Corporate Tax

Monaco provides for a single-level tax regime.

Corporate entities which are tax resident in Monaco are subject to the following taxes:

• Monegasque corporate income tax applies at the rate of 25%. The scope of this tax is limited to commercial or industrial business activities which derive more than 25% of their revenue outside of Monaco. As an exception, corporate income tax applies to companies that derive profits from the sale or licensing of patents, trademarks, manufacturing processes or formulas, as well as from literary or artistic property rights, irrespective of any territorial criteria.
• Value-added tax applies at the standard rate of 20%. Reduced rates of 5.5% or 10% apply to most food products for human consumption and certain other items; and a preferential rate of 2.1% is payable on some periodicals and medicines reimbursed by the social security system.
• Insurance companies are subject to a tax on insurance contracts ranging from 0.2% to 9%, depending on the nature of the underlying risk covered by the insurance contract.

Monegasque corporations are subject to corporate income tax on their worldwide income, including capital gains, derived from a commercial or industrial activity carried out in or from Monaco. Taxable income is calculated based on accounting income – that is, including operating income, financial income and extraordinary income such as capital gains, subject to certain book-to-tax adjustments, including tax incentive schemes.

Specific rules govern the taxation of capital gains and dividends.

Capital gains: As a general rule, capital gains realised by enterprises subject to corporate income tax are subject to corporate income tax as regular income (Article 8-1 of Ordinance 3.152).

However, the following incentive schemes may apply:

• Capital gains realised upon the sale of fixed assets are exempt from corporate income tax if the company undertakes to reinvest, within a three-year period as from the end of the financial year in which the capital gains were realised, a sum equal to the amount of the capital gains increased by the cost price of the assets sold in certain qualifying fixed assets (eg, except for lavish ones). The capital gains reinvested are deducted from the cost price of the new asset in order to compute its depreciation and possible future capital gain from its sale.
• This scheme applies to the sale of shares provided that they constitute fixed assets – that is, they:
• • offer full ownership of at least 20% of the share capital of the underlying company; and
  • have been held for at least two years as of the sale date (Article 10 of Ordinance 3.152).
• Under certain conditions, capital gains realised on goodwill at the time of a sole trader’s death (individual) or at the time of the sale or termination of a business are exempt from corporate income tax, provided that the business is continued by certain persons, including the sole trader’s heirs in direct line or surviving spouse (Article 11-1 of Ordinance 3.152).
• Capital gains deriving from the sale of fixed assets upon the termination of the business may benefit from the following incentive schemes:
• • Only 50% of the capital gains are taxable if such events occur less than five years after the creation or acquisition of the business; and
  • Only 20% of the capital gains are taxable if such events occur after this five-year period (Article 11-3 of Ordinance 3.152).
• Capital gains realised by businesses that are not subject to corporate income tax or by non-resident companies are exempt from any taxation in Monaco.

Taxation of dividends: Under the parent-subsidiary regime, dividends received by Monegasque companies from their Monegasque or foreign subsidiaries are exempt from corporate income tax, provided that the recipient holds at least 20% of the share capital of the distributing company for at least two years.

The aforementioned exception is only partial and a service charge computed on the gross dividend is added back to the recipient’s taxable income. The rate of this service charge varies depending on the extent of the shareholding and amounts to:

• 20% if, at the date of payment of the dividend, the recipient holds less than 35% of the share capital of the distributing company;
• 10% if the recipient holds at least 35%; and
• 5% if the recipient holds at least 50%.

This service charge cannot exceed the aggregate sum of business expenses.

Therefore, any tax paid abroad upon such foreign source dividends (eg, withholding taxes levied abroad) does not grant a tax credit to be offset against Monegasque corporate income tax.

On the contrary, if the conditions of the parent-subsidiary regime are not met:

• dividends are subject to Monegasque corporate income tax; and
• any tax paid abroad grants a tax credit that can be offset against Monegasque corporate income tax related to such dividends.

For the computation of Monegasque corporate income tax, the amount of the foreign tax (withholding tax) must, in such case, be added to the gross amount of the dividends.

