Montenegro is a politically stable country, a NATO member and a candidate for the European Union membership. The negotiation process with the EU started in 2012 and so far 30 chapters out of 33 have been opened and two of them are temporarily closed. Following the restoration of its independence in 2006, Montenegro has significantly improved the business environment, thus making it more attractive to foreign investors.
Therefore, Montenegro is a leader in terms of foreign direct investments, attracted from over 100 countries. It has been recording constant growth of GDP and it has been improving its positions in terms of strengthening competitiveness, attracting business environment and credit rating.
The last parliamentary elections were held in 2016, when the stable political majority, leading the country towards the European integration, regained the trust of the Montenegrin citizens. The current Government is focused on strengthening regional political and economic cooperation. In Montenegro a number of infrastructure projects have also been carried out through the Berlin process as well as in line with the national economic agendas. The presidential elections will be held in April 2018.
Since regaining its independence in 2006, Montenegro has been increasingly attractive to foreign investors. Its development is centred on attracting FDIs through a competitive business environment, striving to become the business hub of Southeast Europe. It offers many rewarding investment opportunities and impressive natural potential, along with continuous improvements in the business climate intended to attract foreign investors.
The Montenegrin Government is well aware of the importance of foreign direct investment for the sustainable growth of the economy – which makes sense since, so far, the recorded increase in wealth has been driven primarily by large volumes of foreign investment. Its activities have mainly consisted of reforms directed at improvement of the investment climate in Montenegro. We have seen improvements in competitiveness, transparency and business-friendliness. Having become a member of the WTO in April 2012, and due to the process of negotiations for its accession to the EU, one can be optimistic about further improvements in the Montenegrin trade system and the general business climate in Montenegro.
1. Investment laws - This Law aims to enhance the investment environment in Montenegro and provide for the equal treatment of foreign and domestic investors. Among others, this Law prescribes forms of foreign investment, foreign investor rights, protection of foreign investors (which includes the freedom to invest, the protection of acquired rights, guarantees against expropriation) promotion and other issues of importance for foreign investments in Montenegro. The foreign investment may be made on the basis of the concession contract, franchising agreement, contract, financial leasing, immovable property contracts and other contracts, in accordance with the law. The terms and conditions for the award of subsidies for new investments are more closely prescribed with the Decree on Fostering Direct Investments.
The only type of subsidies available for direct investments are direct cash subsidies, which are conditioned by the fulfilment of a large number of different criteria concerning the qualification conditions, procedure, and deadlines for the completion of the investment.
2. Corporate law - Foreign investors wishing to establish a business presence in Montenegro have an opportunity to incorporate a branch office of the foreign company. There are 4 forms of business entities: general partnership, limited partnership, limited liability company and joint stock company.
Value added tax rate is one of the lowest in Central and Eastern Europe and amounts to 21%. Certain goods and services (such as the supply of groceries, medicines, newspapers, utility services, etc.) are taxed at a reduced VAT rate of 7%. Foreign entities are entitled to a refund of the VAT paid in Montenegro. However, the refund is limited to legal entities from only a few countries, under the reciprocity principle.
On the other hand, the tax system in Montenegro is not predictable, as it is constantly changing. Bureaucracy and the constant change of regulations have led to the inconsistent operation of the tax administration, which in turn undermines the legal security of taxpayers in Montenegro.
4. Free trade regime - As all other countries in Western Balkans Montenegro has signed the Stabilization and Association Agreement with EU which allows trade liberalization. SAA benefits different ‘realms’ of Montenegro such as economy, agriculture, industry, rule of law, energy system, education, commerce, employment, protection of Companies operating in Montenegro have the advantage of duty free regional agreements that have been signed with Albania, Bosnia and Hercegovina, Croatia, Serbia, Macedonia, Moldova, and Kosovo ⃰, and grant free access to a market of 30 million people. A free trade agreement signed with Russia in 2000 makes Montenegro an especially attractive place for foreign investors and manufacturers. This agreement gives goods with prevailing value added in Montenegro a free of customs access to Russia. Montenegro, besides Serbia, is the only country in the Balkans and South-Eastern Europe that has established a free trade agreement with Russia.
5. Labour Law - Employment matters in Montenegro are governed by the Labour Law, Collective Agreements, and general acts of the employer and employment agreements concluded with individual employees. The employment of foreign citizens is regulated by the Law on Employment of Foreign Citizens. A foreign citizen may be employed only upon obtaining work permit, permanent or temporary residence permit and concluding employment or services agreement. The advantage of the existing Labour law is that it allows both the possibility of engaging staff based on the employment agreement (which can be for an indefinite or a definite term) and the out-of-employment agreement. The director or other legal representative of the company can be engaged only on the basis of an employment agreement. The structure and calculation of salary is extremely complex and unclear. Most international companies have a system of salary calculation applied throughout the world. Forcing these companies to accept a completely different and very complex salary system in Montenegro creates an additional barrier to foreign investments and increases investment costs. In addition, unclear provisions lead to misunderstandings in practice and complicate calculations and budgeting.
