As the tax season for 2023 approaches, it's worth noting that Montenegro offers a more favorable tax environment compared to many other European countries. Until the close of 2021, Montenegro maintained a flat-rate tax system, with a modest 9% tax rate applied to both personal and corporate income.
However, a significant change occurred in January 2022 when the Montenegrin government transitioned to a progressive tax system. In this article, we will delve into the details and assess whether Montenegro still qualifies as a tax-friendly destination or comes close to being one.
Montenegro's tax system relies on the concept of tax residency. Tax residents are obligated to pay income tax in Montenegro on their global earnings. This approach differs from territorial-based tax systems, which do not tax income brought back to the country, and citizenship-based tax systems, as seen in the United States.
Montenegro's income tax structure can be broadly categorized into two main components: one dealing with corporate taxation and the other focusing on personal taxes. To learn about personal or property taxes in Montenegro instead, you can proceed to the following section.
In Montenegro, the tax landscape for businesses is characterized by moderate rates. Corporate income tax follows a progressive structure, with rates ranging from 9% to 15%. Below, we provide an overview of the three corporate tax brackets:
It's important to note that these progressive tax rates are marginal, aligning with specific income brackets. For instance, if your business generates a taxable income of €300,000 in 2022, it falls into the 12% bracket. However, this doesn't mean you pay a 12% on the entire income. Instead, you'll pay 9% on the first €100,000 and 12% on the remaining amount.
For example, if you have a yearly net profit of €110,000, your effective tax rate would be 10.2%, resulting in a total corporate tax liability of €10,200 (€9,000 + €1,200).
It's worth noting that tax regulations in Montenegro adhere to the International Financial Reporting Standards (IFRS). Additionally, businesses that generate profits from land sales, property transactions, property rights, and financial instruments must record these capital gains in their financial records. Capital gains are considered business income in the current accounting period, while capital losses can be carried forward for up to five years to offset against future capital gains.
Foreign companies, categorized as non-residents, are subject to a progressive tax system (ranging from 9% to 15%) on their income generated within Montenegro, mirroring the tax obligations of resident companies. In the eyes of tax authorities, a branch operating in Montenegro is regarded as a permanent establishment
It's important to note that if a business is either incorporated in Montenegro or has its place of effective management within the country, it is categorized as a resident entity rather than a foreign one>
In Montenegro, a withholding tax rate of 15% is applied to the income sourced within Montenegro for non-resident entities that do not have a permanent establishment in the country.
This withholding tax encompasses various types of income, including dividends, capital gains, interest payments, royalties, rental income, fees for intellectual property rights, charges related to market research and consulting, audit service fees, as well as income generated from sports or artistic events in Montenegro.
It's important to note that you can either eliminate or reduce withholding taxes if your country of tax residence has a double tax treaty with Montenegro. To do so, two conditions must be met: you must provide evidence of ownership over the income to be distributed, and you should possess a tax residency certificate issued and authenticated by your foreign tax authority.
A resident taxpayer who earns income outside of Montenegro and pays income tax to another country shall be granted a tax credit equal to the income tax paid in that country.
The tax credit referred to cannot exceed the amount that would be obtained by applying the provisions of the Montenegrin law to the income earned in another country.
Montenegro additionally maintains double tax treaties with 43 countries, which makes the process much easier and faster, including: Albania, Austria, Azerbaijan, Belgium, Belarus, Bosnia, Bulgaria, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Germany, Hungary, India, Ireland, Italy, South Korea, Kuwait, Latvia, Macedonia, Malaysia, Malta, Moldova, Netherlands, Norway, Poland, Portugal, Romania, the Russian Federation, Serbia, Slovakia, Slovenia, Sri Lanka, Sweden, Switzerland, Turkey, Ukraine, United Arab Emirates, and the United Kingdom.
Does your country have a double tax treaty with Montenegro? If not, the process of getting the tax credit can be a bit messy, but that is not a reason to worry, as we have you covered. Contact us for more information
In Montenegro, employee salaries are subject to a combination of state and municipal taxes, along with several contributions. Four national taxes and contributions are levied on wage and salary income: income tax, pension and disability insurance contributions (social security), health care contributions, and unemployment insurance contributions.
Additionally, there is a municipal surtax in place.
Furthermore, three additional contributions are due monthly:
All these taxes and contributions are withheld by the employer from the gross salary and paid every month.
