Montenegro’s transfer pricing laws are aligned with the Guidelines set by the Organization for Economic Co-operation and Development (OECD) and incorporated within the Corporate Income Tax (CIT).
Arm’s Length Principle
Montenegro’s transfer pricing (TP) rules are based on the OECD Guidelines and they provide guidance on determining an arm’s length price for cross-border related party transactions. According to Article 38 of the CIT, any price resulting from transactions in assets or obligations between related parties shall be considered a transfer price. This means that such transactions must be valued as if they occurred between unrelated parties on market terms. In a case where a transaction creates a tax benefit, adjustments may be made to align it with the arm’s length principle, and the taxable income must be recalculated based on prices that would prevail between unrelated parties.
Related Party Definition
Montenegrin Corporate Income Tax provides a definition of the “related parties”, pursuant to Article 38. The law defines “related parties” as individuals or entities that have influence or control over each other’s business decisions. This can happen when someone owns at least 25% of a company’s shares or voting rights, has the right to at least 25% of the profit, or is involved in the company’s management or decision-making. Even family members or people connected to them can fall under this category. Also, if two companies are controlled by the same person or entity, they are considered related. Importantly, nonresident companies from low-tax jurisdictions are always treated as related parties, regardless of any actual control or ownership.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Montenegro are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Profit Split Method
The preferred method is the Comparable Uncontrolled Price Method. Montenegro allows for the application of other appropriate methods if none of the five above can be applied; moreover, a combination of the five methods is also allowed, when necessary.
Comparability Analysis
Montenegro follows the OECD Transfer Pricing Guidelines for comparability analysis but does not have specific domestic laws on the topic. There is a preference for domestic comparables over foreign ones. When preparing transfer pricing documentation in Montenegro, benchmarking studies are expected to rely on the most recently published financial data available for comparable companies in the first year the transfer pricing documentation is prepared.
Documentation Requirements
Despite Montenegro’s transfer pricing rules following the OECD Guidelines, the Master/Local file requirement has not yet been regulated domestically. On the other side, the Country-by-Country (CbC) reporting is now applicable as of 2024.
Currently, large taxpayers in Montenegro are required to submit transfer pricing documentation together with their annual tax return. All other taxpayers must have the documentation ready by the tax return deadline and provide it to the tax authorities within 45 days upon request. However, if a taxpayer’s transactions with related parties do not exceed 75,000 euros during the tax year, they may prepare simplified documentation.
As a transitional rule, until 2027, all taxpayers are allowed to submit or prepare their transfer pricing documentation by June 30 of the year following the tax year, instead of the usual tax return deadline. These rules also apply to transactions between a Montenegrin permanent establishment (PE) and its nonresident head office.
The documentation must include a clear and structured analysis. This involves:
- A group analysis covering the group’s structure, business activities, policies, and basic data on related parties.
- A business activities analysis, which includes market conditions, competitors, regulations, and industry-specific pricing and profitability factors.
- A functional analysis outlining the related party transactions, roles, assets, and risks.
- A detailed explanation of the transfer pricing methods used and the adjustments made per transaction.
- Appendices that show the data sources, comparable transactions or companies (domestic or foreign), and the arm’s length pricing range.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Montenegro does not provide advance rulings or pricing agreements.
Approach to Transfer Pricing Audits
In Montenegro, transfer pricing rules have been introduced since 2002 with the Corporate Income Tax, but the Tax Administration has not been actively involved in transfer pricing audits. This is related to the limited experience and the country’s relatively low corporate income tax rate of 9%. However, as it adopted the CbC reporting in 2024, it’s expected that Montenegro will apply audit techniques in accordance with the regional level.
Penalties
Montenegrin law does not provide specific penalties regarding transfer pricing implementation. However, the law stipulates that in case prices between related parties are not at arm’s length, the Montenegrin taxpayer will have to adjust its income accordingly.
Taxation at a Glance
Montenegro’s tax system follows a two-layer taxation system: direct and indirect taxation. The main sources of taxation law include Corporate Income Tax, Personal Income Tax, Tax Administration, Real Estate Tax, and Hydrocarbons Tax.
The administration of taxation policies and implementation in Montenegro is governed by the Montenegro Tax Administration. The currency used in Montenegro is Euro (EUR).
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 9-15% |
VAT | 21% |
Withholding tax on dividends to non-residents | 15% |
Withholding tax on interest to non-residents | 15% |
Withholding tax on royalties to non-residents | 15% |
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