January 2022

Mazars Tax News for January 2022

Amendments to the Corporate Income Tax Law have been published in the Official Gazette of the Republic of Montenegro and are in force as of January 1, 2022. Main amendments relate to transfer pricing rules, progressive tax rates as well as higher tax rates for capital gains and withholding tax.  

Transfer pricing rules

Most significant change in this respect relates to mandatory submission of transfer pricing documentations for large taxpayers whereas other taxpayers will be obliged to possess transfer pricing documentation, if necessary. Submission deadlines are set at June 30 until FY2027 (and March 30 for all following years).

Additionally, the amendments to the Law with respect to transfer pricing also cover following topics:

• Related party entities are more closely defined;
• All five OECD analysis methods are introduced, with the possibility to use other methods as well;
• Threshold of EUR 75,000 is introduced for submission of the documentation in abbreviated form;
• “Safe harbor” rules with respect to financial transactions are expected to be introduced.

It is expected that the Ministry of Finance will also introduce a rulebook on application of transfer pricing rules, further clarifying this matter.

Progressive tax rates

Progressive taxation is introduced whereas the tax rate will depend on realized taxable profits and will be set as follows:

• for taxable profits lower than EUR 100,000, a 9% rate is to be applied
• for taxable profits in the bracket between EUR 100,000.01 and EUR 1,500,000, income tax will be calculated as EUR 9,000+12% rate applicable to the amount over EUR 100,000.01
• for taxable profits higher than 1,500,000.01, income tax will be calculated as EUR 177,000+15% rate applicable to the amount over EUR 1,500,000.01.

Additionally, capital gains tax rate and withholding tax rate will be set at 15% (compared to previously applied 9%).

Other amendments and clarifications

Remaining amendments and clarifications relate to:

• Tax incentive with respect to timely payment of calculated corporate income tax liability will no longer be applicable.
• Penalty for non-submission or non-possession of transfer pricing documentation is introduced; other monetary penalties are also increased.
• Calculated interest and other related costs owned to a related party entity will be deemed tax deductible only in the amount which is in accordance with “arm’s length” principle. Interest revenues realized with related party entities will be taxable at least in the “arm’s length” amount.
• Definition of interest and royalties is aligned with EU Interest and Royalties Directive.
• Rules regarding withholding tax for interest, royalties, dividends and other payments related to profit sharing are aligned with EU Parent-Subsidiary Directive and Interest and Royalties Directive. These rules prescribe conditions under which withholding tax will not be payable and their application will begin upon Montenegro’s accession to the European Union.
• Capital loses realized on sale of land, buildings, property rights, shares and securities will not be tax deductible.