Resident companies are subject to corporate income tax on their worldwide income, including capital gains, derived from a commercial or industrial activity carried out in Monaco.

However, under Article 1-2 of Ordinance 3.152, the corporate tax base of Monegasque companies subject to corporate income tax does not include foreign source income deriving from:

• a foreign permanent establishment;
• a ‘complete commercial cycle’ outside Monaco; or
• operations conducted outside Monaco through foreign dependent intermediaries that lack a distinct legal personality and have the authority to conclude contracts in the name of the Monegasque companies.

Losses may be carried forward indefinitely.

However, the amount of losses used in a given financial year must not exceed €1 million plus 50% of the taxable profit above €1 million.

Companies have the option, with certain limitations, to carry back losses of up to €1 million for one year.

In principle, foreign losses cannot be used domestically.

There is no concept of beneficial ownership of taxable income in Monaco, as income is taxed at the level of the company that is subject to corporate income tax.

There is no reduced corporate income tax rate, even for small businesses.

All Monegasque enterprises and entities, whatever their legal form, that carry out commercial or industrial activities and derive more than 25% of their revenue outside of Monaco are subject to corporate income tax.

In Monaco, there is no specific tax regime for certain economic zones.

However, Monaco has three categories of tax relief, in the form of:

• the headquarters/administrative offices scheme;
• the business startup scheme; and
• the research and development (R&D) tax credit.

Headquarters/administrative offices scheme: Headquarters/administrative offices are subject to corporate income tax based on a percentage of their total annual operating expenses, generally leading to an effective tax rate of approximately 8%.

Business startup scheme: Companies established in Monaco that fall within the scope of corporate income tax, carry on a genuinely new business and satisfy certain other conditions:

• are exempt from the tax for a period of two years; and
• subsequently benefit from a favourable regime for the following three years.

The tax regime is as follows:

• First and second years: No corporate income tax applies.
• Third year: Corporate income tax applies to 25% of taxable profits exclusively.
• Fourth year: Corporate income tax applies to 50% of taxable profits exclusively.
• Fifth year: Corporate income tax applies to 75% of taxable profits exclusively.
• Sixth year onward: Tax is calculated on 100% of taxable profits.

R&D tax credit: Companies that are subject to corporate income tax may benefit from an R&D tax credit based on eligible R&D expenses incurred during the fiscal year.

The R&D tax credit amounts to:

• 30 % of eligible R&D expenses up to €100 million; and
• 5% for the portion of R&D expenses exceeding €100 million.

The R&D tax credit is capped at €10 million

The use of the R&D tax credit is capped at 50% of the corporate income tax due in respect of the year in which the eligible R&D expenses giving rise to the R&D tax credit were incurred.

Capital gains, other than those realised on inventory, deriving from the free allocation of shares following the merger of joint stock companies are exempt from corporate income tax. This exemption is subject to the condition, stipulated in the merger agreement, that the absorbing or newly formed company must compute, in respect of the contributed assets (excluding inventory), annual depreciation and any subsequent capital gains based on the original cost basis held by the merged companies, net of the depreciation already recorded by them.

In the event of a full or partial transfer or cessation of business, capital gains arising from the disposal of fixed assets are included in the corporate income tax base for:

• half their amount if the transfer or cessation occurs within five years of the creation or acquisition of the business; and
• one-fifth of their amount if the transfer or cessation occurs after that period.

Taxable profits are calculated on the basis of the accounting profits prepared according to Monegasque generally accepted accounting principles, subject to certain book-to-tax adjustments, except in the specific case of the headquarters tax regime (see question 2.1).

According to Article 24 of Ordinance 3.152, operating accounts, profit and loss statements and balance sheets prepared from the accounting records required under Articles 10 and 18 of the Commercial Code must be established in accordance with Ordinance 3.167 of 29 January 1946.

Assets and liabilities denominated in a currency other than euros must, for each balance-sheet item, be grouped by currency. The foreign currency amounts thus aggregated must be recorded in the balance sheet alongside their euro equivalents, which are adjusted based on the official exchange rate in effect at the balance-sheet closing date.

