The shadow economy in Montenegro has become a serious issue, undermining legal employers and hindering the country’s economic growth. Despite regular inspections of registered companies, illegal activities conducted in private apartments and online remain almost entirely outside regulatory oversight.
According to the Employers’ Union, one of the additional challenges is a legal limitation that prohibits inspectors from entering residential spaces, where many unregistered business activities occur. This creates an uneven playing field, where those operating legally face unfair competition.
Data shows that one in three businesses operates in the shadow economy, leading to reduced revenues for legal companies, loss of tax revenue, and job insecurity. Employers believe that the solution lies in expanding the powers of inspection services, implementing digital oversight over online sales, and encouraging formal business activities through tax incentives and administrative reforms.
The Employers’ Union finds it problematic that unregistered activities, particularly those conducted in private homes and via social media, remain outside regulatory control. They argue that such practices further demotivate entrepreneurs from operating legally and contribute to the spread of the shadow economy. They call on the government to ensure equal conditions for all businesses by extending inspection powers, including the ability to monitor unregistered activities in private spaces, while respecting appropriate legal procedures.
The need for digital oversight and tax incentives
“Additionally, it is essential to introduce digital inspection mechanisms to monitor and identify illegal sales and services on social media, as a significant portion of the shadow economy operates online. Inspections must also use risk-based analysis methods, focusing on areas and sectors where informal economic activity is most prevalent, instead of further burdening those already operating within the law,” said the Employers’ Union.
They believe that rewarding reports of illegal business activities and introducing anonymous apps for reporting the shadow economy could significantly improve control efficiency. Furthermore, they advocate for stronger educational campaigns to inform citizens about the risks of using illegal services and to encourage them to support the formal economy by requesting fiscal receipts.
“If decisive actions are not taken, legal employers will be further jeopardized, and the informal economy will continue to grow at the expense of the overall economy,” the Employers’ Union emphasizes.
The prevalence of the shadow economy in Montenegro’s key sectors
The shadow economy in Montenegro is most prominent in sectors such as tourism, trade, transportation, construction, agriculture, forestry, and woodworking. In these areas, informal activities include unreported sales of products and services, avoiding employment contracts, paying wages without taxes and contributions, and operating businesses without appropriate licenses and tax registration. To reduce the size of the shadow economy in these sectors, improvements are needed in laws related to misdemeanors, inspection oversight, and the Criminal Code, which currently limit the powers of inspectors.
Inspectors prohibited from entering residences
“For example, inspectors are prohibited from entering residential spaces where unregistered business activities may be taking place, which weakens enforcement efforts,” the Employers’ Union notes. They call for active efforts to reduce administrative barriers and business costs, enhance education and awareness, and introduce tax incentives and support for formalizing business activities.
In practice, inspection oversight is mostly focused on registered companies, while the informal sector, which thrives on unreported work, illegal services in private homes, and online sales, often escapes scrutiny.
“This approach further burdens legal entrepreneurs, who bear the full tax burden, while those operating in the gray area gain an unfair market advantage. The consequences are not only financial losses for the state budget but also job insecurity, wage reductions, and the demotivation of new entrepreneurs to start legitimate businesses,” the Employers’ Union states, emphasizing the urgent need to improve the inspection system to combat the shadow economy on all fronts, including the digital market and informal business activities in private spaces.
Solutions: Combining strict controls with incentives for legal business
International experiences show that the most effective way to combat the shadow economy is by combining stricter controls with incentives for legal business operations. Scandinavian countries have successfully reduced undeclared work by introducing tax incentives for citizens who request fiscal receipts for services.
“Germany and the Czech Republic have simplified the registration of small businesses and introduced low flat taxes, encouraging the transition from the shadow economy to the formal sector. Italy and Portugal reward consumers who report illegal transactions with tax benefits. Norway uses advanced digital tools to track informal transactions and links tax data with bank accounts. Montenegro could adopt a model of tax incentives for legal services, modernize inspection oversight, and introduce digital mechanisms to monitor the shadow economy,” the Employers’ Union suggests, adding that strengthening control over online sales and anonymous reporting of illegal activities could yield positive results.
“The key is to balance stricter controls with encouraging entrepreneurs to operate legally,” concludes the Employers’ Union of Montenegro.
