Montenegro has specific tax rules applicable to innovative companies, within the framework of the Innovation Activity Act (Zakon o inovacionoj djelatnosti), the Act on Incentives for Research and Innovation Development (Zakon o podsticajnim mjerama za razvoj istraživanja i inovacija), and implementing rulebooks, the key ones being the Rulebook on Registry of Innovation Activity (Pravilnik o registru inovacione djelatnosti) and the Rulebook on Closer Conditions for Acquiring the Status of the Beneficiary of Incentive Measures for Development of Research and Innovations (Pravilnik o bližim uslovima za sticanje statusa korisnika podsticajnih mjera za razvoj istraživanja i inovacija).
Innovation and innovation activities
Innovation is defined as a new or improved product or process or a combination of the two, which significantly differs from existing or previous products or processes, and is made available for potential use. Innovation activity is defined as a group of activities the purpose of which is modernization of economy, development and implementation of innovation of products and processes, introduction of new business models, and development of infrastructure and capacity for these activities.
Innovation activities can be performed by non-commercial entities such as scientific and research institutions, centers of excellence and higher education institutions, as well as by commercial entities such as companies, start-ups, spin-offs etc. In this context, start-up is defined as a company established in Montenegro not more than five years before the relevant moment when incentives are applied for, which creates, develops, and puts into use innovations with high growth potential in the international market. A spin-off is a newly established company formed through a separation from an existing legal entity with the aim of commercial exploitation of research results or innovations.
Innovation activities may also be performed by individuals who are classified as inventors, innovators, freelancers, etc. Freelancer is a Montenegrin or a foreign individual who resides in Montenegro and who independently performs innovation activities by providing intellectual services.
“Entities of innovation infrastructure” provide support for implementation of innovation activities. They can be organized in the form of science and technology park, innovation and entrepreneurship center, business and technology incubator, technology transfer center, cluster organization. “Entities investing in innovation activity” are legal or natural persons who invest in innovation activity, encourage or promote innovation activity, or otherwise provide support to those engaged in innovation activity.
Registration of innovation entities
The status of ‘innovation entity’ is acquired through the registration with the Registry of Innovation Activity, subject to the satisfaction of various conditions for different types of entities as set forth in the Rulebook on Registry of Innovation Activity.
A legal entity can be registered as innovation entity if it satisfies the following conditions:
- it is registered with the Montenegrin Central Registry of Commercial Entities;
- has at least one scientific research or innovation project worth at least EUR 5,000, which is being implemented or was implemented in the last three years, or has an innovation program or project that has received a positive independent evaluation;
- has a proof of research and development costs incurred in the previous fiscal year (not applicable if it is a newly incorporated entity);
- employs at least one person who performs activities in the field of innovation.
Additional requirements for startups and spin-offs are that they were not established through a merger and that they have not been operating for more than five years.
Registration of the freelancer status requires that a person:
- has residence in Montenegro;
- has proof of performance of innovation activity through provision of intellectual services on a commercial basis to domestic or foreign legal and natural persons in the field of research, development and innovation.
An individual can be registered as inventor or innovator if (s)he:
- has residence in Montenegro;
- is the holder of intellectual property rights on a conceptual design, new or significantly improved product, service or technology, prototype, new method or other form of innovation, which is protected in the country or abroad.
Innovation entities are entitled to incentives in the form of reduction of, exemption from, or relief in relation to: (i) personal income tax and surtax; (ii) contributions for social insurance; (iii) corporate income tax; (iv) fees for communal equipment of construction land; (v) use of state-owned real estate; (vi) and real estate tax.
The exact type and scope of available incentive depend on the type of entity. Start-ups and spin-offs are entitled to: (i) full exemption from personal income tax and surtax for their employees and other engaged persons for a period of up to five years from the date of establishment, (ii) exemption from social contributions due by the employer for the period of three years from the issuance of decision on award of the incentive measure. Additionally, any legal entity registered with the Registry of Innovation Activity there is entitled to exemption from the corporate income tax for the profit reinvested in an innovation or scientific and research project. Corporate income tax exemption also applies to the profit reinvested in the purchase of shares of startups or spin-offs, profit given as a donation to scientific research institutions and entities of innovation infrastructure, if donation is made for projects and scientific research infrastructure, or profit invested into the special Fond for Innovations established by the Government of Montenegro or other investment fund in Montenegro that invests in entities engaged in innovation activities.
Freelancers, inventors and innovators are entitled to 80% reduction of personal income tax and social contributions for the period of duration of the beneficiary status.
There is also a set of incentives related to real estate used for the innovation activity. In that respect, innovation entities may be entitled to a 50% reduction of fees for communal infrastructure payable for the construction of a building if at least 75% of net area of such building is to be used for the innovation activity. Also, the annual real estate tax on the business space owned by innovation entities and used for the innovation activity is reduced by 50%. Finally, innovation entities may be granted the right to use state-owned property either for free or at below-market rates. The conditions for the latter measure are not yet defined.
The total cumulative amount of all reductions, exemptions or reliefs granted to one legal or natural person cannot exceed EUR 300,000 for a period of three years. Large companies in terms of the accounting regulations are eligible only for the incentives in the form of reduction or exemption from corporate income tax for the funds invested in other entities of innovation activity.
Incentives cannot be granted to legal entities or natural persons engaged in: (i) production and sale of weapons and military equipment; (ii) organization of games of chance; (iii) production and trade of any products or activities that are considered illegal or harmful to the environment and/or human health; (iv) the activities prohibited in accordance with the law; (vi) production and trade of excise goods, (vii) political activity, or (viii) activities jeopardizing the dignity of people.
Conditions for the incentives
In order to become a beneficiary of incentives, interested innovation entity must submit an application to the Ministry of Economic Development, which forwards it to the Commission for Granting the Status of the Beneficiary of Incentives (“Commission“) for an assessment as to whether the applicant satisfies the eligibility requirements.
A general condition for any applicant, whether a legal entity or an individual, is that it is registered with the Registry of Innovation Activity. Additional requirements for a legal entity engaged in innovation activity are that: (i) it is registered with the Central Registry of Commercial Entities of Montenegro, (ii) has a scientific research or innovation program or project worth at least EUR 25,000, pertaining to an innovation novel on the domestic or international market, provided that implementation of the program or project did not commence before the entry into force of the Act on Incentives for Research and Innovation Development, (iii) it has no tax debt, (iv) there is no bankruptcy or liquidation proceedings initiated against the applicant, (v) it is not a founder or co-founder of a scientific research institution or an innovation entity or its related party which has already received incentives. The requirements under (i), (iii) and (v) apply also to individuals involved in innovation activity. An additional requirement for individuals is that they must either hold intellectual property rights on an innovation project or have a contract for the provision of intellectual services on an innovative project, on the basis of which they generate income.
The decision on the status should be rendered within 15 days from the application. The beneficiary status is granted for a period of up to three years and is entered in the Register of Innovation and the Register of Incentive Measures kept by the competition authority.