The Principality of Monaco and France have signed two tax treaties, the first in 1950 relating to the rules of inheritance taxation and the second in 1963 relating to the rules of income of natural and legal persons taxation. These treaties, which are still in force, were each concluded in a very different political context and therefore have different rules and implications.

A little bit of history…

After World War II, the Principality of Monaco and France officially maintained good relations despite the protectorate set up as a result, on one hand of the 1918 treaty granting limited protection by France and, on the other hand, of the 1930 convention granting France considerable prerogatives in the management of Monegasque affairs.

In a calm climate, the first tax treaty was signed on April 1st, 1950 in order to avoid double taxation for both French and Monegasques and to codify the rules of administrative assistance in inheritance matters and thus achieve a balanced situation. Real estate located in Monaco is thus subject only to Monegasque inheritance tax, which is extremely reduced, according to the principle that "real estate and real estate rights forming part of the estate of a national of one of the two States are subject to inheritance tax only in the State where they are located". For securities (shares, bonds, mutual funds, debts, etc…), Monegasque inheritance tax also applies, but on one important condition: that the deceased has been resident in Monaco for at least five years at the time of his/her death.

Only successions are targeted by this agreement, donations being excluded.

Over the years, this supervision became burdensome for Prince Rainier III, who wanted to give his country greater independence. He then got closer to the United States and wanted to renegotiate all the treaties signed with France, which gave the latter the power to interfere in Monegasque life and affairs. Relations became strained between the two countries, leading to a political and financial crisis.

The quarrel erupted in 1962 following the Monegasque takeover of a French state-owned broadcasting company and Rainier III's dismissal of his French head of Government.

General de Gaulle put pressure, declared the blockade of Monaco and introduced customs controls at the border between the two States. France condemned a number of Franco-Monegasque economic, financial, commercial, tax and customs agreements and, in particular, reproached Monaco for its tax system, which allowed too many French citizens residing more or less regularly in Monaco to evade French tax.

The Principality of Monaco was then forced to make major concessions regarding tax in return for a strengthening of its sovereignty. After several months of discussion, the crisis was resolved with the agreements of May 18th, 1963. France obtained from Monaco a substantial adjustment of its tax provisions, which we present here, with the aim of abolishing all the competitive advantages granted to companies established in Monaco and limiting the departure of French people to the Principality who aim to transfer their tax residence there.

The Tax Treaty of May 18th, 1963

This new treaty concerning income tax, discriminates against French nationals living in Monaco, who will henceforth be treated differently from residents of other nationalities who also live in the Principality.

It includes the Principality in the territorial scope of application of French income tax and aims essentially to:

• provide for the set up in Monaco of a tax on profits made by certain companies or enterprises in Monaco;
• define the tax regime applicable to individuals of French nationality who have transferred their domicile to the Principality;
• set the rules for administrative assistance between the two countries.

1. Business and corporate income taxation (Article 1 of the Treaty)

From a taxation point of view, the only direct taxes payable by companies or businesses operating in the Principality are profit tax and registration fees, stamp or mortgage duties payable on the completion of certain operations. Unlike their French counterparts, Monegasque companies do not have to pay payroll tax (due only by employers who are not subject to VAT on their entire turnover), business tax or training levy.

Sovereign Order no. 3152 of March 19th, 1964, issued in application of the 1963 Convention, set up this tax on profits, but its scope does not extend to all companies or businesses: only some of them, because of the nature of their activities and under certain conditions, are subject to this tax.

According to Article 2 of the tax treaty, two categories of companies are subject to Monegasque income tax:

• companies which, whatever their legal form, carry out an industrial or commercial activity in Monaco and at least 25% of their turnover comes from operations carried out directly, or through intermediaries, outside the territory of the Principality.

These Monegasque companies are taxed on profits on the same basis and at the same rates as in France: the rate was for a long time 33 1/3 and has been gradually reduced since 2018 to reach 25% in 2022. As in France, the VAT rate is 20%.

• companies whose business in Monaco consists of receiving proceeds from the assignment or licensing of patents, trademarks, manufacturing processes or formulae or proceeds from literary or artistic property rights.

Therefore, the tax has not a general scope and companies which are not expressly referred to in the Sovereign Order are exempt from it. Apart from the two hypotheses mentioned above, any company or enterprise carrying on an industrial, commercial, or liberal activity in Monaco may be subject to tax on profits.

2. Personal income taxation (Article 7 of the Treaty)

The Principality of Monaco does not impose income tax on individuals domiciled in its territory. As a general rule, the only taxes, direct or indirect, that they pay are registration and stamp duties, mortgage duties and VAT. Principality residents do not pay local or income taxes, nor are they liable for any capital gains tax, wealth tax or gift tax in direct line. Only foreign-source income may have been subject to withholding tax.

For non-French foreigners residing in Monaco, the situation is exactly the same. However, the case of French nationals residing or owning properties in Monaco is very different.

Under certain conditions, Article 7-1 provides for French nationals domiciled in Monaco to be subject to income tax in France on all their income, under the same conditions as if they had their domicile or residence in France, within the meaning of Article 4B of the French General Tax Code (CGI), namely:

• have their home or main place of residence on French territory, or
• carry out a professional activity there, whether salaried or not, unless the person can prove that this activity is carried out on a secondary basis, or
• have their centre of economic interests in France, or
• be an administrative agent exercising his functions or on mission in a country where he is not subject to personal tax on all his income.

