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Limited Company Montenegro
A limited company is one of the most popular company types in Montenegro, offering various advantages over other business structures such as sole proprietorships and joint-stock companies. One of the largest draws of a limited company (Montenegrin: ‘Društvo sa ograničenom odgovornošću’ or simply ‘D.O.O.’) its limited liability protection to its shareholders/owners.
Read on to find out what a limited liability is, what its characteristics and benefits are, and how it can help you to reduce your taxes and achieve your business goals in Montenegro. You’ll also learn about the neccessary steps needed to set up a limited company in Montenegro.
What is a limited company?
A limited company is a business structure that’s a separate legal entity from you as the business owner, i.e. shareholder, and whose liability is limited to the company’s assets, separating your personal finances from the money invested in the company, and are often used as a key asset protection tool.
In case of lawsuits and other common legal matters that your limited company may face, your (and your business partners’) personal assets that you have commited to the company are protected and separate to your company, and you are only liable up to the total value of your shares.
Like individuals, limited companies are allowed to own assets in their name, sign contracts (i.e. buying real estate), and take on debts to finance business operations. D.O.O.’s that are exclusively set up to buy property are also referred to as Special Purpose Vehicles (SPV’s).
Our tip: Always keep your real estate investment portfolio separate from any existing trading businesses using an Special Purpose Vehicle.
Compared to a sole proprietorship, registering your business as a limited company in Montenegro often offers a more tax-optimized way to operate because you’re taxed at lower rates (up to a certain amount) and are able to claim a broader range of business expenses.
How a limited company is organized
Understanding how limited companies function and how they are organized is crucial for business owners and potential (co-)investors. LLCs are owned by one or more shareholders and managed by a director or board of directors. The following section offers a precise glance at the workings of a limited company in Montenegro, from its coordination and ownership structure to the responsibilities of everyone invoved in its operations.
The Company’s Shareholders
A limited company in Montenegro can have up to 50 shareholders, who have percentage ownership in the company, based on the number of shares they hold. Each shareholder is granted several rights, including the right to transfer ownership of his/her shares and the right to share in the company’s profits and draw dividends while only having limited liability up the amount he/she invested in the business.
The Director(s)
Each limited company must have at least one company director, who can at the same time also be the (sole) shareholder. Directors are typically responsible for management duties and day-to-day business operations such as signing off on financial statements and making sure the company is compliant with the demands of all regulatory authorities.
The process of appointing the company’s directors by the shareholders is usually recorded in the Articles of Association when establishing the company at Montenegro’s Company Register. Subsequent directors are appointed through a formal resolution by the shareholders.
Directors have a legal duty to act within their authirty and in accordance with the company’s memorandum and articles of association, in the interest of the company and its shareholders, avoiding conflicts of interest and not benefiting others at the expense of the company.
Info: Company secretaries are not common in limited companies, but are mandatory in joint-stock companies to assist with compliance and administrative tasks.
Financial Structure
Limited companies can raise finance for (expanding of) business operations by selling or issuing shares. These shares are financial assets, representing units of ownership in the company. There is no upper limit to the amount and value of shares a company can authorize. The shareholder structure (who owns how many shares) of your corporation is established in its articles of association.
There you’ll also find information on how the company’s profits are distributed to the shareholders. The dividend amount each shareholder receives will be proportional to their share in the company. Dividends are a distributions of post-tax profits, and are typically paid out once a year.
Recordkeeping
Under Montenegro’s company and accounting laws, limited companies must maintain accurate financial records, ensuring compliance with regulatory requirements. Good records are essential for preparing your financial statements and filing taxes, and will help you track your business’s performance over time.
Some records, including balance sheets & profit and loss statements, must be prepared annually while others such as VAT returns have to be filed on a monthly basis. Limited companies in Montenegro may need to register for VAT once their 12-month rolling revenue exceeds the threshold of 30.000,00€.
