Doing Business In: Monaco
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MONACO AT A GLANCE
Being the second smallest country in the world after the Vatican, Monaco is located at the crossroads of France and Italy and is opened on the Mediterranean basin, which gives its residents an exceptional quality of life and makes it easily accessible by all means of transportation, Nice Airport being only 22 km away from Monaco. It is about 3.3 km long and 0.6 km wide, with a surface area of about 2 sq. km, some of which has been reclaimed from the sea over the past decades, especially through the construction, between 1966 and 1973, of the Fontvieille area, which can be qualified as the Monaco business and industries district.
With 38,300 inhabitants (among which 9,259 are Monaco nationals as of 31 December 2017) and a density of around 19,300 inhabitants per sq. km, Monaco has an urbanization that covers almost all its surface area, making it the most densely populated country in the world and contributing to maintaining real estate prices that are among the highest in the world.
For that reason, the Principality, being aware of its need for space, decided to launch in 2017 the building of a 6-hectare eco-neighborhood through an extension of the Principality’s territory over the sea. Work on the construction site is due to last until 2025 for a global cost of 2 billion euros. This gigantic project, which will include the construction of high-quality housing, a public car park, a pedestrian walk and a park, is marked by a strong ambition as regards sustainable development and the protection of the environment and biodiversity, in line with the sustainable city policy implemented by the Principality.
I. THE ECONOMY
Despite a small population, Monaco had a GDP of 5.68 billion euros in 2017, which recorded a drop of 3.5 % in comparison with 2016 occurring after a continually growth (Source: IMSEE), after the stagnation that was observed in 2009 following the financial crisis that affected western economies at that time.
In terms of foreign trade, while the overall volume of exports has only increased by 1.1 % in 2017 in comparison with 2016, to reach 866.2 million euros, the continuing growth of imports since 2013 has led to a trade balance deficit reaching 570 million euros at the end of 2017 (Source: IMSEE).
Despite these figures and the current complex international background, marked by a market recovery since mid-2016 due to increased investment in developed countries and growing manufacturing output in Asia, the Principality’s foreign trade resists well, thanks to the dominance of historical trade relations with the European Union and the rest of the European continent, which accounts for more than 75 % of the Monaco’s foreign trade.
2) MAIN TRADE SECTORS
Monaco has a dynamic economy, both on the local and the international levels, which has gone through a significant evolution during the second half of the past century, from an economy dominated by and dependent on the activities of the State owned Société des Bains de Mer, which runs the casinos and the major hotels in Monaco, to an economy that has managed to develop across many other sectors such as construction and real estate (18.7 % of the GDP, with a continuous increase in the number of transactions), financial and insurance activities (17.8 % of the GDP), scientific and technical activities (17 % of the GDP), wholesale and retail business (around 14.4 % of the GDP), industry (4.1 % of the GDP) or shipping (more than 4 % of the GDP), through well-structured family businesses (mainly in the construction and real estate sectors) as well as subsidiaries and branch offices (mainly in the banking and finance as well as luxury sectors).
The shipping sector, which, for the sake of precision, does not include the yachting industry, is quite important in Monaco since it employs around 1,000 employees and generated a turnover of approximately 180 million euros. Its importance in Monaco is mainly due to the advantageous tax system offered by the Principality and its central location on the world time zones map.
Finally, the traditional sector of tourism, which highly contributed to the international fame of the Principality due to Monaco’s mild climate, its history, casinos and world famous events such as the Monaco Grand Prix, the Monte-Carlo Rolex Masters or the Monaco Yacht Show, remains important, although it was negatively impacted by the Nice terrorist attack in July 2016, which resulted in a decline in attendance of 4 % over 2016. This unfavorable economic context led the Tourism Directorate of the Principality to focus on new markets such as China and South-East Asia or business tourism and Monaco’s good reputation in terms of security and stability.
II. BUSINESS ENVIRONMENT
One of the major features of the Monaco economy being that it is government-driven, the Principality is, subject to certain conditions, open to trade and foreign investments.
