Corporate taxes in Montenegro
Corporate - Significant developments
In accordance with the proposed plan of the Montenegrin Government „Europe Now“, a major change in tax laws has been made:
- There is now new progressive corporate income tax rate;
- Withholding / capital gains tax rate has been increased;
- New detailed transfer pricing rules have been introduced;
- Transfer pricing documentation is now mandatory;
- Country by country reporting have been introduced;
- There is now new progressive personal income tax rate for salaries;
- For other income types subject to personal income tax, tax rate has increased;
- Health insurance liability have been abolished;
U skladu sa nedavnim izmenama i dopunama Zakona o doprinosima za socijalno osiguranje, stopa zdravstvenog osiguranja koju plaća poslodavac smanjena je sa 4,3% na 2,3%.
Corporate - Taxes on corporate income
Entities operating in Montenegro are subject to a 9% corporate profit tax (CPT).
Resident taxpayers are taxed on their worldwide profit. Non-resident taxpayers are taxed on their Montenegrin-sourced income or income attributed to their Montenegrin permanent establishment (PE). Non-residents are also subject to withholding tax (WHT) on income sourced in Montenegro (see the Withholding taxes section for more information).
Local income taxes
No local (i.e. municipality) corporate income taxes exist in Montenegro.
Corporate - Corporate residence
A legal entity is considered to be a tax resident if it is incorporated in Montenegro. In addition, a foreign corporation may also be deemed a Montenegrin tax resident if the corporation has a place of effective management in Montenegro. No explicit rules exist for determination of effective management. In practice, it usually is the place where key managerial decisions are made or where the board of directors sits.
Permanent establishment (PE)
Montenegrin tax legislation contains very basic PE rules following, in main features, the guidelines set out in the Commentary to the Organisation for Economic Co-operation and Development (OECD) Model Tax Treaty. PE is defined as a fixed place of business through which a non-resident carries out business in Montenegro. PE is deemed to exist in case of a non-resident having one of the following in Montenegro: place of management, branch office, office, factory, workshop, mine, gas or oil site, stone pit, or any other place of natural resources exploitation in Montenegro. A construction site constitutes a PE only if construction activities last longer than six months.
PE is not deemed to exist in case of a non-resident having storage of inventory in Montenegro only for the purpose of delivery of goods or having operations in Montenegro that are of a preparatory or auxiliary nature.
Corporate - Other taxes
Value-added tax (VAT)
The main principles of the Montenegrin VAT are in line with the European Union (EU) Sixth Directive guidelines. Taxable supplies are subject to a general 21% VAT rate; however, certain supplies are taxed at a reduced 7% rate (e.g. bread, milk, books, medicines, computers) and 0% rate (e.g. export of goods, supply of gasoline for vessels in international traffic).
In principle, the VAT base is comprised of consideration (in cash, goods, or services) received for supplies, including taxes, except VAT (e.g. customs, excise duty), and direct costs (e.g. commissions, cost of packing, transport). If the consideration is not paid in cash, or if an exchange of goods for services takes place, the tax base will be the market value of the goods or services received at the time of supply. The VAT base cannot be lower than the cost of goods sold.
Registration for VAT in Montenegro may be either voluntary or mandatory. Voluntary VAT registration is possible for small taxpayers who have not realised turnover exceeding 18,000 euros (EUR) in the last 12-month period. Once registered, a company may not apply for deregistration for at least three years. VAT registration is mandatory for an entity that realises turnover exceeding the EUR 30,000 threshold in any 12-month period.
VAT is calculated and paid on a calendar-month basis (i.e. a VAT return must be submitted and VAT liability must be cleared monthly). VAT calculated on imports is paid along with customs duties.
There are no export duties in Montenegro, nor is it forbidden to export any goods. Exceptionally, the Montenegrin government can impose quantity limitation of exports only in case of critical shortage of certain goods or for the purpose of protection of non-renewable natural resources, under certain conditions.
Customs duties are paid on goods imported into the customs territory of Montenegro in accordance with the rates and tariffs set forth in the Customs Tariffs, which is in line with the harmonised system of tariff codes prescribed by the World Trade Organization (WTO). Customs duties can be levied in two manners, as ad valorem or specific duty per unit of goods.
