The Real Estate Investment Structure Taxation Review: Monaco

Overview

i Investment vehicles in real estate

Beyond direct ownership, two types of vehicles are generally used for investment in real estate in Monaco.

First, a tax transparent entity: the private property company (SCP). The SCP can buy and rent real estate; however, given its civil nature it is not suitable for the development of commercial activity. The SCP is well suited for the development of property assets for private and family needs. The SCP also allows for a diversified asset portfolio, since it can also hold movable assets.

When investors want to carry out real estate investment activities that are not purely of a civil nature, a Monegasque limited company (SAM) or limited liability company (SARL) can be chosen. Both are capital companies, but the SAM's corporate purpose may be of a commercial or civil nature.

Overall, the SAM and the SCP remain the main vehicles used for real estate investment in Monaco, for different reasons and objectives.

The choice between these two types of vehicle depends on facts and circumstances, specific to each investor's profile and objectives. The choice is impacted by tax considerations (e.g., tax transparency, liability to corporate income tax). In addition, particular attention should always be paid to the corporate purpose (whether civil or commercial) when choosing the suitable vehicle.

ii Property taxes

Income tax

There is no income tax for individuals whose tax residency is in Monaco. Thus, Monegasque tax residents would not be liable for income tax in Monaco for the ownership (e.g., rental income) and the disposal of real estate assets (whether located in Monaco or abroad).

Enterprises, irrespective of their legal form (i.e., whether an individual sole trader or a legal entity) that carry out commercial or industrial activities in or from Monaco, and of which at least 25 per cent of the turnover is derived from operations carried out directly or indirectly outside Monaco, are subject to Monegasque corporate income tax (CIT).2 Should a company be subject to CIT in Monaco, any income derived from real estate assets located in Monaco (e.g., rental income, capital gains arising from the disposal) is subject to CIT. This would, in particular, not be applicable to a company whose activity only consists of renting real estate in Monaco, since it would then not be liable for CIT in Monaco.

For non-residents (whether individuals or companies), income derived from real estate assets located in Monaco is not subject to withholding tax in Monaco.

Property taxes

There are no property taxes in Monaco, which makes the Principality of Monaco an attractive country for real estate investment.

There is no wealth tax in Monaco (thus no real estate wealth tax).

Registration duties on the sale of real estate assets

The sale or more generally the transfer of a real estate asset located in Monaco triggers registration duties (proportional registration duties and stamp duties) and notary fees.

Operations on real estate located in Monaco carried out by property traders are exempt from registration duties under certain conditions.

Indirect tax (VAT) on the sale of real estate assets

The sale of a real estate asset located in Monaco by a VAT taxable person is subject to Monegasque VAT, provided such real estate asset has been built for less than five years. In this respect, when VAT applies, no proportional registration duty is due but a transcription fee of 1 per cent applies.

A special regime applies for property traders.

Asset deals versus share deals

i Legal framework

In Monaco, the acquisition of real estate assets can be performed either by direct purchase of the assets or through a company (share purchase).

In practice, both ways of acquiring real estate assets are equally used. To determine which structure is more interesting, a thorough analysis of the overall situation should be carried out, taking into account tax issues, but also legal issues, the investor's objectives and the investor's risk profile (since the acquisition of shares in a real estate company will necessarily entail additional risks for the buyer, related to the owning company itself).

ii Corporate forms and corporate tax framework

In Monaco, the acquisition of real estate assets by way of a share purchase can be performed either through a corporation (SARL, SAM) or through a partnership (SCP).

Corporations

Legal form

The two forms of Monegasque commercial companies that can be used for investment in real estate assets are the limited liability company (SARL) and the Monegasque limited company with a commercial legal purpose (SAM).

The SAM is regulated by Ordinance of 5 March1895 on limited companies and limited partnerships and the provisions of the Monegasque Commercial Code.

The SARL, which is only available for a commercial purpose, is regulated by the provisions of the Monegasque Commercial Code.

Both the SAM and the SARL can be subject to CIT in Monaco provided certain conditions are met. Should they be subject to CIT, the rules below apply.

