Competitiveness of Montenegro Tax SystemALTax
Montenegro’s tax regime has become one of the most competitive in whole of Europe. In an attempt to increase the efficiency of the national economic system as a reaction to the global economic crisis, Montenegro’s government has adopted a whole package of tax law amendments.
Montenegro is a small and highly open economic system has a potential to be flexible in fitting in the global FDI trends, and in that sense, it primarily has to work on the improvement of the overall investment climate. Attracting foreign investments is one of the primary objectives, bearing in mind their positive effect on speeding up the production and creating new jobs by opening new businesses or companies.
With 9% corporate profit tax rate companies operating in Montenegro enjoy not only a business-friendly environment but also a low tax burden, thus maximizing their operational profit.
The tax system in Montenegro is settled in a modern way that corresponds to the comparative experiences of developed countries and international standards.
It provides the following:
– Functioning and stability of the integral market and efficient conducting of macroeconomic and stabilization policy.
– Compatibility with the tax systems of countries of market economy;
– Equal position and business conditions and competitiveness of taxpayers in a unified economic territory and on an integral market, which enables the free movement of goods, services, persons and capital.
– Equal position of all legal entities and natural persons in the territory of Montenegro.
– Payment of liabilities of all taxpayers in conformity with their economic force.
– Foreign investment incentives by providing equal tax treatment and tax security in the territory of Montenegro, and thus also competitiveness on the international market of capital, goods and services.
Unified tax registration in Montenegro
In order to improve the effectiveness of tax charging policy, the Montenegrin tax administration implemented an unified registration and collection of taxes and contributions.
The tax system in Montenegro consists of:
- corporate income tax;
- personal income tax;
- Value Added Tax (VAT);
- real estate transfer tax;
- social security contributions;
- excise duties;
- customs duties.
The tax system for foreign investors is the same as for local business entities.
Corporate income tax amounts to 9%. Capital gains, dividends, interests and royalties are included in the income of companies and are taxed as part of corporate income tax. Upon payment of the corporate income tax, business entities operating in Montenegro have the possibility to transfer funds to their accounts abroad at the end of the year.
All expenses incurred wholly and exclusively for the generation of income are deductible for tax purposes if supported by relevant documents such as tax invoices, foreign invoices, receipts issued by state entities or other documents compiled and issued according to the Ministry of Finance Directives.
The withholding tax rate is 9%. All residents, including companies, sole entrepreneurs, central and local governmental bodies, non-profit organisations and any other legal entity registered in Montenegro are obliged to withhold tax from the dividend payments, interest profit shares, interests paid to non-residents, royalties paid to non-residents, capital gain paid to non-residents, income derived from consulting services paid to non-residents, rent of movable and immovable property paid to non-residents, market research services paid to non-residents, audit services paid to non-residents.
The domestic withholding tax rate (9%) may be reduced when a double tax treaty exists with more favorable rates.
Personal income tax (PIT) of 9% is levied on salaries, property-related income, and investment income (interest income earned by non-residents is subject to a 5% PIT).
Personal income tax rate is at 11% for gross salaries exceeding EUR 720 (whereas the higher rate applies only on part of the salary exceeding EUR 720). Exemptions are granted to taxpayers with specific types of income.
There is obligatory taxation of the income derived from capital gains realized from the sale of real-estate, shares, and securities which is to be treated as personal income and taxed accordingly.
Local surtax exists in addition to PIT and is paid to the municipality where the taxpayer is domiciled. Surtax of 13% is applicable in all municipalities with the exception of Podgorica and Cetinje, where the rate is 15%.
The surtax base is the amount of PIT assessed.
Two positive rates of value added tax (VAT)Â are applied, standard rate of 19% and the reduced rate of 7%, while the zero rate applies to: export transactions and delivery of medicines and medical devices that are funded by the Republican Health Insurance Fund.
Value added tax is calculated and paid for:
- delivery of products and services done for a fee by the taxpayer within the performance of its business activities;
- imports of products;
- imports of motor vehicles (new and pre-owned) is liable to VAT at the rate of 19%;
- trade in pre-owned passenger vehicles, motorcycles and vessels for which the taxpayer was not entitled to input VAT deduction upon acquisition is not subject to VAT; In this case, a special tax is paid at the rate of 5% by the buyer;
- trade in land (agricultural, construction, developed and undeveloped), is not subject to VAT.
Ownership of Immovable property in Montenegro
Montenegro treats foreign legal and physical persons in the same manner as the domestic business subjects without any reciprocity terms. However, the law does provide specific restrictions for foreign investors’ acquisitions of immovable properties that belong to cultural heritage and public interests.
The tax rate on real estate transfer is proportional and amounts to 3% of the tax base. Trade in real estate is considered to be all acquisitions of ownership over real estate in Montenegro and this area is thoroughly regulated by the Law on Real Estate Transfer Tax.
Tax implication on acquisition of immovable property in Montenegro
The tax base for property transfer tax is the value stated in the Purchase Agreement. However, in cases when the value from the Purchase Agreement is far from the market value or it’s not presented realistic therein, the municipal market value calculation shall be applied.
Moreover, in cases when the real estate is included in the company’s capital as a contribution in kind, the Property Transfer Tax shall not be paid.
