Montenegro adopts in its Parliament the Law on Amendments to the Corporate Income Tax Law (“CIT Law”). The amendments introduce an obligation to prepare transfer pricing documentation, progresive CIT rate, as well as increased withholding and capital gains tax rates.

A set of laws amending regulations in the domain of tax policy has been published in the "Official Gazette of Montenegro" on December 31, 2021. Among other things, the Law on Amendments to the Law on Corporate Income Tax was adopted, which is applicable as of January 1, 2022.

Transfer pricing

More detailed transfer pricing rules („TP Rules“) are in place now,in the first place the obligation to prepare transfer pricing documentation. Large taxpayers are obligated to submit the documentation, while other taxpayers should possess the transfer pricing documentation, with duty to provide it on request of the tax authority within 45 days from such request.

End view to main amendments related to TP Rules:

  • Define more closely related parties
  • Introduce all five OECD TP methods, with the possibility of applying other methods not explicitly mentioned
  • Prescribe materiality threshold (EUR 75,000) for documenting transactions in short form
  • Foresee publication of arm’s length rates for loans and other financial instruments by the Ministry.

The provisions are applicable as of 2022, i.e. the taxpayers shall be obliged to submit transfer pricing documentation for the fiscal year 2022. The submission deadline will be June 30th until 2027, whereas after that the documentation shall be submitted alongside the tax return (no later than three months from the expiration of the fiscal period).

Ministry of Finance is to prescribe a more detailed manner of determining transfer prices and the content of documentation, in accordance with the OECD Guidelines and other international organizations.

Tax rates

A progressive corporate tax rate has been prescribed, whereby the applicable tax rate would depend on the realized profit of taxpayers as follows:

  • On the profit up to € 100,000, the tax rate shall be 9% fixed
  • On the profit from € 100,000.01 to € 1,500,000, the tax shall be paid in the amount of € 9,000 fixed + 12% on the profit above € 100,000.01
  • On the profit above € 1,500,000, the tax shall be paid in the amount of € 177,000 fixed + 15% on the profit above € 1,500,000.01.

The withholding tax rate and capital gains tax rate were also amended, thus increasing the tax rates from the previous 9% to 15%.

Other amendments to the CIT Law

Amendments to the CIT Law also envisage the following:

  • Capital losses incurred on the sale of land, buildings, property rights, shares in capital and securities are not deductible for CIT assessment purposes
  • Accrued interest and related costs incurred in regard to a related party debt are tax deductible only up to the arm’s length amount as determined at the moment of the approval of a loan and/or other financial instruments
  • Alignment of definitions of interest and royalties in line with the EU Directive on Interest and Royalties
  • Alignment of the CIT Law with the EU Directives 32003L0049 and 32011L0096 (Parent-Subsidiary Directive and Interest and Royalties Directive), which provide withholding tax exemption for interest, royalties, dividends and other payments based on participation in profit paid to EU companies, which will come into effect after Montenegro's accession to the EU - therefore, this is a deffered application
  • Abolishment of the right to reduce the tax liability based on the payment of the calculated tax liability within the prescribed deadline
  • Introduction of a specific penalty for non-submission, i.e. non-possession of transfer pricing documentation, as well as overall increase of the amount of fines.

Bylaws for the implementation of the CIT Law are to be adopted within one year time from the day of the beginning of the amended CIT Law application, more precisely, one year from January 1, 2022.