Monaco: Types of Company
The categories of business entity in Monaco are defined by the Commercial Code, which is essentially similar to its French equivalent. For business-people used to common law jurisdictions, the civil law company framework can be confusing: companies are still companies, but their management structure is defined by statute to a far greater extent, and must be entered into the official commercial registry if it is to have legal force. ‘Directors’ have extensive statutory powers but are not normally executive: executive management is delegated to a named Managing Director (administrateur delegue) or to a General Manager (Gerant) whose name is entered into the Commercial Register — and hence he derives his power.
Until recently, one of the key differences between the Monagesque Commercial Code and most others, including the French one, was that the convenient and reasonably simple SARL did not exist. A SARL (Societe a Responsabilite Limitee) is the nearest equivalent to the Anglo-Saxon limited company, although the similarity should not be pushed too far. The Societe Anonyme (SA) is the grander type of civil code limited company and is a much more constipated form — there isn’t an equivalent in common law jurisdictions.
Article 26 of Monaco’s Commercial Code deals with the types of companies that can be incorporated in Monaco. In offshore terms limited liability companies incorporated in Monaco are not attractive corporate vehicles because of the extremely cumbersome and bureaucratic formation procedures, the fairly heavy taxation of foreign activity, and the rather expensive professional services in Monaco. See Direct Corporate Taxation and Offshore Legal and Tax Regimes for details of Monagesque corporate taxes and low-tax alternatives.
As of January 2011, there were 41 Corporate Service Providers (CSPs) licensed to operate in Monaco. The licensing requirements are tiered with all applicants required to meet specific minimum standards including a detailed client identification protocol, appropriate education and experience, verification of source of funds, and a police background check.
Additional requirements must be met when the legal form selected to hold the license is a Monegasque limited liability company (Société Anonyme Monegasque, SAM). Conditions for approval unique to the SAM include minimum capitalization of EUR150,000, a requirement to retain the services of a notary, appointment of two statutory auditors from an approved list who must prepare an annual statement and a statutory audit report. All individuals and partnerships are licensed for two years renewable upon reapplication.
For CSPs that are not SAMS, oversight is currently not as robust as the licensing process. The DEE has power under Law No. 1.144, 1991, to conduct on site reviews. This authority has been sparingly employed.
Monegasque regulators estimated that approximately 3,950 offshore companies and 725 trusts were under CSP management, as at April 30, 2002.
Monaco Societe Anonyme Monegasque (SAM)
The Societe Anonyme Monegasque (SAM) has the following characteristics:
The minimum share capital is EUR150,000;
Stamp duty of 1% is payable on the amount of issued share capital on incorporation;
Although by law a company secretary is not required a local office is nonetheless required prior to Government authorization being granted;
Audited annual accounts must be filed annually;
There must be at least two shareholders and 2 directors one of whom must be resident in Monaco; directors have to be shareholders in the company;
Bearer shares are permitted but they must be deposited with a local institution;
There are no re-domiciliation and migration provisions.
Monaco: Domestic Corporate Taxation
Monaco Scope of Income Tax
Business Profits Tax (Impot sur les benefices) is levied on three types of entity:
An entity receiving royalties or other income which relates to intellectual property rights such as the licensing and selling of copyrights, patents and trademarks. If however some tax has been deducted at source in another jurisdiction then the Monegasque authorities will give a tax credit against the amount assessed;
An entity involved in commercial or industrial activities 25% or more of whose income is from sources located outside of Monaco; and
A company incorporated in Monaco which holds 20% or more of the shares of a non-resident company will pay business profits tax on dividends received from the non-resident company (note that pure holding companies are not allowed in Monaco).
Thus business profits tax is not levied on:
Entities which are not involved in intellectual property or in commercial and industrial activities (eg professional firms, consultancies, service providers);
Entities which are involved in industrial and commercial activities 75% or more of whose income comes from within Monaco; and
Non-resident entities in any line of business, residence being determined by the residence of the directors, officers and main shareholders and the location of board meetings.
Since no income tax is payable by individuals in Monaco (save by certain classes of French nationals) where a business entity is subject to profit tax this can be mitigated by adopting the practice of paying out all profits in salaries or management fees and thereby ensuring negligible business profits for taxation purposes (subject to statutory limits on directors’ fees).