If the accounting records are kept in a foreign language, a certified translation by a sworn translator must be provided upon request by the tax inspector.

There are no specific or incentive tax regime for intellectual property except the R&D tax credit (see question 2.1).

Contributions to pensions are not subject to deductible restrictions for the computation of the taxable profits.

Insurance companies are subject to a tax on insurance contracts ranging from 0.2% to 9%, depending on the nature of the underlying risk covered by the insurance contract.

No specific surtaxes apply in Monaco.

Monaco has not implemented any deemed deductions against corporate income tax in respect of equity financing, including notional interest deductions.

Fixed assets are recorded in the balance sheet at their acquisition or production cost, possibly revalued.

‘Depreciation’ is defined as any reduction in value intended to reflect the ongoing loss in value of fixed assets resulting from use and ageing.

Each category of fixed assets must be matched with a corresponding depreciation account.

Depreciation may be calculated either:

• on the basis of the actual decrease in value observed; or
• as a fixed amount determined by applying a constant rate to the value of each asset, such rate depending on the nature of the asset.

No asset may be depreciated beyond its original – potentially revalued – value.

All fully depreciated fixed assets included within each category must be disclosed separately.

Fixed assets located in a foreign country other than France must be the subject of a note included in Section X of the balance sheet, indicating, for each country:

• the acquisition value of the relevant assets; and
• the corresponding amount of depreciation.

A company may book a provision for the purpose of offsetting a decrease in value of a specific asset – other than depreciation of fixed assets – where:

• such decrease is not considered definitive; or
• its amount cannot be precisely determined as of the balance-sheet date.

Such provisions must be presented in the balance sheet as deductions from the corresponding asset items. These items must be grouped under separate headings with appropriate labels, to distinguish them from similar assets that are not subject to such provisions.

Lastly, asset revaluation may be realised by the company, as the revaluation surplus recognised by companies that have revalued their assets must be allocated to a special reserve (Article 17 of Ordinance 3.152).

Reference is made to question 2.1.

Monaco provides for a research and development (R&D) tax credit based on eligible R&D expenses incurred during the fiscal year.

The R&D tax credit amounts to:

• 30 % of eligible R&D expenses up to €100 million; and
• 5% for the portion of R&D expenses exceeding €100 million.

The R&D tax credit is capped at €10 million.

The use of the R&D tax credit is capped at 50% of the corporate income tax due in respect of the year in which eligible R&D expenses giving rise to the R&D tax credit were incurred.

Inventories are not subject to a special tax regime or valuation rules.

In practice, according to Article 8 of Ordinance 3.152, inventories must be valued at the cost or the market value at the closing date of the financial year if this is lower than the cost. Work-in-progress is valued at the cost.

Derivatives are not subject to any specific tax rules in Monaco.

Monaco has no legal definition of ‘residence’ for corporate income tax purposes. However, a business is generally deemed as a Monegasque resident if its head office, place of effective management or main establishment is located in Monaco.

There is no withholding tax applicable in Monaco on any kind of outbound payments.

Monaco has concluded treaties for the avoidance of double taxation with:

• Andorra;
• France;
• Guernsey;
• Liechtenstein;
• Luxembourg;
• Mali;
• Malta;
• Mauritius;
• Montenegro;
• Qatar;
• St Kitts and Nevis;
• the Seychelles; and
• the United Arab Emirates (not yet in force).

Provisions derived from such tax treaties override domestic tax provisions.

Companies that receive foreign-source income subject to withholding tax or to income tax in the foreign-source country may, depending on the category of income, offset the foreign tax against corporate income tax in Monaco.

For the purpose of calculating the tax due in the principality, the amount of foreign tax is added back to the company’s gross income.

Under Monegasque tax law, there is no legal provision allowing inbound corporate entities to obtain a step-up in the tax basis of assets upon relocation or transfer of activity into Monaco. Assets contributed or transferred are typically recorded at fair market value.

