Monaco applies a profits tax, which was introduced in 1964 in accordance with the tax treaty with France. The tax is limited in scope in that it applies only to:

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 to royalties from intellectual property rights, irrespective of their source.

In order to fall within the scope of the tax under the first condition, the activity has to be commercial or industrial in nature. 'Commercial’ is defined strictly as trading and excludes various activities relating to the provision of services.

Administrative offices are also subject to the same tax but on a notional tax base depending on location and the nature of activities, but typically amounting to 8% of annual operational expenditure.

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 the difference between net worth at the beginning and 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.

Dividend

Under a 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 company owns at least 20% of the capital of the distributing entity for at least two 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 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 profits tax provided the gain is reinvested in fixed assets within a period of three 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 two years may also be rolled over, providing that they are reinvested in fixed assets within a period of three years;
The above exemption may also apply to the sale of shares if they constitute ﬁxed assets, i.e., they fulfil the following conditions:

the shareholding comprises full ownership of at least 20% of the capital of an unrelated company; or
where the shareholding is below 20%, the shares must have been held for at least two years as of the sale date.

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 five years of the creation or acquisition of the business, and 20% of the capital gains are taxable if such events occur after this five-year period; and
Gains in the case of mergers are exempt, subject to certain conditions.

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