On June 17, I presented my final Master's paper titled "The Principality of Monaco, a path towards fiscal transparency" at the "La Sapienza" University of Rome. On 28 June, the FATF (Financial Action Task Force) placed Monaco on the "grey list". Reading these first lines of introduction, there is certainly something that doesn't add up.
The first sentence is the point of view of a locally rooted professional, who on a daily basis has to comply with the internationally required standards of fiscal transparency and identification of his clients. They also need to comply with the obligations dictated by law by the Monegasque government. The second sentence reflects a fact.
So, let's try to better understand what is happening.
The Principality's desire for transparency and adequacy
Over the last decade, Monaco and its government bodies have been called upon to make various efforts to achieve fiscal transparency and in adapting to international and community standards in various aspects. From the identification of economic beneficiaries to the tracking of flows from financial institutions with the aim of becoming a compliant country.
The push perhaps came in 2002, when the OECD included Monaco in the list of uncooperative countries (and then eliminated it in 2009). But this event triggered a series of concerns that were not perhaps considered before. The international financial context was undoubtably changing, and the Principality felt the increasing pressure of the international financial community, in addition of the desire not to lose the trust of foreign investors and to be considered a financial center and not a "paradise" or “tax haven".
In my paper, I exposed precisely this desire of the Principality to adapt and ally itself with the fiscal transparency policy of the European Union, while trying not to lose its atypical nature.
The Principality of Monaco is therefore the protagonist of a path towards compliance with EU policy that is based on several initiatives. These initiatives are especially in the corporate sphere and which since 2015 has seen several proposals, both in the field of corporate taxation and on the subject of tax transparency. The aim of combating tax evasion and avoidance (such as the BEPS Project and the Common Reporting Standard), or certain situations of unequal treatment between domestic and cross-border situations or double taxation (‘Mother-Daughter’ Directives), up to the latest proposal for the ATAD III Directive.
Monaco and its relations with Europe
Although the Principality is located in Europe, it is not part of the European Union, but always has a view of mutual assistance and collaboration, it applies union policies and pursues a European policy on the basis of some bilateral sectoral agreements.
Some events that characterized the collaboration between Monaco and the European Union:
- 1963: Monaco becomes part of the community customs territory, through the signing of the Franco-Monegasque convention;
- 1991: accession of the Principality to the OECD;
- 1999: accreditation of a Monaco Ambassador to Brussels;
- 1999: monetary agreement between the European Union and the Principality of Monaco for the introduction of the Euro;
- 2003: agreement between the European Community and the Principality of Monaco on the application of certain community acts in the territory of the Principality of Monaco, such as that relating to the medicines sector;
- 2005: agreement providing for the automatic exchange of information on tax matters between Monaco and the European Union (equivalent to directive 2003/48/EC, the so-called Savings Directive);
- 2014: accession to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters;
- 2016: signature of the Protocol that abrogates and replaces the 2005 agreement;
The Principality's action plan
With a view of more openness and comparison with the European Community, the Principality has adopted a series of tax reforms and actions over the years. This is due to the goal of implementing various community regulations and policies to fill the gaps in the national regulatory framework for fiscal transparency found by the international community.
There are several steps towards tax compliance such as:
- The concept of residence in the Principality: both for natural persons and for legal entities, the community requirements have been adopted, especially in reference to the economic substance for commercial companies. For natural persons, this emerges from the procedures for obtaining and renewing the Monegasque residence card. On the other hand, for commercial companies, the provision of premises in the area, a solid structure with employees, the exercise of the activity and a requirement for the partner/director to be a Monegasque resident.
- Adherence to the CRS, the Common Reporting Standard, which took place in 2016, with the signing between Monaco and the European Union of the protocol on the implementation of the automatic exchange of information in financial matters;
- Another manifestation of the cooperation of the Monegasque Government is the signing of agreements on the exchange of tax information with neighboring countries such as Italy. The result of this collaboration led the Italian legislator to include the Principality of Monaco in the white list;
- The fulfillment of Country by country reporting and therefore the implementation of Action n° 13 of the BEPS Project (Base Erosion and Profit Shifting), which provides for the reporting obligation for large multinational groups and a guarantee of use of transfer pricing. This in turn helps to avoid falling back into aggressive tax planning mechanisms;
- The role of bilateral agreements on double taxation, which in fact has the aim of avoiding double taxation on the income of their residents and preventing aggressive taxation mechanisms, which could result in tax avoidance.
In short, the progress of the Principality of Monaco, as also underlined in the FATF press release, is nevertheless substantial and regardless of the inclusion in the gray list, the continuous strengthening of resources for the fight against terrorist financing, the creation of a new Financial Supervisory and Intelligence Authorities (AMSF), the introduction of targeted financial sanctions and the supervision of associations based on risk assessment.
Negotiations with the European Union
Among the various integration steps of the Principality, negotiations started in 2015 for the conclusion of an association agreement with the European Union. In this phase of negotiations, the Monegasque authorities have carried out various studies both from a legal and economic point of view. The aim of such studies was to understand the factors of attraction and its relations with the European Union and also the impact that the signature would have had of an agreement.
Today, negotiations with the European Union are suspended (as can be seen from the EU note of September 2023). The Principality does not intend to make "compromises" and the objective was to conclude an agreement based on respect for the four freedoms circulation and at the same time maintain homogeneity in the internal market of the European Union.
The Principality of Monaco has remained firm on points such as residence: in fact, obtaining residence in the Principality is granted subject to authorization from the authorities and only under certain conditions such as "good morality", financial sufficiency (which must be in line with the standards of the Principality) and a certificate of domicile in the territory.
This global control of the settlement of natural persons on the territory of the Principality and of their flows (as in the case of the renewal of the residence card) is objectively in contrast with the principles and values of the European Union, and with the pillar principle of free movement of people and freedom of establishment.
Another misalignment between community principles and Monegasque specificities can also be found in the procedure for obtaining authorization, necessary when "non-Monegasques" create a company or in the priority of employment reserved for Monegasques in derogation. Once again the pillar principle of freedom of movement of goods and services, and other recognized freedoms such as that of establishment and non-discrimination on the basis of nationality.
The future of the Principality in Europe
In short, it is true that the road towards an approval of the Principality with the values and regulations of the European Union is still long, although the efforts of both the administrative, fiscal and legislative authorities are evident.
However, we must also ask ourselves what the continuation of European tax reforms will be after the latest legislative elections and the new composition of the European Parliament.
Legislative elections, which as we have seen recently, will certainly have a strong impact on union politics and consequently on the future of the Principality.
And I conclude by posing a question: how can a micro-state like Monaco be asked to revolutionize its policy, with the aim of achieving levels of harmonization and coordination of corporate tax policy, if other countries such as those with far more means at their disposal (as in terms of human resources), are also struggling?
Today, the financial future of the Principality of Monaco certainly remains uncertain, as do the consequences of its inclusion on the "grey" list. The certainty is that the Government of Monaco will do everything to exit the gray list by 2026, with the aim of avoiding any impact on the economy and its local budget remaining.