Towards an evolution of the property traders' profession in Monaco

Towards an evolution of property traders' profession in Monaco, in order to enhance the value of the real estate assets

 

The increase in the number of property traders and the tax advantages they benefit from in the Principality prompted the National Council to react. The bill n°252 relating to the regulation of the profession aims to provide it with an autonomous legislative framework, and to establish it as a regulated profession, both in terms of access and practice.

 

Definition

Property dealers are natural or legal persons who, on their own account, on a professional, regular and speculative basis, purchase real estate, business assets or shares in real estate companies (“SCI”) for the purpose to resale them and generate a capital gain, possibly by renovating them or upgrading them through renovations. Indeed, property traders are not obliged to carry out renovation work.

They differ from real estate brokers in that they own the properties they resell, whereas the others are intermediaries. The profession of property trader is not statutorily assimilated to a real estate trade because it is not subject to the regulations of the real estate professions. Property traders have the status of retailers and are therefore bound by the legal obligations related to it (registration with the Trade and Industry Register, keeping accounts, drawing up annual accounts, etc.).

 

Law in force

In the Principality of Monaco, the activity of property trader is currently subject to the common law regime of authorisation and administrative declaration to exercise, provided for by Act No. 1.144 of July 26th, 1991, relating the exercise of certain economic activities, as amended. It is therefore not governed by a specific law, even though other real estate professionals are subject to the provisions of Act No. 1.252 of July 12th, 2002 on the conditions for carrying out activities relating to certain transactions involving buildings and business assets.

The profession is also subject to Act No. 1.044 of July 8th, 1982, in the same way as public sales of certain tangible movables and works, supplies or materials contracts. This law specifies the exemption from registration duties in the context of transactions carried out by property traders, subject to the fulfilment of certain conditions (in particular that of reselling the properties within four years).

Finally, Act No. 1.362 of August 3rd, 2009 on the fight against money laundering, terrorist financing and corruption subjects property traders to the obligations it lays down.

 

How to start the business?

Any commercial activity is subject to a system of prior authorisation, under penalty of criminal sanctions. No usual economic activity may be carried out in the Principality without prior authorisation from the Prince's Government. The property trader must file an application which is quite simple and will receive the decision within 3 months, which may be refused.

With more than 300 property traders in the territory in 2021, this activity is considered "over-represented". For this reason, since January 8th, 2020, only applications concerning Nationals are potentially registered. Indeed, the profession is now exclusively "reserved for Monegasques", as confirmed by the Business Development Agency. This measure will make it possible to regulate the number of property traders, without penalising others, including non-Monegasques, who already have authorisation to work in the Principality.

Property traders can count on the Monegasque Property Traders Association (AMMB), which became official on December 6th, 2019, to assist its members regarding property traders’ activity and in general all activities relating to real estate and their legal, economic, social, fiscal, financial and ecological impact.

 

Property traders’ liability

In France, as a professional seller, and sometimes as a builder for renovations carried out, the property trader is requested to take out various types of insurance as a result of his/her/its activity (professional civil liability insurance, ten-year liability insurance, damage to building work insurance in the event that the work requires a legal ten-year guarantee, guarantee of perfect completion, etc.).

In Monaco, this is not compulsory and, as a result, few or no companies have taken out specific insurance for the purchase and resale of properties after conversion or improvement.

 

An advantageous tax system

Even if the activity of property trader is not regulated, it benefits from a particular and advantageous tax system, in accordance with the aforementioned Act no.1.044.

Purchases of buildings, business assets or shares in “SCI” are exempt from property transfer tax under certain conditions. Instead of the 6% notary and registration fees on the market value of the property, which must be paid, property traders pay only 1.5% corresponding to the notary's fees, provided they resell the property within 4 years.

In case of successive acquisitions by different property traders, the time limit for the first purchaser is binding on each of these persons.

In addition, property traders have the option of not paying VAT on the margin, provided that they waive the right to recover it, particularly in the case of works. To sum up, if the amount of the expected capital gain is greater than the amount of the work, therefore it will be more interesting to pay VAT.

It is important to precise that only persons liable to VAT can carry out transactions under the tax system of property traders, i.e. these transactions must be carried out on a regular basis and be recognised as professional, in particular by the payment of all social security contributions and other taxes related to a commercial activity.

If the 4-year period has expired, and if they do not obtain an extension period, the property traders will have to pay the 4.5% notary's fee saved at the time of the purchase, a related interest on arrears calculated at the legal interest rate, as well as additional fees of 6%. These fees and penalties for late payment must be paid within one month of the expiry of the said period.

In the event that the 4-year period has elapsed, and if they do not obtain an extension period, a general and systematic extension of the legal 4-year period for resale cannot be considered.

