Monaco: Offshore Business Sectors

Although Monaco is an attractive location for individual residents, it does not seek to offer itself as an offshore jurisdiction for businesses, in fact the tax regime acts to discourage companies from making profits unless activity is strictly local, and the local market is inevitably small. Any business deriving more than 25% of its turnover from outside Monaco is taxed at 33.33% on its profits.

The absence of individual taxation favours the development of service centres, headquarters offices, logistics management, research labs and other cost centres which are not expected to make a profit. Even then, high social contributions (40% of salaries) are a disincentive.

Despite the poor tax regime for exporting businesses, it's even worse for them in neighbouring France and Italy, and Monaco has created many light industrial jobs in non-polluting, high value-added factories supplying regional markets, particularly in pharmaceuticals, cosmetics and electronics. Employees are drawn in from surrounding population centres. Some tax incentives for business start-ups have encouraged this type of development.

The usual types of offshore financial institution - banks, insurance companies, mutual funds - which populate offshore centres are unlikely to find Monaco interesting. The disadvantages include strict and cumbersome authorization requirements and high rentals caused by a limited supply of land, in addition to the unfavourable fiscal situation noted above.

The exception to this is private banking (see below), which has thrived in order to service the growing numbers of wealthy individuals who have settled in Monaco. Clearly, if a bank is handling assets for locally-resident individuals, it will escape the business profits tax.

As with offshore financial institutions, Monaco also does not attract licensing companies or other types of intellectual property-owning company with international royalty, interest or dividend income.

An IMF report on Monaco's financial supervisory and regulatory regimes in September, 2003, was complimentary, saying: "The Principality of Monaco has in place a comprehensive legal framework, supervisory structure, and practices that support a well regulated financial environment."

It went on to add that: "The authorities have over the past two years adopted a strongly proactive approach to supervision, especially in the AML/CFT area. This emphasis is appropriate to a system largely dominated by internationally active private banking and related financial services, the supervision of which benefits from close collaboration with the French supervisory authorities."

On the initiative of Monaco's Financial Activities Auditing Committee (CCAF), the annual meeting of the IFREFI (Francophone Institute for Financial Regulation) was held in the Principality in 2008. According to the Monegasque authorities, IFREFI's first meeting in Monaco, which was held from April 2 to 4, 2008, was of key importance to the future development of the Principality's financial management industry.

Established in 2002, the IFREFI groups together approximately twenty countries from Europe, French-speaking Africa and Quebec. The goal of the Institute is to strengthen cooperation and exchange between its members in the field of financial regulation, a burning issue in the light of the financial market crisis of the last few months.

The topics of the meetings, chosen by the regulators themselves, this year concerned the subprime crisis and potential regulatory solutions, group savings products, and codes of good conduct in financial information matters.

The opening of the April 4 session was held in the presence of Prince Albert II, and brought together the Presidents of the CCAF, Christian de Boissieu and the Authority for the French Financial Markets, Michel Prada, among others.

Established as an independent administrative authority, following the adoption of new legal provisions on financial activities in September 2007, the Financial Activities Auditing Committee is entrusted with the following:

President Christian de Boissieu pointed out that, far from acting as a brake for the development of the market, the regulator "is there to increase its security and consequently help Monaco compete as a financial market”.

Secretary General of the CCAF, Jean Castellini, added that:

“With the steady growth of consultancy and management firms setting up over the last few years (42 at the end of February 2011), some of which are of high repute (Goldman Sachs, Citigroup and hedge funds such as SRM), on the one hand we need to ensure investors are given the best information possible on products available, and on the other hand, to promote efficient financial and operational risk control of the organisations supervised by the CCAF”.

See Direct Corporate Taxation and Offshore Legal and Tax Regimes for details of corporate tax regimes in Monaco.

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Monaco Banking

Although private banking for rich Monagesque residents was the original basis of the Principality's banking sector, this has changed. Many factors have contributed to Monaco's rise as a banking centre in the last 10 years, including the presence of a secure legislative base (the Bank of France is responsible for regulatory oversight), the absence of withholding tax on interest payments, and a rush of Italians away from their ever-tighter domestic tax regime.

At the time of writing there were some 87 banks and financial institutions in Monaco, with more than 300,000 accounts (remember that there are 7,600 Monagesque nationals, and another 28,000 foreign residents). Approximately 85% of the banks' customers are non-resident. Banking turnover is in excess of EUR2bn, and assets under management top EUR78bn.

Although the majority of banking is still for private individuals, commercial banking has grown substantially, particularly in real-estate lending and in shipping.

Much of the legal basis of banking in Monaco stems from the French Banking Law, supplemented by provisions of Monaco Criminal and Company law. Banking secrecy is imposed by Clause 57 of the French law, while defences against money-laundering are contained in Monagesque laws nos. 1157 of 23/12/92 and 1162 of 7/7/93. Secrecy is adequate for individuals with no French connections, but somewhat compromised for French residents (see Double Tax Treaties).

In October 2001 France's Finance Ministry confirmed that France and Monaco had reached an agreement on initiatives to counter money laundering in the principality. According to the Ministry, Monaco 'significantly strengthened' its stance against money laundering activities by doubling the number of staff who trace the money launderers as well as pledging to report more suspicious transactions.

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% from July 1, 2008 and 35% from July 1, 2011) and to hand over 75% 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 force from July 1, 2005.

In 2009, Monaco agreed to increase its transparency with foreign tax authorities in the hope that the OECD will remove it from its list of uncooperative jurisdictions. In its statement Monaco said that it would follow ‘recent evolutions in the area of bank secrecy and information exchange’ undertaken by jurisdictions such as Switzerland, Luxembourg and Austria and conform to standards laid down by the OECD (see Double Tax Treaties).Indeed, Monaco, along with Andorra and Liechtenstein, was removed from the OECD list of uncooperative jusdictions in May 2009. Since then, Monaco has signed 19 Tax Information Exchange Agreements.

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