On April 28, 2026, the United States and Croatia signed a protocol (Protocol) amending the income tax treaty (and an accompanying protocol) (Treaty) between the two countries that was signed on December 7, 2022.

The Protocol makes amendments to the limitation on benefits, relief from double taxation, and non-discrimination articles of the Treaty. The Treaty is the first treaty based on the revised US Model Treaty released in 2016 (the 2016 Model), and together with the Protocol reflects current US law and treaty policy.¹

The Treaty, together with the Protocol, will be transmitted to the U.S. Senate for advice and consent to ratification. The Treaty and Protocol will enter into force after the United States and Croatia notify each other that their respective ratification procedures are satisfied.

Detailed discussion

Article I of the Protocol

Article I of the Protocol defines the term "active conduct of a trade or business" as used in various provisions of Article 22 (Limitation on Benefits) of the Treaty, which limits eligibility for benefits under the Treaty to certain qualified persons. Most notably, the definition applies for purposes of the active trade or business test and the headquarters company test, which are two of several tests available for a resident of either the United States or Croatia to qualify for Treaty benefits.

As defined, the active conduct of a trade or business generally means "a specific unified group of activities of a resident that constitutes (or could constitute) an independent economic enterprise carried on for profit." In addition, the active conduct of a trade or business includes every operation that forms a part of, or is a step in, a process by which an enterprise may earn income and involves regular and substantial management and operational functions performed by the enterprise's officers or employees.

The definition is broadly consistent with the definition of a "trade or business" in the Treasury regulations under IRC Section 367(a), which the Technical Explanations to the 2006 US Model and to various US income tax treaties cross-reference for defining the same term. By being included in the text of the Treaty (as amended by the Protocol), the definition should apply to residents of both the United States and Croatia.

Article II of the Protocol

Article II of the Protocol replaces paragraphs 2 through 4 of Article 23 (Relief from Double Taxation) of the Treaty. Under amended paragraph 2, "double taxation shall be relieved in accordance with the provisions of, and to the extent allowed under, the law of the United States (as it may be amended from time to time without changing the general principle hereof)." Consistent with existing US income tax treaty policy, the foreign tax credit (FTC) and dividends received deduction (DRD) provided by the United States under Article 23 conforms to the FTC and DRD rules in the Internal Revenue Code (Code).² Thus, Article 23(2) does not reflect an intention by the United States to provide an independent Treaty-based FTC or DRD that deviates from the FTC and DRD allowed under the provisions of the current Code (e.g., IRC Sections 901, 960, and 245A).

Changes to Article 23(2)(b)

The Protocol amends Article 23(2)(b), which originally entitled a US company to a DRD for dividends from a Croatian resident company if the US company owned at least 10% of the aggregate vote or value of the shares of the company. Article 23(2)(b) is similar to IRC Section 245A, which allows a US corporation that is a US shareholder a DRD for certain dividends paid by a specified 10% owned foreign corporation. Under IRC Section 951(b), a US shareholder is a US person who directly, indirectly or constructively owns 10% or more of the total voting power or total value of the foreign corporation's stock.

To better conform the terms of Article 23(2)(b) to IRC Section 245A, the Protocol replaces the prior ownership requirement with the requirement that the US company be a US shareholder of the Croatian resident company. Even though the term "United States shareholder" is not defined in Article 23, such meaning likely would be supplied by IRC Section 951(b) in accordance with Article 3(2), which applies the meaning provided by the Code when it relates to the application of Article 23 for the US federal income tax liability of a US resident.

New Article 23(2)(c)

The Protocol also adds new subparagraph (c) to Article 23(2), which allows an indirect FTC for Croatian income taxes that corresponds to the deemed paid FTC under IRC Section 960. Generally, under IRC Section 960(a) and (d), a US corporation (or US individual that makes an IRC Section 962 election) that is a US shareholder of a controlled foreign corporation (CFC) is deemed to have paid an amount of the CFC's foreign income taxes related to the US corporation's IRC Section 951(a) subpart F income inclusion or IRC Section 951A net CFC tested income (NCTI) inclusion with respect to that CFC.

The "One Big Beautiful Bill Act" (OBBBA) reinstated former IRC Section 958(b)(4) to prohibit "downward attribution" of stock from a foreign person to a US person for purposes of determining whether a US person is a US shareholder or a foreign corporation is a CFC. In connection with the reinstatement of IRC Section 958(b)(4), the OBBBA introduced IRC Section 951B, which requires only certain foreign controlled US shareholders to recognize subpart F income and NCTI inclusions with respect to foreign controlled foreign corporations (foreign CFCs). Generally, a foreign CFC is a foreign corporation that would have been a CFC if IRC Section 958(b)(4) had not been reinstated.

As amended, new Article 23(2)(c) aligns with the deemed paid taxes provisions of IRC Section 960(a) and (d). Specifically, the new provision requires the United States to allow a credit against US tax in the amount of Croatian income tax paid or accrued by a Croatian resident CFC or Croatian resident foreign CFC that is "properly attributable to the profits giving rise to an income inclusion" of a US resident or citizen, provided the US resident or citizen is either, as applicable:

1. A US shareholder of the Croatian resident CFC or
2. A foreign controlled US shareholder of the Croatian resident foreign CFC

Article III of the Protocol

Article III of the Protocol adds a new limitation in Article 24(1)(b) (Non-Discrimination). Generally, Article 24(1) prohibits any discriminatory taxation that would otherwise be imposed by the United States or Croatia on a national of the other country. Under the new limitation, this non-discrimination rule shall not be construed to require the United States to grant a national of Croatia any personal allowances, reliefs, or tax reductions, if that national does not provide a social security number or any other number required by the Code to claim such benefits.

Implications

The Protocol aligns the Treaty with current US law and treaty policy, including provisions that accommodate changes made under the OBBBA. These amendments may also signal the direction of US treaty policy for future treaties or protocols that the United States may pursue with other countries.