Category: Montenegro

The Montenegrin Real Estate market hit a high in 2007 and has remained active since then.

Montenegro’s accession to NATO in 2017 contributed to the rise of the curve of the real estate market again due to the growing interest of foreigners, attracted by additional security for their investments, low tax rates, and positive business practice.

In the first half of the last decade, interest in Montenegrin real estate was focused on the purchase of houses and apartments, while in the second half investors focused on large investment projects such as luxury tourist resorts and hotels, including, most notably, the Porto Montenegro, Lustica Bay, and Portonovi projects.

The Real Estate business picked up in 2019 due to the new Economic Citizenship Program, allowing individuals to obtain Montenegrin passports. The program, which started in January 2019, will help the national economy grow by attracting wealthier investors interested in Montenegrin citizenship. The project is also designed to develop the northern and mountainous part of the country by speeding up the construction of high-class hotels currently missing from the area. Therefore, the Economic Citizenship Program can be only a winning combination for both investors and Montenegro.

The ECP program, like the above-mentioned large investment projects, provides additional incentives for foreign investors and generates interest in independent properties like old stones houses or apartments in small residential buildings along the beautiful coast. There is also significant interest in exclusive, small plots of land on the coast, where the building of villas for individual housing has been permitted.

The lockdown of most countries caused by the COVID-19 crisis has resulted in a freeze of the development of Montenegro’s Real Estate market, causing a total crash of the summer tourist season in 2020. In the fourth quarter of 2020 Montenegro started easing the restrictive measures, including those related to the entry of foreigners into Montenegro. This immediately led to the return of interested investors, and the Real Estate market began to revive. Indeed, despite the difficulties caused by the COVID-19 crisis, work on already-started projects continued, and some new projects were even launched.

Despite the impact of COVID-19, Real Estate prices have not fallen significantly, because it is expected that development in real estate will return, faster and more efficiently, immediately after stabilization.  Information concerning the development of projects in the Real Estate sector, and our personal experience in the field, reveal that real estate development is really amazingly active despite the crisis. For example, one major project (which our office is involved in as local legal adviser) involves the development of a residential tourist resort on the seaside, which started in October 2020, and which is moving forward aggressively.

It is not simply optimism, but fact, that Montenegro will become even more popular and attractive with the continued development of its Real Estate in the near future.

By Jelena Vujisic, Partner, Law Office Vujacic

This Article was originally published in Issue 8.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Law Office Vujacic has advised GE Capital Aviation Services on the sale of two Embraer 195 aircrafts to the Montenegro’s ToMontenegro airline.

ToMontenegro was established by the Government of Montenegro in February 2021, following its December, 2020, shut-down of indebted national airline Montenegro Airlines. The two aircrafts purchased by ToMontenegro had been leased by GE Capital Aviation Services to Montenegro Airlines since 2007 (with Law Office Vujacic assisting on that deal as well).

The Law Office Vujacic team was led by Partners Jelena Vujisic and Sasa Vujacic.

In our legal work in Montenegro, CMS has been engaged in a number of major mergers & acquisitions, representing both buyers and sellers, including Monte Rock’s acquisition of HIT Montenegro in connection with the Hotel Maestral in Budva-Przno, the Delhaize Group’s acquisition of food retailer Delta Maxi, KKR’s acquisition of SBB/Telemach Group, and OTP Bank’s acquisition of Societe Generale Montenegro.

Based on our extensive experience, this short overview represents a guide to the stages of a typical M&A transaction in Montenegro.

The principal phases of an M&A transaction in Montenegro are: (1) Legal due diligence; (2) Signing of the sale purchase agreement; and (3) Closing.

Legal Due Diligence

A legal due diligence represents the initial step in the vast majority of M&A processes. After the analysis of legal documentation, advisors prepare a report, representing a comprehensive overview of the targeted company/business/assets to identify risks and provide recommendations to potential buyers and/or bidders, so they can decide: (i) whether to proceed with the transaction; and, if so, (ii) under which terms, conditions, and protection mechanisms.