There is no exit tax provided for under the Monegasque tax rules.

According to Article 29.3 of Ordinance 3.152, the transfer of the registered office or a place of business abroad is treated as:

• a transfer or cessation of business, as well as the dissolution of the company;
• a transformation resulting in the creation of a new legal entity – including, in particular, the conversion of a joint stock company into a partnership;
• a contribution of assets to a company; or
• a merger.

In the event of a cessation of business, entities that are subject to corporate income tax must file a corporate income tax return in the month following that in which the cessation became effective. This tax return must cover the results generated since the end of the last tax period.

There are specific rules concerning the taxation of capital gains. According to Article 11.3 of Ordinance 3.152, in the event of the cessation of business or a full or partial transfer of activity, the capital gains arising from the disposal of fixed assets are included in the corporate income tax base for:

• half their amount if the transfer or cessation occurs within five years of the creation or acquisition of the business; or
• one-fifth of their amount if the transfer or cessation takes place after this five-year period.

There are no controlled foreign corporation rules or general anti-avoidance rule in Monaco.

Monaco has implemented specific rules concerning:

• thin capitalisation; and
• the deductibility of net financial expenses.

Thin capitalisation rules: The deduction of interest paid by a Monegasque company to its shareholders is allowed up to a maximum interest rate equal to the marginal lending facility rate of the European Central Bank, plus 200 basis points. In addition, interest paid by a Monegasque company to its controlling shareholders (which ‘in law or in fact’ control the company) is not deductible when the aggregate sum of the shareholders’ loans exceeds or is equal to 50% of the borrower’s share capital (Article 9-1.3° of Ordinance 3.152).

Net financial expenses limitations: Limitations to financial expenses allowances apply to loans borrowed from both related and unrelated parties (Ordinance 7.334 dated 1 February 2019). There are:

• general limitations; and
• special limitations in case of thin capitalisation.

General limitations: Net interest expenses are deductible from the corporate income tax basis up to the highest of

• €3 million per fiscal year (or, if applicable, for the 12-month period); or
• 30% of the taxable result, including net interest expenses, amortisation and provisions allowances, as well as capital gains and losses (‘tax EBITDA’), and before the offsetting of tax losses carried forward.

Excess net interest expenses can be carried forward with no time limitation and are deductible under the same conditions.

The tax deduction capacity that has not been used can also be carried forward over the five following fiscal years.

Thin capitalisation limitations: These limitations apply to loans from related entities when the borrower is deemed thin capitalised.

The Monegasque thin capitalisation rules apply to all loans granted to the borrowing company by any related party. Affiliation links are deemed to exist between two entities where:

• one entity:
• • holds, directly or through an interposed entity, the majority of the share capital of the other; or
  • exercises de facto the decision-making power; or
• both entities are under the control of a third entity (eg, sister companies).

When the average yearly amount of proceeds granted by a related entity exceeds a debt/equity ratio of 1.5:1, the entity is deemed to be thin capitalised. Net interest expenses accrued on related-party loans are deductible up to the highest of:

• €1 million per fiscal year (or, if applicable, for the 12-month period); or
• 10% of its tax EBITDA.

Excess net interest expenses can be carried forward for one-third of their amount (two-thirds are lost) and are deductible under the same conditions, with no time limitations.

The tax deduction capacity that has not been used is definitely lost, however.

See question 5.1.

See question 5.1.

There is no specific legal ruling process provided for under Monegasque law.

However, in practice, it is possible to liaise with the Monegasque tax authorities to request prior confirmation of the tax implications associated with a contemplated transaction.

As a matter of principle, intercompany transactions involving a Monegasque entity must be ‘arm’s length’ and therefore reflect market conditions set in comparable transactions between unrelated entities.

In this way, according to Article 14 of Ordinance 3.152, the commercial or financial relations that a Monegasque company has with any non-resident natural or legal entity must be carried out under arm’s-length conditions. In the absence of specific elements making the tax reassessment possible, taxable income is determined by comparison with taxable income of similar companies that operate normally. In case of tax reassessment on this topic, the transactions are added back for corporate income tax purposes in the Monegasque company’s accounts for an arm’s-length amount.

