KPMG flags U.S.-Croatia tax protocol updates affecting treaty planning

KPMG is flagging a treaty update that could ripple through withholding, deal structuring and transfer pricing work for clients with Croatian exposure. The United States and Croatia signed a protocol in Dubrovnik on April 28, on the margins of the Three Seas Initiative Summit, adding new language to the 2022 income tax treaty that tax teams will have to work into planning before the deal becomes effective.

U.S. Ambassador to Croatia Nicole McGraw and Croatia’s finance minister, Ćorić, signed the protocol, which Treasury said will be sent with the treaty package to the U.S. Senate for advice and consent to ratification. Treasury Assistant Secretary of Tax Policy Kenneth J. Kies called the deal a milestone in the department’s effort to expand the U.S. tax treaty network and give investors more certainty, but the practical point for KPMG teams is simpler: the rules that govern cross-border tax risk are changing again, and clients will expect a quick read.

The protocol amends Article 22 on limitation on benefits, Article 23 on relief from double taxation and Article 24 on non-discrimination. It adds a treaty-based definition of active conduct of a trade or business for LOB purposes, revises the U.S. relief-from-double-taxation rules and aligns the non-discrimination article with certain provisions enacted under the One Big Beautiful Bill Act of 2025. For multinational groups, that means fresh scrutiny of who qualifies for treaty benefits, how income is relieved from tax on both sides of the Atlantic and whether the new language changes the analysis for inbound structures or financing flows.

That matters inside KPMG well beyond pure treaty work. International tax teams will need to revisit withholding positions and entity classification assumptions. Transfer pricing specialists may need to consider whether Croatian operations still support the intended commercial footprint. Deal advisory teams will have to look at targets with Croatian subsidiaries, intercompany debt or licensing arrangements, because treaty changes can alter post-deal integration math even when the business itself has not changed.

The 2022 treaty was itself notable. Treasury said it was the first treaty of its kind between the United States and Croatia and the first comprehensive U.S. tax treaty signed in over ten years. The State Department said it was meant to protect taxpayers from double taxation while strengthening trade and commercial ties. The protocol does not enter into force yet. That will happen only after both countries complete domestic approval procedures and notify each other, which leaves a window for KPMG practitioners to identify affected clients now and prepare them for the next round of treaty implementation.