It should be noted that an administrative head office of a foreign corporation is not subject to business profits taxation since it does not have a commercial purpose. Instead the administrative head office pays a charge of 2.66% of the sum of expenses relating to the running of the office.
The profits of a branch of a foreign company are deemed to be earned outside the Principality and so the branch may be required to pay business profits tax.
Monaco Rates of Income Tax
When levied, the rate of business profits tax is 33.33%. Reduced rates apply to newly incorporated entities: a new trading entity less than 50% of whose share capital is held directly or indirectly by other companies pays a reduced rate of business profits tax on its activities for the first 5 years after its incorporation, as follows:
0% payable in the first 2 years;
tax calculated on 25% of the reduced profits in the third year;
tax calculated on 50% of the reduced profits in the fourth year
tax calculated on 75% of the reduced profits in the fifth year
tax calculated on 100% of the reduced profits in the sixth year
Monaco Calculation of Taxable Base
Generally speaking, taxable income is based on GAAP financial statements. The following are some particular rules applied in Monaco:
Directors’ fees are deductible up to a maximum based on turnover and the social security ceiling, and there is a reasonableness test;
Inventory is normally valued at the lower of cost or market value; cost is determined either by FIFO or by average cost;
One half of any increase in research costs is deductible, with an inflation adjustment;
Certain types of provision are deductible, including specific loss provisions and provisions against asset valuations;
Trading losses can be carried forward and set off against trading profits for a period of 5 years; trading losses can in some cases be carried back and set off against profits arising in the previous 3 years — a tax credit is issued;
There are some limitations on the deductibility of luxury goods and services, interest on loans, and expenses against foreign source income;
Capital gains on the disposal of business assets are taxable as income.
Monaco Filing Requirements and Payment of Tax
The tax year is the calendar year. Advance payments of one fifth of the previous year’s tax bill are due on February 20th, May 20th, August 20th and November 20th. Tax returns are due three months after the end of the year, and any balance of tax due is immediately payable.
Monaco Withholding Tax
There are no withholding taxes in Monaco.
Monaco: Offshore Legal and Tax Regime
There is no offshore activity as such in Monaco. It is a low-tax jurisdiction for individuals and certain types of business activity are exempt from. Generally, taxation is determined by the activities carried on by an entity and not by its corporate form.
Trusts can be formed in Monaco but only by local residents; the question of taxation therefore doesn’t arise. See below for the fee basis.
While no financial market can claim not to have been affected by the international financial crisis, Monaco has remained relatively untouched by events in the United States and beyond, according to Christian de Boissieu, President of Monaco’s Financial Activities Audit Committee.
In 2008, De Boissieu, who is also the Deputy Chairman of the Council of Economic Analysis for the French Prime Minister, told an audience of bankers and accounting experts and key figures from within the local finance industry that he was «quite optimistic» over Monaco’s capacity to emerge from the financial crisis more or less unscathed.
It was with these words that de Boissieu opened the session to present the Financial Activities Audit Committee’s 2007 activity report on September 25, 2008. This Committee was set up in September 2007 following the approval of new laws by the National Council (Parliamentary Assembly). It is entrusted with approving, monitoring via its Inspection Unit and taking disciplinary action against the various players and financial products.
Its main task, according to the 2007 report, is “to protect investors, whilst at the same time enable financial activities and products to be developed with the focus on internationalisation and maintaining the specific features that make the Monegasque financial market attractive.»
The Committee consists of eleven members, including Jean-Pierre Michau, Advisor to the Governor of the Bank of France.
While the 2007 activities were being presented, Jean Castellini, Secretary General of the CCAF, pointed out the absence of «criminal acts for which legal proceedings may be instigated». Regarding inspection missions, he was keen to add that the Committee does “not judge the pertinence of the products,” and went on to say that the «the controller is there to support the market but not promote it, even if his role does influence such promotion”.
Among its objectives, the CCAF has promised to continue signing bilateral agreements, in particular with regard to financial crime: “We are turning towards international cooperation,” concluded Christian de Boissieu. The latest agreement was signed in January 2011 with the Dutch Financial Regulator (AFM).