CIT principle and rates

CIT rules are provided for by Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

Monegasque commercial companies are subject to CIT under standard conditions, namely, if they carry out commercial or industrial activities in or from Monaco and of which at least 25 per cent of the turnover is derived from operations carried out directly or indirectly outside Monaco.

The standard CIT rate is currently 26.5 per cent (for tax year 2021).3 This rate will change since it will be reduced to 25 per cent as from 2022.4

Net taxable income

The tax basis is equal to the accounting income (including capital gains), subject to certain tax adjustments.

There is no general rule for the tax deductibility of expenses, but there are rules for the deduction of certain expenses for tax purposes.5 Some examples are described below.

Depreciation of the real estate asset

Depreciation is assessed and deducted at the end of each financial year by means of amortisation. Monegasque tax law does not include specific rules for amortisation of real estate assets or land. Accounting rules and general tax deductibility rules for amortisation should be referred to.

Interest tax deductibility

Monegasque tax law provides for various limitations to the tax deductibility of interest expense.

First, there is a maximum interest rate limitation. The deduction of interest paid by a Monegasque company to its shareholders is allowed up to a maximum interest rate determined as per a foreign banking rate.6

In addition, interest paid by a Monegasque company to its controlling shareholders (i.e., those who in law or in fact control the company) is not deductible when the aggregate sum of the shareholders' loans exceeds 50 per cent of the borrower's share capital.7

Second, net interest expenses are deductible up to the higher of the following two amounts:

  1. €3 million per financial year; or
  2. 30 per cent of the taxable income subject to CIT plus net interest expenses, amortisation and provisions allowed for deduction, as well as capital gains and losses on assets disposal, and before deduction of tax losses carried forward (tax EBITDA).8

Third, if the event of related party debt (i.e., debt from associated companies), where the average yearly amount granted to the borrower by such companies exceeds a debt-to-equity ratio of 1.5:1, net interest expenses accrued on related party loans are deductible only up to the higher of:

  1. €1 million per financial year; or
  2. 10 per cent of tax EBITDA.9

In this respect, associated companies are defined as follows:

  1. one company, directly or through an interposed entity, holds the majority of the share capital of the other or exercises the power of decision; or
  2. both companies are under the control of a third entity.10

Excess net interest expenses can be carried forward under certain conditions.11

Partnerships

Generally, investments made through non-commercial companies are made through SCPs. When SCPs hold real estate, they are usually referred to as SCIs (real-estate non-trading companies).

SCPs are transparent for tax purposes: there is no direct tax at the company level and the partners are taxed on their share of the profits, according to their own tax rules (thus depending on their tax residency).

Real estate income generated by a Monegasque tax resident through a SCP would not be taxable in Monaco. In Monaco, a SCP cannot elect for the application of CIT, this tax being dedicated to commercial or industrial activities.

iii Direct investment in real estate

Registration duties at the time of purchase

General rules

Proportional registration duties at a rate of 7.5 per cent are levied upon transfer for consideration of real estate assets located in Monaco.12 This rate is decreased to 4.5 per cent for transfers carried out to the benefit of individuals and certain qualifying Monegasque civil companies.13

Deeds of contribution of real estate property or rights relating to real estate situated in Monaco to the benefit of certain legal entities are subject to a registration duty of 7.5 per cent.14 The tax base for registration duties is the market value of the real estate.

Registration duties or VAT

Below are general rules, thus not covering the special regime for property traders.

Acquisitions that are subject to VAT are not subject to the proportional registration duties of 4.5 per cent or 7.5 per cent;15 instead, a transcription fee of 1 per cent applies.16

This exemption from registration duties is not systematic for the sale or contribution of building land subject to VAT. To benefit from this exemption, the purchaser must meet certain conditions, in particular undertaking to carry out certain work within a period of four years.17

The special status of property traders

Operations on real estate located in Monaco carried out by property traders are exempt from registration duties under certain conditions.18 In this situation, a fixed transcription fee of €10 applies.19

VAT at the time of purchase

The acquisition of real estate assets located in Monaco may, under certain conditions, be subject to VAT, depending mainly on the seller VAT status, the date of completion of the building and the work that has been done on the building.