For agricultural and alimentary products, a combined duty has been determined, that is, both ad valorem and specific duty are charged simultaneously.
Ad valorem duties are prescribed within the scope from 0% to 30%. Specific duties range from EUR 0.04 per 1kg to EUR 1 per 1kg.
Customs rates stipulated by international agreements are only applied to goods of preferential origin from countries covered by such agreements. The most important free trade agreements that Montenegro signed are with the European Union, the European Free Trade Association (EFTA), the Central European Free Trade Agreement (CEFTA) states, Russia, Turkey, and Ukraine.
Tax on coffee
Tax on coffee is payable on coffee imported and produced in Montenegro. The tax rate varies from EUR 0.80/kg to EUR 1.30/kg, depending on the type of the coffee. Tax on coffee is also payable for products and beverages that contain coffee. The tax rate for these products is EUR 2.50/kg for one kg of net coffee contained in the final product.
Property tax is payable by legal entities who own or have user rights over real estate located in Montenegro. The annual tax is levied at proportional rates, ranging from 0.25% to 1% on the market value of assets as of 1 January of the current year. In case of acquisition of new property, the taxpayer is obligated to submit a tax return to the tax authorities within 30 days from the acquisition date (i.e. registration return for property tax) and to declare annual property tax by the submission of annual returns. Tax is payable in two instalments, based on decisions issued by the tax authorities.
Property transfer tax
Transfer tax of 3% is payable on the acquisition of ownership rights over immovable property.
The taxable base is the market value of the immovable property at the time of the acquisition. A taxpayer (i.e. the acquirer of immovable property) is obligated to self-assess a tax liability, submit a tax return, and settle a tax liability within 15 days from the contract date.
No stamp taxes are in place in Montenegro.
Employment income includes all receipts paid or provided to an individual based on employment (salaries, pensions, benefits in kind, insurance premiums, benefits, and awards above the non-taxable thresholds). Income generated through other types of personal engagements similar to employment (e.g. temporary jobs) is also considered employment income.
While employees are the taxpayers, the employer is responsible for calculating and withholding personal income tax (PIT) on behalf of its employees.
Employment income is subject to WHT at a flat rate of 9%. Gross salary exceeding average monthly gross salary in Montenegro for the previous year published by the relevant authority is subject to 11% PIT. The 11% rate applies to the part of the salary exceeding the prescribed threshold, while the 9% rate applies to the part of the salary below (and including) this threshold.
Social security contributions
Social security contributions for pension and disability insurance, health insurance, and unemployment insurance are calculated and withheld by an employer from the salary paid to an employee. Unlike the other two types of social security contributions, pension and disability insurance contributions are subject to a specific annual cap (EUR 53,302 for 2018).
Social security contributions are payable by the employer and employee at different rates. The amount borne by the employer is treated as an operating cost while the portion payable by the employee is taken from the gross salary.
The rates paid by the employer are as follows:
- Pension and disability insurance: 5.5%.
- Health insurance: 2.3%.
- Unemployment insurance: 0.5%.
The rates paid by the employee are as follows:
- Pension and disability insurance: 15%.
- Health insurance: 8.5%.
- Unemployment insurance: 0.5%.
Legal entities are subject to environmental charges for the following:
- Use of firing or electrical feed equipment with power greater than 1MW.
- Import of substances harmful to the atmosphere.
- Production or deposit of dangerous waste.
- Other charges (for space denominated for consumers of tobacco products and electroacoustic and acoustic devices).
Corporate - Branch income
Non-residents carrying out business in Montenegro through a PE are taxed on their Montenegrin-source income at a progressive rate as follows:
- On the profit up to EUR 100,000, the tax rate shall be 9% fixed;
- On the profit from EUR 100,000.01 to EUR 1,500,000, the tax shall be paid in the amount of EUR 9,000 fixed + 12% on the profit above EUR 100,000.01;
- On the profit above EUR 1,500,000, the tax shall be paid in the amount of EUR 177,000 fixed + 15% on the profit above EUR 1,500,000.01.