Article 9 of Ordinance 6.713 expressly provides that the Monegasque tax authorities may use country-by-country reporting to check whether the transfer pricing policy of an eligible international group is compliant with the transfer pricing rules.

In addition, as a consequence of Monaco’s base erosion and profit shifting commitments, and in particular as regards Action 13 (see question 6.3), the Monegasque tax authorities have recently been more active in controlling intercompany transactions to ensure that no profit is artificially transferred abroad by companies subject to corporate income tax.

Even if there are no specific legal provisions, advance rulings or pricing agreements, such advance rulings or pricing agreements remain possible in practice.

According to Article 33 of Ordinance 3.152, the Monegasque tax authorities may conduct corporate income tax reassessments until the end of the third year following that in respect of which the tax is due.

However, in the event of a loss carry forward, it must be possible to justify the loss carried forward until the end of the third calendar year following the financial year against the profit of which the loss was offset.

In principle, companies must file a tax return:

• within three months of the end of their financial year; or
• by 1 April, for financial years that are aligned with the civil year (Article 23-2 of Ordinance 3.152).

Corporate income tax is paid as follows:

• Four provisional tax instalments (advance payments) of corporate income tax are paid throughout the year (February, May, August and November). Each instalment amounts to 20% of the corporate income tax paid in respect of the previous financial year.
• Payment of the outstanding corporate income tax balance is made spontaneously upon filing of the corporate income tax return. If the corporate income tax instalments paid throughout the year exceed the corporate income tax due, excess corporate income tax paid will be offset against corporate income tax due in respect of the two following fiscal years.

The balance of corporate tax is due by the deadline for filing the tax return.

In addition, taxpayers must maintain adequate records for at least:

• five years for entities that are not subject to corporate income tax in Monaco; and
• 10 years for entities that are subject to corporate income tax in Monaco.

In principle, the late filing of a tax return is subject to a penalty averaging between €15 and €75 (Article 34 of Ordinance 3.152).

In case of the late payment of instalments or of the balance of corporate tax, a 3% penalty is applied; an additional 1% penalty is charged per month in case of additional delay of payment (Article 35 of Ordinance 3.152).

Any other breaches of statutory provisions committed in good faith will be subject to a tax penalty not exceeding one and a half times the amount of the basic tax that was omitted or put at risk – notably as a result of:

• a total or partial failure to file a return; or
• a failure to comply with a formality or time limit.

In cases of bad faith or fraudulent conduct, the tax is increased by:

• a fiscal penalty equal to four times its amount, without prejudice to criminal prosecution and fines as provided under Ordinance 653; and
• administrative sanctions – including temporary closure of the establishment, permanent disqualification from carrying on business and compulsory liquidation – which may also be imposed by the minister of state upon request of the director of tax services.

Monaco has made enforceable the multilateral agreement between competent authorities on the exchange of country-by-country reports (CbCRs) (Ordinance 6.712 of 14 December 2017).

This measure is part of the international project of countering base erosion and profit shifting (BEPS), which led to the passing by the Organisation of Economic Co-operation and Development of a set of measures (15 actions), including new rules on the documentation of transfer pricing to increase transparency for tax administrations (Action 13). Action 13 includes provisions regarding CbCRs.

A CbCR must be produced by the ultimate parent entity or a surrogate parent entity designated by the parent entity of a multinational enterprise group with consolidated annual revenue of more than €750 million before tax.

Consequently, Monaco requires Monegasque ‘constituent companies’ belonging to such multinational enterprise groups to report to the Monegasque tax authorities – whether they are the ultimate parent entity or the surrogate parent entity – at the latest on the last day of the group’s reportable financial year (Article 4 of Ordinance 6.713). If it fails to do so, the Monegasque company will be subject to a penalty of €750 (Article 11 of Ordinance 6.713).

The CbCR must be submitted to the Monegasque tax authorities each year within 12 months of the last day of the financial year (Article 6 of Ordinance 6.713).

