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Montenegro is the small European country notable for its touristic sector. It is a republic without its own currency. It uses euro, but it is still not the member of the EU. Law system is Romano-Germanic (continental) system (which is more familiar to Russian lawyers). The county is not in 'black' lists of FATF and has anti-money laundering legislation.
Speaking about tax planning, it is not a country that has been widely used in tax schemes. But the thing is that the advantages of more "profitable" jurisdictions (such as Cyprus) are recently overweight by the risk of attracting close attention of Russian tax authorities. And not only Russian. As far as Europe fights for fair taxation, such jurisdictions as BVI or Cyprus are under severe pressure. Montenegro with its comparatively low rates might be a good alternative. Let's see what can be gained by settling the company in Montenegro.
Company formation in Montenegro
The prices are without VAT (19%) and are intended for professional intermediaries only.
Montenegrin companies in details
Registration of companies
Establishing of the company is rather easy. The formation of the companies is regulated by The Law on business organizations of 31/01/2002 (with amendments). As per Article 2 there are various types of companies, but as usual the most popular is limited liability company. The name of a limited liability company must contain the indication “limited liability company” or “LLC” abbreviation. Parent company may use in its name the indication “holding”, “holding company”, “parent company”, “group” and similar. Parent company shall mean the company having a majority ownership of or majority right to manage another company - subsidiary.
A limited liability company may be formed by natural or legal persons (one or many, maximum - 30). The amount of initial capital shall not be less than 1 Euro. The registration is proceeded by Central Registry. (https://montenegro.eregulations.org/Contacts/15?l=en)
The following documents and data shall be submitted to the Central Registry and published at the first registration of a limited liability company:
1) the foundation agreement;
2) the charter;
3) a list of founders, members of the company, managers and members of the Board of Directors, if appointed, including--
a) the first and last names and former names in case of change of the first/last name;
b) the date and place of birth of members of the Board of Directors, their personal identification number, or passport number if a foreign national;
c) the permanent or temporary residence of the members of the Board of Directors;
d) the statement of the members of the Board of Directors regarding their citizenship;
e) data on any other company memberships, directorships or other functions held in Montenegro or elsewhere, as well as the place of registration of such companies if not in Montenegro;
4) the name of the Executive Director;
5) the name of company, the address of the registered office and address of place for receipt of official notices, if different;
6) persons authorized to represent the company either jointly or individually;
7) the signed consent of the members of the Board of Directors to their appointments, if any;
8) a document confirming payment of the registration fee.
Executive Director shall be mandatory body of the company - either resident or non-resident of Montenegro. A secretary is not required. The beneficial owner is not required to be present at the registration and filing procedures.
The documents certified by a notary are submitted on paper to the Central Registry. Unfortunately there is no e-registration. After the registration the Central Registry issues the certificate of registration.
There is no beneficiary owners' registries in Montenegro, either public or non-public (at list at the present moment).
The corporate tax rate is 9%. The worldwide income of the company is taxed on this rate. As per Law on corporate tax of 31 December 2001 (with amendments), the revenues realized from following grounds shall be considered as sources of profit in Montenegro:
Tax period for which the corporate tax is assessed shall be a financial year. Taxpayer of the corporate tax shall be obliged to submit to the competent tax authority a tax return for the period for which the tax is assessed. The tax return shall be submitted by the end of March, and paid also by the end of March.
Bookkeeping and audit are mandatory.
There is no legislation concerning controlled foreign companies.
A legal entity is considered to be a tax resident if it is incorporated in Montenegro. In addition, a foreign corporation may also be deemed a Montenegrin tax resident if the corporation has a place of effective management in Montenegro. No explicit rules exist for determination of effective management. In practice, it usually is the place where key managerial decisions are made or where the board of directors sits.
