24 Oct AiroAV Announces Corporate tax planning developments in Monaco
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 towards a non-Monegasque clientele; 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 such 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 such 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 held for more than 25 per cent 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 such expenses (the R&D Tax Credit). The R&D Tax Credit is equal to 30 per cent of the R&D expenses not…