The purpose of a legal due diligence depends on its type (e.g., (i) corporate vs. others (project financing, real estate development, etc.), (ii) share deal vs. assets/business deal, (iii) sell-side vs. buy-side, (iv) broader vs. red-flag), and the client and his/her instructions (e.g., (i) type of client (in particular, the industry in which the target operates, investment funds, foreign/domestic entities); and (ii) the client’s instructions concerning the form of the legal due diligence required, specific areas to be covered, thresholds, applicable legal framework, etc.). We recommend that the instructions related to the scope of work be set out in writing with full understanding between the advisors and the client.

In our practice in Montenegro, we have identified the following questions to be addressed during a (buy-side) legal due diligence: (a) What are you buying? (To obtain a description of significant assets, titles, permits, including any lack of them and possible encumbrances, existing, potential or contingent liabilities); (b) Is it acceptable? (To learn of potential deal breakers or significant obstacles (existing or triggered by a transaction)); (c) And under which terms and conditions? (Are there ways to handle the obstacles or not? At what cost?); (d) Do we have all necessary information? (The scope of the necessary information; can we obtain it (in the course of the legal due diligence, before the closing)? Can we rely on representation?); (e) What do we need to close the deal? (Conditions precedent (approvals, restructuring, completion of the procedures, etc.); and (f) What do we recommend? (Disclosure, indemnities, representation & warranties, conditions precedent, price adjustments, retention of the purchase price, etc.).

Signing of the SPA

The SPA in an M&A transaction is a master agreement that regulates all rights and obligations related to the transaction. The following provisions are of relevance to the buyer in an M&A transaction: (a) Commercial clauses and conditions (subject matter of the agreement, i.e. transfer of shares/assets); (b) Conditions precedent/closing actions: (i) all actions that need to be performed or all documents that need to be executed in order that the M&A transaction can close successfully (e.g. merger clearance, corporate approvals, other regulatory approvals); and (ii) all actions that need to be performed and all documents that need to be executed at the closing meeting (transfer deed, payment of the price, registration of the title, waiver of certain rights, etc.); (c) Transitional provisions (definition of the acts and activities of the target and the management in the period from the signing to the closing in order to preserve the value of the target and its business operations (usually limited to day-to-day business operations); (d) Representations and warranties: (i) referring to the issues that do not present identified risks, and (ii) breaches of representations and warranties are subject to indemnification mechanisms; (e) Specific indemnity matters: (i) referring to the issues that present identified risks; and (ii) indemnification mechanisms in the case of occurrence of events identified as risks.

Closing

An M&A transaction is deemed to be closed when (i) all conditions precedent are fulfilled or waived; (ii) when shares and/or assets are transferred; and (iii) the purchase price is paid. 

By Milica Popovic, Partner, and Tamara Samardzija, Attorney-at-law, CMS Podgorica

This Article was originally published in Issue 7.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Former Karanovic & Partners attorneys Luka Prelevic, Stefan Lucic, and Djordje Kuzmanovic have opened PLK Advokati for business in Podgorica.

Prelevic specializes in corporate law, labor law, real estate law, and dispute resolution. He started his legal career with Jovovic, Mugosa & Vukovic in 2016 and joined Karanovic & Partners in 2018.

Lucic specializes in dispute resolution with a focus on commercial and civil litigation, restructuring and insolvency proceedings, and debt recovery. He had been with Karanovic & Partners since 2014, joining the firm after serving as the Head of Legal of Podgoricapromet. 

Kuzmanovic specializes in banking & finance with an emphasis on corporate restructurings, capital market operations, business transactions, financing, and securitization. Before joining Karanovic & Partners in 2018, he spent three years as a Legal Officer with Societe Generale.

The economy of Montenegro was severely impacted by the breakup of Yugoslavia into its constituent parts. In order to jump start its economy, calculated and efficient measures had to be undertaken. One of these measures was selecting a stable foreign currency as its own: first the Deutschmark (which was used in parallel with the Yugoslav dinar from 1999 to 2000), then, later, the Euro. This paved the path for economic growth and the creation of an open market, more welcoming to investors.

Today, Montenegro’s financial sector consists of financial institutions, a financial market, and financial infrastructure. The Central Bank of Montenegro is responsible for monetary and financial stability and the functioning of the banking system. The Central Bank also has a supervisory role, cooperating with international financial institutions such as the International Monetary Fund and relevant European Union bodies.

