The Corporate Tax Planning Law Review: Monaco
A business income tax (ISB) was introduced in Monaco following the conclusion of a tax treaty with France on 18 May 1963 (the Tax Treaty). As further developed, the scope of the ISB is limited compared with corporate income tax regimes applicable in neighbouring jurisdictions, since it is limited to income derived from cross-border commercial and industrial activities, or from the corporate ownership of IP rights. It should further be noted that the ISB is the only income tax applicable in Monaco. No personal income tax on income and gains derived by individuals are applicable in Monaco (to the extent that they do not derive the income from cross-border commercial and industrial activities).
Where applicable, and pursuant to Article 1 of the Tax Treaty, the ISB is in principle assessed and recovered under the same conditions as is assessed and recovered corporate income tax in France. This principle is, however, not absolute and, owing to the specificities of the Monegasque jurisdiction, there are numerous rules governing the French corporate income tax that are not reflected in the Monegasque legislation for the purpose of the ISB.
Another specificity of the Monegasque jurisdiction is that the constitution of corporations or other business companies or partnerships whose shares are not fully held by Monegasque citizens are subject to the delivery of a prior authorisation by the Monegasque Ministry of State.
In this respect, the current practice of the Monegasque government does not allow for the constitution of pure holding companies, the sole purpose of which is to hold and manage the shares of its subsidiaries and that does not carry out any operating activities. This practice, combined with a lack of flexibility of Monegasque corporate law, has a major impact on the corporate planning of Monaco-based businesses, in particular those wishing to develop themselves internationally, which are, as a result, encouraged to constitute their holding companies abroad.
The main recent change affecting the rules governing the ISB is the reduction of the ISB rate from 31 per cent to 28 per cent for fiscal years beginning as from 1 January 2020. It will be further reduced progressively to 25 per cent by 2022.
i Entity selection and business operations
The rules governing the ISB are mainly contained in the Sovereign Ordinance No. 3,152 of 19 March 1964 instituting the ISB in Monaco, as amended from time to time (the Ordinance 3,152).
Pursuant to Article 1 of the Ordinance 3,152, the following are subject to the ISB in Monaco:
- enterprises (whatever their legal form) that carry out an industrial or commercial activity in Monaco and whose turnover is generated for more than 25 per cent from operations carried out, directly or indirectly, outside of Monaco; and
- Companies incorporated in Monaco, whatever their legal form, deriving income from:
- the sale or the licensing of patents, trademarks and manufacturing processes; or
- intellectual property rights (referred as to IP assets), wherever the location of the relevant IP assets.
Articles 2 and 3 of the Ordinance 3,152 detail how the turnover criteria mentioned in point (a) should be understood. In this respect:
- Turnover derived from the sales of goods and assets is considered as generated outside of Monaco when the sales are realised outside of Monaco or when the final destination of the sold goods or assets is located outside of Monaco, whether the delivery took place within or outside the Monegasque territory. Retail sales of goods on the Monegasque territory are, however, always treated as realised in Monaco.
- Turnover derived from services rendered within the course of a commercial or industrial activity is considered as generated outside of Monaco when the services are rendered or used outside of Monaco. The following, in particular, should be considered as realised outside of Monaco:
- the insurance of risks located outside of Monaco;
- banking and financing services provided to non-Monegasque beneficiaries;
- transports of passengers and goods to or from outside of Monaco; and
- renting or licensing of any tangible or intangible assets outside of Monaco.
The ISB is assessed on Monegasque entities depending on the nature of their activity, as described above, and irrespective of their legal form. Pursuant to Article 4 of the Ordinance 3,152, the ISB, where applicable, is assessed in the name of the company, partnership or other entity carrying out the taxable activity. There are therefore no look-through entities for ISB purposes in Monaco.
Certain Monegasque entities, such as Monegasque non-trading companies (sociétés civiles), are, however, prevented from carrying out any commercial or industrial activities and therefore should not, in principle, be subject to the ISB.