It's essential to distinguish between three tax brackets for personal income:
For monthly net wages below €700.00, the taxable income incurs a 0% tax rate. Personal incomes ranging from €701.00 to €1,000.00 are taxed at 9%, while those exceeding €1,001.00 fall into the 15% tax bracket.
The pension and disability insurance tax rate is 15% on the employee's side and 5.50% on the employer's side, contributing to the government's social security fund to finance pension obligations.
Some individuals opt for self-employment rather than establishing a corporation in Montenegro. Typically, you are considered self-employed if:
As a self-employed individual, you generally need to submit an annual return and make monthly tax and contribution payments. These taxes and contributions closely resemble the payroll taxes and contributions withheld from the salaries of most employees.
Self-employment and liberal professions are subject to a 0% tax rate for annual incomes up to €8,400.00. Incomes falling between €8,401.00 and €12,000.00 are taxed at 9%, while those surpassing €12,001.00 are subject to a 15% tax rate.
Health insurance contributions have been temporarily suspended for both employees and employers, with Montenegro's healthcare system financed through the state budget. Prior to this change, 8.5% was withheld from employees, and 2.3% from employers
Montenegro has a government health insurance scheme, with no private healthcare alternatives.
Unemployment insurance tax totals 1.00% (0.50% from both the employer and employee), used to finance Montenegro's job center and related initiatives.
Municipalities in Montenegro impose a surtax on salaries exceeding €700.00, with tax rates varying between 10% and 15%, contingent on the specific municipality. For instance, the surtax is 10% in Budva, 13% in Bar, and 15% in Podgorica and Cetinje. As a surtax on top of other taxes, the impact on the final amount is relatively moderate. For example, on a net wage of €1,000.00, a 15% surtax would amount to €9.94, not 15% of the total salary
Value Added Tax (VAT) is applied to consumers based on the purchase price of specific goods and services. As discussed in the section on Montenegro's tax policy, VAT serves as a critical source of funding for the country's state budget. Therefore, when your company falls under the VAT system, strict compliance is crucial, given the substantial penalties for noncompliance.
VAT registration is obligatory if your taxable business turnover surpasses the current threshold of €30,000 (calculated over the previous 12 months, not the calendar year).
In Montenegro, VAT is imposed at a rate of 21% on most goods and services, while essential items such as medicine, books, meat, milk, bread, medicines, textbooks, newspapers, and public transport incur a reduced rate of 7%.
Notably, a 0% VAT rate is applied to the export of goods and services. This means that if you provide services online to foreign clients, you are exempt from paying VAT.
Montenegro's tax system aims to encourage the growth of luxury real estate and yachting tourism. As a result, the supply of gasoline for boats and yachts, as well as the construction of specific luxury hotels, are zero-rated for VAT purposes.
The tax brackets for remain unchanged from the previous year. Montenegro employs a dual personal income tax system with two brackets: 9% and 15%. The applicable tax bracket is determined by both your monthly taxable income and the nature of the income source
Property tax is one of the two real estate taxes that foreign investors will encounter when owning, purchasing, or selling property in Montenegro.
Property taxes are proportional, with rates ranging from 0.25% to 1.00% per year, calculated based on the estimated current value of the property.
Property tax obligations apply to various types of land and properties within Montenegro's borders, including:
It's important to note that property taxes are distinct from taxes on rental income and transfer tax. Payments are made in two equal installments with due dates on June 30th and October 31st, respectively.
These real estate taxes are subject to annual adjustments by local municipalities, with taxpayers receiving notifications by mail no later than April 30th each year
The property transfer tax represents the second of the two real estate taxes in Montenegro. It is applicable to all immovable property transactions except for newly constructed real estate.
Buyers of land, residential, and commercial properties are subject to a fixed tax rate of 3.00%, regardless of the transaction value.
Notably, property sales are exempt from taxation when the transfer is a gift to first-order relatives or when the property serves as the taxpayer's primary and sole domicile. Moreover, no inheritance tax is imposed among first-order relatives
As we have mentioned above in the section about tax brackets, tax residents pay anywhere between 9% and 15% personal income tax in Montenegro. Only employment income that is lower than 700,00 Euros per month and annual income from self-employment that does not exceed 8.400,00 Euros is tax-free.
If you receive rental-, dividend-, royalty-, or interest income, it is worth noting that you will pay income tax at a rate of 15%.
Individuals can achieve tax residency in Montenegro through one of the following criteria:
Notably, if your center of personal and economic activity is in Montenegro or you spend more than 183 days annually in the country, you can request to be recognized as a tax resident.
