Accounting and Audit of a Company in Montenegro

The accounting and auditing practices in Montenegro are governed by a mix of local regulations and international standards. If you're interested in setting up or managing a business in Montenegro, it's important to understand these requirements to ensure compliance. Here’s an overview of the accounting and auditing framework in Montenegro:

Accounting Framework

1. Regulatory Body - The Ministry of Finance is the primary regulatory authority for accounting in Montenegro.
- The Institute of Accountants and Auditors of Montenegro (IAAM) also plays a significant role in maintaining professional standards.

2. Accounting Standards
- Montenegro applies the International Financial Reporting Standards (IFRS) for all companies.
- Small and Medium-sized Enterprises (SMEs) can apply the IFRS for SMEs, which simplifies some of the requirements of full IFRS.

3. Financial Statements
- Companies must prepare annual financial statements, which typically include:
- Balance Sheet
- Income Statement
- Cash Flow Statement
- Statement of Changes in Equity
- Notes to the Financial Statements
- Financial statements must be prepared in the Montenegrin language and currency (Euro).

4. Bookkeeping
- Businesses are required to maintain accurate and up-to-date books of accounts.
- Records must be kept for a minimum of five years.

5. Tax Reporting
- Companies must file annual tax returns with the Montenegrin Tax Administration.
- VAT returns, if applicable, are usually filed quarterly.

Audit Framework

1. Audit Requirements
- Mandatory audits are required for:
- Publicly traded companies
- Large companies meeting specific thresholds (e.g., revenue, number of employees, total assets)
- Financial institutions, including banks and insurance companies
- Other companies may be subject to audit based on specific criteria or regulatory requirements.

2. Auditing Standards - Audits in Montenegro are conducted in accordance with International Standards on Auditing (ISA). - The IAAM oversees the auditing profession and ensures compliance with these standards.

3. Audit Process
- The audit process typically involves:
- Planning and risk assessment
- Evaluation of internal controls
- Testing of financial transactions and balances
- Issuance of an audit report expressing an opinion on the financial statements

4. Appointment of Auditors - Auditors must be appointed by the company’s shareholders.
- The appointment must be made at least 30 days before the end of the financial year being audited.

5. Audit Reports - Audit reports must be submitted to the company’s management and filed with the relevant regulatory authorities.

Additional Considerations

- Corporate Governance
- Companies are encouraged to adopt good corporate governance practices, which include establishing audit committees and maintaining transparency in financial reporting.

- Professional Qualifications
- Accountants and auditors must be certified by the IAAM and possess relevant professional qualifications and experience.

- Recent Developments
- Montenegro continues to harmonize its accounting and auditing regulations with EU directives as part of its ongoing efforts to align with European standards.

Overview of the main taxes that companies need.

Corporate Taxation

1. Corporate Income Tax (CIT)
- Rate: The standard corporate income tax rate in Montenegro is 9%.
- Tax Base: The tax is applied to the net profits of the company, calculated according to local accounting standards and adjusted for tax purposes.
- Deductions: Companies can deduct business expenses that are necessary for generating income, including salaries, rent, utilities, and depreciation.
- Loss Carryforward: Companies can carry forward tax losses for up to five years to offset future taxable income.

2. Withholding Tax
- Dividends: A 9% withholding tax applies to dividends paid to both resident and non-resident shareholders.
- Interest and Royalties: A 9% withholding tax is also levied on interest and royalty payments to non-residents.
- Double Taxation Treaties: Montenegro has a network of double taxation treaties (DTTs) with various countries, which can reduce or eliminate withholding taxes.

3. Value Added Tax (VAT)
- Standard Rate: The standard VAT rate in Montenegro is 21%.
- Reduced Rates: A reduced rate of 7% applies to certain goods and services, such as basic food items, medicines, and hotel accommodation.
- Exemptions: Some goods and services, such as financial services and education, are exempt from VAT.
- Registration Threshold: Companies with an annual turnover exceeding EUR 18,000 must register for VAT.

Other Taxes

1. Social Security Contributions
- Employer Contributions: Employers must pay social security contributions at a rate of 10.5% of gross salaries.
- Employee Contributions: Employees contribute 24% of their gross salary, which is withheld by the employer.

2. Personal Income Tax
- Rate: The personal income tax rate for individuals, including employees, is a flat rate of 9%.
- Base: Taxable income includes wages, benefits, and other income, less allowable deductions such as personal allowances.

