This doctoral thesis examines if tax breaks have any impact, as well as the significance of such an impact, on profitability of businesses and development of areas awarded special national status where entrepreneurs included in the income tax system operate. Namely, in the period of 1996–2002, Croatian state authorities have already administratively designated certain areas of the country, declaring them areas of special national status. Components of the above areas examined by this thesis are Group I, II and III areas of special state care, the City of Vukovar and the mountainous area. The research includes the period of 2005–2013. The tax breaks represent various forms of incentives and breaks allowing taxpayers to reduce the basis for tax calculation and/or the amount of tax liability on one hand while, on the other, the same generate losses to state budget used by the state to finance public needs and/or its fundamental functions. More developed countries largely allow their taxpayers to use tax breaks with the purpose of providing incentives to innovations, research and development, foreign investments etc., while less developed countries channel the bulk of tax breaks to address the issue of regional inequality. Because of the above, use of the tax breaks has its advantages as well as shortcomings. Regional inequalities in development of the Croatian state arose from wartime issues, demographic, geographic and other circumstances which represented factors in establishment of the areas given the special national status. By giving the areas such a privileged tax status, taxpayers pursuing business in the above areas were primarily allowed to avail themselves to the right to reduce their tax liability as well as to reduce the basis for calculation of tax on success of performance of their entrepreneurial activity, i.e. their profit. However, it is important to emphasise that the tax breaks for the above areas arose from individual pieces of legislation since the legal framework as well as the strategic document regulating regional development in Croatia were adopted nearly twenty years after the Croatian state has gained independence.The theoretical part of the doctoral thesis provides an overview of theoretical knowledge in the field of tax breaks and their impact on profitability of business enterprises in the areas of special national status and development of the areas where they operate. The theoretical part of the thesis also reviews the historical context of development, sources of financing, as well as demographic and economic properties of the special national status areas, tax and accounting aspects of the income tax, and financial yield of the income tax in the state budget. In the empirical part of the thesis, an analysis of results is based on a performed descriptive statistical analysis of data, a panel analysis and a correlation analysis. Models were formulated to test effects of the observed factors on profitability and development for five components over nine years. The panel analysis of data entailed application of a joint panel model, a fixed effects model, and a variable effects model. In the correlation analysis, Spearman’s and point biserial correlation coefficients were used to test correlation of given variables. Dependent variables observed in the empirical part of the research are net profit margin representing entrepreneurs’ profitability and number of employees representing development of the areas. The independent and control variables used in the analysis are represented through tax breaks reducing the basis for the income tax (net reduction of tax liability and tax credit carried forward), tax breaks reducing tax liability, actual tax burden, population density, costs of gross salary, enterprise growth and productivity of work. The observation also takes into account the effect of a period of recession through a binary, so-called dummy variable for the period of 2009–2013. The results obtained in the thesis demonstrate that there is no significant impact of individual tax breaks on profitability of business entities in the special national status areas, but a significant influence of the same on development of the area has been observed. Some of the observed control variables indicated statistical significance both in terms of profitability and in respect of development. The observed correlation of the tax breaks and profitability considering the components of the special national status areas is clear in the Group I and Group III areas of special state care and in the City of Vukovar. Considering the observed correlation of profitability and efficiency of the tax breaks to individual components in the total tax breaks in the special national status area, it is clear that there is significant unpredictability of correlation of the observed variables. Following the above, it may be concluded that business entities operating in the special national status areas may not seek ways to improve their profitability in the tax breaks. Despite existence of significant impact of the tax breaks on development the special national status areas, it is also necessary to analyse other factors, in addition to the observed variables, in order to obtain more specific information on possible influence –primarily on profitability of business, but also on development of the area. The above is supported by the fact that some of the observed variables indicated a statistically significant, but unexpected impact on profitability and development – requiring additional research and elucidation. In view of the above, the presented results and provided conclusions may serve as a starting point for future research as well as an aid to owners and managers creating new business policies and tax authorities analysing and creating the tax system closely related to taxation of entrepreneurs’ income as well as the entire Croatian tax system. Composition of the doctoral thesis entails the following: introduction, situation and trends in economic development of special national status areas in Croatia, taxation of business entities’ income, empirical research of impact of tax breaks on profitability of business entities, and conclusion.