Bilateral screening: Chapter 16 PRESENTATION OF MONTENEGRO M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Working Group for Chapter 16 - Taxation Brussels, 29 April 2013

MONTENEGRO Negotiating Team for the Accession of Montenegro to the European Union Working Group for Chapter 16 - Taxation Bilateral screening: Chapter 16 Presentation of Montenegro Brussels, 29 April 2013 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

Arbitration Convention Aida Muratović Independent Advisor, Ministry of Finance TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

 Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/436/CEE, OJ L225 20/08/1990 ) RELEVANT ACQUIS TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

 Law on Corporate Profit Tax (Official Gazette of the Republic of Montenegro No 65/01, 12/02 and 80/04; Official Gazette of Montenegro No 40/08, 86/09, 40/11 and 14/12);  Law on Tax Administration (Official Gazette of the Republic of Montenegro, No 65/01, 80/04 and 29/05; Official Gazette of Montenegro, No. 73/10, 20/11 and 28/12);  Convention on Avoidance of Double Taxation LEGAL FRAMEWORK TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

SCOPE OF THE CONVENTION  Avoidance of double taxation of the profit made by associated enterprises is regulated by the Convention for the Avoidance of Double Taxation signed by Montenegro with other countries.  Under the Decision on Declaration of Independence of the Republic of Montenegro (Official Gazette of the Republic of Montenegro, No 36/06), Montenegro assumed 36 international conventions and agreements for avoidance of double taxation entered into by SFRY and SRY and acceded by the State Union of Serbia and Montenegro, which apply to Montenegro and are in conformity with its legal order. Treaties with those countries are in full force and effect in Montenegro.  Montenegro, as an independent country, concluded treaties with Ireland (2012), Serbia (2012) and the United Arab Emirates (2013).  Montenegro signed a treaty with Azerbaijan and initiated treaties with Qatar and Austria.  The Convention for the Avoidance of Double Taxation applies to corporate profit tax and personal income tax. The Convention applies also to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

GENERAL PROVISIONS Definitions  A taxpayer is a resident or non-resident legal entity, which carries out a for-profit activity (Article 2 of the Law on Corporate Profit Tax).  A resident legal entity is an entity established in Montenegro, or having registered office with actual headquarters and control on the territory of Montenegro (Article 3 of the Law on Corporate Profit Tax).  A non-resident legal entity is an entity that is not established in Montenegro, and without registered office having actual headquarters and control in Montenegro, but that carries out its operations through a permanent establishment (Article 3 of the Law on Corporate Profit Tax).  The permanent establishment means a permanent place of operations wherein or through which a non-resident entirely or partly carries out its operations and is organized in one of the following forms: a headquarters, a branch, an office, a factory, a workshop, a mine, oil or gas deposit, a quarry or any other place of exploitation of natural recourses. A construction site or a prefabricated structure shall constitute a permanent establishment only if it continues to exist for the period exceeding six months (Article 4 of the Law on Corporate Profit Tax). TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

GENERAL PROVISIONS continued  Related persons are considered to be the persons having special mutual relations that may have a direct impact on the conditions or economic results of transactions between them.  The special relations include individual relations between: the persons having at least 25% of share in the capital of another person; one person that has a direct or indirect interest in another person which is a company, if such an interest is at least 25%; one person that is subordinate to the other person in terms of his business position and that other person, or one person that is under control (directly or indirectly) of the other person and that other person; the persons representing subsidiaries or are under direct or indirect control of a third person; the persons that directly or indirectly control a third person and that third person, if each person’s voting right is at least 25%. (Article 38 of the Law on Corporate Profit Tax and Article 15 of the Law on Tax Administration). TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

GENERAL PROVISIONS continued  The price originating from asset transactions or creation of obligations between related parties is considered a transfer price (Article 38, Law on Corporate Profit Tax).  The price expected to be achieved from asset-related transactions or contractual obligations between parties that were operating at “arm's length” basis or higher achieved price shall be considered as the arm’s length price (Article 38, Law on Corporate Profit Tax).  The term “competent authority” in Montenegro means: the Ministry of Finance or its authorized representative – Tax Administration (Article related to general definitions in the Convention for the Avoidance of Double Taxation). TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