Despite not being a member of the EU, The Principality of Monaco belongs to the euro zone and has established permanent relations with the EU and accredited an ambassador in Brussels in 1999. In addition, its customs regulations comply with French regulations, since both countries are, since 1968, part of a Customs Union which enables capital to move without restrictions between Monaco and France and results in the Principality being part of the EU customs zone, it being specified that:
– The French customs service collects duties on the products unloaded in Monaco and pays a share to the Principality.
– Monaco taxes exportations to all countries but those members of the EU customs zone.
– By virtue of the Franco-Monegasque agreements concluded on 18 May 1963 and 26 May 2003, Monaco collects VAT on the same basis and according to the same rate as in France.
Over the past two years, Monaco law firms continued to be engaged in the restructuring of the banking sector in Monaco, it being specified, however, that according to the Monaco Financial Activities Association (AMAF), this trend did not prevent the Monaco financial place to keep developing its overall resources, as between 2007 and 2015, these resources raised from 78.7 to 116.7 billion euros and the number of asset management companies raised from 37 to 56, whereas on the same period of time, the number of banks dropped from 40 to 35.
According to many observers and members of the Monaco National Council (Monaco Parliament), this trend is the result of the increased compliance costs imposed by regulators, as well as the low interest rates, which factors will continue to favor concentrations in the banking sector in small financial places like Monaco, since a larger volume of assets is now needed to generate the same profitability, while the overall volume of assets keeps growing in Monaco, as it was demonstrated through the figures presented by the AMAF.
Because of this trend, the Monaco banking place has adapted and evolved towards an activity more on shore, as all the financial places in the rest of the world. On one hand, it focused on developing quality of service and asset management and new means of attractiveness for foreign clients, who represent almost the half of its turnover. On the other hand, it worked on increasing the amount of assets deposited by Monaco residents, since it was estimated that these Ultra Net Worth Individuals only deposit an average of 10 % of their assets in Monaco banks.
Besides banking and finance, the legal market was also marked over the past two years:
– By the implementation in Monaco companies of new anti-money laundering measures enacted through law n° 1.462 of 6 July 2018, which resulted in the need to update their internal systems to combat money laundering, terrorist financing and corruption, which in turn created work opportunities for lawyers.
– By the necessity for various kinds of companies, from small sized to international groups and from various sectors such as medias and telecommunications or the manufacturing and oil & gas industries, to review their workforce structure, due to a lack of profitability or lower oil prices for example, which created work opportunities for labor lawyers.
– By the maintenance of a significant number of real estate transactions, which account for a substantial part of the legal market in terms of fees, due to the exceptionally high prices of the real estate market in Monaco.
– The perspective of the signature of an association agreement between Monaco and the UE, which would have significant legal consequences in regard with running a business in Monaco. Such an agreement would indeed open the EU market to Monaco, since products and goods manufactured in Monaco are currently not easily exportable within the EU market. Consequently, the association agreement currently in negotiation between Monaco and the EU would aim at facilitating the exportation of Monaco manufactured products and goods and the settlement of businesses by Monaco citizens in the EU market, while maintaining in Monaco a derogatory regime consisting in the requisite of a prior Government approval for EU citizens and companies wishing to invest in Monaco.
All things considered, Monaco’s security and political stability, its tax legislation and its position as a hub for High Net Worth Individuals and as a strategic financial place at the cross-roads of Southern and Northern Europe, as well as Western and Eastern Europe, with access to the Mediterranean and world class infrastructures, make it an excellent location for investors that besides the banking and finance area, wish to develop small and medium sized companies (which are the most common types of companies in Monaco) in areas such as consulting, shipping, tourism, fashion, leisure or the industry, or international groups that wishes to benefit from a subsidiary, a branch or administrative offices in a place likely to provide a high quality lifestyle to their employees and executives.
