According to Benjamin Franklin, the only two certainties in life are death and taxes. This fact makes Montenegro’s favorable tax regime more attractive. Living and working in this country does not mean a total holiday from taxes, but it does mean a reduced tax load compared to the rest of Europe.
All economically developed countries, including Montenegro, finance their public expenditures mainly through taxes, so taxes are an essential part of every public system of every country.
Montenegro has made great efforts to fight the gray economy and shadow labor market by sanctioning irregular business operations, demonstrating that it is striving for progress, a modernized tax system, and harmonization with the legislation of the European Union.
The tax system in Montenegro consists of: (a) corporate income tax; (b) personal income tax; (c) value added tax; (d) real estate transfer tax; (e) social security contributions; (f) excise duties; (g) fees; and (h) customs duties.
The tax system of Montenegro treats foreign investors and domestic economic entities the same, which is of great importance for attracting investors.
One of Montenegro’s main goals is to join the EU, and one of the fundamental conditions for accession is the closure of Chapter 16, which refers to tax harmonization achieved through the coordination of the tax systems of EU member states in order to avoid national tax measures that could negatively affect the functioning of the EU’s internal market. The most important step in this direction is the implementation of the twinning project “Support to the Tax Administration,” funded by the EU, which implements the International and Ibero-American Foundation for Administration and Public Policies (FIIAPP) with the Tax Administration of Spain and the Tax Administration of Montenegro as twinning partners. The FIIAPP is a public-sector foundation under the Kingdom of Spain which works to improve public systems in more than 100 countries by managing international cooperation projects. This project has helped Montenegro to further align its legal framework in the area of indirect and direct taxation and tax policies and represents the first twinning project implemented in the Tax Administration of Montenegro.
On October 3, 2019, Montenegro signed the multilateral Convention on Mutual Administrative Assistance in Tax Matters. State parties to the convention are allowed to engage in a wide range of mutual assistance in tax matters, such exchanging information on request, spontaneous exchange, automatic exchange, tax examinations abroad, simultaneous tax examinations, and assistance in tax collection. The convention also prescribes measures to protect the rights of taxpayers.
Montenegro is working to improve its tax system by adopting new tax solutions, in particular through the “Tax Administration Reform Project in Montenegro,” which is projected to last until March 2023, ad which consists of four components: (i) Institutional Development (ii) Business Processes, (iii) Taxpayer Services, and (iv) Electronic Account Fiscalization.
The aim of the project is to modernize the Tax Administration, enabling it to respond to market demands and ensure a high level of collection of public revenues, to improve the efficiency of the Tax Administration’s operational functions, and to reduce the costs of taxpayers (legal entities) in complying with their tax obligations.
A major contribution to the modernization of the tax system and Tax Administration is the adoption of the Law on Fiscalization in Trade in Products and Services (the “Law”). The Law prescribes electronic fiscalization, which means that all cash registers are connected to the Tax Administration, so that all issued fiscal invoices are published on the Internet and checks can be performed electronically or via SMS.
The Law aims to prevent abuse by taxpayers who, in the past, have found ways not to issue fiscal invoices or to issue incorrect ones, and thus damaged the state by tens of millions of euros. To implement the Law, Montenegro recently signed a contract to procure a system for online electronic fiscalizing of cash and non-cash transactions in real time.
In accordance with the Law, three rulebooks that define the area of electronic fiscalization in the trade of products and services in real time for cash and non-cash transactions have been drafted. The Law, together with these rulebooks, will apply from 2021. Moreover, the Government of Montenegro plans to amend the tax laws, especially the Law on Value Added Tax, in order to harmonize them with the the Law.
By Igor Zivkovski, Partner, Zivkovic | Samardzic