However, taxpayers who, on expiry of the legal 4-year period, are able to prove the existence of a real estate transaction in progress or imminent (e.g. signing of a preliminary sales agreement), or a delay in the work, may apply to the Manager of the Department of Tax Services for an extension of this period. The additional period that would be granted to finalise a sale transaction may not, under any circumstances, exceed a 12-month period.

In case of new properties: a property trader can buy a new property (less than five years old) and will be subject to the rates applicable in this case, i.e. 1% registration fee + 1.5% notary's fee, without exemption.

However, as he/she/it does not benefit from a more favourable tax system, he/she/it is not required to resell the property within the four-year period.

 

Issue and draft law

The undeniable tax advantages offered to property traders have led to an exponential increase in their numbers in a limited and already very competitive market and today, the profession is largely over-represented in the Principality. As proof, in 2011, there were only two property traders registered with the Trade and Industry Register, whereas in 2020 there were 310.

For this reason, the Government considered, on one hand, that this number was sufficient to meet the Principality's needs and, on the other hand, that the authorisation of new players would be likely to harm this sector of activity, and therefore part of the economy. On a territory of 2 square kilometer, it therefore appeared essential to contain this situation, to stabilise the market and preserve the economic players concerned. The Government then confirmed that it was not currently possible to examine the possibility of opening up this sector of activity to new applications. It should be noted, however, that this limitation only concerns persons subject to authorisation. In other words, those subject to declaration, i.e. Nationals, are not affected by this limitation.

In addition, this advantageous tax system increases the risk of property speculation that could result from it. Indeed, as no minimum investment is required to carry out renovation work on the property acquired, it has been found that some property traders carried out purchase-resale deals, without any work or just simple comfort work, reselling the property with a large, untaxed margin and without making any real improvement to the property. This practice thus contributes to an artificial increase in the price of property, from which there could be a risk of a speculative bubble in the long term, which would be detrimental to the Principality's image.

However, some of them do renovate flats with nice features, offer turnkey products, and contribute to improving the housing stock. They also provide work/employment for local construction companies and architects.

Finally, the observation that most transactions do not generate any tax revenue for the State has also prompted the National Council to react. On May 10th, 2021, the National Council adopted Bill No. 252 on the legal framework of the profession in order to regulate it independently. According to estimates, the additional revenue generated by this legislative change would be around €20 million a year.

 

The measures proposed by the National Council aims to achieve several objectives:

  1. to raise the profession of property trader as a new regulated profession (as well as other real estate professionals subject to the provisions of Act No. 1.252 of July 12th, 2002 on the conditions of exercise of activities relating to certain deals concerning buildings and businesses) and to ensure the security of real estate transactions;
  2. to reinforce the conditions of access to the profession of property trader, distinguishing according to whether the person is of Monegasque (declaration) or foreign nationality (authorisation to practise by ensuring the legitimacy of non-Monegasque applicants, in terms of their experience and professionalism). In this respect, only residents could be authorised, which would exclude cross-border services and competition from outside the Principality;
  3. to prove, in the context of the declaration or application for authorisation, that a financial guarantee has been obtained from a bank or financial institution authorised to give a guarantee and having its registered office or branch in the Principality, as well as the subscription of an insurance contract covering the financial consequences of professional civil liability;
  4. to recast the specific and derogatory tax regime from which property traders benefit when acquiring real estate so that it is more profitable for the State and the Monegasque economy, and to encourage property traders to make substantial improvements to the property they have acquired in order to resell it.

 

The exemption from property transfer taxes would be partial, and, in particular, provided that the work has been completed and that an intention to resell within a period of 3 years has been declared, possibly being extended for a one-year period.

A registration duty of 2.25% of the value of the property acquired (which corresponds to half the rate applicable to sales of property to persons meeting the transparency criteria set out in Act No. 1.381 of June 29th, 2011 on registration duties payable on transfers of property and real estate rights) would apply, with the obligation to carry out an amount of work equal to 5% of the market value of the property acquired. 

In addition, incentive measures, through VAT refunds, would be possible if the property trader could prove that the work carried out has been done by a company in the Principality.

Furthermore, to ensure the effectiveness of the system, administrative and criminal sanctions are provided for in the event of failure to comply with the provisions of the law.

The objective of this text is to enhance and protect professionals, who contribute to producing added value and improving Monaco's sometimes ageing real estate assets, by distinguishing them from those who take advantage of piecemeal and very advantageous regulations in this area, to the detriment of the State's interests.

It should in no way be considered as a sign of mistrust addressed to property traders, who the State recognises can contribute to the dynamism of the Monegasque economy. It intends, in fact, to ensure that this contribution is effective, and even reinforced, and that the added value brought to these properties is real.

If you are already set up in the Principality as a property trader and wish to carry out new transactions, the Valeri Agency team will be really pleased to select the most suitable properties for purchase and/or to market them for you.

Do not hesitate to contact us!