Monaco Corporate Fees
Trusts and certain types of tax-exempt corporate entity pay fees to the Principality as follows:
Trusts: One-time registration fees are payable on formation of a trust, at the rate of 1.3%,1.5% or 1.7% of the value of the settled property depending on whether the trust has 1, 2, or 3 or more beneficiaries. The fee drops to between 0.25% and 0.45% where the property settled is Monaco real estate. Alternatively the trustees can elect to pay an annual tax of 0.2% of the value of the settled property. Lower tax rates may apply in relation to trust assets which consist of shares in Monegasque companies. An asset placed in a trust on which registration tax has been paid is not subject to inheritance or gift tax.
Entities outside the Commercial Code, ie Branches of foreign companies, Administrative offices (‘bureaux administratifs’), and Agencies (‘Agences’) pay a version of the Business Income Tax by applying the standard rate of 35% to a fraction of their expenses, usually 8%, although it can be up to 30%. 35% of 8% gives a tax rate of 2.8% of expenses.
Monaco Taxation of Foreign Employees of Offshore Operations
This section refers to the taxation of foreign employees of the various types of offshore entity; for the general principles of individual taxation in Monaco, which also apply to the resident employees of non-resident entities.
There is in fact no distinction between the employees of resident or non-resident operations. There are in any event no individual taxes on employment or other income in Monaco; however, social security contributions are payable by the employer in all circumstances, and these amount to 40% for the employer, 10% for the employee.
In 2004, Monaco was forced to join the EU’s Savings Tax Directive regime, and agreed to impose a withholding tax on the interest income of EU residents at the same rate as Austria, Belgium and Luxembourg (initially 15%, rising to 20% on 1 July 2008, and to 35% on 1 July 2011) and to hand over 75 per cent of such revenues to the Member State of the EU resident concerned. Monaco also agreed to exchange information on request in criminal or civil cases of tax fraud or similar misbehaviour. The new regime came into effect from 1st July 2005.
Monaco Exchange Control
There are no exchange controls in Monaco, which has a monetary union with France, a part of the EU.
Monaco Offshore Activities
In Monaco, business activities which escape tax are those that service the local market to at least 75% of their turnover, in a reversal of the usual situation in offshore centres whereby it is external activities which escape tax. Pure holding companies are not permitted in Monaco, although a trading company can hold shares in its trading subsidiaries.
Trusts are for Monaco residents only, who don’t pay tax; there are no particular restrictions on their holdings. Foundations are not limited to Monaco residents, and are also flexible in terms of their holdings;
Monaco Employment and Residence
Any non-French national wishing to take up employment in Monaco must obtain a work permit from the authorities. To obtain a work permit the foreign national must submit a visa application, a contract of employment and evidence of a fixed address in Monaco. There are no quotas on the hiring of foreign nationals and work permits are not hard to obtain but Government policy is for priority to be given to residents and nationals of Monaco.
Any person wishing to reside in Monaco for more than 3 months must apply for a residence permit. The rules for the grant of a residence permit were agreed with France in 1998 and distinguish between European Union nationals and others.
The procedure is for the applicant to present himself at the local police station for interview with documents in hand proving identity and with a letter from a bank verifying sufficient assets or income to support himself and any dependants during the duration of his stay. A residence permit will not be granted where it is shown that the applicant has a conviction for a serious criminal offence.
A residence permit is usually issued within 45 days from the application and initially is valid for 1 year and must be renewed annually for the next 2 years. Thereafter the resident permit is granted for 3 year periods and after having had a residence permit for 9 years an applicant is entitled to one which is valid for a period of 10 years. A 10 year residence permit entitles the applicant to apply for citizenship. Alternatively any person whose father is a national of Monaco can acquire Monegasque nationality as of right.
There are no restrictions on foreigners or locals purchasing real estate in Monaco (except, obviously, your overdraft limit).
Monaco: Personal Taxation
Monaco Residence and Liability for Taxation
Only French nationals pay income tax in Monaco. The amount payable is assessed according to the principles of French tax law and is paid directly to the French Government. By way of exception French nationals do not pay income tax if any one of the following 3 situations apply:
they had been habitually resident in Monaco for 5 years on October 13, 1962 and they hold dual French and Monegasque nationality;
they are attached to the Prince’s household; or
they are the French spouses of foreigners residing in Monaco and the marriage took place before January 1, 1986.