6. Visa regime - Holders of travel documents issued by the EU member-states, the United States of America, the Kingdom of Norway, the Republic of Iceland, the Swiss Confederation, Canada, the Commonwealth of Australia, New Zealand, or Japan, may enter the country, cross its territory, and reside in Montenegro for up to 30 days without a visa.
7. Private Partnership and Concessions - The cooperation between the public and private sector in Montenegro is mainly used in developing infrastructural sites and in the privatisation process. The legislative framework of PPP has been enhanced by the adoption of the 2009 Law on Concessions and a relatively high number of PPPs were realised in Montenegro.
|Free trade agreements both with the EU and Russia|
|Subsidies for investors|
|Low tax rates|
|Duty free regional agreements|
|Unpredictable tax system that is constantly changing|
|Time consuming case proceedings (court and administrative)|
|High salary contributions|
|Difficult conditions for cancelling employment agreements|
|Complex salary structure|
The tax system for foreign investors is the same as for domestic companies. Income tax is 9%, while the income tax rate for natural persons is 9% and 11% respectively. A business entity operating in Montenegro has the possibility, with a previously paid income tax, to transfer funds to its account abroad at the end of the year.
Two positive VAT rates are applied, with a standard rate of 19% and a reduced rate of 7%, while the zero rate applies to: export transactions and delivery of medicines and medical devices financed from the funds of the Republican Fund for health insurance.
Value added tax is calculated and paid at:
-delivery of products and services which the taxpayer performs for compensation in the course of his activity;
-import of products;
-the import of motor vehicles (new and used) is subject to VAT payment at a rate of 21%;
-traffic of used passenger cars, motorcycles and vessels, for which the taxpayer in the procurement did not have the right to deduct input VAT, is not subject to VAT. In this case, a special tax is paid at a rate of 5% paid by the buyer;
- land transport (agricultural, construction, constructed and not built) is not subject to VAT payment.
The real estate tax rate is proportional and amounts to 3% of the tax base. Immovable property is considered any acquisition of ownership of immovable property in Montenegro and this area is regulated in detail by the Law on Tax on Real Estate Transfer.
Compulsory social insurance in Montenegro is paid by employees, employers, entrepreneurs and farmers who are not obliged to pay contributions in the event of unemployment. Contributions for compulsory social security are:
-contribution for compulsory pension and disability insurance;
-contribution for compulsory health insurance;
-contribution to unemployment insurance.
The rates of contributions vary depending on the category of taxpayers and are defined by the Law on Contributions for Compulsory Social Insurance.
The Law on Excises regulates the system and introduced the obligation to pay excise taxes for individual goods and conditions that are placed in free circulation in the territory of Montenegro. Excise products are:
-alcohol and alcoholic beverages;
-mineral oils, their derivatives and substitutes.
The excise taxpayer calculates the excise tax for the calendar month.
Customs tariff system in Montenegro is made by the Customs Tariff Law and the Customs Law. Customs clearance according to this law includes the receipt of an import customs declaration, inspection of goods and classification according to the Customs Tariff and other tariffs, determination of the customs base, amount of customs and other import duties charged by the goods, collection of established amounts of customs duties and other import duties. Pursuant to the law, the investor may acquire the right to release customs duties.
Corporate income tax rate is 9% and is one of the lowest in Europe, while the personal income tax rate for natural persons is 9% and 11%. In economically underdeveloped municipalities in Montenegro, whose development index is below 75, the Law on Profit Tax stipulates that a newly established legal entity does not pay income tax for the first eight years of business. Also, the Law on Personal Income Tax of the taxpayer, calculate the income tax for the first eight years of business is reduced by 100%. Tax exemption does not apply to a taxpayer operating in the primary production of agricultural products, transport or shipyards, fisheries and steel. The laws define the tax relief for investors, in the form of exemption from paying taxes if their total amount does not exceed the amount of €200,000 for the first eight years of business.
If the amount of the tax liability (exit tax) in the tax period is less than the amount of input VAT that the taxpayer can deduct during the same tax period, the difference is recognized as a tax credit for the subsequent tax period, or, on demand, is returned within 60 days from the date of submission of the application for VAT calculation.
A taxpayer who mainly exports products and a taxpayer who, in more than three consecutive VAT counts, shows the surplus of input VAT, the difference in VAT is returned within 30 days from the date of submission of the application for VAT calculation. If the taxpayer has expired the deadline for payment of other taxes, the VAT difference is reduced by the amount of tax debt.
To the taxpayer, who in the business year for an indefinite period, at least for two years, recruit new workers, the tax base is reduced by amount of paid salaries of newly employed workers, increased by contributions forcompulsory social insurance paid by the employer.
A taxpayer who makes investments in fixed assets which are used for the production of energy from renewable sources and energy efficiency, the tax base is reduced in the amount of 50% of the investments made, and up to the amount of the tax base.
Legal entity -non-governmental organization, registered for performing an economic activity, the tax base is reduced in the amount from €4,000, provided that the profit is used to achieve the goals for which it was founded.
Tax incentives for the investments in the following sectors:
- Highend tourism – hotels with 5 or more stars;
- Food production, except primary agricultural production, and
- Capital investments in the energy sector.
