Reverse charge in construction: when VAT is not charged on the invoice

Few VAT rules cause as much doubt in practice as the domestic reverse charge in construction: the contractor does not charge VAT on the invoice, and the obligation to account for it passes to the recipient of the service. The rule sounds simple, but the boundary between the services to which it applies and those to which it does not sometimes runs through — the same building. Below: who is covered, which services are included and which are not, and how foreign contractors should proceed.

What the domestic reverse charge is

Under Article 75(3) of the VAT Act, a taxable person registered in the VAT register in Croatia is liable to pay VAT when specifically defined supplies are made to them. Alongside construction services, these are supplies of used material and waste, supplies of immovable property where the supplier has opted for taxation under Article 40(4) of the Act, supplies of immovable property sold by a debtor in enforcement proceedings, transfers of greenhouse gas emission allowances, and supplies of concrete steel and iron — reinforcement.

For construction services, the reverse charge applies to the works as a whole, with or without the material used: this is a single service in which the labour is not separated from the material installed.

Which construction services fall under the reverse charge

The Act prescribes the reverse charge for construction services in connection with the construction, maintenance, reconstruction or removal of structures, including repair and cleaning services. Article 152 of the VAT Ordinance elaborates on this, so the following are covered:

Annex II to the Ordinance also lists specific types of works: structural works, electrical installation and communications works, masonry, insulation, plumbing, gas installation, glazing, sheet metal, carpentry, parquet, painting and decorating works, installation of joinery and metalwork, heating and cooling installation, lift installation and others.

Which services are not covered — and where mistakes are most often made

The Ordinance expressly excludes a number of services: testing parts of a structure to verify essential requirements, the manufacture of construction products, periodic inspections and repairs of devices and equipment already installed, the cleaning of streets and roads, routine cleaning of premises and window washing outside the scope of construction, horticultural works outside construction, chimney sweeping services, the preparation of spatial plans, energy audits and certificates, expert appraisal services, and the transport of construction material, workers and equipment such as scaffolding, cranes and tools.

The best example of how fine the boundary is comes from practice itself: maintenance of the structural part of a property — repairing windows, walls or doors — falls under the reverse charge, but maintenance of installed equipment, such as a lift, a boiler or a boiler room, does not. The same building, two different VAT treatments, depending on exactly what is being repaired.

A foreign contractor working on property in Croatia

Where a service relating to property in Croatia — construction, but also engineering or architectural services connected with building or design — is performed by a contractor without a registered office in Croatia, the treatment depends on their registration. If they are not registered for VAT purposes in Croatia, the person liable to account is the Croatian recipient under Article 75(2) of the Act, who reports the liability in the VAT form among supplies received from taxable persons without a registered office in Croatia. If the foreign contractor is registered for VAT purposes in Croatia, the domestic reverse charge under Article 75(3) applies to construction works — the contractor issues an invoice with the domestic reverse charge, reports the supply in the VAT form and submits the PPO form quarterly.

If the recipient of the works is a natural person, there is no reverse charge: the foreign contractor must register for VAT purposes in Croatia or apply the OSS scheme. And a practical note: works lasting longer than six months may create a permanent establishment for a foreign contractor — but that is an institute of corporate income tax, with possibly different periods under a double taxation treaty, so it should be assessed separately from the VAT treatment.

A Croatian contractor working on property abroad

The reverse situation: services relating to property are taxed where the property is located, so works by a Croatian contractor on property in another country are not subject to taxation in Croatia — the invoice carries a note that the supply is not subject to taxation pursuant to Article 19 of the VAT Act. Whether the contractor will have to register in that country depends on its legislation: for works for a taxable person, the reverse charge applies if that country prescribes it, and if not, registration follows. For works for a natural person, registration is the rule, with the possibility of the OSS scheme — except for supply with installation, such as the fitting of construction joinery. Since 1 January 2025 there is also the option of applying the cross-border scheme for small taxable persons, if the value of supplies within the EU does not exceed EUR 100,000 per year and the threshold in the country where the works are carried out has not been exceeded.

Records and returns

Supplies subject to the domestic reverse charge are reported in the VAT form under the separate line for the domestic reverse charge, and alongside the books of outgoing and incoming invoices the taxable person also keeps separate records of the domestic reverse charge. One restriction is also worth remembering: accounting for VAT on the basis of collected consideration does not apply to supplies subject to the reverse charge.

Conclusion

The reverse charge in construction is a rule with a long list of covered services and an equally long list of exceptions — and an incorrect assessment means either VAT charged without basis or a liability not accounted for by the recipient, with an effect that repeats invoice after invoice. For more complex contracts, combinations of works and equipment, or foreign contractors, checking the VAT treatment before contracting is far cheaper than corrections after the fact. Feel free to get in touch to have a specific transaction analysed.

This article is informational in nature and does not constitute tax advice for any individual case.