According to a revision of the tax treaty between Monaco and France agreed in 2001, French nationals who took up residence in Monaco after 1989 began to pay French wealth tax from 2002.
For other than French nationals, residence is not an issue affecting taxation in Monaco, since income tax and capital gains taxes do not apply. However, if an individual is in business as a sole trader or on his own account, he will be taxed according to the principles of the the Business Profits Tax.
All employees in Monaco are liable to pay social insurance contributions; see below.
Social insurance contributions payable by employers and employees are high. The employer’s contribution is between 28%-40% (averaging 35%) of gross salary including benefits and the employee pays a further 10%-14% (averaging 13%).
An employee who is paid part of his wage by way of stock options which can be cashed in and sold at a future point in time may be required to pay social insurance on the value of the option at the time it is realized as if the option had been a salary.
Social insurance contributions, amounting to nearly 50% of salary, are a major disincentive to the hiring of staff and in many ways detract substantially from the advantageous income tax regime which exists in Monaco.
The Principality has concluded social security agreements with France and Italy for retirement and medical expense coverage.
Monaco Stamp Duty
Stamp Duty, Capital Transfer Tax and Registration Fees are payable on transactions evidenced by the official registration of documents in various public registries. It is mandatory to register inter vivos transfers of real estate located in the principality, the official documents of notaries and bailiffs, private agreements concerning leases, wills, agreements evidencing the sale of businesses and certain other legal and corporate documents and instruments.
The following rates of tax are payable:
7.5% on the registered value of a business sold;
7.5% of the registered value of real estate sold (which includes other associated fees);
3% of the value of a registered mortgage (which includes other associated fees);
2% of the value of a civil judgment registered;
5% on the sale of personal assets unless they are sold by auction in which case the tax is reduced to 2%;
1% on the registered value of a short term lease which value is determined according to set formulas;
6.5% on the registered value of a long term lease which value is determined according to set formulas.
0.65% on mortgage subscription fee
Monaco Inheritance and Gift Taxes
Inheritance and gift taxes are only payable by residents on assets situated in Monaco and do not apply to assets located outside the jurisdiction. The tax payable arises on a transfer made at the time of a person’s death or on a transfer made by way of inter vivos gift.
Gifts located within Monaco which are left to charitable institutions or to the nation are exempt from this tax whether the transfer occurs on death or inter vivos.
The rates of tax payable depend on how close the relationship is between the donor and the donee with the general rule being that the more distant the relationship the higher the tax payable.
The rates payable on transfers of property situate in Monaco whether by way of inter vivos gift or on death are as follows:
Direct line spouses (wife, parents and children), nil;
Brothers and Sisters, 8%;
Uncles, Aunts, Nieces & Nephews, 10%;
Other relatives, 13%;
Unrelated persons, 16%.
If the deceased is a French national who had been resident in Monaco for 5 years at the time of his death then assets located in Monaco are governed by the laws of Monaco whereas assets located in France are taxed according to the principles of French tax law.
Monaco does not give tax credits for death duties, inheritance taxes and gift taxes. Thus if a person dies with assets in Monaco and tax has already been paid on the transfer of those assets by the laws of another jurisdiction Monaco will levy its own taxes if tax is payable under its own internal laws.
Monaco Value Added Tax
For the purposes of VAT Monaco is part of the European Union. The Principality adopts the French system for collection. French customs operate the levying of VAT which relates to non European Union transactions whereas the Monegasque authorities operating the levying of VAT on all other transactions.
Two rates of VAT apply: the normal rate of 19.6% (which is the standard rate in France) and a reduced rate of 5.5%, which applies to water, food products, medicines, books, special equipment for handicapped people, hotel accommodation, public transport services and public entertainment services.
The standard rate of VAT is payable on sales of real estate whose construction was completed less than 5 years ago and which have never been transferred for value. Real estate which has been constructed more than 5 years ago and which has already had one purchaser who paid market value does not attract VAT.