A branch is considered to be a PE.
Non-residents carrying out business in Montenegro through a PE are taxed on their Montenegrin-source income at a rate of 9%. A branch is considered to be a PE.
Corporate - Income determination
Taxable profit is calculated by adjusting the accounting profit (determined in accordance with International Financial Reporting Standards [IFRS] and accounting legislation) in accordance with the provisions of the CPT Law.
Inventory is valued by applying the average weighted cost method or the first in first out (FIFO) method. If another method is used for book purposes, an adjustment for tax purposes should be made.
Capital gains realised by the sale or transfer of real estate or other property rights, as well as shares and other securities, are subject to the 9% CPT rate.
Capital gains may be offset against capital losses occurring in the same period. A capital loss may be carried forward for five years.
Dividend income of the recipient is exempt from CPT in Montenegro if the distributor is a Montenegrin corporate taxpayer.
Interest income is included in taxable profit and subject to 9% CPT.
Royalty income is included in taxable profit and subject to 9% CPT.
A Montenegrin resident receiving foreign income is granted a tax credit in the amount of the tax paid abroad but limited to the amount that would be calculated using Montenegrin rates.
There are no provisions that provide for the possibility that taxation of income earned abroad may be deferred.
Corporate - Deductions
Depreciable assets are tangible and intangible assets with a useful life of at least one year and an individual acquisition value of at least EUR 300.
Intangible and fixed assets are divided into five depreciation groups, with depreciation rates prescribed for each group (I – 5%, II – 15%, III – 20%, IV – 25%, and V – 30%). A straight-line depreciation method is prescribed for assets classified in the first group (real estate), while a declining-balance method is applicable for assets classified in the other groups.
Goodwill is determined according to IFRS and is subject to impairment. There are no other special provisions on goodwill.
There are no special provisions regarding treatment of start-up expenses. Consequently, they will be deductible if they are incurred for business purposes and properly documented under the general expense deductibility rule.
Interest expenses are generally deductible if they are business related and properly documented. Also, interest and related cost of loans paid out to a creditor with the status of a related party are recognised as expenses only in the amount that does not exceed market interest rates between unrelated parties. The exceeding amount is not recognised as an expense, but it is included in the taxable profit and subject to 9% CPT.
Interest paid out to non-resident legal entities (unless it is revenue of a PE of a non-resident legal entity) is subject to WHT levied at 9%.
Write-offs and provisions for doubtful debts are considered deductible, provided that:
- written-off/provided receivables were previously included in the taxpayer’s revenues
- doubtful debts were written-off as uncollectible
- the taxpayer can provide proof of filing a lawsuit, that enforced proceedings were instigated, or that receivables were reported in bankruptcy or liquidations proceedings, and
- such receivables are older than 365 days.
Expenses incurred for social purposes, reduction of poverty, protecting persons with disabilities, child and youth social care, elderly care, protection and promotion of human and minority rights, the rule of law, civil society and volunteerism, Montenegro’s Euro-Atlantic and European integration, art, technical culture, promotion of agriculture and rural development, sustainable development, consumer protection, gender equality, the fight against corruption and organised crime, and the fight against addictions are recognised for CPT purposes, up to a threshold of 3.5% of total revenue.
Expenditures for the above-mentioned purposes are recognised regardless of whether they are made in cash, goods, rights, or services.
Expenses incurred in this regard will be deductible for CPT purposes only if they are made to legal entities, which are engaged in provision of the aforementioned services in accordance with specific regulations, and if received funds are used by such entities exclusively for the above-mentioned purposes.
Impairment of assets
Expenses incurred on the basis of impairment of assets are not deductible for CPT purposes. Impairment expenses are deductible in the period in which assets are disposed of or damaged due to force majeure.
Salary costs and costs related to termination of employment
Salary costs, severance payments related to retirement of employees, costs related to technological surplus, and other payments related to termination of employment are recognised as deductible in the tax period in which they are paid (not in the period in which they are accrued).
Fines and penalties
Penalty interest for late payment of taxes is not CPT deductible.
The basic deductibility rule is that business expenses incurred for business purposes are CPT deductible. Following that rule, CPT Law provides for full deductibility of taxes.
