Montenegro, a jewel of the Adriatic, has long captivated visitors with its dramatic coastlines, ancient towns, and rugged mountains.
For a nation where tourism isn’t just an industry but the very bloodstream of its economy, contributing a staggering 30 percent of its Gross Domestic Product, the latest policy shift feels less like a strategic adjustment and more like a self-inflicted wound.
A seemingly straightforward tax hike, enacted by a parliament that turned a deaf ear to economists’ dire warnings, is now unraveling the very fabric of Montenegro’s lucrative tourism sector, pushing it onto a dangerous and uncharted path.
The catalyst for this unfolding crisis is a significant increase in Value Added Tax (VAT) on hotel stays, leaping from a modest 7 percent to a formidable 15 percent, effective January 2025.
While many European Union countries maintain hotel VAT rates between 5% and 14%, Montenegro’s new rate places it squarely at the higher end, instantly diminishing its competitive edge against regional rivals.
The logic behind such a sharp increase, especially given the sector’s outsized importance, remains baffling to many, inviting questions about foresight and economic planning.
But what has truly laid bare the inherent weaknesses in Montenegro’s regulatory framework is the ingenious, albeit damaging, response from its hotelier community.
Faced with the prospect of absorbing higher costs or passing them on to increasingly price-sensitive tourists, around two dozen hotels have opted for a legal, yet deeply problematic, workaround: they are shedding their official hotel classifications and re-registering as “private accommodation units.”
This seemingly innocuous administrative reshuffle allows them to sidestep the elevated VAT, as private accommodations often fall below the €30,000 annual turnover threshold, thereby exempting them from VAT altogether.
This isn’t merely a handful of small guesthouses making a pragmatic choice; it’s a systemic shift that leverages existing legal loopholes with surprising creativity.
Imagine an 80-bed property, previously a legitimate hotel, now on paper divided among four family members, each operating 20 beds independently.
What was once a single, taxable entity, contributing transparently to state coffers, transforms into several ostensibly separate private households, each conveniently operating below the VAT radar.
This ingenious circumvention, while legal, allows hundreds of thousands of euros to vanish from the formal tax system, creating a gaping hole in state revenues.
It’s a classic case of policy driving unintended consequences, where the pursuit of increased revenue paradoxically leads to its erosion.
This trend of formal downgrading also shines an uncomfortable spotlight on a far larger and more entrenched problem: the vast, shadowy economy of unregistered private accommodation.
For years, Montenegro has grappled with an proliferation of undeclared rental units – apartments and rooms advertised on global platforms like Airbnb and Booking.com, yet never reported to local authorities.
Official estimates suggest a staggering €86 million in losses for 2025 alone due to these unmonitored rentals.
Despite past government promises and attempts to collaborate with international booking platforms, efforts have consistently faltered, leaving this grey market to flourish unchecked.
The implications extend beyond just lost tax revenue.
The very mechanism of guest registration, crucial for security and the collection of daily occupancy taxes (typically one euro per night), is routinely bypassed by these unregistered operators.
This means not only a further drain on state and local budgets but also a diminished understanding of actual tourist flows and patterns.
With punitive measures for non-compliance remaining woefully inadequate, there is little incentive for operators to step into the light and contribute fairly to the nation’s economic well-being.
The financial fallout is no longer a theoretical projection; it’s a stark reality hitting Montenegro’s balance sheets.
In 2024, total tourism revenues dipped to €1.46 billion, a 3.6 percent decline from the previous year.
This marked a sobering milestone: the first fall in tourism revenues since Montenegro gained independence in 2006, excluding the anomalies of the pandemic year.
Data from MONSTAT, the national statistics office, paints an even grimmer picture for 2025, revealing a drop of 272,000 overnight stays between January and June compared to the same period last year – the second consecutive year of decline.
Revenues from foreign tourists in the first five months of 2025 also plummeted by over six percent.
These figures are not mere statistics; they are the early warning signs of a nation losing its competitive edge and, more critically, its appeal.
The decline has sent ripples of concern through the industry.
Leaders fear that the continued downgrading of hotels, coupled with the rampant growth of unregistered accommodation, will not only distort fair competition but also fundamentally disrupt market equilibrium.
While visitors might initially perceive little difference in service quality, the uneven distribution of tax burdens places immense pressure on legitimate, registered hotels, making it increasingly difficult for them to compete.
Analysts are now issuing urgent calls for action.
Montenegro’s authorities must move beyond reactive measures and implement robust control mechanisms.
More importantly, they need to craft a coherent, long-term strategy for the tourism sector that addresses systemic issues, not just symptoms.
Without immediate and decisive reforms, Montenegro risks a downward spiral: reduced revenues, diminished international competitiveness, and a profound erosion of trust among both investors and the millions of visitors who once saw it as a burgeoning, vibrant destination.
The dream of a thriving Montenegrin tourism industry, once a beacon of post-independence prosperity, now hangs precariously in the balance, threatened by policies that appear to prioritize short-term gains over long-term sustainability.
The question remains: will Montenegro choose to mend its economic lifeline before it frays beyond repair?
