Montenegro’s real estate sector is again on the verge of a significant regulatory shift, as the government prepares to implement substantial amendments to the Law on Value Added Tax and the corresponding bylaw governing its application.
These reforms have been recently announced, and although the legislative process is not yet finalized, the proposed changes are already creating uncertainty across the market due to their potential to fundamentally alter the financial structure of real estate development and sales.
One of the most consequential reforms concerns the calculation of the VAT base for newly constructed real estate. Under the system currently in force, the VAT base for the sale of newly built structures does not include the value of the underlying land or the amount paid for communal land development fees. This approach has long been viewed as a measure that supports development activity by narrowing the taxable base and mitigating overall investment costs.
The newly proposed framework eliminates this preferential treatment. According to the announced amendments, the value of the land will now be incorporated into the total value of newly built structures or their individual units, and this combined value will constitute the VAT tax base. In practice, this means that land will become subject to VAT at the moment when the object constructed (or units within it) are sold.
The effects of this change are far-reaching. It does not affect only new, upcoming developments or projects in the conceptual phase; it will apply equally to ongoing developments, including projects already near completion. Developers who structured their investments, financing, and presale arrangements under the existing VAT regime now face a considerable shift in cost projections. Many projects already executed at 80% or 90% completion may suddenly confront increased indirect tax exposure that was never anticipated at the time of planning or contracting.
Inevitably, these additional costs will cascade through the market. Developers will not be able to absorb them fully, particularly in an environment of rising construction costs and tightening financing conditions. Consequently, the final burden will, in most cases and particularly for upcoming projects, be shifted to end buyers. Higher VAT-inclusive prices per square meter will affect residential and commercial purchasers alike, with likely consequences for demand, affordability, and the overall pace of market activity.
It remains unclear whether the competent authorities fully considered these economic implications when shaping the proposed amendments. What is certain, however, is that the real estate sector will require a transitional period to adapt to the new rules. In that respect, it is important to note that VAT liabilities calculated under the new methodology will not be eligible for invoicing at least before December 31, 2025, which provides developers with a narrow window to finalize existing transactions under the old system.
VAT reform is not the only upcoming change that may reshape market behavior. Another major regulatory initiative currently under consideration concerns the introduction of financial penalties for failure to complete construction within the statutory five-year deadline prescribed by the building permit. According to the draft amendments, these penalties are set at 5% of the relevant investment value. The government has already implemented these provisions by adopting a new regulation governing construction timelines and compliance obligations, thereby introducing these requirements into the Montenegrin legal framework.
While the objective behind these penalties – encouraging timely completion of construction – is understandable, the proposal in its current form raises concerns. Montenegro’s development sector has repeatedly faced delays arising from circumstances outside of the investor’s control, including prolonged administrative procedures, outdated or incomplete public infrastructure, and various unforeseen events. Applying strict penalties without accounting for such external factors could result in unjust outcomes and deter responsible investors. It would therefore be prudent for the legislator to include clearly defined exceptions for delays caused by public authorities or other circumstances that investors could not reasonably foresee or prevent.
Both reform packages – VAT restructuring and construction-deadline penalties – signal a new and more demanding regulatory phase for the real estate sector in Montenegro. Although the government aims to increase fiscal discipline and enhance regulatory predictability, these measures may, at least in the short term, slow down development momentum and elevate the financial burden on investors and buyers alike.
As the legislative process moves forward, market participants will closely monitor the final text of the amendments. The coming months will be critical in determining whether Montenegro’s real estate market will navigate this transition smoothly or face notable disruptions once the new rules enter into force.
By Milos Komnenic, Managing Partner, and Andrej Vukcevic, Junior Associate, Komnenic & Partners
This article was originally published in Issue 12.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