Other significant items
The following expenditures are also recognised for CPT purposes, up to the prescribed threshold:
- Entertaining expenses, up to 1% of total revenue.
- Membership fees paid to chambers of commerce and other associations (except political parties), up to 0.1% of gross revenue unless the amount of the fees has been determined by law.
- Provisions for redundancy payments and jubilee awards recognised as expenditures, up to the amount prescribed by the labour legislation.
- Increase of provisions of balance sheet receivables and the provisions for off-balance sheet losses are recognised as expenses in the bank’s tax assessment form, in the amounts calculated at the level of the bank, which were, in accordance with the bank’s internal acts, reported in the bank’s profit and loss statement as an expense in the tax period, in accordance with the regulations of the Central Bank of Montenegro.
- Increase of indirect write-off made according to the receivables collectability and technical provisions are recognised as expense in the insurance company’s tax assessment form in the amount prescribed by the insurance legislation.
- Provisions for special risks of brokers and dealers, up to the amounts prescribed by the securities law.
- Provisions for renewable natural resources, warranties for the sale of goods and services (guarantee period), and the expected loss from court process (delicate agreements) if accounted for in accordance with the accounting legislation.
Net operating losses
The taxpayer is entitled to carry forward losses incurred in an accounting period over the following five years. Carryback of losses is not allowed.
Payments to foreign affiliates
Supplies of goods or services from a foreign group entity not established in Montenegro to a Montenegrin entity must be valued at arm’s length. Excess expenses recorded over market value are treated as non-deductible expenses.
With respect to payment of charges of a PE, CPT Law provides that administrative costs charged by the non-resident head office are non-deductible for CPT at the level of the PE.
Corporate - Group taxation
Tax consolidation is permitted for a group of companies in which all of the members are Montenegrin residents and the parent company directly or indirectly controls at least 75% of the shares in the other companies. Each company files its own tax return, and the parent company files a consolidated tax return for the entire group.
Each company is taxed based on its contribution to the consolidated taxable profit (or loss) of the group.
Tax consolidation is binding for at least five years.
The difference between the transfer price and arm’s-length price is included in the taxable profit and is taxed accordingly. Parties considered to be related are the parties between whom special relations exist, which could directly impact the conditions or economical results of the transaction between them.
Methods permitted in determining arm’s-length price are the comparable uncontrolled price (CUP) method (as the primary method), resale minus method, or cost plus method.
There are no other rules or guidelines introduced apart from the above rules in respect to transfer pricing.
There are no thin capitalisation provisions in place in Montenegro.
Controlled foreign companies (CFCs)
There are no CFC rules in Montenegro.
Corporate - Tax credits and incentives
The CPT Law provides four tax incentives related to businesses: one for newly established businesses in underdeveloped municipalities, one for non-governmental organisations (NGOs), a discount for settling of CPT liability by the prescribed deadline, and a foreign tax credit.
Tax exemption for newly established businesses in underdeveloped municipalities
Newly established production companies located in underdeveloped municipalities are entitled to an eight-year tax exemption. The maximum amount of tax exemption for the period of eight years is limited to EUR 200,000.
The incentive is applicable to companies whose business units are established in underdeveloped regions. In that case, tax holiday is proportional to the amount of profit generated by such unit over the total profit for the period of eight years from establishment of the unit.
The tax incentive is not applicable to a taxpayer operating in the sectors of (i) primary production of agricultural products, (ii) transport, (iii) shipbuilding, (iv) fishery, (v) steel production, (vi) trade, and (vii) catering, except primary catering facilities.
Tax exemption for NGOs
NGOs registered for business activity are permitted to decrease the corporate tax base by EUR 4,000, with the condition that profit is used for realisation of the main goals of an NGO.
Discount for settling CPT liability on time
A discount of 6%, which is applied on the amount of the calculated CPT liability, is available to taxpayers that settle their CPT liability by the prescribed deadline (i.e. by 31 March of the current year for the tax liability of the previous year).
