Self Employment Taxes in Montenegro

When working as a (freelancing) sole trader in Montenegro, it is crucial to be aware of your tax implications. If you’re self-employed, you either work for one or more (international) clients to whom you typically must submit invoices to get paid. Sole proprietorships are taxed at the individual level, which can result in either a net profit or loss, and report their taxes on the tax form GPP-FL, Schedule A.

While net losses can potentially be carried forward for up to five years, taxes on profits have to be paid in installments in the year in which they incur. In addition to personal income taxes, solo entrepreneurs are also obliged to pay social contributions in Montenegro, at the current rate of 11%.

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These taxes represent the compulsory monthly payments towards the retirement pension scheme, as well as towards the mandatory disability & unemployment insurance schemes. Unlike with salaried employment, these contributions are not automatically withheld from your paycheck, but must be declared separately on your annual, individual tax return. Here are further things to consider as a freelancer/sole trader when filing your taxes.

KEY TAKEAWAYS

Self-employed taxes are assessed annually but usually paid in monthly installments
As a sole proprietorship, you’re personally liable for any losses that your business makes
For social contribution purposes, you are both considered the employee and the employer
You’re typically responsible for paying both income taxes and a self-employment tax, covering social benefits like disability insurance and pension
You may be able to claim various business-related deductions, such as travel, business meals, office expenses, equipment, and phone and internet service, as long as they’re ordinary and necessary for your business.
You typically can deduct expenses for a home office, provided the space is used exclusively for business purposes.

Income Tax Rates

Unlike corporations, including the Montenegrin limited liability company, as a sole proprietor, you are not subject to double taxation, meaning that you are not taxed both at the entity level in the form of corporate income taxes, and again on the personal level when dividends are distributed from the company to its shareholders.

Instead, you only have to pay personal income taxes (plus social contributions) on your freelance/business profits. A progressive marginal tax method is used, meaning income is taxed at different brackets that rise as income increses up to the top marginal tax rate of currently 15%.

That is, you won’t pay 15% self-employed income taxes on all your income, only the last Euros earned (above 12.000,01€ per year) would be subject to the top tax rate of 15%. For example, if you earn 20.000,00€ (= revenue minus expenses and available self-employment deductions), the first 8.4000,00€ would not be taxed at all, whereas the following 3.600,00€ would be subject to the reduced rate of 9%, totaling 1.524,00€, which would translate to an effective tax rate of 7.62%.

The Local Surtax

In addition to the layers of personal income taxes set at the national level, 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 a (temporary) resident. The local income surcharge comes in the form of a flat tax rate, ranging from 10% to 15%.

To come back to the example mentioned above, where a sole trader earns a yearly income of 20.000,00€ and has to pay 1.524,00€ taxes on it. In case he/she is registered in the municipality of Kotor, where the local surtax amounts to 13%, he/she has to pay an additional 198,12€ in municipal surcharges.

Social Contributions

In addition to personal income taxes, your self-employed activity is also subject to social security contributions in Montenegro, which are reported on your individial tax return (GPP-FL, Schedule A1). They are paid at the end of the fiscal year for the first year of running your business, and from then on, in monthly installments, together with the income taxes.

Your compulsory contributions to the social security scheme are calculated based on average salary figures in Montenegro. For self employment, there are three income brackets that depend on your yearly revenue:

For example, if your annual revenue is 60.000,00€, you’ll have to pay social contributions on 1.5x the gross average salary at that moment. In case the reported average salary figures are 12.000,00€ per year, the tax base for assessing your (monthly) payments is 18.000,00€ (12.000,00€ x 1.5). From 2024 onwards, the social security tax rates for the self-employed are as follows:

Pension and disability insurance: 10%
Unemployment insurance: 1%

Sole traders making 60.000,00€ per annum, would thus have to pay 1.980,00€ (= 11% on 18.000,00€) in the form of social contributions to the Montenegrin Government each month.

The Lump-Sum Tax Regime

Small freelancers and entrepreneurs whose yearly business income does not exceed 30.000,00€ can alternatively choose to be taxed under Montenegro’s simpler, lump-sum regime. To facilitate administration, you are subject to pay a fixed monthly amount of taxes and social contributions, rathern than being taxed on the actual profits of your operations.

Under this simplified taxation system, micro entrepreneurs are grouped into four clusters by type of business activitiy that have different percentages of allowable expenses. The tax amount owed is always due by the end of the current month for the previous one, in the scope of 1/12 of your annually assessed amount.

Entrepreneurs listed in Group I are allowed to apply 50% of tax-deductible expenses, whereas sole traders from Group IV can only claim business expenses using the flat rate of 30%. Below are some examples of business activities that fall into each group:

Group I: hairdressers, taxi drivers, street vendors, beekeepers, etc
Group II: plumbers, locksmiths, carpenters, florists, etc
Group III: mechanics, masons, house-painters, tilers, copy shops, photographers, etc
Group IV: pastry shops, bakers, cosmeticians among others

Unfortunately, programmers, digital marketeers, consultants, and other IT specialists can not take advantage of Montenegro’s lump-sum tax regime. Within this tax structure, Montenegro’s tax office considers your income taxes to be pay-as-you-go rathern than due at year’s end, meaning that you are obliged to make estimated monthly tax payments throughout the year.

Available Business Deductions

As a freelancer or micro entrepreneur, you’ll plausibly have higher eligible business expenses than a salaried employee, and the Montenegrin tax code offers you a range of available tax deductions and reliefs not available to the regular employee. Nonetheless, all expenses must be ‘wholly and fully’ essential for the running of your business.

As a general guideline, self-employed entrepreneurs in Montenegro have a whole range of business expenses allowable for tax purposes, meaning that they can directly be used to reduce your tax base, on which you’ll have to pay income tax and social contributions. Some of the most common expenses include:

office expenses
legal, bookkeeping, and notary fees
travel expenses and lodging
entertainment expenses incl. restaurants of up to 1% of yearly revenue
charitable contributions up to 3% of annual turnover
phone and internet service
office rent
irrecoverable debts written off
interest expenses

Long-term capital assets with a value above the threshold of 200,00€ must be written-down gradually over their expected economic life according to the amortization schedule, which consists of five groups with annual amortization rates from 5% (real estate) to 30%, depending on the asset class.

If you register your business in one of Montenegro’s less developed municipalities or engage in research and development business activities, you may be eligible for a tax relief of up to 200.000,00€ over a period of eight years.

VAT Implications

In Montenegro, revenue generated by self-employment is taxable for VAT if the registration threshold of 30.000,00€ has been breached. You may also opt to voluntarily register for Value-Added Tax, which is beneficial if the VAT you pay on expenses exceeds the amount of VAT you charge on your sales.

In Montenegro, the standard rate of VAT is 21%, although some goods and services are charged at reduced rates (7% and 15%), whereas others are excempt from VAT entirely. Exports are zero-rated for VAT purposes as are services offered online to a foreign company.

VAT returns in Montenegro are due on a monthly basis, and have to be paid and filed with the tax office by the 15th of each month:

If the Output VAT is greater than the Input VAT, you will have to pay the difference to Montenegro’s tax administration
If Input VAT > Output VAT, you will be refunded the difference within 60 days

Tax Filing Obligations

As a self-employed entrepreneur or freelancer, you are obliged to prepare and file your personal GPP-FL tax return by April 30 each year. After the first year of operations, you must pay income taxes in the form of monthly installments based on one twelfth (1/12) of the previous year’s tax amount, with payment due on the last day of the month for the previous month’s accounting period.