Such attractiveness makes Monaco’s legal market quite dynamic, with a rather high and varied dispute resolution activity focused on judicial litigation, and small and medium-sized companies that continue to outsource their legal work to law firms (Avocats Défenseurs).
1) HOW TO INVEST IN MONACO
Application for a permit to carry on an activity for foreign investors (and Monaco citizens for financial activities)
According to Monaco law n° 1.144 of 26 July 1991, foreign citizens who wish to carry on a business activity in Monaco and the Monaco citizens who wish to carry on financial activities must file an application for a permit to carry on an activity in Monaco, be it as a shareholder, a director, or a sole trader. Such prerequisite also applies to foreign companies wishing to create open a branch office or an administrative office in Monaco.
The application must be submitted to the Minister of State (through the Direction de l’Expansion Economique), who is in Monaco the equivalent of the Prime Minister and is normally held to deliver the permit within 3 months (6 weeks are observed in practice). In the absence of a reply beyond the expiry of this 3 months’ period, the authorization is presumed acquired.
Such permit is personal and cannot be transferred or sold to a third party and delimits the business activity authorized, it being specified that any change in the said activity or its headquarters requires a new application for a permit.
Prior to the constitution of a company, such company does not legally exist if the required Government authorizations are not delivered for all shareholders and directors.
Such authorization is also required for the creation of a SAM, although being governed by specific rules provided for by the order of 5 March 1895, according which the creation of a SAM is subject to a ministerial order.
Such authorization regime, although not being common in Western Europe economies, is justified in Monaco by the will of public authorities to exercise a control over the economy in such a small country, to preserve the general interest of business.
Declaration of business activity for Monegasques citizens
Monaco citizens who wish to carry on a business activity other than financial activities only have to file a declaration of business activity with the Minister of State.
A receipt is then notified to the declarant within 15 days of the submission of its declaration, it being specified that any modification to the activities mentioned in the declaration or to their headquarters requires a new declaration.
Besides the Monaco Government, which exercises control over each foreign investment in Monaco, other key regulators supervise specific sectors, such as the Commission for the Control of Financial Activities (“CCAF”) for any investment regarding the financial activities run by the banks and asset management companies (be it by a foreigner or a Monaco citizen), the Prudential Supervisory Authority (“ACPR”, French authority supervising banking activities in Monaco by virtue of Franco Monegasque treaties) and the CCIN (independent authority in Monaco for data protection).
2) BUSINESS STRUCTURES
Monaco business law is characterized by the subsistence of the ancient regime of the prior Government authorization, with in return a legislation relating to companies and other business structures which is marked by a certain contractual freedom, while being relatively inspired by French company law.
Direct investments in Monaco tend towards the creation of a subsidiary or a branch or by foreign companies, or the acquisition of existing Monaco companies by such foreign companies or individuals wishing to develop small and medium-sized businesses in a stable and dynamic business environment, it being specified that for such acquisitions, cash is in practice most commonly used as consideration in Monaco, since most sellers do not have strategic goals when selling their business and rather wish to retrieve some liquidity.
Besides these traditional means of entering the Monaco market, foreign companies also have the possibility to use Monaco to relocate the administrative functions of their businesses through the creation of administrative offices, which are comparable to a branch and benefit from an advantageous tax legislation in the Principality.
Considering the scope of the due diligences required, the need to obtain financing, if applicable, and the applicable regulatory approval processes, the duration of the process regarding acquiring/selling a business in Monaco generally takes between 2 and 12 months.
Most common companies’ structures
The investment vehicles mostly used are the limited liabilities companies, which in Monaco are either the “société anonyme monégasque” (SAM, public limited company) or the “société à responsabilité limitée” (SARL, private limited company), it being specified that since its creation through the law n° 1.331 of 8 January 2007, the latter replaced progressively the “société en commandite simple” (SCS, limited partnership), SARL being a corporate structure much easier to understand for investors while preserving the family character of a business.