The CbCR includes:

• aggregate information on revenues, profit or loss before tax, income tax paid, income tax payable, share capital, retained earnings, staff and tangible assets other than cash or cash equivalents, for each jurisdiction in which the group operates; and
• the identity of each entity belonging to the group, specifying:
• • its jurisdiction of residence for tax purposes; and
  • the nature of its activity.

A CbCR must be drawn up for each country in which the group has constituent entities.

Under Article 12 of Ordinance 6.713, in the event of failure to file a CbCR within the timeframe set above, the penalty will be:

• €10,000 if the report is not sent on time;
• €50,000 if the report is sent within 30 days of receipt of a formal notice sent via registered letter with acknowledgement of receipt; and
• €100,000 if the situation has not been regularised after this.

Inaccuracies and missing information will incur a penalty of:

• €150; or
• €250 if the entity fails to regularise the situation within 30 days of receipt of a formal notice sent via registered letter with acknowledgement of receipt (Article 13 of Ordinance 6.713).

There is no group relief available in Monaco for tax purposes.

Companies that are subject to corporate income tax will be taxed individually in accordance with their own taxable results.

All persons regularly making paying business transactions are subject to value-added tax (VAT).

The French and Monegasque territories, including their territorial waters, form a customs union under the France-Monaco Customs Agreement of 18 May 1963. French customs regulations apply directly in Monaco.

Monaco is incorporated into the European customs territory (although it remains a third country with regard to the European Union). Goods and services in the single European market can thus be accessed from Monaco.

Key transactions subject to VAT include:

• transactions forming part of business activities that are performed for a charge by a taxpayer either ordinarily or occasionally, whatever the taxpayer’s legal status;
• transactions specifically designated by the law (eg, self-supplies of goods, certain purchases and imports);
• transactions that are usually exempt but may be taxed at the option of the person performing them – for example:
• • transactions performed by persons carrying out exempt non-commercial activities;
  • transactions performed by banking and financial institutions; and
  • rentals of unfurnished property for industrial, commercial or professional use); and
  • transactions contributing to the production and delivery of property.

In addition, businesses in Monaco are not subject to any of the following:

• environmental tax;
• goods or service tax;
• consumption tax; or
• broadcasting tax.

Registration tax is levied on:

• certain capital transactions (eg, increase of share capital); and
• legal documents.

Transfer tax applies to the onerous transfer of certain assets, including:

• the transfer of Monegasque real estate (at the rate of 4.75%, 7.5% or 10%, depending on the circumstances and situation of the buyer); or
• the transfer of a going concern (at the rate of 7.5%).

The transfer of shares in joint stock companies is subject to a 1% transfer tax if voluntarily registered. Registration is compulsory if the company holds Monegasque real estate assets and, in such case, transfer tax is increased to 7.5%.

The Monegasque tax regime is very stable and provides an attractive framework for companies.

The trend is towards greater tax transparency and exchange of tax information.

Monaco is a member of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and is committed to the adoption of all mandatory measures of the BEPS to support the global movement to enhance tax transparency (to date, four actions out of the 15 BEPS actions are already applicable in Monaco – that is, Actions 5, 6, 13 and 14).

Monaco has acceded to the Multilateral Convention for the Implementation of Measures on Tax Conventions to Prevent Base Erosion and Profit Shifting.

Furthermore, Monaco has ratified the Convention on Mutual Administrative Assistance in Tax Matters.

Monaco provides a stable and attractive legal and fiscal framework which is particularly well suited to international groups, considering:

• its attractive corporate income tax provisions;
• the absence of withholding tax applicable to cross-border payments of dividends, interest and royalties; and
• the income tax exemption of directors and employees, since the principality does not provide for any individual income tax.

From a tax perspective, the main disadvantage results from Monaco’s rather poor double tax treaty network with Organisation for Economic Co-operation and Development countries; although Monaco has signed double tax treaties with Luxembourg and Malta providing for favourable provisions in view of eliminating double taxation.