The Government of Montenegro has published its Draft Law on Amendments to the Corporate Income Tax Law (“CIT Law”). It is currently in the parliamentary procedure.

Transfer pricing

The amendments envisage introduction of more detailed transfer pricing rules, including the obligation to prepare transfer pricing documentation.

Large taxpayers will be obligated to submit the documentation; other taxpayers should possess the transfer pricing documentation and provide it on the request of the tax authority within 45 days.

The amendments in relation to transfer pricing rules define more closely related parties, introduce all five OECD transfer pricing methods (with the possibility of applying other methods not specifically mentioned); prescribe materiality threshold of 75,000 € for documenting transactions in an abbreviated form and foresee publication of “arm’s length” rates for loans and other financial instruments.

The provisions are to become applicable as of 2022: the taxpayers will be obliged to file transfer pricing documentation for the fiscal year 2022. The deadline for submission is to be June 30 until next year up to 2027: after 2027 the documentation is to be filed alongside the tax return (no later than three months from the expiration of the fiscal period).

The Ministry of Finance will establish a more detailed manner of determining transfer prices and the content of overall documentation, all in accordance with the OECD Guidelines and other international organizations.

Other amendments to the CIT Law

In addition to the above, the proposed amendments to the CIT Law also envisage the following:

  • Capital losses incurred on the sale of land, buildings, property rights, shares in capital and securities are not deductible for CIT assessment purposes;
  • Accrued interest and related costs incurred in regard to a related party debt are tax deductible only up to the “arm’s length” amount as determined at the moment of the approval of a loan and/or other financial instruments;
  • Alignment of the CIT Law with the EU Directives 32003L0049 and 32011L0096 (Parent-Subsidiary Directive and Interest and Royalties Directive), which provide withholding tax exemption for interest, royalties, dividends and other payments based on participation in profit paid to EU companies, which will come into effect after Montenegro's accession to the EU;
  • Alignment of definitions of interest and royalties in line with the EU Directive on Interest and Royalties;
  • Abolishment of the right to reduce the tax liability based on the payment of the calculated tax liability within the prescribed deadline
  • Introduction of a specific penalty for non- submission, i.e. non-possession of transfer pricing documentation, as well as overall increase of the amount of fines.

Bylaws for the implementation of the CIT Law will be adopted within one year from the day of the beginning of the amended CIT Law application, i.e. from January 1, 2022.