The Government of Montenegro has proposed amendments to its Corporate Income Tax Law to align with the EU Anti-Tax Avoidance Directive, introducing measures such as interest limitation, CFC rules, exit taxation, and hybrid mismatch rules to curb profit shifting and strengthen anti-avoidance provisions.
The Government of Montenegro has released a draft law on Amendments to the Law on Corporate Income Tax, proposing measures to address profit shifting in accordance with the EU Anti-Tax Avoidance Directive (ATAD) (Directive 2016/1164 as amended by Directive 2017/952).
Key anti-profit shifting rules
- Interest limitation rule: A taxpayer’s deductible borrowing costs are limited to 30% of EBITDA or EUR 3,000,000, whichever is higher. This rule targets various debt forms and financing costs but excludes certain standalone taxpayers and financial institutions.
- Controlled Foreign Company (CFC) rules: These rules require a resident taxpayer to include the undistributed income of a foreign entity in their tax base if they hold more than 50% of the voting rights, capital, or profit rights and the foreign entity pays significantly lower taxes abroad. This applies to specific income categories like interest, royalties, dividends, and certain financial services, unless the foreign entity performs significant economic activity.
- Exit taxation: Taxpayers must pay tax on the difference between the market value and the tax value of assets when they transfer assets, operations, or tax residency to another jurisdiction, which would otherwise result in Montenegro losing its right to tax those assets.
- Hybrid mismatch rules: The law establishes rules to eliminate tax benefits arising from different jurisdictional treatments of the same entity or instrument. These rules prevent “double deductions” (deducting the same expense in two countries) and “deductions without inclusion” (deducting an expense in one country without the recipient being taxed in another).
- Reverse hybrid and residence mismatches: “Reverse hybrid” rules ensure that certain entities are treated as residents to prevent double non-taxation. Similarly, “residence mismatch” rules limit deductions for entities resident in multiple jurisdictions to prevent them from claiming the same deduction twice.
Administrative and anti-abuse measures
- Advance Pricing Agreements (APA): Taxpayers can enter into binding agreements with the Tax Administration regarding transfer pricing methods for a specific period, providing more legal certainty for related-party transactions.
- General Anti-Abuse Rule (GAAR): A broad provision is introduced to deny tax benefits—such as exemptions or reduced rates—for “non-authentic” arrangements created primarily for tax avoidance rather than for valid economic reasons.
- International conventions: Montenegro commits to joining the Convention on the elimination of double taxation regarding the adjustment of profits of associated enterprises upon its accession to the EU.
The law is set to enter into force eight days after its official publication, but its actual application is deferred until the day Montenegro joins the European Union.