SARL minimum share capital required is 15,000 €, which is ten times lower than that required for incorporating a SAM, making it a corporate structure particularly well adapted for small and medium-sized businesses directly owned by natural persons having a limited cash flow when starting their business, although particular attention should be paid in avoiding undercapitalization, which is closely scrutinized in Monaco by judicial liquidators (“Syndic”) in charge of companies’ insolvency proceedings when dealing with shareholders and/or directors’ personal liability in respect with the insufficiency of assets affecting, as the case may be, their bankrupt company.
SAM, in which shareholders’ liability is also limited to the amount of their contributions, are for their part appreciated by foreign investors for the development and transfer of ownership of existing companies, since unlike what is applicable for SARL:
– The sale or transfer of shares to persons or companies which are third parties to the SAM are free and are not subject to the shareholder’s prior agreement nor to the prior authorization of the Monaco Government.
– SAM can proceed to public offering through the issue of bonds.
– SAM offer a solid and reliable image, particularly sought by international groups of companies realizing most of their turnover abroad.
SAM directors benefit from a favorable status, since Monaco jurisdictions have developed a case law enabling them to cumulate their corporate mandate with an employment contract within the SAM, thus involving a status of employee and the favorable social security regime linked to such status. Eventually, it is worth noting that due to the higher minimum amount of share capital a SAM requires and to its more complex rules of functioning, a SAM is more adapted than a SARL for industrial projects usually requiring greater investments. These characteristics led the Monaco regulator to make the appointment of a statutory auditor (“Commissaire aux Comptes”) compulsory in a SAM, for the purpose of exercising a general and permanent mission of supervision relating to the regularity of the company’s transactions and accounts, whereas such appointment is required in SARL only when their share capital is superior to 150,000 € or when, for two years in a raw, they reach at least two of the following thresholds:
– Their balance sheet is superior to 1,500,000 €
– Their turnover before taxes is superior to 2,500,000 €.
– They employ more than 20 employees.
Foreign companies can create a branch office (“succursale”) in Monaco for the purpose of carrying out commercial activity in the Principality.
Branch offices are recorded on the Monaco Companies Register (“Répertoire du Commerce et de l’Industrie”), do not have legal personality.
As a branch office, an administrative office does not have legal personality and may be created by a foreign group of companies, for exercising from Monaco effective and regular functions of administrative and financial management for the sole benefit of the said group.
No commercial activity can be performed through an administrative office, which entity is subject to a 2.66 % tax based on the global amount of its operation expenditures. Such office’s main advantage consists for an international group in relocating its directors and executive in a place with a high-quality lifestyle and social security regime for lower contribution amounts.
It is not possible, under Monaco law, to form a sole shareholder company, even though it is worth noting that the creation of such a corporate structure, on the same basis as the French “Entreprise Unipersonnelle à Responsabilité Limitée” (EURL), was once considered in the Principality, through the explanatory memorandum of the law project relating to the modernization of economic law dated 1 July 2013, which project has eventually been withdrawn.
Therefore, individuals who wish to invest and create or acquire a business in Monaco on their own may pursue such activity through the direct ownership such business, it being specified that sole ownership is in practice only permitted for Monaco residents.
The sole trader status enables to start a business quickly and easily, without being subject to the constraints or the obligations imposed on companies such as bylaws, a minimum share capital, or the obligation to file accountancy documents with the Monaco Companies Register or to appoint a statutory auditor.
However, sole trader implies that the investor is liable on all his personal assets, which can also affect his/her spouse’s assets, depending on their matrimonial regime.
3) ADVANTAGES OF MONACO AS A BUSINESS LOCATION
Tax legislation and Government incentives supporting businesses
Due to the absence of income tax (except for the French and US citizens) and of inheritance tax on real estate located in the Principality between first degree relatives, Monaco remains quite attractive from a tax point of view for its residents.
In terms of business taxes, Monaco constitutes also an advantageous place for foreign investors:
– Companies which carry on in Monaco an activity other than commercial or industrial do not pay taxes on their profits.