GENERAL PROVISIONS Basic principles  An enterprise of a Contracting State is associated with enterprise of the other Contracting State, if one of enterprises participates directly or indirectly in the management, control or capital of another enterprise. The enterprises are also associated if the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State.  Competent authorities of contracting states may make adjustments to bookkeeping records of such enterprises, for the purpose of assessing tax liabilities if such enterprises, due to their special relations, are not stating actual taxable profit generated in such state. Thus, an adjustment of the taxable profit may be made if an enterprise of a Contracting State is associated with an enterprise of another Contracting State and, if due to such relation, those enterprises have entered into special arrangements or contract activities in a mutual business or financial relations which are different from those that would have been contracted between independent enterprises. However, the said adjustment is not allowed if business transactions between these enterprises take place under normal market conditions. TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

GENERAL PROVISIONS continued  These principles are contained in the Convention for the Avoidance of Double Taxation applied by Montenegro, under Article related to associated enterprises.  For a resident taxpayer that generates profit outside of Montenegro and pays a tax on such profit in another country, the tax credit shall be approved at the account of the profit tax assessed in accordance with the provision of this Law in amount equal to the amount of the profit tax paid in such country (Article 33, Law on Corporate Profit Tax).  The object of taxation of the non-resident’s permanent establishment shall be the profit generated by such establishment (Article 4, Law on Corporate Profit Tax). TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

GENERAL PROVISIONS continued  Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.  In determining the profits of a permanent establishment, deductions expenses will be allowed which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.  These provisions are contained in the Convention for the Avoidance of Double Taxation applied by Montenegro, under Article related to business profits. TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

MUTUAL AGREEMENT AND ARBITRATION PROCEDURE  If the principles are not complied with, an enterprise may, irrespective of the legal remedies provided by a national law of those States, present its case to the competent authority of the Contracting State. If the competent authority deems that the complaint has merits and is not able to reach a satisfactory solution, such a case may be settled by a mutual agreement with the competent authority of the other Contracting State.  This provision is contained in all conventions for the avoidance of double taxation applied by Montenegro, under Article related to mutual agreement procedure.  In connection with Article 7 of the Arbitration Convention, pertaining to establishment of an arbitration committee tasked with issuing opinion on double taxation removal, if a competent authority fails to reach an agreement, conventions for the avoidance of double taxation applied by Montenegro will not contain a provision concerning the establishment of the arbitration committee within the above mentioned article. TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

SERIOUS PENALTIES  All tax laws in Montenegro stipulate penalty provisions for tax violations and are aligned with the Law on Misdemeanours.  Penalties provisions in the Law on Corporate Profit Tax (Article 42a): A pecuniary fine ranging from 550 euro to 16,500 euro shall be imposed for an offence on a legal entity - taxpayer if: o fails to calculate, calculates incorrectly or fails to pay the withholding tax on payments made on the following bases: dividends and share in profits paid to the resident and non-resident legal entities and natural persons; and interest, royalties, and other intellectual property rights compensations, capital gain, movable and immovable assets lease considerations, considerations from rendering consulting services, market research services and audit services paid to a non-resident legal entity; o fails to submit report on the assessed withholding tax within the prescribed; o fails to submit to the competent tax authority a tax return or fails to submit along with the tax return an evidence on paid tax or income statement and balance sheet within the prescribed deadline. TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

EXCHANGE OF INFORMATION  In connection with Article 10 of the Arbitration Convention, pertaining to exchange of information of competent authorities and arbitration committee, the tax authority, in discharging competencies, has the authorisation to cooperate with other bodies and organizations in the country and abroad regarding the issues of tax crimes, in accordance with international treaties or agreements (Article 6, Law on Tax Administration)  Tax secret shall mean any information or date about the taxpayer at the disposal of the tax authority, except for information and data: for which the taxpayer states in writing that they are not considered as tax secret; that cannot be related to a particular taxpayer, and cannot be identified in any other manner; pertaining to the existence of tax debt if the mortgage, or fiduciary right used as security is registered in the public books; on registration of the taxpayer, TIN, company name (name) and principal place of business; value of immovable property.  Data considered as tax secret, at request of the competent state authority, may be available to that authority in accordance with law (Article 16, Law of Tax Administration). TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

EXCHANGE OF INFORMATION  The competent authorities of the Contracting States shall exchange such information as is forseeably relevant for carrying out the provisions of the Convention or to the administration or enforcement of the domestic laws concerning taxes covered by the Convention imposed on behalf of the Contracting States, or local authorities, insofar as the taxation thereunder is not contrary to the Convention.  Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes covered by the Convention. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.  These provisions are contained in Convention for the avoidance of double taxation applied by Montenegro, under Article related to exchange of information. TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 16: Taxation

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