Excellent economic independence, monetary stability, and a steady tax structure in Montenegro, together with the Government’s customs and fiscal incentive measures, are attracting many foreign investors.
The national tax rates of Montenegro are the most competitive in Europe and are based on a modern, flexible tax structure.
The currency used in Montenegro is the euro, even though the country is not a member of the EU and there is no foreign exchange control.
Montenegro has signed many taxation treaties with countries on income and property that regulate double taxation, and there are 44 taxation treaties in force.
Taxes are payable in Montenegro by individuals and companies and are applicable to both residents and non-residents. The subject of taxation for a resident is the income they generate in Montenegro and outside of Montenegro, whereas the subject of taxation for a non-resident is the income they generate in respect of activities performed through a permanent place of business in Montenegro.
Montenegro had a flat rate tax structure with a 9% tax rate on both personal and corporate income until the end of 2021, but tax legislation has been amended in the last two years with the intention of adjusting the local fiscal system to European Union standards by introducing a progressive tax system.
Despite the introduction of a progressive tax system, Montenegro’s tax rates are still lower than those in other European nations.
Taxable income comprises income from employment, business and professional income, investment income (dividends, interests, and royalties), and income from immovable property.
Salary and income of entrepreneurs are subject to progressive tax rates as follows: (a) a 0% tax rate is applied for a monthly salary of up to EUR 700 or for an annual entrepreneur’s income of up to EUR 8,400; (b) a 9% tax rate is applied for a monthly salary between EUR 701 and EUR 1,000 or for an annual entrepreneur’s income between EUR 8,400 and EUR 12,000; and (c) a 15% tax rate is applied for a monthly salary over EUR 1,000.01 or for an annual entrepreneur’s income over EUR 12,000.01. There is also an additional income tax charged by Municipalities – a surtax. The rate of the surtax is between 13% and 15%.
Dividends, interest income, capital gains, and income from immovable property are taxed at a flat rate of 15%.
Company income tax is also progressive with the tax rates between 9% and 15%. Specifically, (a) for an annual income of up to EUR 100,000, the tax rate is 9%; (b) for an annual income between EUR 100,000.01 and EUR 1.5 million, the tax rate is EUR 9,000 plus 12% of the amount over EUR 100,000; and (c) for an annual income over EUR 1.5 million, the tax rate is EUR 177,000 plus 15% of the amount over EUR 1.5 million.
The value-added tax (VAT) rate in Montenegro is 21%, with a reduced tax rate of 7 % for certain suppliers (bread, milk, books, medicines, etc.) and a 0% rate for certain exemptions (export of goods, supply of gasoline for vessels in international traffic, etc.). VAT is calculated and paid on a calendar month basis.
Real-time fiscalization and electronic invoicing have been introduced in Montenegro as key components of its tax administration system.
Tax reforms also include an amendment of the real estate transfer tax which will be applicable from January 1, 2024, which introduces a progressive tax rate depending on the estimated market value of the real estate. Specifically, for an estimated market value of less than EUR 150,000, the tax rate applied is 3%. For an estimated market value over EUR 150,000, the tax rate applied is EUR 4,500 plus 5% of the amount over EUR 150,000.
Owners of the real estate in Montenegro are also required to pay an annual property tax. The rate for the annual property tax is proportional and ranges from 0.3% to 1% of the market value of the real estate. The amount can be increased in the case of a secondary apartment to 1.5% and, for undeveloped land, up to 5%.
Although Montenegro is not a tax haven, with favorable tax rates, it is advantageous for all investors to choose to establish a business in Montenegro. The modifications of the tax system in Montenegro are important not only for the fulfillment of the requirements for accessing the European Union but also because they make it easier for foreign investors to adapt to it.
By Sasa Vujacic, Partner, Vujacic Law Office