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15 March 2022
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5 minutes

Introduction of the euro in Croatia: what you need to know

The Republic of Croatia is preparing to replace the kuna with the euro. Businesses will need to be aware of when and how this is happening, so that they can make any accommodations or adjustments where required, and continue to operate while remaining compliant.

The transition is planned to take place in three distinct phases. The first of these, the preparation period, will start approximately six months before the introduction of the euro, or more precisely, from the date when the Council of the European Union decides that Croatia will introduce the euro and sets a fixed exchange rate.

The mandatory dual display of prices period begins on the first Monday in September 2022 and ends 12 months after the euro introduction date (starting on 5 September 2022 and ending on 31 December 2023). The dual circulation period in which the euro and kuna are used simultaneously as a legal tender in cash transactions, ie during which the euro and the kuna will be in circulation at the same time, begins on the euro introduction date and lasts two weeks (14 days from the euro introduction date).

Accounting and tax implications

The replacement of the kuna by the euro will inevitably affect businesses accounting systems.

Values in financial reports for the year preceding the adoption of the euro are required to be displayed  kuna. Financial reports will be prepared using the euro as the new official currency starting at the beginning of the year in which the euro is introduced. However, if financial reports for the year in which the euro is adopted contain data from the previous year, the data from the prior year will be converted from kuna to the euro at the fixed conversion rate for comparability purposes.

Forms relating to tax and other responsibilities payable to the government by businesses, as well as their claims on the government, that are presented in the year the euro is introduced but pertain to the preceding year, will be completed in kuna. For the period where the display of dual pricing is obliged, tax authorities' decisions and any other decisions issued by public entities based on these forms will display amounts in both kuna and euro. All payments originating from decisions issued by the tax authorities, or other public entities, will be implemented exclusively in euros as of the day of the adoption of the new currency.

After the date of introduction, all payments based on issued tax or other decisions will be executed exclusively in euros. On the date of introduction, banks and other payment services providers are obliged to convert funds in accounts from kuna to euros, free of charge, according to the fixed conversion rate. Despite doing this, the account numbers of transaction accounts in which cash is recorded as funds will remain exactly the same.

To avoid incurring additional costs in the form of account management fees, an account holder, who before the date of the introduction had an account in both kuna and euro, may exercise the right to close one or more accounts free of charge and transfer the funds recorded in those accounts to a single account of his choice held with the same institution, provided that this is done within 60 days of the date of the euro’s introduction. Therefore, it will be possible for any account holder who, after recalculation, has two accounts in euros (formerly kuna converted into euros and formerly euro) to close one of these accounts, in order to reduce their account management fees. As mentioned, this is only possible if the account continues to be held with same institution.

In relation to the impact of dual display of currencies on the books of outgoing and incoming accounts, for the accounting period 2022 and earlier, data will be presented in kuna. For the accounting period from 1 January 2023 onwards, data will be presented in euros.

Business entities that are liable to calculate VAT after collection, and thus are also liable for management records of books of outgoing and incoming invoices after collection, must pay attention to the correct recalculation (conversion) of data in the above books from 1 January 2023, especially where conversion makes it is necessary to round the principal amount, the amount of VAT and the total amount of an invoice.

Regarding data sent for fiscalisation, the XML schema will not change. Data for the period ending 31 December 2022 is to be delivered in kuna, and from 1 January 2023 in euros. During the period of double circulation, ie from 1 January to 14 January 2023, the issued invoice is fiscalised in euros.

Payroll and entity management

Salaries for December 2022, which will be paid in January 2023, will have to be paid in euros together with all benefits. The JOPPD form for December salaries will be marked 23xxx, as they will be paid in 2023. All JOPPD forms marked 23xxx are submitted in euros. Any late payment of salaries and other taxable and non-taxable payments for the period until 31 December 2022, which will be carried out in 2023, will be paid in euros, with the submission of the corresponding JOPPD form in euros, marked 23xxx.