All records. including lease agreements and legal & contractual records, must be available for inspection by regulatory authorities. Even after the company has been closed down, you’ll still need to keep invoices, bank statements, tax documents amongst others.
Benefits of a limited company
The key reasons for establishing a limited company in Montenegro are its flexible ownership structure, potential tax efficiency, and limited liability, protecting individual shareholders from debts incurred by the company. There are also various less discussed advantages, but also some major disadvantages over sole proprietorships and other company types.
Liability limitation
In a limited company, its owners have no personal liability for the company’s debts, financial losses, and legal issues. Instead, each shareholder’s financial responsibility is capped to the amount invested in the company, i.e. the value of his/her shares. If the company is sued, any assets which personally belong to the shareholders are protected from seizure.
Potential tax benefits
Whereas sole traders are taxed as part of their personal income at a rate of 15% for incomes greater than 12.000,00€ per year, the corporate income tax rate for businesses earning less than 100.000,00€ annually is just 9%. What’s more, corporation taxes can significantly be lowered through allowable expenses.
Higher business profile
Limited companies are often perceived as more substantial and credible when compared to sole proprietorships, making your business look more legitimate in the eyes of potential business partners. When customers/clients buy services from you or place orders, they want to be confident that they are dealing with a professional company that has the resources to deliver on its promises.
More funding options
Perceived as more credible and less risky by investors, limited companies often have access to a wider range of funding options, including venture capital and crowdfunding. They can also raise capital by selling shares, enabling them to expand quicker and capitalize on new business opportunities.
Potential disadvantages
While establishing a private limited company comes with various benefits, it is essential to consider the potential disadvantages of such a business setup as well, helping you make a well-informed decision about whether a LLC in Montenegro is the right fit for your business venture. Read on to discover some key challenges associated with operating a limited company.
Higher set-up costs
Before you can register your business with Montenegro’s Company Register, you must reserve a business name, appoint the company’s director(s), and draft and notarize the Memorandum and Articles of Association, which is not required when setting up a sole proprietorship.
The Adminstrative Burden is Higher
Running a limited company involves maintaining accurate records and complying with any relevant rules and regulations – fines are typically higher for limited companies compared to sole traders. Additionally, as an owner of a limited company, you’ll have to factor in higher ongoing expenses like getting a registered business and hiring an accountant for managing your and your staff’s payroll, corporation tax and VAT returns.
Two Layers of Taxation
Unlike sole trader who are not legally separate from their business and only have to file an individual tax return, limited companies have to both account for corporation tax and dividend taxes when profits are distributed from the company’s bank account to its shareholders, which may not be optimal for micro entrepreneurs and freelancers.
Employment Laws
Each company must have at least one director who is a natural person, and must comply with Montenegrin employment and immigration laws: he needs to get paid at least the minimum wage and needs to sign a written employment contract with the company.
The director and other employees must obtain a temporary residence permit in Montenegro before starting employment. The company is obligated to manage payroll, income taxes, and social contributions for their employees – this is commonly outsourced to accounting companies.
Setting up a limited company – checklist
Every limited company in Montenegro must be registered with the Company Register. This involves submitting an application form, along with the company’s memorandum and articles of association, and paying the registration fee. Here are the steps you’ll have to take to effectively name and set up your limited company:
- Choose and reserve a unique name for your new company
- Decide on the shareholder structure
- Appoint a company director
- Get a registered office address for your business
- Draft, sign, and notarize the memorandum of association
- Draft and sign the articles of association
- File company with Montenegro’s Company Register
- Apply for a temporary residence permit (required for directors and non-Montenegrin employees)
- Set up your business banking
- Obtain necessary business licenses
- Register with the social security system and Montenegro’s health system
Taxation of Limited Companies
Limited companies in Montenegro must pay several taxes such as capital gains tax, corporate income tax, and value-added tax (VAT) if above a certain threshold. They always must make sure to stay compliant with Montenegrin tax laws, and also partly have to contribute to the national insurance system.
