Montenegro aligns tax framework with EU – Introduction
In the dying days of 2023, specifically on December 29th, Montenegro‘s National Assembly passed significant amendments to the Corporate Income Tax (CIT) Law.
This marks a key moment in the country’s tax legislation history.
The key amendments
General
These amendments, effective from January 1, 2024, are set to modernize Montenegro’s tax system, bringing it into closer alignment with European Union (EU) standards.
This move is particularly aimed at harmonizing with the EU Council’s Directive 2009/133/EC, a cornerstone directive that establishes a common system of taxation applicable to mergers, divisions, transfers of assets, and exchanges of shares involving companies from different EU member states.
It also covers the transfer of registered offices of companies within the EU. The application of these rules will be activated upon Montenegro’s accession to the EU.
The recent legislative overhaul goes beyond mere compliance with EU directives. It introduces a series of substantive changes to the CIT regime, reflecting Montenegro’s commitment to fostering a transparent, EU-compatible tax environment.
Here’s a breakdown of the key amendments and their implications for businesses:
Adjustments to the CIT Base
The revised CIT Law specifies the calculation of the CIT base, incorporating profit before taxation, as reported in the balance sheet.
This calculation must now adhere strictly to International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). A significant addition is the treatment of accounting policy changes.
Any income or expense arising from such changes will be recognized in the tax period of correction and spread evenly over five tax periods.
Furthermore, the amendments clarify that income from the liquidation of other legal entities will be excluded from the CIT base, alongside refining the conditions for write-offs.
Capital Gains Taxation Enhancements
The amendments have introduced precise guidelines for determining the acquisition value of assets.
In a notable shift towards market transparency, the tax authorities are now empowered to adjust the sale price of assets to reflect market value in transactions between both related and unrelated parties.
This adjustment is mandatory if the sale price is below the market rate, ensuring fair market practices and preventing tax evasion.
Broadening the Scope of Withholding Tax
A significant change is the expansion of the withholding tax’s scope, now encompassing a wider range of legal entities.
The definition of taxpayers subject to withholding tax has been broadened, with the new law also taxing the distribution of liquidation surplus.
Moreover, permanent establishments must now withhold tax on dividends, profits, and liquidation surplus, among other payments, marking a considerable extension of tax obligations.
Revised Amortization Rates
The amendments have ushered in new amortization rates designed to reflect the current economic realities more accurately.
These include reduced rates for buildings, roads, bridges, and similar assets, now set at 2.5%, and adjustments in rates for other asset groups to ensure a more equitable depreciation schedule.
Subsidy Rules Overhaul
In an effort to streamline tax benefits, the amendments eliminate the subsidy for newly employed individuals from the CIT Law, as these incentives are already encapsulated within the Personal Income Tax Law.
Montenegro aligns tax framework with EU – Conclusion
These amendments represent Montenegro’s proactive steps towards integrating with the European tax framework, signaling its readiness for future EU membership.
By aligning its tax laws with EU standards, Montenegro not only enhances its business environment but also strengthens its commitment to international compliance and transparency.
Final thoughts
For businesses operating within Montenegro, these changes necessitate a thorough review of tax planning and compliance strategies, ensuring alignment with the new legislative landscape. For further details, then please get in touch.