Montenegro has a small and highly open economic system, and is a stable environment worth investing in, as well as being a globally-recognized tourist and travel destination with high potential for further development.
Intensified efforts to develop the national economy and attract foreign capital by creating a favorable economic and political environment and eliminating all types of business barriers have already produced visible results. Despite the fact that Montenegro is facing numerous transitional challenges in its attempts to reach sustainable economic growth and further the process of accession to the European Union, foreign investors have shown a keen interest in investing in the country. That said, there are still several aspects that might act as barriers towards attracting FDI.
Tourism and eco-tourism are among the most promising activities in Montenegro's developing economy. The Montenegrin economy places particular importance on tourism, and, as a result, the World Travel and Tourism Council (WTTC) has listed Montenegro first among 184 countries where tourism is a strategic economic sector.
Montenegro depends on attracting foreign investment to ensure long-term tourism development and thus value has successfully been added to particularly attractive locations on the Montenegrin coast, where tourist projects of the highest categories, such as luxury hotels, marinas, golf courses, etc. are underway.
Tourism taxation can represent a potential barrier though. With over 20% of domestic GDP resulting from these taxes, it is generally considered a deterrent towards further investment in the industry with legal entities, both residents and non-residents, being liable to pay 9% tax on their profit generated from tourism sector. Similarly, residents and non-residents alike who receive revenue from tourism services such as the lease of apartments, houses, rooms. and campsites are obligated to pay 7% tax on income earned from those services, as well as 19 % VAT if their taxable income exceeds EUR 18,000.
One of the key sectors of the Montenegrin economy is agriculture. The healthy lifestyle trend reflected in organic food consumption around the world makes Montenegro an ideal destination especially for organic food production.
In harmonizing its legislation with the EU regulations, Montenegro has introduced organic certification, which contributes to environmental protection and meets a consumer need for organically produced food, thus increasing the value of brands in this area.
One considerable barrier in attracting more FDI to this industry is the large number of unresolved cases of land expropriation. Indeed, in many cases these were resolved through financial compensation rather than actual land expropriation, which limited the exposure of investors who built infrastructures for their businesses on Government-lent land. All of these issues require specific approaches and require an investment of time, and all present some risk for investors.
The energy sector in Montenegro is characterized by high natural potential, particularly in terms of coal, water, biomass, wind, and solar energy. In accordance with its potential, Montenegro has focused its development strategy on renewable energy sources, which, in light of little current competition, represents a significant opportunity for foreign investors who are already present in particular projects, such as wind farms.
The first comprehensive wind, solar, and biomass energy assessment in Montenegro was made as early as 2007 by the Italian company CETMA, as a result of bilateral cooperation between Italy and Montenegro in the area of environmental protection. This was followed by the creation of a legislative framework, creating favorable conditions for foreign investments in this area.
Specific opportunities in the aforementioned areas, which are the result of economic development of Montenegro, are reflected not only in the country's natural potential, but also in significant benefits, such as tax incentives, offered to foreign investors encouraging investment in less developed geographic areas, such as the mountainous north.
Aside from the above-mentioned land expropriations, energy sector investments might also shy away from the market due to considerable amount of red tape involving permits and licenses (construction permits, building permits, etc). The Government has taken steps towards solving this by adopting a set of laws in 2011 simplifying the process of issuing building permits. The set of amendments reduces the number of steps required for issuing building permits from 14, registered by World Bank’s Doing Business team, to only 2. The reform also envisaged the establishment of “one stop-shops” at the relevant ministry and local administration bodies to enable investors to apply for building permits with a single public authority, but this is not fully implemented in all business areas, with the country ranking only number 59 in the Forbes List of Best Countries for Business 2013 in terms of red tape.
Our recommendation to foreign investors interested in successfully starting a business in Montenegro is to take reasonable steps in coordination and local legal advice, in order to avoid potential business barriers, because Montenegro is bound to become a considerable source of benefits in the coming years.
By Sasa Vujacic, Partner, Law Office Vujacic
This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.