Montenegro

Sead Dado Salkovic
Eurofast Global
Montenegro

Sead Dado Salkovic of Eurofast Global analyses the tax steps the Montenegro government has taken to attract foreign investment, particularly in the real estate sector

In the three years since its independence, Montenegro has tried hard to establish a better investment climate that will contribute to the acceleration of its economic development.

As such, in an attempt to attract foreign investors, economic, business and tax incentives have been introduced.

There are several advantages and incentives available to investors:

Political and macroeconomic stability;
Security and protection of property rights;
Simple and fast company incorporation procedures; and
A favourable tax system: the corporate tax rate is 9%; 12% is the personal income tax rate, which will fall to 9% in 2010. Average customs duty is 6% and there are duty-free zones.

Annual property tax

Property tax is levied on real estate in Montenegro. The owner of the property (including a foreign person or company) must pay this tax which is set by the municipal tax authorities. This tax is levied on the market value of the property and the rates range from 0,08 % to 0,80%.

Property transfer tax

A tax at the rate of 3% is payable upon the transfer of real estate. The tax base for property transfer tax is the value stated in the purchase agreement. Only in cases where the value from the purchase agreement is unrealistic, that is, is not close to market value, will the municipal market value calculation be applied.

The property transfer tax shall not be paid when the real estate is included in the company's capital as a contribution in kind.

The buyer of the real estate pays the tax. The transfer of the property must be reported to the tax authorities by submitting the tax return within 15 days from the date the Sale and Purchase agreement is signed.

Capital gains tax

Capital gains from the sale of real property owned by a legal entity are not taxed separately in Montenegro. The tax law states that capital gains are consider as income which the taxpayer realised from the sale or other assignment of the land, building facilities, property rights, shares in capital and stock values. Capital gains are included in the taxable income of the company when making the annual tax balances.

Tax incentives

Initially, Montenegro imposed certain incentives in the form of tax credits where the gross amount of tax could be reduced by 25% of the amount invested in the fixed assets for the given tax period. This reduction cannot be more than 30% of the total tax obligation.

Montenegro also implemented establish tax incentives for areas of the country that were underdeveloped. Newly incorporated companies enjoy tax free treatment for the first three years of operations in such areas.

Moreover, the Montenegrin law provides for added tax incentives when hiring new employees for a period of not less than two years. This tax incentive is applicable only for one year from the day the new employee is hired.

Finally, a company can benefit, subject to the fulfillment of certain requirements, from the favorable provisions that apply to gains deriving from the sale of securities.

Stamp duty

There is a general stamp duty on documents and verification charges by the court. Stamp duty depends on the total value of the purchase agreement.

Real estate
The new amendment to the Property Law, which took effect on March 21 2009, has introduced a more liberal approach to foreigners' rights to acquire real estate in Montenegro.

The new law allows both foreign natural persons and legal entities to acquire ownership rights to land, apartments and residential buildings, and business premises. Furthermore, reciprocity of rights to purchase for Montenegrin citizens abroad is no longer required. Moreover, a certificate proving that the real estate is necessary for conducting business activity in Montenegro is no longer a prerequisite. The law, however, does impose certain restrictions that stipulate that foreigners cannot acquire ownership rights over the natural resources, real estate in public ownership, culture heritage and real estate in the state border line zone.

In addition to these restrictions, foreign natural persons may acquire forestry and agriculture land of not over 5,000 square metres, provided that the real estate being purchased is a residential building located on that land. A foreign company can acquire rights to real estate in Montenegro, such as company facilities, places of business, apartments, living spaces and land for construction. Additionally, foreign persons can claim property rights to real estate by inheritance in the same manner as a domestic citizen and can transfer their funds freely after fulfilling all liabilities and obligations such as income tax, return of funds invested in initial capital, share in net assets and obligations in the case of a contract ending.

In general, a foreign investor in Montenegro can be a legal entity or physical person and both have equal economic and legal rights under Montenegrin law. Foreign investment can be streamlined in the form of money, securities, properties, services and assets rights. The value of the investment is stated in an agreement or any other act prescribed by law and there is no limit on the amount of investment required. Foreign investors can co-invest with one or more foreign investors, whether foreign or local. Equally, foreign investors can acquire rights to real estate in Montenegro, such as company facilities, places of business, apartments, living spaces and land for constructions. Additionally, foreign persons can claim property rights to real estate by inheritance in the same manner as a domestic citizen.

Transfer of property under Montenegro company
Establishing a Montenegro company
Due to recent legislative changes and insufficient practice that regulate ownership of real estate by foreign individuals and companies in Montenegro, it is highly recommended to establish a Montenegro limited liability company to buy certain property. A procedure for establishing a company has been simplified and it could be completed within four working days.

Information, for example, basic details regarding the company, such as the founder, date of incorporation, date of issue of the founding decision, name of the executive director and the names of the (if any) board of directors, should be publicly available.

Preparation for and implications of purchasing real estate
According to common practice lawyers are hired to draft the sale-purchase agreement. Also, additional funds should be set aside for document translation and other related expenses.

Montenegro is expected to join the EU, and the government has made substantial efforts to establish all economic and legal preconditions in relation to European standards regarding the acquisition of real estate. To avoid any risks of disputes over ownership when purchasing real estate in Montenegro, the right and valuable information and expert tax advice is crucial in such transfers. Therefore, due diligence on the legal status of the real estate should be conducted before exchange to give investors a complete view of the status of their acquisitions.

Sead Dado Salkovic (sead.salkovic@eurofast.net), Tax & Legal Advisor, Eurofast Global