Corporate Income Tax
During the incorporation process, you’ll receive a company registration number and tax identification number (PIB), which are used to register your business for corporation taxes. Since January 1, 2022, the marginal corporate income tax rates in Montenegro have been:
- 9% for the first 100.000,00€ in annual corporate profits
- 12% for annual profits between 100.000,00€ and 1.500.000,00€
- 15% for profits above 1.500.000,00€
Montenegrin limited companuies must file an annual Corporation Tax return (PD), which includes a detailed overview of the company’s income, capital gains, its expenses, and amortization schedules. Returns are filed electronically and the filing deadline is March 31.
VAT
If you aren’t already registered for value-added tax when setting up your limited company, you must register for VAT once your 12-month-rolling taxable turnover exceeds the VAT threshold of 30.000,00€. However, voluntary VAT registration is also an option if you deem it beneficial for claiming back VAT on business purchases.
Once registered, your limited company must start charging VAT on all taxable sales and submit monthly VAT returns by 15th of every month. Further, you’ll have to provide information on both output VAT (i.e. the value-added tax collected on sales) and input VAT (i.e. tax paid on purchases), and pay or reclaim the difference between the output and input VAT.
Dividend Tax
Dividend taxes in Montenegro must be withheld by limited companies before the dividends (i.e. the portion of a company’s profit) are distributed to their shareholders. Dividends are taxed at a flat rate of 15% when paid out to resident taxpayers, wheras nonresidents can often claim a double tax treaty exemption to reduce or eliminate Montenegrin dividend taxes entirely.
Capital Gains Tax
Limited companies in Montenegro may need to pay capita gains taxes on profits generated on the sale or disposal of business assets such as property and shares in other companies. Capital gains taxes are reported separately when filing the company’s annual financial statements. In Montenegro, there is no difference between short-term and long-term capital gains, and all gains are taxed at a rate of 15%.
Salary Taxes
Limited companies taking on staff, including company directors, must register each employee with Montenegro’s health and social security system. Salary taxes and social contributions are withheld from every employee’s monthly salary and paid to the relevant institutions by the employer. They consist of:
- pension and disability insurance: 10%
- unemployment insurance 1%
- income tax: from 0% to 15%
- labor fund: 0.2%
- chamber of commerce: 0.27%
Info: There is also a small additional municipal surcharge (‘tax on tax’) on salaries, which ranges from 10% to 15% and is charged on the taxable amount.
Wrapping things up
When starting a new business venture, it is important to make sure that you do not encounter unforeseen risks and that you’re protected under all circumstances. There are clear advantages of setting your business up as a limited company, but there are also some clear downsides you should be wary of.
In many cases, the pros of registering a limited company far outweigh the cons, and for the majority of business owners, it is advantageous to set up a LLC, as opposed to becoming a sole trader. Figuring out the ideal structure for your specific business can be a complex task and requires expertise.
To ensure compliance with local tax laws and business regulations, increase tax efficiency, and make sound financial decisions, it is always recommended to hire a specialist. If you are looking for valuable advice on how to get started with your new company in Montenegro, our team of experienced business advisors and accountants will be looking forward to helping you!
Frequently asked questions
Can I be the sole owner and director of my company?
Yes, many of the companies that we establish for our clients are owned and managed by the same people. There is absolutely no problem with being the sole director and shareholder of your company, and no local sponsors, directors, or secretaries need to be appointed in Montenegro.
Can I change from sole trader to limited company?
Yes, it is possible to convert your existing sole trader business into a limited company. This process commonly involves first registering a limited company with Montenegro’s Company Register, and then transferring the sole proprietorship’s assets and oeprations to the new limited company.
How many directors are allowed?
While there is no legal upper limit to the number of company directors, for residency purposes, it is only possible to have one non-Montenegrin director for each company. However, it is possible to bring your business partners on board as shareholders or regular employees.