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Business Environment WELCOME to the fortysecond edition of Montenegro Business Outlook. MBO is quarterly publication of pertinent economic indicators presenting a comprehensive view of Montenegro’s business environment. This publication is intended to serve international business people seeking investment opportunity in Montenegro. We welcome your comments.

Business Environment in Montenegro: The economic crisis is still influencing companies in Montenegro which creates repercussions on the state finance. In order to improve the budget incomes the Government of Montenegro proposed and the Parliament adopted increased rate for Personal income tax above average wage in Montenegro. . Illiquidity continues to be a problem in Montenegro with rising number of companies with blocked accounts. Economic Freedom: For more than 20 years the Heritage Foundation has published an index of economic freedom, ranking economies in the World by the level of economic freedom and putting them into different categories. While the debate about this and other rankings are continuing this Foundation is trying to promote the importance of economic freedom by ranking them and providing them an opportunity to improve their overall score. Macroeconomic Outlook: Basic characteristics of the last quarter of 2012, at a macroeconomic level, are illustrated by quarterly indices (IV 2012/III 2012): - industrial output recorded the fall of 5,5%, - CPI index rose by 1,4% - Employment fell by 2,2%, - Salaries without taxes and contributions also recorded a fall of 0,6%. Banking Sector: From the end of September to the end of November 2012, the banking sector recorded a decrease of total assets and liabilities of banks, while household deposits recorded a slight increase. In this period, the weighted average lending effective interest rate was decrease by 0.42%. In addition, weighted average deposit effective interest rate was slightly increased. The situation in the banking system, in terms of solvency and liquidity is satisfactory.  Privatization and Investments: According to the announcements of the Government of Montenegro, the main projects expected this year will be in the energy sector: the launching of the tender for gas and oil exploration is expected; there are interests in building the Thermo Power Plant Pljevlja’s second block; and it is expected to start with construction of the first small hydro power plants and their commissioning. The Government also approved the Privatization Plan 2013. The privatization process will be orientated towards repeated procedures of failed privatization processes and new projects for which open calls have not been invited yet.

CENTRE FOR ENTREPRENEURSHIP AND ECONOMIC DEVELOPMENT Kralja Nikole 27a/4, BC “Čelebić“, Podgorica, Montenegro Tel/Fax: +382 (0) 20 633-855 +382 (0) 20 620-611 E-mail: ceed@t-com.me web site: www.visit-ceed.org.me

Capital Markets: During the 2012, the Montenegrin capital market was characterized by negative trends. This was followed by a decrease in the volume of trade and also in the number of transactions when compared with the same period of 2011. Judging by January of 2013, we can conclude that better days are ahead of us. However, crisis is not yet over. In 2012, the greatest turnover was recorded in the area of company shares, followed by bonds and investment funds. We introduce: Doing business in a changing climate- building a case for adaptation (1) Privatization plan for 2013 EU Corner: Montenegrin steps towards EU Interview: prof. Petar Ivanovic, Minister of Agriculture and Rural Development

Business Environment in Montenegro by Darko Konjević

As the economic crisis is still influencing companies in Montenegro the repercussions on state finances are visible. There are numerous proposals to increase taxes and especially Value Added Tax (VAT) coming from international organizations. So far the attitude of the Ministry of Finance is that they do not plan to increase the VAT rate, as it would be a decision that would further complicate the situation in the Montenegrin economy. However, in order to improve the budget incomes the Government of Montenegro proposed and the Parliament adopted an increased rate for Personal income tax above the average wage in Montenegro. The plan for 2013 is to make a fiscal consolidation and to improve the budget income from one side, cutting the non-necessary expenses from the other. The Government established a new body that would be better organized to fight for the elimination of the grey economy in Montenegro. Insolvency continues to be a problem in Montenegro with a rising number of companies with blocked accounts. Over the past few years Montenegro has been recognized as one of the countries, in this part of the world, with the lowest taxation. Montenegro introduced a flat tax system providing investors the opportunity to invest in an attractive investment destination and providing domestic companies to further grow and develop their business. That system provided Montenegro with good international recognition and a favorable investment climate resulting in the highest FDI per capita in South East Europe. During the last couple of years of economic crisis there were internal and external (international organizations) debates on whether the

flat tax system is good and whether it is just helping the rich one to be richer and poor to be poorer by paying the same tax rate. The international organizations such as the World Bank are proposing an increase of the VAT rate (current VAT rate is 17% for the majority of goods and services which place Montenegro just above Malta and Luxembourg with the lowest VAT rate in Europe) in order to decrease the budget deficit and at the same time decrease the public debt that is approaching 60% of GDP. So far the Ministry of Finance of Montenegro announced that they don’t plan to propose an increase of VAT in 2013. This is a good sign for companies and foreign investors due to the fact that Montenegro is showing responsibility for those that are working and that plan to invest in Montenegro. From the other side, at the beginning of 2013 and after big debate the Montenegrin Government proposed, and the Parliament adopted, changes of the Personal Income tax rate in Montenegro. Until then the system of flat tax of 9% was established in Montenegro. From February 2013 all wages that are under 720 euros gross (479 euros net) will be taxed at 9% while 15% tax will be paid on amounts higher than this. This actually means that workers that are receiving average and under average salaries will be taxed as before while those that are receiving above average wages will be additionally taxed. This is, in a way, a start of the introduction of progressive taxation that Montenegro had before tax reforms. Lets hope that this is just a temporary measure, since in our opinion it would not contribute to further development of new businesses.

As the grey economy represents a problem in all economies of transition and especially in a period of economic crisis, the Government of Montenegro established a working group for the suppression of the grey economy in Montenegro. The working group consists of all relevant stakeholders including Government, inspections, business associations, trade unions etc. The working group already presented an action plan for the following period. The action plan will specifically target the collection of VAT, excise goods, and grey economy at the labor market (especially in the areas of employment of foreigners in sectors of tourism and construction). The main point to be achieved is an increase of the budget income due to the increase in collection of taxes, fees and other contributions. Insolvency remains a problem in the Montenegrin economy. According to the data from the Central Bank from March 2013 more than 2,200 companies are blocked more than 30 days with an overall debt of more than 10,000 euros. From July 2013 the Tax Authority of Montenegro will publish a list of the largest tax debtors in Montenegro. ■ Number of registered companies in Montenegro as of 1st March 2013 Source: Commercial Court

Joint stock company Limited liability company

343 27,476

Part of a foreign company

442

General partnership

59

NGO

294

Limited partnership

426

Entrepreneur

16,928

Institution

1,140

Other

114

Total

47,252

Tax rates Value added tax

17%, 7% and 0%

Corporate profit tax

9%

Personal income tax

9% (15% over 479€)

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BUSINESS ENVIRONMENT 43  
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