Domestic income tax
Only enterprises generating more than 25 per cent of their turnover outside of Monaco, as detailed above, and Monegasque companies deriving income from IP assets are subject to the ISB. Where an enterprise is generating more than 25 per cent of its turnover outside of Monaco, all its income becomes subject to the ISB, including, as the case may be, income derived from the portion of the turnover generated in Monaco.
Numerous non-commercial activities (such as real estate promotion, liberal activities performed by medical professionals, lawyers or accountants) or local commercial activities (such as retail trade, catering and hotels) are therefore exempt from the ISB.
When applicable, the ISB is assessed on the taxable income realised during the fiscal year. Expenses incurred in the interest of the taxpayer are generally deductible from the taxable income, in particular:
- general expenses of any nature, payroll expenses, rents;
- amortisations of fixed assets and impairments booked in accordance with Monegasque accounting rules;
- financial expenses, subject to the thin capitalisation rules described below;
- directors' fees, subject to the limitations described below; and
- taxes, with the exception of the ISB.
The following expenses are, however, not deductible, and would be added back to the taxable income:
- penalties related to infringements of the tax legislation;
- expenses incurred for corruption purposes; and
- lavish expenditures relating to the practise of hunting or fishing, or the acquisition of private houses or yachts.
Finally, tax losses recognised in respect of a fiscal year may be carried forward and offset upon the taxable income recognised in respect of the following fiscal years without any time limitation, up to €1 million, plus 50 per cent of the taxable income exceeding €1 million.
Tax losses recognised in respect of a fiscal year may also be carried back and offset on the taxable income recognised in respect of the previous fiscal year, to the extent that this income has not been distributed to the shareholders. The offsetting is limited to €1 million. In this scenario, the taxpayer would receive a claim against the Monegasque tax authorities corresponding to the amount of the ISB saved as a result of the offsetting of the carried-back tax losses, which could be used to pay the ISB due in respect of the five following fiscal years, with any outstanding amount being reimbursed by the Monegasque tax authorities at the end of this five-year period.
The ISB is levied in Monaco on a territorial basis. Therefore, income realised by a Monegasque taxpayer attributable to (1) a foreign permanent establishment of the taxpayer; (2) transactions realised abroad on a regular basis by a dependent representative of the taxpayer empowered to act on its behalf; or (3) a complete circle of operations realised outside of Monaco by the taxpayer, is excluded from the ISB taxable base.
Conversely, income realised by foreign companies carrying out commercial or industrial activities in Monaco through a Monegasque permanent establishment, a dependant representative or a complete circle of operations, is subject to the ISB in Monaco – to the extent that more than 25 per cent of their turnover is realised outside of Monaco, as described above.
Local subsidiaries of foreign parent companies are subject to the ISB under the same conditions as Monegasque controlled companies.
Pursuant to the Sovereign Ordinance No. 10.324 of 17 October 1991, new companies can benefit from a full exemption from the ISB during the first 23 months of their existence. The exemption is further reduced to 75 per cent, 50 per cent and 25 per cent for each following period of 12 months. Those full and partial exemption are subject to the condition that (1) the share capital of the new company is not more than 25 per cent held by other companies and (2) the company is not created within the context of a regrouping, a restructuring or an extension of pre-existing activities.
Pursuant to the Sovereign Ordinance No. 10.325 of 17 October 1991, as amended, companies incurring research and development expenses can benefit from a tax credit assessed on these expenses (the R&D Tax Credit). The R&D Tax Credit is equal to 30 per cent of the R&D expenses not exceeding €100 million and 5 per cent of the R&D expenses exceeding this amount. Public subsidies and, under certain conditions, fees paid to third-party advisers to obtain advice for benefiting from the R&D Tax Credit are, however, deducted from the R&D Tax Credit base.
