By Slobodanka Kolundžija, Independent Tax Advisor, Serbia and Montenegro
On December 31, 2021, the Montenegrin parliament made significant changes to its corporate tax law, including a historic new set of transfer pricing rules.
Most notably, the government introduced a progressive corporate income tax rate as well as the new mandatory requirement for businesses to prepare and file transfer pricing documentation, effective January 1, 2022.
Proving that the OECD’s work on Pillar 2 has had a huge effect, Parliament raised Montenegro’s corporate tax rate from a flat 9% to a tiered tax structure with a maximum rate of 15 %. This degree of change has not been observed for more than 15 years. It has also introduced a progressive taxation of its corporate tax base so that the first €100,000 (about US$111,500) of profits will be taxed at the rate of 9%; profits ranging from €100,000.01 to €1,500,000 (approximately US$111,500 to US$1,672,000) will be taxed at a rate of 12%; and any profit over €1,500,000 (approximately US$1,672,000) will be taxed at a rate of 15%.
As a simple example, if the taxpayer’s tax base is €1,600,000, the corporation tax due would be €192,000 (100,000*9%+1,400,000*12%+100,000 *15%) i.e. approx. US$214,000.
In addition, the rate of withholding tax on cross-border payments of dividends, interest, royalties, rental income, entertainment income, as well as fees for certain types of services has been raised from a fixed rate from 9% to a fixed rate of 15%, applicable to gross income. Finally, the capital gains tax levied by non-residents has also been adjusted to a fixed rate of 15%.
Introduction of transfer pricing rules
However, the most significant change made by parliament to the Montenegrin corporate tax system was the introduction of detailed transfer pricing rules and the requirement, for the first time, of mandatory preparation of documentation on transfer pricing. Previous legislation contained general statements on transfer pricing but did not contain detailed rules or require requirements to establish transfer pricing documentation and complete arm’s length pricing. Therefore, transfer pricing rules were not effectively applied in Montenegro before.
The latest amendments define a related party in detail, introducing a direct or indirect ownership threshold of 25%, a threshold of 25% indirect or direct voting rights, or 25% or more of the taxpayer’s profit shares. In addition, the amendments clarify that family members of a taxpayer will be considered related parties.
Now, as of January 1, 2022, the five OECD transfer pricing methods can be used to determine arm’s length prices, without any hierarchy, as well as any additional method or combination of methods if the five methods are not not adequate.
In addition, safe harbor rules have been 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 be required to apply the safe harbor rules and may apply any other transfer pricing method.
In addition, the rules on interest deductibility will no longer refer to “free market interest”, but will now be based on arm’s length rules.
From 2027, however, the documentation will be due (in the manner explained) together with the tax return.
Finally, it is expected that statutes will be adopted within the next year providing more details on these rules as well as the content of the transfer pricing documentation, which will be prepared in accordance with the OECD guidelines on transfer pricing. transfert price.
Furthermore, the Parliament also introduced a comprehensive chapter of specific rules on withholding tax on cross-border transactions between related parties located in the EU which will be applicable once Montenegro becomes an EU member. The rules are based on EU Parent-Subsidiary and EU Interest and Royalty Directives. They assume exemption from withholding tax on these transactions, subject to conditions and rules relating to the type of income, the type of taxpayer, as well as the applicability of certain anti-evasion rules (transmission rules, general anti-evasion, etc.).
Slobodanka Kolundžija is an independent tax advisor in Serbia and Montenegro.