Unique territory with France

Monaco and France form a single territory for VAT purposes.20 The primary Monaco VAT legislation is levied under the provisions of the Monegasque Revenue Tax Code and its Appendix, and the European Union Directive 2006/112/EC on the common system of VAT. However, Monegasque VAT legislation presents some specificities.

VAT taxable persons (VAT payers)

A natural or legal person who habitually carries out an economic activity is liable for VAT.

More precisely, a VAT taxable person is a person who carries out, on an independent basis, any of the following economic activities, regardless of its legal status, its situation as regards other taxes and the form or nature of its activities: manufacturer, trader or service provider (including mining, agricultural and professional or similar activities). The exploitation of tangible or intangible property with a view to deriving permanent income is also an economic activity.21

Transactions involving real estate are in the scope of VAT, provided certain conditions are met, which are defined below.

A person must generally register for VAT when they start a business in Monaco. However, if the annual turnover of the taxable person's activities does not exceed certain specified small business thresholds, a taxpayer established in Monaco may be exempted from Monegasque VAT by opting into the 'small business franchise regime'.22

VAT for real estate transactions

The following transactions involving real estate are VAT taxable operations:

  1. the sale of a building plot, having a specific definition, by a taxable person acting as such; and
  2. the sale of a new building by a taxable person acting as such, in other words, one that has been completed within the past five years, as a new construction or following works on an existing building that involved raising the height or significant renovations (such renovations having a specific definition).23

Conversely, some sales are exempt from VAT. These are 'old buildings' sales (i.e., buildings that do not meet the definition of 'new buildings') and land sales (i.e., that are not considered as building plots).

The seller may choose to elect for VAT on exempt transactions under certain conditions.

If the above-mentioned transactions are carried out by a non-VAT taxable person, they remain outside the scope of VAT and election for VAT is not available.

The standard VAT rate is 20 per cent.

Income tax arising during ownership and on disposal of real estate

There is no income tax for individuals whose tax residency is in Monaco. Thus, Monegasque tax residents would not be liable for income tax in Monaco for the ownership (e.g., rental income) and disposal of real estate assets (whether located in Monaco or abroad).

It should, however, be noted that, as per the 1963 double tax treaty covering income tax signed between France and Monaco, French nationals living in Monaco are subject to French personal income tax on their worldwide income, except (in particular) for those who can prove more than five years of habitual residence in Monaco as of 13 October 1962. French nationals who do not benefit from the exemption are deemed to be tax residents of France and would be liable for income tax in France for the ownership (e.g., rental income) and the disposal of real estate assets, even located in Monaco.

As regards companies subject to CIT in Monaco, any income derived from real estate assets located in Monaco (e.g., rental income, capital gains arising from the disposal) is subject to CIT as ordinary income.24

For non-residents (whether individuals or companies), income derived from real estate assets located in Monaco is not subject to withholding tax in Monaco.

Permanent establishment exposure

Monegasque tax law does not provide any definition of the concept of 'permanent establishment'. In practice, reference should be made to the definition provided by the OECD Model Tax Convention on Income and Capital.

In any case, the mere ownership and leasing of real estate located in Monaco by a non-resident company does not give rise to a permanent establishment exposure in Monaco.

iv Acquisition of shares in a real estate company

Registration duties at the time of purchase

Acquisition through a SCP

The following rules focus on the acquisition of shares in SCPs holding real estate in Monaco.

Transfers for valuable consideration of shares in SCPs owning real estate located in Monaco trigger registration duties.

More precisely, the sale of shares in Monegasque SCPs that hold, directly or through other civil companies, real estate property or rights relating to real estate situated in Monaco, is subject to a registration duty of 7.5 per cent.25

The rate is reduced to 4.5 per cent when the purchaser is an individual or a qualifying Monegasque civil company.26 However, transfers for valuable consideration of shares in SCPs not owning real estate located in Monaco also trigger registration duties, but at a different rate.

Other means

Transfers for valuable consideration of shares in commercial companies also trigger registration duties, but at a different rate.

Tax base

The tax base for registration duties is the transfer price, or market value if higher.