Permanent establishment (PE)
Montenegrin tax legislation contains very basic PE rules following, in main features, the guidelines set out in the Commentary to the Organisation for Economic Co- operation and Development (OECD) Model Tax Treaty. PE is defined as a fixed place of business through which a non-resident carries out business in Montenegro. PE is deemed to exist in case of a non-resident having one of the following in Montenegro: place of management, branch office, office, factory, workshop, mine, gas or oil site, stone pit, or any other place of natural resources exploitation in Montenegro. A construction site constitutes a PE only if construction activities last longer than six months.
PE is not deemed to exist in case of a non-resident having storage of inventory in Montenegro only for the purpose of delivery of goods or having operations in Montenegro that are of a preparatory or auxiliary nature.
VAT - Value-added tax
The main principles of the Montenegrin VAT are in line with the European Union (EU) Sixth Directive guidelines. Taxable supplies are subject to a general 19% VAT rate; however, certain supplies are taxed at a reduced 7% rate (e.g. bread, milk, books, medicines, computers) and 0% rate (e.g. export of goods, supply of gasoline for vessels in international traffic).
In principle, the VAT base is comprised of consideration (in cash, goods, or services) received for supplies, including taxes, except VAT (e.g. customs, excise duty), and direct costs (e.g. commissions, cost of packing, transport). If the consideration is not paid in cash, or if an exchange of goods for services takes place, the tax base will be the market value of the goods or services received at the time of supply. The VAT base cannot be lower than the cost of goods sold.
Registration for VAT in Montenegro may be either voluntary or mandatory. Voluntary VAT registration is possible for small taxpayers who have not realised turnover exceeding EUR 18,000 in the last 12-month period. Once registered, a company may not apply for deregistration for at least three years. VAT registration is mandatory for an entity that realises turnover exceeding the EUR 18,000 threshold in any 12-month period.
1677 Montenegro PwC Worldwide Tax Summaries
VAT is calculated and paid on a calendar-month basis (i.e. a VAT return must be submitted and VAT liability must be cleared monthly). VAT calculated on imports is paid along with customs duties.
Montenegrin CPT Law imposes WHT on income realised from a Montenegrin source and distributed to a non-resident. The scope of the WHT applies to dividends and profit distribution, capital gains, interest, royalties, intellectual property rights fees, rental income, fees for consulting, market research, and audit services, as well as to income earned on the basis of performing entertainment, artistic, sport, or similar programmes in Montenegro.
WHT will also be payable on income earned by non-resident or resident individuals on the basis of repurchase of used products, semi-final products, and agricultural products from a manufacturer registered for VAT purposes.
Distributions of dividends and share of profits are also subject to WHT if the recipient is a Montenegrin resident (either an individual or legal entity).
The general WHT rate is 9%.
Application of a double tax treaty (DTT) may reduce or eliminate Montenegrin WHT. To qualify for the beneficial rates prescribed by the treaty, a non-resident must prove tax residency of a relevant treaty country and beneficial ownership over the income. In
order to qualify for a preferential tax rate according to a DTT, a non-resident will need to provide the tax residency certificate filled out and stamped by the relevant authority of its country of residence.
Although Serbia is regarded as the legal successor of the Serbia and Montenegro State Union that ceased to exist in June 2006, the Republic of Montenegro, upon its Decision on Independence (dated 3 June 2006), continues to honour international treaties
that were applicable in the State Union, including those executed by State Union’s legal predecessors (Federal Republic of Yugoslavia and Socialist Federal Republic of Yugoslavia, i.e. former Yugoslavia). However, a quite low statutory WHT rate of 9%, which was enacted after most of the treaties had been introduced, is usually more beneficial than treaty rates.
2017 tax system developments
The latest amendments to the Montenegrin Corporate Profit Tax (CPT) Law from 2016 came into effect on 1 January 2017. Namely, the amended CPT Law introduced rules regarding:
Tax deductibility of certain expenses (e.g. salary costs and costs related to termination of employment, impairment of assets, write-off of receivables).
Submission of tax returns: Taxpayers are obligated to electronically submit CPT returns through the web portal of the tax authorities. Please note that in order to submit CPT returns electronically, taxpayers should possess digital certificates issued by the certification body (‘Pošta Crne Gore’).