Being a tax resident in Montenegro entails the obligation to pay taxes on your worldwide income, including investment income, dividends, royalties, interest payments, and more.
The capital gains tax rate in Montenegro for individuals is 15%.
Capital gains represent the profits derived from the sale of real estate or financial instruments. For instance, if you acquire shares in a publicly-traded or non-public company and their value appreciates prior to selling, you are liable to pay capital gains tax.
If you hold shares in either foreign or Montenegrin companies and receive dividend income, it is subject to taxation. Dividends are taxed at a fixed rate of 15% and are typically withheld by the income payer in the case of domestic companies.
In the event that you receive dividends from sources outside Montenegro and maintain tax residency, it is necessary to declare the dividend income in your individual income tax return.
There is currently no regulation regarding the taxation of profits generated from the buying and selling of cryptocurrencies or other crypto assets.
All Interest and Royalty income is uniformly taxed at 15%.
Rental income is taxed at a rate of 15% after deductions.
Rental income deductions in the amount of 30% do not need to be documented.
For example, if you rent out an apartment in Montenegro for a monthly rent of 1,000€, you would pay the following rental income taxes:
Some special conditions with potentially larger deductions for short-term rentals. Contact us for more information.
With this recent change in tax regulations, the Montenegro tax system has become a little less favorable for companies with high corporate income. In exchange, employment income is now taxed less than before. At the same time, the minimum monthly net wage has been increased to 450 Euros.
Looking at the table below, we can see how important the Value Added Tax is for Montenegro’s state budget. The VAT (sales tax) is one of the indirect taxes and is levied in the amount of 21% on most goods and services and 7% on essential goods. Being such as critical lynchpin in the Montenegro tax system, this is where you need to be careful to meet due diligence demands when running your business.
In Montenegro, the tax year primarily follows a 12-month calendar, and the deadlines for submitting your annual tax return are as follows:
It's important to note that when you file your taxes in 2023, you are addressing your 2022 tax obligations.
In cases where a new business is initiated or an existing one is liquidated during the year, the tax year is adjusted accordingly, and income tax liabilities are recalibrated..
No, Montenegro does not fall into the category of a tax haven. It is, in fact, a nation with a straightforward taxation system that boasts moderate tax rates for both individuals and corporations, with the highest marginal tax rate set at a modest 15%.
While certain tropical and Middle Eastern countries may provide near-zero taxation options, it's crucial to recognize that these tax-friendly jurisdictions have come under heightened scrutiny and tighter regulations, leading to increased difficulties in moving funds in and out of such regions.
The notion of relocating to a country without personal income tax might initially seem attractive, but it is vital to consider personal lifestyle preferences. Montenegro, however, strikes a harmonious balance between advantageous tax conditions, especially for the north, and a diverse, adaptable culture, all within a setting of pristine weather, where the sea and mountains coexist seamlessly.
Montenegro offers a range of benefits, including a low corporate tax rate, access to 43 double tax treaties, and numerous tax incentives for businesses. As a tax resident, you can leverage the country's favorable personal tax rates while relishing its strategic location at the heart of Europe.
What is the corporate income tax rate in Montenegro for resident companies?
The corporate income tax rate for resident companies in Montenegro is progressive, ranging from 9% to 15%, depending on the company's annual profit.
How are non-resident companies taxed in Montenegro?
Non-resident companies are subject to a flat corporate tax rate of 15% on their Montenegro-sourced income.
What are the Value Added Tax (VAT) rates in Montenegro?
Montenegro follows EU guidelines for VAT, with a standard rate of 21% and a reduced rate of 7%.
What is the tax rate for Montenegro residents on capital gains, dividends, interest, and rental income?
Montenegro residents are subject to a 15% tax rate on capital gains, dividends, interest, and rental income.
When are corporate tax returns due in Montenegro?
Corporate tax returns must be submitted annually by March 31st.
What is the deadline for filing individual tax returns in Montenegro?
Individual tax returns in Montenegro should be filed by April 30th each year.
What is the taxation status for cryptocurrency trading and profits in Montenegro?
As of now, Montenegro does not have specific regulations for taxing profits from cryptocurrency trading or other crypto assets. The tax treatment of cryptocurrencies is not clearly defined.
What is the process for VAT registration in Montenegro, and when is it obligatory for businesses to register for VAT?
VAT registration in Montenegro is mandatory when your taxable business turnover surpasses the threshold of €30,000, calculated over the previous 12 months, not the calendar year. The registration process involves filing an application with the tax authorities.
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