– Companies which carry on an industrial or commercial activity in Monaco do not pay taxes on their profits provided that at least 75 % of their turnover is generated in Monaco. Should such companies realize less than 75 % of their turnover in Monaco, they then pay a tax on their profit based on the same rate as that in force in France, that is to say 33.33 %.
– In such case, companies which are subject the tax on their profits can benefit from a research tax credit based on their research expenditures, which amounts to 30 % of the portion of their expenditures up to 100 million euros and to 5 % for the portion of their expenditures superior to that amount, it being specified that this tax credit is capped at 10 million euros.
Foreigners can occupy a salaried position in Monaco, subject to prior obtaining a work permit delivered by the Employment Department for the position they have acquired.
Apart from that constraint, which is also applicable to foreigners in other European countries, Monaco labor law is rather flexible, since:
– Employers can have recourse to fixed-term employment contracts without justifying their choice. No precariousness premium nor severance indemnity shall be paid at the termination of such contract.
– Employers can terminate permanent employment contracts without giving reasons.
– The collective redundancy procedure is much simpler than in neighboring countries such as France.
– There is a visibility over financial contentious risks: indemnities for abusive dismissal are based on legal calculation rules and capped. Monaco Labor jurisdictions therefore developed a case law with relatively constant ranges of damages attributed to employees in such cases.
Current opportunities and prospects
The Principality of Monaco made a recent move towards the promotion and support of new technologies, through a project involving the Monaco State and Monaco Telecom, the Principality telecommunications service provider, which resulted in the creation and opening in November 2017 of MONACOTECH, a startup incubator which is managed by Monaco Telecom on behalf of the Monaco State.
This incubator currently hosts 14 startups and aims at encouraging the creation and development of innovative companies in Monaco, through the selection and accompaniment of project promoters, especially in terms of management and business strategy (business plan, banking negotiations, search for sponsors and financial support, legal and financial diligences).
Hosted entities, regardless of their legal form, are allocated a registration number by the Monaco Department of Economic Expansion, which enables innovative project promoters to develop their activity in Monaco and have an easy access to the various administrations involved for setting up a company in the Principality.
MONACO TECH is therefore an interesting opportunity for project promoters and investors who wish to develop innovative businesses in a pro-business environment such as Monaco which in addition constitute, due to its world fame, a quality brand for such projects.
4) LEGISLATIVE AND REGULATORY CHANGES OF 2017 AND 2018 IMPACTING ON BUSINESS
Law n° 1.456 of 22 December 2017 establishing in Monaco and Environmental Code
This Code enshrines in the Principality the following principles, which will in practice mostly apply to the construction and the real estate industries:
– The right for everyone to live in a healthy and balanced environment which is respectful of biodiversity.
– The principle of prevention, according to which any person must prevent, or failing that, limit, the possible environmental damage it might cause.
– The precautionary principle, which aims, in the absence of any absolute technical or scientific certainty, at not slowing down the implementation of preventive measures regarding a risk of irreversible damage to the health or the environment.
– The principle of corrective action at the source, which implies that anyone shall give priority to a corrective action on environmental damages at their source.
– The « polluter pays » principle.
– The principle of integration in public policies of sustainable development and protection of the environment.
Although the control of the rightful application of the Environmental Code’s provisions remains in the hands of the Monaco administration’s sworn officers, the Environmental Code also contains provisions enabling anybody having an interest to do or raising the existence of a violation of a right granted by the aforementioned Code, to communicate to the administration any observation related to the occurrence of an environmental damage or to the risk of such damage and to request from the administration any measure which appears as necessary in order to stop or avoid such damage.
Finally, it may be noted that the the Vth Book of the Environmental Code establishes a new specific liability system (mostly for fault or negligence) in case of environmental damage, and a range of administrative and criminal sanctions.