The banking system is by far the most dominant component of the financial sector, taking up to 92.3% of shares in active assets and consisting of a dozen banks, divided almost evenly between corporations based in Montenegro and ones from other countries. Some of the key laws regulating the system are: the Central Bank of Montenegro Law; the Financial Stability Council Law; the Banking Law; the Bank Bankruptcy and Liquidation Law; the Law on Credit Institutions; and the Law on the Capital Market.

Insurance companies and monetary financial institutions are the second and third largest actors in the financial sector, followed by leasing companies, investment funds, and factoring companies.

Three authorities are jointly tasked with regulating the financial market: the Central Bank, the Insurance Supervision Agency, and the Capital Market Authority. The Central Bank is authorized to supervise other banks, monetary financial institutions, and institutions dealing with leasing, factoring, purchasing receivables, and credit-guarantee operations. The Insurance Supervision Agency supervises insurance companies. The Capital Market Authority is tasked with supervising investment and pension funds, along with the Central Securities Depository and Clearing Company, which is the relevant body regarding trading on the Montenegroberza, the only stock exchange in Montenegro.

The Central Bank, the Insurance Supervision Agency, and the Capital Market Authority have representatives in the Financial Stability Council, which was established in 2010 as part of the Financial Stability Council Law. The Financial Stability Council provides advice on how to maintain or improve financial stability and detects and mitigates systemic risks threatening the financial system of Montenegro.

The entire world has been impacted by the negative effects of the coronavirus outbreak, and Montenegro is no exception. In order to mitigate the negative effects of the COVID-19 pandemic the Central Bank offered two moratoria on credit loans: the first became effective on March 20, 2020 and the second became effective on June 1, 2020. For the first moratorium debtors were obligated to notify the banks of their acceptance of the moratorium and the banks had to ensure the effectiveness of the moratorium with five business days from receipt of that notification. The deadline for the second moratorium was eight days. The maximum extension of the repayment period in both moratoria was 90 days, and debtors were also offered a moratorium of 30 or 60 days.

It is evident that the development of the banking sector in Montenegro has already been significantly influenced by the financial technology that has changed the business models of traditional providers of financial services, with which the efficiency of the operation of service users has also improved significantly. The pandemic has accelerated digitization, and the digital identity systems that have been introduced are likely to stimulate greater financial inclusion and frictionless payments and mitigate the impacts of COVID-19.

As Montenegro strives towards membership in the European Union, it is important to create a stable and predictable financial sector as well as to harmonize it with other major European financial systems. This can be achieved by close cooperation with other central banks in order to improve standards and practices and to include new activities.

By Igor Zivkovski, Partner, Zivkovic Samardzic Law Office

This Article was originally published in Issue 7.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

“The most important development in Montenegro is the recent change in government,” says Marko Ivkovic, Senior Lawyer at the Prelevic Law Firm in Podgorica, referring to the August 2020 victory of opposition parties and the fall from power of the DPS party, which had ruled the country since the introduction of the multi-party system in 1990.

Just in December the leaders of three opposition coalitions — For the Future of Montenegro, Peace is Our Nation, and In Black and White — agreed to form an expert government, which he says requires “a little change in our perspective.” According to him, “it’s a new situation, and all of us are trying to understand what’s going on, because they have restructured the ministries and so on.” Indeed, he points out that “some discrepancies between the President Milo Dukanovic — who is a member of DPS — and the new government. It’s the first time we’ve had a division like that in 30 years. That will be interesting to watch.”

At the moment, though, Ivkovic says, as the government finishes the transition process, things are fairly calm. “Everything is on stand-by,” he says, “because of the coronavirus on one side and the new government on the other. So there are no new things happening right now.”

“After 30 years, change is good for democracy,” Ivkovic says, but he warns that it’s too early to know how things will work out. “Let’s see. There are totally new people and a new government formed in the beginning of December. They are still restructuring the ministries and reorganizing the government. It’s too early to know the outcome for sure.”