Taxation of non-residents: Adopted amendments to the Law that introduced specific rules for assessment and mechanisms for taxation of:
capital gains of non-residents in transactions with other non-resident entities or
resident and non-resident individuals, and
Montenegrin-sourced income realised by non-residents on the basis of lease of
movable and immovable assets from a person who is not obligated to calculate, withhold, and pay withholding tax (WHT) (i.e. non-resident entities or resident and non-resident individuals).
The non-resident is obligated to file the tax return, via their Montenegrin tax representative (tax agent), within 30 days from generating income. Tax liability will be determined based on the decision issued by the Montenegrin tax authorities.
WHT: The amended Law provides more detailed definitions of the certain types of income earned by non-residents. Also, the scope of WHT is broadened and applies on income earned by a non-resident on the basis of performing entertainment, artistic, sport, or similar programmes in Montenegro, as well as income earned by non-resident and resident individuals on the basis of repurchase of used products, semi-final products, and agricultural products from a manufacturer registered for value-added tax (VAT) purposes.
Penalties: Fines ranging from 550 euros (EUR) to EUR 16,500 are introduced for failing to calculate CPT in accordance with provisions of the Law.
Why a Montenegro company might be useful for Russian entrepreneurs
First of all, there is Double tax treaty of 12/10/1995 (between Russia and Yugoslavia, but Montenegro confirmed to fulfill it as the successor of Yugoslavia).
As per Section 10 the dividends are taxed on 5% rate if Montenegro company:
Russian tax authorities pays great interest to the fact that the dividends should not go toso-called "conduit" companies. A company shall have economic substance: office, staff, some business activity other than collecting dividends. There is no concrete list of what the company should have to be considered as having beneficial rights for dividends, but usually it should have at least an office.
In comparison with Cyprus authorities Montenegro tax authorities are not cooperative. Montenegro has not signed the Convention on mutual administrative assistance on tax matters and so far does not exchange tax information either automatically or by request of Russian tax authorities.
So let's see the following schemes:
Interests and royalties
If interest is paid to Montenegro company, it is taxed at 10% rate in Russia. But these sums can be taken away from Russian profit tax base. The sum paid in Russia is deductible from the total tax due to be paid in Montenegro.
So, the Russian company gained 1000 EURO profit.
Imagine, the Russian company pays 400 Euro royalties or/and interests to Montenegro. They are taxed at 10% rate. That makes 40 EURO.
The rest 600 EURO are taxed at 24% rate, the tax is 144 EURO.
The total amount of taxes is 184 EURO. If the whole 1000 EURO are taxed at 24%, the sum is 240 EURO.
If one uses Montenegro company, 56 EURO are saved.
Royalties are taxed the same way.
Russian Company pays 1000 EURO dividends to Montenegro company. This money is taxed per 5% rate if all abovementioned conditions are met. The tax is 50 euro.
Then this tax is deducted from the amount of tax, that should be paid to Montenegro budget. The tax rate here is 9%, so 1000 euro shall be taxed at 9% rate. The tax is 90 euro, but as per Article 33 of Law on corporate tax the taxpayer has the right to deduct 50 EURO.
The effective rate is 9%.
The next step is distributing the dividends to shareholders. There 9% is withholding tax on dividends paid to residents and non-residents.
There is the vise a versa situation. Russian company establishes Montenegro company. Montenegro company pays dividends to Russian company - for example, the same 1000 EURO. These dividends are taxed in Montenegro per 9% rate and are not taxed in Russia (see point 3 Article 284 of Tax code of Russian Federation).
In comparison with Russia 9% corporate tax is much lower than 24%. So Montenegro company can be used as a trade company.
5) Montenegro has many double tax treaties. They might be very useful to distribute profit from countries with high profit to Montenegro. Russia is not the only one country with high corporate tax rates . Ukraine and Belorussia also have double tax treaties with Montenegro, and their tax rates are much higher than the same in Montenegro.
Once again, Montenegro is not the most profitable variant, but it is relatively safe and gives high level of confidentiality. And besides the country itself gives a lot of opportunities for investing.