Many people may not know this, but Monaco is a sovereign country—and the smallest nation outside of Vatican City. The national language is French, which is probably why it's often mistaken for a part of France. Located on the Mediterranean near Italy, it's just hours away from some of the major cities in Europe. Monaco has a beautiful setting and high quality of life, not to mention superior cultural, educational, and medical programs.
And there's another plus to living in this sunny locale: very favorable tax laws. Many people choose to call this principality home because it's a high-profile tax haven. The country's personal and business tax laws and policies are relatively lax compared to those of many other nations. In this article, we highlight some of the tax advantages of living in Monaco.
- Monaco is considered a tax haven because of its favorable tax laws and policies.
- Individuals must show proof of accommodation for a year and be self-sufficient to be considered a resident of Monaco.
- Monaco does not collect personal income tax or capital gains taxes.
- There are no property taxes in Monaco, but rental properties are taxed at 1% of the annual rent plus other applicable charges.
- Monaco eliminated taxes on dividends paid by local companies and does not charge a general corporate income tax.
Personal Income Tax
Since 1869, Monaco has not levied a personal income tax on its residents. An individual must intend to stay longer than three months a year to be considered a resident. Considering the strategic location of Monaco, which is easily accessible by airplane, boat, or train, it is very common for residents to work and even live in other countries in Europe.
For example, nonresidents are allowed a 90-day stay in the United Kingdom. Many businesspeople who reside in Monaco work in the U.K. without exceeding the 90-day limit. This, in turn, makes them subject to Monaco tax laws, so any income earned in the U.K. avoids taxation in that country.
But there is a catch. Many countries in Europe consider this strategy tax evasion and try to impede it. For instance, French nationals residing in Monaco are subject to French income taxes, unless they became residents of Monaco before 1957.
Monaco isn't part of the European Union (EU). However, the EU and Monaco (plus Andorra and San Marino) are negotiating an Association Agreement for their participation in the EU internal market.
Capital Gains and Wealth Tax
A capital gain occurs when the value of a capital asset increases from its original purchase price when it is sold. Capital gains can be realized on any type of assets—for example, stocks, real estate, and other investments. Most countries impose a tax on capital gains, including the U.S. But residents of Monaco do not pay capital gains taxes.
Similarly, Monaco also does not levy any net wealth taxes. Wealth taxes are charged on the net fair market value of someone's assets. They are charged on a taxpayer's assets less their liabilities. This tax is also called a capital tax or equity tax.
These rules don't apply to current or prior French residents. These individuals may be subject to some amount of taxation. Nevertheless, French citizens who transfer their residence or domicile to Monaco will have their worldwide property subject to France's net wealth tax.
The real estate market in Monaco is open to residents and foreign investors alike. There are no restrictions on foreign ownership, and it's fairly easy to buy or rent in the country. Keep in mind that buying or renting real estate is an important part of establishing residency in Monaco According to the rules, you must own or rent a property for at least a year in order to become a resident.
If you own property in Monaco, it's important to note that there are no property taxes in the principality. But that doesn't apply to rentals. In fact, rental properties are taxed at 1% of the annual rent plus other applicable charges.
You will have to pay taxes if you sell your property. This tax is levied at a rate of 33.3% on any profits earned on the sale of real estate. However, losses on the sale of real estate can be carried forward for up to five years to offset any gains on other sales.
Anyone who intends to operate a business must first apply for a permit. This includes anyone who intends to operate as a company, trade, sole proprietorship, or freelancer. Paperwork must be filed with the Welcome Office. The business owner must have a solid professional reputation and qualifications and must demonstrate the promise of stable business activity through a business plan.
Individuals must also understand the country's business tax rules. There isn't a general corporate income tax in Monaco. But Monaco has a treaty with France that allows profits of certain business activities to be taxed. Companies must demonstrate that 75% or more of their profits are generated domestically. Companies whose profits exceed 25% from outside of Monaco are taxed at a rate of 33.33%.
Certain rules apply to businesses that operate within the principality. For instance:
- Monaco eliminated dividend taxes in 1963 for shares in local companies. This policy greatly increased the amount of foreign investment in the principality, as did the large availability of data privacy.
- The profits of Monaco-based companies are taxed if they engage in selling the licensing of trademarks, patents, manufacturing processes, or artistic copyrights.
Monaco is known for its financial and professional secrecy laws. This means it maintains a high degree of data privacy within its banking system, including the existence of wealth management and bank accounts and any related information like account balances and activity. Failure to abide by these standards results in punishment as per the Monegasque Penal Code. Keep in mind, though, that Monaco has signed transparency agreements with other countries of late.
Despite this, the government does have measures in place to counter money laundering and terrorist financing. The first anti-money laundering (AML) law was established in 1993 and continues to be amended as international standards change. This activity is monitored by the country's Financial Action Task Force.
Monaco is known for financial secrecy but is increasing its efforts for transparency agreements with other countries.
Tax Havens Around the World
Monaco isn't the only country in the world that attracts new residents and businesses because of its status as a tax haven. There are others that offer similar or other tax-based incentives, notably:
- Switzerland: Although banks can no longer operate anonymously, the country still registers high on the global privacy list because of its financial privacy laws. It continues to offer the wealthy a safe place to store their money and keep it there.
- The Cayman Islands: This island nation doesn't have a corporate tax. As such, it allows companies to set up subsidiaries to protect some or all of their income from taxation. Investors aren't required to pay taxes on dividends or interest earned on investments and the privacy laws are some of the strictest in the world.
- Panama: Companies incorporated in Panama that conduct offshore business aren't subject to many forms of taxation, including corporate, withholding, income, and capital gains taxes. Panama has very favorable privacy laws that shield offshore corporations, trusts, and foundations.
How Does Monaco Make Money?
Monaco is a popular tourist destination because of its climate and casino. As such, the country relies heavily on the tourism industry to generate revenue. It also charges a value-added tax (VAT) of 20%, stamp duties on documents, and a 33.33% tax on corporations whose profits exceed 25% from offshore sources.
What Is the Cost of Living in Monaco?
The general cost of living in Monaco for a single individual is just over $1,400. This figure doesn't include accommodations and is about 47% higher than in the U.S. Renting a one-bedroom apartment in the city center costs about $5,500 while one outside the city is $3,600. Rent costs about 440% higher in Monaco than in the U.S.
Is Monte Carlo a Tax Haven?
Monte Carlo is an administrative area of Monaco. As such, it is considered a tax haven because of its favorable laws. For instance, individual residents aren't taxed on personal income. The area also has a business-friendly tax structure because it only taxes profits on companies that earn 25% or more of their profits from overseas sources. They are charged at a rate of 33.33%.
The Bottom Line
Monaco has long been considered a tax haven because of its favorable personal and corporate tax rules. The country does not tax individuals on their income and corporations that make 75% or more of their profits within the country are tax-exempt. If you're thinking of moving because of these reasons, you must show proof of accommodation and show that you're able to sustain your lifestyle. And as with any major life change, make sure you do your research before you take the plunge.