3. Real Estate Transfer Tax
- A tax of 3% is levied on the transfer of real estate property.

4. Excise Duties
- Excise duties are imposed on specific goods, including alcohol, tobacco, and petroleum products.

Tax Administration and Compliance

1. Filing and Payment Deadlines
- Corporate Income Tax: Annual CIT returns must be filed by March 31st for the previous calendar year. Taxes are usually paid in advance in monthly installments.
- VAT: VAT returns are typically filed quarterly, with payment due by the 15th of the month following the end of the quarter.
- Withholding Tax: Withholding taxes are generally due when the payment subject to withholding is made.

2. Tax Audits
- The Montenegrin Tax Administration conducts audits to ensure compliance with tax laws. Companies are expected to maintain proper records and documentation to support their tax filings.

3. Penalties
- Penalties and interest may be imposed for late payments, underpayments, or failure to comply with tax obligations.

Montenegro’s tax system is relatively straightforward, with a low corporate tax rate and a simple tax structure. However, companies must ensure compliance with all tax laws and regulations to avoid penalties and take advantage of available deductions and benefits. Montenegro has entered into several international tax treaties to prevent double taxation and encourage cross-border economic activities. These treaties aim to clarify and allocate taxing rights between Montenegro and other countries, reduce withholding taxes on dividends, interest, and royalties, and provide mechanisms for resolving tax disputes.

Key Features of Montenegro's Tax Treaties

1. Double Taxation Avoidance (DTA)
- Montenegro's tax treaties primarily focus on avoiding double taxation by allowing tax paid in one country to be credited against the tax payable in another.
- These treaties help determine which country has the primary taxing rights over different types of income, such as income from employment, business profits, dividends, interest, and royalties.

2. Reduced Withholding Tax Rates
- The treaties often provide for reduced rates of withholding tax on dividends, interest, and royalties. This is beneficial for companies and individuals engaging in cross-border transactions, as it reduces the overall tax burden.
- The specific reduced rates depend on the treaty and the type of income involved.

3. Permanent Establishment (PE)
- The treaties define what constitutes a permanent establishment in a country, which determines when a business entity is subject to taxation in that country.
- Generally, a PE refers to a fixed place of business through which the business of an enterprise is wholly or partly carried on, such as a branch or an office.

4. Exchange of Information
- The treaties include provisions for the exchange of information between tax authorities to prevent tax evasion and ensure compliance with tax laws.
- This includes sharing information about income and assets held in the respective countries.

5. Mutual Agreement Procedure (MAP)
- MAP provides a mechanism for resolving disputes between the contracting states regarding the interpretation or application of the treaty.
- It helps prevent instances of double taxation that might arise despite the provisions of the treaty.

List of Countries with Which Montenegro Has Tax Treaties

As of now, Montenegro has concluded tax treaties with several countries, including but not limited to:

1. Europe
- Austria
- Belgium
- Croatia
- Czech Republic
- Denmark
- Finland
- France
- Germany
- Greece
- Hungary
- Italy
- Netherlands
- Norway
- Poland
- Portugal
- Romania
- Russia
- Serbia
- Slovakia
- Slovenia
- Spain
- Sweden
- Switzerland
- United Kingdom

2. Asia
- China
- Cyprus
- India
- Kuwait
- Malaysia
- Qatar
- Singapore
- Turkey
- United Arab Emirates

3. Other Regions
- Albania
- Bosnia and Herzegovina
- Bulgaria
- North Macedonia
- Ukraine

Benefits of Tax Treaties

- Investment Incentives: Tax treaties make it more attractive for foreign investors to invest in Montenegro by reducing the tax burden and providing certainty regarding tax liabilities.
- Economic Cooperation: They facilitate economic cooperation and trade by providing clear rules and reducing tax-related barriers.
- Tax Planning: Companies and individuals can use treaties to optimize their tax positions and reduce overall taxation through strategic planning.

Montenegro’s network of international tax treaties plays a significant role in its fiscal policy, promoting international trade and investment by minimizing tax-related barriers. Companies and individuals engaging in cross-border transactions should carefully consider the provisions of relevant treaties to maximize benefits and ensure compliance with international tax obligations. Establishing a business requires careful planning. Working with our experts can help streamline this process, providing valuable insights and tailored strategies to ensure successful outcome. Don’t hesitate any longer. Apply to become a client today to work with our experts on legal strategies to overcome barriers.

Indotco International

Accounting and Audit of a Company in Montenegro