Foreign tax credit
Resident taxpayers are entitled to a tax credit up to the amount of corporate tax paid in another country on income realised in that country. This tax credit is equal to the tax paid in another country but may not exceed the amount of the tax that would have been paid in Montenegro.
Corporate - Withholding taxes
Montenegrin CPT Law imposes WHT on income realised from a Montenegrin source and distributed to a non-resident. The scope of the WHT applies to dividends and profit distribution, capital gains, interest, royalties, intellectual property rights fees, rental income, fees for consulting, market research, and audit services, as well as to income earned on the basis of performing entertainment, artistic, sport, or similar programmes in Montenegro.
WHT will also be payable on income earned by non-resident or resident individuals on the basis of repurchase of used products, semi-final products, and agricultural products from a manufacturer registered for VAT purposes.
Distributions of dividends and share of profits are also subject to WHT if the recipient is a Montenegrin resident (either an individual or legal entity).
The general WHT rate is 9%.
Application of a double tax treaty (DTT) may reduce or eliminate Montenegrin WHT. To qualify for the beneficial rates prescribed by the treaty, a non-resident must prove tax residency of a relevant treaty country and beneficial ownership over the income. In order to qualify for a preferential tax rate according to a DTT, a non-resident will need to provide the tax residency certificate filled out and stamped by the relevant authority of its country of residence.
Although Serbia is regarded as the legal successor of the Serbia and Montenegro State Union that ceased to exist in June 2006, the Republic of Montenegro, upon its Decision on Independence (dated 3 June 2006), continues to honour international treaties that were applicable in the State Union, including those executed by State Union’s legal predecessors (Federal Republic of Yugoslavia and Socialist Federal Republic of Yugoslavia, i.e. former Yugoslavia). However, a quite low statutory WHT rate of 9%, which was enacted after most of the treaties had been introduced, is usually more beneficial than treaty rates.
The list of the treaties is provided below:
Corporate - Tax administration
The tax year in Montenegro is the calendar year.
Tax returns and supplementary documents (e.g. tax depreciation form) must be filed with the tax authorities by the end of March of the following year.
Payment of tax
CPT is paid by the end of March of the following year for the previous year. Alternatively, CPT may be paid in six annual instalments at the taxpayer’s request. A discount of 6% is applicable on the amount of the calculated CPT liability for the timely payment of the tax due (see the Tax credits and incentives section for additional information).
Taxation of non-residents
Montenegrin CPT Law contains specific rules for assessment and mechanisms for taxation of:
- capital gains of non-residents in transactions with other non-resident entities or resident and non-resident individuals, and
- Montenegrin-sourced income realised by non-residents on the basis of lease of movable and immovable assets from a person who is not obligated to calculate, withhold, and pay WHT (i.e. non-resident entities or resident and non-resident individuals).
The non-resident is obligated to file the tax return, via their Montenegrin tax representative (tax agent), within 30 days from generating income. Tax liability will be determined based on the decision issued by the Montenegrin tax authorities.
Tax audit process
There are no particular provisions regarding the audit cycle in Montenegro.
Statute of limitations
The right to assess taxes expires within five years after the end of the year in which the tax should have been assessed.
The right to collect taxes expires within five years after the end of the year in which tax has been determined.
Topic on focus for tax authorities
According to our best knowledge, the focus of the tax authorities is VAT (when the VAT refund is claimed), proper documenting of expenses, and WHT. Apart from this, we are expecting that in the near future the focus of the tax authorities will be transfer pricing, following trends of the countries in the region.
Corporate - Other issues
Foreign Account Tax Compliance Act (FATCA) intergovernmental agreement (IGA)
Montenegro and the United States reached an ‘agreement in substance’ on a Model 1 IGA and consented to this status as of 30 June 2014. In accordance with this status, the text of such IGA has not been released, and financial institutions in Montenegro are allowed to register on the FATCA registration website consistent with the treatment of having an IGA in effect, provided that the jurisdiction continues to demonstrate firm resolve to sign the IGA as soon as possible.
On 1 June 2017, Montenegro signed an IGA in order to implement provisions of the FATCA and to promote transparency between Montenegro and the United States on tax matters. The Agreement was ratified on 1 March 2018, and it is applicable from 28 March 2018.