Self-Employment Taxes in Montenegro
When working as a (freelance) sole trader in Montenegro, it is crucial to be aware of your tax obligations. If you’re self-employed, you work for one or more (international) clients, and usually invoice them to receive payment. Sole proprietorships are only taxed once at the individual level and must report their taxes using the GPP-FL, Schedule A form.
While net losses can potentially be carried forward for up to five years, taxes on profits have to be paid in (monthly) installments in the year in which they are incurred. In addition to personal income taxes, sole traders are also obliged to pay social security contributions in Montenegro as a percentage of their salary, at the current rate of 11%.
These contributions cover the mandatory monthly payments to Montenegro’s retirement pension, disability, and unemployment insurance schemes. Unlike with salaried employment, they are not automatically withheld from your paycheck, but must be declared and paid separately. Here are some additional points to consider as a freelancer or sole trader when filing your taxes:
KEY TAKEAWAYS
- Self-employment taxes are assessed annually but are usually paid in monthly installments.
- As a sole proprietor, you’re personally liable for any business losses and debts.
- For social contribution purposes, you are considered both the employee and the employer.
- You’re typically responsible for paying both income tax and social contributions like disability insurance and pensions.
- You may be able to deduct various business-related expenses, e.g., travel, business meals, office expenses, equipment, and phone and internet service, as long as they’re ordinary and necessary for your business.
- You can only claim deductions for a home office if the space is used exclusively for business purposes.
Income Tax Rates
Unlike limited liability companies, sole proprietors in Montenegro are not subject to double taxation. In other words, you won’t be taxed twice – once at the entity level through corporate income taxes and again at the shareholder level when dividends are distributed. Instead, you are only responsible for paying personal income tax and social contributions.
A progressive marginal tax method is applied, meaning income is taxed in brackets that increase as your earnings rise, up to the current top marginal rate of 15%:
Example: You won’t won’t pay the top 15% tax rate on your entire income because only the portion above 12,000.01€ per year is subject to the top marginal rate. If you earn 20,000.00€, the first 8,4000.00€ would not be taxed at all, the next 3.600,00€ is taxed at 9% (totaling 324€), and the remaining 8,000€ is taxed at 15% (totaling 1,200€), resulting in an effective tax rate of 7.62%.
The Municipal Surtax
In addition to personal income tax, as a Montenegrin taxpayer, you are also subject to a local surtax, i.e., a tax on a tax, paid to the municipality where you are registered as resident. The local income surcharge is applied as a flat rate, typically ranging from 10% to 15%. Returning to the example above, if they are registered in the municipality of Kotor, where the local surtax is 13%, they would need to pay an additional 198.12€ in municipal surcharges.
Social Security Contributions
Social security contributions in Montenegro are paid at the end of the fiscal year during your first year of business and, from the second year onward, in monthly installments together with income taxes. They are calculated based on the current average salary, and there are three income brackets determined by your annual revenue:
For example, if your annual revenue is 60,000.00€, you’ll need to pay social contributions based on 1.5 times the gross average salary at that time. If the reported average salary is 12,000.00€ per year, your tax base for calculating monthly payments would be 18,000.00€ (12,000.00€ × 1.5).
Sole traders making 60,000.00€ per annum would therefore have to pay 1,980.00€ annually (calculated as 11% of 18,000.00€) in the form of social contributions.
The Lump-Sum Tax Regime
Freelancers and micro entrepreneurs with annual revenue not exceeding 30,000.00€ may alternatively opt to be taxed under Montenegro’s simplified lump-sum taxation regime, under which they are required to pay a fixed monthly amount of salary taxes and social contributions rather than being taxed on the actual profits of their operations.
This scheme groups micro-entrepreneurs into four categories based on the type of business activity, each with different percentages of allowable expenses:
Entrepreneurs in Group I are entitled to deduct 50% of their expenses for tax purposes, while those in Group IV can only claim business expenses at a flat rate of 30%. Below are examples of business activities that fall into each group:
- Group I: Hairdressers, taxi drivers, street vendors, beekeepers, and similar trades
- Group II: Plumbers, locksmiths, carpenters, florists, and similar professionals
- Group III: Mechanics, masons, house painters, tilers, copy shops, photographers, and related businesses
- Group IV: Pastry shops, bakeries, cosmeticians, and others
Note : Freelancers in professional services (like IT, consulting, marketing, and similar intellectual or online activities) cannot use the lump-sum taxation regime (“paušalno oporezivanje”). The regime is only available for specific crafts and small local trades listed by classification, not for “intellectual” or digital professions.
Available Business Deductions
As a freelancer or micro entrepreneur, you have a whole range of allowable business expenses, deductions, and tax reliefs to reduce your taxable income – benefits that are not available to regular employees. Nonetheless, all expenses must be “wholly and exclusively” necessary for the operation of your business.
Some of the most common expenses include:
- Office supplies and equipment
- Legal, bookkeeping, and notary fees
- Travel and lodging expenses
- Entertainment expenses, including restaurants, up to 1% of annual revenue
- Charitable contributions, up to 3% of annual turnover
- Phone and internet services
- Office rent
- Irrecoverable debts written off
- Interest expenses
Long-term capital assets with a value above the threshold of 200.00€ must be depreciated gradually over their expected economic life according to the amortization schedule. It groups assets into five categories, with annual amortization rates ranging from 5% (for real estate) to 30%, depending on the asset class.
In addition, if you register your business in one of Montenegro’s less-developed municipalities or engage in research and development activities, you may be eligible for a tax relief of up to 200,000.00€ over a period of eight years.
VAT Implications
Revenue from self-employment is subject to VAT in Montenegro if it exceeds the registration threshold of 30,000.00€. However, you can also voluntarily register for Value-Added Tax to be able to deduct Input VAT on purchases. The standard VAT rate is 21%, with reduced rates of 7% and 15%, while certain goods and services are exempt from VAT.
Info: Exports are zero-rated for VAT purposes, as are services offered online to customers abroad.
VAT returns are filed monthly and must be submitted to the Tax Administration of Montenegro by the 15th of each month:
- If Output VAT exceeds Input VAT, you must pay the difference.
- If Input VAT > Output VAT, the difference will be refunded to you within 60 days.
Tax Filing Obligations
You are required to prepare and file your personal GPP-FL tax return by April 30 each year. After the first year of operations, income taxes must be paid in monthly installments, calculated as one twelfth (1/12) of the previous year’s tax liability, with each payment due on the last day of the month for the preceding month’s accounting period.
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