French nationals residing in Monaco are therefore subject to income tax in France on all their income, whether generated in France or elsewhere, in Monaco or in other countries, under the same conditions as if they had their domicile or residence in France. These French people are:

• those who have been ordinarily resident in Monaco for less than five years as of October 13th, 1962 (i.e. after October 13th, 1957);
• those transferring their domicile or residence to Monaco;
• those with dual nationality residing in Monaco. Insofar as Article 7-1 of the Treaty refers to persons of French nationality, it is irrelevant whether or not these persons have another nationality. Consequently, only persons of French nationality who have had their continuous habitual residence in Monaco for at least five years as at October 13th, 1962 should remain outside the scope of this provision.

These provisions make the treaty different from other tax treaties, most of which provide that a person resident in a contracting State can only be domiciled for tax purposes in that State by virtue of his or her "permanent home". The treaty has created a new case of tax domicile in France, not provided for by the CGI, based solely on French nationality. The fact (residence in Monaco) and the law (assimilation to tax domicile in France) no longer coincide. This Treaty also has the particularity of not remedying cases of double taxation, but on the contrary of avoiding situations of "double absence of taxation". 

However, only one exception is provided for: French nationals and their children who have been resident in Monaco for more than five years as at October 13th, 1962 (i.e. October 13th, 1957) and who have retained their residence in the Principality since that date are considered as Monegasques by the French tax authorities and qualified as "privileged French citizens".

In addition, the Council of State ruled in 2014 that French nationals born in Monaco and who have constantly resided there since their birth ("Enfants du Pays"), regardless of the date of birth, are not subject to the scope of this Article 7-1. They can apply for a certificate of domicile which allows them to have the status of privileged French citizen. It should be noted that any interruption of permanent and habitual residence in Monaco, regardless of the country to which the domicile is transferred, causes the persons concerned to lose the benefit of this certificate.

Similarly, this certificate must be suspended as long as the beneficiary, although still ordinarily resident in Monaco, meets one of the other criteria of Article 4B of the CGI. French nationals who have their main professional activity or the centre of their economic interests in France are targeted.

These are therefore the only French nationals who will be able to avoid taxation. Continuing as before to be considered as domiciled outside France, they may only be liable to tax in France on their French income, if they have any.

There are also several special cases of French nationals who settled in the Principality after October 13th, 1957 and who are not subject to income tax in France except on their French source income, if they have any:

• individuals belonging to the Sovereign House;
• administrative agents and employees of the Principality's public services who established their regular residence in Monaco prior to October 13th, 1962 (status maintained when they retire but withdrawn when they lose their status);
• individuals who have dual French-Monegasque nationality, as Monegasque nationality takes precedence;
• nationals who have married Monegasques or a French individual with privileged French status or an individual of foreign nationality, but certain conditions must be met in order to avoid income tax on income from sources other than French ones;
• individuals who have dual French and foreign nationality other than the Monegasque one, provided that they were established in the Principality before December 29th, 1995 and that they had completed administrative procedures before December 31st, 1996;

Finally, it should be noted that Monegasque nationals residing in the Principality and carrying out a professional activity in France or having the centre of their professional interests there would not be subject to income tax on their income earned in Monaco, provided that this income is independent of their activities carried out on French territory.

On the other hand, individuals of Monegasque nationality who carry out activities in France and have their home or main place of residence there within the meaning of Article 4B of the aforementioned CGI are subject to unlimited tax liability in France.

The case of property wealth and income

In addition to income, the Tax Treaty also provides for liability to the solidarity tax on wealth, which has not existed since January 1st, 2018, replaced by the tax on real estate wealth. The 1963 Tax Treaty now deals with this tax.

Article 7-3 provides that individuals of French nationality who have transferred their domicile or residence to Monaco as from January 1st, 1989, are subject, as from January 1st, 2002, to this tax in France under the same conditions as if they had their domicile or residence there. The tax is therefore levied on all of their assets included in the tax base, whether they are located in France or abroad, including in Monaco (along with all of their property income and assets).

Individuals established in Monaco before January 1st, 1989, are only liable to social security levies on their assets located in France, under the same conditions as individuals domiciled for tax purposes outside France.

French nationals born in Monaco and who have constantly retained their residence there since their birth are also considered for wealth tax purposes as individuals domiciled for tax purposes outside France, subject to the presentation of a certificate of domicile.

The income tax regime set up by the Treaty does not deal with social security contributions on income from assets and similar items, i.e., the general social contribution (CSG) and the contribution to the reimbursement of the social debt (CRDS), for French nationals residing in Monaco.

On the other hand, they are the subject of a decision by the Council of State dated November 10th, 2004, which states that "natural persons of French nationality residing in Monaco who are considered to be domiciled in France for tax purposes accordance to Article 7-1 of the Treaty, cannot be subject to social security contributions" (that are of 17.20% in France, and which apply to income from assets).

However, the Council of State also ruled that an individual who does not meet any of the residence criteria set out in Article 4B of the CGI will not be subject to social security contributions on the basis of income from worldwide assets but only on income from French real estate assets, with the exception of French real estate gains.

As for individuals of French nationality outside the scope of paragraph 1 of Article 7-1 of the Treaty (e.g. privileged French nationals), they are, in principle, subject to income tax in France only on their French-source earnings.

Regarding real estate income, only French source profit is considered for income tax purposes. Thus, revenue from the rental of real estate located in France is taxed on the progressive scale of income tax.

To sum up, whether they are taxed in France, French nationals residing in Monaco only have to pay social security contributions on their French-source real estate revenue (property income), and not on their business, assets and investment incomes, (unearned income).

In accordance with all the above, it is advisable to study your situation with the help of a tax expert, as the interpretation and application of the 1963 Treaty are not always easy.

Valeri Agency is surrounded by the best experts in real estate law and tax law in the Principality and will make you benefit from its network. Our agency will also be your privileged partner to create and develop your assets.

Do not hesitate to contact us!