Work contracts, royalties and related obligations of a business entity for the payment of any other taxable income will be treated in the same way.

Adapting information systems for the introduction of the euro will also require timely preparation. Necessary adjustments include ensuring that the information system can:

  • support double pricing requirements in the prescribed period (both before and after the euro introduction date)
  • convert all amounts and financial positions from kuna to euro using a fixed conversion rate and rounding rules, by the date of introduction of the euro
  • support the implementation of all euro processes and processing as the official currency after the euro changeover date
  • support dual circulation requirements (euro and kuna) in the first two weeks after the euro introduction date
  • enable comparative reporting (optional adjustments) with the same period last year (where last year's reporting results need to be converted into euros)
  • retain the possibility of conducting processes and processing in kuna for those processes that relate to the previous year, and are performed in the current year (eg preparation of annual financial statements for the previous year in kuna).

Cash considerations

When it comes to cash management, businesses will need to be supplied with euro banknotes and coins in a timely manner, in order to be able to conduct cash transactions in the new currency from the date of its introduction.

Four months before the introduction date, the Croatian National Bank will start supplying banks with euro banknotes and coins, at the earliest three months before the introduction of the euro. Pre-supply of banks with cash is necessary so that banks, from the date of the introduction of the euro, can provide consumers and businesses with a currency exchange service to the required extent.

A precondition for the start of indirect pre-supply is that the bank has pre-supplied itself with cash in euros, and that a business entity has entered into an indirect pre-supply agreement with the bank. Indirect pre-supply can start no earlier than 1 September 2022 for euro banknotes and 1 October 2022 for euro coins.

Five days before the euro introduction date at the earliest, banks will be able to spend the so-called simplified indirect pre-supply, in which business entities will be provided with cash in amounts of up to €10,000. Only micro business entities will have the right to participate in this procedure, ie those business entities that have fewer than ten employees and whose annual net income and/or annual balance sheet does not exceed €2 million.

It is especially important to raise workers' awareness of the introduction of the euro, which is why it is mandatory to state at least the total amount paid to the account in euros and kuna on documents related to pay and other employment benefits during the mandatory double reporting period.

Impact on consumers

For consumers, the national plan for the replacement of the Croatian kuna by the euro envisages a period of mandatory dual pricing display (in both currencies).

The double statement should be unambiguous, easy to see and legible, and the full amount of the fixed conversion rate must always be used when converting.

Dual pricing does not include trade agreements, ie accounts between business entities (B2B), internal accounts within the same company and various records and reports that will need to be sent to public authorities.

Only the fixed conversion rate set by the EU Council, which in most cases consists of six digits, is used to convert kuna into euros, which is why it will not be allowed to convert prices using a shortened version of the fixed conversion rate, such as two decimal places.

Regarding the dual pricing on invoices, payment devices of business entities will have to be adjust for dual pricing so that the total amount in the invoices is shown in both currencies. The invoice also must also show a fixed conversion rate.

In the period of mandatory dual pricing, the business entity will have to detail both currencies for the total amount paid to an employee’s account on salary payslips, or documents related to any other fees paid as part of the employment relationship (copyright agreements, work contracts, travel orders, Christmas bonuses, recourse, gifts for children, etc.).

In accordance with the principle of contract continuity, existing contracts with amounts in kuna are still valid. Monetary statements of value in the mentioned agreements, will be considered monetary statements in euros with the application of a fixed conversion rate, from the date of introduction of the euro as the official currency. The same applies to employment contracts, which will not need to be changed just because of the introduction of the euro as the official currency. Any amounts stated in employee handbooks, contract annexes, and so forth, will have to be expressed in euros due to the currency transition.

Changes have also been defined for the manner of display of dual pricing in business premises, and also for online shopping, outside business premises, by telephone, and during the implementation of promotional and marketing activities. More information on these can be found here.

Talk to us

If you have any additional questions about the adoption of the euro in Croatia, or require any support to guide your organisation through this transition, talk to TMF Group today.

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