The taxpayer is a buyer i.e. acquirer of the real estate. The transfer of the property must be reported to the Tax administration by submitting the tax return within 15 days from the date of signing the Purchase agreement.
According to the Montenegro tax regulation, the property tax rate is proportional. The owner of the property (including foreign person or Company) is liable to pay this tax which is set by municipal tax authorities. The property tax rates range from 0, 08% to 0, 80 % of immovable property market value.
Montenegro does not have a Public Notary regulated legal system, and some preliminary preparation has been made recently for its establishment henceforth. Therefore, property transfer is not subject to any kind of Notary charge.
The Real Estate Purchase Agreement is a strictly formal document and in order to be considered as valid, the signatures of the Buyer and the Seller must be verified in front of the Court officials.
There is a general stamp duty on documents and verification charges by the Court. Stamp duty depends on total value of the Purchase Agreement.
Compulsory social insurance in Montenegro is paid by the employees, employers, entrepreneurs and farmers who are not contributors to unemployment insurance.
Contributions for compulsory social insurance for a business are:
- contribution for compulsory pension and disability insurance at 20.7%;
- contribution for compulsory health insurance at 12.8%;
- contribution for unemployment insurance at 1%;
- contribution for Labor Fund and Chamber of Commerce Membership contribution at 0.5%.
Contribution rates are different depending on the category of taxpayers, and they are defined by the Law on Compulsory Social Insurance.
The maximum annual base for payment of social security contributions is EUR 50,000.
Law on Excise Duties governs the system and introduces the obligation to payÂ exciseÂ duties for individual goods and services that are released to free circulation on the territory of Montenegro.
Excise products are:
- alcohol and spirituous beverages;
- tobacco products;
- mineral oils, their derivatives and substitutes.
Excise duty payers calculate the excise duty for the calendar month themselves.
Types of fees in Montenegro, that have to be paid by investors, are:
- administrative fees;
- court fees;
- utility fees;
- registration fees;
- sojourn fees.
The basis of the customs system in Montenegro consists of the Law on Customs Tariff and the Customs Law. Customs clearance under this law, includes receipt of import customs declaration, inspection of goods and classification according to the customs tariff and other tariffs, fixing the customs basis, amount of customs duties and other import duties charged on the goods, collection of fixed customs duty amounts and other import duties.
According to the law, investors may be eligible for exemption from customs duties.
Customs duty is based generally on the value of goods or upon the weight, dimensions, or other criteria, depending on the item. The rate of customs duty in Montenegro is different for each product and it also varies by country(ies) of origin. The customs authorities have the obligation to publish and update the list of the customs rates for each product and each country.
Transfer Pricing and Tax consolidation
According to Montenegro’s regulations, parent and subsidiary companies constitute a group of related resident companies if the parent has direct or indirect control over no less than 75% of shares or participation in the subsidiary company and thus has a right to apply for tax consolidation. Each member of the related companies group is liable to submit its tax return to the relevant tax administration, while the parent company has to submit the consolidated tax return for the group of related companies. Once approved from the competent tax authorities, tax consolidation is applied for at least five years.
It is worth mentioning that transfer pricing is considered to be the price applied in relations and transaction between related parties.
A transfer price has to be shown in a tax balance as well as the “arm’s length” price which would have been applied between unrelated parties. The difference between these two prices shall be calculated in the tax basis.
Capital Gains Tax
Capital Gains generated from sales of property owned by the legal entity are not separately taxed in Montenegro. According to Montenegro’s tax law, capital gains are considered to be incomes which the taxpayer realized from the sale or other assignment of land, building facilities, property rights, shares in capital and stock values. Capital gains are not taxed separately at the moment of sale of those assets, but they are included in the taxable income when making annual tax balances. The sale of such property is included in the taxable gains when annual tax balance is calculated.
Montenegro Double Tax Treaties
Montenegro has so far signed 42 double taxation treaties with various countries on income and property (6 treaties are pending).
The 36 treaties are now in force with: Albania, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Hungary, Iran, Italy, Korea, Kuwait, Macedonia, Malaysia, Moldova, Netherlands, Norway, Poland, Romania, Russia, Slovakia, Slovenia, Sri Lanka, Sweden, Switzerland, Turkey, Ukraine and United Kingdom.
Tax incentives in Montenegro
The amount of property tax for buildings and residential apartments can be reduced to 20 % of the tax base including 10% for each family member. However, such tax reduction cannot exceed 50% of taxpayer’s tax liability.
Furthermore, in the case when the total tax base for all specific assets of a taxpayer does not exceed Denars 5, 000 (if assets are not used for obtaining the income), immovable property tax is not paid.
Incentives for non-developed areas of Montenegro
Newly incorporated companies in the production sector are exempted from payment of corporate income tax during the first three years starting from the day of the commencement of business activities in relation of profit realized in an undeveloped municipality.
The taxpayer in such cases shall be entitled to tax credit for the period of three years, proportionally to the share of such realized profit of the total amount of the taxpayers’ profit. The first year of utilization of this tax exemption begins on the day of registration into the Central Register of the Commercial Court. It is worth mentioning that a newly incorporated company is not a candidate for this tax relief if the founder or cofounder is a related person.
Finally, a legal entity formed as a result of any status changes or by a merger or a division of an existing legal entity shall not be considered a newly incorporated company and consequently shall not be entitled to this tax relief.