Montenegro Corporate Tax Guide

Montenegro, Republic of

Please direct all inquiries regarding the Republic of Montenegro to Ivan Rakic of the Belgrade, Serbia, office.

Belgrade, Serbia GMT +1

EY

+381 (11) 209-5800

Antifasisticke borbe 13A Fax: +381 (11) 209-5891 11070 Belgrade Email: ey.office@rs.ey.com Republic of Serbia

Principal Tax Contact

 Ivan Rakic

+381 (11) 209-5794

Mobile: +381 (63) 635-690 Fax: +381 (11) 209-5891 Email: ivan.rakic@rs.ey.com

The Union of Serbia and Montenegro ceased to exist on 25 May 2006. The following chapter provides information on taxation in the Republic of Montenegro only.

A. At a glance

Corporate Income Tax Rate (%) 9 to 15

Capital Gains Tax Rate (%) 9 to 15

Branch Tax Rate (%) 9 to 15

Withholding Tax (%)

Dividends 15 (a) Interest 15 (b) Royalties from Patents, Know-how, etc. 15 (b) Capital Gains and Leasing Fees 15 (b) Consultancy, Market Research and Audit Fees 15 (b) Used Products, Semi-products and Agricultural Products 15 (c) Performances of Art, Sports and Entertainment 15 (d)

Net Operating Losses (Years)

Carryback 0

Carryforward 5

(a) This tax applies to resident and nonresident legal entities and individuals. (b) This tax applies to nonresident legal entities. Individuals are taxed under the Personal Income Tax Law at rates of 9% and 15%. (c) This tax applies to nonresident and resident individuals. (d) This tax applies to nonresident legal entities.

B. Taxes on corporate income and gains

Corporate income tax. Companies resident in the Republic of Montenegro (RM) are subject to tax on their worldwide income. A company is resident in the RM if it is incorporated in the RM or if its central management and control is actually exercised in the RM. Nonresident companies are subject to tax only on their income derived from the RM. Nonresident companies are com panies registered in other countries that do not have its central management and control in the RM, but have a permanent place of business in the RM.

Rate of corporate income tax. Corporate income tax is payable at a scale ranging from 9% to 15% in the RM. Annual profit up to EUR100,000 is subject to the 9% rate; profit from EUR100,000 to EUR1.5 million is subject to a 12% rate; profit exceeding EUR1.5 million is subject to a 15% rate.

Tax incentives. Newly established companies that perform business activities in undeveloped municipalities are exempt from corporate profit tax for an eight-year period from the date of the commencement of their business activities.

The corporate profit tax liability of companies that have business units established in undeveloped municipalities that engage in production activities may be reduced proportionally based on the percentage of the business unit’s profit in the total profit of the company. This tax relief can be claimed for an eight-year period from the date of the incorporation of the business unit. The total amount of the tax incentive cannot exceed EUR200,000. In addition, under the Corporate Income Tax Law, newly established companies who perform business activities in undeveloped municipalities may be exempt from paying salary tax (and the surtax on salary tax) for newly employed individuals and disabled persons under the conditions specifically mentioned in the legislation.

For a legal entity that is a non-governmental organization and is registered for business activities, the tax base is reduced by the amount of EUR4,000 if the profit is used to realize the purposes for which the entity was founded.

Capital gains. Capital gains derived from the disposal of land, real estate, industrial property rights, capital participations and shares and other securities are included in taxable income and are sub ject to tax at the regular corporate income tax rate.

Capital gains realized by a nonresident legal entity from another nonresident legal entity or a resident or nonresident individual in Montenegro is subject to a 15% capital gains tax (determined by a decision of the tax authorities), unless otherwise specified by a double tax treaty.

Capital gains realized by a nonresident legal entity from a resi dent legal entity in Montenegro is subject to a 15% withholding tax.

Capital gains may be offset by capital losses incurred in the same year, and net capital losses may be carried forward to offset capi tal gains in the following five years.

Administration. The tax year is the calendar year, except in the case of liquidation or the beginning of business activities during the year. A company may not elect a different tax year. Companies must file annual tax returns in electronic form and pay tax due by 31 March of the year following the tax year.

Dividends. Resident companies include dividends received from its nonresident affiliates in taxable income.

