Benefits in kind
Benefits in kind
What is the benefit in kind?
The benefit in kind is the non-monetary benefit that employees and other persons receiving from the employer. Such benefits are taxable. The Income Tax Act (and Ordinance on Income Tax) treats them equalized with the salary and other income, and the Law on VAT (and Ordinance on VAT) are considered taxable deliveries. So, generosity is beautiful but expensive.
What is considered a benefit in kind?
Benefit in kind is considered:
1. Using business buildings and their parts, and residential buildings, apartments and a garage. Example: an employer gives his employee apartment to use, free of charge. In this case, it is considered that the employer pays its employees an additional net-salary amounting market rental rate (depending on the area of the flat and the place where the property is located) and it is required to calculate contributions, income tax and surtax on net salary. In addition, the employer (if he is taxpayer of VAT) will have to charge VAT from the rent (not to rent – considered to be the market rental price in itself already includes VAT) and pay to the State.
- Using a vacation house or a resort, free of charge. Example: the employer owns resort at sea and their employees sent on a free stay in it. Then it will be necessary to determine a market price of accomodation and it is treat as a net salary in the previous example. The calculation of VAT is based on the principle of the previous example.
3. Giving presents to employees. If the employee bestows, the value of the gift is up to 400,00 HRK (with VAT included) is not a benefit in kind, but only the value above 400,00 HRK. Example: The employer bestows his employee a perfume in the value of 450,00 HRK. As the value is over 400,00 HRK is deemed benefit in kind, while the remaining 50,00 HRK will be add up to her salary and will be charged all the benefits deriving therefrom. If it bestows a natural person who is not employed, or is a business partner (or his employee) or a potential business partner or customer, the value of the gift with VAT represents a benefit in kind and taxable as other income.
4. A gift to child of employee, under the age of 15 shall not be considered other income up to the amount (value) of 600,00 HRK. The gift in this sense should not be in cash.
5. Giving borrowings and loans without interests or with interests rates lower than 3%, is considered receiving benefit in kind. Example: the employer pays the employee a loan with 1% (with VAT included). Benefit in kind then represents the amount of interest of 2% (3% -1%) and is considered increasing net salaries. From the benefit it will also need to calculate and pay VAT.
6. Giving shares without compensation, with the amount of benefit in kind presents the market value of those shares.
7. making available for use of vehicles owned by entrepreneur for private purposes. And cherry on top! Although here is the last in a row, this is the most common form of benefit in kind. When an entrepreneur gives to employee or other person a vehicle to use all day, and therefore outside of working hours, it is considered that the user of the vehicle received a benefit in kind. There are two ways of determining the benefit:
- Monthly income of 1% of the purchase value of the vehicle (including VAT) or in the amount of 20% of the rate of operative leasing.
Determining the benefit based on the actual use of the vehicle ie. based on kilometers traveled. Then you have to keep records of kilometers traveled, a benefit is calculated by multiplying the number of kilometers and the charge per kilometer of 2,00 HRK (including VAT).
In both cases, at the benefit in kind shall be calculated contributions, income tax and surtax. Since in the purchasing of cars for personal use is not recognized prepayment, in calculating the benefit in kind is not calculated VAT.
In the case of the air and sea traffic, units for the calculation of the hours of use, and the accounting value is the market price of assets hour rental.
Another note with the calculation of benefits in kind on the basis of the use of personal vehicle: commonly expenses of using the personal vehicle is tax recognized in the amount of 70% of the total cost (with VAT included). In the event that the agreed use of vehicle in private use, when calculating benefit in kind, the cost of using this vehicle are fully tax deductible (with VAT included).
The method of calculation of taxes
If the recipient of the benefit in kind is employee, as it is evident from the above examples, the benefit in kind is treated as net income.
If the recipient is a person outside of employment, benefit in kind is considered other income. This means that you should calculate contributions for retirement from 20% (I and II pillar), health insurance contribution of 15% and income tax of 25% and a surtax (depending on the place where the recipient is logged in).
In both cases, VAT is calculated on the amount of net benefit only in the case if during purchasing or expense, which is given to a person without compensation, is used prepayment.