Although Monegasque companies are generally aware that the costs of director's fees are tax deductible, it is still worth offering an overview of the finer points of this regime.
Corporate income tax (CIT) originated as a result of the tax treaty concluded by Monaco and France in 1963, specifically Article 1, in which the Government of H.S.H. the Prince of Monaco committed to "introducing a tax on companies in the Principality".
CIT is governed by Ordinance No. 3.152 of 19 March 1964, which defines its scope and the procedures for determining the tax base of a company.
Traditionally, when establishing this tax base, some costs are deductible while others are not, or are subject to limits on the amount that can be deducted.
In accordance with Article 3 of the Franco-Monegasque tax treaty and Article 13 of Ordinance No. 3.152, the remuneration paid to a company's "directors" may only be deducted where:
- it relates to actual work; and
- the amount paid is not excessive when compared to internationally recognised practices, particularly those within the European Union.
The purpose of the first condition, which is duly verified by the tax authorities, is to avoid any establishment of a fictitious presence in Monaco.
Assessment of the second condition, which is based on specific criteria relating to both the director's activity and the company's revenue, warrants further development.
The deduction limit for remuneration of the highest paid director / executive
To determine whether the level of remuneration in question is excessive compared to international practices, it is important to distinguish between two situations:
Situation 1: If the company's revenue does not exceed €3.5 million in the case of service providers and €7 million for other companies, it must comply with a scale setting out the maximum levels of deduction for director's fees.
To give an example, the highest level, allowing remuneration of €1,509,264 per year to be deducted, corresponds to revenue of between €3,375,001 and €3,500,000 for service activities, and between €6,750,001 and €7,000,000 for other activities.
In addition, the limits may be increased by up to 15% to take account, in one lump sum, the costs borne personally by the individual concerned in the course of their duties.
Situation 2: For companies whose revenue exceeds the limits set out above, there is no preset scale; the maximum deduction level will be determined on a case-by-case basis.
What about other directors or executives?
The scale that applies to other directors or executives in the company is more restrictive and their deductible remuneration may not exceed 75% of the maximum remuneration authorised for the highest paid director in the company.
Difficulties encountered when applying this tax regime
Application of this regime raises some practical questions which include, but are not limited to, the following:
- To which individuals / social mandates do the limitations apply?
- What is included in the "remuneration" paid? How should benefits in kind be taken into account?
- What happens if someone both has a social mandate and receives a salary?
- Under what conditions can the 15% lump sum for costs over and above the initial limit be applied?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
