On April 28, 2026, the United States and Croatia signed a protocol amending the income tax treaty signed on December 7, 2022, which will be  the first tax treaty between the two countries. The protocol aims to align the treaty with current U.S. law, including developments under the 2025 One Big Beautiful Bill Act (OBBBA), and to update rules relieving double taxation under the treaty. The treaty, together with the protocol, will be transmitted to the Senate for advice and consent, and will enter into force after the United States and Croatia complete their ratification procedures. More generally, the updated language regarding relief from double taxation resolves a policy issue regarding the interaction between treaties and the 2017 Tax Cuts and Jobs Act (TCJA) that had been identified by the Senate Committee on Foreign Relations in its June 6, 2023 report approving the U.S.-Chile income tax treaty, thereby opening the door to treaties and protocols with additional countries.

The most significant changes relate to relief from double taxation in Article 23, which confirm that the United States will allow an indirect foreign tax credit (FTC) for Croatian taxes deemed paid in connection with inclusions under section 951(a) (subpart F) and section 951A (net CFC tested income (NCTI)  ). Specifically, the protocol introduces a new rule in Article 23(2)(c) providing that the United States shall allow to a U.S. shareholder an FTC for covered taxes paid or accrued by a CFC resident in Croatia, to the extent such taxes are properly attributable to an income inclusion by that shareholder. This provision expressly extends to foreign-controlled U.S. shareholders and foreign-controlled foreign corporations described in section 951B, which was enacted as part of OBBBA. The protocol states that any Croatian taxes identified as covered taxes in Article 2(3)(a) are also considered income taxes for purposes of the indirect credit – thereby addressing a concern that had arisen in the context of controversial FTC regulations finalized in 2022 that attempted to limit the scope of creditable foreign taxes (those regulations were indefinitely suspended by Notice 2023-80). 

The protocol also revises the introductory language of Article 23(2) from providing U.S. relief "to the extent allowed under the law of the United States (as it may be amended from time to time)" to providing U.S. relief "in accordance with the provisions of, and to the extent allowed under, the law of the United States (as it may be amended… without changing the general principles hereof[.]" The revised formulation is more consistent with the language historically used in U.S. income tax treaties and provides more certainty with respect to relief from double taxation than the original language of the treaty, as signed. 

In addition, the protocol adopts a treaty-based definition of "active conduct of a trade or business" for purposes of Article 22 (limitation on benefits). Finally, the protocol updates Article 24 (non-discrimination) to coordinate with OBBBA-related amendments, clarifying that the United States may deny certain personal tax allowances to non‑U.S. nationals who do not provide a Social Security number (or other identification numbers required under U.S. law), without violating the treaty's non‑discrimination rule. 

Taken together, these changes underscore the Department of the Treasury's commitment to modernizing treaty language to reflect relevant developments in U.S. domestic law. In addition to providing greater certainty for cross-border investment between the United States and Croatia, these developments may portend increased efforts to modernize and expand the U.S. tax treaty network.

For more information, please contact:

Layla J. Asali, lasali@milchev.com, 202-626-5866

Rocco V. Femia, rfemia@milchev.com, 202-626-5823

Jeffrey M. Tebbs, jtebbs@milchev.com, 202-626-1480

Chadwick Rowland, crowland@milchev.com, 202-626-1589

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.