Law n° 1.462 of 6 July 2018 on the fight against money laundering, terrorist financing and corruption
This new law, which provisions came into force on 7 July 2018 and are applicable to individuals and legal entities in the Principality, aligns Monegasque legislation with the 4th EU Directive 2015/849 of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and reinforces anti-money laundering measures applicable in Monaco through widening the scope of application of these measures to new legal entities, tightening identification and vigilance obligations bearing on this entities and imposing new organizational requirements to them.
In addition, this law, through subsequent ordinances that have been taken by the Monaco Government for its implementation, has created:
– A register of beneficial owners of companies through which all Monaco based companies shall communicate to the Monaco Companies Register (“Répertoire du Commerce et de l’Industrie”) information about each natural person who ultimately holds or control directly or indirectly 25 % or more of its share capital or voting rights, it being specified that this register is accessible to the Monaco anti-money laundering service (SICCFIN), to the judicial authorities, to the Monaco tax services (“Direction des Services Fiscaux”), and to any person authorized to such access by the Monaco First Instance Tribunal.
– An internal anonymous whistle-blower system enabling companies’ staff and executives at to report any breach of anti-money laundering rules within their company.
– New administrative penalties and new criminal offences.
III. The legal system
Monaco is a constitutional monarchy currently governed by the Constitution of 17 December 1962, developed from the Charter of 1848 and the Constitutional Act of 1911 which established the separation of powers in the Principality. According to the Constitution, the Prince heads the executive power. The legislative power is exercised by two chambers, the Crown Council and the National Council.
Although the Principality of Monaco has, as a sovereign State, its own legal system, the latter is relatively influenced by the French legal system and is widely based on Roman Law and the Napoleonic Code. In this respect, some important parts of Monaco law are inspired from French law, such as contracts law and delict. Indeed, it is likely that if the 2016 French reform on contract law appears to be a success from a practitioners’ point of view, the Monaco Government will consider implementing in the Principality a reform widely based on the provisions of the French reform.
Indeed, Monaco authorities use to “wait and see”, further to reforms implemented in France, as they already did, for example, when they reformed prescription delay applicable to civil matters in 2013, after France did so in 2008.
In terms of judicial organization, Monaco has three levels of civil jurisdictions:
– 1st degree:
- The Justice of the Peace, which deals with claims up to 4,600 €, the First Instance Tribunal, which is competent to rule on civil and commercial litigation and certain areas of administrative disputes involving the State or public organisms, for claims superior to 4,600 €.
- The Employment Tribunal, which is competent for disputes related to employment contracts.
- The Commercial Lease Arbitral Commission and the Rents Arbitral Commission.
– 2nd degree:
- Court of Appeal, which has general jurisdiction over appeals, except, mainly, for the appeal of some decisions issued by the Judge of the Peace, the appeal of civil and commercial arbitral awards.
– The Court of Revision acts as a Cassation jurisdiction which role is therefore to ensure that lower degree jurisdictions issued decisions which correctly apply the law. Although not being a third degree of jurisdiction, due to the judicial organization in
Monaco, the Court of Revision becomes a third-degree jurisdiction when, after having set aside a decision of a lower jurisdiction, the Court refers to relevant case to itself, composed differently, to retry it definitively both in fact and in law.
Criminal jurisdictions are organized as follows:
– Investigating Judge, whose orders are subject to the review of the Council Chamber of the Court of Appeal.
– Public Prosecutor (“Procureur Général”).
– Decision from the Judge of Police and the Criminal Tribunal are appealable before the Court of Appeal, which decisions can in turn be subject to a recourse (“pourvoi en revision”) before the Court of Revision. Criminal proceedings before the Criminal Tribunal involve jurors drawn by lot from a list of Monegasque citizens.
Eventually, the constitutionality of laws is controlled by the Supreme Court, which is also competent for constitutional disputes such as actions for compensation related to the infringement of constitutional rights and freedoms. The Supreme Court also acts as an administrative jurisdiction competent in administrative cases such as proceedings for obtaining the annulment administrative authorities’ decisions and administrative acts, and rules conflicts of jurisdiction. It also rules on conflicts of jurisdiction.