Corporate and dividend taxes paid abroad may be claimed as a tax credit up to the amount of domestic tax payable on the dividends. Any unused amount of the tax credit for dividend taxes paid abroad can be carried forward to offset corporate income tax in

the following five years. This tax credit applies only to dividends received by companies with a shareholding of 10% or more in the payer for at least one year before the date of submission of the tax return.

A 15% withholding tax is imposed on dividend payments. An applicable double tax treaty may provide a reduced withhold ing tax rate for dividends (see Section F). To benefit from a dou ble tax treaty, a nonresident must verify its tax residency status and prove that it is the true beneficiary of the income.

Foreign tax relief. Companies resident in the RM that perform business activities through permanent establishments outside the RM may claim a tax credit for corporate income tax paid in other jurisdictions. The credit is equal to the lower of the foreign tax and the Montenegrin tax paid on the foreign-source income.

C. Determination of trading income

General. The assessment is based on the profit or loss shown in the financial statements prepared in accordance with Montenegrin accounting regulations, subject to certain adjustments for tax purposes.

Taxable income is the positive difference between income and expenses. Dividend income of taxpayers is not included in the tax base if the payer of the dividend is a taxpayer according to the Montenegrin Corporate Income Tax Law.

Tax-deductible expenses include expenses incurred in perform ing business activities. Expenses must be documented. Certain expenses, such as depreciation (see Tax depreciation) and dona tions, are deductible up to specified limits.

Salary costs, severance payments and redundancy payments to employees are recognized for tax purposes in the period in which the payment is made.

Inventories. Inventories must be valued using average prices or the first-in, first-out (FIFO) method.

Write-offs (provisions). Legal entities may claim deductions for adjustments or write-offs (provisions) of receivables if such ac tions are in conformity with the Accounting Law. This confor mity exists if the following conditions are satisfied:

• It can be proved that the amounts of receivables were previously included in the taxpayer’s revenues.

• The receivable is written off from the taxpayer’s accounting books as uncollectible.

• The taxpayer can provide clear evidence that the litigation process has been started or that the receivables have been reported as a part of liquidation or bankruptcy proceedings against the debtor.

• The receivable is longer than 365 days.

Long-term provisions made for renewal of the natural resources, expenses payable in a guarantee period and expected losses on the basis of court disputes are recognized as expenses in accor dance with the local accounting regulations. In addition, increas es in provisions for receivables and loss provisions for off-balance items made by banks that are in accordance with their internal

regulations and with Montenegrin Central Bank regulations are recognized as expenses for tax purposes.

Severance and jubilee payments that are calculated but not paid are deductible up to the amount determined in the Labor Law.

Asset impairment costs are recognized as tax deductible in the period in which the impaired assets are disposed of or damaged due to force majeure

Tax depreciation. Assets with the value over EUR300 are subject to tax depreciation. Intangible and fixed assets are divided into five groups, with depreciation and amortization rates prescribed for each group. A ruling classifies assets into the groups. Group I includes immovable assets.

The straight-line method must be used for Group I, while the declining-balance method must be used for the assets in the other groups.

The following are the depreciation and amortization rates.

Group of assets Rate (%) I 5 II 15 III 20 IV 25 V 30

Relief for losses. Tax losses incurred in business operations may be carried forward for five years. Loss carrybacks are not allowed.

Groups of companies. Under group relief provisions, companies in a group that consists only of companies resident in the RM may offset profits and losses for tax purposes. Tax consolidation is available if a parent company holds directly or indirectly at least 75% of the shares of subsidiaries. To obtain group relief, a group must file a request with the tax authorities. If tax consolidation is allowed, the group companies must apply the group relief rules for five years. Each group company files its own annual income tax return and the parent company files a consolidated tax return based on the subsidiaries’ tax returns. Any tax liability after con solidation is paid by the group companies with taxable profits on a proportional basis.

D. Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)

Value-added tax (VAT), on supplies of goods and services in the RM and on imports of goods; certain tax exemptions with or without the right to deduct input VAT are granted; VAT taxpayers are legal entities and entrepreneurs who had turnover of goods and services in excess of EUR30,000 in the preceding 12 months or who expect to have annual turnover greater than the threshold

rate

Nature of tax Rate (%)

Lower rate 7

Property tax; paid on rights over immovable property in the RM, including residential and business buildings, apartments, garages, buildings and rooms for resting and recreation, and other buildings; certain immovable property is exempt; tax credits are available for the dwellings of owners and their immediate families and for certain accommodation facilities; the amount of tax due is determined by a tax authority’s ruling, which should be issued by 30 April of the year for which the tax is rendered; the tax is payable in two installments, which are due on 30 June and 31 October; tax rate varies depending on the municipality in which the immovable property is located 0.25 to 5 Transfer tax; imposed on the transfer of the immovable property located in Montenegro; the tax base equals the market value of the transferred property at the time of acquisition; the acquirer of the property is the taxpayer; the tax is due within 15 days after the moment of transfer of the immovable property 3 Tax on income; paid by employee; higher rate applies to gross salary exceeding EUR1,000 9/15 Surtax on salary tax; paid by employer 10/15 Social security contributions (for pension and disability funds and unemployment insurance); paid by Employer 6 Employee 15.5 Additional contributions for the Association of Labor Unions of Montenegro, labor fund and chamber of commerce; total rate 0.67

E. Miscellaneous matters

Foreign-exchange controls. The official currency in the RM is the euro (EUR).

Capital transactions (investments), current foreign-exchange trans actions and transfers of property to and from the RM are gener ally free.

Transfer pricing. Under general principles, transactions between related parties must be made on an arm’s-length basis. The differ ence between the price determined by the arm’s-length principle and the taxpayer’s transfer price is included in the tax base for the computation of corporate income tax payable.

As of January 2022, the RM’s Corporate Income Tax Law has introduced more comprehensive rules on transfer pricing, which are loosely based on the Organisation of Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. Furthermore, it is expected that the Ministry of Finance will issue a rulebook, which will regulate this topic in more detail. It is also envisaged that the Ministry of Finance will annually publish the safe harbor interest rates for the purpose of analyzing

intercompany loans. Large taxpayers that have transactions with related parties must submit transfer-pricing documentation by 30 June 2022, while other taxpayers are required to possess documentation by 30 June 2022. These deadlines are applicable until 2027 (as an exemption from the general deadline for submission, which is 31 March).

F. Treaty withholding tax rates

Montenegro became an independent state in June 2006. The gov ernment has rendered a decision that it will recognize tax treaties signed by the former Union of Serbia and Montenegro and the former Yugoslavia until new tax treaties are signed. The follow ing table lists the withholding tax rates under the treaties of the former Union of Serbia and Montenegro and under the treaties of the former Yugoslavia that remain in force. It is suggested that taxpayers check with the tax authorities before relying on a par ticular tax treaty.

Dividends Interest Royalties % % %

Albania 5/15 10 10

Austria 5/10 10 5/10

Azerbaijan 10 10 10 Belarus 5/15 8 10

Belgium 10/15 15 10 Bosnia and Herzegovina 5/10 10 10 Bulgaria 5/15 10 10

China Mainland 5 10 10 Croatia 5/10 10 10

Cyprus 10 10 10

Czech Republic 10 10 5/10

Denmark 5/15 0 10

Egypt 5/15 15 15

Finland 5/15 0 10

France 5/15 0 0

Germany 15 0 10

Hungary 5/15 10 10

Iran 10 10 10

Ireland 5/10 10 5/10

Italy 10 10 10

Korea (North) 10 10 10

Kuwait 5/10 10 10

Latvia 5/10 10 5/10

Malaysia 10 10 10

Malta 5/10 10 5/10

Moldova 5/15 10 10

Netherlands 5/15 0 10

North Macedonia 5/15 10 10

Norway 15 0 10

Poland 5/15 10 10

Portugal 5/15 10 5/10

Romania 10 10 10

Russian Federation 5/15 10 10

Serbia 10 10 5/10

Slovak Republic 5/15 10 10

Slovenia 5/10 10 5/10

Sri Lanka 12.5 10 10

Dividends Interest Royalties % % %

Sweden 5/15 0 0 Switzerland 5/15 10 0/10

Turkey 5/15 10 10

Ukraine 5/10 10 10

United Arab Emirates 5/10 10 0/5/10

United Kingdom 5/15 10 10 Non-treaty jurisdictions 15 15 15