VAT at the time of purchase

In Monaco, there is no VAT on the acquisition of shares.

Regulated real estate investment vehicles

The real estate investment funds market in Monaco is evolving. Law No. 1.339 of 7 September 2007 and Ordinance No. 1.285 of 10 September 2007 established the general legal framework of mutual funds and investment funds in Monaco.

In particular, Ministerial Decree No. 2013-391 of 8 August 2013 related to real estate investment funds regulates such funds.

When a real estate investment fund is set up, the assets contributed must be at least €400,000.27

After 12 months of the fund being incorporated, and at any time during the existence of the fund after that date, the fund must hold a minimum amount of assets of €5 million.28

This type of fund makes it possible to hold, directly or indirectly, buildings, whether built or not, or land, with a view to renting or reselling them, as well as to manage the operations necessary for their use or resale, and to carry out works of any kind.29

These funds may also manage, but to a lesser extent, financial instruments and deposits.30

The assets of a real estate investment fund must be composed of a minimum of 60 per cent of real estate assets, whether held directly or indirectly.31

The fund may also hold other financial assets, the list of which is provided by Articles 7 and 8 of above-mentioned Sovereign Ordinance No. 1.285 of 10 September 2007, up to a maximum of 40 per cent, provided certain conditions are met.32

In practice, these funds are very rarely developed.

Real estate investment trusts and similar structures

In Monaco, trusts that are inter vivos and testamentary can be settled under Law No. 214 of 27 February 1936. However, these trusts are not specifically settled for real estate investments.

In addition, the settlor's national law shall allow for the settlement of such trusts. Such trusts are subject to proportional registration duties, which are payable as a percentage of the total value of the assets placed in trust. The registration duties vary according to the number of beneficiaries, as follows:

  1. one beneficiary: 1.30 per cent;
  2. two beneficiaries: 1.50 per cent; and
  3. more than two beneficiaries: 1.70 per cent.33

Alternatively, at the request of the parties, an annual tax of 0.2 per cent of the value of the trust assets may be paid. This tax is levied to the exclusion of any gift or inheritance tax.34

In Monaco, foreign trusts are recognised for estate purposes.

Until 2017, the Monegasque tax authorities used to apply the highest rate of inheritance and gift tax (16 per cent, between unrelated persons) to all assets located in Monaco bequeathed or given to a foreign trust. The tax administration did not take into consideration the kinship between the settlor and the beneficiaries of the trust.

This policy has been reconsidered to take account of the relationship between the settlor and the beneficiary or beneficiaries of the trust, although this practice is not yet supported by a legal provision.

International and cross-border tax aspects

i Tax treaties

Treaty network

Monaco has signed 35 tax information exchange agreements, tax assistance agreements and double tax treaties, out of which 33 are in force.35

While some of these treaties (those signed with Guernsey, Liechtenstein, Luxembourg, Mali, Malta, Mauritius, Montenegro, Qatar, Saint Kitts and Nevis and Seychelles) aim at avoiding double taxation, many treaties simply cover exchange of information in tax matters.

Monaco signed a particular treaty with France covering income taxes, VAT and other matters. In addition, Monaco signed one tax treaty with France as regards inheritance tax. It is the only treaty of this nature signed by Monaco.

Monaco is committed to the OECD's BEPS project (the fight against base erosion and profit-shifting). Indeed, on 17 May 2016, Monaco committed to adopt all of the compulsory BEPS measures. In this context, on 7 June 2017, Monaco signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.

Thus, Monaco aims at aligning all its tax information exchange agreements, tax assistance agreements and double tax treaties with international standards.

Directive DAC 6

As Monaco is not part of the European Union, the Monegasque government was not required to transpose this Directive into Monegasque law and DAC 6 does not apply in Monaco.

However, insofar as the scope of DAC 6 may extend to arrangements that concern a European Union Member State and a third country, DAC 6 may have consequences for operations involving Monegasque taxpayers.

ii Cross-border considerations

French national living in Monaco

It should, however, be noted that, as per the 1963 double tax treaty covering income tax signed between France and Monaco, French nationals living in Monaco are subject to French personal income tax on their worldwide income, except (in particular) for those who can prove more than five years of habitual residence in Monaco as of 13 October 1962. French nationals who do not benefit from the exemption are deemed to be tax residents of France.

