The Zagreb City Assembly has passed a decision on new income tax rates, which will be applied retroactively from January 1, 2025. According to this decision, the lower tax rate will be 23%, while the higher rate will be 33%. These changes result from adjustments to the recently amended Income Tax Act, adopted by the Croatian Parliament in December 2024.
Reason for the Changes and Legal Alignment
The amendments to the law introduced a framework within which local government units must determine their tax rates. Under these changes, local governments can no longer maintain rates outside the prescribed range, meaning that the City of Zagreb had to adopt a new decision regarding income tax rates.
Before these amendments, Zagreb applied a lower tax rate of 23.60% and a higher rate of 35.40%. The new tax reduction has slightly eased burdens, but the decreases are not drastic. This change is part of a broader tax reform to increase fiscal decentralization and give local governments greater flexibility in shaping their fiscal policies.
Financial Impact on the City of Zagreb
Estimates suggest that these changes will result in an annual revenue loss of between 120 and 130 million euros for the City of Zagreb, representing approximately 8 to 9% of total income. Since income tax revenues are a key source of funding for local communities, policymakers must determine how to compensate for this shortfall.
Despite the revenue reduction, the City of Zagreb has stated that it will continue to fund public and municipal services and capital investments such as infrastructure renewal, school facilities, and other vital projects. Officials plan a thorough budget review and expenditure rationalization to ensure adequate funding for essential projects.
What Does This Mean for Citizens?
For residents of Zagreb, these changes mean a slight decrease in tax burdens, which could positively impact their purchasing power. However, it is essential to note that the effects of these adjustments will largely depend on future decisions by city authorities regarding budget allocations. If policymakers compensate for the revenue shortfall by increasing other fees or reducing investments in infrastructure and public services, citizens may experience negative consequences.
Conclusion
The decision on new tax rates is part of a broader fiscal reform aimed at aligning with national regulations and adjusting the financial system of local government units. While it provides some tax relief for citizens, it also raises concerns about how the revenue gap will be addressed and whether this will have long-term effects on the quality of public services and development projects in Zagreb.
The first effects of this decision will become evident in the coming months, allowing citizens to assess the real impact of the tax rate reduction on their standard of living and municipal services.
