Croatia to adopt the Euro currency in 2023

The Council of the European Union has formally approved the accession of Croatia to the euro area (also known as the eurozone). From 1 January 2023, Croatia will officially adopt the Euro currency. The conversion rate for the Croatian Kuna currency has been set at 7.53450 per Euro. The Croatian Mint has already started producing euro coins with Croatian national motifs. 

With effect September 5, 2022, prices will have to be displayed in both kunas and euros. Payments can be made in both currencies during the first two weeks of January 2023 but then only in euro going forward. 

Businesses with a presence or VAT registration in Croatia should ensure that they are prepared for the currency change, including:

• Ensuring the Euro currency is shown on tax invoices with a tax point of January 1, 2023 or later.
  
• Where an invoice is raised in a currency other than the Euro, that the relevant daily exchange rate is used to convert the VAT amount to Euros for VAT purposes (to include on the tax invoice and also for VAT reporting) e.g. using the European Central Bank (ECB)’s day rate.
  
• Ensuring systems are updated to reflect the Euro currency (including ERPs, e-commerce platforms, EPOS and invoicing systems).
  
• Consider any required updates to price lists, contracts, purchase orders and agreements.
  

Croatia joined the EU on July 1, 2013 and its membership obliged it to join the eurozone once it fulfilled the euro convergence criteria. Croatia joined the European Exchange Rate Mechanism (ERM) II on July 11, 2020. Croatia will become the 20th EU member state to adopt the Euro as its currency. There are seven other EU member states that haven’t adopted the Euro and have their own local official currencies:

• Bulgaria
  
• Czech Republic
  
• Denmark
  
• Hungary
  
• Poland
  
• Romania
• Sweden

Croatia has the second highest standard rate of VAT in the EU at 25%.  While e-invoicing is not mandatory between businesses (B2B), it has been compulsory for public procurement (B2G) since July 1, 2019. All e-invoices must comply with the European e-invoicing standard (EN 16931), and be transmitted via the national platform, Servis eRačun za državu. The platform is also connected to Peppol (the FINA Peppol Access Point). Croatia has a national Core Invoice Usage Specification (CIUS) that complies with Croatian VAT legislation and sets out the data elements to be included on tax invoices.

This currency change in Croatia is a reminder of the importance of currency conversion and exchange rates in relation to VAT and GST reporting, and tax invoicing. While most countries allow invoices to be raised and paid in any currency (a commercial decision), where VAT or GST is charged, there is generally a requirement to show this is the local reporting currency on the tax invoice. Tax authorities will generally mandate the use of a specific exchange rate e.g a daily rate from the local national bank or a monthly rate for VAT and customs purposes published by the tax authority. In the EU, it is possible to use the ECB’s day rate for currency conversion for VAT invoicing purposes in every EU member state. 

A common risk area is that accounts payable teams in the country, or within a regional shared service centre, may not be aware of these requirements and simply enter the tax amount into the ERP system using the document currency and the company’s own exchange rate, rather than the one used by the supplier. The rationale for these strict currency and exchange rate rules is that the tax amounts should match, so there is symmetry between the VAT / GST reported on the sale (the output tax) and the VAT / GST recovered on the purchase (the input tax). This can lead to issues upon audit or when tax authorities attempt to match the amounts in countries with digital reporting or e-invoicing systems.

To find out more about how Avalara can help with your global indirect tax compliance requirements, including Croatia, get in touch today and speak to one of our experts.