The only other recent development of significance in Montenegro (other than the ongoing Covid-19 crisis), Ivkovic says, is the entrance into effect of the new Company Law in July of last year, which was enacted to harmonize local law with EU standards. According to Ivkovic, “It’s a little more complex than the previous law, with new institutions.” He points particularly to the new procuration rules (a form of power of attorney, authorizing natural persons to conclude legal transactions and take other legal actions on a company’s behalf) and new rules regarding conflicts of interest, affiliated persons, and corporate governance. According to him, the acclimation process is still under way. “This is new for us,” he says with a smile. “We need some time for a practice to develop in this regard.” In the meantime, he says, lawyers are staying busy helping clients comply with the new standards, as they were last year advising clients on Covid-19-related rules. 

Otherwise, he says, until the new government really begins to move forward with its pro-EU agenda, not much is happening.

By adopting the new Company Act on 11 July 2020 (the “Act”), Montenegro made a big leap in the area of Corporate Law, although “big leap” maybe isn’t a phrase strong enough to describe the number of changes the Montenegrin Corporate Law went through, having in mind that the new Company Act is three times more extensive compared to the previous one.

This, of course, also means that all companies will have to harmonize their operations with the new law, some of them sooner than later. The Act prescribes that all Joint Stock Companies (“JSC”) and Limited Liability Companies (“LLC”) who are treated as companies of public interest or classified as large companies from the accounting aspect, will have to harmonize their business with the Act within 9 months as of the date when Act entered into force i.e., 11 April 2020.

Other companies are not excluded from having to harmonize their operations with the Act, however, they are left with more than enough time for this, as the Act determines that they should harmonize within 18 months as of the date when Act enters into force, i.e., 1 January 2022.

As April is not so far from now, it would be good to recall what are the biggest changes adopted in the new Act. The list below is not an exhaustive one, but rather a selection of major changes introduced by the new Act, which we consider most important for the process of harmonization:

1. New Act introduces differentiation between share capital and net share capital, defining net share capital as the difference between the value of the company`s assets and the company`s liabilities. Nonmonetary stakes can be composed of either objects or rights, however, work or services as nonmonetary stakes can only be possible within such legal entities incorporated as partnerships or limited partnerships.
2. Public interest companies are not a new company form, but rather a type of LLC`s or JSC`s which issues securities and other financial instruments on the regulated market in Montenegro or abroad.
3. A lot of changes have been introduced to the JSC, among which:

• Rights of the shareholder are now prescribed in detail, determining property and non-property rights of the shareholder;
• Introduction of two-tier management system consisting of assembly, the supervisory board, and management board. The companies still have the option to opt for a one-tier management system;
• The Board of directors consists of at least three members, save for the board of directors of a public interest company, which has to consist of at least five members. The Board of directors has to consist of at least 1/3 independent members while a public interest company`s board of directors has to consist of at least 2/5 independent members;
• Public interest companies have to appoint a secretary of the company, while other companies may decide to appoint a secretary if they wish. In companies where there is no secretary, the executive director is responsible for performing tasks within the secretary`s competence.

4. Changes to the LLC were not that broad, but still introduced important novelties:

• Assembly becomes a mandatory body of the LLC, save for LLC`s which consist of only one shareholder which can opt for Assembly;
• LLC can have additional bodies determined by the Act,
• LLC whose securities are listed on the Organized securities market in Montenegro or classified as large companies must have the same bodies as JSC;
• The shareholder can pledge his share or part of the share, but the pledgee has no right to vote until he becomes a member of the company.

One more important harmonization obligation is that all entrepreneurs and partnerships that weren’t previously registered are now obliged to register within the Central Register of Business Entities within nine months from the date of entry into the force of the Act, i.e., 11 April 2021.

If you need any help regarding the harmonization procedure, feel free to contact us.

This text is for informational purposes only and should not be considered legal advice. Should you require any additional information, feel free to contact us.

By Milan Samardzic, Partner, and Nemanja Providzalo, Senior Associate, Samardzic, Oreski & Grbovic

According to Benjamin Franklin, the only two certainties in life are death and taxes. This fact makes Montenegro’s favorable tax regime more attractive. Living and working in this country does not mean a total holiday from taxes, but it does mean a reduced tax load compared to the rest of Europe.

