The business income tax (“ISB”) was introduced in Monaco following the conclusion of a tax treaty with France on May 18th, 1963. Where applicable, and pursuant to article 1 of the Tax Treaty, the ISB is in principle assessed and recovered under the same conditions as is assessed and recovered the corporate income tax in France.
The scope of the ISB is however limited to income derived from cross border commercial and industrial activities, or from the corporate ownership of intellectual property rights. More precisely, pursuant to article 1 of the Ordinance n° 3.152, are subject to the ISB in Monaco:
- Enterprises (whatever their legal form) which carry out industrial or commercial activities in Monaco and whose turnover is derived for more than 25% from operations carried out, directly or indirectly, outside of Monaco;
- Companies incorporated in Monaco, whatever their legal form, deriving income from (i) the sale or the licensing of patents, trademarks and manufacturing processes or (ii) intellectual property rights, wherever the location of these relevant assets.
Two Sovereign Ordinances dated October 24th, 2018 and February 1st, 2019 have respectively modified the ISB rate and the rules governing the deduction of financial expenses, in order to harmonize them with the changes recently implemented under the French corporate income tax rules.
- Reduction of the ISB rate
Ordinance n° 7.174 of October 24th, 2018 provides that the ISB rate, previously fixed at 33.33%, will be progressively reduced as follows:
- 31% for fiscal year beginning as from January 1st, 2019;
- 28% for fiscal year beginning as from January 1st, 2020;
- 5% for fiscal year beginning as from January 1st, 2021;
- 25% for fiscal years beginning as from January 1st, 2022.
- New interest deduction limitation rule
- Summary of rules governing the deduction of interest expenses until the implementation of the Sovereign Ordinance n° 7.334 of February 1st, 2019
Pursuant to article 9 of Ordinance n°3.152, interest served on loans granted by a company to its direct shareholders are subject to an interest rate limitation, pursuant to which the portion of the interest calculated at a rate exceeding by two points the legal interest rate published by the French Central Bank, is not deductible from the taxable income.
In addition to this interest rate limitation, interest served by a company to its direct controlling shareholders is deductible only to the extent that the relevant shareholder loans do not exceed half of the amount of the share capital of the company.
More generally, when the amount of net financial expenses of the company in respect of a fiscal year exceeds 3,000,000 €, the deduction of such financial expenses is capped at 75% of their amount (the “General Deduction Cap”).
- Changes introduced by the Sovereign Ordinance n° 7.334 of February 1st, 2019
As from fiscal years opening on or after January 1st, 2019, the General Deduction Cap is replaced by new deduction limitations rules.
Pursuant to those new rules, the deduction of net financial expenses is capped at the highest of the following amounts:
- 3,000,000 € per fiscal year, or;
- 30% of the taxable income subject to ISB, before offsetting of any carried forward tax losses, increased by the relevant net financial expenses, any booked amortizations and impairments and capital gains or losses recognized upon the transfer of assets.
For the purpose of this new general deduction limitation rule, net financial expenses are defined as the difference between interest served and interest received from any debts contracted by the company. Non-deductible net financial expenses in respect of a fiscal year may be deducted from the taxable income recognized in respect of the 5 following fiscal years, subject to the same limitations.
By exception, the portion of the net financial expenses served by a company to related parties is subject to a more restrictive deduction limitation rule, to the extent that the average amount of the debts contracted by the company towards such related parties exceeds by 1.5 the amount the company’s net equity, assessed either at the beginning or at the end of the fiscal year. In such a scenario, the deduction of the net financial expenses would be limited to the highest of the following amounts:
- 1,000,000 € per fiscal year, or
- 10% of the taxable income subject to the ISB, before offsetting of any carried forward tax losses, increased by the relevant net financial expenses, booked amortizations and impairments and capital gains or losses recognized upon the transfer of assets.
For the purpose of this more restrictive deduction limitation rule, two parties are deemed related where:
- One of them holds, directly or indirectly, the majority of the share capital of the other, or in fact exercise a power of decision on the other, or;
- Both of them are controlled by the same third party, under the conditions described in a).
The portion of financial expenses served to related parties which are not deductible in respect of a fiscal year in application of the above mentioned deduction limitation rule may only be deducted in respect of the following fiscal years, and subject to the same conditions, up to one third of their amount.