Montenegro’s real estate sector is undergoing significant transformations due to recent legislative changes and proposed reforms, particularly in the tourism sector. These novelties will impact investors, developers, and most certainly the entire economy of Montenegro, but it remains debatable if the impact will be positive.
Focusing on tourism, Montenegro has adopted amendments to the Law on Value Added Tax, which will become effective as of January 1, 2025.
Namely, the amendments introduced the repeal of the VAT rate of 0% for the delivery of products and services for the construction and equipping of facilities in tourism in the category of five or more stars for investment values exceeding EUR 500,000. This change means that such supplies will now be subject to the standard VAT rate of 21%, increasing construction costs for luxury hotel projects. The same amendments included a new VAT rate of 15% for service of accommodation in hotels – more than double compared to the 7% VAT rate that was applicable before.
It is not without reason that the business community has expressed concerns since these incentives in particular have attracted many large-scale investments in tourism over the past years. These concerns are exacerbated by the current trend of decreasing foreign direct investments while the country faces hardships familiar to many developing countries: inadequate infrastructure and limited connectivity, increasing competition from neighboring countries, complex administrative procedures, etc.
Furthermore, there are discussions to repeal exemptions related to communal fees for the development of hotels with at least four stars operating under mixed-use and condo models. Currently, Montenegro’s legal framework provides that investors pay a fee for the communal equipment of the construction land only for the accommodation units that are subject to individual sale. The potential changes conflict with Montenegro’s tourism development strategy, with some projects on the verge of feasibility potentially abandoned due to the significant increase in communal fees (amounting to millions).
The communal infrastructure fee in Montenegro is intended as a bilateral contractual obligation to fund public infrastructure, but it has effectively functioned as a one-time levy on investors for the past three decades. This practice is evident in numerous projects stalled due to incomplete public infrastructure and even legal actions initiated by investors.
Consequently, in order to avoid delays or even the discontinuation of their projects, investors often find themselves compelled to independently equip their parcels, bearing significant costs for constructing essential utilities and undertaking extensive procedures to secure necessary approvals. Even in such scenarios, local authorities refuse to offset mutual claims, leading to a situation where investors effectively pay twice for communal equipping. On a different note, Montenegro is considering replacing the existing Law on Spatial Planning and Construction of Buildings with two new laws: the Law on Construction of Buildings and the Law on Spatial Planning.
The drafts were put to public debate in May 2024 and propose reinstating construction and usage permits as a mandatory prerequisite for all construction undertakings (leading to lengthier and more expensive procedures), the decentralization of spatial planning processes, the ability to directly download urban-technical conditions online, etc. Recent discussions suggest that the published drafts have undergone significant changes. Some of them refer to a provision that the preparation of planning documentation in Montenegro will only be entrusted to state-owned companies.
The laws are expected to be adopted in the upcoming months based on unofficial information, and whereas the new legal solutions may be a step forward, it is particularly noteworthy that all these reforms happen on rather short notice. Considering the aforementioned VAT incentives that were revoked, the potential increase in communal fees, and new legislation, there is no doubt that the state has moved to a more direct approach in order to increase the budgetary revenue.
In our view, it would certainly be challenging for Montenegro to preserve and attract foreign investments, but the true impact of these changes will only become clear over time.
By Milos Komnenic, Managing Partner, and Desanka Kotlaja, Senior Associate, Komnenic & Partners
This article was originally published in Issue 11.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