All economically developed countries, including Montenegro, finance their public expenditures mainly through taxes, so taxes are an essential part of every public system of every country.

Montenegro has made great efforts to fight the gray economy and shadow labor market by sanctioning irregular business operations, demonstrating that it is striving for progress, a modernized tax system, and harmonization with the legislation of the European Union.

The tax system in Montenegro consists of: (a) corporate income tax; (b) personal income tax; (c) value added tax; (d) real estate transfer tax; (e) social security contributions; (f) excise duties; (g) fees; and (h) customs duties.

The tax system of Montenegro treats foreign investors and domestic economic entities the same, which is of great importance for attracting investors.

One of Montenegro’s main goals is to join the EU, and one of the fundamental conditions for accession is the closure of Chapter 16, which refers to tax harmonization achieved through the coordination of the tax systems of EU member states in order to avoid national tax measures that could negatively affect the functioning of the EU’s internal market. The most important step in this direction is the implementation of the twinning project “Support to the Tax Administration,” funded by the EU, which implements the International and Ibero-American Foundation for Administration and Public Policies (FIIAPP) with the Tax Administration of Spain and the Tax Administration of Montenegro as twinning partners. The FIIAPP is a public-sector foundation under the Kingdom of Spain which works to improve public systems in more than 100 countries by managing international cooperation projects. This project has helped Montenegro to further align its legal framework in the area of indirect and direct taxation and tax policies and represents the first twinning project implemented in the Tax Administration of Montenegro.

On October 3, 2019, Montenegro signed the multilateral Convention on Mutual Administrative Assistance in Tax Matters. State parties to the convention are allowed to engage in a wide range of mutual assistance in tax matters, such exchanging information on request, spontaneous exchange, automatic exchange, tax examinations abroad, simultaneous tax examinations, and assistance in tax collection. The convention also prescribes measures to protect the rights of taxpayers.

Montenegro is working to improve its tax system by adopting new tax solutions, in particular through the “Tax Administration Reform Project in Montenegro,” which is projected to last until March 2023, ad which consists of four components: (i) Institutional Development (ii) Business Processes, (iii) Taxpayer Services, and (iv) Electronic Account Fiscalization.

The aim of the project is to modernize the Tax Administration, enabling it to respond to market demands and ensure a high level of collection of public revenues, to improve the efficiency of the Tax Administration’s operational functions, and to reduce the costs of taxpayers (legal entities) in complying with their tax obligations.

A major contribution to the modernization of the tax system and Tax Administration is the adoption of the Law on Fiscalization in Trade in Products and Services (the “Law”). The Law prescribes electronic fiscalization, which means that all cash registers are connected to the Tax Administration, so that all issued fiscal invoices are published on the Internet and checks can be performed electronically or via SMS.

The Law aims to prevent abuse by taxpayers who, in the past, have found ways not to issue fiscal invoices or to issue incorrect ones, and thus damaged the state by tens of millions of euros. To implement the Law, Montenegro recently signed a contract to procure a system for online electronic fiscalizing of cash and non-cash transactions in real time.

In accordance with the Law, three rulebooks that define the area of electronic fiscalization in the trade of products and services in real time for cash and non-cash transactions have been drafted. The Law, together with these rulebooks, will apply from 2021. Moreover, the Government of Montenegro plans to amend the tax laws, especially the Law on Value Added Tax, in order to harmonize them with the the Law.

By Igor Zivkovski, Partner, Zivkovic | Samardzic

This Article was originally published in Issue 7.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The new Media Law in Montenegro which entered into force on July 6, 2020, will update the country’s legislation in the area.  By adopting certain media standards, it is intended to provide the country with the modern legal solutions already present in the countries of the EU.

The new law takes over many of the systems of the previous Media Law, and the basic principles in relation to the media in Montenegro are more or less similar – and sometimes identical – to the previous law, so on first reading one may get the impression that there are no significant changes.

The introductory remarks to the new law make it clear that the intention of the legislator is to make it known that European standards must be applied.  This is stated in the form of principles.

The prohibition of censorship is especially highlighted.

