# Savings and capital gains tax – Loans

The current topic last week, and thus the inquiries of the citizens who flooded our calls, was the Savings Tax .

Obviously, communication on the introduction of new taxes and changes to citizenship is not at the level it should be, as most (!) People who have called us think they will be taxed on their whole savings account.

This, of course, is not true. The subject of taxation is interest on savings, not principal. In addition, we provide an overview of other details we consider relevant to the topic of savings taxes.

We can picture savings as a waiver today so we can enjoy tomorrow. Given that we have denied ourselves the use of funds for the foreseeable future, we want to maximize profits during this period.

Long ago, people realized that time and money were closely linked! Savings at the bank provide security and the ability to dispose of funds if we urgently need them, and thus generate incentive profits.

## Since the new year, the Government has introduced a tax on savings interest

### All deposits are taxed

The government announced the introduction of a savings tax from January 1, 2015 at a rate of 12%.

According to the initial announcements, deposits up to the amount of HRK 400,000.00 were to be exempted from taxation, but the most recent Government decision will subject all deposits to taxation, regardless of the amount of invested funds.

Interest rates on short-term retail deposits in Croatian banks range between 2.5% and 3.5%, depending on the currency and the maturity of the contract.

Interest rates on household deposits in other EU Member States are much lower, from 1.0 to 1.5%. In most EU Member States, the profit tax on savings is around 35%.

It follows that savings in Croatian banks are still incentive savings.

## Make money from the bank or not?

### No principal is taxed

It should be emphasized that taxed savings income or interest accrued on the money invested, not the savings principal. It is easy to show the difference in the following examples:

Example:

*You have deposited HRK 12,000.00 with 2.4% interest for a year. You have earned interest on the money invested in the amount of 288,80 kn. You will be charged a tax of 12% on the money received, which is 34.66 kn. You earn HRK 254.14 on a fixed term HRK 12,000.00.*

*You have deposited € 10,000.00 with 2.75% interest for a year. You have earned EUR 275.76 in interest on the money invested. You will be charged 12% tax on the money you receive, which is € 33.09. You earned an amount of € 242.67 on a term deposit of 10,000.00 euros.*

*You have deposited HRK 500,000.00 with 3.1% interest for one year. You have earned interest on the money invested in the amount of 15.543,12 kn. You will be charged a tax of 12% on the money received, which is HRK 1865.17. You earned an amount of HRK 13,677.95 on a term deposit of HRK 500,000.00.*

To help illustrate the loss to citizens, we will convert the taxable amount into reduced interest. The introduction of a savings tax, for example 12%, will reduce the interest rate from 3.3% to 2.904%.

Here’s a hypothetical round number calculation:

Term: HRK 10,000

Interest: 1%

After one year, interest income (tax excluded) would be HRK 100.

So we would have $ 10,100 in the account.

Savings tax is 12%, so at 100 kn interest would be 12 kn.

After tax, interest would be HRK 88 instead of HRK 100.

We would have 10.088 kn in the account.

The real percentage change to the total is -0.12%.

## How to avoid a savings tax?

### Capital flight to other forms of property

It is best to invest money in different types of assets to minimize incomes tax on interest income.

Many forms of property income are taxed in some ways today, including dividends above a certain amount, rents from rental apartments, income from entrepreneurial investments, rental of tourist accommodations, etc. from capital.

Equal tax treatment for all forms of property income (dividends, rents, corporate investments, etc.) would prevent capital flight from one form of property to another.

Otherwise, introducing a savings tax could lead to capital flight to other forms of property. The bankers assembled in the association do not have a view on taxing savings interest because it is not a tax on banks, but on depositors.

On the other hand, if the number of savers will decrease due to taxation, interest rates on savings and thus on loans will probably follow.