Finally, pursuant to the Sovereign Ordinance No. 14 of 10 May 2005, foreign companies involved in the cross-border shipping and aircraft navigation industry are, under certain conditions, exempt from the ISB in respect of their activities conducted in Monaco. Further to the Ministry Order No. 2005-270 of 27 May 2005, these activities include, in particular, the transportation of passengers and merchandises, the operating, renting or chartering of cruises and aircrafts, and the operating of fishing vessels.
Foreign source income
Foreign source income not attributable to a foreign permanent establishment is generally included in the ISB taxable basis. Any withholding tax withheld by the jurisdiction of source of the income can, upon justification, be offset against the ISB due in Monaco in respect of the same income.
Pursuant to Article 15 of the Ordinance 3,152, Monegasque corporations (SAMs) may benefit from a participation exemption regime in respect of dividends received from subsidiaries that take the form of limited liability companies or corporations whose shares are nominative, whether the limited liability companies or corporations are established in Monaco or abroad. Under the participation exemption regime, dividends received from these subsidiaries are:
- 95 per cent exempt if the parent company held at least 50 per cent of the share capital of the subsidiary for at least two years at the time the dividend is paid;
- 90 per cent exempt if the parent company held at least 35 per cent of the share capital of the subsidiary for at least two years at the time the dividend is paid; and
- 80 per cent exempt if the parent company held at least 20 per cent of the share capital of the subsidiary for at least two years at the time the dividend is paid.
No tax credit is granted in respect of any foreign withholding tax withheld on dividends benefiting from the participation exemption.
Under Article 9 of the Ordinance 3,152, interest incurred on loans granted by a company to its direct shareholders is subject to an interest rate limitation, pursuant to which the portion of the interest calculated at a rate exceeding by two points the legal interest rate published by the French Central Bank is not deductible from the taxable income.
In addition to this interest rate limitation, interest served by a company to its direct controlling shareholders incurred on the portion of the loan exceeding half of the amount of the share capital of the company is not deductible.
More generally, as from fiscal years opening on or after 1 January 2019, the deduction of net financial expenses is subject to a new general deduction limitation. Deductible financial expenses are capped at the higher of the following amounts:
- €3 million per fiscal year; or
- 30 per cent of the taxable income subject to the ISB, before offsetting of any carried forward tax losses, increased by the relevant net financial expenses, any booked amortisations and impairments and capital gains or losses recognised upon the transfer of assets.
For the purpose of the general deduction limitation, net financial expenses are defined as the difference between interest served and interest received from any debts contracted by the company. Non-deductible net financial expenses in respect of a fiscal year may be deducted from the taxable income recognised in respect of the five following fiscal years, subject to the same limitations.
By exception, the portion of the net financial expenses served by a company to related parties are subject to a more restrictive deduction limitation rule, to the extent that the average amount of the debts contracted by the company towards such related parties exceeds by 1.5 the amount of the company's net equity, assessed either at the beginning or at the end of the fiscal year. In such a scenario, the deduction of the net financial expenses would be limited to the highest of the following amounts:
- €1 million per fiscal year; or
- 10 per cent of the taxable income subject to the ISB, before offsetting of any carried-forward tax losses, increased by the relevant net financial expenses, booked amortisations and impairments and capital gains or losses recognised upon the transfer of assets.
For the purpose of this more restrictive deduction limitation rule, two parties are deemed related where:
- one of them holds, directly or indirectly, the majority of the share capital of the other, or in fact exercises a power of decision on the other; or
- both of them are controlled by the same third party, under the conditions described in point (a).
The portion of financial expenses served to related parties that is not deductible in respect of a fiscal year in the application of the above-mentioned deduction limitation rule may only be deducted in respect of the following fiscal years, and subject to the same conditions, up to one-third of their amount.
ii Common ownership: group structures and intercompany transactions
Ownership structure of related parties
There is no tax group consolidation regime in Monaco allowing a tax consolidation of income and losses between entities of the same group of companies.