Starting a business in Monaco

Starting a business in Monaco requires specific authorisations.

iii Locally domiciled vehicles investing abroad

Investment in French real estate assets through a Monegasque SCP

Monegasque SCPs are often set up or used to acquire real estate in France for reasons related to inheritance tax's territorial rules in Monaco.

Year in review

A bill is currently being assessed by the Monegasque National Council on the status of property traders.36

Outlook

The Monegasque CIT tax rate will be lowered as from 1 January 2022 to 25 per cent.37 This reduction will have an impact on companies that hold buildings and are subject to the CIT in Monaco, for example, on capital gains on real estate disposal.

Footnotes

1 Stéphan Pastor, Raphaëlle Svara and Sophie Marquet are partners at CMS Pasquier Ciulla Marquet Pastor Svara Gazo.

2 Article 1 of Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

3 Article 21 of Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

4 Article 21 of Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

5 Articles 9 to 15 of Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

6 Article 9(1)(3°) of Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

7 Article 9(1)(3°) of Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

8 Article 9(5) of Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

9 Article 9(5) of Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

10 Article 9(5) of Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

11 Article 9(5) of Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

12 Article 13 bis (1°) of Law No. 580 of 29 July 1953 related to registration and mortgage duties.

13 Article 12(1°) of Law No. 580 of 29 July 1953 related to registration and mortgage duties.

14 Article 13 bis (11°) of Law No. 580 of 29 July 1953 related to registration and mortgage duties.

15 Article 1 of Law No. 842 of 1 March 1968 modifying the system of registration duties applicable to real estate transactions subject to value added tax.

16 Article 29(4°) of Law No. 580 of 29 July 1953 related to registration and mortgage duties.

17 Articles 2 and 3 of Law No. 842 of 1 March 1968 modifying the system of registration duties applicable to real estate transactions subject to value added tax.

18 Article 1(I) of Law No. 1.044 of 8 July 1982 concerning the exemption from registration duties for transactions carried out property traders, for public sales of certain tangible movables and for contracts for work, supplies or materials

19 Article 29(1°) of Law No. 580 of 29 July 1953 related to registration and mortgage duties.

20 Article 15 of the double tax treaty covering income tax signed between France and Monaco and dated 8 May 1963.

21 Article 3 of the Monegasque VAT Code (Monegasque Revenue Tax Code).

22 Article 87 of the Monegasque VAT Code (Monegasque Revenue Tax Code).

23 Article 5 of the Monegasque VAT Code (Monegasque Revenue Tax Code).

24 Article 8 of Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

25 Article 13 bis (7°) of Law No. 580 of 29 July 1953 related to registration and mortgage duties.

26 Article 12(1°) of Law No. 580 of 29 July 1953 related to registration and mortgage duties.

27 Article 1 of Ministerial Decree No. 2013-391 of 8 August 2013 related to real estate investment funds.

28 Article 1 of Ministerial Decree No. 2013-391 of 8 August 2013 related to real estate investment funds.

29 Article 4 of Ministerial Decree No. 2013-391 of 8 August 2013 related to real estate investment funds.

30 Article 4 of Ministerial Decree No. 2013-391 of 8 August 2013 related to real estate investment funds.

31 Article 6(1) of Ministerial Decree No. 2013-391 of 8 August 2013 related to real estate investment funds.

32 Article 6(2) of Ministerial Decree No. 2013-391 of 8 August 2013 related to real estate investment funds.

33 Article 7 of Law No. 214 of 27 February 1936.

34 Article 7 of Law No. 214 of 27 February 1936.

35 The one with Montenegro and the one with Belgium are not yet in force. Counting two with Liechtenstein. Not counting the one signed with France related to inheritance tax. Not counting the one signed with the USA related to exchange of country by country reports.

36 Bill No. 252 - Proposition of law relating to controlling the profession of property traders.

37 Article 21 of Ordinance No. 3.152 of 19 March 1964 instituting a tax on revenues.

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