tax treatment may differ depending on the specific circumstances and the status of the individual concerned.
What About VAT?
For taxpayers registered for VAT, the tax treatment of the private use of a boat or apartment recorded as a company asset must be analysed separately, particularly from a VAT perspective.
If business assets are used for the private purposes of owners, directors, employees, or other individuals, a VAT liability may arise under certain circumstances. The tax treatment depends on several factors, particularly:
- how the asset was acquired,
- whether input VAT was deducted upon acquisition,
- the extent and manner in which the asset is used for business and private purposes,
- whether a fee is charged for private use and whether it corresponds to market value.
In practice, company assets or boats are often made available for private use without any compensation. It is sometimes assumed that, as no fee is charged, there is consequently no VAT liability. However, this assumption is incorrect. Even where an asset or boat is used free of charge, VAT may still have to be accounted for if input VAT was fully or partially deducted when the asset was acquired.
These rules derive from the Croatian VAT Act, particularly the provisions governing supplies of goods and services for consideration and transactions treated as supplies for private purposes, specifically Articles 7 and 8 of the VAT Act, which determine when the use of business assets for private purposes constitutes a taxable supply.
Does Private Use Affect the Tax Deductibility of Expenses?
If a company records a boat or apartment as a fixed asset and the asset is used for private purposes, depreciation and costs associated with such private use will not be tax deductible.
Special Rules for Boats Used for Business Activities
When a boat is used for business purposes, tax and regulatory rules require proper compliance with a range of administrative and record-keeping obligations. The way in which the vessel is used directly affects its tax treatment and the deductibility of related operating expenses.
Depending on the specific circumstances, particular attention should be paid to:
- registering the vessel for business activities,
- properly documenting business and private use,
- concluding appropriate rental or usage agreements where applicable,
- issuing invoices in accordance with tax regulations,
- maintaining and retaining the required documentation that may be subject to inspection by the competent authorities.
If a vessel registered for business activities is used for private purposes without appropriate documentation or in breach of applicable rules, tax or other administrative audits may result in additional tax liabilities, denial of certain tax benefits, and the identification of other irregularities under applicable legislation.
Common Mistakes Made by Business Owners
In practice, the most common issues include:
- purchasing a boat or apartment through a company exclusively for private use,
- using company assets privately without accounting for VAT,
- failing to account for benefits in kind,
- incorrectly recording the use of company assets,
- deducting all expenses without verifying the conditions under the Corporate Income Tax Act,
- failing to maintain appropriate documentation and records.
Such situations often result in additional assessments of taxes, social security contributions, VAT, and other tax adjustments during a tax audit.
Conclusion
Using a company-owned boat or apartment for private purposes is possible, but it requires appropriate tax planning and accurate recording of all relevant transactions.
Incorrect treatment of private use may result in additional VAT liabilities, benefits in kind, an increased tax base, and other tax obligations. It is therefore advisable to assess all tax and accounting implications before purchasing or privately using such assets.
If you are considering purchasing a boat or apartment through a company, or already use such assets for both business and private purposes, contact CONEO Croatia. Our team can analyse the tax treatment of your specific situation, assist with the proper documentation and recording of asset use, and help ensure compliance with applicable tax and accounting regulations.
