Taxation of managers in companies registered in Monaco is once again subject to scrutiny by the tax authorities.
While Monaco business owners are generally aware of the fact that directors' salary costs are tax deductible, it is still worth exploring the finer points of this system.
Corporate income tax (CIT) was created as a result of a tax treaty concluded by Monaco and France in 1963. This figure of tax law in the Principality of Monaco is regulated by Art. 1 of the Tax Act, in which the government of H.S.H. the Prince of Monaco pledged to "introduce a tax on companies registered in the Principality".
CIT is regulated by Regulation No. 3.152 of March 19, 1964, which defines its scope and the procedure for determining the company's tax base.
Traditionally, in determining this tax base, some costs are deductible and others are not, or there are limits to the maximum amount that can be deducted.
According to Art. 3 of the Franco-Moneganese Tax Agreement and Art. 13 of Regulation No. 3.152, the remuneration paid to the "directors" of the company may be deducted only if:
1. relates to actual work; and
2. the amount paid is not excessive compared to internationally recognized practices, in particular in the European Union.
The purpose of the first condition, which is duly verified by the tax authorities, is to avoid establishing a fictitious presence in Monaco.
The assessment of the second condition, which is based on specific criteria relating to both the overall activity of the director and the company's revenues, justifies further development.
Limit of deductions on the salary of the highest paid director/executive
To determine whether the level of remuneration in question is excessive in relation to the international practice, the following two situations must be distinguished:
Situation 1: If the company's revenues do not exceed €3.5 million for service providers and €7 million for other companies, it must comply with a scale that sets maximum levels of deductions for directors' fees.
For example, the highest level allowing deduction of remuneration of EUR 1,509,264 per year corresponds to revenues of EUR 3,375,001 to EUR 3,500,000 for service activities and EUR 6,750,001 to EUR 7,000,000 for other type of activity.
In addition, the limits may be increased by up to 15% in order to include in the lump sum the costs incurred personally by the person concerned in the performance of his duties.
Situation 2: For companies whose revenues exceed the financial limits set out above, there is no set scale; the maximum level of deduction will be determined on a case-by-case basis.
Legal status relative to other directors and managers
The scale for other directors or executives in a company is much more restrictive and their deductible compensation cannot exceed 75% of the maximum salary allowed for the company's highest paid director.
Difficulties encountered in applying this type of tax system
The use of this fiscal system raises some practical questions, including the following:
- To which individuals / social mandates do the limitations apply?
- What is included in the “remuneration” paid? How should benefits in kind be taken into account?
- What happens if someone both has a social mandate and receives a salary?
- Under what conditions can the 15% lump sum for costs over and above the initial limit be applied?