There are, further, no rules that would allow the taxation in Monaco of income recognised by foreign-controlled companies, even in the circumstances where such controlled foreign companies would be established in low-tax jurisdictions.
Domestic intercompany transactions
Domestic transactions between a company subject to the ISB and a related party are usually not challenged by the Monegasque tax authorities, to the extent that these transactions are entered into within the interest of the company and are properly documented.
Pursuant to Article 12 of the Ordinance 3,152, payments of services fees, brokerage fees, intermediary commissions, and IP right licence fees, are, however, not deductible from the taxable income when they are paid to Monegasque-resident related parties.
Pursuant to Article 13 of the Ordinance 3,152, payments of directors' fees are generally deductible from taxable income, provided that they relate to effective work and they are not excessive with regards to international recognised practices, in particular those applied in the European Union. For companies whose turnover does not exceed €3.5 million as regards services provider companies, and €7 million as regards other companies, the fees paid to directors are capped to the amounts fixed under the Sovereign Ordinance No. 373 of 26 January 2006. These caps are, however, high. For instance, for a services provider company whose turnover amounts to €3.5 million, the fees paid to the best paid director would be capped at €1.5 million, to which can be added an allocation for reimbursement of business expenses that can be determined as a percentage up to 15 per cent of the fees. The fees of the other directors are capped at 75 per cent of the fees paid to the best-paid director.
For companies whose turnover exceeds the €3.5 million or the €7 million thresholds, there is no fixed regulatory cap.
Director fees are not subject to personal income tax in Monaco in the hands of Monegasque resident directors (such fees may, however, be subject to personal income tax in the state of their citizenship, such as in France, on the basis of the Tax Treaty, or in the United States), and are not subject to any withholding tax in Monaco where paid to non-Monegasque resident directors. Therefore, the payment of these fees to Monegasque resident directors or to directors benefiting from a favourable income tax regime in their state of residence would result in a decrease of the overall tax liability.
International intercompany transactions
Article 14 of the Ordinance 3,152 provides for transfer pricing rules. Pursuant to this Article, any transfer of profits from a Monegasque company subject to the ISB to foreign related parties, through transactions that are not concluded under arms-length conditions (increase or decrease of price compared to the fair market price, any other means), should be added back to the taxable income of the Monegasque company.
Monaco does not withhold any withholding tax on payments of any kind made to non-resident beneficiaries (dividend, interest, royalties, services fees, etc.).
iii Third-party transactions
Sales of shares or assets for cash
Pursuant to Article 10 of the Ordinance 3,152, any capital gain recognised by a company that is subject to the ISB on the transfers of a fixed asset may be excluded from the taxable income of the fiscal year during which the transfer is realised, to the extent that the company undertakes to reinvest, within a three-year period, the amount of the capital gain increased by the tax basis of the transferred asset in the acquisition of other fixed assets in the interest of the company. This is a tax deferral mechanism, since the amount of capital gain excluded from the taxable income at the time of the transfer is deducted from the tax basis of the assets acquired in reinvestment.
Transfer of shares representing at least 20 per cent of the share capital of the issuing company, or held for more than two years at the time of their transfer, as well as, under certain conditions, income derived from exclusive license of patents, can benefit from this tax deferral mechanism.
Any capital gain recognised by a company that is subject to the ISB upon a partial or full interruption of the company's business is: (1) 50 per cent exempt if the interruption occurs within a five-year period from the beginning of the company's activity; and (2) 80 per cent exempt if the interruption occurs after this.
One should be reminded that, other than Monegasque companies deriving income from IP rights, only Monegasque companies realising more than 25 per cent of their turnover outside of Monaco are subject to the ISB. In this respect, only sales of assets outside of Monaco or to be delivered outside of Monaco would be considered turnover realised outside of Monaco.
Tax-free or tax-deferred transactions
A merger involving a Monegasque company may trigger income tax consequences in Monaco, if the company is subject to the ISB.