The Law on VAT stipulates zero VAT rate on the delivery of products and services for the construction and furnishing of any hospitality establishment with 5 or more stars, construction of energy-generation facilities with more than 10 MW installed capacity or of food production plants categorized within sector C group 10 under the Law on Business Activity Classification (Official Gazette of MNE 18/11), if the investment exceeds €500,000.
Agreements on avoidance of Double taxation
Montenegro has signed the agreements on avoidance of double taxation with 41 countries which refer to the laws that regulate corporate income tax, property tax and individual income tax. There is the list of countries in the following table.
|No.||Countries||Avoiding double taxation|
|5||Bosnia and Herzegovina||In force|
|10||Czech Republic||In force|
|20||Korea, Dem. People's Rep. of||In force|
|23||North Macedonia||In force|
|31||Russian Federation||In force|
|35||Sri Lanka||In force|
|40||United Arab Emirates||In force|
|41||United Kingdom||In force|
There is only one active free zone in Montenegro located on the territory of the Port of Bar. It houses 36 companies, 15 of which are foreign investments.
Special economic zones in Montenegro
|Free Zone||Area in hectares||Number of enterprises||Main operating activity||Number of people employed||Total turnover in EUR millions|
|Port of Bar||130 ha (2013; with possibility of expansion)||36||Storage and transhipment||398||7.6|
Types of incentives (fiscal and non-fiscal) in Montenegro
|Incentives||Awarded aid||Eligibility criteria||Condition for use of aid||Length of incentives||Zone specific|
|Decree promoting direct investment in Montenegro||Grants ranging from EUR 3,000 to EUR 10,000 per job created depending of the score obtained in the evaluation criteria.||Any foreign investor establishing a business entity in Montenegro||Minimum Investment Value of EUR 500,000 and which ensure at least 20 new jobs within three years from the date of conclusion of the Use of Funds Agreement||One-off payment||No|
|Subsidies for employment of certain categories of unemployed persons||Exemption of paying contributions for compulsory social insurance on wage earning and personal income tax.||Being a domestic or foreign company registered in Monenegro||Hire certain categories of disadvantaged population (over 40s, Romas, Ashkalis or Egyptians, long-term unemployed).||For the duration of the contractual engagement with the employee.||No|
|Avoiding double taxation||Montenegro signed 42 treaties (36 in force, 6 pending) regulating double taxation of income and property with various countries.||Being a domestic or foreign company registered and operating in Montenegro.||Operating in one of the 36 countries that has a treaty with Montenegro in force.||n/a||No|
|Customs duty exemptions||Customs duties are not paid for the goods entering the zone no matter the type of imported goods or their purpose in the zone.||Being a domestic or foreign company registered and operating in the zone.||Operating in the zone.||No limitation while in the zone||Yes|
|VAT exemptions||VAT is not paid on goods entering the zone no matter the type of imported goods or their purpose in the zone.|
|Goods entering the zone are not liable to foreign-trade restrictions (permits, quotas etc.)||No foreign-trade restrictions.|
|Goods stored in the zone are allowed to stay for unlimited period of time||Unlimited period of time.|
|Goods may be temporarily taken in and out of the zone.||Goods may be temporarily taken from the zone into the rest of Montenegro or enter the zone from the rest Montenegro for the purpose of improving, assembling, testing, repairing, marketing presentation etc.
Goods entering the Montenegrin custom territory from the zone with commercial purposes are subject to the payment of customs, custom duties and value added tax – yet only for the foreign components present in them.
|Capital Investments||Capital investments in the zones, its derived transfer of profits and role are tax-free.|
|Payment of Fiscal Charges for construction sites||Overall reduction of 40% for all fiscal charges relating to construction permits to be paid to be Municipality of Bar for all buildings destined for manufacturing in the Free Zone Port of Bar.|
- Free zones Law of Montenegro (Official Gazette of the Republic of Montenegro 42/2004; amendments to the Law in the Official Gazette of the Republic of Montenegro 11/07: 76/08, and 40/16)
- CUstoms Law ("Official Gazette RS", No. 73/2003, 61/2005, 85/2005 - other law and 63/2006 - corrected other law)
- Decree on Customs Act Enforcement
- General Regulation of Carrying out Business Activities in the Port of Bar Free Zone
|Zone name||Size (ha)||Number of investors||Cumulative investment in EUR millions|
|Bar (Free Port)||130||36||5|
|Global Competitiveness Index||RANK 77|
|Ease of doing business||RANK 42|
|Starting Business rank||RANK 60|
|Global logistics report||RANK 77|
|Rank||Institutions||Infrastructure||Health||Skills||Labor market||Product market||Business dynamism||Innovation|
|EU - 28||0.209||0.205||0.204||0.121||0.116||0.114|
There are at least seven attractive investment features of the Western Balkan region that, in our view, are worth emphasising. They are: 1) prospective EU membership; 2) price stability; 3) strategic location; 4) diverse economies; 5) favourable taxes 6) low labour costs combined with a relatively educated population and 7) prospects regarding the regional integration.