With the goal of bringing the existing legislation in Montenegro in line with the EU rules and regulations regarding the prevention of base erosion and profit shifting, and in order to ensure that corporate tax is paid where the actual economic value and business activities take place, the Montenegrin Ministry of Finance has recently published the new draft law on amendments to the corporate tax law.
The main concerns covered within the new draft law are:
- The rules on the limitation of interest;
- The rules on controlled foreign companies;
- Exit taxation;
- Hybrid mismatches
One of the main changes proposed by the new law is the rule on the limitation of interest, according to which excess borrowing costs may be recognized as tax-deductible expenses up to 30% of EBITDA or three million Euros. It should be noted that this provision, if accepted, will not be applied to stand-alone entities and financial undertakings.
Another novelty introduced in the new draft is the category of controlled foreign companies, the undistributed earnings of which, derived from specifically defined sources, must be included in the tax base of the resident controlling entity, which is a corporate taxpayer, if the legal prerequisites are fulfilled. On the other hand, losses of a controlled foreign company will not be included in the tax base of the resident controlling entity.
Furthermore, rules on exit taxation regulating the inclusion of the difference between the market value of assets and its value determined for tax purposes in the cases of transfer of assets or business between countries were introduced. These were introduced in order to avoid the possibility of a reduction of tax base through the transfer of value into other countries with more favourable tax policies.
Lastly, the rules on hybrid mismatches ( double deduction and deduction without inclusion) were taken directly from the EU ATAD 2 Directive.
Prepared by,
Daniel Vujacic, LL.M. (UW)