All the countries around the world regardless of whether they are big or small, wealthy or poor, developed or developing, are facing the consequences of the coronavirus crisis. The ongoing COVID-19 pandemic has revealed the fragility of healthcare systems, the instability of economic structures, and the vulnerability of society.
Given the strong impact of the COVID-19 pandemic on the economy of Montenegro over the past year, to improve the economic situation and living standards of the population, the Government of Montenegro adopted an ambitious economic plan – Europe Now. The reform aims to increase the living standards of all citizens, improve the business and investment environment, and reduce the grey economy in the labor market.
One of the key parts of the Plan was the changes in the tax legislation, as taxes are undoubtedly among the most important components of every state’s economy.
On December 29, 2021, the Assembly of Montenegro passed a series of laws that are part of the Europe Now plan. Among the most important changes were amendments to the Law on Personal Income Tax, the Law on Corporate Income Tax, and the Law on Mandatory Social Security Contributions. All changes to the relevant laws are in effect from January 1, 2022.
The starting points of the plan were the high tax burden of employees on the one side and the low level of the minimum wage on the other side. In addition, the plan has introduced a system of progressive taxation, as a more efficient model of taxation.
Amendments to the Law on Personal Income Tax have been introduced a non-taxable portion of earnings of EUR 700 on a gross basis, which implies an income tax rate of 0% on a gross wage of up to and including EUR 700. Furthermore, the amount of earnings between EUR 700 and EUR 1,000 is taxed at an income tax rate of 9%, while a gross basis above EUR 1,000 is taxed at an income tax rate of 15%. Reform measures also include the abolition of compulsory health insurance contributions borne by both employers and employees, which will reduce the tax burden by 18.4%.
The amounts of the tax rate on income from self-employment have also been changed so that now the amount of taxable income over EUR 8,400 to EUR 12,000 is taxed at a rate of 9%, while the amount of taxable income over EUR 12,000 is taxed at a rate of 15%.
Another important aspect of the tax reform relates to corporate income tax. Amendments to the Corporate Income Tax Law have abolished the proportional rate of 9% and a progressive taxation system is envisaged. The amount of taxable profit from up to EUR 100,000 is taxed at a rate of 9%. If the amount of taxable profit is between EUR 100,000 to EUR 1.5 million, the income tax will be calculated as EUR 9,000 plus a 12% rate on the amount over EUR 100,000. In addition, for taxable profits over EUR 1.5 million, the income tax will be calculated as EUR 177,000 plus a 15% rate applicable to the amount over EUR 1.5 million. The deductible tax has also been increased from 9% to 15%, based on gross income.
For all revenues generated from income from property, capital, capital gains, revenues from sports activities, copyrights, and related rights, patents, the tax rate has been increased from 9% to 15%.
The fact is that the Laffer curve indicates that tax revenues increase with the growth of the tax rate, but to a certain level. After that certain level, progressive taxation and the growth of the tax rate could have a disincentive effect on economic activity and affect the decline in tax revenues and tax evasion.
Therefore, the question is whether progressive taxation will lead to further stimulation of the grey economy or smart, sustainable, and inclusive economic growth.
By Igor Zivkovski, Partner, Zivkovic Samardzic
This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.