Montenegro’s European Alliance plans to introduce legislation reducing VAT on accommodation services from 15% to 7%, seeking to restore the previous preferential rate ahead of the 2027 tourism season. The proposal would reduce the tax burden on registered accommodation providers by eight percentage points, although its potential fiscal impact has not yet been quantified.
The tax increase to 15% took effect on January 1, 2025. The opposition argues that the higher rate has increased operating costs for tourism businesses and weakened Montenegro’s competitiveness against other Mediterranean destinations. Lawmakers have called for the previous 7% rate to be reinstated before the next main tourism season. The legislative proposal has not yet been adopted.
VAT Reduction and Hotel Competitiveness
A lower accommodation VAT rate could affect hotel pricing and profitability in different ways. Operators could transfer the tax savings to customers through lower room prices or retain part of the benefit to improve margins and finance investment.
The extent of any price reduction would depend on market competition, occupancy rates and individual pricing policies. Hotels facing higher wages, energy, food and financing costs could use part of the tax saving to strengthen their financial position rather than pass the entire benefit to guests.
The debate comes as tourism businesses face labour shortages, rising operating expenses and additional investment requirements related to energy efficiency, environmental standards and EU accession. New visa restrictions affecting several important tourism markets have also added uncertainty to demand.
Tourism remains a major contributor to Montenegro’s economy, generating foreign revenue for hotels, restaurants, transport operators, retailers, property-rental businesses and numerous small enterprises. The accommodation tax rate therefore has implications beyond the hotel sector.
Budget Revenue and Formal Accommodation
Reducing VAT on accommodation would lower tax revenue collected per transaction unless the impact is offset by higher visitor numbers, increased spending or improved tax compliance.
A lower rate could potentially encourage more businesses to operate within the formal economy and make registered accommodation more competitive against informal rentals. Higher occupancy, longer stays and a shift towards registered providers could also compensate for part of the initial revenue reduction, although these outcomes are not guaranteed.
The fiscal implications are particularly relevant as Montenegro faces competing expenditure requirements involving infrastructure investment, proposed wage-policy changes and sovereign debt servicing. The government would therefore need to assess the potential revenue loss against the wider economic effects of a lower accommodation tax rate.
Regional Competition and Tourism Season Extension
Hotels compete with destinations including Croatia, Albania and Greece, where visitors compare the total cost of their stay rather than the individual tax arrangements applied in each country.
Differences in accommodation taxation can influence demand, particularly among price-sensitive travellers and during periods outside the peak summer season, when hotels rely more heavily on competitive pricing.
A lower rate could support Montenegro’s efforts to extend tourism activity into spring, autumn and winter. Reducing the concentration of arrivals during the summer months remains an important objective, given the seasonal utilisation of hotels, airports and the tourism workforce.
Implications for Hospitality Investment
Accommodation taxation also affects investment calculations for new hotels and renovation projects. A lower VAT rate could improve expected operating margins and project economics, particularly for developments carrying substantial construction and financing costs.
This could be relevant in Ulcinj, Kolašin, Žabljak and Herceg Novi, where Montenegro is seeking to attract additional high-quality hospitality investment. Taxation is only one factor affecting the sector’s investment environment. Road congestion, airport capacity, water and wastewater infrastructure, labour availability and delays in spatial planning also influence operating costs and hotel profitability.
The distribution of any tax benefit will also be important. If the reduction primarily improves margins at higher-end hotels without affecting accommodation prices, its wider economic impact could be limited. Greater benefits could arise if it supports lower prices, higher occupancy, formalisation and additional investment.
Assessment of the 2025 Tax Increase
Montenegro has data from the periods before and after the VAT increase from 7% to 15%, which could provide a basis for evaluating the proposed change.
Comparisons of occupancy rates, accommodation prices, tax receipts and company profitability could help establish the economic and budgetary consequences of the higher rate. The debate is expected to gain importance as preparations for the 2027 tourism season progress, with the hospitality industry seeking lower operating costs and the government facing the need to protect public revenues.
For investors, the issue also concerns the predictability of taxation. Hotel developments require long-term financial planning, making stable tax rules important for revenue projections and investment decisions. A return to the 7% rate would reduce the tax burden on registered accommodation providers, while the longer-term policy challenge remains balancing tourism competitiveness, investment, formalisation and sustainable public finances.
