By Slobodanka Kolundžija, freelance tax advisor, Serbia and Montenegro
On December 31, 2021, the Montenegrin parliament introduced significant changes to its corporate income tax law, including a new landmark set of transfer pricing rules.
Most notably, the government introduced a progressive corporate income tax rate along with the mandatory new requirement for companies to prepare and file transfer pricing documentation, with effect from January 1, 2022.
Tax rate
In a display of proof that the OECD work on Pillar 2 has had a far-reaching effect, the parliament raised Montenegro’s corporate income tax rate from the flat 9 percent rate to a tiered tax structure with a maximum of rate of 15 percent. This degree of change has not been seen for more than 15 years. It also introduced a progressive taxation of its corporate income tax base so that the first €100,000 (approx. US $111,500) of profit will be taxed at the 9 percent rate; profits ranging from €100,000.01 to €1,500,000 (approx. US $111.500 to US $1,672,000) will be taxed at a 12 percent rate; and any profits exceeding €1,500,000 (approx. US $1,672,000) will be taxed at a 15 percent tax rate.
As a simple example, if the taxpayer’s tax base is €1,600,000, the corporate income tax due would be €192,000 (100,000*9%+1,400,000*12%+100,000*15%) or approx. US $214,000.
Additionally, the withholding tax rate on cross-border payments of dividends, interest, royalties, rental income, entertainment income, as well as the fees for certain types of services was raised from a flat 9 percent to a flat 15 percent rate, applicable to the gross income. Finally, the tax on capital gains derived by non-residents also was adjusted to a flat 15 percent rate.
Introduction of transfer pricing rules
The most important change parliament made to the Montenegrin corporate income tax system, however, was the introduction of detailed transfer pricing rules and the requirement—for the first time—of mandatory transfer pricing documentation preparation. Earlier legislation contained general statements on transfer pricing but did not contain detailed rules or require an obligation to prepare transfer pricing documents and supplement the arm’s length nature of prices. Transfer pricing rules were not effectively applied in Montenegro before, as a result.
The latest amendments define in detail a related party, introducing a direct or indirect 25% ownership threshold, a threshold of indirect or direct 25% of voting rights, or 25% or more of profit shares from the taxpayer. Also, the amendments state that a taxpayer’s family members will be considered related parties.
Now, as of January 1, 2022, all five OECD transfer pricing methods can be used to determine the arm’s length prices, without any hierarchy, as well as any additional method or combination of methods if the five methods are not adequate.
Furthermore, safe harbor rules were introduced for interest, where the relevant ministry will publish safe harbor interest rates by December 31 for the following year. However, the taxpayer will not have the obligation to apply the safe harbor rules and may apply any other transfer pricing method.
Also, the rules on deductibility of interest will not refer to “open market interest” anymore but will now be based on arm’s length rules.
Beginning in 2027, however, documentation will be due (in the manner explained) with the tax return.
Finally, it is expected that bylaws will be passed over the course of the next year providing more details on these rules along with the content of the transfer pricing documentation, which will be prepared in line with OECD transfer pricing guidelines.
Other amendments
Separately, parliament also introduced a full chapter of specific rules on withholding taxation of cross-border transactions between related parties located in the EU that will be applicable once Montenegro becomes a member of the EU. The rules are based on the EU parent-subsidiary and the EU’s directives on interest and royalties. They assume exemption from withholding tax of such transactions, subject to conditions and rules relating to the type of income, type of taxpayer, as well as applicability to certain anti-avoidance rules (pass-through rules, general anti-avoidance rules, etc.).
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Slobodanka Kolundžija is a freelance tax advisor in Serbia and Montenegro.
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