Both foreign and domestic legal entities are free to establish media operations in Montenegro, assuming the basic legal requirements are met.

Under the new law, the state is obliged to allocate certain funds from the State Budget to establish a Fund for Media Pluralism/Diversity.

The law establishes the responsibility of the editor-in-chief, the editor for a particular area, and the journalist author for published content that harms others. Of course, these persons are not liable for the content if they prove that there was a public interest in publishing it, which is generally a constitutional principle in Montenegro.

The law also stipulates that a journalist is obliged to disclose his/her source of information if that information violates national security, territorial integrity, or health protection, or in cases where criminal offenses punishable by imprisonment of five years or more have been made public. In this case, the court is to assess whether the constitutional principle of informing the public has been violated or not.

The position of independent media in Montenegro, as well as NGOs that are interested in civil liberties and media freedom in general, is that this provision violates the integrity of the secrecy of information sources, which is the standard in EU countries and free democracies, which Montenegro strives for.

The law also introduces the following principles, among others: “Obligation to inform the public about court proceedings;” “Prohibition of hate speech;” “Prohibition of discrimination;” “Protection of children;” “Prohibition of public exposure to pornography;” and “Right to privacy.”

Courts finding violations of the principles listed in the law may prohibit the distribution of the offending content, and even, in extreme cases, order the closure of the offending media company altogether.

In light of all this, the law has all the elements of a modern law that regulates this matter, except for the part that refers to the right of the court to order the publication of sources of information, which seriously violates the standards of journalism in Montenegro. The contours of this particular issue will be found, in any event, after regulations are implemented and specific court decisions are made, if such cases occur in practice.

It should be noted that this law, in draft form, was analyzed by the Council of Europe, as well as the representatives of the European Commission, before its adoption by the Parliament of Montenegro.

By Sasa Vujacic and Jelena Vujisic, Partners, Vujacic Law Office

This Article was originally published in Issue 7.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

“As much as we don’t want to deal mess with politics – it seems to be messing with us,” says Milena Roncevic Pejovic, Partner and Head of the Montenegrin practice at Karanovic & Partners. “Montenegro is waiting for the new government to form, and until that happens, everything is on hold, more or less.”

Roncevic Pejovic says that, following the parliamentary elections this August, Montenegro is facing a deadline to see a new government formed on December 2, and this waiting period has led to projects slowing down or being put on hold. “Investors are erring on the side of caution,” she says, “and are quicker to place proceedings on hold in order to wait and see what the new administrative landscape will look like – whom will they have to address for permits and regulatory approval, what policy changes there will be, and so on.” She notes that the new government will have 12 ministries – down from 18 – and that it “remains to be seen which department will be picking up what slack from which old one.”

However, Roncevic Pejovic is confident that the deadline to form the new government will be met, especially because “it has already been prolonged and extended before and it is evident that it cannot be prolonged anymore. Things need to get going and work needs to resume.” She is confident that, after the government forms, deals and projects will get going once again. “What matters most for investors is that there is somebody on the other end, in the governmental, administrative, and regulatory bodies that they can talk to – as soon as that happens, things will pick up the pace.”

Given this protracted waiting period – not to mention the effects of the ongoing Covid-19 pandemic – Roncevic Pejovic says that, from a legislative perspective, there hasn’t been much new to report on. “Following the changes of earlier this summer to the corporate and labor legal frameworks, before the elections, nothing much has been done,” she says. 

Nonetheless, she says, “there have been rumors that the new Fiscalization Act and the new Credit Institutions Act might be delayed.” These two acts were originally expected to enter into force on January 1, 2021, but she reports that, with “the government not being formed yet and the pandemic not slowing down, it is possible we won’t see them in action before January 1, 2022.” She says that this would allow businesses and investors to adjust properly and fully prepare for the new frameworks.

Finally, Roncevic Pejovic says that the Montenegrin market has been experiencing a free-fall, like other countries in Europe. “Uncertainties increase, unemployment rates rise, and projects are on hold,” she says, citing as an example of the tender process for the construction of the Solaren Power Plant in Podgorica. “The tender process should have started already, but it has been postponed until the end of the year. Hopefully, this and other projects will pick up speed soon.”