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5.1. Tax Base for Resident Entities

Monaco ordinarily does not tax business income. However, the tax treaty with France requires the territory to levy a corporate tax on:

  • Companies, regardless of their legal status, if they carry out industrial or commercial activities in Monaco and derive 25% or more of their turnover from outside Monaco; and
  • Companies whose activities in Monaco consist of the collection of proceeds from the sale or licensing of patents, trademarks, manufacturing processes or formulae, and literary and artistic copyrights, irrespective of their source.

Where a company becomes liable to tax as per the above, the taxable base includes only the income derived or deemed to be derived in Monaco. Foreign-source business income (but not investment income, see below) derived through a permanent establishment, a business establishment or a ‘complete commercial cycle’ outside Monaco is excluded from the taxable base. Note, however, that whilst excluded from the taxable base, foreign-source business income is taken into account in determining whether the Monaco entity derives 25% or more of its turnover outside Monaco and falls consequently under the profits tax ambit.  

Investment income from foreign sources is included in the taxable base, unless it is connected to a foreign permanent establishment or other business establishment. The taxable base is expressed as the difference between net worth at the beginning and at the end of the tax period. Expenditure incurred in the production of taxable income is deductible, but limitations apply to financing charges and management and executive compensation.

Headquarters may be taxed under a notional net profit corresponding to a percentage of local expenditure (generally 8% of local running costs).

Dividend

Under the participation exemption regime, dividends received from domestic and foreign subsidiaries are exempt from the profits tax (except for a specified variable percentage of their amount, see below) provided the Monaco parent owns at least 20% of the capital of the distributing entity for at least 2 consecutive years as at the date of distribution. A specified variable percentage of the dividend received is not eligible for the exemption and is added to taxable income. The portion added to taxable income depends on the holding percentage but is capped at the expenses incurred by the parent with respect to the relevant participation:

  • 20% if the participation is lower than 35%;
  • 10% if the participation is 35% or more but less than 50%; and
  • 5% if the participation is  50% or more.

Where the dividends received benefit from the participation exemption regime, any foreign tax credits attached to the dividends are forfeited.

Where the required conditions are not met, the dividends are added to taxable income for their gross amount and assessed to the tax on profits at the standard rate with commensurate relief for any foreign taxes.

Capital Gains

There is no separate tax on capital gains in Monaco. Capital gains are considered as ordinary income and taxed at the standard profit tax rate. However, certain exemptions apply as follows:

  • Gains on the disposal of fixed assets are exempt from corporate tax provided the gain is reinvested in fixed assets within a period of 3 years from the end of the period in which the gain was realized, increased by the cost price of the asset, in certain qualifying business assets (not necessarily similar to those which were sold). Gains realized from the disposal of investments held for more than 2 years may also be rolled over, providing that they are reinvested in fixed assets within a period of 3 years;
  • Gains on winding-up or disposal of business are partially taxed at the standard rate, i.e., 50% of the capital gains are taxable where such events occur within 5 years of the creation or acquisition of the business, and 20% of the capital gains are taxable if such events occur after this 5-year period; and
  • Gains in the case of mergers are exempt, subject to certain conditions.