Pursuant to Article 11-2 of the Ordinance 3,152, capital gains recognised upon a merger (other than capital gains recognised on merchandise, if any) of Monegasque corporations are exempt from the ISB, provided that the merging entity undertakes in the merger agreement to compute any further amortisation and capital gains recognised on the assets contributed by the merged entity as a result of the merger by reference to the accounting net value they had in the books of the merged entity.
Merged Monegasque companies subject to the ISB and that cannot benefit from the favourable regime of mergers will be considered as terminating their business and will be immediately subject to the ISB on any ongoing income and latent capital gains. The capital gains would, however, benefit from the partial exemptions described above.
From a pure Monegasque income tax perspective, there is no fundamental difference between domestic third-party transactions and cross-border third-party transactions, except that it is more likely than international transactions involve Monaco entities carrying out a cross-border activity subject to the ISB. This can be explained in particular by the absence of withholding tax levied in Monaco on any kind of payments made to non-residents, and the absence of any tax consolidation regime in Monaco.
There is no legislation dealing with cross-border mergers. The merger of a Monegasque company into a foreign company may not benefit from the Monegasque favourable regime on mergers.
As Monaco has a limited tax treaty network, foreign income may often be subject to domestic withholding tax in the source jurisdiction without limitation, in particular dividends, interest and royalties received from foreign subsidiaries. To the extent that the Monegasque beneficiary company is subject to the ISB, this withholding tax would, however, give right to a tax credit that could be offset upon the ISB due in respect of the same income, except as regards dividends benefiting from the participation exemption regime.
iv Indirect taxes
VAT and customs duties
Monaco and France form a custom union and are deemed part of the same territory for VAT and customs duty purposes. VAT rules applicable in Monaco are mostly the same as the ones applicable in France.
Registration duties applicable on companies
Subscriptions to the share capital of Monegasque companies are subject to a 1 per cent registration duty. Subscriptions to the share capital of SAMs are subject to a further 0.5 per cent stamp duty, and give rise to notary fees at the rate of 0.9 per cent. Therefore, the total costs for a share capital subscription in a corporation amounts to 2.4 per cent.
Transfers of shares of Monegasque corporations not owning real estate assets located in Monaco are subject to a 1 per cent registration duty; however, in practice these duties are rarely paid since it is not mandatory to register the transfers within a particular period, with the exception of the transfer of shares of Monegasque civil companies (sociétés civiles). Transfers of shares of companies owning real estate assets in Monaco are subject to a registration duty of 4.5 per cent or 7.5 per cent (the rate and the taxable base vary depending on the circumstances).
Transfers of real estate assets located in Monaco (assuming the real estate asset is not acquired by an individual or a Monegasque civil company owned by individuals), and transfer of ongoing businesses, are subject to a 7.5 per cent registration duty.
International developments and local responses
i OECD-G20 BEPS initiative
Monaco undertook to apply four BEPS actions: Actions 5 and 6 on the prevention of harmful tax practices and tax treaty abuses, Action 13 on transfer pricing documentation and Action 14 on dispute resolution.
Monaco has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, which entered into force on 1 May 2019.
As regards transfer pricing, the Sovereign Ordinances No. 6,712 and No. 6,713 implemented the OECD agreements on the country-by-country reporting, which applies to multinational groups of companies whose turnover on a consolidated basis exceeds €750 million. In this context, the Monegasque tax authorities will have access to country-by-country declarations mentioning information as regards the repartition of the turnover, the net income, the income tax paid, the share capital, the undistributed profits, the number of employees and the tangible assets between the different jurisdictions of establishment of the group of companies.
The information contained in the country-by-country declaration may be exchanged by the Monegasque tax authorities with the tax authorities of foreign jurisdictions that have concluded an exchange-of-information agreement with Monaco. In this respect, Monaco is a party to the Country-by-Country Multilateral Competent Authority Agreement and is exchanging information with 54 other signatory countries of this agreement.
Article 9 of the Sovereign Ordinance No. 6,713 expressly mentions that the Monegasque tax authorities may use the country-by-country declarations to verify if the transfer pricing policy of a an eligible multinational group is compliant with the transfer pricing rules provided for in Article 14 of the Ordinance 3,152 (which generally requires that transactions between related parties be entered under arm's-length conditions).
ii EU proposals on taxation of the digital economy
Monaco is not a member of the European Union and to date has not undertaken any action aiming at strengthening the taxation of the digital economy.
iii Tax treaties
Monaco has a limited double tax treaty network. The tax treaty entered into between France and Monaco is not a proper tax treaty aiming at preventing double taxation scenarios, but rather a treaty aiming at instituting the ISB on Monegasque businesses involved in cross-border activities and maintaining the French personal income tax on French citizens having their residence in Monaco.
Since 2009, Monaco has concluded 10 double tax treaties with Guernsey, Liechtenstein, Luxembourg, Mali, Malta, Mauritius, Montenegro (not yet in force) Qatar, Saint Kitts and Nevis, and the Seychelles. Double tax treaties signed by Monaco generally follow the model provided for by the OECD. Owing to the absence of personal taxation and the limited scope of the ISB, the concept of residency is not defined by reference to a tax liability. In the absence of any personal tax and withholding taxes in Monaco, the impact of tax treaties concluded by Monaco on its domestic tax rules is limited.
The more significant double tax treaty in terms of corporate planning opportunities is the one concluded with Luxembourg. The double tax treaty provides for a reduction of the Luxembourg withholding tax on dividends to 5 per cent if the Monegasque parent company holds more than 10 per cent of the share capital of the Luxembourg distributing company.
There is a very limited volume of published case law on tax matters, and more particularly on the ISB. This can be explained by the fact that (1) only a small portion of the decisions rendered by the courts of Monaco are published and made available to the public; and (2) litigation regarding tax matters is often settled between the Monegasque tax authorities and the taxpayer before bringing the case to court.
The Monegasque tax authorities are rather responsive and keen to answer in a timely manner the taxpayer's requests on any difficulties arising from the interpretation of Monegasque tax law, even in writing. There is, however, very little published doctrine from the Monegasque tax authorities summarising their interpretation of Monegasque tax law.
Outlook and conclusions
During the past 10 years, Monaco has been committed to implementing international standards aimed at improving tax transparency and the fight against tax fraud. Since 2009, Monaco has entered into 35 bilateral tax treaties (25 exchange of information tax treaties and 10 double tax treaties).
Furthermore, Monaco has implemented in its legislation the automatic exchange of information regarding financial accounts under the OECD CRS Standards, which has applied since September 2018, and has signed the OECD Convention on mutual administrative assistance in tax matters, which entered into force in Monaco on 1 April 2017.
As already mentioned, Monaco is committed to implementing mandatory BEPS actions, which include the prevention of harmful tax practices and tax treaty abuses.
As a result of these actions, Monaco has been declared a compliant jurisdiction in terms of tax transparency by the OECD and is not included in the European Commission's list of non-cooperative jurisdictions.
In light of Monaco's BEPS commitments, the Monegasque tax authorities have recently been more active in controlling attempts by taxpayers to minimise their taxable income subject to ISB, in particular through related parties transactions and payments. In the context of international group of companies, the Monegasque tax authorities would ensure that no profits are artificially transferred out of Monaco by entities that are subject to the ISB. For this purpose, the Monegasque tax authorities are now able to rely on the information exchanged with other jurisdictions having implemented the country-by-country reporting and party to the Country-by-Country Multilateral Competent Authority Agreement, as long as a Monegasque entity subject to the ISB is part of a group of companies whose consolidated turnover exceeds €750 million.
1 Jules Bourboulon is a senior associate at ALFA Monaco.